UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10245
RCM TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 95-1480559
------ ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
(Address of Principal Executive Offices) (Zip Code)
(856) 486-1777
--------------
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act)
YES NO X
-- ---
Indicate the number of shares outstanding of the Registrant's class of common
stock, as of the latest practicable date.
Common Stock, $0.05 par value, 11,310,529 sharesoutstanding as of May 6, 2004.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of March 27, 2004 (Unaudited)
and December 27, 2003 3
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Three-Month Periods Ended March 27, 2004 and March 29, 2003 5
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Three-Month Period Ended March 27, 2004 7
Unaudited Consolidated Statements of Cash Flows for the Three-
Month Periods Ended March 27, 2004 and March 29, 2003 8
Notes to Unaudited Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 30
Item 4 - Controls and Procedures 30
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 31
Item 6 - Exhibits and Reports on Form 8-K 33
Signatures 34
Certifications 35
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 27, 2004 and December 27, 2003
ASSETS
March 27, December 27,
2004 2003
--------------- ---------------
(Unaudited)
Current assets
Cash and cash equivalents $2,454,570 $5,152,499
Accounts receivable, net of allowance for doubtful accounts
of $1,885,000 (March 27, 2004) and $1,854,000
(December 27, 2003), respectively 37,272,654 36,269,369
Restricted cash 8,295,625 8,295,625
Prepaid expenses and other current assets 1,992,291 2,781,053
Deferred tax assets 4,598,373 4,598,373
--------------- ---------------
Total current assets 54,613,513 57,096,919
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 9,318,565 9,564,939
Less: accumulated depreciation and amortization 4,376,177 4,435,164
--------------- ---------------
4,942,388 5,129,775
--------------- ---------------
Other assets
Deposits 82,290 82,958
Goodwill 38,007,233 38,007,233
Intangible assets, net of accumulated amortization
of $259,386 and $242,249 at March 27, 2004 and
December 27, 2003, respectively 51,414 68,551
--------------- ---------------
38,140,937 38,158,742
--------------- ---------------
Total assets $97,696,838 $100,385,436
=============== ===============
3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
March 27, 2004 and December 27, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
March 27, December 27,
2004 2003
--------------- ---------------
(Unaudited)
Current liabilities
Line of credit $5,500,000 $7,300,000
Accounts payable and accrued expenses 13,399,822 15,574,036
Accrued payroll 6,826,342 6,143,902
Payroll and withheld taxes 229,521 171,305
Income taxes payable 3,838,452 4,026,097
--------------- ---------------
Total current liabilities 29,794,137 33,215,340
--------------- ---------------
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; 11,300,529 and
11,285,279 shares issued and outstanding
at March 27, 2004 and December 27, 2003, respectively 565,026 564,264
Accumulated other comprehensive income 446,784 556,795
Additional paid-in capital 97,952,789 97,906,888
Accumulated deficit (31,061,898) (31,857,851)
--------------- ---------------
67,902,701 67,170,096
--------------- ---------------
Total liabilities and shareholders' equity $97,696,838 $100,385,436
=============== ===============
4
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended March 27, 2004 and March 29, 2003
(Unaudited)
2004 2003
-------------- --------------
Revenues $41,272,729 $50,650,469
Cost of services 31,245,291 39,845,409
-------------- --------------
Gross profit 10,027,438 10,805,060
-------------- --------------
Operating costs and expenses
Selling, general and administrative 8,436,424 8,199,767
Depreciation and amortization 299,342 296,212
-------------- --------------
8,735,766 8,495,979
-------------- --------------
Operating income 1,291,672 2,309,081
-------------- --------------
Other (expenses) income
Interest expense, net of interest income (114,691) (51,267)
(Loss) gain on foreign currency transactions (728) 32,623
-------------- --------------
(115,419) (18,644)
-------------- --------------
Income before income taxes 1,176,253 2,290,437
Income taxes 380,300 936,489
-------------- --------------
Net income 795,953 1,353,948
Other comprehensive (loss) income
Foreign currency translation adjustment (110,011 ) 346,813
-------------- --------------
Comprehensive income $685,942 $1,700,761
============== ==============
5
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED)
Three Months Ended March 27, 2004 and March 29, 2003
(Unaudited)
2004 2003
--------------- --------------
Basic earnings per share
Basic earnings per share $.07 $.13
==== ====
Weighted average number of common shares outstanding 11,290,779 10,626,076
========== ==========
Diluted earnings per share
Diluted earnings per share $.07 $.13
==== ====
Weighted average number of common
and common equivalent shares outstanding 11,861,676 10,663,662
========== ==========
(includes dilutive securities relating to options
of 570,897 and 37,586 in 2004 and 2003, respectively)
6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months Ended March 27, 2004
(Unaudited)
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Accumulated
------------
Income Capital Deficit Total
------ ------- ------- -----
Shares Amount
------ ------
Balance, December 27, 2003 11,285,279 $564,264 $556,795 $97,906,888 ($31,857,851) $67,170,096
Exercise of stock options 15,250 762 45,901
46,663
Translation adjustment (110,011) (110,011)
Net income 795,953 795,953
---------- -------- ---------- ----------- -------- ---------
Balance, March 27, 2004 11,300,529 $565,026 $446,784 $97,952,789 ($31,061,898) $67,902,701
========== ======== ======== =========== ============ ===========
7
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 27, 2004 and March 29, 2003
(Unaudited)
2004 2003
--------------- --------------
Cash flows from operating activities:
Net income $795,953 $1,353,948
--------------- --------------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 299,342 296,212
Provision for losses on accounts receivable 31,000 16,000
Changes in assets and liabilities:
Accounts receivable (1,034,285) (6,674,940)
Income tax refund receivable 2,256,670
Deferred tax asset 480,352
Prepaid expenses and other current assets 788,762 1,042,592
Accounts payable and accrued expenses (2,174,214) 3,725,084
Accrued payroll 682,440 2,023,253
Payroll and withheld taxes 58,215 205,219
Income taxes payable (187,644) (250,457)
--------------- --------------
Total adjustments (1,536,384) 3,119,985
--------------- --------------
Net cash (used in) provided by operating activities (740,431) 4,473,933
--------------- --------------
8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 27, 2004 and March 29, 2003 - (Continued)
(Unaudited)
2004 2003
--------------- --------------
Cash flows from investing activities:
Property and equipment acquired (94,816) (70,895)
Decrease in deposits 668 5,448
Contingent consideration (1,353,638)
--------------- --------------
Net cash used in investing activities (94,148) (1,419,085)
--------------- --------------
Cash flows from financing activities:
Exercise of stock options 46,663
Net repayments of line of credit (1,800,000) (3,120,000)
--------------- --------------
Net cash used in financing activities (1,753,337) (3,120,000)
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents (110,013) 346,813
--------------- --------------
(Decrease) increase in cash and cash equivalents (2,697,929) 281,661
Cash and cash equivalents at beginning of period 5,152,499 2,845,154
--------------- --------------
Cash and cash equivalents at end of period $2,454,570 $3,126,815
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $50,333 $53,485
Income taxes (refund) $600,407 ($1,468,990)
9
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). This Quarterly Report on Form 10-Q should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 27, 2003. Certain information and footnote disclosures which are
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to SEC
rules and regulations. The information reflects all normal and recurring
adjustments which, in the opinion of management, are necessary for a fair
presentation of the financial position of the Company, and its results of
operations for the interim periods set forth herein. The results for the three
months ended March 27, 2004 are not necessarily indicative of the results to be
expected for the full year.
2. Fiscal Year
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to December 31. A 53-week year occurs periodically. The fiscal
year ended 2004 is a 53-week reporting year. The first quarter of 2003, year
ended 2003 and the first quarter of 2004 ended on the following dates,
respectively:
o March 29, 2003
o December 27, 2003
o March 27, 2004
3. 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.
10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. New Accounting Standards
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 VIEs
created after January 31, 2003 and to VIEs 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 VIEs 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 financial statements
for periods ending after March 14, 2004. The Company does not have interests in
special purpose entities and the adoption of FIN 46R did not have a material
impact on the Company's consolidated financial position, results of operations,
or cash flows.
5. 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.
This agreement 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.
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 the
Company's 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 and the Company intends to
renew or replace the current facility. The weighted average interest rates under
the Revolving Credit Facility for the three months ended March 27, 2004 and
March 29, 2003 were 2.92% and 3.07%, respectively. The amounts outstanding under
the Revolving Credit Facility at March 27, 2004 and December 27, 2003 were $5.5
million and $7.3 million, respectively. At March 27, 2004, the Company had
availability (after deducting amounts outstanding) under the Revolving Credit
Facility of $19.5 million.
6. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
Three Months Ended
------------------------------
March 27, March 29,
2004 2003
------------- -------------
Interest expense ($137,000) ($62,066)
Interest income 22,309 10,799
------------- -------------
($114,691) ($51,267)
============= =============
11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Goodwill
Statement of Financial Accounting Standards ("SFAS") 142 requires the Company to
perform a goodwill impairment test on at least an annual basis. For purposes of
its 2003 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. The Company compared the fair value of each of its reporting
units to their respective carrying values, including related goodwill. The
results of the 2003 impairment testing indicated no impairment to goodwill.
Future changes in the industry could impact the market multiples of comparable
businesses, and consequently could impact the results of future annual
impairment tests. There have been no events through March 27, 2004 that have
indicated a need to perform the impairment test prior to the Company's annual
test date.
There are no changes in the carrying amount of goodwill for the period
ended March 27, 2004.
8. Accounts Payable
Accounts payable and accrued expenses consisted of the following at
March 27, 2004 and December 27, 2003:
March 27, December 27,
2004 2003
--------------- -----------------
(Unaudited)
Accounts payable and other accrued expenses $5,382,530 $7,216,885
Reserve for litigation 8,017,292 8,357,151
--------------- -----------------
Total $13,399,822 $15,574,036
=============== =================
9. Shareholders' Equity
Common Shares Reserved
Shares of unissued common stock were reserved for the following purposes:
March 27, December 27,
2004 2003
-------------- ----------------
(Unaudited)
Exercise of options outstanding 1,192,366 1,214,916
Future grants of options 1,034,287 1,074,287
-------------- ----------------
Total 2,226,653 2,289,203
============== ================
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. 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.
At March 27, 2004, the Company had 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 plans 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).
Three Months Ended
--------------------------
March 27, March 29,
2004 2003
------------ -------------
Net income, as reported $796 $1,354
Less: stock-based compensation costs
determined under fair value based
method for all awards. 145 174
Net income, pro forma 651 1,180
Earnings per share of common stock-basic:
As reported $.07 $.13
Pro forma $.06 $.11
Earnings per share of common stock-diluted:
As reported $.07 $.13
Pro forma $.06 $.11
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Stock - Based Compensation (Continued)
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 March 29, 2003 has been adjusted. The weighted average
fair value of options granted using Black-Scholes Option Pricing Model during
the three months ended March 29, 2003 has been estimated using the following
assumptions: risk free interest rate of 4.06%, expected life of options of 5
years, and expected stock volatility of 49%. The weighted average per share
value granted was $2.18. There were no options granted during the three months
ended March 27, 2004.
Incentive Stock Option Plans
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 100,000 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 March 27, 2004, options to purchase 92,855 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 at which time the
1994 Plan expired. 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. Unvested options terminate when an optionee ceases to be a
Director of the Company. At March 27, 2004, options to purchase 70,000 shares of
common stock were outstanding.
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 March 27, 2004, options to purchase
1,033,980 shares of common stock were available for future grants, and options
to purchase 143,845 shares of common stock were outstanding.
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Stock - Based Compensation (Continued)
Incentive Stock Option Plans (Continued)
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 of 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 March 27, 2004, options to purchase 307 shares of common stock are
available for future grants, and options to purchase 885,666 shares of common
stock were outstanding.
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 three months ended March 27, 2004 and
March 29, 2003, there were no shares issued under the Purchase Plan. As of March
27, 2004, there were 335,006 shares available for issuance under the Purchase
Plan.
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information
The Company has adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"), which establishes standards for companies
to report information about operating segments, geographic areas and major
customers. The adoption of SFAS 131 has no effect on the Company's consolidated
financial position, consolidated results of operations or liquidity.
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling general and
administrative expenses directly attributable to that segment as well as charges
for allocating corporate costs to each of the operating segments. The following
tables reflect the results of the segments consistent with the Company's
management system (in thousands):
Three Months Ended Information Professional Commercial
March 27, 2004 Technology Engineering Services Corporate Total
-------------- ------------ -------------- ------------ ------------ -
Revenue $22,584 $13,434 $5,255 $41,273
Operating expenses (1) 21,835 12,416 5,431 39,682
-------------- ------------ -------------- ------------ ------------ -
EBITDA (1) (2) 749 1,018 (176 ) 1,591
Depreciation 153 105 24 282
Amortization of
intangibles 5 11 1 17
-------------- ------------ -------------- ------------ ------------
Operating income 591 902 (201 ) 1,292
Interest expense, net
of interest income 63 37 15 115
Loss on foreign currency
transactions 1 1
Income taxes 170 281 (71 ) 380
-------------- ------------ -------------- ------------ ------------
Net income $358 $583 ($145 ) $796
============== ============ ============== ============ ============
Total assets $97,697 $49,285 $22,260 $6,387 $97,697
Capital expenditures $10 $85 $95
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information (Continued)
Three Months Ended Information Professional Commercial
March 29, 2003 Technology Engineering Services Corporate Total
-------------- ------------- ------------- ----------- ------------ --
Revenue $26,249 $19,994 $4,407 $50,650
Operating expenses (1) 24,534 19,236 4,275 48,045
-------------- ------------- ------------- ----------- ------------ --
EBITDA (1) (2) 1,715 758 132 2,605
Depreciation 146 130 15 291
Amortization of 2 3 5
intangibles
-------------- ------------- ------------- ----------- ------------ --
Operating income 1,567 625 117 2,309
Interest expense, net of
interest income 26 20 5 51
Gain on foreign currency
transactions (2) (31) (33)
Income taxes 635 254 48 937
-------------- ------------- ------------- ----------- ------------ --
Net income $908 $382 $64 $1,354
============== ============= ============= =========== ============ ==
Total assets $51,947 $21,435 $5,833 $15,046 $94,261
Capital expenditures $71 $71
<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. 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.
</FN>
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information (Continued)
The Company is domiciled in the U.S. and its segments operate in the United
States and Canada. Revenues and fixed assets by geographic area as of and for
the three months ended March 27, 2004 and March 29, 2003 are as follows (in
thousands):
March 27, March 29,
---------------- ----------------
2004 2003
---------------- ----------------
Revenues
U.S. $35,526 $37,492
Canada 5,747 13,158
---------------- ----------------
$41,273 $50,650
================ ================
Fixed Assets
U. S. $4,636 $5,247
Canada 306 423
---------------- ----------------
$4,942 $5,670
================ ================
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. Contingencies
The Company was named as a defendant in a lawsuit filed in the Superior Court of
New Jersey in 2001 by two individuals from whom the Company acquired stock in an
acquisition that occurred in 1998. The lawsuit arises from allegations of
wrongful failure by the Company to pay deferred consideration under the relevant
acquisition agreement. In February 2002 the court, at the Company's request,
ordered the plaintiffs to arbitrate their breach of contract claims and
subsequently dismissed the rest of the lawsuit. The arbitration will likely take
place in 2004, although no hearing date has yet been established. The range of
possible loss from the this 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 late 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 2002. 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 verdict and upheld the
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 27, 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. As of March 27, 2004, the accrued
litigation reserve was $8.0 million.
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. Contingencies (Continued)
In addition, in November 2002, the Company brought suit in the Superior Court of
New Jersey on professional liability claims against the attorneys and law firms
who served as its counsel in the above-described 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
litigation 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 the Company's consolidated financial position and the
consolidated results of operations for the period in which the effect becomes
reasonably estimable.
13. Reclassifications
Certain reclassifications have been made to 2003 balances to conform to 2004
presentation.
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings made
by 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.
21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
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
18.5%, or $9.4 million, for the three months ended March 27, 2004 as compared to
the same period in the prior year. 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 services, 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
services 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.
22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
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 certain of the more complex assignments where the
engagements are for longer terms or where precise documentation on the nature
and scope of the assignment is necessary. Although contracts normally relate to
longer-term and more complex engagements, they 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.
23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
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 primarily due from trade customers. 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. 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.
24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
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 $145,000 for the
three months ended March 27, 2004. 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 27, 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.
Forward-looking Information
The Company's growth prospects are influenced by broad economic trends. The pace
of customer capital spending programs, new product launches and similar
activities have a direct impact on the need for consulting and engineering
services as well as temporary and permanent employees. Should the U.S. economy
decline, the Company's operating performance could be adversely impacted. The
Company believes that its fiscal discipline and strategic focus on targeted
vertical markets provides some insulation from adverse trends. However, further
declines in the economy could result in the need for future cost reductions or
changes in strategy.
Additionally, changes in government regulations could result in prohibition or
restriction of certain types of employment services or the imposition of new or
additional benefits, licensing or tax requirements with respect to the provision
of employment services that may reduce RCM's future earnings. There can be no
assurance that RCM will be able to increase the fees charged to its clients in a
timely manner and in a sufficient amount to cover increased costs as a result of
any of the foregoing.
The staffing services market is highly competitive with limited barriers to
entry. RCM competes in global, national, regional and local markets with
numerous consulting, engineering and staffing companies. Price competition in
the aforementioned industries is significant, and pricing pressures from
competitors and customers are increasing. RCM expects that the level of
competition will remain high in the future, which could limit RCM's ability to
maintain or increase its market share or profitability.
25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Forward-looking Information - (Continued)
Certain information in this report, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements, as such term is defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Certain forward-looking statements can be identified by the use of
forward-looking terminology such as, "believes", "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "estimates," or
"anticipates" or the negative thereof or other comparable terminology, or by
discussions of strategy, plans or intentions. Forward-looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. These include risks and
uncertainties such as competitive market pressures, material changes in demand
from larger customers, availability of labor, the Company's performance on
contracts, changes in customers' attitudes toward outsourcing, government
policies or judicial decisions adverse to the staffing industry, changes in
economic conditions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
assumes no obligation to update such information.
Three Months Ended March 27, 2004 Compared to Three Months Ended March 29, 2003
A summary of operating results for the three months ended March 27, 2004 and
March 29, 2003 is as follows (in thousands, except for earnings per share data):
2004 2003
---------------------- -----------------------
% of % of
Amount Revenue Amount Revenue
---------- ---------- ---------- ----------
Revenues $41,273 100.0 % $50,650 100.0 %
Cost of services 31,246 75.7 39,845 78.7
---------- ---------- ---------- ----------
Gross profit 10,027 24.3 10,805 21.3
---------- ---------- ---------- ----------
Selling, general and administrative 8,436 20.5 8,200 16.2
Depreciation and amortization 299 .7 296 .6
---------- ---------- ---------- ----------
8,735 21.2 8,496 16.8
---------- ---------- ---------- ----------
Operating income 1,292 3.1 2,309 4.6
Other expense 115 .3 19 .1
---------- ---------- ---------- ----------
Income before income taxes 1,177 2.8 2,290 4.5
Income taxes 381 .9 936 1.8
---------- ---------- ---------- ----------
Net income $796 1.9 % $1,354 2.7 %
========== ========== ========== ==========
Earnings per share
Basic and Diluted:
Net income $.07 $.13
========== ==========
The above summary is not a presentation of results of operations under generally
accepted accounting principles and should not be considered in isolation or as
an alternative to results of operations as an indication of the Company's
performance.
26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended March 27, 2004 Compared to Three Months Ended
March 29, 2003 - (Continued)
Revenues. Revenues decreased 18.5%, or $9.4 million, for the three months ended
March 27, 2004 as compared to the three months ended March 29, 2003 (the
"comparable prior year period"). The revenue decreased $3.7 million in the
Information Technology ("IT") segment and decreased $6.5 million in the
Professional Engineering ("PE") segment and increased $848,000 in the Commercial
Services ("CS") segment. Management attributes the overall decrease to the
anticipated conclusion of two major contracts in late 2003. Management
anticipates revenues for fiscal 2004 to remain consistent with the revenues
(annualized) for the three months ended March 27, 2004.
Cost of Services. Cost of services decreased 21.6%, or $8.6 million, for the
three months ended March 27, 2004 as compared to the comparable prior year
period. This decrease was primarily due to the decrease in costs associated with
the conclusion of two major contracts in late 2003. Cost of services as a
percentage of revenues decreased to 75.7% for the three months ended March 27,
2004 from 78.7% for the comparable prior year period. This decrease was
primarily attributable to a decrease in subcontracted labor related to low
margin revenues in the PE segment. Management anticipates the ratio of cost of
sales to revenues for fiscal 2004, to remain consistent with the same ratio for
the three months ended March 27, 2004.
Selling, General and Administrative. Selling, general and administrative ("SGA")
expenses increased 2.9%, or $236,000, for the three months ended March 27, 2004
as compared to the comparable prior year period. This increase was primarily
attributable to increased healthcare costs and statutory payroll taxes. SGA
expenses as a percentage of revenues were 20.5% for the three months ended March
27, 2004 as compared to 16.2% for the comparable prior year period. Management
anticipates SGA for fiscal 2004 to remain consistent with the SGA (annualized)
for the three months ended March 27, 2004.
Depreciation and Amortization. Depreciation and amortization ("DA") increased
1.0%, or $3,000, for the three months ended March 27, 2004 as compared to the
comparable prior year period. This increase was primarily due to the addition of
fixed assets purchased in periods since March 29, 2003.
Other Expense. Other expense consists of interest expense, net of interest
income and gains on foreign currency transactions. For the three months ended
March 27, 2004, actual interest expense of $137,000 was offset by $22,300 of
interest income, which was principally earned from short-term money market
deposits. Interest expense, net, increased $63,400 for the three months ended
March 27, 2004 as compared to the comparable prior year period. This increase
was primarily due to interest on a post-judgment verdict of $7.6 million (see
note 11). Gains and losses on foreign currency transactions decreased $33,400
because of the stabilization of the Canadian Dollar in the three months ended
March 27, 2004 as compared to the strengthening of the Canadian Dollar in
relation to the U.S. Dollar in the comparable prior year period.
Income Tax. Income tax expense decreased 59.4%, or $556,000, for the three
months ended March 27, 2004 as compared to the comparable prior year period.
This decrease was attributable to a lower level of income before taxes for the
three months ended March 27, 2004 compared to the comparable prior year period.
The effective tax rate was 32.3% for the three months ended March 27, 2004 as
compared to 40.9% for the comparable prior year period. The decrease in
effective tax rate was attributable to the increased amount of tax deductible
amortization in relation to reduced income before income tax purposes.
27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended March 27, 2004 Compared to Three Months Ended
March 29, 2003 - (Continued)
Segment Discussion (See Footnote 11)
Information Technology ("IT")
IT revenues of $22.6 million in 2004 decreased $3.7 million, or 14.0%, compared
to 2003. 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 $749,000, or 3.3% of revenues, for 2004 as compared to $1.7,
million or 6.5% of revenues, for 2003. The EBITDA margin percentage decrease was
due to the conclusion of a major IT contract in late 2003.
Professional Engineering ("PE")
PE revenues of $13.4 million in 2004 decreased $6.6 million, or 32.8%, compared
to 2003. The PE segment EBITDA was $1.0 million, or 7.6% of revenues for 2004 as
compared to $758,000 or 3.8% of revenues for 2003. The increase was attributable
to the conclusion of a major contract in late 2003 on which RCM had accepted
lower margins.
Commercial Services ("CS")
CS revenues of $5.3 million in 2004 increased $848,000, or 19.2%, compared to
2003. The CS segment EBITDA was ($176,000), or (3.4%) of revenues, as compared
to $132,000, or 3.0% of revenues, for 2003. The overall decline is principally
attributable to competitive pricing pressures and an unfavorable worker's
compensation rating market in California.
28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources
Operating activities used $740,000 of cash for the three months ended March 27,
2004 as compared to operating activities providing $4.5 million of cash for the
comparable 2003 period. The decrease in cash provided by operating activities
was primarily attributable to decreased earnings, an increase in accounts
receivable and a decrease in accounts payable and accrued expenses and income
taxes payable which was partially offset by a decrease in prepaid expenses and
other current assets and an increase in accrued payroll and payroll and withheld
taxes. Based on current operating activities, management does not anticipate the
use of cash in operating activities, as reflected in the financial statements
for the three months ended March 27, 2004, to be a trend for the remainder of
fiscal 2004.
Investing activities used $94,000 for the three months ended March 27, 2004 as
compared to $1.4 million for the comparable 2003 period. The decrease in the use
of cash for investing activities for 2004 as compared to the comparable period
was primarily attributable to a decrease in deferred consideration earn-out
payments.
Financing activities principally consisted of debt reduction of $1.8 million in
2004 as compared to financing activities using $3.1 million for debt reduction
for the comparable 2003 period.
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. 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. 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 and the Company
intends to renew or replace the current facility. The weighted average interest
rates for the three months ended March 27, 2004 and March 29, 2003 was 2.92% and
3.07%, respectively. The amounts outstanding under the Revolving Credit Facility
at March 27, 2004 and December 27, 2003 were $5.5 million and $7.3 million,
respectively. At March 27, 2004, the Company had availability (after deducting
amounts outstanding) under the Revolving Credit Facility of $19.5 million.
The Company anticipates that its primary use of capital in future periods will
be for working capital purposes. Funding for any future acquisitions will be
derived from one or more of the Revolving Credit Facility, funds generated
through operations, or future financing transactions.
The Company's business strategy is to achieve growth both internally through
operations and externally through strategic acquisitions. The Company from time
to time engages in discussions with potential acquisition candidates. As the
size of the Company and its financial resources increase, however, acquisition
opportunities requiring significant commitments of capital may arise. In order
to pursue such opportunities, the Company may be required to incur debt or issue
potentially dilutive securities in the future. No assurance can be given as to
the Company's future acquisition and expansion opportunities or how such
opportunities will be financed.
The Company does not currently have material commitments for capital
expenditures and does not 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.
29
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources (Continued)
At March 27, 2004, the Company had a deferred tax asset totaling $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 twelve months ending April 2, 2005.
ITEM 3. 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 March 27, 2004, 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 27, 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 4. 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 the 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.
30
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was named as a defendant in a lawsuit filed in the Superior Court of
New Jersey in 2001 by two individuals from whom the Company acquired stock in an
acquisition that occurred in 1998. The lawsuit arises from allegations of
wrongful failure by the Company to pay deferred consideration under the relevant
acquisition agreement. In February 2002 the court, at the Company's request,
ordered the plaintiffs to arbitrate their breach of contract claims and
subsequently dismissed the rest of the lawsuit. The arbitration will likely take
place in 2004, although no hearing date has yet been established. The range of
possible loss from this 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 late 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 2002. 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 verdict and upheld the
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. As of March 27, 2004, the accrued
litigation reserve was $8.0 million.
31
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
In addition, in November 2002, the Company brought suit in the Superior Court of
New Jersey on professional liability claims against the attorneys and law firms
who served as its counsel in the above-described 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
litigation 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 the Company's consolidated financial position and the
consolidated results of operations for the period in which the effect becomes
reasonably estimable.
32
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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.)
(b) Reports on Form 8-K
None
33
RCM TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RCM Technologies, Inc.
Date: May 6, 2004 By:/s/ Stanton Remer
--- ------- -----
______________
Stanton Remer
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the Registrant)
34
Exhibit 31.1
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATIONS
I, Leon Kopyt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this 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 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 officer(s) 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 performing the equivalent functions):
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.
Date: May 6, 2004 /s/ Leon Kopyt
Leon Kopyt
Chief Executive Officer
35
Exhibit 31.2
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATIONS
I, Stanton Remer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this 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 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 officer(s) 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 performing the equivalent functions):
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.
Date: May 6, 2004 /s/ Stanton Remer
Stanton Remer
Chief Financial Officer
36
Exhibit 32.1
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Leon Kopyt, President and Chief Executive Officer of
RCM Technologies, Inc., a Nevada corporation (the "Company"), hereby certify
that, to my knowledge:
(1) The Company's periodic report on Form 10-Q for the period ended
March 27, 2004 (the "Form 10-Q") fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
* * *
/s/ Leon Kopyt
Leon Kopyt
Chief Executive Officer
Date: May 6, 2004
37
Exhibit 32.2
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Stanton Remer, Chief Financial Officer of
RCM Technologies, Inc., a Nevada corporation (the "Company"), hereby certify
that, to my knowledge:
(1) The Company's periodic report on Form 10-Q for the period ended
March 27, 2004 (the "Form 10-Q") fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
* * *
/s/ Stanton Remer
Stanton Remer
Chief Financial Officer
Date: May 6, 2004
38