UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
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 if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
YES NO X
____ _____
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
YES X NO__
____
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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one): Large accelerated filer ___ Accelerated filer ___
Non-accelerated filer X
___
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $49,645,000 based upon the closing price of $4.44
per share of the registrant's common stock on June 30, 2005 on The Nasdaq
National Market. 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 21, 2006: 11,743,861.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the registrant's 2006
Annual Meeting of Stockholders (the "2006 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 2006 Proxy Statement is not filed by May 1, 2006, 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
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Item 1. Business.................................................................................. 2
Item 1A Risk Factors ............................................................................. 12
Item 1B Unresolved Staff Comments................................................................. 14
Item 2. Properties................................................................................ 14
Item 3. Legal Proceedings......................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders....................................... 14
PART II 15
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Item 5. Market for Registrant's Common Equity, Related Stock Holder Matters and Issuer Purchases
of Equity Securities...................................................................... 15
Item 6. Selected Consolidated Financial Data...................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................ 30
Item 8. Financial Statements and Supplementary Data............................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting Financial Disclosure.......... 30
Item 9A. Controls and Procedures................................................................... 31
Item 9B. Other Information......................................................................... 31
PART III 32
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Item 10. Directors and Executive Officers of the Registrant........................................ 32
Item 11. Executive Compensation.................................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters................................................................................... 32
Item 13. Certain Relationships and Related Transactions............................................ 32
Item 14. Principal Accountant Fees and Services.................................................... 32
PART IV 33
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Item 15. Exhibits, and Financial Statement Schedules............................................... 33
Signatures.............................................................................................. 36
PART I
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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 and the outcome of litigation (at both the trial and appellate
levels) involving the Company. 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," "believe," 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 from such statements. Such
risks and uncertainties include, without limitation: (i) unemployment and
general economic conditions affecting the provision of information technology
and engineering services and solutions and the 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) adverse effects on the market
price of the Company's common stock due to the potential resale into the market
of a significant amounts of common stock; (vii) the adverse effect a potential
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
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General
RCM 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 35
years. The Company provides a diversified and extensive range of service
offerings and deliverables. The Company's Information Technology segment
provides e-commerce, enterprise management, application lifecycle management,
regulatory compliance solutions and selected vertical market specific offerings.
RCM's Engineering segment provides engineering design, technical support and
project management and implementation services. The Company's Commercial
Services Segment provides health care contract professionals as well as clerical
and light industrial temporary personnel. The Company serves clients in a
variety of industries including those in the financial services, aerospace,
healthcare, pharmaceutical, utility, technology, manufacturing, distribution and
government sectors. The Company believes it offers a range of solutions that
fosters long-term client relationships, affords cross-selling opportunities, and
minimizes the Company's dependence on any single technology or industry sector.
RCM sells and delivers its services through a network of 34 branch offices
located in selected regions throughout North America.
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.
During the year ended December 31, 2005, approximately 54.3% of RCM's total
revenues were derived from Information Technology ("IT") services, 26.4% from
engineering services, and the remaining 19.3% from commercial services. The
Company has executed a regional strategy to better leverage its consulting
services offerings.
The IT consulting services market enjoyed rapid growth and expansion through the
1990s leading up to the well documented Y2K peak demand period that lasted until
early 2001. Demand for the Company's IT consulting services has yet to rebound
to those levels. A decline in revenues and operating income of certain branch
offices resulted in goodwill impairment charges for the fiscal years ended
January 1, 2005 and December 28, 2002. Demand for the Company's IT services is
significantly impacted by changes in the general level of economic activity,
particularly any negative effect on technology spending. During periods of
reduced economic activity, the Company may also be subject to increased
competition and pricing pressure in its market. As a result, continued periods
of reduced economic activity could have a material adverse impact on our
business and results of information technology operations.
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 is critical.
Although many companies have recognized the importance of optimizing IT systems
and products to support business processes in order to compete in today's
challenging environment, the process of designing, developing and implementing
IT solutions has become increasingly complex. As a result, many companies have
elected to defer, redefine or cancel investments in new systems, software and
solutions, and are focused on making more effective use of previous
technological investments. The Company's clients are faced with some of these
same decisions. This is resulting in greater uncertainty and cautiousness in
pursuing new technology projects, which had previously been considered a
competitive imperative. Consequently, many clients have trimmed or redeployed
their permanent workforce, thereby reducing the demand for consulting services.
This has had a direct negative impact on the Company's revenues and earnings.
2
ITEM 1. BUSINESS (CONTINUED)
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Industry Overview (Continued)
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 technology developments, 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.
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 and 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 influence the quality and
compatibility of IT solutions. RCM is structured to provide middle-market
companies an objective, single source for their IT needs.
While many businesses have been impacted by higher oil prices in recent years,
there has been growing sentiment around the world for the development of
alternative sources of energy, including a renewed interest in nuclear power.
Over the same period, there has been a significant increase in spending in the
United States in the aerospace and defense industries due largely to a
strengthening of the military and homeland security in response to geo-political
unrest and the threat of terrorism. The combination of higher energy prices and
increased military spending has created numerous business opportunities for
service providers, especially those engaged in engineering operations in North
America and abroad. The Company's Engineering group continues to focus on areas
of growth within the nuclear and aerospace industries.
In addition, over the past two years, a shortage of nurses and other health care
professionals in the United States has led to increases in business activity for
health care service companies. Due in part to an aging population and improved
medical technology, the demand for selected health care professionals is
expected to continue over the next several years.
Meanwhile, improvement in the general economy of the United States over the past
couple of years has positively affected temporary staffing businesses who are
providers of light industrial and clerical help. Generally, demand for
lower-skilled workers is stronger in the earlier stages of an economic cycle. As
the economic recovery reaches a certain level of maturity, demand for
lower-skilled temporary help tends to diminish.
Business Strategy
RCM is dedicated to providing solutions to meet its clients' business needs by
delivering information technology and engineering services. The Company's
objective is to be a recognized leader of specialized 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 promotes a full life cycle solution capability to its customers. The
goal of the full life cycle solution strategy is to fully address a client's
project implementation cycle at each stage of its development and deployment.
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 selectively to build projects and solutions offerings, which utilize
its extensive resource base.
3
ITEM 1. BUSINESS (CONTINUED)
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Growth Strategy (Continued)
Full Life Cycle Solution (Continued)
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 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 and generate revenue that is more
predictable. The company believes this can be accomplished by pursuing
additional vertical market specific solutions in conjunction or combination with
longer-term based solutions. The Company will seek to accomplish this 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. Its growth
strategy is designed to better serve the Company's customers, generate higher
revenues, and achieve greater operating efficiencies. National and regional
sales management programs were designed and implemented to segregate clients by
vertical market and national accounts to advance our value added services focus.
This process is improving account coordination so clients can benefit from
deeper industry knowledge as well as maximizing our major account opportunities.
RCM provides a company-wide training program in which sales managers and
professionals receive 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 vertical markets 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 this strategy will lead to greater account penetration and enhanced
client relationships.
Operational strategies contributing to RCM's internal productivity include the
delineation of certain new solutions 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. RCM's recently established Recruiting
Center of Excellence facilitates the recruitment of large numbers of candidates
across the U.S. and their placement through regional offices, providing a more
effective and efficient means of attracting highly qualified professionals to
RCM.
Continue Selective Strategic Acquisitions
The industry in which the Company operates 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 or market segments 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.
4
ITEM 1. BUSINESS (CONTINUED)
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Operating Strategy (Continued)
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. This industry-centric strategy is designed to allow 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. Additionally, the Company believes that by collaborating 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 appropriately
skilled personnel. The Company believes it has been successful in retaining
these personnel due in part to its use of practice managers who are dedicated to
maintaining contact with, and monitoring the satisfaction levels of, the
Company's consultants while they are on assignment.
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, as well as to quickly
integrate and enhance the return from new acquisitions. It also allows local
branches to focus more on growing their local operations.
To accomplish this, the Company's financial reporting and accounting systems are
centralized in the Company's operational headquarters in Parsippany, NJ. During
2004, the Company upgraded the back office operations to include increased
functionality as well as business continuity planning. The systems have been
configured to allow the performance of all back office functions, including
payroll, project management, project cost accounting, billing, human resource
administration and financial reporting and consolidation. The Company believes
that this configuration provides a robust and highly scalable platform from
which to manage daily operations, and has the capacity to accommodate increased
usage.
5
ITEM 1. BUSINESS (CONTINUED)
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Information Technology
The Company's Information Technology Segment 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
development and integration, software quality management, regulatory compliance,
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 both custom and
packaged software product solutions, implementation, infrastructure support,
hosting and 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 technology solutions best
suited to their business needs.
The Company provides its IT services through a number of flexible 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, 2005, the Company had assigned approximately 658 information
technology employees and consultants to its customers.
Engineering
The Company's Engineering Segment 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 Engineering
Segment 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 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 competitive 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.
6
ITEM 1. BUSINESS (CONTINUED)
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Engineering (Continued)
As of December 31, 2005, the Company had assigned approximately 426 engineering
and technical employees and consultants to its customers.
Commercial
The Company's Commercial Services Segment consists of specialty health care and
general support services.
The Company's Specialty Health Care Group specializes in long-term and
short-term staffing as well as executive search and placement for the following
fields: rehabilitation (physical therapists, occupational therapists and speech
language pathologists), nursing, managed care, allied health care, health care
management and medical office support. The specialty health care group provides
services to hospitals, long-term care facilities, 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. Typical engagements either range 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, 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, 2005, the Company had assigned approximately 1,178 commercial
services personnel to its customers.
7
ITEM 1. BUSINESS (CONTINUED)
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Branch Offices
The Company's organization consists of six operating regions with 34 branch
offices located in the United States, Puerto Rico, and Canada. The regions and
services provided by each of the branch offices are set forth in the table
below.
NUMBER OF SERVICES
REGION OFFICES PROVIDED(1)
- ----------------------------- ------------------ -------------------
EAST
Connecticut 2 E
Maryland 1 IT
Massachusetts 1 IT
New Jersey 2 IT, E
New York 3 IT, E, C
Pennsylvania 1 C
-
10
GREAT LAKES
Michigan 4 IT, E
Minnesota 1 IT
Missouri 1 IT
Wisconsin 3 IT, E
-
9
CENTRAL
Texas 2 IT
-
2
WEST
Northern California 1 IT
Southern California 7 IT, C
-
8
PUERTO RICO 1 IT
CANADA 4 IT, E
(1) Services provided are abbreviated as
follows: IT - Information Technology E -
Engineering C - Commercial
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.
8
ITEM 1. BUSINESS (CONTINUED)
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Branch Offices (Continued)
The Company is domiciled in the United States and its segments operate in the
United States and Canada. Revenues and Definite-Long Lived Assets by geographic
area for the year ended and as of December 31, 2005 are as follows (in
thousands):
Definite
Long-Lived
Revenues Goodwill Assets
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United States $165,808 $32,863 $809
Canada 14,810 $4,797
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$180,618 $37,660 $809
===========================================================================================
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 headquarters 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 vice presidents who
are responsible for ensuring that performance goals are achieved. The Company's
regional vice presidents 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, Harland Financial, 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.
9
ITEM 1. BUSINESS (CONTINUED)
- -------------------------------------------------------------------------------
Sales and Marketing (Continued)
The Company's larger representative customers include 3M, ADP, Ameriquest,
BancTec, Inc., Bristol Myers Squibb, Bruce Power L.P, Countrywide Home Loans,
Entergy, FlightSafety International, MSC Industrial Supply, Ontario Power
Generation, Schering Plough, United Technologies, 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 2005, the Company's largest customer accounted for 8.8% of the Company's
revenues. The Company's five and ten largest customers accounted for
approximately 26.3% and 35.6%, respectively, of the Company's revenues for 2005.
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, newspapers, 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 and technical practice managers. Consultant
relationship managers 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 provides technical training and skills development
through vendor-sponsored courses, computer-based training tools and on-the- job
mentoring programs.
Information Systems
The Company has invested, and is continuing to invest, in its current ERP
installation. During 2004, the Company upgraded the hardware, operating system,
and ERP software to accommodate its growing needs The ERP system resides on
Windows 2003 enterprise server operating system, and is housed on multi
redundant Dell PowerEdge servers. The branch offices of the Company are
networked to the corporate offices via AT&T managed VPN enabling the ERP
application to be accessed securely at all operational locations. The ERP 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.
The Company also maintains a unified front end system. This system consists of
two elements: the PCR system and the Microsoft CRM system. The PCR system
manages candidate information in a skills based database, work order flows, and
recruiting reporting on a national basis. The PCR application is housed on a
Dell PowerEdge 1750 with a RAID 5 disk configuration. The database in which the
PCR information is stored is Microsoft SQL 2000 (SP 3A). The web based system,
provided by Main Sequence, Inc., is customized to RCM's business requirements
and is hosted and maintained at the Company's data center. 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.
The Microsoft CRM system manages the business sales funnel, which includes
customer contacts, single sales objectives, contact management functionality for
the sales force, and sales reporting on a national basis. The system is housed
on a Dell PowerEdge 1750 with a multi hardware redundant configuration. The OS
is Windows 2003 and the database engine is Microsoft SQL 2000 (SP 3A). The web
based system, provided by Microsoft, has minor customization and is hosted and
maintained at the Company's headquarters.
The company is also reviewing proposals for a time and attendance system, which
will augment the ERP application by catering to the needs of its diverse
business offerings and distributed workforce. Anticipated rollout for this
system is expected by mid 2006.
10
ITEM 1. BUSINESS (CONTINUED)
- ------------------------------------------------------------------------------
Other Information
Safeguards - Business, Disaster and Contingency Planning
RCM has implemented a number of safeguards to protect the Company from various
system-related risks including a warm data center disaster recovery site,
redundant telecommunications and server systems architecture, multi-tiered
server and desktop backup infrastructure, and data center physical and
environmental controls. In addition, RCM has developed disaster recovery /
business continuity procedures for all offices, and is in the process of
documenting application support frameworks for all business critical
applications.
Given the significant amount of data generated in the Company's key processes
including recruiting, sales, payroll and customer invoicing, RCM has established
redundant procedures, functioning on a daily basis, within the Company's primary
data center. This redundancy mitigates the risks related to hardware application
and data loss by utilizing the concept of live differential backups of servers
and desktops to Storage Area (SAN) devices on its backup LAN, culminating in
offsite storage at an independent facility. Controls within the data center
environment ensure that all systems are proactively monitored and data is
properly archived.
Additionally, RCM has contracted and brokered strategic relationships with
third-party vendors to meet its recovery objectives in the event of a system
disruption. For example, comprehensive service level agreements provided by AT&T
for RCM's managed firewall, VPN and data circuits guarantees minimal outages as
well as network redundancy and scalability. The Disaster Recovery site, located
at the corporate office in Pennsauken, provides WAN, ERP and messaging
redundancy services should the primary data center facility at Parsippany become
inoperable.
The company's ability to protect its data assets against damage from fire, power
loss, telecommunications failures, and facility violations is critical. The
deployment of virus, spam, and patch management controls extends from the email
gateway to all desktops and is centrally monitored and managed. In addition to
the standard virus and malware controls, an Intrusion Protection System (IPS)
monitors and alerts on changes in network traffic patterns as well as known
hostile signatures.
Finally, the Company maintains a comprehensive disaster recovery plan that
outlines the recovery organization structure, roles and procedures, including
site addendum disaster plans for all of its key operating offices. Corporate IT
personnel regulate the maintenance and integrity of backed-up data throughout
the Company.
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
engineering services market include: strong relationships with existing clients,
a long track record with over 1,000 clients, a broad range of services,
technical expertise, knowledge and experience in multiple industry sectors,
quality and flexibility 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, and its strong corporate-level support and resources.
11
ITEM 1. BUSINESS (CONTINUED)
- ------------------------------------------------------------------------------
Seasonality
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.
Employees
As of December 31, 2005, the Company employed an administrative staff of
approximately 250 people, including certified IT specialists and licensed
engineers who, from time to time, participate in IT and engineering design
projects undertaken by the Company. As of December 31, 2005, there were
approximately 658 information technology and 426 engineering and technical
employees and consultants assigned by the Company to work on client projects for
various periods. As of December 31, 2005, there were approximately 1,178
commercial services employees and consultants. None of the Company's employees
is represented by a collective bargaining agreement. The Company considers its
relationship with its employees to be good.
ITEM 1A. RISK FACTORS
- ------------------------------------------------------------------------------
The Company's business involves a number of risks, some of which are beyond its
control. The risk and uncertainties described below are not the only ones the
Company faces. Management believes that the most significant of these risks and
uncertainties are as follows:
Economic Trends
The Company's growth and earnings 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 temporary and permanent
employees. 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 would adversely affect the Company's
operating performance and could result in the need for future cost reductions or
changes in strategy.
Government Regulations
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.
Highly Competitive Business
The staffing services and outsourcing markets are highly competitive and have
limited barriers to entry. RCM competes in global, national, regional, and local
markets with numerous temporary staffing and permanent placement companies.
Price competition in the staffing industry is significant and pricing pressures
from competitors and customers are increasing. In addition, there is increasing
pressure on companies to outsource certain areas of their business to low cost
offshore outsourcing firms. 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.
Dependence Upon Personnel
The Company's operations depend on the continued efforts of its officers and
other executive management. The loss of key officers and members of executive
management may cause a significant disruption to the Company's business. RCM
also depends on the performance and productivity of its local managers and field
personnel. The Company's ability to attract and retain new business is
significantly affected by local relationships and the quality of service
rendered. The loss of key managers and field personnel may also jeopardize
existing client relationships with businesses that continue to use our services
based upon past relationships with local managers and field personnel, which
could cause future revenues to decline in that event.
12
ITEM 1A. RISK FACTORS (CONTINUED)
- -----------------------------------------------------------------------------
Workers' Compensation and Employee Medical Insurance
The Company self-insures a portion of the exposure for losses related to
workers' compensation and employees' medical insurance. The Company has
established reserves for workers' compensation and employee medical insurance
claims based on historical loss statistics and periodic independent actuarial
valuations. While management believes that its assumptions and estimates are
appropriate, significant differences in actual experience or significant changes
in assumptions may materially affect the Company's future financial results.
Improper Activities of Our Temporary Professionals Could Result in Damage to Our
Business Reputation, Discontinuation of Our Client Relationships and Exposure to
Liability
The Company may be subject to possible claims by our clients related to errors
and omissions, misuse of proprietary information, discrimination and harassment,
theft and other criminal activity, malpractice, and other claims stemming from
the improper activities or alleged activities of our temporary professionals.
There can be no assurance that our current liability insurance coverage will be
adequate or will continue to be available in sufficient amounts to cover damages
or other costs associated with such claims. Claims raised by clients stemming
from the improper actions of our temporary professionals, even if without merit,
could cause us to incur significant expense associated with the costs or damages
related to such claims. Further, such claims by clients could damage our
business reputation and result in the discontinuation of client relationships.
Integration of Acquisitions
The Company reviews prospective acquisitions as an element of its growth
strategy. The failure to successfully integrate any future acquisition may
divert management's attention from its core operations or could negatively
affect the Company's ability to timely meet the needs of its customers.
Goodwill and Intangible Impairments May Have an Adverse Effect on our Results of
Operations
The Company recorded a write down of $2.2 million in 2004 related to impairment
of goodwill. As of December 31, 2005, we had $38.5 million of goodwill and
intangible assets on our balance sheet, which represented 36.0% of our total
assets. This amount primarily represents the remaining excess of the total
purchase price of our acquisitions over the fair value of the net assets
acquired. If we are required to further write down goodwill, the related charge
could materially reduce reported net income or result in a net loss for the
period in which the write down occurs.
Foreign Currency Fluctuations and Changes in Exchange Rates
The Company is exposed to risks associated with foreign currency fluctuations
and changes in exchange rates. RCM's exposure to foreign currency fluctuations
relates to operations in Canada principally conducted through its Canadian
subsidiary. Exchange rate fluctuations affect the U.S. dollar value of reported
earnings derived from the Canadian operations as well as the carrying value of
our investment in the net assets related to these operations. The Company does
not engage in hedging activities with respect to foreign operations.
Litigation
The Company is involved in certain litigation as described in Note 16 to the
financials statements (Legal Proceedings). An adverse outcome to the litigation
could have an adverse impact on the financial position and results of operations
of the Company.
Data Center Capacity and Telecommunication Links
Uninterruptible Power Supply (UPS), fire suppression and environmental control
systems, protect RCM's datacenter. All systems are monitored on a 24/7 basis
with alerting capabilities via voice or email. The telecommunications
architecture at RCM utilizes a managed solution from AT&T, which encompasses
redundancy, with the incorporation of shadow circuits and backup devices, and
diversity, with circuits provisioned from different geographical locations and
high availability failover VPN tunnels across locations.
13
ITEM 1A. RISK FACTORS (CONTINUED)
- -------------------------------------------------------------------------------
Data Center Capacity and Telecommunication Links (Continued)
RCM's ability to protect its data centers against damage from fire, power loss,
telecommunications failure and other disasters is critical. In order to provide
many of its services, RCM must be able to store, retrieve, process and manage
large databases and periodically expand and upgrade its capabilities. Any damage
to the Company's data centers or any failure of the Company's telecommunication
links that interrupts its operations or results in an inadvertent loss of data
could adversely affect RCM's ability to meet its customers' needs and their
confidence in utilizing RCM for future services.
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 100 F Street, NE, 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, proxies, 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 an inactive text reference only.
ITEM 1B. UNRESOLVED STAFF COMMENTS
- -------------------------------------------------------------------------------
Not applicable.
ITEM 2. PROPERTIES
- -------------------------------------------------------------------------------
The Company provides specialty professional consulting services, principally
performed at various client locations, through 34 administrative and sales
offices in 13 states and territories in the United States, Puerto Rico, and
Canada. The Company's 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
10,200 square feet and are leased at a rate of $13.75 per square foot per annum
for terms ending on December 31, 2006 and January 31, 2011.
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 $27.50 per square foot per annum for a
term ending on June 30, 2012.
- -------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
See discussion of Legal Proceedings in Note 16 to the consolidated financial
statements included in Item 8 of this Report.
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, 2005.
14
PART II
- -------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
- -------------------------------------------------------------------------------
Shares of the Company's common stock are 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, 2005 as reported
by The Nasdaq National Market:
Common Stock
- ----- ---------------------- ----------------------
Fiscal 2004 High Low
- ---------------------------- --------- -- ---------
First Quarter $8.06 $6.48
Second Quarter 7.69 3.89
Third Quarter 6.73 3.95
Fourth Quarter $5.15 $4.00
Fiscal 2005
- ---------------------------- --------- -- ---------
First Quarter $5.39 $4.26
Second Quarter 5.00 3.96
Third Quarter 7.99 4.20
Fourth Quarter $7.47 $4.86
Holders
As of March 1, 2006, the approximate number of holders of record of the
Company's Common Stock was 560. 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 1,956.
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.
Unregistered Sales of Equity Securities
On October 17, 2005, RCM issued 100,000 shares of its common stock, par value
$0.05 (the "Shares") at an aggregate offering price of $632,000, to the former
holders of all the issued and outstanding stock of Soltre as part of the
consideration for the acquisition of Soltre. See Financial Statement Note No. 2.
The issuance of the Shares was made in reliance on an exemption from
registration of the Shares under Rule 506 of Regulation D ("Regulation D")
promulgated under Section 5 of the Securities Act of 1933, as amended (the
"Act"). Each holder of the Shares is an "accredited investor," as such term is
defined in Regulation D. Each holder of the Shares has represented that he or
she will not sell, transfer, or otherwise dispose of the Shares unless the
Shares are registered under the Act or unless an exemption from registration is
available under applicable federal and state securities law. Each certificate
representing the Shares contains a restrictive legend stating that the Shares
have not been registered under the Act and may not be sold, transferred or
otherwise disposed of unless registered under the Act or exempt from
registration under applicable federal and state securities law.
15
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
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, January 1, December 27, December 28, December 29,
- -----------------------------------------------------------------------------------------------------------------------------------
2005 2005(2) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Income Statement
Revenues $180,618,164 $169,277,490 $206,605,188 $186,650,616 $234,739,066
Gross profit 42,682,532 40,973,845 44,594,686 46,664,861 62,575,740
Income before the charges listed
below 3,593,086 4,412,205 6,812,107 8,005,135 9,407,072
Amortization, net of tax (57,000) (41,000) (18,000) (12,000) (5,385,000)
Goodwill impairment, net of tax (2,164,338) (24,748,000) (22,758,000)
Unusual items, net of tax (6,414,000)
Equity compensation, net of tax (4,014,954)
Income (loss) from continuing
operations 3,536,086 2,206,867 2,779,153 (23,168,865) (18,735,928)
Loss from discontinued
operations (967,065) (20,041)
Net income (loss) $3,536,086 $2,206,867 $2,779,153 ($24,135,930) ($18,755,969)
Earnings Per Share (1)
Income (loss) from continuing
operations - Diluted $.30 $.19 $.26 ($2.19) ($1.78)
Loss from discontinued
operations (.09)
Net income (loss):
Basic $.31 $.19 $.26 ($2.28) ($1.78)
Diluted $.30 $.19 $.26 ($2.28) ($1.78)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, January 1, December 27, December 28, December 29,
- -----------------------------------------------------------------------------------------------------------------------------------
2005 2005 (2) 2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
Working capital $33,032,366 $29,544,955 $23,881,579 $16,516,062 $10,977,131
Total assets 106,772,702 99,388,087 99,703,589 88,439,784 131,155,945
Long term liabilities
Total liabilities 31,084,077 29,443,051 32,533,493 29,193,630 47,866,145
Stockholders' equity $75,688,625 $69,945,036 $67,170,096 $59,246,154 $83,289,800
- ------------------------------------
<FN>
(1) Shares used in computing earnings per share:
Basic 11,456,757 11,325,626 10,716,179 10,585,503 10,519,701
Diluted 11,731,591 11,679,811 10,896,305 10,585,503 10,519,701
((2)) Year ended January 1, 2005 had fifty-three weeks and all other years had
fifty-two weeks.
</FN>
16
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.
During the latter portion of the 1990s' RCM made significant personnel and
infrastructure investments 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 reductions in its staff
personnel and office requirements in response to the decrease in sales volume in
the 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 by providing a more cohesive and relevant marketing and sales
approach to new and existing customers and now focuses on growth in targeted
vertical markets and in service offerings providing greater revenue
opportunities.
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 had anticipated.
Nonetheless, the Company continues to believe that 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 current clients and prospective
future 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 based on either 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.
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.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------------------------
Overview (Continued)
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 the allocation of the purchase price of an acquisition, which has
been assigned to covenants not to compete, and customer lists. Acquisitions have
been accounted for under Statement of Financial Accounting Standards No. 141
"Business Combinations", and have created goodwill.
Critical Accounting Policies
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States, 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 from 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 Engineering Services and
Information Technology Services segments also perform project services. All of
the Company's segments derive revenue from permanent placement fees.
Project Services
The Company recognizes revenues in accordance with the Securities and Exchange
Commission, Staff Accounting Bulletin Number 104, "Revenue Recognition" ("SAB
No. 104"). SAB No. 104 clarifies application of U.S. generally accepted
accounting principles to revenue transactions. 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 the performance of such project or activity. The Company
recognizes revenues and associated costs on a gross basis as services are
provided to the customer and costs are incurred using its employees. The
Company, from time to time, enters into contracts requiring the completion of
specific deliverables. The Company recognizes revenue on these deliverables at
the time the client accepts and approves the deliverables. 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. Provision for
contract losses, if any, is made in the period such losses are determined.
Expenses related to contracts that extend beyond a 12-month period are charged
to Cost of Services as incurred.
18
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 Services
The Company earns permanent placement fees from providing permanent placement
services. Fees for placements are recognized at the time the candidate commences
employment. The Company guarantees its permanent placements on a prorated basis
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 prorated
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
The Company follows SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS
No. 142"). Accordingly, the Company evaluates 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 as well as the use of discounted cash flows and
market multiples in determining fair market value. In order to estimate future
cash flows, management must make subjective judgments based on reasonable and
supportable assumptions and projections. The periods for estimating future cash
flows are uncertain, 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 have an effect upon the future values
of these reporting units, which could result in future impairment charges.
19
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. Accounting principles generally accepted in the United States
allow alternative methods of accounting for these awards. The Company has chosen
to account for its stock plans (including stock option plans) under Accounting
Principle Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB
Opinion 25"). 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 No. 123, "Accounting for
Stock-Based Compensation," ("SFAS 123") prescribes the alternative method of
accounting for stock options. Had SFAS 123 been adopted, the Company would have
recorded additional costs of approximately $692,000, $321,000 and $500,000 for
the years ended December 31, 2005, January 1, 2005 and December 27, 2003,
respectively. 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 and is based upon freely traded options. Changes in the underlying
assumptions could affect the pro forma compensation cost.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (revised 2004), Share-Based Payment ("SFAS 123R"), which is a
revision of SFAS No. 123. SFAS 123R supersedes APB Opinion No. 25, and amends
FASB Statement No. 95, "Statement of Cash Flows". The approach to quantifying
stock-based compensation expense in SFAS 123R is similar to SFAS No. 123.
However, the revised statement requires all share-based payments to employees,
including grants of employee stock options, to be recognized as an expense in
the Consolidated Statements of Income based on their fair values as they are
earned by the employees under the vesting terms. Pro forma disclosure of
stock-based compensation expense, as is the Company's practice under SFAS No.
123, will not be permitted after 2005, since SFAS 123R must be adopted no later
than the first interim or annual period beginning after December 15, 2005. The
Company has adopted the "modified prospective" method of adoption of SFAS 123R
effective as of January 1, 2006, whereby earnings for prior periods will not be
restated as though stock based compensation had been expensed. Although the
Company has not yet fully evaluated the effect of SFAS 123R on its results of
operations, the Company believes that the impact on the Consolidated Statements
of Income will be similar to the pro forma impact shown above for the fifty-two
weeks ended December 31, 2005.
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, and estimates of future earnings. As of December 31, 2005, the
Company had total net deferred tax assets of $4.0 million. This includes $3.3
million for a reserve for litigation charges. 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.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
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, strategic focus on targeted
vertical markets and diversification of service offerings 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 employee 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 employment services market is highly competitive with limited barriers to
entry. RCM competes in global, national, regional, and local markets with
numerous consulting, engineering and employment companies. Price competition in
the industries the Company serves 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.
21
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, 2005 January 1, 2005 December 27, 2003
------------------------------------------------------------------------------------------------------------------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
------------------------------------------------------------------------------------------------------------------------
Revenues $180,618 100.0 $169,277 100.0 $206,605 100.0
Cost of services 137,935 76.4 128,303 75.8 162,010 78.4
------------------------------------------------------------------------------------------------------------------------
Gross profit 42,683 23.6 40,974 24.2 44,595 21.6
Selling, general and administrative 35,461 19.6 34,330 20.3 32,558 15.8
Depreciation and amortization 1,206 .7 1,219 .7 1,223 .6
Compensation expense for
stock option tender 6,692 3.2
offer
Impairment of goodwill 2,164 1.3
Other expense, net 209 .1 450 .3 182 .1
Income before income taxes 5,806 3.2 2,811 1.6 3,940 1.9
Income taxes 2,270 1.2 604 .3 1,161 .6
------------------------------------------------------------------------------------------------------------------------
Net income $3,536 2.0 $2,207 1.3 $2,779 1.3
========================================================================================================================
Earnings per share
Basic: $.31 $.19 $.26
------------------------------------------------------------------------------------------------------------------------
Diluted: $.30 $.19 $.26
========================================================================================================================
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.
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. Therefore, the reporting period
ended January 1, 2005 consisted of fifty-three weeks as compared to the two
other years, which ended on December 31, 2005 and December 27, 2003, consisting
of fifty-two weeks. Unless specifically noted otherwise, the following
discussion of changes between comparable periods does not reflect the fact that
the fiscal year ended 2004 contains an additional one week.
Year Ended December 31, 2005 Compared to Year Ended January 1, 2005
Revenues. Revenues increased 6.7%, or $11.3 million, for the year ended December
31, 2005 as compared to the same period in the prior year (the "comparable prior
year period"). The revenue increased $5.1 million in the Information Technology
("IT") segment, decreased $3.5 million in the Engineering segment, and increased
$9.7 million in the Commercial segment. Management attributes the overall
increase to an improvement of the general economy and successful marketing and
sales efforts.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
Year Ended December 31, 2005 Compared to Year Ended January 1, 2005 (Continued)
Cost of Services. Cost of services increased 7.5%, or $9.6 million, for the year
ended December 31, 2005 as compared to the comparable prior year period. This
increase was primarily due to the increase in revenues. Cost of services as a
percentage of revenues increased to 76.4% for the year ended December 31, 2005
from 75.8% for the comparable prior year period. This increase was primarily
attributable to increased pricing pressures in the IT segment as well as
increased revenues in the Commercial Segment, which has lower gross margins.
Selling, General and Administrative. Selling, general and administrative ("SGA")
expenses increased 3.3%, or $1.1 million, for the year ended December 31, 2005
as compared to the comparable prior year period. As a percentage of revenues,
SGA expenses were 19.6% for the year ended December 31, 2005 as compared to
20.3% for the comparable prior year period. This modest decrease was primarily
attributable to continued cost containment activities, which were offset by
increased sales costs on higher revenues and increased legal fees.
Depreciation and Amortization. Depreciation and amortization decreased 1.1%,
or $13,000, for 2005 as compared to 2004.
Other Expense. Other expense consisted of interest expense, net of interest
income and gains and losses on foreign currency transactions. For the year ended
December 31, 2005, actual interest expense of $568,000 was offset by $347,000 of
interest income, which was principally earned from short-term money market
deposits. Interest expense, net, decreased $253,000 for the year ended December
31, 2005 as compared to the comparable prior year period. This decrease was
primarily due to a reduction of debt, which was partially offset by an increase
in the effective interest rate on the line of credit for the year ended December
31, 2005 as compared to the comparable prior year period. Gains on foreign
currency transactions decreased $13,000 because of the stabilization of the
Canadian Dollar as compared to the U. S. Dollar during the year ended December
31, 2005, 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 increased 276%, or $1.7 million, for the year
ended December 31, 2005 as compared to the comparable prior year period. The
increase was attributable to a favorable change in the valuation allowance in
2004, which was offset by a nondeductible goodwill impairment charge of $2.2
million in fiscal year ended January 1, 2005. The effective tax rate was 39.1%
for the year ended December 31, 2005 as compared to 27.1%, in the year ended
January 1, 2005, which was net of the goodwill charge and change in valuation
allowance in the comparable prior year.
Goodwill Impairment. SFAS 142 requires the Company to perform a goodwill
impairment test on at least an annual basis. The results of the 2005 impairment
testing indicated no impairment to goodwill. The 2004 analysis revealed that
goodwill amounting to approximately $2.2 million had been impaired for the
fiscal year ended January 1, 2005, and therefore, would not be recoverable
through future profitable operations. There can be no assurance that future
goodwill impairment tests will not result in further impairment charges.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------------
Year Ended December 31, 2005 Compared to Year Ended January 1, 2005 (Continued)
Segment Discussion (See Footnote 15)
Information Technology
IT revenues of $98 million in 2005 represented an increase of $5.1 million, or
5.5%, compared to 2004. This increase is attributable to an increase in demand
for IT services. EBITDA for the IT segment was $5.8 million, or 80% of the
overall EBITDA, for 2005 as compared to $2.1 million, or 47.6% of the overall
EBITDA, for 2004.
Engineering
Engineering revenues of $47.7 million in 2005 represented a decrease of $3.5
million, or 7.5%, compared to 2004. The decrease in revenue was attributable to
the softening of demand for the Company's engineering services. The Engineering
segment EBITDA was $258,000, or 3.6% of the overall EBITDA, for 2005 as compared
to $2.8 million, or 63.1% of the overall EBITDA, for 2004.
Commercial
Commercial revenues of $34.9 million in 2005 represented an increase of $9.7
million, or 38.6% compared to 2004. The increase in revenues for the Commercial
segment was attributable to improvement in economic activity within this
segment. The Commercial segment EBITDA was $1.1 million, or 15.6% of the overall
EBITDA, for 2005 as compared to a loss of $428,000, for 2004.
Year Ended January 1, 2005 Compared to Year Ended December 27, 2003
Revenues. Revenues decreased 18.1%, or $37.3 million, for the year ended January
1, 2005 as compared to the same period in the prior year (the "comparable prior
year period"). The revenue decreased $8.0 million in the Information Technology
segment, decreased $35.5 million in the Engineering segment, and increased $6.2
million in the Commercial segment. Management attributes the overall decrease to
the conclusion in accordance with the terms of two major contracts in the IT and
Engineering segments in early 2004 as well as a softening of demand for
information technology services, offshore competition, and widespread pricing
pressures. The aggregate revenues from the two major contracts in fiscal 2003
were $31.9 million.
Cost of Services. Cost of services decreased 20.8%, or $33.7 million, for the
year ended January 1, 2005 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 early 2004. Cost of services as a
percentage of revenues decreased to 75.8% for the year ended January 1, 2005
from 78.4% for the comparable prior year period. This decrease was primarily
attributable to a decrease in subcontracted labor related to low margin revenues
in the Engineering segment. This subcontracted labor was part of a major
contract, which concluded in early 2004.
Selling, General and Administrative. Selling, general and administrative ("SGA")
expenses increased 5.4%, or $1.8 million, for the year ended January 1, 2005 as
compared to the comparable prior year period. This increase was primarily
attributable to increased healthcare costs, statutory payroll taxes and one
additional week of SGA payroll. SGA expenses as a percentage of revenues were
20.3% for the year ended January 1, 2005 as compared to 15.8% for the comparable
prior year period. This increase was primarily attributable to a decline in
revenue of $37.3 million or 18.1%.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- ------------------------------------------------------------------------------
Year Ended January 1, 2005 Compared to Year Ended December 27, 2003 (Continued)
Depreciation and Amortization. Depreciation and amortization decreased 0.3%,
or $4,000, for 2004 as compared to 2003.
Other Expense. Other expense consisted of interest expense, net of interest
income and gains and losses on foreign currency transactions. For the year ended
January 1, 2005, actual interest expense of $536,000 was offset by $61,700 of
interest income, which was principally earned from short-term money market
deposits. Interest expense, net, increased $160,000 for the year ended January
1, 2005 as compared to the comparable prior year period. This increase was
primarily due to an increase in the effective interest rate on the line of
credit for the year ended January 1, 2005 as compared to the comparable prior
year period. Gains on foreign currency transactions decreased $107,000 because
of the stabilization of the Canadian Dollar during the year ended January 1,
2005 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 47.9%, or $556,000, for the year ended
January 1, 2005 as compared to the comparable prior year period. The effective
tax rate was 21.5% for the year ended January 1, 2005 as compared to 29.4% for
the comparable prior year period. These decreases were attributable to a
nondeductible goodwill impairment charge of $2.2 million in fiscal year ended
January 1, 2005, which was offset by a change in the valuation allowance. The
effective tax rate net of the goodwill charge and change in valuation allowance
is 27.1% for the year ended January 1, 2005 as compared to 29.4% for the
comparable prior year. This decrease was attributable to a decrease in the
Canadian income tax rate.
Goodwill Impairment. SFAS 142 requires the Company to perform a goodwill
impairment test on at least an annual basis. For purposes of its 2004 and 2003
annual impairment testing, the Company determined the fair value of its
reporting units using a discounted cash flow method and relative market
multiples for comparable businesses, as of November 30, 2004 and 2003,
respectively. The analysis revealed that goodwill, amounting to approximately
$2.2 million had been impaired for the fiscal year ended January 1, 2005 and
therefore, would not be recoverable through future profitable operations. The
results of the 2003 impairment testing indicated no impairment to goodwill.
There can be no assurance that future goodwill impairment tests will not result
in further impairment charges.
Segment Discussion (See Footnote 14)
Information Technology
IT revenues of $92.9 million in 2004 decreased $8.0 million, or 7.9%, compared
to 2003. The decline was principally attributable to a softening of demand for
information technology services, offshore competition, and widespread pricing
pressures. EBITDA for the IT segment was $2.1 million, or 47.6% of the overall
EBITDA for 2004 as compared to $7.3 million, or 136% of the overall EBITDA, for
2003.
Engineering
Engineering revenues of $51.2 million in 2004 decreased $35.5 million, or 41.0%,
compared to 2003. The decrease in revenue was attributable to the conclusion of
a major engineering contract in early 2004 on which RCM had accepted lower
margins. The Engineering segment EBITDA was $2.8 million, or 63.1% of the
overall EBITDA for 2004 as compared to $3.4 million, or 63.1% of the overall
EBITDA, for 2003.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
Year Ended January 1, 2005 Compared to Year Ended December 27, 2003 (Continued)
Commercial
Commercial revenues of $25.2 million in 2004 increased $6.2 million, or 32.4%
compared to 2003. The increase in revenues for the Commercial segment was
attributable to improvement in economic activity within this segment. The
revenues in the Commercial segment increased as compared to the decrease in
revenues in the IT and Engineering segments, which resulted in a larger
allocation of corporate overhead burden to the Commercial segment as compared to
the same period a year ago. The Commercial segment EBITDA was a loss of
$428,000, as compared to income of $334,000, for 2003. The overall decline is
principally attributable to competitive pricing pressures, an unfavorable
worker's compensation rating market in California and start-up expenses
associated with market expansion of the specialty health care group.
Liquidity and Capital Resources
The following table summarizes the major captions from the Company's
Consolidated Statements of Cash Flows:
Year Ended Year Ended
(In thousands) December 31, 2005 January 1, 2005
- ---------------------------- -- --------------------- -- ------------------
Operating Activities $3,346 ($424)
Investing Activities ($2,483) ($494)
Financing Activities ($141) ($2,011)
Operating Activities
Operating activities provided $3.3 million of cash for the year ended December
31, 2005 as compared to operating activities using $424,000 of cash for the
comparable 2004 period. The increase in cash provided by operating activities
was primarily attributable to increased earnings, an increase in accounts
payable and accrued expenses and income taxes payable, which was partially
offset by an increase in accounts receivable, a decrease in accrued payroll and
payroll and withheld taxes. The Company continues to institute enhanced
managerial controls and standardization over its receivables collection and
disbursement processes.
Investing Activities
Investing activities used $2.5 million for the year ended December 31, 2005 as
compared to $494,000 for the comparable prior year period. The increase in the
use of cash for investing activities for 2005 as compared to the comparable
prior year period was primarily attributable to the use of cash of $1.6 million
for an acquisition.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
Financing Activities
Financing activities consisted of debt reduction of $1.0 million for the fiscal
year ended December 31, 2005 as compared to financing activities using $2.4
million for debt reduction for the comparable prior year period. In addition,
the Company received $1.0 million in 2005 as compared to $389,000 in 2004 of
cash as a result of the exercise of employee stock options and the sale of stock
through the Company's Employee Stock Purchase Plan.
The Company and its subsidiaries entered into an amended and restated loan
agreement on May 31, 2002, which was further amended on July 27, 2004, 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 90 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 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 2006. Management of the Company
has commenced negotiations for renewal or replacement of the Revolving Credit
Facility. Management has renewed this Revolving Credit Facility in the past and
anticipates that it will do so again. The weighted average interest rates under
the Revolving Credit Facility for the years ended December 31, 2005 and January
1, 2005 were 6.31% and 3.99%, respectively. The amounts outstanding under the
Revolving Credit Facility at December 31, 2005 and January 1, 2005 were $3.9
million and $4.9 million, respectively. At December 31, 2005, the Company had
availability for additional borrowing under the Revolving Credit Facility of
$21.0 million.
The Company anticipates that its primary uses of capital in future periods will
be for working capital purposes. Funding for any long and short term capital
requirements as well as 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 16 (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.
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 12 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 12 months.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- -------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
At December 31, 2005, the Company had a deferred tax asset totaling $4.0
million, primarily representing the tax effect of a litigation reserve. The
Company expects to utilize the deferred tax asset during the 12 months ending
December 30, 2006 by offsetting the related tax benefits of such assets against
tax liabilities incurred from forecasted taxable income.
Summarized below are the Company's obligations and commitments to make future
payments under lease agreements and debt obligations as of December 31, 2005 (in
thousands):
Payments Due by Period
- ---------------------------------------------------------------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
- ---------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations (1) $3,900 $3,900
Operating Lease Obligations 9,966 2,620 $3,450 $2,605 $1,291
- ---------------------------------------------------------------------------------------------------------------
Total $13,866 $6,520 $3,450 $2,605 $1,291
===============================================================================================================
<FN>
(1) The Revolving Credit Facility is for $25.0 million and includes a sub-limit
of $2.0 million for letters of credit. The agreement expires in August 2006. At
December 31, 2005, there was an outstanding letter of credit for $116,000.
</FN>
Significant employment agreements are as follows:
Employment Agreement
The Company has an employment agreement with its Chief Executive Officer and
President, Leon Kopyt, which currently provides for an annual base salary of
$475,000 and other customary benefits. In addition, the agreement provides that
Mr. Kopyt's annual bonus is based on EBITDA, defined as earnings before
interest, taxes, depreciation and amortization. As of December 31, 2005, the
agreement expires on February 28, 2008. The agreement is for a rolling term of
three years, which automatically extends each year for an additional one-year
period on February 28 of each year. The employment agreement is terminable by
the Company upon Mr. Kopyt's death or disability, or for "good and sufficient
cause," as defined in the agreement.
Termination Benefits Agreement
The Company is party to a Termination Benefits Agreement with 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, 2005, Mr. Kopyt would have been entitled to cash payments of
approximately $3.2 million (representing salary and excise tax payments).
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- ----------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
Severance Agreement
The Company is party to a Severance Agreement with Mr. Kopyt, dated June 10,
2002, (the "Severance Agreement"). The severance 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, 2005, 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 $1.7 million, inclusive of employee
benefits.
Impact of Inflation
Staffing and project services are generally priced 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 2005, 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
2003 and 2004, the Company implemented a plan to control these costs through
higher co-pays and pricing adjustments during 2005. 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
SFAS 123R, which the Company has adopted effective as of January 1, 2006,
requires all share-based payments to employees, including grants of employee
stock options, to be recognized as an expense in the Consolidated Statements of
Operations based on their fair values as they are earned by the employees under
the vesting terms. Pro forma disclosure of stock-based compensation expense, as
is the Company's practice under SFAS No. 123, will not be permitted after 2005,
since SFAS 123R must be adopted no later than the first interim or annual period
beginning after December 15, 2005. The Company expects to follow the "modified
prospective" method of adoption of SFAS 123R in the first quarter of 2006,
whereby earnings for prior periods will not be restated as though stock based
compensation had been expensed.
Management believes the impact on the financial statements will be similar to
the disclosures made by footnote to the financial statements, showing the effect
on earnings and earnings per share of expensing the value of stock options
granted for the fifty-two weeks ended December 31, 2005.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
- -----------------------------------------------------------------------------
Recently Issued Accounting Standards (Continued)
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154
("SFAS 154"). "Accounting Changes and Error Corrections--A Replacement of APB
Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 also requires that
retrospective application of a change in accounting principle be limited to the
direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the
accounting change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate affected by a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date SFAS 154 is issued. The Company is
required to adopt the provision of SFAS 154, as applicable, beginning in fiscal
2006.
In June 2005, the FASB's Emerging Issues Task Force reached a consensus on Issue
No. 05-6, "Determining the Amortization Period for Leasehold Improvements"
("EITF 05-6"). The guidance requires that leasehold improvements acquired in a
business combination or purchased subsequent to the inception of a lease be
amortized over the lesser of the useful life of the assets or a term that
includes renewals that are reasonably assured at the date of the business
combination or purchase. The guidance is effective for periods beginning after
June 29, 2005. The Company does not expect the adoption of EITF 05-6 to 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, 2005, 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 63 basis points) increase in interest rates on its variable debt
(using average debt balances during the year ended December 31, 2005 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 SUPPLEMENTARY DATA
- -------------------------------------------------------------------------------
The financial statements, together with the report of the Company's Registered
Public Accounting Firm, begins 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's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that those disclosure controls and
procedures were adequate to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure.
A controls system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected.
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter and that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
- -------------------------------------------------------------------------------
None.
31
PART III
- -------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------------------------
The information in the 2006 Proxy Statement beginning immediately following the
caption "ELECTION OF DIRECTORS" to, but not including, the caption "EXECUTIVE
COMPENSATION" and the additional information in the 2006 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 2006 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
2006 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
AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
The information in the 2006 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 1,935,483 $4.34 36,486
approved by security
holders...............
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security ____________________ ____________________ ____________________
holders...............
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Total................. 1,935,483 $4.34 36,486
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------------------------------
The information in the 2006 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 2006 Proxy Statement beginning immediately following the
caption "PRINCIPAL ACCOUNTANT FEES AND SERVICES" is incorporated herein by
reference.
32
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
The Company furnished to the Securities and Exchange Commission, on
December 5, 2005, a Current Report on Form 8-K containing disclosure
pursuant to item 7.01 of Form 8-K.
The Company furnished to the Securities and Exchange Commission, on
November 9, 2005, a Current Report on Form 8-K containing disclosure
pursuant to item 2.02 of Form 8-K.
(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) Certificate of Amendment of Articles of Incorporation;
incorporated by reference to Exhibit A of the Registrant's Proxy
Statement, dated February 6, 1996, filed with the Securities and
Exchange Commission on January 29, 1996.
(3)(c) Certificate of Amendment of Articles of Incorporation;
incorporated by reference to Exhibit B of the Registrant's Proxy
Statement, dated February 6, 1996, filed with the Securities and
Exchange Commission on January 29, 1996.
(3)(d) Amended and Restated Bylaws; incorporated by reference to
Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1997.
(4)(a) 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,
filed with the Securities and Exchange Commission on March 20,
1996.
* (10)(a) RCM Technologies, Inc. 1992 Incentive Stock Option Plan;
incorporated by reference to Exhibit A of the Registrant's Proxy
Statement, dated March 9, 1992, filed with the Securities and
Exchange Commission on March 9, 1992.
(10)(b) RCM Technologies, Inc. 1994 Non-employee Director Stock Option
Plan; incorporated by reference to the appendix of the
Registrant's Proxy Statement, dated March 31, 1994, filed with the
Securities and Exchange Commission on March 28, 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, filed with the Securities and Exchange
Commission on January 21, 1997 (the "1996 10-K").
*(10)(d) RCM Technologies, Inc. 2000 Employee Stock Incentive Plan, dated
January 6, 2000; incorporated by reference to Exhibit A of the
Registrant's Proxy Statement, dated March 3, 2000, filed with the
Securities and Exchange Commission on February 28, 2000.
* (10)(e) 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 SEC File No.
333-23753), filed with the Securities and Exchange Commission on
March 21, 1997.
* (10)(f) 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
Registrant's 1996 Annual Report on Form 10-K, filed with the
Securities and Exchange Commission on January 15, 1997.
33
PART IV (CONTINUED)
- -------------------------------------------------------------------------------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
- -------------------------------------------------------------------------------
(c) Exhibits (Continued)
*(10)(g) RCM Technologies, Inc. 2000 Employee Stock Incentive Plan;
incorporated by reference to Exhibit A to the Registrant's Proxy
Statement, dated March 3, 2000, filed with the Commission on
February 28, 2000.
(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.
* (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.
(10)(n) Fourth Amendment And Modification to Amended And Restated Loan and
Security Agreement, dated July 23, 2004, between RCM Technologies, Inc.
and all of its Subsidiaries and Citizens Bank of Pennsylvania as
Administrative Agent and Arranger.
* (10)(o) Compensation Arrangements for Named Executive Officers.
(Filed herewith)
* (10)(p) Compensation Arrangements for Directors.
(Filed herewith)
(11) Computation of Earnings (loss) Share. (Filed herewith)
(21) Subsidiaries of the Registrant. (Filed herewith)
(23) Consent of Grant Thornton LLP. (Filed herewith)
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.
34
PART IV (CONTINUED)
- -------------------------------------------------------------------------------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
- -------------------------------------------------------------------------------
(c) Exhibits (Continued)
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.
35
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 13, 2006 By: /s/ Leon Kopyt
-----------------
Leon Kopyt
Chairman, President, Chief Executive
Officer and Director
Date: March 13, 2006 By: /s/ Stanton Remer
-------------------
Stanton Remer
Executive Vice President,
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. This report has been signed below by
Date: March 13, 2006 /s/ Leon Kopyt
--------------------------------
Leon Kopyt
Chairman, President, Chief Executive
Officer (Principal Executive Officer)
and Director
Date: March 13, 2006 /s/ Stanton Remer
-------------------------------
Stanton Remer
Executive Vice President,
Chief Financial Officer, Treasurer,
Secretary
(Principal Financial and Accounting
Officer) and Director
Date: March 13, 2006 /s/ Norman S. Berson
---------------------
Norman S. Berson
Director
Date: March 13, 2006 /s/ Robert B. Kerr
-------------------
Robert B. Kerr
Director
Date: March 13, 2006 /s/ David Gilfor
-----------------
David Gilfor
Director
36
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
------------------------------------------------------------------------------- ------ ---------
Consolidated Balance Sheets, December 31, 2005 and January 1, 2005 F-2
Consolidated Statements of Income,
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003 F-4
Consolidated Statements of Changes in Stockholders' Equity and
Consolidated Statements of Comprehensive Income,
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003 F-6
Consolidated Statements of Cash Flows,
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003 F-7
Notes to Consolidated Financial Statements F-9
Report of Independent Registered Public Accounting Firm F-32
Schedules I and II F-33
F-1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and January 1, 2005
- -------------------------------------------------------------------------------
ASSETS
December 31, January 1,
2005 2005
- ----------------------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents $3,761,063 $2,401,794
Accounts receivable, net of allowance for doubtful accounts
of $1,792,000 and $1,862,000 in fiscal 2005 and 2004, respectively 44,930,276 40,535,949
Restricted cash 8,572,064 8,295,625
Prepaid expenses and other current assets 2,840,700 2,790,631
Deferred tax assets 4,012,340 4,964,007
- ----------------------------------------------------------------------------------------------------------------
Total current assets 64,116,443 58,988,006
- ----------------------------------------------------------------------------------------------------------------
Property and equipment, at cost
Equipment and leasehold improvements 10,038,094 9,572,546
Less: accumulated depreciation and amortization 6,017,593 5,153,519
- ----------------------------------------------------------------------------------------------------------------
4,020,501 4,419,027
- ----------------------------------------------------------------------------------------------------------------
Other assets
Deposits 166,814 138,158
Goodwill 37,660,320 35,842,896
Intangible assets, net of accumulated amortization
of $405,376 and $-0- in fiscal 2005 and 2004, respectively 808,624
- ----------------------------------------------------------------------------------------------------------------
38,635,758 35,981,054
- ----------------------------------------------------------------------------------------------------------------
Total assets $106,772,702 $99,388,087
================================================================================================================
F-2
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2005 and January 1, 2005
- -----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, January 1,
2005 2005
- ----------------------------------------------------------------------------------------------------------------
Current liabilities
Line of credit $3,900,000 $4,900,000
Accounts payable and accrued expenses 14,979,127 13,530,131
Accrued payroll 7,087,897 6,766,586
Payroll and withheld taxes 867,274 1,099,856
Income taxes payable 4,249,779 3,146,478
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 31,084,077 29,443,051
- ----------------------------------------------------------------------------------------------------------------
Stockholders' 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; 11,728,261 and
11,383,470 shares issued and outstanding in fiscal
2005 and 2004, respectively 586,413 569,173
Accumulated other comprehensive income 981,772 736,128
Additional paid-in capital 100,235,338 98,290,719
Accumulated deficit (26,114,898) (29,650,984)
- ----------------------------------------------------------------------------------------------------------------
75,688,625 69,945,036
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $106,772,702 $99,388,087
================================================================================================================
F-3
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
December 31, January 1, December 27,
2005 2005 2003
- ------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Revenues $180,618,164 $169,277,490 $206,605,188
Cost of services 137,935,632 128,303,645 162,010,502
- ------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Gross profit 42,682,532 40,973,845 44,594,686
- ------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Operating costs and expenses
Selling, general and administrative 35,460,706 34,330,392 32,557,953
Depreciation 1,110,676 1,149,991 1,192,293
Amortization 95,376 68,556 31,104
Impairment of goodwill 2,164,338
Compensation expense for stock option tender offer 6,691,590
- ------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
36,666,758 37,713,277 40,472,940
- ------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Operating income 6,015,774 3,260,568 4,121,746
- ------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Other (expenses) income
Interest expense, net of interest income (221,070 ) (474,420 ) (314,491)
Gain on foreign currency transactions 11,898 24,954 132,296
- ------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
(209,172 ) (449,466 ) (182,195 )
- ------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Income before income taxes 5,806,602 2,811,102 3,939,551
Income tax expense 2,270,516 604,235 1,160,398
- ------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Net income $3,536,086 $2,206,867 $2,779,153
======================================================= == =============== == == ============== === == ===============
F-4
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
December 31, January 1, December 27,
2005 2005 2003
- --------------------------------------------------- --- ------------- --- -- -------------- --- -- --------------
Basic earnings per share
- --------------------------------------------------- --- ------------- --- -- -------------- --- -- --------------
Net income $.31 $.19 $.26
=================================================== === ============= === == ============== === == ==============
Weighted average number of common shares
outstanding 11,456,757 11,325,626 10,716,179
Diluted earnings per share
- --------------------------------------------------- --- ------------- --- -- -------------- --- -- --------------
Net income $.30 $.19 $.26
=================================================== === ============= === == ============== === == ==============
Weighted average number of common and common equivalent
shares outstanding (includes dilutive securities
relating to options of 274,834 in 2005, 354,186 in 2004
and 180,126 in 2003) 11,731,591 11,679,812 10,896,305
F-5
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- ------------------------------------------------------------------------------
Accumulated Retained
Other Additional Earnings
Common Stock Comprehensive Paid-in (Accumulated
Shares Amount Income (Loss) Capital Deficit) Total
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 28, 2002 10,626,076 $531,304 ($584,084) $93,935,938 ($34,637,004 ) $59,246,154
Issuance of stock under employee
stock purchase plan 39,926 1,996 129,419 131,415
Exercise of stock options 11,500 575 42,925 43.500
Issuance of restricted shares
pursuant to stock option tender 607,777 30,389 3,798,606 3,828,995
offer
Translation adjustment 1,140,879 1,140,879
Net income 2,779,153 2,779,153
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 27, 2003 11,285,279 564,264 556,795 97,906,888 (31,857,851 ) 67,170,096
---------------------------------------------------------------------------------------------------------------------------------
Issuance of stock under employee
stock purchase plan 37,107 1,855 174,365 176,220
Exercise of stock options 61,084 3,054 209,466 212,520
Translation adjustment 179,333 179,333
Net income 2,206,867 2,206,867
---------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2005 11,383,470 569,173 736,128 98,290,719 (29,650,984) 69,945,036
---------------------------------------------------------------------------------------------------------------------------------
Issuance of stock under employee
stock purchase plan 38,941 1,947 144,431 146,378
Exercise of stock options 205,850 10,293 843,188 853,481
Issuance of common stock and stock
options in connection with
acquisition 100,000 5,000 957,000 962,000
Translation adjustment 245,644 245,644
Net income 3,536,086 3,536,086
---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 11,728,261 $586,413 $981,772 $100,235,338 ($26,114,898) $75,688,625
================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
December 31, January 1, December 27,
2005 2005 2003
----------------------------------------------------------------------------------------------
Net income $3,536,086 $2,206,867 $2,779,153
Foreign currency translation
adjustment 245,644 179,333 1,140,879
----------------------------------------------------------------------------------------------
Comprehensive income $3,781,730 $2,386,200 $3,920,032
==============================================================================================
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, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
December 31, January 1, December 27,
2005 2005 2003
- -------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $3,536,086 $2,206,867 $2,779,153
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,206,052 1,218,547 1,223,397
Provision for allowances on accounts
Receivable (70,000 ) 8,000 305,000
Recognition of noncash portion of
compensation expense for stock
tender offer 3,828,995
Goodwill impairment 2,164,338
Deferred tax assets 951,667 (365,634 ) (308,106 )
Changes in assets and liabilities:
Accounts receivable (4,341,774 ) (4,274,580 ) (4,820,435 )
Income tax refund receivable 17,401 3,766,585
Restricted cash (276,439 ) (8,295,625 )
Prepaid expenses and other current ) )
assets (67,470 (691,428 536,098
Accounts payable and accrued expenses 1,448,996 (2,043,905 ) 845,307
Accrued payroll 321,311 1,310,255 1,093,306
Payroll and withheld taxes (232,581 ) 922,826 (16,820 )
Income taxes payable 1,103,301 (879,619 ) 1,956,518
- -------------------------------------------------------------------------------------------------------------
Total adjustments 60,464 (2,631,200 ) 114,220
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $3,596,550 ($424,333 ) $2,893,373
- -------------------------------------------------------------------------------------------------------------
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, 2005, January 1, 2005 and December 27, 2003
- ---------------------------------------------------------------------------
December 31, January 1, December 27,
2005 2005 2003
- --------------------------------------------------- -- --------------- -- -- -------------- -- -- --------------
Cash flows from investing activities:
Property and equipment acquired ($558,131 ) ($439,246 ) ($431,816 )
(Increase) decrease in deposits (28,656 ) (55,200 ) 3,632
Cash paid for acquisition, net of working
capital acquired (1,895,997 ) (1,353,638 )
- --------------------------------------------------- -- --------------- -- -- -------------- -- -- --------------
Net cash used in investing activities (2,482,784 ) (494,446 ) (1,781,822 )
- --------------------------------------------------- -- --------------- -- -- -------------- -- -- --------------
Cash flows from financing activities:
Net repayments of line of credit (1,000,000 ) (2,400,000 ) (120,000 )
Sale of stock for employee stock purchase plan 146,378 176,220 131,415
Exercise of stock options 853,481 212,520 43,500
- --------------------------------------------------- -- --------------- -- -- -------------- -- -- --------------
Net cash (used in) provided by financing
activities (141 ) (2,011,260 ) 54,915
- --------------------------------------------------- -- --------------- -- -- -------------- -- -- --------------
Effect of exchange rate changes on cash
and cash equivalents 245,644 179,334 1,140,879
- --------------------------------------------------- -- --------------- -- -- -------------- -- -- --------------
Net increase (decrease) in cash
and cash equivalents 1,359,269 (2,750,705 ) 2,307,345
Cash and cash equivalents at beginning of year 2,401,794 5,152,499 2,845,154
- --------------------------------------------------- -- --------------- -- -- -------------- -- -- --------------
Cash and cash equivalents at end of year $3,761,063 $2,401,794 $5,152,499
=================================================== == =============== == == ============== == == ==============
Supplemental cash flow information:
Cash paid for:
Interest $332,892 $201,101 $244,727
Income taxes (refund) 422,917 1,753,251 (3,951,320)
F-8
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
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 accounting principles generally
accepted in the United States 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 2005 and 2003 represent the 52 weeks ended
December 31, 2005 and December 27, 2003, respectively. Fiscal year 2004
represents the 53 weeks ended January 1, 2005.
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, consisting primarily
of accounts receivable and debt approximates fair value. 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 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.
F-9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- ------------------------------------------------------------------------------
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
Goodwill represents the excess of the cost of businesses acquired over the
fair market value of identifiable assets. In accordance with SFAS 142,
Goodwill and Other Intangible Assets, the Company performs its annual
goodwill impairment testing, by reportable segment, in the fourth quarter,
or more frequently if events or changes in circumstances indicate that
goodwill may be impaired. Application of the goodwill impairment test
requires significant judgments including estimation of future cash flows,
which is dependent on internal forecasts, estimation of the long-term rate
of growth for the businesses, the useful life over which cash flows will
occur, and determination of our weighted average cost of capital. Changes
in these estimates and assumptions could materially affect the
determination of fair value and/or conclusions on goodwill impairment for
each reporting unit. The Company conducted its annual goodwill impairment
test as of November 30, 2005 and identified no impairments. Goodwill at
December 31, 2005 and January 1, 2005 was $37,330,000 and $35,843,000,
respectively.
During the fourth quarter of fiscal year 2004, the review indicated that
there was an impairment of value, which resulted in a $2.2 million charge
to expense for the fiscal year ended January 1, 2005, in order to properly
reflect the appropriate carrying value of goodwill. The aforementioned
impairment was in a reporting unit within the Company's Information
Technology business segment. The results of the 2003 impairment testing
indicated no impairment of goodwill.
Long-Lived Assets
The Company evaluates long-lived assets and intangible assets with definite
lives for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. When it is
probable that undiscounted future cash flows will not be sufficient to
recover an asset's carrying amount, the asset is written down to its fair
value. Assets to be disposed of by sale, if any, are reported at the lower
of the carrying amount or fair value less cost to sell.
Software
In accordance with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). 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, 2005, January 1, 2005 and December 27,
2003, the Company capitalized approximately $269,000, $226,000 and
$114,000, respectively, of software costs in accordance with SOP 98-1.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes" ("SFAS 109") 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.
F-10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company derives its revenues from several sources. All of the Company's
segments perform staffing services. The Company's Engineering Services and
Information Technology Services segments also perform project services. All
of the Company's segments derive revenue from permanent placement fees.
Project Services - The Company recognizes revenues in accordance with the
Securities and Exchange Commission, Staff Accounting Bulletin (SAB) Number
104, "Revenue Recognition" ("SAB 104"). SAB 104 clarifies application of
U.S. generally accepted accounting principles to revenue transactions.
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 the
performance of such project or activity. The Company recognizes revenues
and associated costs on a gross basis as services are provided to the
customer and costs are incurred using its employees. The Company, from time
to time, enters into contracts requiring the completion of specific
deliverables. The Company recognizes revenue on these deliverables at the
time the client accepts and approves the deliverables. 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. Provision for contract losses, if any, is made in the
period such losses are determined. 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 Services - The Company earns permanent placement fees
from providing permanent placement services. Fees for placements are
recognized at the time the candidate commences employment. The Company
guarantees its permanent placements on a prorated basis 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.
Concentration
During 2005, the Company's largest customer accounted for 8.8% of the
Company's revenues. At December 31, 2005, the accounts receivable due from
the largest customer was $7.7 million. The Company's five and ten largest
customers accounted for approximately 26.3% and 35.6%, respectively, of the
Company's revenues for 2005.
During 2004, the Company's largest customer accounted for 7.4% of the
Company's revenues. At January 1, 2005, the accounts receivable due from
the largest customer was $7.9 million. The Company's five and ten largest
customers accounted for approximately 25.4% and 36.9%, respectively, of the
Company's revenues for 2004.
F-11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration (Continued)
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.
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 income.
Comprehensive Income
Comprehensive income consists of net income 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 2005, 2004 and 2003 was determined as follows:
Year Ended Year Ended Year Ended
December 31, January 1, December 27,
2005 2005 2003
------------------------------------ -- --------------- -- ------------- --- --------------
Basic average shares outstanding 11,456,757 11,325,626 10,716,179
Dilutive effect of stock options 274,834 354,186 180,126
------------------------------------ -- --------------- -- ------------- --- --------------
Dilutive shares 11,731,591 11,679,812 10,896,305
==================================== == =============== == ============= === ==============
Options to purchase 1,935,483 shares of common stock at prices ranging from
$3.00 to $7.04 per share were outstanding as of December 31, 2005. There
were 163,000 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, 2005.
Options to purchase 1,183,583 shares of common stock at prices ranging from
$3.00 to $7.04 per share were outstanding as of January 1, 2005. There were
84,000 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 January 1, 2005.
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 27, 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.
F-12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation
The Company accounts for stock options under SFAS No. 123, as amended by
SFAS No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure-an amendment of FASB Statement No. 123 ("SFAS 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 No. 25.
Entities that continue to account for stock options using APB Opinion No.
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 December 31, 2005, the Company has four stock-based employee
compensation plans. The Company accounts for the plans under the
recognition and measurement principles of APB Opinion 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, January 1, December 27,
2005 2005 2003
--------------------------------------------------------------------------------------------------
Net income, as reported $3,536 $2,207 $2,779
Less: stock-based compensation costs
--------------------------------------------
determined under fair value based
method for all awards 692 321 500
Net income, pro forma $2,844 $1,886 $2,279
Earnings per share of common stock-basic:
As reported $.31 $.19 $.26
Pro forma $.25 $.16 $.21
Earnings per share of common stock-diluted:
As reported $.30 $.19 $.26
Pro forma $.24 $.16 $.21
F-13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 weighted
average fair value of options granted using Black-Scholes Option Pricing
Model during 2005, 2004 and 2003 has been estimated using the following
assumptions:
Year Ended Year Ended Year Ended
December 31, January 1, December 27,
2005 2005 2003
---------------------------------------------------------------------------------------
Risk-free interest rate 3.91% 3.74% 3.18%
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 58% 60% 66%
Expected dividend yield - - -
Weighted-average per share
value granted $2.51 $2.65 $2.29
Advertising Costs
Advertising costs are expensed as incurred. Total advertising expense was
$884,000, $667,000, and $595,000 for the years ended December 31, 2005,
January 1, 2005, and December 27, 2003, respectively.
Use of Estimates and Uncertainties
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 December 2004, the FASB issued SFAS 123R, which is a revision of SFAS
No. 123. SFAS 123R supersedes APB Opinion No. 25, and amends FASB Statement
No. 95, Statement of Cash Flows. The approach to quantifying stock-based
compensation expense in SFAS 123R is similar to SFAS No. 123. However, the
revised statement requires all share-based payments to employees, including
grants of employee stock options, to be recognized as an expense in the
Consolidated Statements of Income based on their fair values as they are
earned by the employees under the vesting terms. Pro forma disclosure of
stock-based compensation expense, as is the Company's practice under SFAS
No. 123, will not be permitted after 2005, since SFAS 123R must be adopted
no later than the first interim or annual period beginning after December
15, 2005. The Company has adopted the "modified prospective" method of
adoption of SFAS 123R effective January 1, 2006, whereby earnings for prior
periods will not be restated as though stock based compensation had been
expensed.
F-14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards (Continued)
Management believes the impact on the financial statements will be similar
to the disclosures made by footnote to the financial statements, showing
the effect on earnings and earnings per share of expensing the value of
stock options granted for the fifty-two weeks ended December 31, 2005.
In May 2005, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 154, "Accounting Changes and Error Corrections--A Replacement of
APB Opinion No. 20 and FASB Statement No. 3" ("SFAS 154"). SFAS 154
requires retrospective application to prior periods' financial statements
for changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of
the change. SFAS 154 also requires that retrospective application of a
change in accounting principle be limited to the direct effects of the
change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an
accounting change, should be recognized in the period of the accounting
change. SFAS 154 also requires that a change in depreciation, amortization,
or depletion method for long-lived, non-financial assets be accounted for
as a change in accounting estimate affected by a change in accounting
principle. SFAS 154 is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. Early
adoption is permitted for accounting changes and corrections of errors made
in fiscal years beginning after the date SFAS 154 is issued. The Company is
required to adopt the provision of SFAS 154, as applicable, beginning in
fiscal 2006.
In June 2005, the FASB's Emerging Issues Task Force reached a consensus on
Issue No. 05-6, "Determining the Amortization Period for Leasehold
Improvements" ("EITF 05-6"). The guidance requires that leasehold
improvements acquired in a business combination or purchased subsequent to
the inception of a lease be amortized over the lesser of the useful life of
the assets or a term that includes renewals that are reasonably assured at
the date of the business combination or purchase. The guidance is effective
for periods beginning after June 29, 2005. The Company does not expect the
adoption of EITF 05-6 to have a material impact on the Company's
consolidated financial position, results of operations, or cash flows.
2. ACQUISITION
On October 17, 2005, the Company acquired Soltre Technology, Inc., a
Delaware Corporation, ("Soltre"), a Los Angeles, California based specialty
provider of consulting and technology services. The acquisition was
effective as of September 1, 2005, and was accomplished through a stock
purchase transaction pursuant to which Soltre, through an exchange of all
of its outstanding shares of stock for cash and shares of RCM's common
stock, became a wholly-owned subsidiary of the Company.
The purchase consideration paid to the former stockholders of Soltre
consisted of $1,868,000 cash, 100,000 shares of RCM's common stock, par
value $.05, valued at $632,000 and 100,000 of stock options valued at
$330,000 and $2,400,000 of deferred consideration contingent upon Soltre
achieving certain base levels of operating income for each of the three
twelve month periods following the purchase. An additional earn-out payment
may be made to the former stockholders at the end of each of the three
twelve month periods following the purchase, to the extent that operating
income exceeds these base levels.
F-15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- ------------------------------------------------------------------------------
2. ACQUISITION (Continued)
The acquisition has been accounted for in accordance with SFAS No. 141,
"Business Combinations." The deferred consideration and earnouts, if paid,
will be recorded as additional purchase consideration. Earnouts cannot be
estimated with any certainty.
The allocation of the purchase price is as follows:
Period of
(In thousands) Amortization- Years
------------------ --------------------
Equipment $109
Non-compete agreements 114 5
Customer relationships 790 3
Goodwill 1,817
------------------
$2,830
==================
The annual sales of Soltre Technology, Inc. for the twelve months ended
December 31, 2004 was $3.7 million.
The following (Unaudited) results of operations have been prepared assuming
the acquisition had occurred as of the beginning of the periods presented.
Those results are not necessarily indicative of results of future
operations nor of results that would have occurred had the acquisition been
consummated as of the beginning of the periods presented.
Fifty-Two Fifty-Three Fifty-Two
Weeks Ended Weeks Ended Weeks Ended
(In thousands, except per December 31, January 1, December 27,
share amounts) 2005 2005 2003
--------------------------- ---------------- ----------------- ----------------
Revenues $186,228,885 $173,008,215 $211,195,811
Operating income 6,792,651 3,472,061 4,319,584
Net income $3,946,485 $2,277,886 $2,896,820
Earnings per share $.33 $.19 $.26
In connection with certain post 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 two
to three 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.
F-16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- ------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
December 31, January 1,
2005 2005
------------------------------------------------------------------------------
Equipment and furniture $1,761,454 $1,967,137
Computers and systems 7,585,782 7,007,352
Leasehold improvements 690,858 598,057
------------------------------------------------------------------------------
10,038,094 9,572,546
Less: accumulated depreciation and
amortization 6,017,593 5,153,519
------------------------------------------------------------------------------
$4,020,501 $4,419,027
==============================================================================
The Company writes off fully depreciated assets each year. In fiscal 2005,
2004 and 2003, the write offs were $881,000, $438,000 and $117,000,
respectively.
4. GOODWILL AND INTANGIBLES
In accordance with SFAS 142, Goodwill and Other Intangible Assets, the
Company performs its annual goodwill impairment testing, by reportable
segment, in the fourth quarter, or more frequently if events or changes in
circumstances indicate that goodwill may be impaired. Application of the
goodwill impairment test requires significant judgments including
estimation of future cash flows, which is dependent on internal forecasts,
estimation of the long-term rate of growth for the businesses, the useful
life over which cash flows will occur, and determination of our weighted
average cost of capital. Changes in these estimates and assumptions could
materially affect the determination of fair value and/or conclusions on
goodwill impairment for each reporting unit. The Company conducted its
annual goodwill impairment test as of November 30, 2005 and identified no
impairments. Goodwill at December 31, 2005 and January 1, 2005 was
$37,330,000 and $35,843,000, respectively. There can be no assurance that
future tests of goodwill impairment will not result in further impairment
charges.
During the fourth quarter of fiscal year 2004, the review indicated that
there was an impairment of value, which resulted in a $2.2 million charge
to expense for the fiscal year ended January 1, 2005, in order to properly
reflect the appropriate carrying value of goodwill. The aforementioned
impairment was in a reporting unit within the Company's Information
Technology business segment. The results of the 2003 impairment testing
indicated no impairment of goodwill.
The changes in the carrying amount of goodwill for the years ended December
31, 2005 and January 1, 2005 are as follows (in thousands):
Information
Technology Engineering Commercial Total
---- ----------------------------------- --- -------------- -- ------------- -- ------------- -- -------------
Balance as of December 27, 2003 $30,479 $7,528 $38,007
Goodwill impairment losses (2,164 ) (2,164 )
---- ----------------------------------- --- -------------- -- ------------- -- ------------- -- -------------
Balance as of January 1, 2005 28,315 7,528 35,843
Goodwill acquired during the year 1,817 1,817
---- ----------------------------------- --- -------------- -- ------------- -- ------------- -- -------------
Balance as of December 31, 2005 $30,132 $7,528 $37,660
======================================== === ============== == ============= == ============= == =============
F-17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
4. GOODWILL AND INTANGIBLES (Continued)
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
December 31, 2005 January 1, 2005
---------------------------------- -------------------------------- -- ---------------------------------
Gross Accumulated Gross Accumulated
Carrying Carrying
Amount Amortization Amount Amortization
---------------------------------- ------------- -- --------------- -- ------------- --- ---------------
Definite-lived intangible assets
Non-compete agreements $114 $8 $311 $311
Customer relationships 790 88
---------------------------------- ------------- -- --------------- -- ------------- --- ---------------
Total $904 $96 $311 $311
================================== ============= == =============== == ============= === ===============
Amortization of the Definite-lived intangible assets is as follows:
Year Amount
-------------- - --------------
2006 $286,000
2007 286,000
2008 198,000
2009 23,000
2010 15,000
--------------
$808,000
==============
5. ACCOUNTS PAYABLE
Accounts payable and accrued expenses consist of the following at December
31, 2005 and January 1, 2005.
December 31, January 1,
2005 2005
----------------------------------------- -- --------------- -- ---------------
Accounts payable - trade $5,649,920 $5,311,318
Due to sellers 794,894
Reserve for litigation 8,534,313 8,218,813
----------------------------------------- -- --------------- -- ---------------
Total $14,979,127 $13,530,131
========================================= == =============== == ===============
F-18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
6. 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 17, 2004,
with Citizens Bank of Pennsylvania, administrative agent for a syndicate of
banks, which provides for a $25 million Revolving Credit Facility (the
"Revolving Credit Facility"). Availability of credit under the Revolving
Credit Facility is based on 80% of the aggregate amount of accounts
receivable for which not more than 90 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 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 2006. Management of the
Company has commenced negotiations for renewal or replacement of the
Revolving Credit Facility. The weighted average interest rates under the
Revolving Credit Facility for the years ended December 31, 2005 and January
1, 2005 were 6.31% and 3.99%, respectively. The amounts outstanding under
the Revolving Credit Facility at December 31, 2005 and January 1, 2005 were
$3.9 million and $4.9 million, respectively. At December 31, 2005, the
Company had availability for additional borrowing under the Revolving
Credit Facility of $21.0 million.
7. STOCKHOLDERS' EQUITY
Common Stock Reserved
Shares of unissued common stock were reserved for the following purposes:
December 31, January 1,
2005 2005
-------------------------------------------------------------------------
Exercise of options outstanding 1,935,483 1,183,583
Future grants of options 36,486 994,236
-------------------------------------------------------------------------
Total 1,971,969 2,177,819
=========================================================================
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, provided 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 were intended to be incentive
stock options pursuant to Section 422A of the Internal Revenue Code. The
option terms were not permitted to exceed ten years and the exercise price
was not permitted to 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 determined the vesting period at the time of grant for each of
these options. At December 31, 2005, options to purchase 84,855 shares of
common stock were outstanding.
F-19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -----------------------------------------------------------------------------
7. SHAREHOLDERS' EQUITY (CONTINUED)
Incentive Stock Option Plans (Continued)
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, provided 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 granted under the 1994
Plan were 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 under the 1994 Plan terminate when an optionee
ceases to be a Director of the Company. At December 31, 2005, 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
December 31, 2005, options to purchase 10,180 shares of common stock are
available for future grants, and options to purchase 1,148,045 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, 2005,
options to purchase 26,306 shares of common stock are available for future
grants, and options to purchase 632,583 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 January 1, Exercise December 27, Exercise
2005 Price 2005 Price 2003 Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding options 1,183,583 $4.03 1,214,916 $3.85 2,474,214 $7.15
At beginning of year
Granted 1,003,000 4.67 149,000 4.86 220,000 3.91
Cancellations (45,250 ) 4.62 (119,249 ) 3.49 (1,467,798 ) 9.51
Exercised (205,850 ) 4.15 (61,084 ) 3.48 (11,500 ) 6.93
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding options 1,935,483 $4.34 1,183,583 $4.03 1,214,916 $3.85
At end of year
===========================================================================================================================
Exercisable options
At end of year 770,150 766,500 432,500
===========================================================================================================================
Option grant price $3.00 $3.00 $3.00
Per share to $7.04 to $7.04 to $11.93
F-20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
7. STOCKHOLDERS' EQUITY (CONTINUED)
Incentive Stock Option Plans (Continued)
The following table summarizes information about stock options outstanding
at December 31, 2005:
Number of Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices Options Contractual Life Exercise Price
- --------------- -----------------------------------------------------------------------------------
$3.00 - $4.40 1,251,583 7.88 years $3.38
$4.70 - $7.04 683,900 7.91 years $4.84
Employee Stock Purchase Plan
The Company implemented an Employee Stock Purchase Plan (the "Purchase
Plan") with shareholder approval, effective January 1, 2001. 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, 2005, there were 38,941 shares issued
under the Purchase Plan for net proceeds of $146,378. As of December 31,
2005, there were 258,958 shares available for issuance under the Purchase
Plan.
8. 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. The
tender offer had 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 in the aggregate, 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
options to purchase 1,327,973 shares of common stock, 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 lapsed on the first anniversary of
the stock grant date, November 14, 2004.
F-21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
9. 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 at the discretion of the
Board of Directors may make contributions of cash to match deferrals of
compensation by participants. Contributions charged to operations by the
Company for years ended December 31, 2005, January 1, 2005 and December 27,
2003 were $100,000, $111,000 and $91,000, respectively.
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 January 1, 2005, the fair value
of the assets held in trust under the deferred compensation plan was
$677,194. The Board of Directors approved the termination of the plan as of
January 14, 2005 and directed the distribution of the assets in the plan to
the participants. The final distribution of the plan assets of $661,981, as
of January 14, 2005, was made on February 4, 2005.
10. COMMITMENTS
Employment Agreement
The Company has an employment agreement with its Chief Executive Officer
and President, Leon Kopyt ("Mr. Kopyt"), which currently provides for an
annual base salary of $475,000 and other customary benefits. In addition,
the agreement provides that Mr. Kopyt's annual bonus is based on EBITDA,
defined as earnings before interest, taxes, depreciation, and amortization.
As of December 31, 2005, the agreement expires on February 28, 2008. The
agreement is for a rolling term of three years, which automatically extends
each year for an additional one-year period on February 28 of each year.
The employment agreement is terminable by the Company upon Mr. Kopyt's
death or disability, or for "good and sufficient cause," as defined in the
agreement.
Termination Benefits Agreement
The Company is party to a Termination Benefits Agreement with its Chief
Executive Officer, Leon 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, 2005, Mr. Kopyt would have been entitled to cash payments of
approximately $3.2 million (representing salary and excise tax payments).
F-22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
10. COMMITMENTS (CONTINUED)
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,
2005, 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 $1.7 million, inclusive of employee
benefits.
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 operating
escalation charges, are as follows (in thousands):
Year ending December 31, Amount
--------------------------------------------------
2006 $2,620
2007 1,981
2008 1,469
2009 1,391
2010 1,214
Thereafter 1,291
--------------------------------------------------
Total $9,966
==================================================
Rent expense for the fiscal years ended December 31, 2005, January 1, 2005
and December 27, 2003 was $3,514,000, $3,671,000, and $2,666,000,
respectively.
The Company subleases space at various office locations under cancelable
lease agreements. During fiscal 2005, 2004 and 2003 revenues of
approximately $22,000, $109,000, and $279,000, respectively, were
recognized under these leasing arrangements.
11. RELATED PARTY TRANSACTIONS
A director of the Company is a shareholder in a law firm that has 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
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
12. INCOME TAXES
The components of income tax expense (benefit) are as follows:
Year Ended Year Ended Year Ended
December 31, January 1, December 27,
2005 2005 2003
--------------------------------------------------------------------------------------------
Current
Federal $930,020 $30,000
State and local 511,427
Foreign (122,500) 939,869 $1,050,056
--------------------------------------------------------------------------------------------
1,318,947 969,869 1,050,056
--------------------------------------------------------------------------------------------
Deferred
Federal 808,932 (310,789) 93,791
State and local 142,735 (54,845) 16,551
--------------------------------------------------------------------------------------------
951,667 (365,634) 110,342
--------------------------------------------------------------------------------------------
Total $2,270,516 $604,235 $1,160,398
============================================================================================
The income tax provisions reconciled to the tax computed at the statutory
Federal rate was:
December 31, January 1, December 27,
2005 2005 2003
--------------------------------------------------------------------------------------------
Tax at statutory rate (credit) 34.0% 34.0% 34.0%
State income taxes, net of Federal
income tax benefit 5.7 6.6
Foreign income tax effect 2.9 1.7 .5
Deductible amortization (4.1) (8.4) (5.9)
Change in valuation allowance (26.5)
Non-deductible charges (2.4) 11.3
Other, net 3.0 2.8 .9
--------------------------------------------------------------------------------------------
Total income tax expense 39.1% 21.5% 29.5%
============================================================================================
At December 31, 2005 and January 1, 2005, deferred tax assets and
liabilities consist of the following:
December 31, January 1,
Deferred tax assets: 2005 2005
---------------------------------------------------------------------------
Net operating loss carryforward $982,503
Allowance for doubtful accounts $716,909 744,800
Reserves and accruals 165,147 149,246
Litigation reserve 3,130,284 3,219,560
--------------------------------------------------------------------------
4,012,340 5,096,109
Deferred tax liabilities:
Prepaid expense benefit (132,102)
--------------------------------------------------------------------------
4,012,340 4,964,007
Valuation allowance
--------------------------------------------------------------------------
Net deferred tax assets $4,012,340 $4,964,007
==========================================================================
F-24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
13. INTEREST EXPENSE, NET OF INTEREST INCOME
Interest expense, net of interest income consisted of the following:
December 31, January 1, December 27,
2005 2005 2003
- ---------------------------------------------------------------------
Interest expense ($567,683) ($536,099) ($382,568)
Interest income 346,613 61,679 68,077
- ---------------------------------------------------------------------
($221,070) ($474,420) ($314,491)
=====================================================================
14. 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
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
14. SEGMENT INFORMATION (CONTINUED)
Information
Fiscal 2005 Technology Engineering Commercial Corporate Total
-------------------------------------------------------------------------------------------------------------------
Revenue $98,010 $47,683 $34,925 $180,618
Operating expenses (1) 92,173 47,425 33.798 173,396
-------------------------------------------------------------------------------------------------------------------
EBITDA (1) (2) 5,837 258 1,127 7,222
Depreciation 578 373 160 1,111
Amortization of intangibles 95 95
-------------------------------------------------------------------------------------------------------------------
Operating income (loss) 5,164 (115) 967 6,016
Interest expense, net of
interest income 120 58 43 221
Gain on foreign currency
transactions (12) (12)
Income taxes (benefit) 1,973 (63) 361 2,271
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $3,071 ($98) $563 $3,536
===================================================================================================================
Total assets $54,729 $19,316 $11,953 $20,775 $106,773
Capital expenditures $275 $125 $158 $558
F-26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
14. SEGMENT INFORMATION (CONTINUED)
Information
Fiscal 2004 Technology Engineering Commercial Corporate Total
-------------------------------------------------------------------------------------------------------------------
Revenue $92,907 $51,173 $25,198 $169,278
Operating expenses (1) 88,613 48,396 25,626 162,635
Impairment of goodwill 2,164 2,164
-------------------------------------------------------------------------------------------------------------------
EBITDA (1) (2) 2,130 2,827 (428) 4,479
Depreciation 628 407 115 1,150
Amortization of intangibles 20 43 5 68
-------------------------------------------------------------------------------------------------------------------
Operating income 1,482 2,327 (548) 3,261
Interest expense, net of
interest income 261 144 70 475
Gain on foreign currency
transactions (25) (25)
Income taxes (benefit) 262 475 (133) 604
-------------------------------------------------------------------------------------------------------------------
Net income $959 $1,733 ($485) $2,207
===================================================================================================================
Total assets $48,556 $23,275 $6,643 $20,914 $98,388
Capital expenditures $17 $44 $5 $373 $439
F-27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
14. SEGMENT INFORMATION (CONTINUED)
Information
Fiscal 2003 Technology Engineering Commercial Corporate Total
------------------------------ -- --------------- -- ------------- - -------------- - ------------ --- ------------
Revenue $100,872 $86,696 $19,037 $206,605
Operating expenses (1) 93,116 82,838 18,614 194,568
Compensation expense
for stock option tender offer 500 486 89 5,617 6,692
------------------------------ -- --------------- -- ------------- - -------------- - ------------ --- ------------
EBITDA (1) (2) 7,256 3,372 334 (5,617 ) 5,345
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 (1,655 ) 1,161
------------------------------ -- --------------- -- ------------- - -------------- - ------------ --- ------------
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
<FN>
(1) Operating expenses excludes depreciation and amortization.
(2) EBITDA means earnings before interest, taxes, depreciation and
amortization. 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>
F-28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
14. SEGMENT INFORMATION (CONTINUED)
The following reconciles consolidated operating income to the Company's
pretax income (in thousands):
December 31, January 1, December 27,
2005 2005 2003
------------------------------------------------------------------------------------------------
Consolidated operating income $6,016 $3,261 $4,122
Interest expense, net of interest income (221) (475) (314)
Gain on foreign currency transactions 12 25 132
------------------------------------------------------------------------------------------------
Consolidated pretax income $5,807 $2,811 $3,940
================================================================================================
The Company derives a majority of its revenue from companies headquartered
in the United States. During 2003, the Company's largest customer accounted
for 22% of the Company's revenues. However, of the $45.1 million in 2003
revenues from that 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. In fiscal year 2004, the Company's
largest customer accounted for 7.4% of the Company's revenues. In fiscal
year 2005, the Company's largest customer accounted for 8.7% of the
Company's revenues. Revenues from Canadian operations for the years ended
December 31, 2005, January 1, 2005, and December 27, 2003 were $14.4
million, $20.0 million, and $56.4 million, respectively.
Revenues reported for each operating segment are all from external
customers.
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, 2005, January 1, 2005, and December 27,
2003 are as follows (in thousands):
December 31, January 1, December 27,
2005 2005 2003
-----------------------------------------------------------------------------------------------
Revenues
United States $165,808 $149,247 $150,245
Canada 14,810 20,030 56,360
-----------------------------------------------------------------------------------------------
$180,618 $169,277 $206,605
===============================================================================================
Fixed Assets
United States $3,873 $4,210 $4,788
Canada 147 209 342
-----------------------------------------------------------------------------------------------
$4,020 $4,419 $5,130
===============================================================================================
F-29
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
15. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended December 31, 2005
Diluted
Gross Net Net Income
Sales Profit Income Per Share (a)
---------------------------------------------------------------------------------------------------------------
1st Quarter $44,081,579 $10,108,434 $832,663 $.07
2nd Quarter 46,324,401 11,057,047 1,168,035 .10
3rd Quarter 43,390,661 10,153,216 716,844 .06
4th Quarter 46,821,523 11,363,836 818,544 .07
---------------------------------------------------------------------------------------------------------------
Total $180,618,164 $42,682,533 $3,536,086 $.30
===============================================================================================================
Year Ended January 1, 2005
Diluted
Gross Net Net Income (Loss)
Sales Profit Income (Loss) Per Share (a)
---------------------------------------------------------------------------------------------------------------
1st Quarter $41,272,729 $10,027,438 $795,953 $.07
2nd Quarter 45,348,773 10,699,339 869,298 .08
3rd Quarter 40,933,476 9,963,938 765,514 .07
4th Quarter 41,722,512 10,283,130 (223,898 ) (.02)
---------------------------------------------------------------------------------------------------------------
Total $169,277,490 $40,973,845 $2,206,867 $.19
===============================================================================================================
<FN>
(a) Each quarterly amount is based on separate calculations of weighted
average shares outstanding.
</FN>
16. CONTINGENCIES
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
limitation by the Company of the number of shares that the plaintiffs 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 pre-judgment interest.
Post-judgment interest will continue to accrue on the judgment at the rate
of 4% per annum in 2006.
F-30
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
- -------------------------------------------------------------------------------
16. CONTINGENCIES (CONTINUED)
The Company appealed the judgment entered in the Law Division to the
Appellate Division of the Superior Court of New Jersey, 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 cross-appealed
from the Court's denial of pre-verdict, pre-judgment 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. On December 2,
2005, a three-judge panel of the Appellate Division unanimously affirmed
the judgment entered in the Law Division in all respects, rejecting both
the Company's appeal and the plaintiffs' cross-appeal. On January 23, 2006,
the Company sought further appellate review via the filing of a petition
for certification of the Appellate Division's judgment in the Supreme Court
of New Jersey. The Supreme Court will determine in the first half of 2006
whether to grant or deny the requested review.
In connection with this litigation, the Company accrued $9.7 million of
litigation charges at December 31, 2002, which included 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 December 31,
2005, the accrued litigation reserve is $8.5 million.
In addition, in November 2002 the Company brought suit in the Superior
Court of New Jersey, Law Division, Bergen County, 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 with respect to (1) its
costs and counsel fees incurred in defending itself against the claims of
the plaintiffs; (2) any sums for which the Company is ultimately determined
to be liable to the plaintiffs; and (3) its costs and counsel fees incurred
in the prosecution of the legal malpractice action itself. That litigation
was temporarily stayed in the Law Division while the appeal of the
underlying action went forward in the Appellate Division of the Superior
Court. On May 16, 2005, the Law Division lifted that stay and pretrial
discovery in the legal malpractice action ensued through September 2005. On
September 14, 2005, as a consequence of certain procedural constraints
imposed by the court, the Company and the various attorney and law firm
defendants agreed to the dismissal of the action in Bergen County and the
filing of a new action against the same defendants in the Superior Court of
New Jersey, Law Division, Morris County. The complaint in the new action,
in which the Company has asserted certain additional claims against the
defendants, was filed on October 24, 2005. Discovery proceedings in the new
action will be resuming in the first quarter of 2006.
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 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.
F-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
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,
2005 and January 1, 2005 and the related consolidated statements of operations,
changes in stockholders' equity, comprehensive income and cash flows for each of
the three years in period ended December 31, 2005 (52 weeks, 53 weeks and 52
weeks, respectively). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements,
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, 2005 and January 1,
2005, and the consolidated results of its operations and its cash flows for each
of the fiscal years in the three year period ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America.
Our audits were conducted for the purpose of forming an opinion on the
basic consolidated financial statements taken as a whole. The Schedules I and II
are presented for purposes of additional analysis and are not a required part of
the basic consolidated financial statements. These schedules have been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, are fairly stated in all material
respects in relation to the basic consolidated financial statements taken as a
whole.
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
March 1, 2006
F-32
SCHEDULE I
- -------------------------------------------------------------------------------
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
December 31, 2005 and January 1, 2005
ASSETS
December 31, January 1,
2005 2005
- ----------------------------------------------------------------------------------------------------------
Current assets
Prepaid expenses and other assets $7,517 $29,549
- ----------------------------------------------------------------------------------------------------------
Other assets
Long-term receivables from affiliates 75,802,090 70,020,126
- ----------------------------------------------------------------------------------------------------------
Total assets $75,809,607 $70,049,675
==========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, January 1,
2005 2005
- ----------------------------------------------------------------------------------------------------------
Current liabilities
Accounts payable and accrued expenses $120,982 $104,639
- ----------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock 586,413 569,173
Foreign currency translation adjustment 981,772 736,128
Additional paid in capital 100,235,338 98,290,719
Accumulated deficit (26,114,898) (29,650,984)
- ----------------------------------------------------------------------------------------------------------
Total stockholders' equity 75,688,625 69,945,036
- ----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $75,809,607 $70,049,675
==========================================================================================================
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
STATEMENTS OF INCOME
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
December 31, January 1, December 27,
2005 2005 2003
---------------------------------------------------------------------------------------------------
Operating expenses
Administrative $1,137,920 $633,198 $464,424
---------------------------------------------------------------------------------------------------
Operating loss (1,137,920) (633,198) (464,424)
Management fee income 1,137,920 633,198 464,424
---------------------------------------------------------------------------------------------------
Income before income in subsidiaries
Equity in earnings of subsidiaries 3,536,086 2,206,867 2,779,153
---------------------------------------------------------------------------------------------------
Net income $3,536,086 $2,206,867 $2,779,153
===================================================================================================
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
STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
December 31, January 1, December 27,
2005 2005 2003
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $3,536,086 $2,206,867 $2,779,153
- ---------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to Net cash provided by operating
activities:
Recognition of equity compensation 3,828,995
Equity in deficiency in assets (2,779,153
of subsidiaries (3,536,086) (2,206,867) )
Changes in operating assets and liabilities:
Prepaid expenses and other assets 22,032 (384) (22,656)
Accounts payable and accrued expenses 16,344 10,158 (185,665)
- ---------------------------------------------------------------------------------------------------------------
(3,548,005) (2,197,093) 841,521
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 38,376 9,774 3,620,674
- ---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in long-term
receivables from subsidiaries (1,283,879) (577,847) (4,936,468)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,283,879) (577,847) (4,936,468)
- ---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 146,378 176,220 131,415
Exercise of stock options 853,481 212,520 43,500
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 999,859 388,740 174,915
- ---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents 245,644 179,333 1,140,879
- ---------------------------------------------------------------------------------------------------------------
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, 2005, January 1, 2005 and December 27, 2003
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, 2005
Allowance for doubtful
accounts on trade
receivables $1,862,000 $276,000 $346,000 $1,792,000
Year Ended January 1, 2005
Allowance for doubtful
accounts on trade
receivables $1,854,000 $436,000 $428,000 $1,862,000
Year Ended December 27, 2003
Allowance for doubtful
accounts on trade
receivables $1,549,000 $692,000 $387,000 $1,854,000
F-36
EXHIBIT INDEX
- -------------------------------------------------------------------------------
(10) (o) Compensation Arrangements for Named Executive Officers.
(10) (p) Compensation Arrangements for Directors.
(11) Computation of Earnings Per Share.
(21) Subsidiaries of the Registrant.
(23) Consent of Grant Thornton LLP.
31.1 Certification of Chief Executive Officer Required by Rule 13a-14(b)
of the Securities Exchange Act of 1934, as amended.
31.2 Certification 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 10 (o)
- -------------------------------------------------------------------------------
RCM TECHNOLOGIES, INC.
Compensation Arrangements for Named Executive Officers
Stanton Remer. Executive Vice President & Chief Financial Officer. The Company
on an at-will basis pursuant to an oral agreement employs Mr. Remer. In addition
to standard medical, disability, life insurance, 401(k) and employee stock
incentive benefits available to all eligible employees, he is eligible for the
Executive Medical Supplementary Plan available to the named executive officers,
the Executive Stock Option Plan available to officers and key employees and an
auto allowance available to certain middle managers and above. Mr. Remer
received a base salary of $200,000 in 2005. His bonus is compensated according
to a Schedule of Compensation approved by the Compensation Committee on December
17, 1997, pursuant to which the Company pays a bonus of .002 of the Company's
EBITDA, defined as earnings before income taxes, depreciation and amortization,
on a consolidated basis within 60 days following the close of the fiscal year. A
further bonus of .002 of EBITDA is payable to Mr. Remer on a discretionary
basis.
Rocco Campanelli. Executive Vice President. The Company on an at-will basis
pursuant to an oral agreement employs Mr. Campanelli. In addition to standard
medical, disability, life insurance, 401(k) and employee stock incentive
benefits available to all eligible employees, he is eligible for the Executive
Medical Supplementary Plan available to the named executive officers, the
Executive Stock Option Plan available to officers and key employees and an auto
allowance available to certain middle managers and above. Mr. Campanelli
received a base salary of $175,000 in 2005. His bonus is based on a percentage
of divisional Engineering net operating income above certain threshold targets.
Kevin D. Miller. Senior Vice President. The Company on an at-will basis pursuant
to an oral agreement employs Mr. Miller. In addition to the standard medical,
disability, life insurance, 401(k) and employee stock incentive benefits
available to all eligible employees, he is eligible for the Executive Medical
Supplementary Plan available to the named executive officers, the Executive
Stock Option Plan available to officers and key employees and an auto allowance
available to certain middle managers and above. Mr. Miller received a base
salary of $200,000 in 2005. He is eligible for a discretionary bonus.
EXHIBIT 10 (p)
- -------------------------------------------------------------------------------
RCM TECHNOLOGIES, INC.
Compensation Arrangements for Directors
Directors who are RCM Technologies, Inc employees are not compensated for their
services as directors.
Non-employee directors, except as set forth below, each receive $24,000 in
annual compensation for service on the Board, payable in equal monthly
installments in cash.
In addition, each non-employee director receives $750 payable in cash for each
in-person meeting of the full Board attended by that director, and $300 for each
meeting of a committee (in excess of four meetings per year of that committee),
whether in-person or telephonic, attended by that director.
Norman S. Berson, one of the non-employee directors, is of counsel to a law firm
that from time to time performs services for the Company. Fees paid by the
Company to this law firm are not significant or material. Nevertheless, Mr.
Berson has voluntarily declined to accept compensation for his service on the
Board.
EXHIBIT 11
- -------------------------------------------------------------------------------
COMPUTATION OF EARNINGS PER COMMON SHARE
Years Ended December 31, 2005, January 1, 2005 and December 27, 2003
December 31, January 1, December 27,
2005 2005 2003
- --------------------------------------------------------------------------------------------------------------
Diluted earnings
Net income applicable to common
stock $3,536,086 $2,206,867 $2,779,153
==============================================================================================================
Shares
Weighted average number of common
shares outstanding 11,456,757 11,325,626 10,716,179
Common stock equivalents 274,834 354,186 180,126
- --------------------------------------------------------------------------------------------------------------
Total 11,731,591 11,679,811 10,896,305
==============================================================================================================
Diluted earnings per common share $.30 $.19 $.26
==============================================================================================================
Basic
Net income applicable to common
stock $3,536,086 $2,206,867 $2,779,153
==============================================================================================================
Shares
Weighted average number of common
shares outstanding 11,456,757 11,325,626 10,716,179
==============================================================================================================
Basic earnings per common share $.31 $.19 $.26
==============================================================================================================
EXHIBIT 21
- -------------------------------------------------------------------------------
SUBSIDIARIES
Business Support Group of Michigan, Inc.
Cataract, Inc.
Programming Alternatives of Minnesota, Inc.
RCMT Delaware, Inc.
RCM Technologies (USA), Inc.
Soltre Technology, Inc.
EXHIBIT 23
- -------------------------------------------------------------------------------
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
RCM Technologies, Inc.
We have issued our report dated March 1, 2006, accompanying the consolidated
financial statements and schedules included in the Annual Report of RCM
Technologies, Inc. and Subsidiaries on Form 10-K for the year ended December 31,
2005. 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 1, 2006
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 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 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 officer 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 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.
Date: March 23, 2006
/s/ Leon Kopyt
-------------------------------
Leon Kopyt
Chairman and 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 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 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 officer 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 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.
Date: March 23, 2006
/s/ Stanton Remer
------------------------------
Stanton Remer
Executive Vice President
Chief Financial Officer, Treasurer, and Secretary
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, 2005 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, as amended (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 23, 2006
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, 2005 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, as amended (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
Executive Vice President
Chief Financial Officer
March 23, 2006
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.