UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
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)
(609) 486-1777
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of the Registrant's class of common
stock, as of the latest practicable date.
CLASS 10,447,350
Common Stock, $.05 par value Outstanding as of September 2, 1998
1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Page
Consolidated Balance Sheets as of July 31, 1998 (Unaudited)
and October 31, 1997 (Audited) 3
Unaudited Consolidated Statements of Income for the Nine Month
Periods Ended July 31, 1998 and 1997 5
Unaudited Consolidated Statements of Income for the Three Month
Periods Ended July 31, 1998 and 1997 6
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Nine Month Period Ended July 31, 1998 7
Unaudited Consolidated Statements of Cash Flows for the Nine
Month Periods Ended July 31, 1998 and 1997 8
Notes to Unaudited Consolidated Financial Statements 10
ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II - OTHER INFORMATION
ITEM 5 - Other Information 20
ITEM 6 - Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 1998 and October 31, 1997
ASSETS
1998 1997
-------------- ---------
(Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 32,317,407 $ 918,028
Accounts receivable, net of allowance for doubtful accounts
of $405,700 and $316,000 in 1998 and 1997, respectively 36,164,691 24,850,304
Prepaid expenses and other current assets 1,063,051 673,265
--------- -------
Total current assets 69,545,149 26,441,597
---------- ----------
Property and equipment, at cost
Equipment and leasehold improvements 4,525,423 2,508,680
Less: accumulated depreciation and amortization 2,278,128 1,373,275
--------- ---------
2,247,295 1,135,405
--------- ---------
Other assets
Deposits 147,542 94,149
Intangible assets (net of accumulated amortization
of $1,507,307 and $804,640 in 1998 and 1997,
respectively) 45,517,910 26,411,445
---------- ----------
45,665,452 26,505,594
Total assets $117,457,896 $ 54,082,596
============ = ==========
The accompanying notes are an integral part of these
financial statements.
3
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
July 31, 1998 and October 31, 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
(Unaudited) (Audited)
Current liabilities
Note payable - bank $ 2,000,000 $ 2,000,000
Accounts payable and accrued expenses 2,949,558 1,315,937
Accrued payroll 6,449,498 4,501,502
Taxes other than income taxes 1,748,292 665,106
Income taxes payable 876,576 679,937
------- -------
Total current liabilities 14,023,924 9,162,482
---------- ---------
Income taxes payable 308,129
Shareholders' equity
Preferred stock, $1.00 par value; 5,000,000 shares authorized;
no shares issued or outstanding
Common stock, $0.05 par value; 40,000,000 shares authorized; 10,445,650 and
7,582,206 shares issued in 1998 and
1997, respectively 522,282 379,110
Additional paid-in capital 92,969,419 40,877,540
Retained earnings 9,942,271 3,355,335
--------- ---------
103,433,972 44,611,985
Total liabilities and shareholders' equity $117,457,896 $ 54,082,596
============ = ==========
The accompanying notes are an integral part of these
financial statements.
4
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended July 31,
1998 1997
(Unaudited) (Unaudited)
Revenues $138,182,996 $ 76,540,067
Cost of services 105,099,254 58,275,612
----------- ----------
Gross profit 33,083,742 18,264,455
---------- ----------
Operating costs and expenses
Selling, general and administrative 20,872,931 12,616,194
Depreciation and amortization 962,896 368,503
------- -------
21,835,827 12,984,697
Operating income 11,247,915 5,279,758
Interest (expense) income, net 7,657 ( 282,444 )
----- -------
Income before income taxes 11,255,572 4,997,314
Income taxes 4,668,636 2,093,066
--------- ---------
Net income $ 6,586,936 $ 2,904,248
= ========= = =========
Basic earnings per share $.80 $.55
Weighted average number of common
shares outstanding 8,238,172 5,290,599
Diluted earnings per share $.75 $.53
Weighted average number of common
and common equivalent shares
outstanding 8,732,895 5,465,851
The accompanying notes are an integral part of these
financial statements.
5
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended July 31,
1998 1997
(Unaudited) (Unaudited)
Revenues $ 52,008,578 $ 28,009,367
Cost of services 39,684,660 21,090,427
---------- ----------
Gross profit 12,323,918 6,918,940
---------- ---------
Operating costs and expenses
Selling, general and administrative 7,732,561 4,672,356
Depreciation and amortization 369,890 130,422
------- -------
8,102,451 4,802,778
--------- ---------
Operating income 4,221,467 2,116,162
Interest (expense) income, net 198,281 ( 19,777 )
------- ------
Income before income taxes 4,419,748 2,096,385
Income taxes 1,828,964 890,457
--------- -------
Net income $ 2,590,784 $ 1,205,928
= ========= = =========
Basic earnings per share $.27 $.19
Weighted average number of common
shares outstanding 9,476,925 6,253,754
Diluted earnings per share $.26 $.19
Weighted average number of common
and common equivalent shares
outstanding 9,971,684 6,429,006
The accompanying notes are an integral part of these
financial statements.
6
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months Ended July 31, 1998
(Unaudited)
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings
Balance, October 31, 1997 7,582,206 $ 379,110 $40,877,540 $3,355,335
Exercise of Stock Options 200,255 10,013 620,206
Exercise of Warrants 153,209 7,660 2,232,433
Sale of Common Stock 2,509,980 125,499 49,239,240
Net Income 6,586,936
Balance, July 31, 1998 10,445,650 $ 522,282 $92,969,419 $9,942,271
========== ========== =========== ==========
The accompanying notes are an integral part of these
financial statements.
7
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended July 31,
1998 1997
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 6,586,936 $ 2,904,249
- --------- - ---------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 962,896 368,503
Provision for losses on accounts
receivable 89,700 224,748
Changes in assets and liabilities:
Accounts receivable ( 11,404,087) ( 4,368,088 )
Prepaid expenses and other
current assets ( 389,786) ( 299,850 )
Accounts payable and accrued expenses 1,533,621 ( 358,058 )
Accrued payroll 1,947,996 254,210
Taxes other than income taxes 1,083,186 246,560
Income taxes payable ( 111,490) ( 471,510 )
------- -------
Total adjustments ( 6,287,964) ( 4,403,485 )
--------- ---------
Net cash provided by (used in) operating activities 298,972 ( 1,499,236 )
------- ---------
The accompanying notes are an integral part of these
financial statements.
8
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Nine Months Ended July 31,
1998 1997
(Unaudited) (Unaudited)
Cash flows from investing activities:
Property and equipment acquired ($ 648,812) ($ 379,996 )
Increase in deposits ( 53,393) ( 23,392 )
Cash paid for acquisitions,
net of cash acquired ( 20,532,439) ( 5,813,183 )
------------- ---------
Net cash used in investing activities ( 21,234,644) ( 6,216,571 )
---------- ---------
Cash flows from financing activities:
Sale of common stock 49,464,739 23,288,728
Exercise of stock options and warrants 2,870,312 1,094
Net repayments under short term debt arrangements ( 746,636 )
-------
Net cash provided by financing activities 52,335,051 22,543,186
---------- ----------
Net increase in cash and cash equivalents 31,399,379 14,827,379
Cash and cash equivalents at beginning of period 918,028 5,989
------- -----
Cash and cash equivalents at July 31, $ 32,317,407 $ 14,833,368
= ========== = ==========
Supplemental cash flow information:
Cash paid for:
Interest expense $ 338,033 $ 393,931
Income taxes $ 4,780,126 $ 2,489,576
Acquisitions:
Fair value of assets acquired $ 27,224,553 $ 6,442,972
Liabilities assumed 6,692,114 628,986
--------- -------
Cash paid, net of cash acquired $ 20,532,439 $ 5,813,183
= ========== = =========
The accompanying notes are an integral part of these
financial statements.
9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). This Report on Form 10-Q should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended October 31, 1997. Certain information and footnote disclosures which
are normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations. The information reflects all normal
and recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial position of the Company
and its results of operations for the interim periods set forth herein. The
results for the nine months ended July 31, 1998 are not necessarily
indicative of the results to be expected for the full year.
2. Sale of Common Stock
On June 3, 1998, the Company completed a public offering of 2,700,000
shares of its Common Stock, of which, 2,509,980 shares were sold by the
Company and 190,020 shares were sold by certain selling stockholders. The
public offering was undertaken pursuant to the terms of a Registration
Statement on Form S-3 originally filed with the Securities and Exchange
Commission on April 29, 1998 and a final Prospectus dated May 29, 1998. The
net proceeds to the Company after estimated offering costs was
approximately $49,500,000. The Company did not receive any of the proceeds
from the sale of the shares by the selling stockholders.
3. Acquisition
On July 14, 1998, the Company acquired all of the outstanding stock of
Software Analysis and Management, Inc. ("SAMCO"), an Orange,
California-based provider of information technology staffing services
specializing in software and system engineering services, for a purchase
price consisting of: (i) $7.5 million in cash; (ii) $4.5 million of
contingent consideration, payable over three years upon attaining certain
earnings targets; and (iii) additional consideration to the extent that
during the three year period, SAMCO exceeds the earnings targets. Any
additional consideration paid will be recorded as additional purchase
price. SAMCO generated revenues of approximately $20.0 million during the
fiscal year prior to the date of acquisition.
The following unaudited results of operations have been prepared assuming
that all acquisitions which have occurred since November 1, 1996 had
occurred at 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 acquisitions been consummated as of the
beginning of the periods presented.
Nine Months Ended Three Months Ended
July 31, July 31,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------
Revenues $ 160,176,000 $ 132,115,000 $ 55,693,000 $ 47,701,000
Operating income $ 13,425,000 $ 10,510,000 $ 4,597,000 $ 4,013,000
Net income $ 7,466,000 $ 4,827,000 $ 2,791,000 $ 1,944,000
Diluted earnings per share $.85 $.87 $.28 $.30
Weighted average shares outstanding 8,732,895 5,545,354 9,971,684 6,508,509
10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Revolving Credit Facility
On August 19, 1998, the Company and its subsidiaries entered into an
agreement with Mellon Bank N.A., administrative agent for a syndicate of
banks, which provides for a $75.0 million Revolving Credit Facility (the
"Revolving Credit Facility"). Borrowings under the Revolving Credit
Facility bear interest at the Company's option, at LIBOR (London Interbank
Offered Rate), plus applicable margin or the agent bank's prime rate.
Borrowings under the Revolving Credit Facility are collateralized by all of
the assets of the Company and its subsidiaries and a pledge of all of the
stock of its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants. The Revolving Credit
Facility expires August 2001. There were no amounts outstanding under the
Revolving Credit Facility at September 2, 1998.
5. Stock Options
On April 23, 1998, the stockholders of the Company approved amendments to
the 1992 Incentive Stock Option Plan (the "1992 Option Plan") and the 1994
Non-Employee Director Stock Option Plan (the "Director Option Plan"). The
amendments increase the number of shares of the Company's common stock
issuable under the 1992 Option Plan by 400,000 shares to 500,000 shares and
increase the number of shares issuable under the Non- Employee Director
Option Plan by 100,000 shares to 180,000 shares.
Transactions related to all stock options during the nine months ended July
31, 1998 are as follows:
Outstanding options, beginning of period......................................... 1,087,400
Granted.......................................................................... 130,000
Forfeited........................................................................( 103,350)
Exercised........................................................................( 200,255)
Outstanding options, end of period............................................... 913,795
Exercisable options ............................................................. 883,795
==========
Option grant price per share..................................................... $3.44
to $14.50
11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings Per Share
On November 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share." Basic earnings per
share are computed based upon the weighted average number of common
shares outstanding and diluted earnings per share are computed based upon
the weighted average number of common shares outstanding and dilutive
common share equivalents (consisting of incentive stock options,
non-qualified stock options and warrants) outstanding during the periods
using the treasury stock method. Following is a reconciliation of the
shares used to compute basic and diluted earnings per share:
Nine Months Ended Three Months Ended
July 31, July 31,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------
Weighted average number of shares
outstanding used to compute basic
earnings per share 8,238,172 5,290,599 9,476,925 6,253,754
Dilutive effect of stock options
and warrants 494,723 175,252 494,759 175,252
------- ------- ------- -------
Number of shares used to compute
diluted earnings per share 8,732,895 5,465,851 9,971,684 6,429,006
========= ========= ========= =========
7. Accounts Payable and accrued expenses
Accounts payable at July 31, 1998 and October 31, 1997 consists of the
following:
July 31, October 31,
1998 1997
Accounts payable 2,134,258 1,315,937
Funds due sellers (1) 815,300 ________
-------
2,949,558 1,315,937
(1) Represents funds due to shareholders of acquired companies.
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. Interest (Expense) Income, Net
Interest (expense) income, net for the nine and three months ended July
31, 1998 and 1997 consists of the following:
Nine Months Ended Three Months Ended
July 31, July 31,
1998 1997 1998 1997
---------------- ---------------- ---------------- ----------
Interest expense ($ 338,034) ($ 393,916) ($ 131,187) ($ 131,264 )
Interest income 345,691 111,472 329,468 111,487
------- ------- ------- -------
$ 7,657 ($ 282,444) $ 198,281 ($ 19,777 )
= ===== = ======= = ======= = ======
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
When used in or incorporated by reference into this Report, the words
"estimate," "project," "intend," "expect" and similar expressions are intended
to identify forward-looking statements regarding events and financial trends
which may affect the Company's future operating results and financial position.
Such statements are subject to risks and uncertainties that could cause the
Company's actual results and financial position to differ materially. Certain of
these factors have been identified within the Company's various Reports,
Registration Statements and other filings previously made with the SEC.
Overview
The Company is a multi-regional provider of information technology and other
professional staffing services though its 54 branch offices located in 23
states.
The Company's business and strategy have changed dramatically since its
inception in 1971. From 1992 through 1994, current management repositioned its
core staffing business to improve profitability and to take advantage of
consolidating market dynamics. Significant revenue growth began in Fiscal 1995
as the Company implemented a growth strategy that has resulted in the
acquisition of 14 businesses in the staffing industry. These acquisitions
shifted the Company's business toward the higher margin information technology
and specialty healthcare sectors. During this time, the Company also elected to
discontinue providing certain lower margin general support services. General
support services, which from Fiscal 1992 to Fiscal 1994 accounted for
approximately 51.0% of the Company's revenues, decreased as a percentage of the
Company's revenues to 12.1% during the nine months ended July 31, 1998.
Correspondingly, revenues from the Company's specialty professional services
accounted for 87.9% of the Company's revenues during the nine months ended July
31, 1998.
The Company realizes revenues from the placement of contract and temporary
staffing personnel. Principally all of these services are provided to the
customer on a time and material basis at hourly rates that are established for
each of the Company's staffing personnel, based upon their skill level,
experience and type of work performed. In some instances, the Company derives
revenues on a fixed-fee basis in connection with consulting projects. In view of
the diversification of the Company's service offerings, and by drawing upon the
skills developed within the Company's engineering and technical group,
management intends to develop project management skills within its information
technology and other groups and believes that an additional percentage of its
business may be derived in the future from larger-scale consulting projects.
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. Contracts, although they normally
relate to longer-term and more complex engagements, generally do not obligate
the customer to purchase a minimum level of services and are generally
terminable by the customer on 60 to 90 days notice. Revenues are recognized when
services are provided.
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
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 staffing personnel, including payroll taxes, employee
benefits, worker's compensation and other insurance. Principally all of the
billable personnel are treated by the Company as employees. Selling, general and
administrative expenses consist primarily of salaries and benefits of personnel
responsible for operating activities and include corporate overhead expenses.
Corporate overhead expenses relate to salaries and benefits of personnel
responsible for corporate activities, including the company's acquisition
program and corporate marketing, administrative and reporting responsibilities.
The Company records these expenses when incurred. Depreciation relates primarily
to the fixed assets of the Company. Amortization relates principally to the
goodwill resulting from the Company's acquisitions. These acquisitions have been
accounted for under the purchase method of accounting for financial reporting
purposes and have created goodwill which is being amortized over 40-year
periods.
Liquidity and Capital Resources
To support its acquisition program and related working capital requirements, the
Company has historically used borrowings under its bank credit facility which
was in existence prior to August 19, 1998 and proceeds from offerings of Common
Stock. On June 13, 1997, the Company completed a public offering which raised
$23.3 million in proceeds for the Company. The net offering proceeds through
July 31, 1998, have been used to fund acquisitions and retire bank debt.
On June 3,1998, the Company completed a public offering of 2,700,000 shares of
Common Stock, of which 2,509,980 shares were sold by the Company and 190,020
were sold by certain selling stockholders. The proceeds to the Company net of
estimated offering costs was approximately $49.5 million. Concurrently, with the
offering, the Company received $557,000 from the exercise of stock options upon
which the shares were sold in the offering by the selling shareholders.
At July 31, 1998, the Company had approximately $32.3 million in cash and
approximately $18.0 million in unused loan availability under the bank credit
facility in existence at July 31, 1998.
Cash provided by operating activities was $300,000 for the nine months ended
July 31, 1998 compared to a use of cash of $1.5 million for the nine months
ended July 31, 1997. The increase of $1.8 million was the result of the increase
of $4.1 million in net income before depreciation and amortization and other
non-cash charges and a decrease of $2.3 million from changes in working capital,
primarily an increase in accounts payable and taxes other than income taxes
which was in turn offset by an increase in accounts receivable.
Cash used in investing activities for the nine months ended July 31, 1998 was
$21.2 million compared to $6.2 million for the nine months ended July 31, 1997.
This increase was principally the result of larger acquisitions completed by the
Company during the nine months ended July 31, 1998 as compared to those
acquisitions completed during the nine months ended July 31, 1997.
Cash provided by financing activities for the nine months ended July 31, 1998
was $52.3 million compared to $22.5 million for the nine months ended July 31,
1997. This increase was principally the result of proceeds from the June 3, 1998
public offering as well as the exercise of stock warrants.
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources - (Continued)
On August 19, 1998, the Company and its subsidiaries entered into an agreement
with Mellon Bank N.A., administrative agent for a syndicate of banks, which
provides for a $75.0 million Revolving Credit Facility (the "Revolving Credit
Facility"). Borrowings under the Revolving Credit Facility bear interest, at the
Company's option, at LIBOR (London Interbank Offered Rate) or the agent bank's
prime rate, plus applicable margin.
Borrowings under the Revolving Credit Facility are collateralized by all of the
assets of the Company and a pledge of all of the stock of its subsidiaries. The
Revolving Credit Facility also contains various financial and non-financial
covenants. The Revolving Credit Facility expires August 2001. At October 31,
1997, and July 31, 1998, the Company and its subsidiaries were in compliance
with all financial covenants contained within the Revolving Credit Facility in
effect prior to August 19, 1998.
Borrowings under the Revolving Credit Facility are to be used to meet cash flow
requirements for the Company's subsidiaries as well as operating expenses for
the Company. At October 31, 1997 and July 31, 1998 there was approximately $14.0
million and $18.0 million, respectively, of unused loan availability under the
bank credit facility which was in effect at July 31, 1998. The Company utilized
approximately $10.0 million (as of September 2, 1998) of the net proceeds from
its June 3, 1998 public offering to pay down the bank credit facility which had
a balance of approximately $10.0 million as of June 3, 1998, although the
Company does intend to draw on the Revolving Credit Facility as needed in the
future.
The Company anticipates that its primary uses of capital in future periods will
be for acquisitions and the funding of increases in working capital. The
Company's business strategy is to achieve growth both internally through
operations and externally through strategic acquisitions. The Company's
liquidity and capital resources may be affected in the future as the Company
continues to grow through implementation of this strategy which may involve
acquisitions facilitated through the use of cash and/or debt and equity
securities. Funding for future acquisitions and working capital will be obtained
from the proceeds of the June 3, 1998 public offering, the Revolving Credit
Facility, funds generated through operations and future financing transactions.
The Company does not currently have material commitments for capital
expenditures and does not anticipate entering into any such commitments during
the next twelve months. The Company continues to evaluate acquisitions of
various businesses which are complementary to its current operations. The
Company's current commitments consist primarily of lease obligations for office
space. The Company believes that its capital resources are sufficient to meet
its present obligations and those to be incurred in the normal course of
business for the next twelve months.
During the nine months ended July 31, 1998, the Company derived $2.2 million of
proceeds from the issuance of 153,209 shares of Common Stock upon the exercise
of its Class C Warrants (the "Warrants") at an effective exercise price of
$15.00 per share. The Warrants were issued in a public offering undertaken by
the Company during 1989, and after several extensions, expired on April 30,
1998.
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Year 2000 Compliance
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the Year 2000. In
connection with this problem (the "Year 2000 Issue"), and in order to deliver
quality customer service and centrally manage it operations, the Company is
currently upgrading its internal information system. The Company anticipates
that the upgrade will be completed during the calendar year 1999. If such
upgrade is not completed in a timely manner, the Year 2000 Issue may have a
material effect on the operations of the Company. While the total cost
associated with the upgrade of the Company's system is not known at this time,
it is not expected to be material to the Company's financial position and is
being capitalized as incurred. The Company is in the process of developing a
contingency plan if it fails to meet its timetable.
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Results of Operations - Nine Months Ended July 31, 1998, Compared to Nine Months Ended July 31, 1997
Nine Months Ended July 31,
1998 1997
Revenues $ 138,182,996 $ 76,540,067
Cost of services 105,099,254 58,275,612
Gross profit 33,083,742 18,264,455
Selling, general and administrative 20,872,931 12,616,194
Depreciation and amortization 962,896 368,503
Operating income 11,247,915 5,279,758
Interest (expense) income, net 7,657 ( 282,444 )
Income before income taxes 11,255,572 4,997,314
Income taxes 4,668,636 2,093,066
Net income 6,586,936 2,904,248
Diluted earnings per share $.75 $.53
Revenues. Revenues increased 80.5%, or $61.6 million, for the nine months ended
July 31, 1998, as compared to the comparable prior-year period. Of this
increase, approximately $45.2 million was attributable to revenue growth through
acquisitions made during Fiscal 1997 and the nine months ended July 31, 1998,
and approximately $16.4 million was attributable to internal growth. For the
nine months ended July 31, 1998 internal growth was 38.1% for the Professional
Engineering and Information Technology groups and 25.5% for the Company as a
whole.
Cost of Services. Cost of services increased 80.3%, or $46.8 million, for the
nine months ended July 31, 1998, as compared to the comparable prior-year
period. This increase was primarily due to increased salaries and compensation
associated with the increased revenues experienced during this period. Cost of
services as a percentage of revenues decreased to 76.0% for the nine months
ended July 31, 1998, from 76.1% for the comparable prior-year period. This
improvement was primarily due to a greater percentage of the Company's revenues
being derived from specialty staffing services.
Selling, General and Administrative. Selling, general and administrative
expenses increased 65.4%, or $8.3 million, for the nine months ended July 31,
1998, as compared to the comparable prior-year period. This increase was
primarily due to selling, general and administrative expenses associated with
increased revenues during the nine months ended July 31, 1998, as compared to
the comparable prior-year period. Selling, general and administrative expenses
as a percentage of revenues decreased to 15.1% for the nine months ended July
31, 1998, from 16.5% in the comparable prior-year period, primarily attributable
to the sharing of administrative overhead over a larger revenue base.
Depreciation and Amortization. Depreciation and amortization increased 161.3%,
or $594,000, for the nine months ended July 31, 1998, as compared to the
comparable prior-year period. This increase was primarily due to the
amortization of intangible assets acquired in connection with the acquisitions
that occurred after July 31, 1997.
Interest (Expense) Income, Net. Actual interest expense of $338,000, for the
nine months ended July 31, 1998, was offset by $346,000 of interest income,
which was earned from the investment in interest-bearing deposits of the net
proceeds of the Company's public offerings in June 1997 and 1998, after the
repayment of bank debt. Interest expense decreased 14.2%, or $56,000, for the
nine months ended July 31, 1998, as compared to the comparable prior-year
period. This decrease was primarily due to the decreased borrowings necessary to
provide the funds for working capital.
Income Tax. Income tax expense increased 123.1%, or $2.6 million, for the nine
months ended July 31, 1998, as compared to the comparable prior-year period.
This increase was due to increased levels of income.
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended July 31, 1998 Compared to Three Months Ended July 31, 1997
Three Months Ended July 31,
1998 1997
Revenues $ 52,008,578 $ 28,009,367
Cost of services 39,684,660 21,090,427
Gross profit 12,323,918 6,918,940
Selling, general and administrative 7,732,561 4,672,356
Depreciation and amortization 369,890 130,422
Operating income 4,221,467 2,116,162
Interest (expense) income, net 198,281 ( 19,777 )
Income before income taxes 4,419,748 2,096,385
Income taxes 1,828,964 890,457
Net income 2,590,784 1,205,928
Diluted earnings per share $.26 $.19
Revenues. Revenues increased 113.8%, or $24.0 million, for the three months
ended July 31, 1998, as compared to the comparable prior-year period. Of this
increase, approximately $18.0 million was attributable to revenue growth through
acquisitions made during Fiscal 1997 and the three months ended July 31, 1998,
and approximately $6.0 million was attributable to internal growth. For the
three months ended July 31, 1998 internal growth was 35.3% for the Professional
Engineering and Information Technology groups and 23.8% for the Company overall.
Cost of Services. Cost of services increased 88.2%, or $18.6 million, for the
three months ended July 31, 1998, as compared to the comparable prior-year
period. This increase was primarily due to increased salaries and compensation
associated with the increased revenues experienced during this period. Cost of
services as a percentage of revenues increased to 76.3% for the three months
ended July 31, 1998, from 75.3% for the comparable prior-year period. This
increase was primarily due to increased paid vacation, holiday and training
costs as well as a decrease in general support margins and certain high margin
short term projects in the three months ended July 31, 1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased 78.1%, or $5.4 million, for the three months ended July 31,
1998, as compared to the comparable prior-year period. This increase was
primarily due to selling, general and administrative expenses associated with
increased revenues during the three months ended July 31, 1998, as compared to
the comparable prior-year period. Selling, general and administrative expenses
as a percentage of revenues decreased to 23.7% for the three months ended July
31, 1998, from 24.7% in the comparable prior-year period, primarily attributable
to the sharing of administrative overhead over a larger revenue base.
Depreciation and Amortization. Depreciation and amortization increased 183.6%,
or $239,000, for the three months ended July 31, 1998, as compared to the
comparable prior-year period. This increase was primarily due to the
amortization of intangible assets acquired in connection with the acquisitions
that occurred after July 31, 1997.
Interest (Expense) Income, Net. Actual interest expense of $131,000 for the
three months ended July 31, 1998 was offset by $329,000 of interest income,
which was earned from the investment in interest-bearing deposits of the net
proceeds of the Company's public offering in June 1998, after the repayment of
bank debt. Interest expense remained the same for the three months ended July
31, 1998 as compared to the comparable prior-year period.
Income Tax. Income tax expense increased 105.4%, or $939,000, for the three
months ended July 31, 1998, as compared to the comparable prior-year period.
This increase was due to increased levels of income.
19
PART II
Item 5. Other Information
A stockholder of the Company may wish to have a proposal presented at
the 1999 Annual Meeting of Stockholders, but not to have such proposal
included in the Company's proxy statement and form of proxy relating
to that meeting. If notice of any such proposal is not received by the
Company at 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey
08109-4613, Attention president, by January 24, 1999, then such
proposal shall be deemed "untimely" for purposes of rule 14a-4(c)
promulgated under the Securities Exchange Act of 1934, as amended,
and, therefore, the Board of Directors of the Company will have the
right to exercise discretionary voting authority with respect to such
proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Loan and Security Agreement dated August 19, 1998 between
RCM Technologies, Inc. and all of its Subsidiaries and
Mellon Bank, N.A. as Agent.
27a Financial Data Schedule.
27b Restated Financial Data Schedule July 31, 1997.
(b) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K (under Item
5) dated March 17, 1998 reporting the resignation of Barry
S. Meyers from the Board of Directors of RCM Technologies,
Inc. on March 12, 1998.
2. The Company filed a Current Report on Form 8-K dated June
12, 1998, as amended by a Current Report on Form 8-K/A
(under Item 5) dated June 18, 1998, reporting the
acquisitions of Northern Technical Services, Inc. on January
4, 1998 and Global Technology Solutions, Inc. on February 2,
1998.
3. The Company filed a Current Report on Form 8-K (under Item
2) on July 23, 1998 reporting the acquisition of Software
Analysis and Management, Inc. on July 14, 1998.
20
RCM TECHNOLOGIES, INC.
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.
(Registrant)
Date: September 2, 1998 By:/s/ Stanton Remer
-----------------
Stanton Remer
Chief Financial Officer and Treasurer
(Principal Accounting Officer)
21