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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT
OF 1934
For the transition period from ........... to ...........
Commission file number 1-10245
RCM TECHNOLOGIES, INC.
Exact name of registrant as specified in its charter
Nevada 95-1480559
State of incorporation IRS Employer Identification No.
2500 McClellan Avenue, Suite 350, Pennsauken,
New Jersey 08109-4613 Address of principal
executive offices
Registrant's telephone number, including area code: (856) 486-1777
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of
the Registrant on January 5, 2000 was approximately $186,959,000 based upon the
closing price of the Common Stock on such date on The Nasdaq National Market of
$17.88. 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 five cents
per share) outstanding as of January 5, 2000: 10,496,225.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 2000 Annual
Meeting of Stockholders ("2000 Proxy Statement") are incorporated by reference
into Items 10,11,12 and 13 in Part III. If the 2000 Proxy Statement is not filed
by February 28, 2000, an amendment to this Annual Report on Form 10-K setting
forth this information will be duly filed with the Securities and Exchange
Commission.
1
PART I
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other Company reports and public
filings are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned that such forward-looking
statements, which may be identified by words such as "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend," and similar
expressions are only predictions and are subject to risks and uncertainties that
could cause the Company's actual results and financial position to differ
materially. Such risks and uncertainties include, without limitation: (i)
unemployment and general economic conditions associated with the provision of
information technology and engineering services and solutions, placement of
temporary staffing personnel; (ii) the Company's ability to continue to attract,
train and retain personnel qualified to meet the requirements of its clients;
(iii) the Company's ability to identify appropriate acquisition candidates,
complete such acquisitions and successfully integrate acquired businesses; (iv)
uncertainties regarding pro forma financial information and the underlying
assumptions relating to acquisitions and acquired businesses; (v) uncertainties
regarding amounts of deferred consideration and earnout payments to become
payable to former shareholders of acquired businesses; (vi) possible adverse
effects on the market price of the Company's Common Stock due to the resale into
the market of significant amounts of Common Stock; (vii) the potential adverse
effect a decrease in the trading price of the Company's Common Stock would have
upon the Company's ability to acquire businesses through the issuance of its
securities; (viii) the Company's ability to obtain financing on satisfactory
terms; (ix) the reliance of the Company upon the continued service of its
executive officers; (x) the Company's ability to remain competitive in the
markets which it serves; (xi) the Company's ability to maintain its unemployment
insurance premiums and workers compensation premiums; (xii) the risk of claims
made against the Company associated with providing temporary staffing services;
(xiii) the Company's ability to manage significant amounts of information, and
periodically expand and upgrade its information processing capabilities; (xiv)
the Company's ability to remain in compliance with federal and state wage and
hour laws and regulations; (xv) predictions as to the future need for the
Company's services; and (xvi) other economic, competitive and governmental
factors affecting the Company's operations, market, products and services.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date made. The Company undertakes no
obligation to publicly release the results of any revision of these
forward-looking statements to reflect these ends or circumstances after the date
they are made or to reflect the occurrence of unanticipated events.
2
ITEM 1. BUSINESS
General
RCM Technologies, Inc. ("RCM" or the "Company") is a premier national
provider of Business, Technology and resource solutions in information
technology ("IT") and professional engineering to customers in corporate
and government sectors. RCM's offices are located in major geographic
regions throughout North America. The Company has grown its information
technology competencies in the areas of resource augmentation, e-business,
Enterprise Resource Planning ("ERP") support, network and infrastructure
support and knowledge management. RCM's engineering expertise is in the
form of technical design, field engineering, field support, procedures
development and project and program management. The Company provides its
services to clients in Banking & finance, healthcare, insurance,
pharmaceutical, telecommunications, utility, technology, manufacturing &
distribution and government sectors. The Company believes the breadth of
services it can provide fosters long-term client relationships, affords
cross-selling opportunities and minimizes the Company's dependence on any
single technology or industry sector.
During the fiscal year ended October 31, 1999 approximately 73% of RCM's
total revenues were derived from IT services, 19% from Engineering services
and the remaining 8% from commercial services.
RCM sells and delivers its services through a network of 77 branch offices
located in selected regions throughout North America. The Company has
executed a geographic expansion and diversification strategy that places it
in the major markets for the services that the Company offers. This
strategy has been accomplished through the combination of a concerted and
disciplined acquisition program, coupled with an organic growth strategy.
The demand for IT and engineering consulting services has increased rapidly
in recent years. RCM has competed successfully in this environment,
experiencing a compound annual growth rate in revenues of 73% over the last
four years. In fiscal 1999, RCM's revenues grew 56% to $313.4 million from
$201.5 million in fiscal 1998. From November 1, 1998 to October 31, 1999,
the number of consultants employed by the Company increased 47% from 1,900
to approximately 2,800.
Industry Overview
Many businesses today are facing intense competition, accelerating
technological change, personnel downsizing and widespread business process
re-engineering. Increasingly, these 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 deploy new information
technologies has become critical.
Although many companies have recognized the importance of IT systems and
products to compete in today's business climate, the process of designing,
developing and implementing IT solutions has become increasingly complex.
Some companies continue to migrate away from centralized mainframes running
proprietary software toward decentralized, scalable architectures based on
personal computers, client/server architectures, local and wide area
networks, the Internet, shared databases and packaged application software.
These advances have enhanced the ability of companies to benefit from the
application of IT systems and solutions. Consequently, the number of
companies desiring to use IT systems and solutions in new ways and the
number of end users within these organizations are rising rapidly.
As a result of the variety and complexity of these new technologies, IT
managers must integrate and manage computing environments consisting of
multiple computing platforms, operating systems, databases and networking
protocols, and must implement off-the-shelf software applications to
support business objectives. Companies also need to continually keep pace
with new developments, which often render existing equipment and internal
skills obsolete. At the same time, external economic factors have caused
some 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 develop
solutions. IT managers are charged with developing and supporting
increasingly complex systems and applications of significant strategic
value, while working under budgetary, personnel and expertise constraints
within their own organizations.
3
Industry Overview (Continued)
According to Dataquest, a division of Gartner Group, information technology
services is one of the fastest growing segments of the economy. The
worldwide market for information technology services was $218 billion in
1997,with a projected market of $472 billion in 2002, growing at an
estimated compounded growth rate of 16.7%. Dataquest also projects that the
U.S. information technology services market will grow from $95 billion in
1997 to $204 billion in 2002 at an annual compounded growth rate of 16.5%.
Due to the foregoing factors, the demand for IT services has grown
significantly. The Company believes the demand for IT services is
particularly strong 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 counsel to
achieve their business objectives. These companies often rely on IT service
providers to help implement and manage their systems. However, many
middle-market companies rely on multiple providers for their IT needs.
Generally, the Company believes larger IT service providers do not target
these companies and smaller IT service providers lack sufficient breadth of
services or industry knowledge to satisfy 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 and can adversely impact the quality and compatibility of IT
solutions. RCM is structured to provide middle-market companies an
objective, single-source provider for their IT needs.
Business Strategy
RCM is dedicated to providing complete solutions to meet its customers'
business needs by delivering information technology and professional
engineering services. The Company's objective is to be a recognized leader
of specialty professional consulting services and solutions in major
markets throughout North America. The Company has developed interrelated
growth and operating strategies to achieve this objective. Key elements of
its growth and operating strategies are as follows:
Growth Strategy
Full Cycle Solution Capability. The Company will continue to build out its
Full Cycle Solution Capability. The goal of the full cycle strategy is to
fully address a client's project implementation cycle. 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 deliverable. RCM's strategy is to
build an end to end solution offering from its extensive resource base,
directing that expansion through the specific practices that have the
method and delivery expertise in place. 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
affords the Company the opportunity to strengthen long-term client
relationships which will further improve the quality of earnings.
In addition to building out the Full Cycle Solution Offering, the Company
will continue to focus on transitioning into higher value oriented services
to expand its margins on its various service lines. These measures will be
accomplished through a concerted effort of driving internal growth and, at
the same time, pursuing strategic acquisitions.
Promote Internal Growth. The Company's internal growth strategies have
resulted in several well-defined initiatives described below which were
launched during fiscal 1999. The results of these efforts have produced
gains in margin growth, client focus and client penetration.
Gross margins increased as a direct result of implementing a program at all
operating branches of the Company to conduct business at over certain
margin thresholds. The policies developed during this initiative continue
to be refined and administered so the results are expected to continue the
positive trend.
4
Growth Strategy (Continued)
In geographic regions where the Company has a high density of offices,
sales management programs were designed and implemented to segregate
clients into regional accounts. This process has provided a higher degree
of account coordination so clients can benefit from the wider array of
services that can be offered by the Company.
During fiscal 1999, RCM began a company-wide training initiative in which
all sales managers and professionals received advanced sales training. The
purpose of the training, which is a multi-semester program, is to sharpen
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 all clients within the same industry sectors
have common business challenges. It therefore allows the Company to present
and deliver enhanced value to those clients in the industrial sectors in
which RCM has amassed the greatest work experience. Through the alignment
of the collective project experience RCM's consultants have gained, the
Company brings differentiated awareness of the business challenges that
clients in that space are facing. This alignment also facilitates and
creates additional cross-selling opportunities. The result is greater
account penetration and enhanced client intimacy.
Operational strategies contributing to RCM's internal growth include the
delineation of certain new technical practice areas in markets where its
clients had historically known the Company as a contract service provider.
The formation of these practice areas has facilitated the flow of project
opportunities and the delivery of project-based solutions. These projects
have had the positive effect of expanding the margins for the core
technical competencies of a number of Company consultants.
Continue Strategic Acquisitions. The Company will continue to refine its
selective pursuit of strategic acquisitions. The industry for the Company's
services continues to be highly fragmented, and the Company plans to
continue its aggressive acquisition program. The Company's acquisition
strategy is designed to enrich and strengthen the scope of services and
technical competencies that it needs to broaden and maintain its full cycle
solution capabilities. In targeting acquisitions, the Company focuses on
companies with (i) technologies RCM has targeted for strategic value
enhancement, (ii) margins that will not dilute the margins now being
delivered, (iii) experienced management personnel, (iv) substantial growth
prospects and (v) sellers who desire to join the Company's management team.
To retain and provide incentives for management of its acquired companies,
the Company typically structures 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. The Company believes its success in completing acquisitions is due
to its entrepreneurial and decentralized operating philosophy, its strong
corporatelevel support and resources, its status as a public company and
its ability to offer management of the acquired companies an opportunity to
join and participate in the expansion of a rapidly growing provider of
business and information technology solutions.
Operating Strategy
Foster a Decentralized Entrepreneurial Environment. A key element of the
Company's operating strategy is to foster a decentralized, entrepreneurial
environment for its employees. The Company fosters this environment by
continuing to build on the local market knowledge, reputations and customer
relationships of acquired companies and by sharing their operating
policies, procedures and expertise with other branch locations to develop
new ideas to best serve the prospects of the Company. 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 to maximize growth and
profitability.
5
Operating Strategy (Continued)
Develop and Maintain Strong Customer Relationships. The Company seeks to
develop and maintain strong interactive customer relationships by
anticipating and focusing on its customers' needs. The Company emphasizes a
relationship-oriented approach to business, rather than the transaction or
assignment-oriented approach that the Company believes is used by many of
its competitors. The industry-centric strategy implemented during fiscal
1999 has allowed RCM to further expand its relationships with clients in
RCM's targeted sectors. To develop close customer relationships, the
Company's branch managers or practice managers regularly meet with both
existing and prospective clients to help design solutions for, 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 results in greater customer
satisfaction and reduced business development expense. Additionally, the
Company believes that by partnering with its customers in designing
business solutions, it generates new opportunities to cross sell additional
services that the Company has to offer. The Company focuses on providing
customers with qualified individuals or teams of experts compatible with
the business needs of our customers and makes a concerted effort to follow
the progress of such relationships to ensure their continued success.
Attract and Retain Highly Qualified Consultants and Technical Resources.
The Company believes it has been successful in attracting and retaining
qualified consultants and contractors by (i) providing stimulating and
challenging work assignments, (ii) offering competitive wages, (iii)
effectively communicating with its candidates, (iv) providing training to
maintain and upgrade skills and (v) aligning the needs of its customers
with the appropriately skilled personnel. The Company has been successful
in retaining these personnel due in part to its use of qualified personnel
designated as practice managers or "ombudsmen" who are dedicated to
maintaining contact with, and monitoring the satisfaction levels of, the
Company's consultants, while they are on assignment.
Centralize Administrative Functions. The Company seeks to maximize its
operational efficiencies by integrating general and administrative
functions at the corporate level, and reducing or eliminating redundant
functions and facilities at acquired companies, typically within three
months of an acquisition. This enables the Company to quickly realize
potential savings and synergies and efficiently control and monitor its
operations, and allows acquired companies to focus on growing their sales
and operations.
To accomplish this, the Company selected, then completed the installation
and role out of, an SAP operating system this year. The software was
configured to perform all back office functions including payroll, project
management, project cost accounting, billing, human resource administration
and all financial consolidation and reporting functions. The system is now
in operation at all Company branch locations in the United States. In the
next year, RCM will implement SAP for all of its Canadian operations. The
Company believes that this system provides a robust and highly scalable
platform from which to manage daily operations and to be able to
accommodate anticipated future growth.
Operations
The Company provides information technology and other professional
engineering services to a number of industry sectors.
Information Technology
The Company's Information Technology Group offers responsive, timely and
comprehensive business and information technology 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, enterprise
software, network communications, knowledge management and support of
client applications.
6
Information Technology (Continued
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 projects, knowledge management, customer relationship
management and supply chain management solutions. In its ERP practices, RCM
delivers software sales for certain applications, implementation services,
infrastructure support, integration services, and an array of post
implementation support services. In its enterprise application integration
work, the Company maintains its distributed computing practice, electronic
messaging and middleware services. 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
strives to ensure that its consultants have the expertise and skills needed
to keep pace with rapidly evolving information technologies. The Company's
strategy is to maintain expertise and acquire knowledge in multiple
technologies so it can offer its clients non-biased solutions best suited
to their business needs.
The Company provides its IT services through a number of delivery methods.
These include management consulting engagements, project management of
client efforts, project implementation of client initiatives, outsourcing,
both on and off site, and a full complement of resourcing alternatives.
As of October 31, 1999, approximately 2,200 information technology
personnel were employed by the Company.
Professional Engineering
The Company's Professional Engineering Group provides personnel to perform
project engineering, computer aided design, and other managed task
technical services either at the site of the customer or, less frequently,
at the Company's own facilities. Representative services include utilities
process and control, electrical engineering design, system engineering
design and analysis, mechanical engineering design, procurement
engineering, civil structural engineering design, computer aided design and
code compliance. The Professional Engineering Group has developed an
expertise in providing engineering, design and technical services to many
customers in the aeronautical, paper products manufacturing industries and
the nuclear power, fossil fuel and electric utility 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 significant share of professional staffing and project management
requirements of the utilities industry both in professional engineering
services and through cross-selling of its information technology services.
Heightened competition, deregulation and rapid technological advances are
forcing the utilities industry to make fundamental changes in its business
process. These pressures have compelled the utilities industry to focus on
internal operations and maintenance activities and to increasingly
outsource their personnel requirements. Additionally, the Company believes
that increased performance demands from deregulation should increase the
importance of information technology to this industry. The Company believes
that its expertise and strong relationships with certain customers within
the utilities industry position the Company to be a leading provider of
professional services to the utilities industry.
The Company provides its engineering services through a number of delivery
methods. These include managed tasks and resources, complete project
services, outsourcing, both on and off site, and a full complement of
resourcing alternatives.
As of October 31, 1999, approximately 600 engineering personnel were
employed by the Company.
7
Commercial Services
The Company's Commercial Services Group consists of Specialty Healthcare
and General Support Services. The Company's General Support Services Group
provides contract and temporary services, as well as permanent placement
services, for full time and part time personnel in a variety of functional
areas, including office, clerical, data entry, secretarial, light
industrial, shipping and receiving and general warehouse. Contract and
temporary assignments range in length from less than one day to several
weeks or months.
The Company's Specialty Healthcare Group provides skilled, licensed
healthcare professionals, primarily physical therapists, occupational
therapists, speech language pathologists and trauma nurses. The Specialty
Healthcare Group provides services to hospitals, nursing homes,
pre-schools, sports medicine facilities and private practices. Services
include in-patient, out-patient, sub-acute and acute care, rehabilitation,
geriatric, pediatric and adult day care. The Specialty Healthcare Group
does not provide nursing or home healthcare services. Typical engagements
range either from three to six months or are on a day-to-day shift basis.
8
Branch Offices
The Company's branch organization consists of six operating regions with 77
offices located in 26 states and Canada. The region of and services
provided by each branch office are set forth in the table below.
NUMBER OF SERVICES
REGION OFFICES PROVIDED(1)
NORTHEAST
Connecticut................................... 3 IT, PE, CS
Maryland...................................... 1 IT
New Hampshire................................. 1 IT
New Jersey.................................... 9 IT, PE, CS
New York...................................... 3 IT, PE,CS
Pennsylvania.................................. 4 IT, PE, CS
Vermont....................................... 1 PE
-
22
MIDWEST
Illinois...................................... 3 IT
Indiana....................................... 1 IT
Kentucky...................................... 1 PE, CS
Michigan...................................... 8 IT, PE
Minnesota..................................... 2 IT
Missouri...................................... 1 IT, PE
Nebraska...................................... 1 IT
Ohio.......................................... 1 IT
Wisconsin..................................... 5 IT, PE
-
23
SOUTHEAST
Alabama....................................... 1 IT, PE
Florida....................................... 2 IT
Georgia....................................... 2 PE
North Carolina................................ 1 PE
South Carolina................................ 1 PE
Virginia...................................... 1 IT
-
8
SOUTHWEST
Arizona....................................... 4 IT, PE
Texas......................................... 3 IT
-
7
WEST
Colorado...................................... 1 IT
Northern California........................... 3 IT
Southern California........................... 9 IT, CS
-
13
CANADA.......................................... 4 IT, PE
-
(1) Services provided are abbreviated as follows:
IT - Information Technology
PE - Professional Engineering
CS - Commercial Services
9
Branch Offices (Continued)
Branch offices are primarily located in regions which 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.
The Company believes that a substantial portion 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 maximizes operating performance and contributes to employee and
customer satisfaction.
From its headquarter locations in New Jersey, the Company provides its
branch offices with centralized administrative, marketing, finance, MIS,
human resources and legal support. Centralized administrative functions
minimize the administrative burdens on branch office managers and allow
them to spend more time focusing on sales and marketing and practice
development activities. The Company believes that its ability to rapidly
integrate the administrative functions of its acquisitions has greatly
enhanced its internal growth.
Most of the branch offices have one branch manager, one sales manager,
three to six salespeople, one to five practice managers and several
recruiters. The Company's branch managers report to product-line general
managers. General managers meet with branch managers on a regular basis to
identify "best practices" for the various sales and marketing and
recruiting processes and assist the branch managers in implementing these
best practices. The Company's branch managers typically meet every three to
six months 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 which 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
also concentrates on providing carefully screened professionals with the
appropriate skills in a timely manner and at competitive prices. The
Company constantly 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, Lawson, GEAC, IBM, and Compaq among others.
The Partner programs may be either managed at a national level from the
corporate offices or at a regional level from the branch offices.
Some of the Company's larger representative customers include AT&T, Bell
Atlantic, Sprint, Merrill Lynch, Liberty Mutual Insurance, Merck, Warner
Lambert, Novartis, Medtronic, Northeast Utilities, Ontario Power, Lockheed,
and 3M. 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, as the Company does not actively
solicit national contracts, which typically subject the suppliers to
significant pricing pressures.
10
Sales And Marketing (Continued)
During fiscal 1999, no one customer accounted for more than 5% of the
Company's revenues. The Company's five and ten largest customers accounted
for approximately 13% and 22%, respectively, of the Company's revenues for
fiscal 1999.
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 database
of available personnel, which is 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, the internet, job
fairs, newspaper and trade journal advertising, attendance at industry
shows and presentations. The Company also has several recruiters dedicated
to recruiting highly skilled, highly sought-after information technology
personnel from international locations such as Australia, Canada, England,
India, Mexico, New Zealand, and other European and Southeast Asian
countries.
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 "ombudsmen" and technical practice managers. Ombudsmen are qualified
Company personnel dedicated to maintaining on-site contact with, and
monitoring the satisfaction levels of, the Company's consultants and
contract personnel while they are on assignment. Practice managers are
consulting managers responsible for the technical development and career
development of the Company's technical personnel within the defined
practice areas. The Company employs various methods of technical training
and skills development including sending consultants to application vendor
provided courses, the use of computer-based training tools and on-the-job
training through mentoring programs.
Information Systems
The Company has invested, and intends to continue to invest, in the SAP R/3
software that it has installed. This system is deployed on clustered Compaq
servers and is running on a SQL 7.0 database. The branch offices of the
Company are networked to the corporate offices so the SAP application is
accessed at all operational locations. This system supports Company-wide
operations such as payroll, billing, human resources, project systems,
accounts receivable, accounts payable, all general ledger accounting and
consolidation reporting functionality. Additionally, each of the service
groups has separate databases to permit efficient tracking of available
personnel on a local basis. These databases facilitate efficient matching
of customers' requirements with available technical personnel. For acquired
companies, administrative functions are integrated into the Company's
information system and personnel databases are updated accordingly. The
Company typically completes this process within three months after the
acquisition.
The Company believes that the new SAP system as well as all legacy
applications are Year 2000 compliant.
Competition
The market for IT and engineering services includes a large number of
competitors, is subject to rapid change and is highly competitive. Primary
competitors include participants from a variety of market segments,
including publicly and privately held firms, "Big Five" accounting firms,
systems consulting and implementation firms, application software firms,
service groups of computer equipment companies, facilities management
companies, general management consulting firms and staffing companies. In
addition, the Company competes with its clients' internal resources,
particularly where these resources represent a fixed cost to the client.
Such competition may impose additional pricing pressures on the Company.
The Company believes its principal competitive advantages in the IT and
professional engineering services market include: focus on the middle
market, breadth of services offered, technical expertise, knowledge and
experience in the industry, perceived value, quality of service,
responsiveness to client needs and speed in delivering IT solutions.
11
Competition (Continued)
Additionally, the Company competes for suitable acquisition candidates
based on its differentiated acquisition model, its entrepreneurial and
decentralized operating philosophy, its strong corporate-level support and
resources, its status as a public company and its ability to offer
management of the acquired companies an opportunity to participate in the
expansion of a rapidly growing provider of information technology and other
engineering services.
Employees
As of October 31, 1999, the Company employed on its administrative staff
approximately 450 persons, including certified information technology
specialists and licensed professional engineers who, from time to time,
participate in IT and engineering design projects undertaken by the
Company. As of October 31, 1999, approximately 2,200 information technology
professionals and 600 engineering and technical personnel were employed by
the Company to work on client projects for various periods. The Company
also employed approximately 1,300 temporary personnel as of October 31,
1999. None of the Company's employees, including its temporary employees,
are represented by a collective bargaining agreement. The Company considers
its relationship with its employees to be good.
ITEM 2. PROPERTIES
The Company provides specialty professional consulting services,
principally performed at various client locations, through 77 offices in 26
states and Canada. The Company's administrative and sales offices typically
consist of 1,500 to 2,500 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 and administrative offices are located at 2500
McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613. These
premises consist of approximately 9,100 square feet and are leased at a
rate of $12.00 per square foot per month for a term ending on January 31,
2003.
ITEM 3. LEGAL PROCEEDINGS
On November 6, 1998, Barry Meyers and Martin Blaire, two former officers
and directors of the Company, filed suit against the Company in the
Superior Court for the State of New Jersey, Law Division, Bergen County,
alleging wrongful termination of their employment, failure to make
severance payments, wrongful conduct by the Company in connection with the
grant of Stock Options to the plaintiffs and wrongfully limited the number
of shares of Company stock that could be sold by the plaintiffs. The suit
asks for damages of approximately $480,000 plus other unspecified amounts.
Management believes the suit is without merit and intends to defend the
claim vigorously.
From time to time, other disagreements with individual employees and
disagreements as to the interpretation, effect or nature of individual
agreements arise in the ordinary course of business and may result in legal
proceedings being commenced against the Company. Other than as set forth
above, the Company is not currently involved in any litigation or
proceedings which are material, either individually or in the aggregate,
and, to the Company's knowledge, no other legal proceedings of a material
nature involving the Company are currently contemplated by any individuals,
entities or governmental authorities.
The principal risks that the Company insures against are workers'
compensation, personal injury, property damage, professional malpractice,
errors and omissions, and fidelity losses. The Company maintains insurance
in such amounts and with such coverages and deductibles as management
believes are reasonable and prudent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of security holders during the
fourth quarter ended October 31, 1999.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the Symbol "RCMT". The following table sets forth approximate high and low
sales prices by fiscal quarters for the periods indicated, as reported by
the Nasdaq National Market:
Common Stock
Fiscal 1998 High Low
First Quarter..............$ 18.50 $ 14.38
Second Quarter............. 30.13 16.13
Third Quarter.............. 26.75 17.38
Fourth Quarter............. 18.25 10.75
Fiscal 1999
First Quarter..............$ 26.88 $14.50
Second Quarter............. 21.44 10.31
Third Quarter.............. 17.38 10.88
Fourth Quarter............. 14.88 10.06
Holders
As of January 5, 2000, the approximate number of holders of record of the
Company's Common Stock was 1,350. 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 6,000.
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.
13
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 October 31,
1999 1998 1997 1996 1995
---------------- ---------------------------------------------------------------------
Income Statement
Revenues $313,385,772 $201,452,318 $113,959,093 $61,039,173 $26,915,737
Gross profit 76,639,326 48,424,223 27,126,745 12,259,287 4,536,920
Income from
continuing operations 14,948,248 9,796,705 4,839,933 2,367,939 849,105
Loss from discontinued
operations ( 362,500)
Net income 14,948,248 9,796,705 4,477,433 2,367,939(2) 849,105(2)
Earnings Per Share (1)
Income from continuing
operations (diluted) 1.37 1.07 .76 .38(2) .18(2)
Loss from discontinued
operations (diluted) (.06)
Net income (diluted) 1.37 1.07 .70 .38(2) .18(2)
Net income (basic) 1.43 1.11 .74 .39(2) .19(2)
October 31,
Balance Sheet
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
Working capital 54,866,477 53,672,589 17,279,115 6,771,434 3,327,904
Total assets 184,047,546 117,067,151 54,082,596 24,406,620 10,301,555
Long term liabilities 40,800,000 308,129 562,312
Total liabilities 62,045,376 10,395,024 9,471,611 8,186,510 2,774,970
Shareholders' equity $122,002,170 $106,672,127 $44,611,985 $16,220,110 $7,526,585
(1) Shares used in computing earnings per share
Basic 10,484,764 8,787,334 6,068,713 4,247,907 2,933,819
Diluted 10,942,146 9,151,903 6,361,181 4,320,571 3,007,969
(2) The net income amounts above for the years ended October 31, 1996 and
1995 do not include the effect of the then available net operating loss
carryforward (NOL). Giving effect to the NOL, the Company's actual earnings
per share were $.55 and $.28, respectively.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a premier national provider of Business, Technology and
Resource solutions in information technology and professional engineering
to customers in corporate and government sectors. The Company's offices are
located in major geographic regions throughout North America.
The Company has pursued an aggressive growth strategy designed to
transition the Company's business from providing stand-alone technical
resources in a staff augmentation capacity to higher growth, higher margin
project engagements which provide clients with business solutions which
rely on leading edge technologies. This initiative has been enacted through
acquisitions and internal development of technical competencies in such
areas as project management, web development, data base and network
services, call center technology and EDP. For the three months ended
October 31, 1999, information technology and professional engineering
services contributed approximately 73% and 19%, respectively, of the
Company's revenues. Since the beginning of fiscal 1996, the Company has
acquired 28 information technology or professional engineering services
companies, aggregating approximately $218 million in revenues for their
respective latest twelve months prior to acquisition. Through these
acquisitions, the Company has achieved substantial revenue growth, improved
its operating profitability and repositioned itself as a provider of
information technology and professional engineering services and solutions.
The Company brings this expertise to clients in a variety of sectors such
as Banking & Finance, Healthcare, Insurance, Pharmaceutical,
Telecommunications, Utility, Technology, Manufacturing & Distribution and
Government sectors.
The Company realizes revenues from client engagements which range from the
placement of contract and temporary technical consultants to project
assignments which are based on defined deliverables. 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 and
experience and the type of work performed. The Company also provides
project management and consulting work which are billed either by agreed
upon fee or hourly rates, or a combination of both. The billing rates and
profit margins for project management and consulting work are higher than
those for professional staffing services. The Company is expanding its
sales of higher margin consulting and project management services.
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.
Costs of services consist primarily of salaries and compensation-related
expenses for billable consultants, including payroll taxes, employee
benefits and insurances. Selling, general and administrative expenses
consist primarily of salaries and benefits of personnel responsible for
business development, recruiting, operating activities and training, and
include corporate overhead expenses. Corporate overhead expenses relate to
salaries and benefits of personnel responsible for corporate activities,
including the Company's acquisition program and corporate marketing,
administrative and reporting responsibilities. The Company records these
expenses when incurred. Depreciation relates primarily to the fixed assets
of the Company. Amortization 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.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations
Years Ended October 31,
1999 1998 1997
--------------------------------------------------------------------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
Revenues $313,385,772 100.0% $201,452,318 100.0% $113,959,093 100.0%
Cost of Services 236,746,446 75.5 153,028,095 76.0 86,832,348 76.2
------------- ------ ------------- ------ -------------- ------
Gross Profit 76,639,326 24.5 48,424,223 24.0 27,126,745 23.8
Selling, general and
administrative 48,088,801 15.3 30,460,647 15.1 18,068,899 15.9
Depreciation and amortization 3,048,332 1.0 1,454,416 .7 572,279 .5
Interest expense,
net of interest income ( 920,208) .3 235,044 .1 ( 184,645) .2
---------------- -------- ---------------- -------- --------------- --------
Income before income taxes 24,581,985 7.9 16,744,204 8.3 8,300,922 7.3
Income taxes 9,633,737 3.1 6,947,499 3.4 3,460,989 3.0
--------------- ------- --------------- ------- --------------- -------
Income from continuing
operations 14,948,248 4.8 9,796,705 4.8 4,839,933 4.3
Loss from discontinued
operations 362,500 .4
------------------------------------------------ ---------------- --------
Net income $ 14,948,248 4.8% $ 9,796,705 4.8% $ 4,477,433 3.9%
============= ======= ============== ======= ============== =======
Earnings per share:
Income from continuing
operations $1.37 $1.07 $.76
Loss from discontinued
operations (.06)
----- ----- ---
Net income $1.37 $1.07 $.70
===== ===== ====
Year Ended October 31, 1999 Compared to Year Ended October 31, 1998
Revenues. Revenues increased 55.6%, or $111.9 million, for fiscal 1999, as
compared to fiscal 1998. Revenue growth was primarily attributable to
acquisitions and internal growth. The Company completed 14 acquisitions in
fiscal 1999, aggregating approximately $81.8 million in revenues for their
respective latest twelve months prior to acquisition. Acquired companies
contributed $61.5 million of revenues in fiscal 1999 as compared to $70.2
million in revenues for fiscal 1998.
Cost of Services. Cost of services increased 54.7%, or $83.7 million, for
fiscal 1999 as compared to fiscal 1998. This increase was primarily due to
increased salaries and compensation associated with the increased revenues
experienced during fiscal 1999. Cost of services as a percentage of
revenues decreased to 75.5% for fiscal 1999 from 76.0% for fiscal 1998.
This decline was primarily attributable to a continuing increase of the
Company's revenues being derived from information technology and other
professional services.
Selling, General and Administrative. Selling, general and administrative
expenses increased 57.9%, or $17.6 million, for fiscal 1999 as compared to
fiscal 1998. This increase was primarily attributable to a 55.6% increase
in revenues which required additional administrative, marketing and sales
expenses in fiscal 1999 as compared to fiscal 1998. Selling, general and
administrative expenses as a percentage of revenues increased to 15.3% for
fiscal 1999 as compared to 15.1% for fiscal 1998. This increase in
percentage was primarily attributable to increased expenditures required to
upgrade and support back office administrative systems.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended October 31, 1999 Compared to Year Ended October 31, 1998 (Continued)
Depreciation and Amortization. Depreciation and amortization increased
109.6%, or $1.6 million, for fiscal 1999 as compared to fiscal 1998. This
increase was primarily due to the amortization of intangible assets
acquired in connection with the acquisitions completed during fiscal 1999
and 1998.
The Company currently amortizes goodwill, defined as the excess of the
Company's acquisition costs over the net assets of the businesses it
acquires, on a straight-line method over a period of 40 years. The Company
periodically reviews the net realizable value of its intangible assets,
including goodwill, through an assessment of the estimated future cash
flows related to such assets. Management reviews each business unit to
which these intangible assets relate to determine whether the anticipated
future cash flows from that business unit over the estimated useful life of
its intangible assets are expected to provide for recovery of the assets.
If management believes that the intangible assets are being carried at
amounts in excess of estimated undiscounted future cash flows, then the
intangible assets are adjusted for impairment to a level commensurate with
management's discounted cash flow analysis of the underlying assets.
The Financial Accounting Standards Board (the "FASB") is considering
amending its opinions, or adopting one or more new opinions, to require
goodwill purchased in a business combination to be amortized on a
straight-line basis over its useful life, not to exceed 20 years. The
amended or adopted opinions may be made effective as of a date prior to the
date of such amendment or adoption. If the FASB takes such action, the
Company will, with respect to acquisitions which close after the effective
date of any amended or new opinions, amortize its acquisition-related
goodwill over a period of 20 years rather than 40 years, and
correspondingly increase its charge for amortization over the applicable
periods. Although the adoption of any such amended or new opinions would
not change the business operations of the Company, the goodwill carried on
the Company's balance sheet, and its results of operations, would be
affected materially. If the FASB required that goodwill be amortized over a
maximum of 20 years, effective as of the beginning of fiscal 1997, the
Company would have had net income of approximately $4.3 million, $9.3
million and $13.9 million for fiscal 1997, 1998 and 1999, respectively.
Interest Expense, Net of Interest Income. Actual interest expense of $1.2
million for fiscal 1999 was offset by $277,000 of interest income, which
was earned from the investment in interest bearing deposits. Interest
expense increased 183.3%, or $775,000, for fiscal 1999 as compared to
fiscal 1998. This increase was primarily due to the increased borrowing
requirements necessary to complete 14 acquisitions as well as to fund
working capital requirements.
Income Tax. Income tax expense increased 38.7%, or $2.7 million, for
fiscal 1999 as compared to fiscal 1998. This increase was primarily due to
increased levels of income before taxes.
Year Ended October 31, 1998 Compared to Year Ended October 31, 1997
Revenues. Revenues increased 76.8%, or $87.5 million, for fiscal 1998, as
compared to fiscal 1997. Revenue growth was primarily attributable to
acquisitions and internal growth. The Company completed 7 acquisitions in
fiscal 1998, aggregating approximately $67.7 million in revenues for their
respective latest twelve months prior to acquisition. Acquired companies
contributed $70.2 million of revenues in fiscal 1998 as compared to $9.8
million in revenues for fiscal 1997.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended October 31, 1998 Compared to Year Ended October 31, 1997 (Continued)
Cost of Services. Cost of services increased 76.2%, or $66.2 million, for
fiscal 1998 as compared to fiscal 1997. This increase was primarily due to
increased salaries and compensation associated with the increased revenues
experienced during fiscal 1998. Cost of services as a percentage of
revenues decreased to 76.0% for fiscal 1998 from 76.2% for fiscal 1997.
This decline was primarily attributable to an increasingly greater portion
of the Company's revenues being derived from information technology and
other professional services.
Selling, General and Administrative. Selling, general and administrative
expenses increased 68.6%, or $12.4 million, for fiscal 1998 as compared to
fiscal 1997. This increase was attributable principally to a 76.8% increase
in revenues which required additional administrative, marketing, and sales
expenses in fiscal 1998 as compared to fiscal 1997. Selling, general and
administrative expenses as a percentage of revenues decreased to 15.1% for
fiscal 1998 as compared to 15.9% for fiscal 1997. This decrease in
percentage was principally attributable to operating leverage achieved by
the spreading of selling, general and administrative overhead expenses over
a larger revenue base.
Depreciation and Amortization. Depreciation and amortization increased
154.1%, or $882,000, for fiscal 1998 as compared to fiscal 1997. This
increase was primarily due to the amortization of intangible assets
acquired in connection with the acquisitions completed during fiscal 1998
and 1997.
Interest Expense, Net of Interest Income. Actual interest expense of
$422,600 for fiscal 1998 was offset by $657,600 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 decreased 4.9%, or $21,800, for fiscal 1998
as compared to fiscal 1997. This decrease was due to decreased borrowing
requirements necessary to fund working capital required of acquired
companies.
Income Tax. Income tax expense increased 100.7%, or $3.5 million, for
fiscal 1998 as compared to fiscal 1997. This increase was primarily due to
increased levels of income before taxes.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity And Capital Resources
Operating activities used $3.8 million, $2.2 million and $3.8 million of
cash during fiscal 1999, 1998 and 1997, respectively. The increased use of
cash from 1998 to 1999 was primarily attributable to an increase in
accounts receivable which was partially offset by increased levels of
profitability, depreciation and amortization associated with the
acquisitions that were completed during the three years ended October 31,
1999.
Investing activities utilized $58.0 million, $26.8 million and $17.9
million in fiscal 1999, 1998 and 1997, respectively. The Company purchased
14, 7 and 5 consulting companies in 1999, 1998 and 1997, respectively.
These acquisitions required the use of $54.8 million, $26.0 and $17.4
million of cash in 1999, 1998 and 1997, respectively. These acquisitions
collectively resulted in goodwill of approximately $98.2 million which is
being amortized at approximately $2.5 million per year.
Financing activities provided $41.3 million, $50.3 million and $22.6
million for fiscal 1999,fiscal 1998 and 1997, respectively.
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 a $75.0 million Revolving Credit Facility (the
"Revolving Credit Facility"). Borrowing under the Revolving Credit Facility
bears interest at the Company's option, at LIBOR (London Interbank Offered
Rate), plus applicable margin or the agent bank's prime rate. Borrowing
under the Revolving Credit Facility is 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. The amount outstanding under the Revolving Credit Facility at October
31, 1999 was $40.8 million.
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 offering costs were $49.3 million.
During fiscal 1998, the Company derived $2.3 million from the issuance of
153,209 shares of Common Stock upon the exercise of Class C Warrants. The
Warrants were issued in a public offering undertaken by the Company during
1989 and, after several extensions, expired on April 30, 1998.
On June 13, 1997, the Company completed a public offering of 2,875,000
shares of Common Stock, of which, 2,698,187 shares were sold by the Company
and 176,813 shares were sold by certain selling stockholders. The public
offering was undertaken pursuant to the terms of a Registration Statement
on Form S-1 originally filed with the Securities and Exchange Commission on
March 21, 1997 and a final Prospectus dated June 10, 1997. The net proceeds
to the Company after offering costs were $23.3 million.
The Company anticipates that its primary uses of capital in future periods
will be for acquisitions and the funding of increases in accounts
receivables. Funding for further acquisitions will be derived from the
Revolving Credit Facility, funds generated through operations, or future
financing transactions.
The Company's business strategy is to achieve growth both internally
through operations and externally through strategic acquisitions. The
Company continues to engage 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.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
The Company does not currently have material commitments for capital
expenditures and does not anticipate entering into any such commitments
during the next twelve months. The Company's current commitments consist
primarily of lease obligations for office space. The Company believes that
its capital resources are sufficient to meet its present obligations and
those to be incurred in the normal course of business for the next twelve
months.
Seasonal Variations
The Company's quarterly operating results are affected primarily by the
number of billing days in the quarter and the seasonality of its customers'
businesses. The Company usually experiences higher revenues in its fourth
quarter due to increased economic activity and experiences lower revenues
in the first four months of the following fiscal year, showing gradual
improvement over the remainder of the year.
Impact of Inflation
The effects of inflation on the Company's operations were not significant
during the periods presented.
Recently Issued Accounting Standards
In April 1998, Statement of Position ("SOP") 98-5, reporting on the "Costs
of Start-up Activities", was issued. This SOP provides guidance on the
financial reporting of start-up and organization costs and requires that
these costs be expensed as incurred. The provisions of SOP 98-5 are
effective for financial statements for fiscal years beginning after
December 15, 1998. The Company adopted the provisions of this SOP on
November 1, 1999. The adoption of SOP 98-5 did not have a material impact
on the Company's financial statements.
.
Year 2000 Readiness Disclosure
The Company believes it has achieved Y2K readiness by replacing its
computer systems with new, Y2K compliant hardware and software. The new
hardware/software system was put into production on September 1, 1999. The
cost of the new system was approximately $2,900,000. The Company depends on
its computer system for critical business functions, including time record
keeping, billing, payroll, and accounts payable and receivable. The loss of
these capabilities would have a material adverse impact on the Company.
The Company believes its new computer system has remedied the millennium
date change, however, if weaknesses (Y2K or otherwise) in the new system
are discovered, the Company has developed a contingency plan, which will
utilize some of its staff of approximately 2,200 information technology
professionals which can assist in achieving Y2K readiness.
The Company's business does not depend on raw materials, parts or other
goods supplied by third parties and, therefore, the Company believes the
inability of its vendors to achieve Y2K compliance would not have a
material adverse impact on the Company. The Company does use utility
services (electricity, telecommunication, natural gas and the like) for its
offices, and interruption of these services could have a material adverse
impact on the Company's operations. The inability of the Company's clients
to achieve Y2K compliance could have an impact on their ability to pay the
Company for the services it renders to them, with consequent adverse impact
on the Company's cash flow.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year 2000 Readiness Disclosure (Continued)
The Company's services addressing the Year 2000 problem involve key aspects
of its clients' computer systems. A failure in a client's system could
result in a claim for substantial damages against the Company, regardless
of the Company's responsibility for such failure. Litigation, regardless of
its outcome, could result in substantial cost to the Company. Accordingly,
any contract liability claim or litigation against the Company could have
an adverse effect on the Company's business, operations and financial
results.
The Company does not believe any reasonably likely worst-case Y2K scenario
would have a material effect on its results of operations, liquidity or
financial condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's financial statements, together with the report of the
Company's independent auditors, begins on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the 2000 Proxy Statement beginning immediately following
the caption "ELECTION OF DIRECTORS" to, but not including, the caption
"EXECUTIVE COMPENSATION" and the additional information in the 2000 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" are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 2000 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 2000 Proxy Statement beginning immediately following the
caption "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" to,
but not including, the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the 2000 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 2000 Proxy Statement beginning immediately following
the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" to, but not
including, the caption "APPROVAL OF THE RCM TECHNOLOGIES, INC. 2000
EMPLOYEE STOCK INCENTIVE PLAN" is incorporated herein by reference.
22
PART IV
ITEM 14. 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.
(b) Reports on Form 8-K
None.
(c) Exhibits
(3)(a) Articles of Incorporation, as amended; incorporated by reference
to Exhibit 3(a) of the Registrant's Form 10-K dated October 31,
1994.
(3)(b) Bylaws, as amended; incorporated by reference to Exhibit 3 of the
Registrant's Quarterly Report on Form 10-Q dated January 31, 1996.
(4)(a) Rights Agreement dated as of March 14, 1996, between RCM
Technologies, Inc. and American Stock Transfer & Trust Company, as
Rights Agent; incorporated by reference to Exhibit 4 of the
Registrant's Current Report on Form 8-K dated March 21, 1996.
(10)(a) Loan and Security Agreement dated August 19, 1998 between RCM
Technologies, Inc. and all of its Subsidiaries and Mellon Bank,
N.A. as Agent, incorporated by reference to Exhibit 10 of the
Registrant's Quarterly Report on Form 10-Q dated July 31, 1998.
(10)(b) RCM Technologies, Inc. 1992 Incentive Stock Option Plan;
incorporated by reference to Exhibit A of the Registrant's Proxy
Statement dated April 23, 1992, filed with the Commission on March
9, 1992.
(10)(c) RCM Technologies, Inc. 1994 Non-employee Director Stock Option
Plan; incorporated by reference to Exhibit A of the Registrant's
Proxy Statement dated May 19, 1994, filed with the Commission on
June 22, 1994.
(10)(d) RCM Technologies, Inc. 1996 Executive Stock Option Plan dated
August 15, 1996; incorporated by reference to Exhibit 10(l) of the
Registrant's Annual Report on Form 10-K dated October 31, 1996
(the "1996 10-K").
* (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) of the Registration
Statement on Form S-1 dated March 21, 1997 (Commission File No.
333-23753) (the"1997 S-1").
* (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) of the 1996
10-K.
(10)(g) 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) of the
Registrant's current Report on Form 8-K dated March 19, 1996.
23
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(11) Computation of Earnings Per Share.
(21) Subsidiaries of the Registrant.
(23) Consent of Grant Thornton, LLP.
(27) Financial Data Schedule.
* Constitutes a management contract or compensatory plan or arrangement.
24
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: January 6, 2000 By:/s/ Leon Kopyt
-------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer
and Director
Date: January 6, 2000 By:/s/ Stanton Remer
-----------------------------
Stanton Remer
Chief Financial Officer, Treasurer, Secretary
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: January 6, 2000 /s/ Leon Kopyt
--------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: January 6, 2000 /s/ Stanton Remer
-------------------------------
Stanton Remer
Chief Financial Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer)
and Director
Date: January 6, 2000 /s/ Norman S. Berson
----------------------------
Norman S. Berson
Director
Date: January 6, 2000 /s/ Robert B. Kerr
-------------------------------
Robert B. Kerr
Director
Date: January 6, 2000 /s/ Woodrow B. Moats, Jr.
--------------------------
Woodrow B. Moats, Jr.
Director
25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Consolidated Balance Sheets, October 31, 1999 and 1998 F-2
Consolidated Statements of Income,
Years Ended October 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Changes in Shareholders' Equity and Consolidated
Statements of Comprehensive Income,
Years Ended October 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows,
Years Ended October 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-8
Independent Auditors' Report F-22
Schedules I and II F-23
F-1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1999 and 1998
ASSETS
1999 1998
------------------ ------------------
Current assets
Cash and cash equivalents $ 1,540,952 $ 22,187,536
Accounts receivable, net of allowance for doubtful accounts
of $1,002,000 and $486,000 in 1999 and 1998, respectively 71,391,596 40,680,268
Prepaid expenses and other current assets 3,179,305 1,199,809
--------- ---------
Total current assets 76,111,853 64,067,613
---------- ----------
Property and equipment, at cost
Equipment and leasehold improvements 9,602,593 5,041,184
Less: accumulated depreciation and amortization 3,117,773 2,437,316
--------- ---------
6,484,820 2,603,868
--------- ---------
Other assets
Deposits 201,485 145,876
Intangible assets (net of accumulated amortization
of $3,969,000 and $1,823,000 in 1999 and 1998,
respectively) 101,249,388 50,249,794
----------- ----------
101,450,873 50,395,670
Total assets $ 184,047,546 $117,067,151
= =========== ============
The accompanying notes are an integral part of these
financial statements.
F-2
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
October 31, 1999 and 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998
------------------ ------------------
Current liabilities
Accounts payable and accrued expenses $ 8,382,893 $ 3,202,625
Accrued payroll 9,543,082 5,505,465
Taxes other than income taxes 1,003,550 1,629,945
Income taxes payable 2,315,851 56,989
--------- ------
Total current liabilities 21,245,376 10,395,024
---------- ----------
Long term debt 40,800,000
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; 10,496,225 and
10,447,525 shares issued in 1999 and
1998, respectively 524,811 522,376
Foreign currency translation adjustment ( 96,230)
Additional paid-in capital 93,473,301 92,997,711
Retained earnings 28,100,288 13,152,040
---------- ----------
122,002,170 106,672,127
Total liabilities and shareholders' equity $ 184,047,546 $ 117,067,151
= =========== = ===========
The accompanying notes are an integral part of these
financial statements.
F-3
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended October 31, 1999, 1998 and 1997
1999 1998 1997
------------------- ------------------ ------------------
Revenues $313,385,772 $201,452,318 $113,959,093
Cost of services 236,746,446 153,028,095 86,832,348
----------- ----------- ----------
Gross profit 76,639,326 48,424,223 27,126,745
---------- ---------- ----------
Operating costs and expenses
Selling, general and administrative 48,088,801 30,460,647 18,068,899
Depreciation and amortization 3,048,332 1,454,416 572,279
--------- --------- -------
51,137,133 31,915,063 18,641,178
---------- ---------- ----------
Operating income 25,502,193 16,509,160 8,485,567
Interest (expense), net of interest income ( 920,208) 235,044 ( 184,645)
------- ------- --------------
Income before income taxes 24,581,985 16,744,204 8,300,922
Income taxes 9,633,737 6,947,499 3,460,989
--------- --------- ---------
Income from continuing operations 14,948,248 9,796,705 4,839,933
Loss from discontinued operations, net
of income tax benefit of $262,500 (Note 2) 362,500
-------------
Net income $ 14,948,248 $ 9,796,705 $ 4,477,433
= ========== = ========= = =========
Basic earnings per share:
Continuing operations $1.43 $1.11 $0.80
Discontinued operations ( 0.06 )
-------- -------- -----
Net income $1.43 $1.11 $0.74
===== ===== =====
Diluted earnings per share:
Continuing operations $1.37 $1.07 $0.76
Discontinued operations ( 0.06 )
-------- -------- -----
Net income $1.37 $1.07 $0.70
===== ===== =====
The accompanying notes are an integral part of these
financial statements.
F-4
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended October 31, 1999, 1998 AND 1997
Foreign
Currency Additional
Common Stock Translation Paid-in Retained Treasury
Shares Amount Adjustment Capital Earnings Stock
Balance, October 31, 1996 4,878,476 $243,924 17,161,105 ($1,122,098) (62,821)
Retirement of Treasury Stock ( 62,800) ( 3,140) (59,681) 62,821
Exercise of stock options 4,171 209 23,031
Sale of common stock 2,698,187 134,909 23,136,814
Issuance of common stock
in connection with acquisitions 43,347 2,167 317,312
Issuance of common stock
in connection with legal settlement 20,825 1,041 298,959
Net income 4,477,433
-------------------------------- --------------- -------------
Balance, October 31, 1997 7,582,206 379,110 40,877,540 3,355,335
Exercise of stock options 202,130 10,107 688,607
Exercise of warrants 153,209 7,660 2,265,618
Sale of common stock 2,509,980 125,499 49,165,946
Net income 9,796,705
-------------------------------- ------------------- -------------
Balance, October 31, 1998 10,447,525 522,376 92,997,711 13,152,040
Exercise of stock options 48,700 2,435 475,590
Translation adjustment ($96,230)
Net income 14,948,248
-------------------------------- ------------ ---------------- ------------
Balance, October 31, 1999 10,496,225 $524,811 ($96,230) $93,473,301 $28,100,288 $
========== ======== ========= ========== ========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended October 31, 1999, 1998 AND 1997
1999 1998 1997
---------------- ---------------- ----------------
Net income $ 14,948,248 $ 9,796,705 $ 4,477,433
Foreign currency translation adjustment ( 96,230) ___________ ___________
------
Comprehensive income $ 14,852,018 $ 9,796,705 $ 4,477,433
= ========== = ========= = =========
The accompanying notes are an integral part of these
financial statements.
F-5
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 1999, 1998 and 1997
1999 1998 1997
------------------ ------------------ ------------------
Cash flows from operating activities:
Net income $ 14,948,248 $ 9,796,705 $ 4,477,433
- ---------- - --------- - ---------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 3,048,332 1,454,416 572,279
Non cash portion of legal settlement 300,000
Provision for losses on accounts
receivable 516,000 170,000 239,748
Changes in assets and liabilities:
Accounts receivable ( 31,227,328) ( 15,999,964) ( 11,104,607 )
Prepaid expenses and other
current assets ( 1,979,496) ( 526,544) ( 137,067 )
Accounts payable and accrued expenses 5,180,268 1,886,688 581,146
Accrued payroll 4,037,617 1,003,963 1,711,777
Taxes other than income taxes ( 626,395) 964,839 232,499
Income taxes payable 2,258,862 ( 931,077) ( 626,685 )
--------- ------- -------
( 18,792,140) ( 11,977,679) ( 8,230,910 )
---------- ---------- ---------
Net cash used in operating activities ( 3,843,892) ( 2,180,974) ( 3,753,477 )
--------- --------- ---------
The accompanying notes are an integral part of these
financial statements.
F-6
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended October 31, 1999, 1998 and 1997
1999 1998 1997
------------------ ------------------ ------------------
Cash flows from investing activities:
Property and equipment acquired ( 3,829,955) ( 796,905) ( 450,350 )
Increase in deposits ( 55,609) ( 51,727) ( 6,110 )
Cash paid for acquisitions,
net of cash acquired ( 54,098,883) ( 25,964,323) ( 17,426,351 )
---------- ---------- ----------
Net cash used in investing activities ( 57,984,487) ( 26,812,955) ( 17,882,811 )
---------- ---------- ----------
Cash flows from financing activities:
Net borrowing (repayments) under
short term debt arrangements ( 2,000,000) ( 746,636 )
Borrowings long-term debt 40,800,000
Exercise of warrants 2,273,278
Sale of common stock 49,291,445 23,271,723
Exercise of stock options 478,025 698,714 23,240
------- ------- ------
Net cash provided by financing activities 41,278,025 50,263,437 22,548,327
---------- ---------- ----------
Effect of exchange rate changes on cash and
cash equivalents ( 96,230)
------ ------------- ----------
Net increase (decrease) in cash
and cash equivalents ( 20,646,584) 21,269,508 912,039
Cash and cash equivalents at beginning of year 22,187,536 918,028 5,989
---------- ------- -----
Cash and cash equivalents at end of year $ 1,540,952 $ 22,187,536 $ 918,028
= ========= = ========== = =======
Supplemental cash flow information:
Cash paid for:
Interest expense $ 786,064 $ 422,579 $ 444,347
Income taxes 7,374,875 7,878,576 3,825,174
Acquisitions:
Fair value of assets acquired 64,365,991 28,794,018 20,929,663
Liabilities assumed 10,267,108 2,829,695 3,503,312
---------- --------- ---------
Cash paid, net of cash acquired $ 54,098,883 $ 25,964,323 $ 17,426,351
= ========== = ========== = ==========
The accompanying notes are an integral part of these
financial statements.
F-7
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
RCM Technologies, Inc. (the "Company"), through its wholly-owned
subsidiaries, is a premier national provider of Business, Technology and
Resource solutions in information technology and professional engineering
to customers in corporate and government sectors. RCM's offices are located
in major geographic regions 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 Company's fiscal
year ends on October 31. The preparation of the financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes.
Actual results could differ from these estimates.
Property and Equipment
Depreciation of equipment is provided for in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated useful
lives on the straight-line basis. Estimated useful lives range from five to
ten years. Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements, whichever is
shorter.
Software
In accordance with Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use", certain
costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software.
During fiscal 1999 and 1998, the Company capitalized approximately
$2,045,000 and $76,000, respectively, of software costs in conformity with
SOP 98-1.
Income Taxes
The Company and its wholly-owned subsidiaries file a consolidated federal
income tax return. The Company follows the liability method of accounting
for income taxes. Under this method, deferred income tax assets and
liabilities are determined based on differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable for the period and the change during the period
in deferred tax assets and liabilities.
Revenue Recognition
Revenue is recognized concurrently with the performance of services.
Unbilled receivables represent employee hours worked according to
contractual billing rates.
F-8
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Profit Sharing Plan
The Company maintains a 401(k) profit sharing plan as of October 31, 1999,
for the benefit of eligible employees. The plan includes a cash or deferred
arrangement pursuant to Section 401(k) of the Internal Revenue Code of
1986, as amended, sponsored by the Company to provide eligible employees an
opportunity to defer compensation and have such deferred amounts
contributed to the 401(k) plan on a pre-tax basis, subject to certain
limitations. The Company may, at the discretion of the Board of Directors,
make contributions of cash to match deferrals of compensation by
participants. Contributions charged to operations by the Company for fiscal
years ended October 31, 1999, 1998 and 1997 were $328,606, $88,736 and
$6,246, respectively.
Cash Equivalents
For purposes of presenting the consolidated statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Goodwill
The net assets of businesses acquired, which are accounted for as
purchases, have been reflected at their fair values at dates of
acquisition. The excess of acquisition costs over such net assets
(goodwill) is reflected in the consolidated balance sheets as Intangible
Assets. Goodwill, net of amortization of $3,979,000 at October 31, 1999 and
$1,823,000 at October 31, 1998, is being amortized on a straight-line
method over forty years. Amortization expense for goodwill in 1999, 1998,
and 1997 was $2,156,000, $1,018,000 and $411,000, respectively.
It is the Company's policy to periodically review the net realizable value
of its intangible assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. Each business unit to
which these intangible assets relate is reviewed to determine whether
future cash flows over the remaining estimated useful lives of the assets
provide for recovery of the assets. In the event that assets are found to
be carried at amounts which are in excess of estimated undiscounted future
cash flows, then the intangible assets are adjusted for impairment to a
level commensurate with a undiscounted cash flow analysis of the underlying
assets. There were no impairment write-downs during 1999, 1998 or 1997.
Fair Value of Financial Instruments
The carrying value of financial instruments approximates fair value. The
Company's financial instruments are accounts receivable, accounts payable
and long-term debt. The Company does not have any off-balance sheet
financial instruments or derivatives.
F-9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Per Share Data
In February 1997 the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share. The provisions of Statement No. 128 are
effective for years ending after December 15, 1997. Accordingly, earnings
per share data is presented in accordance with those provisions and prior
year data has been restated. Earnings used to calculate both basic and
diluted earnings per share for all periods are reported earnings in the
Company's consolidated statement of earnings. 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 1999, 1998, and 1997 was determined as follows:
1999 1998 1997
-------------- -------------- --------------
Basic average shares outstanding 10,484,764 8,787,334 6,068,713
Dilutive effect of stock options 457,382 364,569 292,468
------------ ---------- ----------
Dilutive shares 10,942,146 9,151,903 6,361,181
========== ========= =========
Options to purchase 214,650 shares of common stock at prices ranging from
$14.13 to $20.13 per share were outstanding during the year ended October
31, 1999, but were not included in the computation of diluted EPS because
their exercise prices were greater than the average market price of the
common shares.
Options to purchase 39,000 shares of common stock at a price of $14.13 per
share were outstanding during the year ended October 31, 1998, but were not
included in the computation of diluted EPS because their exercise prices
were greater than the average market price of the common shares.
Options to purchase 10,000 shares of common stock at $10.63 per share and
warrants to purchase 157,342 shares of common stock at $15 per share were
outstanding during the year ended October 31, 1997, but were not included
in the computation of diluted EPS because their exercise prices were
greater than the average market price of the common shares.
Comprehensive Income
In June, 1997 the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. Statement No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a separate financial statement.
F-10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which establishes accounting and reporting
standards for stock-based employee compensation plans. As permitted by the
standard, the Company has elected not to adopt the fair value based method
of accounting for stock-based employee compensation and will continue to
account for such arrangements under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APA 25") and apply SFAS
123 on a disclosure basis only. Accordingly, adoption of the standard has
not affected the Company's results of operations or financial position (see
Note 8).
Segment Information
During the fiscal year ended October 31, 1999, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
prescribes the use of the management approach whereby the Company's
reportable segments are established based on the internal reporting that is
used by management for making operating decisions and assessing
performance. The adoption of SFAS 131 did not affect the results of
operations or the financial position of the Company (see Note 13).
2. DISCONTINUED OPERATIONS
In fiscal 1992, the Company discontinued the operations of an environmental
technology development business. In connection with the discontinued
operations, on September 26, 1997, the Company and Alumax, Inc. entered
into a Settlement Agreement, whereby the Company agreed to settle the
potential controversy by paying $300,000 and issuing 20,825 restricted
shares of its common stock, valued at $300,000 to Alumax, Inc. Professional
fees associated with the settlement were approximately $25,000. The charge
to operations for the year ended October 31, 1997 was $625,000 and the tax
effected result was $362,500, or $.06 per share.
3. SALE OF COMMON STOCK
On June 13, 1997, the Company completed a public offering of 2,875,000
shares of Common Stock, of which, 2,698,187 shares were sold by the Company
and 176,813 shares were offered by certain selling stockholders. The public
offering was undertaken pursuant to the terms of a Registration Statement
on Form S-1 originally filed with the Securities and Exchange Commission on
March 21, 1997 and a final Prospectus dated June 10, 1997. The net proceeds
to the Company after offering costs were approximately $23.3 million.
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 shares were offered 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 offering costs were approximately $49.3 million.
F-11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
4. ACQUISITIONS
During the three year period ended October 31, 1999, the Company acquired
26 businesses in the staffing and consulting services industry. These
acquisitions, which are summarized below, have been accounted for as
purchases and, accordingly, the results of operations of the acquired
companies have been included in the consolidated results of operations of
the Company from the respective acquisition dates.
In connection with certain acquisitions, the Company is obligated to pay
contingent consideration to the selling shareholders upon the acquired
businesses achieving certain earnings targets over periods ranging from 2-3
years. In general, the contingent consideration amounts fall into two
tiers: (a) tier 1 ("Deferred Consideration") - amounts are due, provided
that these acquisitions achieve a base level of earnings which has been
determined at the time of acquisition and (b) tier 2 ("Earnouts") - amounts
are not fixed and are based on the growth in excess of the base level
earnings. The Deferred Consideration payments are anticipated to be as
follows:
Year Ending Amount
2000 $18,816,000
2001 14,134,000
2002 7,483,000
----------
$40,433,000
===========
The Deferred Consideration and Earnouts, when paid, will be recorded as
additional purchase consideration and will be amortized over the remaining
life of the asset. Earnouts cannot be estimated with any certainty.
The Company's acquisition activities are as follows:
Year Ended October 31,
1999 1998 1997
-------------- -------------- --------------
Number of acquisitions 14 7 5
Consideration paid:
Cash at closing $46,028,000 $22,625,000 $18,400,000
Common stock at closing 319,479
Deferred consideration payments $34,095,000 $15,100,000 $ 7,550,000
The following unaudited results of operations have been prepared assuming
the acquisitions 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 acquisitions
been consummated as of the beginning of the periods presented.
Year Ended October 31,
1999 1998
------------------ ------------------
Revenues $348,570,000 $307,954,000
Operating income 30,546,000 29,713,000
Net income $16,927,000 13,967,000
Earnings per share $1.55 $1.53
F-12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
October 31,
1999 1998
---------------- ----------------
Office equipment and furniture $ 3,996,450 $ 3,638,183
Computer equipment and software 5,462,791 1,151,795
Capitalized lease 174,873
Leasehold improvements 143,352 76,333
------------- ---------------
9,602,593 5,041,184
Less: accumulated depreciation and amortization 3,117,773 2,437,316
------------ ------------
$ 6,484,820 $ 2,603,868
============ ============
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following:
October 31,
1999 1998
------------------ ------------------
Goodwill $104,756,102 $51,610,209
Other intangibles 462,900 462,900
---------------- ---------------
105,219,002 52,073,109
Less: accumulated amortization 3,969,614 1,823,315
--------------- --------------
$101,249,388 $ 50,249,794
============ ============
7. NOTE PAYABLE - BANK
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.
Borrowing 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.
Borrowing under the Revolving Credit Facility is 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 (the "Revolving
Credit Facility") also contains various financial and non-financial
covenants such as restricting the Company's ability to pay dividends. The
Revolving Credit Facility expires August 2001. The weighted average
interest rate at October 31, 1999 was 6.33%. The amounts outstanding under
the Revolving Credit Facility at October 31, 1999 and 1998 was $40.8
million and $-0-, respectively.
F-13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
8. SHAREHOLDERS' EQUITY
Common shares reserved
Shares of unissued common stock were reserved for the following purposes:
October 31,
1999 1998
-------------- --------------
Exercise of options outstanding 1,359,170 1,021,420
Future grants of options 358,300 746,150
------------ ------------
Total 1,717,470 1,767,570
=========== ===========
Incentive Stock Option Plans
On April 21, 1999, the shareholders approved the adoption of the Amended
and Restated RCM Technologies, Inc. 1996 Executive Stock Plan (the
"Restated Plan"). At October 31, 1999, there were 1,198,250 shares of
Common Stock reserved under the plan for issuance not later than January 1,
2006 to officers and key employees of the Company and its subsidiaries.
On April 23, 1998, the shareholders approved amendments to the RCM
Technologies, Inc. 1992 Incentive Stock Option Plan ("1992 Plan") and the
1994 Non-Employee Director Stock Option Plan (the "Director Option Plan").
At October 31, 1999, there were 409,220 shares of Common Stock reserved
under the 1992 plan for issuance not later than February 13, 2002 to
officers, directors and key employees of the Company and its subsidiaries.
Options under the 1992 plan are intended to be incentive stock options
pursuant to Section 422A of the Internal Revenue Code. The option terms
cannot exceed ten years and the exercise price cannot be less than 100% of
the fair market value of the shares at the time of grant.
On May 19, 1994, the shareholders approved the Director Option Plan as a
means of recruiting and retaining nonemployee directors of the Company. At
October 31, 1999, there were 110,000 shares of Common Stock reserved under
the plan for issuance not later than July 19, 2004. All director stock
options are granted at fair market value at the date of grant. The exercise
of options granted is contingent upon service as a director for a period of
one year. If the optionee ceases to be a director of the Company, any
option granted shall terminate.
F-14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
8. SHAREHOLDERS' EQUITY (CONTINUED)
Incentive Stock Option Plans (Continued)
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). It applies APB Opinion No. 25 and related interpretations in
accounting for its plans and does not recognize compensation expense for
its stock-based compensation plans. Had compensation cost been determined
based on the fair value of the options at the grant date consistent with
SFAS 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
Year Ended October 31,
-------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
Net earnings:
As reported $14,948,248 $ 9,796,705 $ 4,477,433
Pro forma $11,869,395 $ 8,096,746 $ 2,542,196
Diluted earnings per share:
As reported $1.37 $1.07 $.70
Pro forma $1.08 $.92 $.39
These pro forma amounts may not be representative of future disclosures
because they do not take into effect proforma compensation expense related
to grants before November 1, 1995. The fair value of these options is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for grants in fiscal years
1999, 1998 and 1997, respectively: expected volatility of 70%, 30% and 30%,
respectively; risk-free interest rates of 5.10%, 5.14% and 6.43%; and
expected lives of 5 years. The weighted-average fair value of options
granted during fiscal years 1999, 1998 and 1997 was $8.51, $4.38 and $3.46,
respectively.
Transactions related to all stock options are as follows:
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
1999 Price 1998 Price 1997 Price
------------ ---------------------------------------------------------------------
Outstanding options
at beginning of year 1,021,420 $8.86 1,087,400 $7.46 214,400 $3.54
Granted 437,500 13.90 239,500 11.23 883,200 8.40
Forfeited ( 51,050) 11.41 ( 103,350) 10.13 ( 6,029) 6.68
Exercised ( 48,700) 9.82 ( 202,130) 3.46 ( 4,171) 5.57
----------- --------- ----------
Outstanding options
at end of year 1,359,170 $10.23 1,021,420 $8.86 1,087,400 $7.46
========= ========= =========
Exercisable options
at October 31, 1,159,170 1,012,420 708,900
========= ========== ==========
Option grant price
per share $5.16 $3.44 $1.09
to $20.13 to $14.50 to $10.625
F-15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
8. SHAREHOLDERS' EQUITY (CONTINUED)
Incentive Stock Option Plans (Continued)
The following table summarizes information about stock options outstanding
at October 31, 1999:
Weighted-Average
Range of Number of Remaining Weighted-Average
Exercise Prices Outstanding Options Contractual Life Exercise Price
$ 5.16 - $7.73 503,700 7.1 years $ 7.11
$ 7.74 - $11.63 577,820 8.4 years $10.65
$11.64 - $17.44 39,000 8.2 years $14.00
$17.90 - $20.13 238,650 9.0 years $15.15
9. COMMITMENTS
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): the Company is obligated to
pay Mr. Kopyt a lump sum equal to his salary and bonus for the remainder of
the Extended Term; the exercise price of the options to purchase 500,000
shares granted to Mr. Kopyt under the 1996 Executive Stock Plan will be
reduced to 50% of the average market price of the Common Stock for the 60
days prior to the date of termination if the resulting exercise price is
less than the original exercise price of $7.125 per share; 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 October 31, 1999,
Mr. Kopyt would have been entitled to cash payments of approximately $4.8
million (representing salary and excise tax payments).
F-16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
9. COMMITMENTS (CONTINUED)
Operating leases
The Company leases office facilities and various equipment under
noncancellable leases expiring at various dates through February 2007.
Certain leases are subject to escalation clauses based upon changes in
various factors. The minimum future annual operating lease commitments for
leases with noncancellable terms in excess of one year, exclusive of
escalation, are as follows:
Year ending October 31, Amount
----------------------- ----------
2000 $2,393,000
2001 1,814,000
2002 1,324,000
2003 655,000
2004 560,000
Thereafter 566,000
----------
Total $7,312,000
==========
Rent expense for the years ended October 31, 1999, 1998 and 1997 was
$2,440,000, $1,456,000 and $814,000, respectively.
10. RELATED PARTY TRANSACTIONS
A director of the Company is a shareholder in a law firm that rendered
various legal services to the Company. Fees paid to the law firm have not
been significant.
11. INCOME TAXES
The components of income tax expense are as follows:
Year ended October 31,
1999 1998 1997
-------------- -------------- --------------
Current
Federal $7,098,737 $5,204,332 $2,282,603
State and local 2,535,000 1,743,167 915,886
----------- ----------- ------------
Total income tax expense - current $9,633,737 $6,947,499 $3,198,489
========== ========== ==========
The income tax provisions reconciled to the tax computed at the statutory
Federal rate was:
1999 1998 1997
---------- -------- -------
Tax at statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal
income tax benefit 6.7 6.8 7.9
Foreign income tax effect 3.4
Net operating loss carry-overs ( 1.9)
Other, net ( 4.9) .7 1.7
----- ------ -----
39.2% 41.5% 41.7%
==== ==== ====
F-17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
12. INTEREST EXPENSE, NET OF INTEREST INCOME
Interest expense, net of interest income consisted of the following:
1999 1998 1997
---------------- ---------------- ----------------
Interest expense ($1,197,236) ($422,579) ($444,347)
Interest income 277,028 657,623 259,702
------------- --------- ---------
($ 920,208) $235,044 ($184,645)
=========== ======== ========
13. SEGMENT INFORMATION
During fiscal 1999 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):
Information Professional Commercial
Technology Engineering Services Corporate Total
Fiscal 1999
Revenue $223,654 $62,887 $26,845 $313,386
Operating expenses 199,664 59,190 25,982 284,836
------- ------ ------ -------
EBITDA (a) 23,990 3,697 863 28,550
Depreciation 576 269 18 863
Amortization 1,873 295 17 2,185
----- --- -- -----
Operating income 21,541 3,133 828 25,502
====== ===== === ======
Total assets 156,468 17,893 4,767 4,920 184,048
Capital expenditures $978 $77 $1 $2,774 $3,830
F-18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
13. SEGMENT INFORMATION (CONTINUED)
Information Professional Commercial
Technology Engineering Services Corporate Total
Fiscal 1998
Revenue $125,683 $46,466 $29,303 $201,452
Operating expenses 111,905 43,695 27,888 183,488
------- ------ ------ -------
EBITDA (a) 13,778 2,771 1,415 17,964
Depreciation 355 65 4 424
Goodwill amortization 938 90 3 1,031
--- -- - -----
Operating income 12,485 2,616 1,408 16,509
====== ===== ===== ======
Total assets 75,071 12,506 6,302 23,188 117,067
Capital expenditures $753 $32 $12 $797
Fiscal 1997
Revenue $50,665 $33,306 $29,988 $113,959
Operating expenses 45,461 30,908 28,531 104,900
------ ------ ------ -------
EBITDA (a) 5,204 2,398 1,457 9,059
Depreciation 92 65 4 161
Goodwill amortization 319 90 3 412
--- -- - ---
Operating income 4,793 2,243 1,450 8,486
===== ===== ===== =====
Total assets 40,119 8,635 3,160 2,168 54,082
Capital expenditures $395 $43 $12 $450
(a) EBITDA consists of earnings before interest income, interest expense,
other non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered
in isolation or as an alternative to net income as an indicator of a
company's performance or to cash flows from operating activities as a
measure of liquidity.
F-19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
13. SEGMENT INFORMATION (CONTINUED)
The following reconciles consolidated operating income to the Company's pretax profit (in thousands)
Year ended October 31, 1999 1998 1997
---------------------- ---------- ---------- ----------
Consolidated operating income $25,502 $16,509 $8,486
Interest (expense), net of interest income ( 920) 235 ( 185)
--------- --------- ------
Consolidated pretax profit $24,582 $16,744 $8,301
======= ======= ======
The Company derives a substantial majority of its revenue from companies
headquartered in the United States. In fiscal 1997, the Company had one
customer which accounted for 11.5% of the Company's consolidated revenue.
In fiscal 1998 and fiscal 1999, no single customer exceeded 10% of the
Company's revenue. Revenues from Canadian operations amounted to $14.8
million in 1999; there were no Canadian revenues in 1998 and 1997.
14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended October 31, 1999
Diluted
Gross Net Income
Sales Profit Net Income Per Share (a)
1st Quarter $ 67,391,593 $ 16,187,947 $ 3,279,725 $.30
2nd Quarter 80,539,313 19,048,183 3,773,290 .35
3rd Quarter 81,837,199 19,665,511 3,884,741 .36
4th Quarter 83,617,666 21,737,685 4,010,492 .37
---------- ---------- --------- ---
Total $ 313,385,772 $ 76,639,326 $ 14,948,248 $1.37
= =========== = ========== = ========== =====
Year Ended October 31, 1998
Diluted
Gross Net Income
Sales Profit Net Income Per Share (a)
1st Quarter $ 37,232,243 $ 9,152,239 $ 1,777,401 $ .22
2nd Quarter 48,942,175 11,607,585 2,218,751 .27
3rd Quarter 52,008,578 12,323,918 2,590,784 .26
4th Quarter 63,269,322 15,340,481 3,209,769 .30
---------- ---------- --------- ---
Total $ 201,452,318 $ 48,424,223 $ 9,796,705 $1.07
= =========== = ========== = ========= =====
(a) Total of quarterly amounts do not agree to the annual amount due to
separate quarterly calculations of weighted average shares outstanding.
F-20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1999, 1998 and 1997
15. NEW ACCOUNTING STANDARDS
In April 1998, Statement of Position ("SOP") 98-5, reporting on the "Costs
of Start-up Activities", was issued. This SOP provides guidance on the
financial reporting of start-up and organization costs and requires that
these costs be expensed as incurred. The provisions of SOP 98-5 are
effective for financial statements for fiscal years beginning after
December 15, 1998. The Company adopted the provisions of this SOP on
November 1, 1999. The adoption of SOP 98-5 will not have a material impact
on the Company's financial statements.
16. CONTINGENCY
On November 6, 1998, two former officers filed suit against the Company
alleging wrongful termination of their employment, failure to make
severance payments and wrongful conduct by the Company in connection with
the grant of Stock Options to the Plaintiffs. The complaint also alleges
the Company wrongfully limited the number of shares of Company stock that
could be sold by the plaintiffs and makes various other claims including a
claim for punitive damages. The suit asks for damages of approximately
$480,000 plus other unspecified amounts. Management believes the suit is
without merit and intends to defend the claim vigorously.
F-21
Independent Auditors' Report
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 October 31,
1999 and 1998 and the related consolidated statements of income, changes in
shareholders' equity, comprehensive income and cash flows for each of the three
years in the period ended October 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 October 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1999 in conformity with generally
accepted accounting principles.
We have also audited Schedules I, and II of RCM Technologies, Inc. and
Subsidiaries as of and for each of the three years in the period ended October
31, 1999. In our opinion, these schedules present fairly, in all material
respects, the information required to be set forth therein.
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
December 15, 1999
F-22
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
October 31, 1999 and 1998
ASSETS
1999 1998
--------------------------------
Current assets
Cash $ 681 $ 2,069
Prepaid expenses and other assets 9,179 9,865
------ -----
Total current assets 9,860 11,934
----- ------
Other assets
Deposits 5,695 5,695
Long-term receivables from affiliates 122,050,611 106,672,260
----------- -----------
122,056,306 106,677,955
Total assets $ 122,066,166 $106,689,889
= =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 63,996 $ 17,762
- ------ - ------
Shareholders' equity
Common stock 524,811 522,376
Foreign currency translation adjustment ( 96,230)
Additional paid in capital 93,473,301 92,997,711
Retained earnings 28,100,288 13,152,040
--------------- -------------
Total shareholders' equity 122,002,170 106,672,127
--------------- -------------
Total liabilities and shareholders' equity $ 122,066,166 $106,689,889
=============== =============
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-23
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
Years Ended October 31, 1999, 1998 and 1997
1999 1998 1997
---------------- ---------------- ----------------
Operating expenses
Administrative $ 244,660 $ 210,317 $ 166,110
------------- ------------- -------------
Operating loss ( 244,660) ( 210,317) ( 166,110 )
------------ ------------ ------------
Other expense
Non recurring charge ( 625,000 )
------------
Loss before management fee income ( 244,660) ( 210,317) ( 791,110 )
------------ ------------ ------------
Management fee income 244,660 210,317 791,110
------------- ------------- -------------
Income before income taxes
Income taxes
Income before income in subsidiaries
Equity in earnings in subsidiaries 14,948,248 9,796,705 4,477,433
------------- ------------- -------------
Net income $ 14,948,248 $ 9,796,705 $ 4,477,433
============= ============= =============
The "Notes to Consolidated Financial Statements" of
RCM Technologies, Inc. and subsidiaries are an integral part of
these statements.
F-24
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
Years Ended October 31, 1999, 1998 and 1997
1999 1998 1997
------------- ---------------- -------------
Cash flows from operating activities:
Net income $ 14,948,248 $ 9,796,705 $ 4,477,433
------------- ------------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Changes in operating assets and liabilities:
Prepaid expenses and other assets 686 ( 8,264) 131,062
Accounts payable and accrued expenses 46,234 ( 26,008) 43,770
------------- ----------- -------------
46,920 ( 34,272) 174,832
------------- ------------ -------------
Net cash provided by operating activities 14,995,168 9,762,433 4,652,265
------------- ------------- -------------
Cash flows from investing activities:
Share in deficiency in assets of
subsidiaries ( 14,948,248) ( 9,796,705) ( 4,477,433 )
Decrease (increase) in long-term
receivables from subsidiaries ( 430,103) ( 52,256,899) ( 23,448,518 )
------------ ------------ ------------
Net cash used in
investing activities ( 15,378,351) ( 62,053,604) ( 27,926,011 )
------------ ------------ ------------
Cash flows from financing activities:
Sale of common stock 49,291,445 23,271,723
Exercise of warrants 2,273,278
Exercise of stock options 478,025 698,714 23,240
------------- ------------- -------------
Net cash provided by financing activities 478,025 52,263,437 23,294,963
------------- ------------- -------------
Effect of exchange rate changes on cash and
cash equivalents ( 96,230)
------------ --------------- -------------
Net increase (decrease) in cash and equivalents ( 1,388) ( 27,734) 21,217
Cash and equivalents at beginning of year 2,069 29,803 8,586
------------- ------------- -------------
Cash and equivalents at end of year $ 681 $ 2,069 $ 29,803
============= ============= =============
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-25
SCHEDULE II
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended October 31, 1999, 1998 and 1997
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 October 31, 1999
Allowance for doubtful
accounts on trade
receivables $486,000 $986,000 $470,000 $1,002,000
Year Ended October 31, 1998
Allowance for doubtful
accounts on trade
receivables $316,000 $170,000 $486,000
Year Ended October 31, 1997
Allowance for doubtful
accounts on trade
receivables $ 76,000 $325,000 $ 85,000 $316,000
F-26
EXHIBIT INDEX
(11) Computation of Earnings Per Share.
(21) Subsidiaries.
(23) Consent of Grant Thornton, LLP.
(27) Financial Data Schedule.
EXHIBIT 11
RCM TECHNOLOGIES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Years Ended October 31, 1999, 1998 and 1997
1999 1998 1997
------------------ ------------------ ------------------
Diluted earnings
Net income applicable to common stock $ 14,948,248 $ 9,796,705 $ 4,477,433
============= ============= =============
Shares
Weighted average number of common
shares outstanding 10,484,764 8,787,334 6,068,713
Common stock equivalents 457,382 364,569 292,468
------------- ------------- -------------
Total 10,942,146 9,151,903 6,361,181
============= ============= =============
Diluted earnings per common share $1.37 $1.07 $.70
===== ===== ====
Basic
Net income applicable to common stock $ 14,948,248 $ 9,796,705 $ 4,477,433
============= ============= =============
Shares
Weighted average number of common
shares outstanding 10,484,764 8,787,334 6,068,713
============= ============= =============
Basic earnings per common share $1.43 $1.11 $.74
===== ===== ====
EXHIBIT 21
SUBSIDIARIES
Cataract, Inc.
RCM Technologies (USA), Inc. (formerly The Consortium)
Programming Alternatives of Minnesota, Inc.
Northern Technical Services, Inc.
Software Analysis & Management, Inc.
Global Technology Solutions, Inc.
Procon, Inc.
Constellation Integration Services Company
Mu-Sigma Engineering Consultants Company
Fulcrum Group, Inc.
RCMT Delaware, Inc.
RCMT Nova Scotia Company
RCMT Canada Company
Business Support Group of Michigan, Inc.
Solutions Through Data Processing, Inc.
Pinnacle Consulting Services, Inc.
* All subsidiaries of the Registrant do business as RCM Technologies, Inc.
EXHIBIT 23
Consent of Independent Certified Public Accountants
Board of Directors
RCM Technologies, Inc.
We have issued our report dated December 15, 1999 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 October 31,
1999. 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.
33-12405, effective March 24, 1987, File No. 33-12406, effective March 24, 1987,
File No. 33-61306, effective April 21, 1993, and File No. 33-80590, effective
June 22, 1994).
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
December 15, 1999