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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ........... to ...........
Commission file number 1-10245
RCM TECHNOLOGIES, INC.
Exact name of registrant as specified in its charter
Nevada 95-1480559
State of incorporation IRS Employer Identification No.
2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
Address of principal executive offices
Registrant's telephone number, including area code: (856) 486-1777
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X ]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on February 28, 2001 was approximately $45,651,000 based upon the
closing price of the Common Stock on such date on The Nasdaq National Market of
$4.38. 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 February 28, 2001: 10,499,651.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 2001 Annual
Meeting of Stockholders ("the 2001 Proxy Statement") are incorporated by
reference into Items 10,11,12 and 13 in Part III of this Annual Report on Form
10-K. If the 2001 Proxy Statement is not filed by April 30, 2001, an amendment
to this Annual Report on Form 10-K setting forth this information will be duly
filed with the Securities and Exchange Commission.
2
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 and placement of
temporary staffing personnel; (ii) the Company's ability to continue to attract,
train and retain personnel qualified to meet the requirements of its clients;
(iii) the Company's ability to identify appropriate acquisition candidates,
complete such acquisitions and successfully integrate acquired businesses; (iv)
uncertainties regarding pro forma financial information and the underlying
assumptions relating to acquisitions and acquired businesses; (v) uncertainties
regarding amounts of deferred consideration and earnout payments to become
payable to former shareholders of acquired businesses; (vi) possible adverse
effects on the market price of the Company's Common Stock due to the resale into
the market of significant amounts of Common Stock; (vii) the potential adverse
effect a decrease in the trading price of the Company's Common Stock would have
upon the Company's ability to acquire businesses through the issuance of its
securities; (viii) the Company's ability to obtain financing on satisfactory
terms; (ix) the reliance of the Company upon the continued service of its
executive officers; (x) the Company's ability to remain competitive in the
markets which it serves; (xi) the Company's ability to maintain its unemployment
insurance premiums and workers compensation premiums; (xii) the risk of claims
being made against the Company associated with providing temporary staffing
services; (xiii) the Company's ability to manage significant amounts of
information, and periodically expand and upgrade its information processing
capabilities; (xiv) the Company's ability to remain in compliance with federal
and state wage and hour laws and regulations; (xv) predictions as to the future
need for the Company's services; (xvi) uncertainties relating to the allocation
of costs and expenses to each of the Company's operating segments; and (xvii)
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.
25
ITEM 1. BUSINESS
General
RCM Technologies is a premier provider of end to end technology solutions
designed to enhance and maximize the business performance of its customers
through the adaptation and deployment of advanced information and
engineering technologies. 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,
Supply Chain Management, 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 that 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 December 31, 2000, approximately 77% of RCM's
total revenues were derived from IT services, 14% from Engineering services
and the remaining 9% from Commercial Services and Healthcare.
RCM sells and delivers its services through a network of 64 branch offices
located in selected regions throughout North America. The Company has
implemented a regional infrastructure to obtain greater synergy and
operating efficiencies within geographic territories. This strategy has
allowed for the reduction of certain duplicated tasks and has better
focused the Company on the territories that hold the greatest growth
potential.
Growth in demand for IT consulting services has slowed in the past year
after many years of rapid growth. Despite a sales slow down, RCM has
competed successfully in this changing environment and achieved positive
growth of the gross margins for the services delivered.
Industry Overview
Businesses today face intense competition, the challenge of constant
technological change, and the ongoing need for business process
optimization. Companies are turning to IT solutions to address these issues
and to compete more effectively. As a result, the ability of an
organization to integrate and deploy new information technologies has
become critical.
Although many companies have recognized the importance of IT systems and
products to competing 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 and the number of end users within these
organizations desiring to use IT systems and solutions in new ways 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 in technology, 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 IT 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.
ITEM 1. BUSINESS (CONTINUED)
Industry Overview (Continued)
The Company believes the strongest demand for IT services is among
middle-market companies, which typically lack the time and technical
resources to satisfy all of there IT needs internally. These companies
typically require sophisticated, experienced IT assistance to achieve their
business objectives. These companies often rely on IT service providers to
help implement and manage their systems. However, many middle-market
companies rely on multiple providers for their IT needs. Generally, the
Company believes that this reliance on multiple providers results from the
fact that larger IT service providers do not target these companies, while
smaller IT service providers lack sufficient breadth of services or
industry knowledge to satisfy all of these companies' needs. The Company
believes this reliance on multiple service providers creates multiple
relationships that are more difficult and less cost-effective to manage
than a single relationship would be and can adversely impact the quality
and compatibility of IT solutions. RCM is structured to provide
middle-market companies an objective, single-source for their IT needs.
Business Strategy
RCM is dedicated to providing solutions to meet its 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 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 intends 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 delivered product. RCM's strategy is to
selectively build projects and solutions offerings which utilize its
extensive resource base. The Company believes that the effective execution
of this strategy will generate improved margins on the existing resources.
The completion of this service-offering continuum affords the Company the
opportunity to strengthen long-term client relationships that 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 increase its margins on its various service lines. These measures will
be accomplished through expansion of its client relationships and, at the
same time, pursuing strategic alliances and partnerships.
Promote Internal Growth. The Company continues to evolve its internal
growth strategies. Several initiatives were launched during the year ended
December 31, 2000 ("fiscal 2000"). The results of these efforts have
produced gains in margin growth, RCM's customer service focus, national
account coordination and greater client penetration.
Gross margins increased as a direct result of implementing a program at all
operating branches of the Company to conduct business at 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.
ITEM 1. BUSINESS (CONTINUED)
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 are offered by the Company.
During fiscal 2000, RCM continued a company-wide training initiative in
which sales managers and professionals received advanced sales training.
The purpose of the training, which is a multi-semester program, is to
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 assembled the greatest work experience. RCM's consultants
have acquired project experience that offers differentiated awareness of
the business challenges that clients in that industry are facing. This
alignment also facilitates and creates additional cross-selling
opportunities. The result, we believe, is greater account penetration and
enhanced client relationships.
Operational strategies contributing to RCM's internal productivity include
the delineation of certain new technical practice areas in markets where
its clients had historically known the Company as a contract service
provider. The formation of these practice areas 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 Selective Strategic Acquisitions. The industry for the Company's
services continues to be highly fragmented, and the Company plans to
continue to assess opportunities to make strategic acquisitions as such
opportunities are presented to the Company. The Company's past acquisition
strategy has been designed to broaden the scope of services and technical
competencies and maintain its Full Cycle Solution capabilities ,and the
Company would seek to further achieve such goals in any future
acquisitions. In considering 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.
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 responds to local market demands and enhances the Company's
ability to motivate, attract and retain managers and to maximize growth and
profitability.
ITEM 1. BUSINESS (CONTINUED)
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
2000 has allowed RCM to further expand its relationships with clients in
RCM's targeted sectors. To develop close customer relationships, the
Company's practice managers regularly meet with both existing and
prospective clients to help design solutions 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 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 is centralized on an SAP operating system
into which it integrated all of its operating units. This year all Canadian
operations implemented the SAP system completing the roll out to all
locations. The software is configured to perform all back office functions
including payroll, project management, project cost accounting, billing,
human resource administration and all financial consolidation and reporting
functions. The Company believes that this system provides a robust and
highly scalable platform from which to manage daily operations, and that
this system has the capacity to accommodate increased usage.
Information Technology
The Company's Information Technology Group offers responsive, timely and
comprehensive business and information technology consulting and solutions
to support the entire systems applications development and implementation
process. The Company's information technology professionals have expertise
in a variety of technical disciplines, including e-business development,
supply chain enterprise software, application integration, network
communications, knowledge management and support of client applications.
ITEM 1. BUSINESS (CONTINUED)
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 integrates diverse but related enterprise applications
into unified cohesive operating environments. The Company believes that its
ability to deliver information technology solutions across a wide range of
technical platforms provides an important competitive advantage. The
Company also ensures that its consultants have the expertise and skills
needed to keep pace with rapidly evolving information technologies. The
Company's strategy is to maintain expertise and acquire knowledge in
multiple technologies so it can offer its clients non-biased solutions best
suited to their business needs.
The Company provides its IT services through a number of delivery methods.
These include management consulting engagements, project management of
client efforts, project implementation of client initiatives, outsourcing,
both on and off site, and a full complement of resourcing alternatives.
As of December 31, 2000, the Company employed approximately 2,050
information technology personnel.
Professional Engineering
The Company's Professional Engineering Group provides personnel to perform
project engineering, computer aided design, and other managed task
technical services either at the site of the customer or, less frequently,
at the Company's own facilities. Representative services include utilities
process and control, electrical engineering design, system engineering
design and analysis, mechanical engineering design, procurement
engineering, civil structural engineering design, computer aided design and
code compliance. The Professional Engineering Group has developed an
expertise in providing engineering, design and technical services to many
customers in the aeronautical, paper products manufacturing and nuclear
power, fossil fuel and electric utilities industries.
The Company believes that the deregulation of the utilities industry and
the aging of nuclear power plants offer the Company an opportunity to
capture a 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 December 31, 2000, the Company employed approximately 450 engineering
personnel.
ITEM 1. BUSINESS (CONTINUED)
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, outpatient, sub-acute and acute care, rehabilitation,
geriatric, pediatric and adult day care. The Specialty Healthcare Group
does not provide general nursing or home healthcare services. Typical
engagements range either from three to six months or are on a day-to-day
shift basis.
ITEM 1. BUSINESS (CONTINUED)
Branch Offices
The Company's organization consists of six operating regions with 64 branch
offices located in 22 states and Canada. The region of and services
provided by each branch office are set forth in the table below.
NUMBER OF
REGION OFFICES SERVICES PROVIDED(1)
NORTHEAST
Connecticut................................... 2 IT, PE
Maryland...................................... 1 IT
New Hampshire................................. 1 IT
New Jersey.................................... 8 IT, PE, CS
New York...................................... 3 IT, PE,CS, HC
Pennsylvania.................................. 3 IT, PE, CS
Vermont....................................... 1 PE
-
19
MIDWEST
Illinois...................................... 2 IT
Indiana....................................... 1 IT
Michigan...................................... 6 IT, PE
Minnesota..................................... 1 IT
Ohio.......................................... 1 IT
Wisconsin..................................... 5 IT, PE
-
16
SOUTHEAST
Alabama....................................... 1 PE
Florida....................................... 1 IT
Georgia....................................... 1 PE
South Carolina................................ 1 PE
Virginia...................................... 2 IT
-
6
SOUTHWEST
Arizona....................................... 1 PE
Texas......................................... 5 IT
-
6
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
HC - Healthcare
ITEM 1. BUSINESS (CONTINUED)
Branch Offices (Continued)
Branch offices are primarily located in regions that the Company believes
have strong growth prospects for information technology and engineering
services. The Company's branches are operated in a decentralized,
entrepreneurial manner with most branch offices operating as independent
profit centers. The Company's branch managers are given significant
autonomy in the daily operations of their respective offices and, with
respect to such offices, are responsible for overall guidance and
supervision, budgeting and forecasting, sales and marketing strategies,
pricing, hiring and training. Branch managers are paid on a
performance-based compensation system designed to motivate the managers to
maximize growth and profitability.
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 it's 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 General Manager, one sales manager,
three to six salespeople, one to five practice managers and several
recruiters. The General Managers report to Regional Managers who are
responsible for ensuring performance goals are achieved. The Company's
branch managers meet frequently to discuss "best practices" and ways to
increase the Company's cross selling of its professional services. The
Company's practice managers meet periodically to strategize, maintain
continuity, and identify developmental needs and cross-selling
opportunities.
Sales And Marketing
Sales and marketing efforts are conducted at the local and regional level
through the Company's network of branch offices. The Company emphasizes
long-term personal relationships with customers that are developed through
regular assessment of customer requirements and proactive monitoring of
personnel performance. The Company's sales personnel make regular visits to
existing and prospective customers. New customers are obtained through
active sales programs and referrals. The Company encourages its employees
to participate in national and regional trade associations, local chambers
of commerce and other civic associations. The Company seeks to develop
strategic partnering relationships with its customers by providing
comprehensive solutions for all aspects of a customer's information
technology, engineering and other professional services needs. The Company
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, i2, QAD, Dorado, GEAC, IBM, Compaq and Oracle
among others. The Partner programs may be managed either at a national
level from RCM's corporate offices or at a regional level from its offices.
Some of the Company's larger representative customers include 3M, Adelphia
Cable Communications, Apple, AT&T, BASF, Liberty Mutual Insurance, Lockheed
Martin, Medtronic, Merck, Merrill Lynch, Ontario Power, Sprint, Sun
Microsystems, Toyota, Verizon, Vermont Yankee Nuclear Power, U.S. Treasury
and Wells Fargo. The Company serves Fortune 1000 companies and many middle
market clients. The Company's relationships with these customers are
typically formed at the local or regional level, as the Company does not
actively solicit national contracts, which typically subject the suppliers
to significant pricing pressures.
ITEM 1. BUSINESS (CONTINUED)
Sales And Marketing (Continued)
During fiscal 2000, no one customer accounted for more than 6% of the
Company's revenues. The Company's five and ten largest customers accounted
for approximately 17% and 23%, respectively, of the Company's revenues for
fiscal 2000.
Recruiting And Training
The Company devotes a significant amount of time and resources, primarily
at the branch level, to locating, training and retaining its professional
personnel. Full-time recruiters utilize the Company's proprietary databases
of available personnel, which are cross-indexed by competency and skill to
match potential candidates with the specific project requirements of the
customer. The qualified personnel in the databases are identified through
numerous activities, including networking, referrals, the Internet, job
fairs, schools, 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 Consultant Relationship Managers ("CRM") and technical practice
managers. CRM are qualified Company personnel dedicated to maintaining
on-site contact with, and monitoring the satisfaction levels of, the
Company's consultants and contract personnel while they are on assignment.
Practice managers are consulting managers responsible for the technical
development and career development of the Company's technical personnel
within the defined practice areas. The Company employs various methods of
technical training and skills development including sending consultants to
application vendor provided courses, the use of computer-based training
tools and on-the-job training through mentoring programs.
Information Systems
The Company has invested, and intends to continue to invest, in the SAP R/3
software that it has installed. This system is deployed on clustered Compaq
servers and is running on a SQL 7.0 database. The branch offices of the
Company are networked to the corporate offices so the SAP application is
accessed at all operational locations. This system supports Company-wide
operations such as payroll, billing, human resources, project systems,
accounts receivable, accounts payable, all general ledger accounting and
consolidation reporting functionality. In addition to SAP, each of the
service groups maintains 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 integration process
within three months after the acquisition.
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, 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.
ITEM 1. BUSINESS (CONTINUED)
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 join and participate
in the expansion of a growing provider of information technology and other
engineering services.
Employees
As of December 31, 2000, the Company employed an administrative staff of
approximately 400 people, 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 December 31, 2000, approximately 2,050 information
technology professionals and 450 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
December 31, 2000. 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 64 offices in 22
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, 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 and ultimate divestiture 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. In the suit, the
plaintiffs seek damages of approximately $480,000 plus other unspecified
amounts. The claims relating to wrongful termination of employment and
wrongful conduct by the Company in connection with the grant of Stock
Options to the plaintiffs have been submitted to binding arbitration;
closing arguments in that proceeding are scheduled for March 30, 2001. In
addition, the Company is currently awaiting the court's decision on the
Company's summary judgment motion addressing the plaintiffs claims with
respect to its allegedly wrongful limiting the number of shares the
plaintiffs could sell. The Company will shortly be seeking a summary
judgment from the court with respect to the plaintiffs claims concerning
allegedly wrongful conduct by the Company in connection with the
divestiture of the plaintiffs' stock options. Management believes the suit
is without merit and has defended the claims vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 31, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq National Market under
the Symbol "RCMT". The following table sets forth approximate high and low
sales prices for the two years in the period ended December 31, 2000 as
reported by The Nasdaq National Market:
Common Stock
--------------------------------
High Low
Fiscal 1999 ------ -----
First Quarter............. $26.44 $10.63
Second Quarter............ 17.38 10.32
Third Quarter............. 14.88 10.44
Fourth Quarter............ $18.38 $10.06
Fiscal 2000
First Quarter............. $19.13 $10.50
Second Quarter............ 12.94 7.25
Third Quarter............. 8.25 3.88
Fourth Quarter............ $ 5.69 $ 2.38
Holders
As of February 26, 2001, the approximate number of holders of record of the
Company's Common Stock was 1,100. 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 5,600.
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.
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.
Year Ended Two Months Years Ended
Ended
---------------- --------------- -------------------------------------------------
December 31, October 31,
--------------------------------- -------------------------------------------------
2000 1999 1999 1998 1997
---------------- --------------- -------------- -------------- ---------------
Income Statement
Revenues $296,001,276 $51,397,429 $313,385,772 $201,452,318 $113,959,093
Gross profit 78,485,616 13,218,972 76,639,326 48,424,223 27,126,745
Income before unusual items 16,910,326 2,050,993
Unusual items (38,806,712)
Income (loss) from
continuing operations (21,896,386) 2,050,993 14,948,248 9,796,705 4,839,933
Loss from
discontinued operations (362,500)
Net income (loss) ($ 21,896,386) $2,050,993 $14,948,248 $ 9,796,705 $ 4,477,433
Earnings Per Share (1)
Income (loss) from continuing
operations (diluted) ($2.09) $.19 $1.37 $1.07 $.76
Loss from discontinued
operations (diluted) ($.06)
Net income (loss) (diluted) ($2.09) $.19 $1.37 $1.07 $.70
Net income (loss) (basic) ($2.09) $.20 $1.43 $1.11 $.74
December 31, October 31,
--------------------------------- ------------------------------------------------
2000 1999 1999 1998 1997
---------------- --------------- ------------- -------------- ---------------
Balance Sheet
Working capital $56,508,604 $61,383,437 $54,866,477 $53,672,589 $17,279,115
Total assets 174,268,828 183,950,884 184,047,546 117,067,151 54,082,596
Long term liabilities 49,483,873 47,300,000 40,800,000 308,129
Total liabilities 72,206,502 59,854,255 62,045,376 10,395,024 9,471,611
Shareholders' equity $102,062,326 $124,096,629 $122,002,170 $106,672,127 $44,611,985
(1) Shares used in computing earnings per share
Basic 10,499,305 10,496,225 10,484,764 8,787,334 6,068,713
Diluted 10,499,305 10,951,447 10,942,146 9,151,903 6,361,181
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
RCM Technologies is a premier provider of end to end technology solutions
designed to enhance and maximize the business performance of its customers
through the adaptation and deployment of advanced information and engineering
technologies. 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, Supply Chain Management,
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 that 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.
RCM sells and delivers its services through a network of 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.
Many businesses today are facing intense competition, the challenge of
accelerating technological change, and the ongoing need for business process
re-engineering to take advantage of the Internet's potential to bring them
closer to their suppliers and customers. Increasingly, these companies are also
suffering from a shortage of qualified expert employees who can build these
solutions. As a result, the ability of an organization to effectively compete is
critically reliant on its ability to introduce and integrate these emerging
technologies in a timely fashion.
Although many companies have recognized the importance of the Internet and
information management technologies to competing in today's business climate,
the process of designing, developing and implementing these solutions has become
increasingly complex. Companies continue to migrate away from centralized
computing environments toward decentralized, scalable architectures based on
local and wide area networks, the Internet, Intranets, shared databases and
collaborative application software bringing them closer to their clients and
suppliers. 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 deploy these systems and solutions and the number of
connected users within these networks 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 packaged 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, the
rampant pace of these developments has left many companies unable to keep their
permanent staffs abreast in the technology evolution. Consequently, business
drivers cause IT managers to develop and support increasingly complex systems
and applications of significant strategic value, while working under budgetary,
personnel and expertise constraints within their own organizations. Many have
increasingly turned to consultants to assist them.
The Company realizes revenues from client engagements that range from the
placement of contract and temporary technical consultants to project assignments
that 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Overview (Continued)
The majority of the Company's services are provided under purchase orders.
Contracts are utilized on 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 a 20-year period effective January 1, 2000. See Footnote 1 to financial
statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (In thousands, except for earnings per share data)
Year Ended Year Ended Year Ended
December 31, 2000 October 31, 1999 October 31, 1998
------------------------ ------------------------ ------------------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
---------- ------------ ----------- ------------ ----------- ------------
Revenues $296,000 100.0% $313,386 100.0% $201,452 100.0%
Cost of services 217,516 73.5 236,747 75.5 153,028 76.0
---------- ------------ ----------- ------------ ----------- ------------
Gross profit 78,486 26.5 76,639 24.5 48,424 24.0
---------- ------------ ----------- ------------ ----------- ------------
Selling, general and administrative 54,846 18.5 48,089 15.3 30,461 15.1
Depreciation 1,154 .4 863 .3 424 .2
---------- ------------ ----------- ------------ ----------- ------------
56,000 18.9 48,952 15.6 30,885 15.3
---------- ------------ ----------- ------------ ----------- ------------
Income before other expense (income),
income taxes, goodwill amortization, and
unusual charges 22,486 7.6 27,687 8.9 17,539 8.7
Other expense (income) (3,702) (1.3) (920) (.3) 235 .1
---------- ------------ ----------- ------------ ----------- ------------
Income before income taxes and
goodwill amortization 18,784 6.3 26,767 8.6 17,774 8.8
Income taxes 7,673 2.6 10,287 3.3 6,754 3.3
---------- ------------ ----------- ------------ ----------- ------------
Income before goodwill amortization 11,111 3.7 16,480 5.3 11,020 5.5
Goodwill amortization, net of income
tax benefits (4,390) (1.5) (1,532) (.5) (1,223) (.7)
Restructuring and unusual charges,
net of tax benefits (28,617) (9.7)
---------- ------------ ----------- ------------ ----------- ------------
Net income (loss) ($ 21,896) (7.4) $14,948 4.8 $ 9,797 4.8%
========== ============ =========== ============ =========== ============
Earnings per share
Basic:
Income before goodwill amortization $1.06 $1.58 $1.25
Goodwill amortization (.42) (.15) (.14)
Unusual charges (2.73)
---------- ----------- -----------
Net income (loss) ($2.09) $1.43 $1.11
========== =========== ===========
Diluted:
Income before goodwill amortization $1.06 $1.51 $1.20
Goodwill amortization (.42) (.14) (.13)
Unusual charges (2.73)
---------- -----------
Net income (loss) ($2.09) $1.37 $1.07
========== =========== ===========
The above summary is not a presentation of results of operations under generally
accepted accounting principles and should not be considered in isolation or as
an alternative to results of operations as an indication of the Company's
performance.
Year Ended December 31, 2000 Compared to Year Ended October 31, 1999
General. The Company changed its fiscal year end to December 31 from
October 31. Accordingly, the following discussion compares the twelve-month
period ended December 31, 2000 ("fiscal 2000") with the twelve-month period
ended October 31, 1999 ("fiscal 1999").
Revenues. Revenues decreased 5.5%, or $17.4 million, for fiscal 2000 as
compared to fiscal 1999. Revenue decline was primarily attributable to a
loss of certain engineering contracts and softness in the Information
Technology ("IT") sector.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 2000 Compared to Year Ended October 31, 1999
(Continued)
Cost of Services. Cost of services decreased 8.1%, or $19.2 million, for
fiscal 2000 as compared to fiscal 1999. This decrease was primarily due to
a decrease in salaries and compensation associated with the decreased
revenues experienced during fiscal 2000 that was partially offset by an
increase in gross margin percentage from Information Technology. Cost of
services as a percentage of revenues decreased to 73.5% for fiscal 2000
from 75.5% for fiscal 1999. This decline was primarily attributable to a
continuing increase of the Company's revenues being derived from
information technology and other professional services, which offer higher
margins than other services.
Selling, General and Administrative. Selling, general and administrative
expenses increased 14.1%, or $6.8 million, for fiscal 2000 as compared to
fiscal 1999. Selling, general and administrative expenses as a percentage
of revenues increased to 18.5% for fiscal 2000 as compared to 15.3% for
fiscal 1999. The increase in percentage was primarily attributable to
increased expenditures required to upgrade and support back office
administrative systems as well as expenditures attributable to acquisitions
subsequent to December 31, 1999.
Depreciation. Depreciation increased 33.7%, or $291,000, for fiscal 2000 as
compared to fiscal 1999. This increase was primarily due to the
depreciation of property and equipment associated with infrastructure
improvements that occurred during the previous fiscal periods.
Other (Expense) Income, Net. Other (expense) income consists principally of
interest expense, net of interest income. For fiscal 2000, actual interest
expense of $4.0 million was offset by $315,000 of interest income, which
was earned from the investment in interest bearing deposits. Interest
expense, net increased 302%, or $2.8 million for fiscal 2000 as compared to
fiscal year 1999. This increase was primarily due to the increased
borrowing requirements necessary to complete acquisitions subsequent to
December 31, 1999, as well as to fund working capital requirements.
Income Tax. Income tax expense decreased $13.2 million, for fiscal 2000 as
compared to fiscal 1999. This decline was attributable to a net loss for
fiscal year 2000 arising in taxes recoverable of $7.4 million at December
31, 2000.
Goodwill Amortization. Goodwill amortization for fiscal 2000 and fiscal
1999 was net of income tax benefit of $1.1 million and $654,000,
respectively. Goodwill amortization net of tax benefit increased 186.6% or
$2.9 million for fiscal 2000 as compared to fiscal 1999. This increase was
primarily due to a change in the amortization period of goodwill associated
with acquisitions from 40 years to 20 years effective January 1, 2000. See
footnote 1 to the financial statements.
Restructuring and Non-Recurring Charges. In the third quarter of 2000, the
Company recorded an impairment of goodwill in connection with a review of
the carrying value of its goodwill, a restructuring charge associated with
the consolidation of certain offices and certain non recurring items
associated with the integration of employee benefit plans and vacation
plans in the amounts of $35.3 million, $1.4 million and $2.1 million,
respectively. Restructuring and non-recurring charges reduced income before
the related tax benefits for fiscal 2000 by $38.8 million, and by $28.6
million after the related tax benefits.
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.
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)
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, which offer higher margins than other 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 that 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.
Depreciation. Depreciation increased 103.5%, or $439,000, for fiscal 1999
as compared to fiscal 1998. This increase was primarily due to the
depreciation of property and equipment associated with infrastructure
improvements that occurred during the previous fiscal periods.
Other (Expense) Income, Net. Other (expense) income consists principally of
interest expense, net of interest income. For the fiscal year 1999, actual
interest expense of $1.2 million was offset by $277,000 of interest income,
which was earned from the investment in interest bearing deposits. Interest
expense, net increased 183.3% or $775,000, for the fiscal year 1999 as
compared to fiscal year 1998. This increase was primarily due to the
increased borrowing requirements necessary to complete 14 acquisitions as
well as to fund working capital requirements.
Goodwill Amortization. Goodwill amortization for fiscal year 1999 and 1998
was net of income tax benefit of $654,000 and $192,000, respectively.
Goodwill amortization net of tax benefit increased 25.3% or $309,000 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.
Income Tax. Income tax expense increased 52.3%, or $3.5 million, for
fiscal 1999 as compared to fiscal 1998. This increase was primarily due to
increased levels of income before taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity And Capital Resources
Operating activities provided $26.7 million of cash for fiscal 2000 as
compared to operating activities using $3.8 million and $2.2 million of
cash during fiscal 1999 and 1998, respectively. The increase in cash
provided by operating activities in fiscal 2000 was primarily attributable
to increased levels of depreciation and amortization associated with the
acquisitions subsequent to December 31, 1999, an increase in restructuring
charges, accounts payable, accrued expenses, accrued payroll, withheld
income taxes and income taxes payable and a decrease in accounts receivable
which was partially offset by increases in income tax receivables, deferred
tax assets and prepaid expenses.
Investing activities used $27.4 million for fiscal 2000 as compared to
using $58.0 million and $26.8 million in fiscal 1999 and 1998,
respectively. The reduction in the use of cash for the fiscal year 2000 as
compared to fiscal 1999 was primarily attributable to a reduction in
acquisition payments and deferred consideration payments.
Financing activities provided $43,000, $41.3 million and $50.3 million for
fiscal years 2000, 1999 and 1998, respectively.
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"). The
Revolving Credit Facility was amended on September 18, 2000. Borrowings
under the Revolving Credit Facility bear interest at one of two alternative
rates, as selected by the Company. These alternatives are: LIBOR (London
Interbank Offered Rate), plus applicable margin, or the agent bank's prime
rate. Borrowings under the Revolving Credit Facility are collateralized by
all of the assets of the Company and its subsidiaries and a pledge of all
of the stock of its subsidiaries. The Revolving Credit Facility also
contains various financial and non-financial covenants. The Revolving
Credit Facility expires August 2002. The amount outstanding under the
Revolving Credit Facility at December 31, 2000 was $47.3 million.
The Company anticipates that its primary uses of capital in future periods
will be for working capital purposes. Funding for any future acquisitions
will be derived from the Revolving Credit Facility, funds generated through
operations, or future financing transactions.
The Company's business strategy is to achieve growth both internally
through operations and externally through strategic acquisitions. The
Company from time to time engages in discussions with potential acquisition
candidates. As the size of the Company and its financial resources
increase, however, acquisition opportunities requiring significant
commitments of capital may arise. In order to pursue such opportunities,
the Company may be required to incur debt or issue potentially dilutive
securities in the future. No assurance can be given as to the Company's
future acquisition and expansion opportunities or how such opportunities
will be financed.
The Company does not currently have material commitments for capital
expenditures and does not 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.
The Company is involved in several litigation matters. See Note 17 to the
Financial Statements. Should a significant number of such matters be
resolved against the Company, the Company will need to devote capital it
anticipates using for other purposes to such litigation matters, which
could result in an increased need for capital.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Seasonal Variations
The number of billing days in the quarter and the seasonality of its
customers' businesses affect the Company's quarterly results. The Company
usually experiences higher revenues in its first and second quarters due to
increased economic activity and experiences lower revenues in the third and
fourth quarters of the fiscal years.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company does not have
any derivative financial instruments in its portfolio. The Company places
its investments in instruments that meet high credit quality standards. The
Company is adverse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk
and reinvestment risk. As of December 31, 2000, the Company's investments
consisted of cash and money market funds. The Company does not expect any
material loss with respect to its investment portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Company's financial statements, together with the report of the
Company's independent auditors, begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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" is 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" is 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. EMPLOYEE
STOCK PURCHASE PLAN AND NON-QUALIFIED DEFERRED COMPENSATION PLAN" is
incorporated herein by reference.
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) to the Registrant's Form 10-K dated
October 31, 1994.
(3)(b) Bylaws, as amended; incorporated by reference to Exhibit 3 to
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 to 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 to 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) to 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) to the Registrant's
Registration Statement on Form S-1 dated March 21, 1997
(Commission File No. 333-23753).
* (10)(f) Amended and Restated Employment Agreement dated November 30, 1996
between the Registrant, Intertec Design, Inc. and Leon Kopyt;
incorporated by reference to Exhibit 10(g) to the 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) to the
Registrant's Current Report on Form 8-K dated March 19, 1996.
(10)(h) RCM Technologies, Inc. 2000 Employee Stock Incentive Plan;
incorporated by reference to Exhibit A to the Registrant's Proxy
Statement dated March 3, 2000, filed with the Commission on
February 28, 2000.
(11) Computation of Earnings Per Share.
(21) Subsidiaries of the Registrant.
(23) Consent of Grant Thornton, LLP.
* Constitutes a management contract or compensatory plan or arrangement.
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: February 21, 2001 By:/s/ Leon Kopyt
-------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer
and Director
Date: February 21, 2001 By:/s/ Stanton Remer
-----------------------------
Stanton Remer
Chief Financial Officer, Treasurer, Secretary
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated have signed this report below.
Date: February 21, 2001 /s/ Leon Kopyt
--------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer
(Principal Executive Officer)and Director
Date: February 21, 2001 /s/ Brian Delle Donne
---------------------------------------
Brian Delle Donne
Chief Operating Officer
(Principal Operating Officer)
and Director
Date: February 21, 2001 /s/ Stanton Remer
-------------------------------
Stanton Remer
Chief Financial Officer, Treasurer,
Secretary (Principal Financial and
Accounting Officer) and Director
Date: February 21, 2001 /s/ Norman S. Berson
----------------------------
Norman S. Berson
Director
Date: February 21, 2001 /s/ Robert B. Kerr
-------------------------------
Robert B. Kerr
Director
Date: February 21, 2001 /s/ Woodrow B. Moats, Jr.
--------------------------
Woodrow B. Moats, Jr.
Director
F-1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Consolidated Balance Sheets, December 31, 2000 and 1999 F-2
Consolidated Statements of Operations,
Year Ended December 31, 2000, Two Months Ended
December 31, 1999 and Years Ended October 31, 1999 and 1998 F-4
Consolidated Statements of Changes in Shareholders' Equity and
Consolidated Statements of Comprehensive Income (loss),
Year Ended December 31, 2000, Two Months Ended F-5 December 31, 1999 and
Years Ended October 31, 1999 and 1998
Consolidated Statements of Cash Flows,
Year Ended December 31, 2000, Two Months Ended
December 31, 1999 and Years Ended October 31, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-8
Independent Auditors' Report F-23
Schedules I and II F-24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
ASSETS
2000 1999
--------------- ---------------
Current assets
Cash and cash equivalents $ 3,170,658 $ 4,025,808
Accounts receivable, net of allowance for doubtful accounts
of $1,875,000 and $1,014,000 in 2000
and 1999, respectively 64,032,564 66,654,677
Income tax refund receivable 7,417,258
Prepaid expenses and other current assets 3,161,235 3,257,207
Deferred tax assets 1,449,518
--------------- ---------------
Total current assets 79,231,233 73,937,692
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 10,238,480 9,789,996
Less: accumulated depreciation and amortization 4,079,857 3,151,626
--------------- ---------------
6,158,623 6,638,370
--------------- ---------------
Other assets
Deposits 223,512 205,878
Intangible assets, net of accumulated amortization
of $7,878,000 and $4,437,000 in 2000
and 1999, respectively 88,655,460 103,168,944
--------------- ---------------
88,878,972 103,374,822
--------------- ---------------
Total assets $174,268,828 $183,950,884
=============== ===============
The accompanying notes are an integral part of
these financial statements.
F-2
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2000 and 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
--------------- ---------------
Current liabilities
Accounts payable and accrued expenses $13,610,547 $ 4,853,763
Accrued payroll 7,691,258 5,640,054
Payroll and withheld taxes 1,311,828 1,269,265
Income taxes payable 108,996 791,173
--------------- ---------------
22,722,629 12,554,255
--------------- ---------------
Long-term liabilities
Note payable 47,300,000 47,300,000
Income taxes payable 2,183,873
--------------- ---------------
49,483,873 47,300,000
--------------- ---------------
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; 10,499,651 and
10,496,225 shares issued and outstanding in
2000 and 1999, respectively 524,982 524,811
Accumulated other comprehensive loss (233,631) (52,764)
Additional paid-in capital 93,516,080 93,473,301
Retained earnings 8,254,895 30,151,281
--------------- ---------------
102,062,326 124,096,629
--------------- ---------------
Total liabilities and shareholders' equity $174,268,828 $183,950,884
=============== ===============
The accompanying notes are an integral part of
these financial statements.
F-3
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2000, Two Months Ended December 31, 1999
and Years Ended October 31, 1999 and 1998
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
2000 1999 1999 1998
-------------- -------------- --------------- ---------------
Revenues $296,001,276 $51,397,429 $313,385,772 $201,452,318
Cost of services 217,515,660 38,178,972 236,746,446 153,028,095
-------------- -------------- --------------- ---------------
Gross profit 78,485,616 13,218,457 76,639,326 48,424,223
-------------- -------------- --------------- ---------------
Operating costs and expenses
Selling, general and administrative 54,845,757 8,703,066 48,088,801 30,460,647
Depreciation 1,153,998 186,588 862,642 423,673
Amortization 5,494,141 468,453 2,185,690 1,030,743
Unusual items
Impairment of goodwill 35,334,972
Restructuring charge 1,371,740
Non recurring 2,100,000
-------------- -------------- --------------- ---------------
100,300,608 9,358,107 51,137,133 31,915,063
-------------- -------------- --------------- ---------------
Operating income (loss) (21,814,992 ) 3,860,350 25,502,193 16,509,160
-------------- -------------- --------------- ---------------
Other income (expenses)
Interest (expense), net of interest (3,677,577 ) (550,734 ) (920,208 ) 235,044
income
Gain (loss) on foreign
currency transactions (24,728 ) 2,766
-------------- -------------- --------------- ---------------
(3,702,305 ) (547,968 ) (920,208 ) 235,044
-------------- -------------- --------------- ---------------
Income (loss) before income taxes (25,517,297 ) 3,312,382 24,581,985 16,744,204
Income taxes (credit) (3,620,911 ) 1,261,389 9,633,737 6,947,499
-------------- -------------- --------------- ---------------
Net income (loss) ($ ) $2,050,993 $14,948,248 $ 9,796,705
21,896,386
============== ============== =============== ===============
Basic earnings (loss) per share ($2.09 ) $.20 $1.43 $1.11
Weighted average number of common
shares outstanding 10,499,305 10,496,225 10,484,764 8,787,334
Diluted earnings (loss) per share ($2.09 ) $.19 $1.37 $1.07
Weighted average number of common
and common equivalent shares
outstanding 10,499,305 10,951,447 10,942,146 9,151,903
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
Year Ended December 31, 2000, Two Months Ended December 31, 1999
and Years Ended October 31, 1999 and 1998
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Retained
------------
Shares Amount Loss Capital Earnings
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
Net income
Translation adjustment 43,466 2,050,993
-------------- ------------- ------------------ ---------------- --------------
Balance, December 31, 1999 10,496,225 524,811 (52,764) 93,473,301 30,151,281
Exercise of stock options 3,426 171 42,779
Translation adjustment (180,867)
Net loss (21,896,386)
-------------- ------------- ------------------ ---------------- --------------
Balance, December 31, 2000 10,499,651 $524,982 ($233,631) $93,516,080 $8,254,895
============== ============= ================== ================ ==============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Year Ended December 31, 2000, Two Months Ended December 31, 1999
and Years Ended October 31, 1999 and 1998
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
2000 1999 1999 1998
------------- -------------- --------------- --------------
Net income (loss) ($21,896,386 ) $2,050,993 $14,948,248 $9,796,705
Foreign currency translation adjustment (180,867 ) 43,466 (96,230 )
------------- -------------- --------------- --------------
Comprehensive income (loss) ($22,077,253 ) $2,094,459 $14,852,018 $9,796,705
============= ============== =============== ==============
The accompanying notes are an integral part of
these financial statements.
F-5
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2000, Two Months Ended December 31, 1999
and Years Ended October 31, 1999 and 1998
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
2000 1999 1999 1998
-------------- -------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) ($21,896,386 ) $2,050,993 $14,948,248 $9,796,705
-------------- -------------- -------------- --------------
Adjustments to reconcile net Income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,648,139 655,041 3,048,332 1,454,416
Provision for allowances on accounts
Receivable 861,000 12,000 516,000 170,000
Restructuring and unusual charge 38,806,712
Changes in assets and liabilities:
Accounts receivable 1,761,114 4,724,919 (31,227,328 ) (15,999,964 )
Income tax refund receivable (7,417,258 )
Deferred tax asset (1,449,518 )
Prepaid expenses and other
current assets (1,148,515 ) (77,902 ) (1,979,496 ) (526,544 )
Accounts payable and accrued expenses 8,052,333 (3,551,439 ) 5,180,268 1,886,688
Accrued payroll 952,494 (3,903,028 ) 4,037,617 1,003,963
Payroll and withheld taxes 42,563 265,715 (626,395 ) 964,839
Income taxes payable 1,501,695 (1,524,677 ) 2,258,862 (931,077 )
-------------- -------------- -------------- --------------
Total adjustments 48,610,759 (3,399,371 ) (18,792,140 ) (11,977,679 )
-------------- -------------- -------------- --------------
Net cash provided by (used in) operating
activities $26,714,373 ($1,348,378 ) ($ 3,843,892 ) ($2,180,974 )
-------------- -------------- -------------- --------------
The accompanying notes are an integral part of
these financial statements.
F-6
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31, 2000, Two Months Ended December 31, 1999
and Years Ended October 31, 1999 and 1998
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
2000 1999 1999 1998
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Property and equipment acquired ($1,721,434 ) ($ 333,902 ) ($3,829,995 ) ($ )
796,905
Increase in deposits (17,634 ) (4,393 ) (55,609 ) (51,727 )
Cash paid for acquisitions,
net of cash acquired (25,692,538 ) (2,371,937 ) (54,098,883 ) (25,964,323 )
-------------- -------------- -------------- --------------
Net cash used in investing activities (27,431,606 ) (2,710,232 ) (57,984,487 ) (26,812,955 )
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Net repayments under
short term debt arrangements (2,000,000 )
Borrowings long-term debt 6,500,000 40,800,000
Exercise of warrants
2,273,278
Sale of common stock 49,291,445
Exercise of stock options 42,950 478,025 698,714
-------------- -------------- -------------- --------------
Net cash provided by financing activities 42,950 6,500,000 41,278,025 50,263,437
-------------- -------------- -------------- --------------
Effect of exchange rate changes on cash
and cash equivalents (180,867 ) 43,466 (96,230 )
-------------- -------------- -------------- --------------
Net increase (decrease) in cash
and cash equivalents (855,150 ) 2,484,856 (20,646,584 ) 21,269,508
Cash and cash equivalents at beginning of year 4,025,808 1,540,952 22,187,536 918,028
-------------- -------------- -------------- --------------
Cash and cash equivalents at end of year $3,170,658 $4,025,808 $1,540,952 $22,187,536
============== ============== ============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $4,215,266 $ 613,492 $ 786,064 $ 422,579
Income taxes 4,831,496 3,005,006 7,374,875 7,878,576
Acquisitions:
Fair value of assets acquired 40,506,867 2,371,937 64,365,991 28,794,018
Liabilities assumed 14,814,329 10,267,108 2,829,695
-------------- -------------- -------------- --------------
Cash paid, net of cash acquired $25,692,538 $2,371,937 $54,098,883 $25,964,323
============== ============== ============== ==============
The accompanying notes are an integral part of
these financial statements.
F-7
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
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 end to end technology
solutions designed to enhance and maximize the business performance of its
customers through the adaptation and deployment of advanced information and
engineering technologies to 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 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.
Change in Reporting Year
In January 2000, the Company changed its fiscal year end from October 31 to
December 31. As a result of this change, the two months ended December 31,
1999 are presented as a transitional period.
Change in Accounting Estimate
Effective January 1, 2000, the Company has changed the amortization period
of goodwill associated with acquisitions from 40 years to 20 years. This
change had the effect of increasing goodwill amortization and reducing net
income by approximately $2,747,000, or $.26 on a diluted earnings per share
basis, for the year ended December 31, 2000.
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 the years ended December 31, 2000 and October 31, 1999, the Company
capitalized approximately $506,000 and $2,045,000, 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.
F-8
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and
October 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
Revenue is recognized concurrently with the performance of services.
Unbilled receivables represent employee hours worked according to
contractual billing rates.
Cash Equivalents
For purposes of presenting the consolidated statement of cash flows, the
Company considers all highly liquid debt instruments purchased with
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, at December 31, 2000 and 1999 was
$88,655,000 and $103,169,000, respectively, and is being amortized on a
straight-line method over twenty years effective January 1, 2000. The
amortization period prior to January 1, 2000 was 40 years. Amortization
expense for the years ended December 31, 2000, October 31, 1999 and 1998
was $5,494,000, $2,156,000 and $1,018,000, respectively. Amortization
expense for the two months ended December 31, 1999 was $468,000.
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 that are in excess of estimated undiscounted future
cash flows, then the intangible assets are adjusted for impairment to a
level commensurate with an undiscounted cash flow analysis of the
underlying assets. During the third quarter of calendar 2000, the Company
performed an impairment review of goodwill in accordance with the
requirements of SFAS No. 121. This review indicated that there was an
impairment of value, which resulted in a $35.3 million charge to expense in
order to properly reflect the appropriate carrying value of goodwill. There
were no impairment write-downs during the years ended October 31, 1999 and
1998 or during the two months ended December 31, 1999.
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.
Foreign Currency
For foreign subsidiaries using the local currency as their functional
currency, assets and liabilities are translated at exchanges rates in
effect at the balance sheet date and income and expenses are translated at
average exchange rates. The effects of these translation adjustments are
reported in other comprehensive income. Exchange gains and losses arising
from transactions denominated in a currency other than the functional
currency of the entity involved are included in income.
F-9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Per Share Data
Basic net income per share is calculated using the weighted-average number
of common shares outstanding during the period. Diluted net income per
share is calculated using the weighted-average number of common shares plus
dilutive potential common shares outstanding during the period. Potential
common shares consist of stock options that are computed using the treasury
stock method. Dilutive securities have not been included in the weighted
average shares used for the calculation of earnings per share in periods of
net loss because the effect of such securities would be anti-dilutive.
Because of the Company's capital structure, all reported earnings pertain
to common shareholders and no other assumed adjustments are necessary.
The number of common shares used to calculate basic and diluted earnings
per share was determined as follows:
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October October
2000 1999 31, 1999 31, 1998
--------------- ----------------- ------------ -----------
Basic average shares outstanding 10,499,305 10,496,225 10,484,764 8,787,334
Dilutive effect of stock options 455,222 457,382 364,569
--------------- ----------------- ------------ -----------
Dilutive shares 10,499,305 10,951,447 10,942,146 9,151,903
=============== ================= ============ ===========
Options to purchase 691,974 shares of common stock at prices ranging from
$10.63 to $20.13 per share were outstanding during the year ended December
31, 2000, but were not included in the computation of diluted EPS because
of net loss incurred in 2000.
Options to purchase 271,650 shares of common stock at prices ranging from
$14.13 to $20.13 per share were outstanding during the two months ended
December 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 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.
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" ("APB 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).
F-10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
2. UNUSUAL ITEMS
In the third quarter of 2000, the Company recorded the following unusual
items:
In Millions
Impairment of goodwill $35.3
Restructuring charge 1.4
Other nonrecurring charges 2.1
-------
$38.8
=======
The income before income taxes, net income and earnings per share on a
diluted basis, for the year ended December 31, 2000 without the unusual
items and its related tax effect would have been $13.3 million, $6.7
million and $.63 per share, respectively.
Impairment of Goodwill
During the third quarter of 2000, the Company performed an impairment
review of goodwill in accordance with the requirements of SFAS No. 121.
This review indicated that there was an impairment of value, which
resulted in $35.3 million charge to expense in order to properly reflect
the appropriate carrying value of goodwill.
Restructuring Charge
The restructuring charge of $1.4 million consists of expenses associated
with the consolidation of certain offices principally lease obligations
for vacated offices as well as a write down of leasehold improvements
and office equipment for closed offices to its net realizable values.
Other Non-Recurring Charges
The non-recurring charge of $2.1 million consists of expenses associated
with integration of employee benefit plans and vacation plans, which were
assumed in connection with the Company's previously, completed
acquisitions.
3. SALE OF COMMON STOCK
On June 3, 1998, the Company completed a public offering of 2,700,000
shares of Common Stock, of which the Company sold 2,509,980 shares and
certain selling stockholders offered 190,020 shares. 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.
4. ACQUISITIONS
During the three year and 2 month period ended December 31, 2000, the
Company acquired 24 businesses in the staffing and consulting services
industry. These acquisitions 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.
F-11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
4. ACQUISITIONS (CONTINUED)
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
---------------- ---------------
2001 $7,283,000
2002 9,149,000
2003 4,000,000
---------------
$20,432,000
===============
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:
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
2000 1999 1999 1998
----------------- ------------------ --------------- ---------------
Number of acquisitions 3 14 7
Consideration paid:
Cash at closing $10,375,000 $46,028,000 $22,625,000
Deferred consideration payments $13,800,000 $34,095,000 $15,100,000
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 Year Ended
December 31, October 31,
2000 1999
---------------- ----------------
Revenues $300,501,000 $362,777,000
Operating income before unusual items $18,554,000 $32,893,000
Unusual items ($ 38,807,000)
Net income (loss) ($ 21,101,000) $17,456,000
Earnings (loss) per share ($2.01) $1.60
F-12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
December 31,
--------------------------------
2000 1999
------------- ------------
Equipment and furniture $3,525,992 $4,026,101
Computer equipment and software 6,626,559 5,622,304
Leasehold improvements 85,929 141,591
------------- ------------
10,238,480 9,789,996
Less: accumulated depreciation and amortization 4,079,857 3,151,626
------------- ------------
$6,158,623 $6,638,370
============= ============
6. GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles consist of the following:
December 31,
---------------------------------
2000 1999
------------- --------------
Goodwill $96,070,746 $107,143,044
Other intangibles 462,900 462,900
------------- --------------
96,533,646 107,605,944
Less: accumulated amortization 7,878,186 4,437,000
------------- --------------
$88,655,460 $103,168,944
============= ==============
7. LONG TERM DEBT
The Company and its subsidiaries entered into an agreement with Mellon Bank
N.A., administrative agent for a syndicate of banks, which provides for a
$75.0 million Revolving Credit Facility (the "Revolving Credit Facility").
The Revolving Credit Facility was amended on September 18, 2000. Borrowings
under the Revolving Credit Facility bear interest one of two alternative
rates, as selected by the Company. These alternatives are: LIBOR (London
Interbank Offered Rate), plus applicable margin, or the agent bank's prime
rate.
Borrowings under the Revolving Credit Facility are collateralized by all of
the assets of the Company and its subsidiaries and a pledge of all of the
stock of its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants, such as restrictions on the
Company's ability to pay dividends. The Revolving Credit Facility expires
August 2002. The weighted average interest rate at December 31, 2000 was
8.33%. The amounts outstanding under the Revolving Credit Facility at
December 31, 2000 and 1999 were $47.3 million and $47.3 million,
respectively.
F-13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
8. SHAREHOLDERS' EQUITY
Common Shares Reserved
Shares of unissued common stock were reserved for the following purposes:
December 31,
-------------------------------
2000 1999
------------- -------------
Exercise of options outstanding 2,039,539 1,359,170
Future grants of options 1,175,906 358,300
------------- -------------
Total 3,215,445 1,717,470
============= =============
Incentive Stock Option Plans
On April 27, 2000, the shareholders approved the adoption of the RCM
Technologies, Inc. 2000 Employee Stock Incentive Plan. At December 31,
2000, there were 1,500,000 shares of Common Stock reserved under the plan
for issuance not later than January 6, 2010 to officers and key employees
of the Company and its subsidiaries.
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 December 31, 2000, there were 1,194,825 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 December 31, 2000, there were 410,620 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 Nonemployee Director Option
Plan as a means of recruiting and retaining nonemployee directors of the
Company. At December 31, 2000, 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
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
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 Two Months Year Ended Year Ended
December 31, Ended October 31, October 31,
2000 December 31, 1999 1998
1999
---------------- -------------------------------- ---------------
Net (loss) earnings:
As reported ($21,896,386) $2,050,993 $14,948,248 $9,796,705
Pro forma ($22,600,103) $2,050,993 $11,869,395 $8,096,746
Diluted (loss) earnings per share:
As reported ($2.09) $.19 $1.37 $1.07
Pro forma ($2.15) $.19 $1.08 $.92
These proforma 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
2000, 1999 and 1998, respectively: expected volatility of 70%, 70% and 30%;
respectively risk-free interest rates of 5.91%, 5.10% and 5.14%; and
expected lives of 5 years. The weighted-average fair value of options
granted during fiscal years 2000, 1999 and 1998 was $4.22, $8.51 and $4.38,
respectively.
Transactions related to all stock options are as follows:
Year Weighted- Year Weighted- Year Weighted-
Ended Average Ended Average Ended Average
December 31, Exercise October 31, Exercise October 31, Exercise
2000 Price 1999 Price 1998 Price
-------------- ----------- ------------- ---------- ------------ -----------
Outstanding options
at beginning of year 1,359,170 $10.23 1,021,420 $8.86 1,087,400 $7.46
Granted 791,974 7.03 437,500 13.90 239,500 11.23
Forfeited (108,179 ) 12.54 (51,050 ) 11.41 (103,350 ) 10.13
Exercised (3,426 ) 12.54 (48,700 ) 9.82 (202,130 ) 3.46
-------------- ------------- ------------
Outstanding options
at end of year 2,039,539 $8.85 1,359,170 $10.23 1,021,420 $8.86
============== ============= ============
Exercisable options
at end of year 1,367,795 1,159,170 1,012,420
============== ============= ============
Option grant price
per share $3.00 $5.16 $3.44
to $20.13 to $20.13 to $14.50
F-15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
8. SHAREHOLDERS' EQUITY (CONTINUED)
Incentive Stock Option Plans (Continued)
The following table summarizes information about stock options outstanding
at December 31, 2000:
Weighted-Average
Range of Number of Remaining Weighted-Average
Exercise Outstanding Contractual Life Exercise Price
Prices Options
--------------- --------------------------------------------------------- -------------------------
$ 3.00 - $ 4.50 229,000 9.9 years $ 3.13
$ 4.75 - $ 7.13 756,475 7.2 years $ 6.32
$ 7.31 - $10.97 346,340 6.7 years $10.00
$11.25 - $16.88 704,724 8.4 years $12.81
$20.13 3,000 7.9 years $20.13
Employee Stock Purchase Plan
On December 4, 2000 the Board of Directors of the Company approved, subject
to further stockholder approval, an Employee Stock Purchase Plan (the
"Purchase Plan"). Under the Purchase Plan, employees meeting certain
specific employment qualifications are eligible to participate and can
purchase shares of Common Stock semi-annually through payroll deductions at
the lower of 85% of the fair market value of the stock at the commencement
or end of the offering period. The purchase plan permits eligible employees
to purchase common stock through payroll deductions for up to 10% of
qualified compensation. As of December 31, 2000, 500,000 shares were
available for issuance under the purchase plan.
9. RETIREMENT PLANS
Profit Sharing Plan
The Company maintains a 401(k) profit sharing plan for the benefit of
eligible employees. The 401(k) plan includes a cash or deferred arrangement
pursuant to Section 401(k) of the Internal Revenue Code sponsored by the
Company to provide eligible employees an opportunity to defer compensation
and have such deferred amounts contributed to the 401(k) plan on a pre-tax
basis, subject to certain limitations. The Company may, at the discretion
of the Board of Directors, make contributions of cash to match deferrals of
compensation by participants. Contributions charged to operations by the
Company for years ended December 31, 2000 and October 31, 1999 and 1998
were $694,000, $329,000 and $89,000, respectively. Contributions charged to
operations for the two months ended December 31, 1999 were $72,000.
Nonqualified Defined Compensation Plan
On December 4, 2000 the Board of Directors of the Company approved a
nonqualified deferred compensation plan for officers and certain other
management employees. The plan allows for compensation deferrals for its
participants and a discretionary company contribution, subject to approval
of the Board of Directors.
F-16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
10. 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), then the following
provisions take effect: the Company is obligated to pay Mr. Kopyt a lump
sum equal to his salary and bonus for the remainder of the Extended Term;
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 December 31, 2000, Mr. Kopyt would have been entitled
to cash payments of approximately $4.8 million (representing salary and
excise tax payments).
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 December 31, Amount
------------------------ -------------
2001 $2,532,000
2002 1,769,000
2003 1,110,000
2004 863,000
2005 414,000
Thereafter 512,000
-------------
Total $7,200,000
=============
Rent expense for the years ended December 31, 2000, October 31, 1999 and
October 31, 1998 was $3,175,000, $2,440,000 and $1,456,000, respectively.
Rent expense for the two months ended December 31, 1999 was $488,000.
11. RELATED PARTY TRANSACTIONS
A director of the Company is a shareholder in a law firm that rendered
various legal services to the Company. Fees paid to the law firm have not
been significant.
F-17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
12. INCOME TAXES
The components of income tax expense (credit) are as follows:
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
2000 1999 1999 1998
----------------- ----------------- --------------- ----------------
Current
Federal ($1,846,000) $920,089 $7,098,737 $5,204,332
State and local (325,393) 341,300 2,535,000 1,743,167
----------------- ----------------- --------------- ----------------
(2,171,393) 1,261,389 9,633,737 6,947,499
----------------- ----------------- --------------- ----------------
Deferred
Federal (1,297,000)
State and local (152,518)
----------------- ----------------- --------------- ----------------
(1,449,518)
----------------- ----------------- --------------- ----------------
Total ($3,620,911) $1,261,389 $9,633,737 $6,947,499
================= ================= =============== ================
The income tax provisions reconciled to the tax computed at the statutory
Federal rate was:
2000 1999 1998
------------ ------------ ------------
Tax at statutory rate (credit) (34.0)% 34.0% 34.0%
State income taxes, net of Federal
income tax benefit 6.7 6.8
Foreign income tax effect 1.9 3.4
Non-deductible unusual charges 20.3
Other, net (2.4) (4.9) .7
------------ ------------ ------------
Total income tax expense (14.2)% 39.2% 41.5%
============ ============ ============
At December 31, 2000 and 1999, deferred tax assets consist of the
following:
2000 1999
-------------- ------------
Unusual charges $2,199,884
Allowance for doubtful accounts 712,500 $375,180
-------------- ------------
2,192,384 375,180
Less: valuation allowance (1,462,686 ) (375,180 )
-------------- ------------
$1,449,518 $
============== ============
13. INTEREST EXPENSE, NET OF INTEREST INCOME
Interest expense, net of interest income consisted of the following:
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
2000 1999 1999 1998
---------------- ----------------- -------------- --------------
Interest expense ($3,992,911 ) ($574,320 ) ($1,197,236 ) ($422,579 )
Interest income 315,334 23,586 277,028 657,623
---------------- ----------------- -------------- --------------
($3,677,577 ) ($550,734 ) ($ 920,208 ) $235,044
================ ================= ============== ==============
F-18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
14. SEGMENT INFORMATION
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS 131"), which establishes standards for
companies to report information about operating segments, geographic areas
and major customers. The adoption of SFAS 131 has no effect on the
Company's consolidated financial position, consolidated results of
operations or liquidity. The accounting policies of each segment are the
same as those described in the summary of significant accounting policies
(see Note 1).
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling, general
and administrative expenses directly attributable to that segment as well
as charges for allocating corporate costs to each of the operating
segments. The following tables reflect the results of the segments
consistent with the Company's management system (in thousands):
Information Professional Commercial
Fiscal 2000 Technology Engineering Services Corporate Total
---------------- --------------- ---------------- --------------- ----------------
Revenue $228,025 $40,993 $26,983 $296,001
Operating expenses 207,894 38,559 25,908 272,361
---------------- --------------- ---------------- --------------- ----------------
EBITDA (a) 20,131 2,434 1,075 23,640
Unusual charges 36,913 1,894 38,807
Depreciation 848 277 29 1,154
Amortization 4,821 630 43 5,494
---------------- --------------- ---------------- --------------- ----------------
Operating income (loss) ($ 22,451) ($ 367) $1,003 ($ 21,815)
================ =============== ================ =============== ================
Total assets $131,414 $17,591 $6,433 $18,831 $174,269
Capital expenditures $827 $205 $56 $633 $1,721
Two Months Ended Information Professional Commercial
December 1999 Technology Engineering Services Corporate Total
---------------- --------------- ---------------- --------------- ----------------
Revenue $39,231 $8,286 $3,880 $51,397
Operating expenses 35,301 7,843 3,738 46,882
---------------- --------------- ---------------- --------------- ----------------
EBITDA (a) 3,930 443 142 4,515
Depreciation 137 48 2 187
Amortization 388 77 3 468
---------------- --------------- ---------------- --------------- ----------------
Operating income $3,405 $ 318 $ 137 $3,860
================ =============== ================ =============== ================
Total assets $148,811 $17,349 $6,338 $11,453 $183,951
Capital expenditures $334 $334
F-19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
14. SEGMENT INFORMATION (CONTINUED)
Information Professional Commercial
Fiscal 1999 Technology Engineering Services Corporate Total
-------------- -------------- -------------- -------------- --------------
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
Information Professional Commercial
Fiscal 1998 Technology Engineering Services Corporate Total
-------------- -------------- -------------- -------------- --------------
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
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
(a) EBITDA consists of earnings before interest income, interest expense,
other non-operating income and expense, income taxes, depreciation and
amortization and unusual charges. 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-20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
14. SEGMENT INFORMATION (CONTINUED)
The following reconciles consolidated operating income to the Company's
pretax profit (in thousands):
Two Months
Year Ended Ended December Year Ended Year Ended
December 31, 31, 1999 October 31, October 31,
2000 1999 1998
---------------- ---------------- -------------- ---------------
Consolidated operating income (loss) ($21,815) $3,860 $25,502 $16,509
Interest (expense), net of interest income (3,702) (548) (920) 235
---------------- -------------------------------- ---------------
Consolidated pretax profit (loss) ($25,517) $3,312 $24,582 $16,744
================ ================ ============== ===============
The Company derives a substantial majority of its revenue from companies
headquartered in the United States. In fiscal 1998, 1999 and 2000, no
single customer exceeded 10% of the Company's revenue. Revenues from
Canadian operations for the year ended December 31, 2000 and October 31,
1999 were $16.4 million and $14.8 million, respectively. Revenues from
Canadian operations for the two months ended December 31, 1999 were $3.4
million. There were no Canadian revenues in 1998.
15. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended December 31, 2000
Diluted
Gross Net Net Income
Sales Profit Income (Loss) Per Share (a)
------------------- ----------------- ------------------- ----------------
1st Quarter $74,945,490 $19,039,291 $1,057,890 $ .10
2nd Quarter 75,989,896 19,603,598 1,340,515 .13
3rd Quarter 73,656,343 20,223,806 (26,417,054 ) (2.52)
4th Quarter 71,409,547 19,618,921 2,122,263 .20
------------------- ----------------- ------------------- ----------------
Total $296,001,276 $78,485,616 ($21,896,386 ) ($2.09)
=================== ================= =================== ================
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
==================== ================== ================== ================
(a) Total of quarterly amounts does not agree to the annual amount due to
separate quarterly calculations of weighted average shares outstanding.
F-21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 and 1999, October 31, 1999 and October 31, 1998
16. 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 did not have a material impact
on the Company's financial statements.
17. CONTINGENCIES
The Company has received claims and notices of possible claims from various
persons from whom the Company acquired stock or assets in four separate
acquisitions that occurred during 1998. Such claims and possible claims are
not related. These claims and possible claims relate to allegations of
wrongful termination and failure of the Company to pay deferred
consideration under the relevant acquisition agreements. In the opinion of
management, the Company has meritorious defenses to such claims and does
not believe that the resolution of such claims should have a material
adverse effect on the Company, its financial position, its results of
operations or its cash flows.
In addition, 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 and ultimate divestiture 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. In the suit,
the plaintiffs seek damages of approximately $480,000 plus other
unspecified amounts. The claims relating to wrongful termination of
employment and wrongful conduct by the Company in connection with the grant
of Stock Options to the plaintiffs have been submitted to binding
arbitration; closing arguments in that proceeding are scheduled for March
30, 2001. In addition, the Company is currently awaiting the court's
decision on the Company's summary judgment motion addressing the plaintiffs
claims with respect to its allegedly wrongful limiting the number of shares
the plaintiffs could sell. The Company will shortly be seeking a summary
judgment from the court with respect to the plaintiffs claims concerning
allegedly wrongful conduct by the Company in connection with the
divestiture of the plaintiffs' stock options. Management believes the suit
is without merit and has defended the claims vigorously.
F-22
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 December 31,
2000 and 1999 and the related consolidated statements of operations, changes in
shareholders' equity, comprehensive income (loss) and cash flows for year ended
December 31, 2000, the two months ended December 31, 1999, and for the years
ended October 31, 1999 and October 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
RCM Technologies, Inc. and Subsidiaries as of December 31, 2000 and 1999 and the
consolidated results of their operations and their cash flows for year ended
December 31, 2000, for the two months ended December 31, 1999, and the years
ended October 31, 1999 and 1998 in conformity with accounting principles
generally accepted in the United States.
We have also audited Schedules I and II of RCM Technologies, Inc. and
Subsidiaries as of year ended December 31, 2000, as of and for the two months
ended December 31, 1999, and the years ended October 31, 1999 and 1998. In our
opinion, these schedules present fairly, in all material respects, the
information required to be set forth therein.
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
February 2, 2001
F-23
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
December 31, 2000 and 1999
ASSETS
2000 1999
--------------- ----------------
Current assets
Cash $ $ 8,850
Prepaid expenses and other assets 62,440 5,469
--------------- ----------------
Total current assets 62,440 14,319
--------------- ----------------
Other assets
Deposits 5,695 5,695
Long-term receivables from affiliates 102,046,691 124,190,682
--------------- ----------------
102,052,386 124,196,377
--------------- ----------------
Total assets $102,114,826 $124,210,696
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
2000 1999
--------------- ----------------
Current liabilities
Accounts payable and accrued expenses $ 52,500 $ 114,068
--------------- ----------------
Shareholders' equity
Common stock 524,982 524,811
Foreign currency translation adjustment (233,631) (52,764)
Additional paid in capital 93,516,080 93,473,300
Retained earnings 8,254,895 30,151,281
--------------- ----------------
Total shareholders' equity 102,062,326 124,096,628
--------------- ----------------
Total liabilities and shareholders' equity $102,114,826 $124,210,696
=============== ================
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 OPERATIONS
Year Ended December 31, 2000, Two Months Ended December 31, 1999
and Years Ended October 31, 1999 and 1998
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
2000 1999 1999 1998
---------------- ---------------- -------------- --------------
Operating expenses
Administrative $ 534,662 $ 9,044 $ 244,660 $ 210,317
---------------- ---------------- -------------- --------------
Operating loss (534,662) (9,044) (244,660) (210,317)
Management fee income 534,662 9,044 244,660 210,317
---------------- ---------------- -------------- --------------
Income before income in subsidiaries
Equity in (shares in) earnings (loss) in
subsidiaries (21,896,386) 2,050,993 14,948,248 9,796,705
---------------- ---------------- -------------- --------------
Net income (loss) ($21,896,386) $2,050,993 $14,948,248 $9,796,705
================ ================ ============== ==============
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-25
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
Year Ended December 31, 2000, Two Months Ended December 31, 1999
and Years Ended October 31, 1999 and 1998
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October 31,
2000 1999 1999 1998
---------------- ---------------- -------------- -------------
Cash flows from operating activities:
Net income (loss) ($21,896,386) $2,050,993 $14,948,248 $9,796,705
---------------- ---------------- -------------- -------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Share in deficiency in assets of subsidiaries 21,896,386 (2,050,993) (14,948,248) (9,796,705)
Changes in operating assets and liabilities:
Prepaid expenses and other assets (56,971) 3,710 686 (8,264)
Accounts payable and accrued expenses (61,568) 50,072 46,234 (26,008)
---------------- ---------------- -------------- -------------
21,777,847 (1,997,211) (14,901,328) (9,830,977)
---------------- ---------------- -------------- -------------
Net cash provided by (used in)
operating activities (118,539) 53,782 46,920 (34,272)
---------------- ---------------- -------------- -------------
Cash flows from investing activities:
Decrease (increase) in long-term
receivables from subsidiaries 247,605 (89,079) (430,103) (52,256,899)
---------------- ---------------- -------------- -------------
Net cash provided by (used in) investing
activities 247,605 (89,079) (430,103) (52,256,899)
---------------- ---------------- -------------- -------------
Cash flows from financing activities:
Sale of common stock 49,291,445
Exercise of warrants 2,273,278
Exercise of stock options 42,951 478,025 698,714
---------------- ---------------- -------------- -------------
Net cash provided by financing activities 42,951 478,025 52,263,437
---------------- ---------------- -------------- -------------
Effect of exchange rate changes on cash and
cash equivalents (180,867) 43,466 (96,230)
---------------- ---------------- -------------- -------------
Net increase (decrease) in cash and equivalents (8,850) 8,169 (1,388) (27,734)
Cash and equivalents at beginning of year 8,850 681 2,069 29,803
---------------- ---------------- -------------- -------------
Cash and equivalents at end of year $ $ 8,850 $ 681 $ 2,069
================ ================ ============== =============
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-26
SCHEDULE II
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Year Ended December 31, 2000, Two Months Ended December 31, 1999
and Years Ended October 31, 1999 and 1998
Column A Column B Column C Column D Column E
- -------------------------------------------- ------------- ------------------------------ ------------- -------------
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deduction Period
- -------------------------------------------- ------------- ------------- ------------- ------------- -------------
Year Ended December 31, 2000
Allowance for doubtful
accounts on trade
receivables $1,014,000 $1,101,000 $240,000 $1,875,000
Two Months Ended December 31, 1999
Allowance for doubtful
accounts on trade
receivables $1,002,000 $53,000 $41,000 $1,014,000
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
F-27
EXHIBIT INDEX
(11) Computation of Earnings Per Share.
(21) Subsidiaries.
(23) Consent of Grant Thornton, LLP.
EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Year Ended December 31, 2000, Two Months Ended December 31, 1999
and Years Ended October 31, 1999 and 1998
Two Months
Year Ended Ended Year Ended Year Ended
December 31, December 31, October 31, October
2000 1999 1999 31,
1998
-------------- -------------- ------------ -----------
Diluted earnings
Net income (loss) applicable to
common stock ($21,896,386 ) $2,050,993 $14,948,248 $9,796,705
============== ============== ============ ===========
Shares
Weighted average number of common
shares outstanding 10,499,305 10,496,225 10,484,764 8,787,334
Common stock equivalents 455,222 457,382 364,569
-------------- -------------- ------------ -----------
Total 10,499,305 10,951,447 10,942,146 9,151,903
============== ============== ============ ===========
Diluted earnings (loss) per common share ($2.09 ) $.19 $1.37 $1.07
============== ============== ============ ===========
Basic
Net income (loss) applicable to common
stock ($21,896,386 ) $2,050,993 $14,948,248 $9,796,705
============== ============== ============ ===========
Shares
Weighted average number of common
shares outstanding 10,499,305 10,496,225 10,484,764 8,787,334
============== ============== ============ ===========
Basic earnings (loss) per common share ($2.09 ) $.20 $1.43 $1.11
============== ============== ============ ===========
EXHIBIT 21
SUBSIDIARIES
Application Solutions Corp.
Business Support Group of Michigan, Inc.
Can-Nuke Technologies Limited*
Cataract, Inc.
Constellation Integration Services Company *
Discovery Consulting Solutions, Inc.
Global Technology Solutions, Inc.
Management Systems Integrators, Inc.
Mu-Sigma Engineering Consultants Company *
Northern Technical Services, Inc.
Pinnacle Consulting Services, Inc.
Procon, Inc.
Programming Alternatives of Minnesota, Inc.
RCM Technologies (USA), Inc.
RCMT Delaware, Inc.
RCMT Nova Scotia Company *
RCMT Canada Company *
Software Analysis & Management, Inc.
Solutions Through Data Processing, Inc.
* Effective January 1, 2001, the subsidiaries indicated by an * were merged into
RCM Technologies Canada Corp.
EXHIBIT 23
Consent of Independent Certified Public Accountants
Board of Directors
RCM Technologies, Inc.
We have issued our report dated December 15, 2000 accompanying the consolidated
financial statements and schedules included in the Annual Report of RCM
Technologies, Inc. and Subsidiaries on Form 10-K for the year ended December 31,
2000. 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, File No. 33-80590, effective June
22, 1994, File No. 333-52206, effective December 19, 2001 and File No.
333-52480, effective December 21, 2000.)
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
February 2, 2001