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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10245
RCM TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
Nevada 95-1480559
(State of Incorporation) (I.R.S. Employer Identification No.)
2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
(Address of Principal Executive Offices) (Zip Code)
(856) 486-1777
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of the Registrant's common stock, as
of the latest practicable date.
Common Stock, $0.05 par value, 10,598,614 shares outstanding
as of October 30, 2002.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2002 (Unaudited)
and December 31, 2001 3
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Nine-Month Periods Ended September 30, 2002 and 2001 5
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Three-Month Periods Ended September 30, 2002 and 2001 7
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Nine-Month Period Ended September 30, 2002 9
Unaudited Consolidated Statements of Cash Flows for the Nine-
Month Periods Ended September 30, 2002 and 2001 10
Notes to Unaudited Consolidated Financial Statements 12
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 19
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 28
Item 4 - Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 29
Item 6 - Exhibits and Reports on Form 8-K 29
Certification 30
Signatures 32
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
ASSETS
September 30, December 31,
2002 2001
--------------- ---------------
(Unaudited)
Current assets
Cash and cash equivalents $ 4,547,403 $ 2,289,743
Accounts receivable, net of allowance for doubtful accounts
of $1,601,000 and $1,795,000, respectively 34,759,669 41,174,828
Income tax refund receivable 6,810,093
Prepaid expenses and other current assets 3,076,992 2,968,612
Deferred tax assets 533,201 5,600,000
--------------- ---------------
Total current assets 42,917,265 58,843,276
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 10,636,150 11,131,750
Less: accumulated depreciation and amortization 4,299,444 4,282,985
--------------- ---------------
6,336,706 6,848,765
--------------- ---------------
Other assets
Deposits 110,648 175,691
Goodwill, net of accumulated amortization
of $10,090,500 and $10,478,600 respectively 66,256,608 62,499,000
Intangible assets, net of accumulated amortization
of $206,000 and $190,400 respectively 104,832 120,400
Deferred tax assets 2,668,813
--------------- ---------------
66,472,088 65,463,904
--------------- ---------------
Total assets $115,726,059 $131,155,945
=============== ===============
3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
September 30, 2002 and December 31, 2001
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2002 2001
---------------- ---------------
(Unaudited)
Current liabilities
Note payable $ 9,230,000 $31,500,000
Accounts payable and accrued expenses 7,450,374 8,653,876
Accrued payroll 6,504,449 5,137,336
Payroll and withheld taxes 399,571 375,784
Income taxes payable 3,539,273 2,199,149
---------------- ---------------
Total current liabilities 27,123,667 47,866,145
---------------- ---------------
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; 10,598,614 and
10,571,761 shares issued and outstanding
at September 30, 2002 and December 31, 2001, respectively 529,931 528,588
Accumulated other comprehensive loss ( 496,950) ( 484,283)
Additional paid-in capital 93,846,137 93,746,569
Accumulated deficit ( 5,276,726) ( 10,501,074)
---------------- ---------------
Total shareholders' equity 88,602,392 83,289,800
---------------- ---------------
Total liabilities and shareholders' equity $115,726,059 $131,155,945
================ ===============
4
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
---------------- ---------------
Revenues $133,014,345 $175,190,426
Cost of services 96,948,334 126,179,122
---------------- ---------------
Gross profit 36,066,011 49,011,304
---------------- ---------------
Operating costs and expenses
Selling, general and administrative 25,064,045 33,578,024
Depreciation 927,046 799,200
Amortization 15,543 4,815,996
---------------- ---------------
26,006,634 39,193,220
---------------- ---------------
Operating income 10,059,377 9,818,084
---------------- ---------------
Other expenses (income)
Interest expense, net of interest income 69,625 1,828,386
(Gain) loss on foreign currency transactions 34,780 ( 15,023)
---------------- ---------------
104,405 1,813,363
---------------- ---------------
Income from continuing operations before income taxes 9,954,972 8,004,721
Income taxes 3,766,212 4,744,079
---------------- ---------------
Income from continuing operations 6,188,760 3,260,642
Gain (loss) from discontinued operations, net of taxes of
$643,000 and $800, respectively ( 964,412) 1,214
---------------- ---------------
Net income 5,224,348 3,261,856
Other comprehensive loss
Foreign currency translation adjustment ( 12,667) ( 145,686)
---------------- ---------------
Comprehensive income $ 5,211,681 $ 3,116,170
================ ===============
5
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED)
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
---------------- ---------------
Basic earnings per share
Income from continuing operations $.58 $.31
Loss from discontinued operations .09
-- --- ----
Basic earnings per share $.49 $.31
==== ====
Weighted average number of common
shares outstanding 10,581,084 10,513,054
========== ==========
Diluted earnings per share
Income from continuing operations $.57 $.30
Loss from discontinued operations .09
-- --- ----
Diluted earnings per share $.48 $.30
==== ====
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to
options of 213,636 and 186,298 in 2002 and 2001, respectively) 10,794,720 10,699,352
========== ==========
6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
--------------- --------------
Revenues $43,743,213 $52,837,991
Cost of services 31,877,131 38,222,734
--------------- --------------
Gross profit 11,866,082 14,615,257
--------------- --------------
Operating costs and expenses
Selling, general and administrative 8,296,441 10,026,514
Depreciation 317,531 305,530
Amortization 5,181 1,449,442
--------------- --------------
8,619,153 11,781,486
--------------- --------------
Operating income 3,246,929 2,833,771
--------------- --------------
Other expenses (income)
Interest expense, net of interest income 100,721 512,757
(Gain) loss on foreign currency transactions 39,887 ( 4,874)
--------------- --------------
140,608 507,883
--------------- --------------
Income from continuing operations before income taxes 3,106,321 2,325,888
Income taxes 1,191,857 1,553,210
--------------- --------------
Income from continuing operations 1,914,464 772,678
Loss from discontinued operations, net of taxes of
$632,000 and $9,200, respectively 948,190 13,882
--------------- --------------
Net income 966,274 758,796
Other comprehensive income
Foreign currency translation adjustment 24,864 82,287
--------------- --------------
Comprehensive income $ 991,138 $ 841,083
=============== ==============
7
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED)
Three Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
--------------- --------------
Basic earnings per share
Income from continuing operations $.18 $.07
Loss from discontinued operations .09
--- ----
Basic earnings per share $.09 $.07
==== ====
Weighted average number of common shares outstanding 10,581,600 10,539,675
========== ==========
Diluted earnings per share
Income from continuing operations $.18 $.07
Loss from discontinued operations .09
--- ----
Diluted earnings per share $.09 $.07
==== ====
Weighted average number of common
and common equivalent shares outstanding and common equivalent
shares outstanding (includes dilutive securities relating to
options of 182,720 and 330,000 in 2002 and 2001, respectively) 10,764,321 10,869,675
========== ==========
8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 2002
(Unaudited)
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Retained
------------
Loss Capital Earnings Total
Shares Amount
Balance, January 1, 2002 10,571,761 $528,588 ($484,283) $93,746,569 ($10,501,074) $83,289,800
Issuance of stock under
stock purchase plan 25,948 1,297 98,084 99,381
Exercise of stock options 905 46 1,484 1,530
Translation adjustment ( 12,667) (
12,667)
Net income 5,224,348 5,224,348
---------- -------- ---------- ----------- ------------- -- ---------
Balance, September 30, 2002 10,598,614 $529,931 ($496,950) $93,846,137 ($5,276,726) $88,602,392
========== ======== ========== =========== =========== ===========
9
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001
(Unaudited)
2002 2001
--------------- --------------
Cash flows from operating activities:
Income from continuing operations $6,188,760 $3,260,642
--------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
(Gain) loss on discontinued operations 964,412 ( 1,212)
Depreciation and amortization 942,589 5,615,196
Provision for losses on accounts receivable ( 194,000) 15,000
Changes in assets and liabilities:
Accounts receivable 6,609,159 15,046,890
Income tax refund receivable 6,810,092 4,481,633
Deferred tax asset 7,735,613 ( 35,491)
Prepaid expenses and other current assets ( 1,216,287) 552,684
Accounts payable and accrued expenses ( 2,137,402) ( 3,511,834)
Accrued payroll 1,367,113 436,337
Payroll and withheld taxes 23,787 ( 592,114)
Income taxes payable 2,077,631 ( 590,010)
--------------- --------------
Total adjustments 22,982,707 21,417,079
--------------- --------------
Net cash provided by operating activities 29,171,467 24,677,721
--------------- --------------
10
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2002 and 2001 - (Continued)
(Unaudited)
2002 2001
--------------- --------------
Cash flows from investing activities:
Proceeds on sale of reporting unit 100,000
Property and equipment acquired ( $ 442,347) ( $1,620,002)
Decrease in deposits 65,043 39,049
Purchase of acquired companies including
contingent consideration, net of cash acquired ( 4,454,747) ( 8,595,963)
--------------- --------------
Net cash used in investing activities ( 4,732,051) ( 10,176,916)
--------------- --------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 99,381 104,747
Exercise of stock options 1,530
Repayments of note payable ( 22,270,000) ( 9,900,000)
--------------- --------------
Net cash used in financing activities ( 22,169,089) ( 9,795,253)
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents ( 12,667) ( 145,686)
--------------- --------------
Increase in cash and cash equivalents 2,257,660 4,559,866
Cash and cash equivalents at beginning of period 2,289,743 3,170,658
--------------- --------------
Cash and cash equivalents at end of period $4,547,403 $7,730,524
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $726,973 $1,918,626
Income taxes (refund) ( $12,762,617) $2,399,761
11
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). This Quarterly Report on Form 10-Q should be
read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 2001. Certain information and footnote disclosures
which are normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to SEC rules and regulations. The information reflects all
normal and recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial position of the Company,
and its results of operations for the interim periods set forth herein. The
results for the nine months ended September 30, 2002 are not necessarily
indicative of the results to be expected for the full year.
2. Discontinued Operations
In August 2002, the Company sold a reporting unit in the commercial
services business segment for $100,000, which resulted in a loss of $1.6
million ($964,000 net of income tax benefit of $643,000) for the nine
months ended September 30, 2002, or $.09 per share and $948,000 net of
income tax benefit of $632,000 for the three months ended September 30,
2002 or $.09 per share. In accordance with Statement of Financial
Accounting Standards (SFAS) 144, the loss is presented as a loss from
discontinued operations in the statements of income for the nine months and
three months ended September 30, 2002. The tax effected operating results
of the reporting unit sold were losses of $29,000 and $12,800 for the nine
months and the three months ended September 30, 2002, respectively and are
excluded from income from continuing operations. The Company has not
discontinued its commercial services business segment. The financial
statements for the comparative periods have been reclassified for
comparative purposes.
3. Recent Accounting Pronouncements
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business
Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is
effective for all business combinations completed after June 30, 2001. SFAS
142 is effective for fiscal years beginning after December 15, 2001;
however, certain provisions of this Statement apply to goodwill and other
intangible assets acquired between July 1, 2001 and the effective date of
SFAS 142. Major provisions of these Statements and their effective dates
for the Company are as follows: (1) all business combinations initiated
after June 30, 2001 must use the purchase method of accounting. The pooling
of interest method of accounting is prohibited except for transactions
initiated before July 1, 2001, (2) intangible assets acquired in a business
combination must be recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the acquired entity
and can be sold, transferred, licensed, rented or exchanged, either
individually or as part of a related contract, asset or liability, (3)
goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
is no longer subject to amortization, (4) effective January 1, 2002,
goodwill and intangible assets with indefinite lives will be tested for
impairment annually and whenever there is an impairment indicator, (5) all
acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting. The adoption of SFAS No. 142 had
a significant impact on the results of operations of the Company for the
nine months and three months ended September 30, 2002 by eliminating
amortization of goodwill.
Under the provisions of SFAS No. 142, the Company is required to perform a
transitional goodwill impairment test within six months of adopting the new
standard and to test for impairment on at least an annual basis thereafter.
For purposes of transitional impairment testing, the Company determined the
fair value of its reporting units using discounted cash flow models and
relative market multiples for comparable businesses. The Company compared
the fair value of each of its reporting units to their respective carrying
values, including related goodwill, which resulted in no impairment loss
being recognized.
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Recent Accounting Pronouncements - (Continued)
In August 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143 applies to all entities, including rate-regulated
entities, that have legal obligations associated with the retirement of a
tangible long-lived asset that result from acquisition, construction or
development and (or) normal operations of the long-lived asset. The
application of SFAS 143 is not limited to certain specialized industries,
such as the extractive or nuclear industries. A liability for an asset
retirement obligation should be recognized if the obligation meets the
definition of a liability and can be reasonably estimated. The initial
recording should be at fair value. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002, with
earlier application encouraged. The Company has not yet adopted SFAS 143.
The provisions of SFAS 143 are not expected to have a material impact on
the financial condition or results of operations of the Company.
In August 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS 144 retains the existing requirements
to recognize and measure the impairment of long-lived assets to be held and
used or to be disposed of by sale. However, SFAS 144 makes changes to the
scope and certain measurement requirements of existing accounting guidance.
SFAS 144 also changes the requirements relating to reporting the effects of
a disposal or discontinuation of a segment of a business. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The
adoption of this Statement had the effect of including a loss of $964,000
in Discontinued Operations on the Consolidated Statement of Income and
Comprehensive Income for the nine month and three month periods ended
September 30, 2002, respectively relating to the sale of a reporting unit.
This amount would have been included in income from continuing operations
prior to the adoption of SFAS 144.
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB No. 13,
and Technical Corrections" (SFAS No. 145) was issued. This standard changes
the accounting principles governing extraordinary items by, among other
things, providing more definitive criteria for extraordinary items by
clarifying and, to some extent, modifying the existing definition and
criteria, specifying disclosure for extraordinary items and specifying
disclosure requirements for other unusual or infrequently occurring events
and transactions that are not extraordinary items. SFAS 145 is effective
for financial statements issued for fiscal years beginning after June 15,
2002. The provisions of the Statement are not expected to have a material
impact on the financial condition or results of operations of the Company.
4. Note Payable
The Company and its subsidiaries entered into an amended and restated loan
agreement on May 31, 2002 with Citizens Bank (successor to Mellon Bank
N.A.), administrative agent for a syndicate of banks, which provides for a
$40.0 million Revolving Credit Facility (the "Revolving Credit Facility")
and a $7.5 million Term Loan Facility (the "Term Loan Facility"). The $7.5
million outstanding balance under the Term Loan Facility was repaid on July
2, 2002, thereby canceling the Term Loan Facility. Availability under the
Revolving Credit Facility is based on 80% of the aggregate amount of
accounts receivable as to which not more than ninety days have elapsed
since the date of the original invoice. Borrowings under the Revolving
Credit Facility bear interest at one of two alternative rates, as selected
by the Company. These alternatives are: LIBOR (London Interbank Offered
Rate), plus applicable margin, or the agent bank's prime rate.
All borrowings under the Revolving Credit Facility are collateralized by
all of the assets of the Company and its subsidiaries and a pledge of the
stock of its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants, such as restrictions on the
Company's ability to pay dividends. The Revolving Credit Facility expires
in August 2004. The weighted average interest rates under the Revolving
Credit Facility and Term Loan Facility for the nine months ended September
30, 2002 and 2001 were 3.78% and 5.69%, respectively. The amounts
outstanding under the Revolving Credit Facility at September 30, 2002 and
December 31, 2001 were $9.2 million and $31.5 million, respectively.
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- --------------- -------------- --------------
Interest expense ($653,079) ($2,095,981) ($114,997) ($575,206)
Interest income 583,454 267,595 14,276 62,449
-------------- --------------- -------------- --------------
($ 69,625) ($1,828,386) ($100,721) ($512,757)
============== =============== ============== ==============
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Segment Information
The Company has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes
standards for companies to report information about operating segments,
geographic areas and major customers. The adoption of SFAS 131 has no
effect on the Company's consolidated financial position, consolidated
results of operations or liquidity.
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling, general
and administrative expenses directly attributable to that segment as well
as charges for allocating corporate costs to each of the operating
segments. The following tables reflect the results of the segments
consistent with the Company's management system (in thousands):
Nine Months Ended Information Professional Commercial
September 30, 2002 Technology Engineering Services Corporate Total
------------- -------------- --------------- ------------- -------------
Revenue $80,186 $37,781 $15,047 $133,014
Operating expenses (1) 73,441 33,987 14,584 122,012
------ ------ ------ -------
EBITDA (2) 6,745 3,794 463 11,002
Depreciation 586 289 52 927
Amortization of intangibles 13 3 16
-- - --
Operating income (3) $6,146 $3,502 411 $10,059
====== ====== === =======
Total assets $83,287 $15,227 $5,481 $11,731 $115,726
Capital expenditures $442 $442
Nine Months Ended Information Professional Commercial
September 30, 2001 Technology Engineering Services Corporate Total
------------ -------------- -------------- ------------- -------------
Revenue $126,395 $31,684 $17,111 $175,190
Operating expenses (1) 115,634 27,687 16,436 159,757
------- ------ ------ -------
EBITDA (2) 10,761 3,997 675 15,433
Depreciation 580 181 38 799
Amortization of intangibles 4,292 499 25 4,816
----- --- -- -----
Operating income $5,889 $3,317 $612 $9,818
====== ====== ==== ======
Total assets $123,360 $17,767 $6,359 $17,861 $165,347
Capital expenditures $421 $173 $1,026 $1,620
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Segment Information - (Continued)
Three Months Ended Information Professional Commercial
September 30, 2002 Technology Engineering Services Corporate Total
-------------- -------------- -------------- ------------- ------------
Revenue $24,718 $14,285 $4,740 $43,743
Operating expenses (1) 23,083 12,524 4,566 40,173
------ ------ ----- ------
EBITDA (2) 1,635 1,761 174 3,570
Depreciation 199 100 19 318
Amortization of intangibles 4 1 5
- - -
Operating income (3) 1,432 1,660 155 3,247
===== ===== === =====
Total assets $83,287 $15,227 $5,481 $11,731 $115,726
Capital expenditures $104 $104
Three Months Ended Information Professional Commercial
September 30, 2001 Technology Engineering Services Corporate Total
------------ -------------- --------------- ------------ -----------
Revenue $36,053 $11,435 $5,350 $52,838
Operating expenses (1) 33,663 9,481 5,105 48,249
------ ----- ----- ------
EBITDA (2) 2,390 1,954 245 4,589
Depreciation 210 80 16 306
Amortization of intangibles 1,270 171 8 1,449
----- --- - -----
Operating income $910 $1,703 $221 $2,834
==== ====== ==== ======
Total assets $123,360 $17,767 $6,359 $17,861 $165,347
Capital expenditures $42 $173 $301 $516
(1) Operating expenses excludes depreciation and amortization.
(2) EBITDA consists of earnings before interest income, interest expense, other
non-operating income and expense, income taxes, depreciation and amortization.
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered in isolation or as an
alternative to net income as an indicator of a company's performance or to cash
flows from operating activities as a measure of liquidity.
(3)The operating results of a reporting unit sold in August 2002, are excluded
from operating income of the Commercial Services Business Segment for all
periods presented.
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Commitment
On June 10, 2002, the Company entered into a Severance Agreement (the
"Severance Agreement") with its Chief Executive Officer, Leon Kopyt. The
agreement provides for certain payments to be made to Mr. Kopyt and for the
continuation of Mr. Kopyt's employee benefits for a specified time after
his service with the Company is terminated other than for Cause, as defined
in the Severance Agreement. Amounts payable to Mr. Kopyt under the
Severance Agreement would be offset and reduced by any amounts received by
Mr. Kopyt after his termination of employment under his current employment
and termination benefits agreements, which are supplemented and not
superseded by the Severance Agreement. If Mr. Kopyt had been terminated as
of September 30, 2002, then under the terms of the Severance Agreement, and
after offsetting any amounts that would have been received under his
current employment and termination benefits agreements, he would have been
entitled to cash payments of approximately $1.2 million, inclusive of
employee benefits.
8. Contingencies
The Company is a party to two lawsuits and two claims from various persons from
whom the Company acquired stock or assets in four separate acquisitions that
occurred in the years 1998 through 2000. The lawsuits and claims are not related
to one another. The lawsuits and 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 and based upon the
advice of counsel, the Company has meritorious defenses to the lawsuits and
claims. However, if material adverse determinations on either the lawsuits or
claims were to be rendered, such determinations will have a material adverse
impact on the results of operations in the period of the respective charges as
well as a material adverse impact on the financial position and liquidity of the
Company. In addition, in 1998, two shareholders, who are former officers and
former directors of the Company, filed suit against the Company alleging
wrongful termination of their employment, failure to make required severance
payments, wrongful conduct by the Company in connection with the grant of stock
options, and wrongful conduct by the Company resulting in the non-vestiture of
their option grants. Their complaint also alleged that the Company wrongfully
limited the number of shares of the Company's common stock that could have been
sold by the plaintiffs under a Registration Rights Agreement entered into in
connection with the acquisition transaction. The complaint sought damages of
approximately $480,000 in severance pay (exclusive of interest). The damages
alleged on their other claims were unliquidated; claims for punitive damages
were also asserted in several counts of the complaint. The most significant
compensatory damages claim, under the Registration Rights Agreement, sought the
difference between the amount for which plaintiffs could have sold their RCM
shares during the 12-month period ended March 11, 1999, but for the alleged
wrongful limitation on their sales,and the amount for which plaintiffs sold
their shares during that period and thereafter.
The claim relating to the wrongful termination of the employment of one of the
plaintiffs and the claims concerning the grant of stock options were resolved in
binding arbitration in early 2002. A trial on the remaining claims has been
scheduled for December 2, 2002. The claims to be adjudicated at the trial
include (i) the claims by both plaintiffs concerning the alleged wrongful
limiting of the number of shares that plaintiffs could sell during the 12-month
period ended March 11, 1999; (ii) the claim for the alleged wrongful termination
of one of the plaintiffs; (iii) that same plaintiff's claim of entitlement to
severance pay of $240,000 under his employment agreement, plus interest; and
(iv) the claims by both plaintiffs for the alleged wrongful prevention of stock
option vestiture, on which $357,500, plus interest, is sought. The Company's
motion to strike all claims for punitive damages is pending before the court.
Management believes, based upon the advice of counsel, that the suit is without
merit and will continue to defend the claims vigorously. If material adverse
determinations were to be rendered in this litigation, a substantial charge will
have to be recorded in the financial statements, which will have a material
adverse impact on the results of operations in the period of the charge as well
as a material adverse impact on the financial position and liquidity of the
Company.
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from
those estimates. Such estimates include the Company's estimates of reserves
such as the allowance for doubtful accounts receivable.
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other Company reports and public
filings are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, without
limitation, statements regarding the adoption by businesses of new technology
solutions and the use by businesses of outsourced solutions, such as those
offered by the Company, in connection with such adoption. Readers are cautioned
that such forward-looking statements, as well as others made by the Company,
which may be identified by words such as "may," "will," "expect," "anticipate,"
"continue," "estimate," "project," "intend," and similar expressions, are only
predictions and are subject to risks and uncertainties that could cause the
Company's actual results and financial position to differ materially. Such risks
and uncertainties include, without limitation: (i) unemployment and general
economic conditions associated with the provision of information technology and
engineering services and solutions and placement of temporary staffing
personnel; (ii) the Company's ability to continue to attract, train and retain
personnel qualified to meet the requirements of its clients; (iii) the Company's
ability to identify appropriate acquisition candidates, complete such
acquisitions and successfully integrate acquired businesses; (iv) uncertainties
regarding pro forma financial information and the underlying assumptions
relating to acquisitions and acquired businesses; (v) uncertainties regarding
amounts of deferred consideration and earnout payments to become payable to
former shareholders of acquired businesses; (vi) possible adverse effects on the
market price of the Company's common stock due to the resale into the market of
significant amounts of common stock; (vii) the potential adverse effect a
decrease in the trading price of the Company's common stock would have upon the
Company's ability to acquire businesses through the issuance of its securities;
(viii) the Company's ability to obtain financing on satisfactory terms; (ix) the
reliance of the Company upon the continued service of its executive officers;
(x) the Company's ability to remain competitive in the markets 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; (xvii) the costs of conducting and the outcome
of litigation involving the Company, and (xviii) other economic, competitive and
governmental factors affecting the Company's operations, markets, products and
services. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. The Company
undertakes no obligation to publicly release the results of any revision of
these forward-looking statements to reflect these ends or circumstances after
the date they are made or to reflect the occurrence of unanticipated events.
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview
RCM Technologies is a premier provider of business and technology solutions
designed to enhance and maximize the performance of its customers through the
adaptation and deployment of advanced information technology and engineering
services. RCM is an innovative leader in the design, development and delivery of
these services to various industries. RCM's offices are located throughout North
America, including many major metropolitan centers. The Company provides a
diversified and extensive range of service offerings and deliverables. Its
portfolio of Information Technology services includes e-Business, Enterprise
Management, Enterprise Application Integration and Supply Chain. RCM's
Engineering services focus on Engineering Design, Technical Support, and Project
Management and Implementation. The Company's Commercial Services business unit
provides Healthcare contract professionals as well as Clerical and Light
Industrial temporary personnel. The Company provides its services to clients in
banking and finance, healthcare, insurance, aerospace, pharmaceutical,
telecommunications, utility, technology, manufacturing, distribution and
government sectors. The Company believes that the breadth of services 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
regional strategy to better leverage its consulting services offering. The
Company centrally manages its Solutions practices to maximize the potential for
sales and marketing of those services.
Many of the Company's clients are facing challenging economic times. This is
creating uncertainty in their ability to pursue technology projects, which had
previously been considered a competitive imperative. Many clients have laid off
portions of their own permanent staff and greatly reduced the demand for
consulting services in attempts to maintain profitability. This has had a direct
impact on RCM's revenues.
Management believes that most companies have recognized the importance of the
Internet and information management technologies to competing in today's
business climate. However, the uncertain economic environment has curtailed many
companies' motivation for rapid adoption of many technological enhancements. The
process of designing, developing and implementing software solutions has become
increasingly complex. Management believes that many companies today are focused
on return on investment analysis in prioritizing the initiatives they undertake.
This has had the effect of delaying or totally negating spending on many
emerging new solutions, which management formerly anticipated.
Nonetheless, IT managers must integrate and manage computing environments
consisting of multiple computing platforms, operating systems, databases and
networking protocols, and must implement packaged software applications to
support existing business objectives. Companies also need to continually keep
pace with new developments, which often render existing equipment and internal
skills obsolete. Consequently, business drivers cause IT managers to support
increasingly complex systems and applications of significant strategic value,
while working under budgetary, personnel and expertise constraints. This has
given rise to increasing demand for outsourcing. The Company believes that its
clients, as well as entities that may be potential clients, are increasingly
evaluating the potential for outsourcing business critical applications and
entire business functions.
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview - (Continued)
The Company presently realizes revenues from client engagements that range from
the placement of contract and temporary technical consultants to project
assignments that entail the delivery of end-to-end solutions. These services are
primarily provided to the client at hourly rates that are established for each
of the Company's consultants based upon their skill level, experience and the
type of work performed. The Company also provides project management and
consulting work which are billed either by an agreed upon fixed fee or hourly
rates, or a combination of both. The billing rates and profit margins for
project management and solutions work are higher than those for professional
consulting services. The Company generally endeavors to expand its sales of
higher margin solution and project management services.
The majority of the Company's services are provided under purchase orders.
Contracts are utilized on more of the 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 in 2002
relates principally to the amortization of intangibles 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. See Footnote 3 to financial statements.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based upon the Company's consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of the Company's financial
statements. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. The Company
believes that its critical accounting policies include those described below.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based on payment history and the customer's current credit
worthiness, as determined by a review of their current credit information. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based on historical experience
and any specific customer collection issues that have been identified. While
such credit losses have historically been within the Company's expectations and
the provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates that it has in the past.
21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Goodwill and intangibles
Pursuant to the adoption of SFAS 142, the Company changed its accounting policy
related to goodwill and intangible assets, effective January 1, 2002. Goodwill
and indefinite-lived intangible assets are no longer amortized but are subject
to periodic impairment assessment. The transitional impairment testing for such
assets was completed during the second quarter of 2002 and as of December 31,
2001, the transition date, there was no impairment to such assets. In accordance
with SFAS 142, the Company will be subject to a 2002 annual impairment test, as
well as, impairment tests each year thereafter. The Company cannot guarantee
that there will not be impairments in the fourth quarter of 2002 or in
subsequent years.
In addition, the Company recognizes contingent consideration from past
acquisitions, which are based on earn-out agreements, as additional goodwill
when earned. The Company cannot guarantee that earn-out provisions will be met.
Revenue Recognition on Long-Term Contracts
When the performance of a contract will extend beyond a 12-month period, revenue
and related costs are recognized on the percentage-of-completion method of
accounting. Profits expected to be realized on such contracts are based on total
estimated sales for the contract compared to total estimated costs at completion
of the contract. These estimates are reviewed periodically throughout the lives
of the contracts, and adjustments to profits resulting from such revisions are
made cumulative to the date of the change. Estimated losses on long-term
contracts are recorded in the period in which the losses become known.
If the Company does not accurately estimate the total sales and related costs on
such contracts, or if the Company is unsuccessful in the ultimate collection of
associated contract claims, the estimated gross margins may be impacted or
losses may need to be recognized in future periods. Any such resulting
reductions in margins or contract losses could be material to the Company's
results of operations and financial position.
22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001
A summary of operating results for the nine months ended September 30, 2002 and
2001 is as follows (in thousands, except for earnings per share data):
2002 2001
------------------------- ------------------------
% of % of
Amount Revenue Amount Revenue
Revenues $ 133,014 100.0% $ 175,190 100.0 %
Cost of services 96,948 72.9 126,179 72.0
---------- ---- ---------- ----
Gross profit 36,066 27.1 49,011 28.0
---------- ---- ---------- ----
Selling, general and administrative 25,064 18.9 33,578 19.2
Depreciation 927 .7 799 .4
---------- ------ ---------- ------
25,991 19.6 34,377 19.6
---------- ---- ---------- ----
Income before other expense, income taxes,
and amortization of intangibles 10,075 7.5 14,634 8.4
Other expense 104 .1 1,814 1.0
---------- --- ---------- ---- -
Income from continuing operations and before
income taxes and amortization of intangibles 9,971 7.4 12,820 7.3
Income taxes 3,773 2.8 5,359 3.0
---------- ----- ---------- -----
Income from continuing operations and before
amortization of intangibles 6,198 4.6 7,461 4.3
Gain (loss) from discontinued operations, net of taxes ( 964 ) .7 1
Amortization of intangibles, net of income tax benefits 10 4,200 2.4
---------- ----- ---------- -----
Net income $ 5,224 3.9% $ 3,262 1.9 %
========== ===== ========== =======
2002 2001
--------- --------
Earnings per share:
Basic:
Income from continuing operations and
before amortization $ .58 $ .71
Loss from discontinued operations .09
Amortization of intangibles .40
------ ------
Net income $ .49 $ .31
====== ======
Diluted:
Income from continuing operations and
before amortization $ .57 $ .69
Loss from discontinued operations .09
Amortization of intangibles .39
------ ------
Net income $ .48 $ .30
====== ======
Revenues. Revenues decreased 24.1%, or $42.4 million, for the nine months ended
September 30, 2002 as compared to the same period in the prior year (the
"comparable prior year period"). The revenue decline was primarily attributable
to softness in the Information Technology ("IT") sector. Management attributes
this softness to overall economic conditions as well as hesitancy by customers
to launch new capital spending programs.
23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended September 30, 2002 Compared to
Nine Months Ended September 30, 2001 - (Continued)
Cost of Services. Cost of services decreased 23.2%, or $29.2 million, for the
nine months ended September 30, 2002 as compared to the comparable prior year
period. This decrease was primarily due to a decrease in salaries and
compensation associated with decreased revenues experienced during the nine
months ended September 30, 2002. Cost of services as a percentage of revenues
increased to 72.9% for the nine months ended September 30, 2002 from 72.0% for
the comparable prior year period. This increase was primarily attributable to an
increase of the Company's revenues being derived from Professional Engineering
services, which have historically had lower gross profit margins.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 25.2%, or $8.5 million, for the nine months ended September
30, 2002 as compared to the comparable prior year period. This decrease was
primarily attributable to a reduction in revenues and a corresponding reduction
in the related variable costs and cost cutting initiatives. SGA expenses as a
percentage of revenues were 18.9% for the nine months ended September 30, 2002
as compared to 19.2% for the comparable prior year period.
Depreciation. Depreciation increased 16.0%, or $128,000, for the nine months
ended September 30, 2002 as compared to the comparable prior year period. This
increase was primarily due to the depreciation and amortization of
infrastructure and leasehold improvements incurred since September 30, 2001.
Other Expense. Other expense consists principally of interest expense, net of
interest income. For the nine months ended September 30, 2002, actual interest
expense of $653,000 was offset by $583,000 of interest income, which was
principally earned from an income tax refund claim with the Internal Revenue
Service. Interest expense, net decreased $1.8 million for the nine months ended
September 30, 2002 as compared to the comparable prior year period. This
decrease was primarily due to the increased cash derived from operating
activities, which was used to reduce interest bearing debt as well as the
aforementioned interest income earned on the income tax refund.
Income Tax. Income tax expense decreased 30.0%, or $1.6 million, for the nine
months ended September 30, 2002 as compared to the comparable prior year period.
This decrease was attributable to a lower level of income before taxes for the
nine months ended September 30, 2002 compared to the comparable prior year
period. The effective tax rate was 37.8%, for the nine months ended September
30, 2002 as compared to 41.8% for the comparable prior year period. The
reduction was attributable to tax deductible amortization of intangibles in
2002.
Loss from Discontinued Operations. In August 2002, the Company sold a reporting
unit in the commercial services business segment for $100,000, which resulted in
a loss of $1.6 million ($964,000 net of income tax benefit of $643,000) for the
nine months ended September 30, 2002, or $.09 per share. In accordance with
Statement of Financial Accounting Standards (SFAS) 144, the loss is presented as
a loss from discontinued operations in the statements of income for the nine
months ended September 30, 2002. The tax effected operating results of the
reporting unit sold were losses of $29,000 for the nine months ended September
30, 2002 and are excluded from income from continuing operations. The Company
has not discontinued its commercial services business segment. The financial
statements for the comparative periods have been reclassified for comparative
purposes
Amortization of Intangibles. Amortization of intangibles for the nine months
ended September 30, 2002 and 2001 was net of income tax benefit of $5,500 and
$616,000, respectively. Amortization of intangibles decreased 99.8%, or $4.2
million, for the nine months ended September 30, 2002 as compared to the
comparable prior year period. On July 20, 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
142, Goodwill and Intangible Assets. SFAS 142 is effective for all fiscal
periods beginning after December 15, 2001. In accordance with SFAS 142, for the
nine months ended September 30, 2002, all previously recognized goodwill and
intangible assets with indefinite lives was no longer subject to amortization.
If SFAS 142 had been in effect on January 1, 2001, net earnings per share
(diluted) would have been $.69 per share for the nine months ended September 30,
2001 as compared to $.48 per share (diluted) for the comparable period in 2002.
24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001
A summary of operating results for the three months ended September 30, 2002 and
2001 is as follows (in thousands, except for earnings per share data):
2002 2001
------------------------- ------------------------
% of % of
Amount Revenue Amount Revenue
Revenues $ 43,743 100.0% $ 52,838 100.0 %
Cost of services 31,877 72.9 38,223 72.3
-------- ---- --------- ----
Gross profit 11,866 27.1 14,615 27.7
-------- ---- --------- ----
Selling, general and administrative 8,296 19.0 10,027 19.0
Depreciation 317 .7 306 .6
-------- ------ --------- ------
8,613 19.7 10,333 19.6
-------- ---- --------- ----
Income before other expense, income taxes,
and amortization of intangibles 3,253 7.4 4,282 8.1
Other expense 141 .3 508 1.0
-------- ---- --------- -----
Income from continuing operations and before
income taxes and amortization of intangibles 3,112 7.1 3,774 7.1
Income taxes 1,195 2.7 1,617 3.1
-------- ----- --------- -----
Income from continuing operations and before
amortization of intangibles 1,917 4.4 2,157 4.0
Loss from discontinued operations, net of tax benefit 948 2.2 14
Amortization of intangibles, net of income tax benefits 3 1,384 2.6
-------- --------- -----
Net income $ 966 2.2% $ 759 1.4 %
======== ===== ========= =======
2002 2001
--------- --------
Earnings per share:
Basic:
Income from continuing operations and
before amortization $ .18 $ .20
Loss from discontinued operations .09
Amortization of intangibles .13
------ --------
Net income $ .09 $ .07
====== ======
Diluted:
Income from continuing operations and
before amortization $ .18 $ .20
Loss from discontinued operations .09
Amortization of intangibles .13
------ ------
Net income $ .09 $ .07
====== ======
Revenues. Revenues decreased 18.8%, or $10.1 million, for the three months ended
September 30, 2002 as compared to the same period in the prior year (the
"comparable prior year period"). Revenue decline was primarily attributable to
softness in the Information Technology ("IT") sector. Management attributes this
softness to overall economic conditions as well as hesitancy by customers to
launch new capital spending programs.
25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2001 - (Continued)
Cost of Services. Cost of services decreased 16.6%, or $6.3 million, for the
three months ended September 30, 2002 as compared to the comparable prior year
period. This decrease was primarily due to a decrease in salaries and
compensation associated with decreased revenues experienced during the three
months ended September 30, 2002. Cost of services as a percentage of revenues
increased to 72.9% for the three months ended September 30, 2002 from 72.3% for
the comparable prior year period. This increase was primarily attributable to an
increase of the Company's revenues being derived from Professional Engineering
services.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 16.3%, or $1.6 million, for the three months ended September
30, 2002 as compared to the comparable prior year period. This decrease was
primarily attributable to a reduction in revenues and a corresponding reduction
in the related variable costs and cost cutting initiatives. SGA expenses, as a
percentage of revenues was 19.2% for the three months ended September 30, 2002
as compared to 19.0% for the comparable prior year period.
Depreciation. Depreciation increased 3.6%, or $11,000, for the three months
ended September 30, 2002 as compared to the comparable prior year period. This
increase was primarily due to the depreciation and amortization infrastructure
and leasehold improvements incurred since September 30, 2001.
Other Expense. Other expense consists principally of interest expense, net of
interest income. For the three months ended September 30, 2002, actual interest
expense of $115,000 was offset by $14,200 of interest income. Interest expense,
net decreased $412,000 for the three months ended September 30, 2002 as compared
to the comparable prior year period. This decrease was primarily due to the
increased cash derived from operating activities, which was used to reduce
interest bearing debt.
Income Tax. Income tax expense decreased 26.1%, or $422,000, for the three
months ended September 30, 2002 as compared to the comparable prior year period.
This decrease was attributable to a lower level of income before taxes for the
three months ended September 30, 2002 compared to the comparable prior year
period. The effective tax rate was 38.4%, for the three months ended September
30, 2002 as compared to 42.8% for the comparable prior year period. The
reduction was attributable to tax deductible amortization of intangibles in
2002.
Loss from Discontinued Operations. In August 2002, the Company sold a reporting
unit in the commercial services business segment for $100,000, which resulted in
a loss of $1.6 million ($948,000 net of income tax benefit of $632,000) for the
three months ended September 30, 2002, or $.09 per share. In accordance with
Statement of Financial Accounting Standards (SFAS) 144, the loss is presented as
a loss from discontinued operations in the statements of income for the nine
months ended September 30, 2002. The tax effected operating results of the
reporting unit sold were losses of $12,800 for the three months ended September
30, 2002 and are excluded from income from continuing operations. The Company
has not discontinued its commercial services business segment. The financial
statements for the comparative periods have been reclassified for comparative
purposes
Amortization of Intangibles. Amortization of intangibles for the three months
ended September 30, 2002 and 2001 was net of income tax benefit of $2,200 and
$65,400, respectively. Amortization of intangibles decreased 99.7%, or $1.4
million for the three months ended September 30, 2002 as compared to the
comparable prior year period. On July 20, 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
142, Goodwill and Intangible Assets. SFAS 142 is effective for all fiscal
periods beginning after December 15, 2001. In accordance with SFAS 142, for the
three months ended September 30, 2002, all previously recognized goodwill and
intangible assets with indefinite lives was no longer subject to amortization.
If SFAS 142 had been in effect on January 1, 2001, net earnings per share
(diluted) would have been $.20 per share for the three months ended September
30, 2001 as compared to $.09 per share (diluted) for the comparable period in
2002.
26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources
Operating activities provided $29.2 million of cash for the nine months ended
September 30, 2002 as compared to operating activities providing $24.7 million
of cash for the nine months ended September 30, 2001. The increase in cash
provided by operating activities was primarily attributable to the increased
cash collections from accounts receivable and the income tax refund receivable.
Investing activities used $4.7 million for the nine months ended September 30,
2002 as compared to $10.2 million for the comparable period. The reduction in
the use of cash for investing activities for the nine months ended September 30,
2002 as compared to the comparable period was primarily attributable to a
reduction in property and equipment expenditures and acquisition and deferred
consideration payments.
Financing activities (principally debt reduction activities from income tax
refunds received) used $22.2 million for the nine months ended September 30,
2002 as compared to financing activities using $9.8 million for the comparable
period.
The Company and its subsidiaries entered into an amended and restated loan
agreement on May 31, 2002 with Citizens Bank (successor to Mellon Bank N.A.),
administrative agent for a syndicate of banks, which provides for a $40.0
million Revolving Credit Facility (the "Revolving Credit Facility") and a $7.5
million Term Loan Facility ("Term Loan Facility"). The $7.5 million outstanding
balance under the Term Loan Facility was repaid on July 2, 2002, thereby
canceling the Term Loan Facility. Availability under the Revolving Credit
Facility is based on 80% of the aggregate amount of accounts receivable as to
which not more than ninety days have elapsed since the date of the original
invoice. Borrowings under the Revolving Credit Facility bear interest at one of
two alternative rates, as selected by the Company. These alternatives are: LIBOR
(London Interbank Offered Rate), plus applicable margin, or the agent bank's
prime rate.
All borrowings under the Revolving Credit Facility are collateralized by all of
the assets of the Company and its subsidiaries and a pledge of the stock of its
subsidiaries. The Revolving Credit Facility also contains various financial and
non-financial covenants, such as restrictions on the Company's ability to pay
dividends. The Revolving Credit Facility expires in August 2004. The weighted
average interest rates for the nine months ended September 30, 2002 and 2001
were 3.78% and 5.69%, respectively. The amounts outstanding under the Revolving
Credit Facility at September 30, 2002 and December 31, 2001 were $9.2 million
and $31.5 million, respectively. (Note 4)
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 one or more of the Revolving Credit Facility, funds generated
through operations, or future financing transactions. The Company is involved in
litigations as described in Footnote 8 (Contingencies) to the financial
statements. If material adverse determinations on either the lawsuits or claims
were to be rendered, such determinations will have a material adverse impact on
the results of operations in the period of the respective charges as well as a
material adverse impact on the financial position and liquidity of the Company.
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.
27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's exposure to market risk
since its Annual Report on Form 10-K for the year ended December 31, 2001.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation conducted within 90 days prior to the filing
date of this Quarterly Report on Form 10-Q, that the Company's disclosure
controls and procedures have functioned effectively so as to provide those
officers the information necessary to evaluate whether:
(i) this Quarterly Report on Form 10-Q contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this Quarterly Report on Form 10-Q, and
(ii)the financial statements, and other financial information included in
this Quarterly Report on Form 10-Q, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this Quarterly
Report on Form 10-Q.
There have been no significant changes in the Company's internal controls or in
other factors since the date of the Chief Executive Officer's and Chief
Financial Officer's evaluation that could significantly affect these internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
28
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to two lawsuits and two claims from various persons from
whom the Company acquired stock or assets in four separate acquisitions that
occurred in the years 1998 through 2000. The lawsuits and claims are not related
to one another. The lawsuits and 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 and based upon the
advice of counsel, the Company has meritorious defenses to the lawsuits and
claims. However, if material adverse determinations on either the lawsuits or
claims were to be rendered, such determinations will have a material adverse
impact on the results of operations in the period of the respective charges as
well as a material adverse impact on the financial position and liquidity of the
Company. In addition, in 1998, two shareholders, who are former officers and
former directors of the Company, filed suit against the Company alleging
wrongful termination of their employment, failure to make required severance
payments, wrongful conduct by the Company in connection with the grant of stock
options, and wrongful conduct by the Company resulting in the non-vestiture of
their option grants. Their complaint also alleged that the Company wrongfully
limited the number of shares of the Company's common stock that could have been
sold by the plaintiffs under a Registration Rights Agreement entered into in
connection with the acquisition transaction. The complaint sought damages of
approximately $480,000 in severance pay (exclusive of interest). The damages
alleged on their other claims were unliquidated; claims for punitive damages
were also asserted in several counts of the complaint. The most significant
compensatory damages claim, under the Registration Rights Agreement, sought the
difference between the amount for which plaintiffs could have sold their RCM
shares during the 12-month period ended March 11, 1999, but for the alleged
wrongful limitation on their sales,and the amount for which plaintiffs sold
their shares during that period and thereafter.
The claim relating to the wrongful termination of the employment of one of the
plaintiffs and the claims concerning the grant of stock options were resolved in
binding arbitration in early 2002. A trial on the remaining claims has been
scheduled for December 2, 2002. The claims to be adjudicated at the trial
include (i) the claims by both plaintiffs concerning the alleged wrongful
limiting of the number of shares that plaintiffs could sell during the 12-month
period ended March 11, 1999; (ii) the claim for the alleged wrongful termination
of one of the plaintiffs; (iii) that same plaintiff's claim of entitlement to
severance pay of $240,000 under his employment agreement, plus interest; and
(iv) the claims by both plaintiffs for the alleged wrongful prevention of stock
option vestiture, on which $357,500, plus interest, is sought. The Company's
motion to strike all claims for punitive damages is pending before the court.
Management believes, based upon the advice of counsel, that the suit is without
merit and will continue to defend the claims vigorously. If material adverse
determinations were to be rendered in this litigation, a substantial charge will
have to be recorded in the financial statements, which will have a material
adverse impact on the results of operations in the period of the charge as well
as a material adverse impact on the financial position and liquidity of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
99.2 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
(b) Reports on Form 8-K
None.
29
CERTIFICATION
I, Leon Kopyt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 30, 2002
/s/ Leon Kopyt
-------------------------------
Leon Kopyt
Chief Executive Officer
30
CERTIFICATION
I, Stanton Remer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
function):
(a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 30, 2002
/s/ Stanton Remer
------------------------------
Stanton Remer
Chief Financial Officer
31
RCM TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RCM Technologies, Inc.
Date: October 30, 2002 By:/s/ Stanton Remer
--- ------- -----
Stanton Remer
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the Registrant)
32