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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 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 26, 2003 was approximately $32,200,000 based upon the
closing price of the Common Stock on such date on The Nasdaq National Market of
$3.05. The information provided shall in no way be construed as an admission
that any person whose holdings are excluded from the figure is an affiliate or
that any person whose holdings are included is not an affiliate and any such
admission is hereby disclaimed. The information provided is included solely for
record keeping purposes of the Securities and Exchange Commission.
The number of shares of Registrant's Common Stock (par value $0.05 per
share) outstanding as of February 26, 2003: 10,626,076.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 2003 Annual
Meeting of Stockholders (the "2003 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 2003 Proxy Statement is not filed by April 30, 2003, an amendment
to this Annual Report on Form 10-K setting forth this information will be duly
filed with the Securities and Exchange Commission.
RCM Technologies, Inc.
FORM 10-K
TABLE OF CONTENTS
PART I........................................................................................................ 1
Item 1. Business....................................................................................... 2
Item 2. Properties..................................................................................... 10
Item 3. Legal Proceedings.............................................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............................................ 11
PART II....................................................................................................... 12
Item 5. Market for Registrant's Common Equity and Related Stock Holder Matters......................... 12
Item 6. Selected Financial Data........................................................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk..................................... 24
Item 8. Financial Statements and Supplementary Data.................................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting Financial Disclosure............... 24
PART III...................................................................................................... 25
Item 10. Directors and Executive Officers of the Registrant............................................. 25
Item 11. Executive Compensation......................................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management................................. 25
Item 13. Certain Relationships and Related Transactions................................................. 25
PART IV....................................................................................................... 26
Item 14. Controls and Procedures........................................................................ 26
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 26
Certification........................................................................................... 28
Signatures............................................................................................... 30
PART I
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other reports and public filings made
by RCM Technologies, Inc. ("RCM" or the "Company") are forward-looking within
the meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include, without limitation, statements regarding the
adoption by businesses of new technology solutions 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.
..
1
ITEM 1. BUSINESS
General
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 a variety of industries.
RCM's offices are located throughout North America, including 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 portfolio of Engineering
services focuses 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 it offers fosters long-term client relationships, affords
cross-selling opportunities and minimizes the Company's dependence on any
single technology or industry sector.
During the year ended December 31, 2002, approximately 60% of RCM's total
revenues were derived from IT services, 30% from Engineering services and
the remaining 10% from Commercial Services. The Company has executed a
regional strategy to better leverage its consulting services offering. RCM
sells and delivers its services through a network of 37 branch offices
located in selected regions throughout North America.
Demand for IT consulting services has continued the decline that commenced
in early 2000 after several years of rapid growth. The decline in sales
along with a decline in operating income of certain branch offices has
resulted in goodwill impairment charges for each of the three years in the
period ended December 31, 2002.
Industry Overview
Businesses today face intense competition, the challenge of constant
technological change, and the ongoing need for business process
optimization. Companies are turning to IT solutions to address these issues
and to compete more effectively. As a result, the ability of an
organization to integrate and align information technologies with new
business objectives has become critical.
Although many companies have recognized the importance of optimizing IT
systems and products to support business processes in competing in today's
challenging climate, the process of designing, developing and implementing
IT solutions has become increasingly complex. With the prevailing economic
conditions, many customers have nonetheless elected to defer, redefine or
actually cancel investments in new systems or software. Many companies are
focusing now on making the most effective use of existing investments they
have already made in software and technology solutions. 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 are
laying off their own permanent staff and reducing the demand for consulting
services in attempts to maintain profitability. This has a direct impact on
RCM's revenues.
The current economic environment has further challenged many companies to
evaluate investment or funding choices and business critical applications.
IT managers must integrate and manage computing environments consisting of
multiple computing platforms, operating systems, databases and networking
protocols and off-the-shelf software applications to support business
objectives. Companies also need to keep pace with new developments in
technology, which often render existing equipment and internal skills
obsolete. At the same time, external economic factors have caused many
organizations to focus on core competencies and trim workforces in the IT
management area. Accordingly, these organizations often lack the quantity,
quality and variety of IT skills necessary to design and support IT
solutions. IT managers are charged with supporting increasingly complex
systems and applications of significant strategic value, while working
under budgetary, personnel and expertise constraints within their own
organizations.
2
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 their 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 clients' 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. The Company is building a 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 a 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. The Company will seek to
accomplish these measures 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 2002. National
and regional sales management programs were designed and implemented to
segregate clients into priority accounts. This process has provided a
higher degree of account coordination so clients can benefit from the wider
array of services that are offered throughout the Company's service area,
thus resulting in greater client penetration.
During 2002, 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 clients within the same industry sectors tend to
have common business challenges. It therefore allows the Company to present
and deliver enhanced value to those clients in the 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 Company believes that the overall result is greater
account penetration and enhanced client relationships.
3
ITEM 1. BUSINESS (CONTINUED)
Growth Strategy (Continued)
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.
Continue Selective Strategic Acquisitions. The industry for the Company's
services continues to be highly fragmented, and the Company plans to
continue to selectively assess opportunities to make strategic acquisitions
as such opportunities are presented to the Company. The Company's past
acquisition strategy was designed to broaden the scope of services and
technical competencies and grow its Full-Cycle Solution capabilities, and
the Company would continue to consider such goals in any future
acquisitions. In considering acquisitions, the Company focuses principally
on companies with (i) technologies RCM has targeted for strategic value
enhancement, (ii) margins that will not dilute the margins now being
delivered, (iii) experienced management personnel, (iv) substantial growth
prospects and (v) sellers who desire to join the Company's management team.
To retain and provide incentives for management of its acquired companies,
the Company has generally structured a significant portion of the
acquisition price in the form of multi-tiered consideration based on growth
of operating profitability of the acquired company over a two to three-year
period.
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 local market knowledge of each branch's reputation,
customer relationships and expertise. The Company believes an
entrepreneurial business atmosphere allows its branch offices to quickly
and creatively respond to local market demands and enhances the Company's
ability to motivate, attract and retain managers and to maximize growth and
profitability.
Develop and Maintain Strong Customer Relationships. The Company seeks to
develop and maintain strong interactive customer relationships by
anticipating and focusing on its customers' needs. The Company emphasizes a
relationship-oriented approach to business, rather than the transaction or
assignment-oriented approach that the Company believes is used by many of
its competitors. The industry-centric strategy 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.
4
ITEM 1. BUSINESS (CONTINUED)
Operating Strategy (Continued)
Centralize Administrative Functions. The Company seeks to maximize its
operational efficiencies by integrating general and administrative
functions at the corporate or regional level, and reducing or eliminating
redundant functions formerly performed at smaller branch offices. This
enables the Company to quickly realize savings and synergies and to
efficiently control and monitor its operations. It also allows local
branches to focus more on growing their sales.
To accomplish this, the Company is centralized on an SAP operating system
into which it integrated all of its operating units. 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. During 2002, the Company completed
the implementation of a unified "front end" system which manages work
orders and client contacts in a web based system. This application puts all
RCM locations on a common database. The results thus far have been improved
efficiencies and greater cooperation in support of key vertical industry
sector requirements.
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.
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, and customer relationship
management and supply chain management solutions. In its Enterprise
Applications area, 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, 2002, there were approximately 850 information
technology employees and consultants assigned by the Company.
5
ITEM 1. BUSINESS (CONTINUED)
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, 2002, there were approximately 530 engineering and
technical employees and consultants assigned by the Company.
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
and lower schools, sports medicine facilities and private practices.
Services include in-patient, outpatient, sub-acute and acute care,
multilingual speech pathology, rehabilitation, and geriatric, pediatric and
adult day care. 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.
As of December 31, 2002, the Company employed approximately 750 commercial
services personnel.
6
ITEM 1. BUSINESS (CONTINUED)
Branch Offices
The Company's organization consists of five operating regions with 37
branch offices located in 12 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)
EAST
Connecticut................................... 2 PE
Maryland...................................... 1 IT
New Hampshire................................. 1 IT
New Jersey.................................... 2 IT, PE
New York...................................... 3 IT, PE, CS
Pennsylvania.................................. 2 IT, PE
Vermont....................................... 1 PE
-
12
GREAT LAKES
Michigan...................................... 5 IT, PE
Minnesota..................................... 1 IT
Wisconsin..................................... 3 IT, PE
-
9
CENTRAL
Texas......................................... 2 IT
-
2
WEST
Northern California........................... 1 IT
Southern California........................... 6 IT, CS
-
7
CANADA.......................................... 7 IT, PE
-
(1) Services provided are abbreviated as follows: IT - Information
Technology PE - Professional Engineering CS - Commercial Services
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.
7
ITEM 1. BUSINESS (CONTINUED)
Branch Offices (Continued)
The Company believes that a substantial portion of the buying decisions
made by users of the Company's services are made on a local or regional
basis and that the Company's branch offices most often compete with local
and regional providers. Since the Company's branch managers are in the best
position to understand their local markets, and customers often prefer
local providers, the Company believes that a decentralized operating
environment maximizes operating performance and contributes to employee and
customer satisfaction.
From its headquarter locations in New Jersey, the Company provides its
branch offices with centralized administrative, marketing, finance, MIS,
human resources and legal support. Centralized administrative functions
minimize the administrative burdens on branch office managers and allow
them to spend more time focusing on sales and marketing and practice
development activities.
Our principal sales offices have one General Manager, one sales manager,
three to six sales people, several technical delivery or practice managers
and several recruiters. The General Managers report to Regional 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
concentrates on providing carefully screened professionals with the
appropriate skills in a timely manner and at competitive prices. The
Company regularly monitors the quality of the services provided by its
personnel and obtains feedback from its customers as to their satisfaction
with the services provided.
The Company has elevated the importance of working with and developing its
partner alliances with technology firms. Partner programs are in place with
firms RCM has identified as strategically important to the completeness of
the service offering of the Company. Relations have been established with
firms such as Microsoft, QAD, Mercury, IBM, H-P/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 branch offices.
Some of the Company's larger representative customers include 3M, ADP,
Bruce Power, FlightSafety International, Lockheed Martin, MSC Industrial
Supply, Ontario Power, Policy Studies, Inc., Schering Plough, United
Technologies, 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 or, when appropriate, at the corporate level
for national accounts.
During 2002, one customer accounted for 12% of the Company's revenues. The
Company's five and ten largest customers accounted for approximately 32%
and 43%, respectively, of the Company's revenues for 2002.
8
ITEM 1. BUSINESS (CONTINUED)
Recruiting And Training
The Company devotes a significant amount of time and resources, primarily
at the branch level, to locating, training and retaining its professional
personnel. Full-time recruiters utilize the Company's proprietary databases
of available personnel, which are cross-indexed by competency and skill to
match potential candidates with the specific project requirements of the
customer. The qualified personnel in the databases are identified through
numerous activities, including networking, referrals, trade shows, job
fairs, schools, newspaper and trade journal advertising, Internet
recruiting services and the Company's website.
The Company believes that a significant element to the Company's success in
retaining qualified consultants and contract personnel is the Company's use
of Consultant Relationship Managers ("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, the Company has
implemented a unified front end system which manages the consultant
information in a skills based database, work order flows, customer contacts
and sales reporting on a national basis. The web based system, provided by
Main Sequence, Inc., was heavily customized and is hosted and maintained
out of the Company's headquarters. Each of the service groups maintains
databases to permit efficient tracking of available personnel on a local
basis. This system facilitates efficient matching of customers'
requirements with available technical personnel and provides contact
management functionality for the sales force.
Competition
The market for IT and engineering services includes a large number of
competitors, is subject to rapid change and is highly competitive. As the
market demand has shifted many software companies have adopted tactics to
pursue services and consulting offerings making them direct competitors
when in the past they may have been alliance partners. Primary competitors
include participants from a variety of market segments, including publicly
and privately held firms, systems consulting and implementation firms,
application software firms, service groups of computer equipment companies,
facilities management companies, general management consulting firms and
staffing companies. In addition, the Company competes with its clients'
internal resources, particularly where these resources represent a fixed
cost to the client. Such competition may impose additional pricing
pressures on the Company.
The Company believes its principal competitive advantages in the IT and
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.
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.
9
ITEM 1. BUSINESS (CONTINUED)
Employees
As of December 31, 2002, the Company employed an administrative staff of
approximately 240 people, including certified IT 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,
2002, there were approximately 850 information technology and 530
engineering and technical employees and consultants assigned by the Company
to work on client projects for various periods. As of December 31, 2002,
there were approximately 750 commercial services employees. None of the
Company's 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 37 offices in 12
states and Canada. The Company's administrative and sales offices typically
consist of 1,000 to 3,000 square feet and are leased by the Company for
terms of one to three years. Offices in larger or smaller markets may vary
in size from the typical office. The Company does not expect that it will
be difficult to maintain or find suitable lease space at reasonable rates
in its markets or in areas where the Company contemplates expansion.
The Company's executive office is located at 2500 McClellan Avenue, Suite
350, Pennsauken, New Jersey 08109-4613. These premises consist of
approximately 9,100 square feet and are leased at a rate of $12.50 per
square foot per annum for a term that ended on January 31, 2003. Effective
February 1, 2003, the lease was extended for three years at a rate of
$13.25 per square foot per year.
The Company's operational office is located at 20 Waterview Boulevard, 4th
Floor, Parsippany, NJ 07054. These premises consist of approximately 28,000
square feet and are leased at a rate of $25.00 per square foot per year for
a term ending on June 30, 2012.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to two lawsuits and three claims from various
persons from whom the Company acquired stock or assets in five separate
acquisitions that occurred in the years 1998 through 2000. The lawsuits and
claims are not related to one another. The lawsuits and claims arise from
allegations of wrongful termination and/or failure of the Company to pay
deferred consideration under the relevant acquisition agreements. The range
of possible loss for the aforementioned lawsuits and claims, when
considered collectively, is from $-0- to approximately $7.6 million. In the
opinion of management and based upon the advice of counsel, the Company has
meritorious defenses to the lawsuits and claims that should serve to defeat
or diminish the Company's potential liability. 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 were formerly officers and
directors of the Company, filed suit against the Company alleging wrongful
termination of their employment, failure to make required severance
payments, wrongful conduct by the Company in connection with the grant of
stock options, and wrongful conduct by the Company resulting in the
non-vestiture of their option grants. The suit was originally filed in New
Jersey Superior Court, Bergen County on November 6, 1998. The complaint
also alleged that the Company wrongfully limited the number of shares of
the Company's common stock that could have been sold by the plaintiffs
under a Registration Rights Agreement entered into in connection with the
underlying acquisition transaction pursuant to which the plaintiffs became
shareholders of the Company. The complaint sought damages of approximately
$480,000 on the severance pay claim. 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 the plaintiffs
sold their shares during that period and thereafter.
10
ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
The claim relating to the wrongful termination of the employment of one of
the plaintiffs and the claims of both plaintiffs concerning the grant of
stock options were resolved in binding arbitration in early 2002. A trial
on the remaining claims commenced on December 2, 2002 and a verdict was
returned on January 24, 2003. The claims adjudicated at the trial were: (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, on which a verdict awarding damages against the
Company of $7.6 million was returned; (ii) the claim for the alleged
wrongful termination of one of the plaintiffs, which was dismissed by the
trial judge; (iii) that same plaintiff's claim of entitlement to severance
pay of $230,000 under his employment agreement, which was rejected by the
jury in a verdict that the plaintiff will likely seek to set aside; and
(iv) the claims by both plaintiffs for the alleged wrongful prevention of
stock option vestiture, which were rejected by the jury. The Company's
motion to strike all claims for punitive damages was granted. Management
believes, based upon the advice of counsel, that there is a substantial
likelihood that the jury's verdict on damages will either be vacated
entirely or reduced significantly by the court on post-trial motions, which
the Court will likely rule upon in March, 2003. The Company further intends
to appeal any judgment that eventually may be entered in favor of the
plaintiffs.
As a result of the verdict, the Company accrued $8.6 million at December
31, 2002, which includes a $1.0 million estimate for attorney fees and
pre-judgment interest.
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, 2002.
11
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, 2002 as
reported by The Nasdaq National Market:
Common Stock
--------------------------------
Fiscal 2001 High Low
------ -----
First Quarter.................................. $8.00 $2.88
Second Quarter................................. 5.70 2.85
Third Quarter.................................. 6.48 3.10
Fourth Quarter................................. $4.75 $3.41
Fiscal 2002
First Quarter.................................. $5.34 $4.41
Second Quarter................................. 5.25 4.10
Third Quarter.................................. 5.14 3.73
Fourth Quarter................................. $4.94 $3.70
Holders
As of February 25, 2003, the approximate number of holders of record of the
Company's Common Stock was 600. 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 2,923.
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.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data was derived from the
Company's Consolidated Financial Statements. The selected historical
consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company, and
notes thereto, included elsewhere herein.
Years Ended Two Months Years Ended
Ended
----------------------------------------------- ---------------- -----------------------------
December 31, December 31, October 31,
----------------------------------------------- ---------------- -----------------------------
2002 2001 2000 1999 1999 1998
--------------- --------------- --------------- ---------------- --------------- -------------
Income Statement
Revenues $186,650,616 $234,739,066 $305,444,247 $51,119,860 $311,412,892 $200,188,156
Gross profit 46,664,861 62,575,740 78,045,164 13,163,458 76,274,494 48,192,123
Income before goodwill
impairment and unusual items 16,538,897 16,257,507 16,858,362 2,039,434 14,827,944 9,726,809
Goodwill impairment (29,990,099) (34,993,435) (35,334,972)
Unusual items (9,717,663) ( 3,471,740)
(Loss) income from continuing
operations (23,168,865) 18,735,928) 21,948,350) 2,039,434 14,827,944 9,726,809
(Loss) gain from discontinued
operations (967,065) (20,041) 51,964 11,559 120,304 69,896
Net (loss) income ($24,135,930) ($ 18,755,969) ($ 21,896,386) $2,050,993 $14,948,248 $ 9,796,705
Earnings Per Share (1)
(Loss) income from continuing
Operations ($2.19) ($1.78) ($2.09) $.19 $1.36 $1.06
(Loss) gain from discontinued
Operations (.09) .01 .01
Net (loss) income ($2.28) ($1.78) ($2.09) $.19 $1.37 $1.07
Net (loss) income (basic) ($2.28) ($1.78) ($2.09) $.20 $1.43 $1.11
December 31, October 31,
---------------------------------------------------------------- -----------------------------
2002 2001 2000 1999 1999 1998
--------------- --------------- --------------- ---------------- --------------- -------------
Balance Sheet
Working capital $16,516,062 $10,977,131 $56,508,604 $61,383,437 $54,866,477 $53,672,589
Total assets 89,977,188 131,155,945 174,268,828 183,950,884 184,047,546 117,067,151
Long term liabilities 49,483,873 47,300,000 40,800,000
Total liabilities 30,731,034 47,866,145 72,206,502 59,854,255 62,045,376 10,395,024
Shareholders' equity $59,246,154 $83,289,800 $102,062,326 $124,096,629 $122,002,170 $106,672,127
(1) Shares used in computing earnings per share:
Basic 10,585,503 10,519,701 10,499,305 10,496,225 10,484,764 8,787,334
Diluted 10,585,503 10,519,701 10,499,305 10,951,447 10,942,146 9,151,903
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 variety of industries. RCM's
offices are located throughout North America, including 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 portfolio of Engineering services
focuses 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 it
offers 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.
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.
14
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 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 insurance. Selling, general and administrative expenses
consist primarily of salaries and benefits of personnel responsible for
business development, recruiting, operating activities and training, and
include corporate overhead expenses. Corporate overhead expenses relate to
salaries and benefits of personnel responsible for corporate activities,
including the Company's corporate marketing, administrative and reporting
responsibilities and acquisition program. The Company records these
expenses when incurred. Depreciation relates primarily to the fixed assets
of the Company. Amortization in 2002 relates to a covenant not to compete
resulting from one of 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 4 to financial
statements.
Revenue Recognition
The Company derives its revenues from several sources. All of the Company's
segments perform staffing services. The Company's Professional Engineering
Services and Information Technology Services segments also perform project
services. The Information Technology Services segment also derives revenue
from permanent placement fees.
Staffing Services - Revenues derived from staffing services are recorded on
a gross basis as services are performed and associated costs have been
incurred using employees of the Company. In these circumstances, the
Company assumes the risk of acceptability of its employees to its
customers.
Project Services - Project services are generally provided on a
cost-plus-fixed-fee or time-and-material basis. Typically, a customer will
outsource a discrete project or activity and the Company assumes
responsibility for performance of the function or project. The Company
recognizes revenues and associated costs on a gross basis as services are
performed and costs are incurred using its employees. In instances where
project services are provided on a fixed-price basis, and the contract will
extend beyond a 12-month period, revenue is recorded in accordance with the
terms of each contract. In some instances, revenue is billed and recorded
at the time certain milestones are reached, as defined in the contract. In
other instances, revenue is billed and recorded based upon contractual
rates per hour. In addition some contracts contain "Performance Fees"
(bonuses) for completing a contract under budget. Performance Fees, if any,
are recorded when the contract is completed and the revenue is reasonably
certain of collection. Some contracts also limit revenues and billings to
maximum amounts. Expenses related to contracts that extend beyond a
12-month period are charged to Cost of Services as incurred.
Permanent Placement Fees - The Company earns permanent placement fees. Fees
for placements are recognized at the time the candidate commences
employment. Based upon the Company's historical experience, the Company's
refunds to customers have been immaterial. However, an allowance for such
refunds is recorded in the financial statements. Revenues are recorded on a
gross basis as a component of revenue.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
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.
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 January 1, 2002, the transition date,
there was no impairment to such assets.
For purposes of the annual impairment testing, the Company determined the
fair value of its reporting units using relative market multiples for
comparable businesses, as of November 30, 2002. The Company compared the
fair value of each of its reporting units to their respective carrying
values, including related goodwill, which resulted in an impairment loss of
approximately $30 million. Future changes in the industry could impact the
market multiples of comparable businesses, and consequently could impact
the results of future annual impairment tests.
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 be assured that earn-out
provisions will be met. Based on the results of future impairment testing,
the Company could be required to incur further impairment losses.
16
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, 2002 December 31, 2001 December 31, 2000
------------------------ ------------------------ ------------------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
---------- ------------ ----------- ------------ ----------- ------------
Revenues $186,651 100.0% $234,739 100.0% $305,444 100.0%
Cost of services 139,986 75.0 172,163 73.3 227,399 74.4
---------- ------------ ----------- ------------ ----------- ------------
Gross profit 46,665 25.0 62,576 26.7 78,045 25.6
---------- ------------ ----------- ------------ ----------- ------------
Selling, general and administrative 33,320 17.9 42,840 18.3 54,494 17.8
Depreciation 1,258 .7 1,125 .5 1,152 .5
---------- ------------ ----------- ------------ ----------- ------------
34,578 18.6 43,965 18.8 55,646 18.3
---------- ------------ ----------- ------------ ----------- ------------
Income before litigation charge,
other expense, income taxes,
goodwill amortization, and unusual charges 12,087 6.5 18,611 7.9 22,399 7.3
Litigation charge (9,718) (5.2)
Other expense (155) ( .1) (2,268) ( .9) (3,702) (1.2)
---------- ------------ ----------- ------------ ----------- ------------
Income before income taxes and 2,214 1.2
goodwill amortization 16,343 7.0 18,697 6.1
Income taxes 623 .3 6,936 3.0 7,638 2.5
---------- ------------ ----------- ------------ ----------- ------------
Income before goodwill amortization
and impairment 1,591 .9 9,407 4.0 11,059 3.6
Goodwill and intangible asset
amortization, net of income tax benefit (12) (5,385) (2.3) (4,390) (1.4)
Goodwill impairment, restructuring and
unusual charges, net of tax benefit (24,748) (13.3) (22,758) (9.7) (28,617) (9.4)
(Loss) gain from discontinued
operations, net of taxes (967) (.4) (20) 52
---------- ------------ ----------- ------------ ----------- ------------
Net loss ($ 24,136) (12.9)% ($ 18,756) (8.0)% ($ 21,896) (7.2)%
========== ============ =========== ============ =========== ============
Earnings per share
Basic and Diluted:
Income before goodwill amortization
and impairment $.15 $.89 $1.06
Goodwill amortization ( .51) ( .42)
Goodwill impairment , restructuring
and unusual charges ( 2.34) ( 2.16) ( 2.73)
Discontinued operations ( .09)
---------- ----------- -----------
Net loss ($2.28) ($1.78) ($2.09)
========== =========== ===========
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, 2002 Compared to Year Ended December 31, 2001
Revenues. Revenues decreased 20.5%, or $48.1 million, for 2002 as compared to
2001. 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.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
(Continued)
Cost of Services. Cost of services decreased 18.7%, or $32.2 million, for
2002 as compared to 2001. This decrease was primarily due to a decrease in
salaries and compensation associated with the decreased revenues
experienced during 2002. Cost of services as a percentage of revenues
increased to 75.0% for fiscal 2002 from 73.3% for 2001. This increase was
primarily attributable to an increase in the Company's revenues being
derived from Professional Engineering Services, which have historically had
lower gross profit margins and a decline in revenues derived from
Information Technology services which have historically higher gross
margins.
Selling, General and Administrative. Selling, general and administrative
("SGA") expenses decreased 22.2%, or $9.5 million, for 2002 as compared to
2001. This decrease was primarily attributable to a reduction in the
related variable costs corresponding to reduction in revenues and cost
cutting initiatives. SGA expenses, as a percentage of revenues, was 17.9%
for 2002 as compared 18.3% for 2001.
Depreciation. Depreciation increased 11.8%, or $133,000, for fiscal 2002 as
compared to fiscal 2001. This increase was primarily due to depreciation
and amortization of infrastructure and leasehold improvements incurred
since December 31, 2001.
Litigation Charge. In 1998, two shareholders, who were formerly officers
and directors of the Company, filed suit against the Company alleging
wrongful termination of their employment, failure to make required
severance payments, wrongful conduct by the Company in connection with the
grant of stock options, and wrongful conduct by the Company resulting in
the non-vestiture of their option grants. The complaint also alleged that
the Company wrongfully limited the number of shares of the Company's common
stock that could have been sold by the plaintiffs under a Registration
Rights Agreement entered into in connection with the underlying acquisition
transaction pursuant to which the plaintiffs became shareholders of the
Company. The complaint sought damages of approximately $480,000 on the
severance pay claim. 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 the plaintiffs sold their shares
during that period and thereafter.
The claim relating to the wrongful termination of the employment of one of
the plaintiffs and the claims of both plaintiffs concerning the grant of
stock options were resolved in binding arbitration in early 2002. A trial
on the remaining claims commenced on December 2, 2002 and a verdict was
returned on January 24, 2003, consisting of the jury finding in favor of
the plaintiffs regarding the alleged wrongful limiting of the number of
shares that plaintiffs could sell during the 12-month period ended March
11, 1999; the judge and jury rejected the other claims.
In connection with this litigation, the Company incurred $9.7 million of
litigation charges at December 31, 2002, which includes the jury award of
$7.6 million, professional fees of $1.1 million and an estimate of $1.0
million for attorney fees and pre-judgment interest.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 2002 Compared to Year Ended
December 31, 2001 (Continued)
Other Expense. Other expense consists principally of interest expense, net
of interest income. For 2001, actual interest expense of $770,000 was
offset by $599,000 of interest income, which was principally earned from an
income tax refund claim with the Internal Revenue Service. Interest
expense, net, decreased $2.1 million, or 93% for fiscal 2002 as compared to
fiscal 2001. 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 and the effect of lower interest rates on borrowed funds.
Income Tax. Income tax expense decreased 91.0%, or $6.3 million, for fiscal
2002 as compared to fiscal 2001. This decrease was attributable to a lower
level of income before taxes for fiscal 2002 as compared to fiscal 2001.
The effective tax rate was 28.1%, for fiscal 2002 as compared to 42.8% for
fiscal 2001. The reduction was attributable to tax deductible amortization
of intangibles in 2002.
Amortization of Intangibles. Amortization of intangibles for fiscal 2002
and 2001 was net of income tax benefit of $8,700 and $908,000,
respectively. Amortization of intangibles decreased 99.8%, or $5.4 million,
for fiscal 2002 as compared to fiscal 2001. 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 fiscal 2002, all previously recognized goodwill and
intangible assets with indefinite lives were no longer subject to
amortization. If SFAS 142 had been in effect on January 1, 2001, net loss
per share would have been $1.27 per share for fiscal 2001 as compared to a
net loss per share of $2.28 for 2002.
Goodwill Impairment. As a result of the softness experienced in the IT
sector and the resultant revenue decline, management had been closely
monitoring the operating results of its IT branches throughout the year,
instituting significant reductions in selling, general and administrative
expenses and increasing efforts to revitalize sales levels. However, during
the fourth quarter, given the current economic environment and continued
reduction of capital spending on technology, management determined that
operating performance of certain of its branches indicated that the
possibility of impairment of goodwill arising at acquisition might be
impaired. The Company performed its annual impairment test as of November
30, 2002 in accordance with SFAS No. 142. The Company determined the fair
value of its reporting units using 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. The
analysis revealed that goodwill, amounting to approximately $30.0 million
($24.7 million after taxes) had been impaired and, therefore, would not be
recoverable through future profitable operations of these branches.
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 ($967,000 net of income tax
benefit of $644,000) for fiscal 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 fiscal 2002. The tax effected operating results of the reporting
unit sold were losses of $29,000 for fiscal 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.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Revenues. Revenues decreased 23.1%, or $70.7 million, for fiscal 2001 as
compared to fiscal 2000. 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.
Cost of Services. Cost of services decreased 24.3%, or $55.2 million, for
fiscal 2001 as compared to fiscal 2000. This decrease was primarily due to
a decrease in salaries and compensation associated with the decreased
revenues experienced during fiscal 2001. Cost of services as a percentage
of revenues decreased to 73.3% for fiscal 2001 from 74.4% for fiscal 2000.
This decline was primarily attributable to continuing efforts by the
Company to seek higher margin business. However, there can be no assurances
that this improvement in gross margin percentage will continue.
Selling, General and Administrative. Selling, general and administrative
("SGA") expenses decreased 21.4%, or $11.7 million, for fiscal 2001 as
compared to fiscal 2000. 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 18.3% for fiscal 2001 as compared 17.8% for fiscal 2000. The
0.5% increase results from certain SGA costs, which could not be reduced in
direct portion to the reduction in revenues.
Depreciation. Depreciation decreased 2.3%, or $27,000, for fiscal 2001 as
compared to fiscal 2000. This decrease was primarily due to write down of
certain fixed assets to net realizable value in fiscal 2000.
Other (Expense) Income, Net. Other (expense) income consists principally of
interest expense, net of interest income. For fiscal 2001, actual interest
expense of $2.6 million was offset by $297,000 of interest income, which
was earned from the investment in interest bearing deposits. Interest
expense, net decreased 38.7% or $1.4 million for fiscal 2001 as compared to
fiscal year 2000. 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 $702,000, for fiscal 2001 as
compared to fiscal 2000. This decrease was attributable to a lower level of
income before taxes and goodwill amortization for fiscal 2001 compared to
fiscal 2000.
Goodwill Amortization. Goodwill amortization for fiscal 2001 and fiscal
2000 was net of income tax benefit of $706,000 and $1.1 million,
respectively. Goodwill amortization net of tax benefit increased 22.7% or
$995,000 for fiscal 2001 as compared to fiscal 2000. This increase was
primarily due to the amortization of intangible assets acquired in
connection with acquisitions completed prior to fiscal 2001.
Goodwill Impairment, Restructuring and Unusual Charges. As a result of the
softness experienced in the IT sector and the resultant revenue decline,
management had been closely monitoring the operating results of its IT
branches throughout the year, instituting significant reduction in selling,
general and administrative expenses and increasing efforts to revitalize
sales levels. However, during the fourth quarter, given the current
economic environment and continued reduction of capital spending on
technology, management determined that operating performance of certain of
its branches indicated that the possibility of impairment of goodwill
arising at acquisition might be impaired. Based on current operating
results and existing business conditions, management projected cash flows
for these branches and compared such projected flows to the carrying value
of the respective branch's goodwill. The analysis revealed that goodwill
amounting to approximately $35.0 million ($22.8 million after taxes) had
been impaired and, therefore, would not be recoverable through future
profitable operations of these branches.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity And Capital Resources
Operating activities provided $30.5 million of cash for fiscal 2002 as
compared to operating activities providing $29.9 million of cash for fiscal
2001. The increase in cash provided by operating activities was primarily
attributable to the collection of an income tax refund receivable.
Investing activities used $6.0 million for the fiscal 2002 as compared to
$15.0 million for the comparable 2001 period. The reduction in the use of
cash for investing activities for the fiscal 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 from the collection of
$14.8 of income tax refunds) used $23.9 million in 2002 as compared to
financing activities using $15.6 million for the comparable period.
The Company and its subsidiaries entered into an amended and restated loan
agreement on May 31, 2002, further amended on February 26, 2003) with
Citizens Bank of Pennsylvania, administrative agent for a syndicate of
banks, which provides for a $40.0 million (reduced to $25.0 million on
February 26, 2003) 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. As cash flow permits and depending on interest rate movements, the
Company may, from time to time and subject to a nominal prepayment fee,
apply available cash flows to reduce the Revolving Credit Facility. The
Company repaid approximately $24.1 million, of which $14.7 million
originated from a federal income tax refund.
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 fiscal 2002 and
2001 were 4.06% and 6.49%, respectively. The amounts outstanding under the
Revolving Credit Facility at December 31, 2002 and December 31, 2001 were
$7.4 million and $31.5 million, respectively. At December 31, 2002, the
Company had availability (including amounts outstanding) under the
Revolving Credit Facility of $21.5 million. (Note 8 and 9)
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 litigation as described in Footnote 16 (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 anticipates that if it is unsuccessful in having damages
vacated or reduced significantly, related to the $7.6 million verdict
returned in January 2003, it would need to borrow funds under its Revolving
Credit Facility in order to satisfy payment of the damages. The Company
believes that its borrowing base is sufficient to manage this additional
borrowing.
The Company's business strategy is to achieve growth both internally
through operations and externally through strategic acquisitions. The
Company from time to time engages in discussions with potential acquisition
candidates. As the size of the Company and its financial resources
increase, however, acquisition opportunities requiring significant
commitments of capital may arise. In order to pursue such opportunities,
the Company may be required to incur debt or issue potentially dilutive
securities in the future. No assurance can be given as to the Company's
future acquisition and expansion opportunities or how such opportunities
will be financed.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity And Capital Resources (Continued)
The Company does not currently have material commitments for capital
expenditures and does not currently 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.
At December 31, 2002, the Company has a current deferred tax asset of
$6,246,119, primarily representing the tax effect of the net operating loss
carry forwards, and the litigation reserve. The Company expects to utilize
the deferred tax asset during the year ended December 31, 2003.
At December 31, 2001, the Company had recorded, based on the enacted law at
that time, a deferred tax asset of $8,268,813 (current - $5,600,000;
long-term - $2,668,813), primarily representing the tax effect of net
operating loss carry forwards. As a result of 2002 tax law changes
increasing the loss carryback period from 3 to 5 years, substantially all
deferred tax assets recorded at December 31, 2001 were realized in the
second quarter of 2002. The proceeds were principally used to reduce
outstanding debt.
The Company's contractual obligations as of December 31, 2002 are as
follows (In Thousands):
Payments Due by Period
--------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
----------- ------------ ------------ ------------ -------------
Note Payable (1) $7,420 $7,420
Operating Leases 10,745 $2,094 2,909 $2,106 $3,636
----------- ------------ ------------ ------------ -------------
Total Obligations $18,165 $2,094 $10,329 $2,106 $3,636
=========== ============ ============ ============ =============
(1) The Revolving Credit Facility agreement expires in August 2004.
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
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 fiscal years beginning after
December 15, 2001. SFAS No. 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize
them; accordingly, the Company no longer amortizes goodwill and indefinite
lived intangible assets, thereby eliminating an annual amortization charge
of approximately $4.7 million.
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.
The transitional impairment testing was completed during the second quarter
of 2002, and as of January 1, 2002, the transition date, there was no
impairment of goodwill.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Recently Issued Accounting Standards (Continued)
For purposes of the annual impairment testing, the Company determined the
fair value of its reporting units using relative market multiples for
comparable businesses, as of November 30, 2002. The Company compared the
fair value of each of its reporting units to their respective carrying
values, including related goodwill, which resulted in an impairment loss of
approximately $30 million.
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 $967,000
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.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires companies
to recognize costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 is effective prospectively for exit and disposal activities
initiated after December 31, 2002. As the provisions of SFAS 146 are to be
applied prospectively after the adoption date, the Company cannot determine
the potential effects that the adoption of SFAS 146 will have on its
consolidated financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS 148 amends SFAS 123
"Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS 148 is effective for fiscal
years beginning after December 15, 2002. The expanded annual disclosure
requirements and the transition provisions are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. Management does not expect the
adoption of SFAS 148 to have a material effect on the Company's financial
position, results of operations, or cash flows.
23
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and debt instruments, which
primarily consist of its line of credit. The Company does not have any
derivative financial instruments in its portfolio. The Company places its
investments in instruments that meet high credit quality standards. The
Company is adverse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk
and reinvestment risk. As of December 31, 2002, the Company's investments
consisted of cash and money market funds. The Company does not use interest
rate derivative instruments to manage its exposure to interest rate
changes. Presently the impact of a 10% (approximately 40 basis points)
increase in interest rates on its variable debt (using average debt
balances during the year ended December 31, 2002 and average interest
rates) would have a relatively nominal impact on the Company's results of
operations. The Company does not expect any material loss with respect to
its investment portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The 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.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the 2003 Proxy Statement beginning immediately following
the caption "ELECTION OF DIRECTORS" to, but not including, the caption
"EXECUTIVE COMPENSATION" and the additional information in the 2003 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 2003 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 2003 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 2003 Proxy Statement beginning immediately following
the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
MANAGEMENT" to, but not including, the caption "ELECTION OF DIRECTORS" is
incorporated herein by reference.
The table below presents certain information concerning securities issuable
in connection with equity compensation plans that have been approved by the
Company's shareholders and that have not been approved by the Company's
shareholders.
Number of securities
remaining available for
Number of securities to be Weighted-average exercise issuance under equity
issued upon exercise of price of outstanding compensation plans
outstanding options, options, warrants and (excluding securities
Plan category warrants and rights rights reflected in column (a)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security
holders............... 2,474,214 $7.15 713,031
Equity compensation plans not
approved by security
holders...............
...................Total 2,474,214 $7.15 713,031
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 2003 Proxy Statement beginning immediately following
the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" is
incorporated herein by reference.
25
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer (principal executive officer) and
Chief Financial Officer (principal financial officer) have concluded, based
on an evaluation conducted within 90 days prior to the filing date of this
Annual Report on Form 10-K, 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 Annual Report on Form 10-K 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 Annual Report on Form 10-K, and
(ii)the financial statements, and other financial information included in
this Annual Report on Form 10-K, 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 Annual
Report on Form 10-K.
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.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statement Schedules -- See "Index to Financial
Statements and Schedules" on F-1.
3. See Item (c) below.
(b) Reports on Form 8-K
1. RCM Technologies, Inc. Current Report on Form 8-K dated January 24,
2003.
(c) Exhibits
(3)(a) Articles of Incorporation, as amended; incorporated by reference
to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1994.
(3)(b) Bylaws, as amended; incorporated by reference to Exhibit 3 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended 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) 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)(b) 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)(c) RCM Technologies, Inc. 1996 Executive Stock Option Plan
dated August 15, 1996; incorporated by reference to Exhibit 10(l)
to the Registrant's Annual Report on Form 10-K for the year ended
October 31, 1996 (the "1996 10-K").
* (10)(d) 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).
26
PART IV (CONTINUED)
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(c) Exhibits (Continued)
* (10)(e) 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)(f) 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)(g) RCM Technologies, Inc. 2001 Employee Stock Incentive Plan;
incorporated by reference to Exhibit A to the Registrant's Proxy
Statement dated March 3, 2001, filed with the Commission on
February 28, 2001.
(10)(h) Amended and Restated Loan and Security Agreement dated May 31,
2002 between RCM Technologies, Inc. and All of its Subsidiaries
with Citizens Bank of Pennsylvania, as Administrative Agent and
Arranger.
* (10)(i) Severance Agreement dated June 10, 2002 between
RCM Technologies, Inc. and Leon Kopyt.
* (10)(j) Exhibit A To Severance Agreement General Release.
(10)(k) Amendment And Modification to Amended And Restated Loan and
Security Agreement dated December 30, 2002, between RCM
Technologies, Inc. and all of its Subsidiaries and Citizens Bank
of Pennsylvania , as Administrative Agent and Arranger (filed
herewith).
(10)(l) Second Amendment And Modification to Amended And Restated Loan and
Security Agreement dated February 26, 2003, between RCM
Technologies, Inc. and all of its Subsidiaries and Citizens Bank
of Pennsylvania , as Administrative Agent and Arranger (filed
herewith).
(11) Computation of Earnings Per Share.
(21) Subsidiaries of the Registrant.
(23) Consent of Grant Thornton LLP.
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.
* Constitutes a management contract or compensatory plan or arrangement.
27
CERTIFICATION
I, Leon Kopyt, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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
annual 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: February 26, 2003
/s/ Leon Kopyt
-------------------------
Leon Kopyt
Chief Executive Officer
28
CERTIFICATION
I, Stanton Remer, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual 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
annual 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: February 26, 2003
/s/ Stanton Remer
--------------------------
Stanton Remer
Chief Financial Officer
29
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 26, 2003 By:/s/ Leon Kopyt
-------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer and
Director
Date: February 26, 2003 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 26, 2003 /s/ Leon Kopyt
--------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: February 26, 2003 /s/ Brian Delle Donne
---------------------------------------
Brian Delle Donne
Chief Operating Officer (Principal Operating Officer)
and Director
Date: February 26, 2003 /s/ Stanton Remer
-------------------------------
Stanton Remer
Chief Financial Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer) and
Director
Date: February 26, 2003 /s/ Norman S. Berson
----------------------------
Norman S. Berson
Director
Date: February 26, 2003 /s/ Robert B. Kerr
-------------------------------
Robert B. Kerr
Director
Date: February 26, 2003 /s/ David Gilfor
-----------------------------
David Gilfor
Director
30
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Consolidated Balance Sheets, December 31, 2002 and 2001 F-2
Consolidated Statements of Operations,
Years Ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Changes in Shareholders' Equity and
Consolidated Statements of Comprehensive Loss,
Years Ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Cash Flows,
Years Ended December 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-9
Independent Auditors' Report F-30
Schedules I and II F-31
F-1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
ASSETS
2002 2001
--------------- ---------------
Current assets
Cash and cash equivalents $2,845,154 $ 2,289,743
Accounts receivable, net of allowance for doubtful accounts
of $1,549,000 and $1,795,000 in 2002
and 2001, respectively 31,753,934 41,174,828
Income tax refund receivable 3,766,585 6,810,093
Prepaid expenses and other current assets 2,635,304 2,968,612
Deferred tax assets 6,246,119 5,600,000
--------------- ---------------
Total current assets 47,247,096 58,843,276
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 9,708,344 11,131,750
Less: accumulated depreciation and amortization 3,818,092 4,282,985
--------------- ---------------
5,890,252 6,848,765
--------------- ---------------
Other assets
Deposits 86,590 175,691
Goodwill 36,653,595 62,499,025
Intangible assets, net of accumulated amortization
of $211,000 and $190,000 in 2002
and 2001, respectively 99,655 120,375
Deferred tax assets 2,668,813
--------------- ---------------
36,839,840 65,463,904
--------------- ---------------
Total assets $89,977,188 $131,155,945
=============== ===============
F-2
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
December 31, 2002 and 2001
LIABILITIES AND SHAREHOLDERS' EQUITY
2002 2001
--------------- ---------------
Current liabilities
Note payable $7,420,000 $31,500,000
Accounts payable and accrued expenses 14,728,729 8,653,876
Accrued payroll 4,363,024 5,137,336
Payroll and withheld taxes 193,850 375,784
Income taxes payable 4,025,431 2,199,149
--------------- ---------------
Total current liabilities 30,731,034 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; 10,626,076 and
10,571,761 shares issued and outstanding in
2002 and 2001, respectively 531,304 528,588
Accumulated other comprehensive loss (584,084) (484,283)
Additional paid-in capital 93,935,938 93,746,569
Accumulated deficit (34,637,004) (10,501,074)
--------------- ---------------
59,246,154 83,289,800
--------------- ---------------
Total liabilities and shareholders' equity $89,977,188 $131,155,945
=============== ===============
F-3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
-------------- -------------- --------------
Revenues $186,650,616 $234,739,066 $305,444,247
Cost of services 139,985,755 172,163,326 227,399,083
-------------- -------------- --------------
Gross profit 46,664,861 62,575,740 78,045,164
-------------- -------------- --------------
Operating costs and expenses
Selling, general and administrative 33,320,034 42,840,489 54,493,684
Depreciation 1,258,323 1,124,601 1,152,183
Amortization 20,720 6,292,942 5,494,141
Impairment of goodwill 29,990,099 34,993,435 35,334,972
Unusual items
Restructuring charge 1,371,740
Non recurring 2,100,000
Litigation charge 9,717,663
-------------- -------------- --------------
74,306,839 85,251,467 99,946,720
-------------- -------------- --------------
Operating loss (27,641,978 ) (22,675,727 ) (21,901,556 )
-------------- -------------- --------------
Other (expenses) income
Interest (expense), net of interest income (171,900 ) (2,289,096 ) (3,677,577 )
Gain (loss) on foreign currency transactions 16,967 20,837 (24,728 )
-------------- -------------- --------------
(154,933 ) (2,268,259 ) (3,702,305 )
-------------- -------------- --------------
Loss from continuing operations
before income taxes (27,796,911 ) (24,943,986 ) (25,603,861 )
Income tax benefit (4,628,046 ) (6,208,058 ) (3,655,511 )
-------------- -------------- --------------
Loss from continuing operations (23,168,865 ) (18,735,928 ) (21,948,350 )
(Loss) gain from discontinued operations
net of taxes of $644,000 (2002),
$13,400 (2001) and $34,600 (2000) (967,065 ) (20,041 ) 51,964
-------------- -------------- --------------
Net loss ($24,135,930 ) ( $18,755,969 ) ($21,896,386 )
========== ========== ==========
F-4
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------- -------------- --------------
Basic earnings per share
Loss from continuing operations ($2.19 ) ($1.78 ) ($2.09 )
Loss from discontinued operations ( .09 )
---------- ----- -----
Net loss ($2.28 ) ($1.78 ) ($2.09 )
====== ===== ======
Weighted average number of common shares
outstanding 10,585,503 10,519,701 10,499,305
Diluted earnings per share
Loss from continuing operations ($2.19 ) ($1.78 ) ($2.09 )
Loss from discontinued operations ( .09 )
---------- ----- -----
Net loss ($2.28 ) ($1.78 ) ($2.09 )
====== ===== ======
Weighted average number of common and
common equivalent shares outstanding 10,585,503 10,519,701 10,499,305
F-5
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Accumulated Retained
Common Stock Other Additional Earnings
------------ Comprehensive Paid-in (Accumulated
Shares Amount Loss Capital Deficit)
------ ---- -------- -------- --------
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
Issuance of stock under employee
stock purchase plan 72,110 3,606 230,489
Translation adjustment (250,652)
Net loss (18,755,969)
------------- -------------- ----------------- ---------------- --------------
Balance, December 31, 2001 10,571,761 528,588 (484,283) 93,746,569 (10,501,074)
Issuance of stock under employee
stock purchase plan 53,410 2,671 187,885
Exercise of stock options 905 45 1,484
Translation adjustment (99,801)
Net loss (24,135,930)
------------- -------------- ----------------- ---------------- ---------------
Balance, December 31, 2002 10,626,076 $531,304 ($584,084) $93,935,938 ($34,637,004)
============= ============== ================= ================ ===============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
--------------- --------------- ------------------
Net Loss ($24,135,930 ) ($18,755,969 ) ($21,896,386 )
Foreign currency translation
adjustment (99,801 ) (250,652 ) (180,867 )
--------------- --------------- ------------------
Comprehensive Loss ($24,235,731 ) ($19,006,621 ) ($22,077,253 )
=============== =============== ==================
F-6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
-------------- -------------- --------------
Cash flows from operating activities:
Net loss ($24,135,930 ) ($18,755,969 ) ($21,896,386 )
-------------- -------------- --------------
Adjustments to reconcile net Loss to net cash provided by operating
activities:
Loss (gain) on discontinued operations 967,065 20,041 (51,964 )
Depreciation and amortization 1,279,043 7,417,543 6,648,139
Provision for allowances on accounts
receivable (246,000 ) (80,000 ) 861,000
Restructuring and unusual charges 29,990,099 34,993,435 38,806,712
Changes in assets and liabilities:
Accounts receivable 9,666,894 22,937,736 1,761,114
Income tax refund receivable 3,043,508 607,165 (7,417,258 )
Deferred tax 2,022,694 (6,819,295 ) (1,449,518 )
Prepaid expenses and other current assets (774,602 ) 192,627 (1,148,515 )
Accounts payable and accrued expenses 6,074,855 (6,999,251 ) 8,052,333
Accrued payroll (774,314 ) (2,553,922 ) 952,494
Payroll and withheld taxes (181,934 ) (936,044 ) 42,563
Income taxes payable 3,578,189 (93,720 ) 1,501,695
-------------- -------------- --------------
Total adjustments 54,645,497 48,686,315 48,558,795
-------------- -------------- --------------
Net cash provided by operating activities $30,509,567 $29,930,346 $26,662,409
-------------- -------------- --------------
F-7
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds on sale of reporting unit $ 100,000
Property and equipment acquired (626,978 ) ($1,819,593 ) ($1,669,470 )
Decrease (increase) in deposits 89,101 47,821 (17,634 )
Cash paid for acquisitions,
net of cash acquired (5,528,563 ) (13,222,932 ) (25,692,538 )
-------------- -------------- --------------
Net cash used in investing activities (5,966,440 ) (14,994,704 ) (27,379,642 )
-------------- -------------- --------------
Cash flows from financing activities:
Repayments of note payable (24,080,000 ) (15,800,000 )
Sale of stock for employee stock purchase plan 190,556 234,095
Exercise of stock options 1,529 42,950
-------------- -------------- --------------
Net cash (used in) provided by financing
Activities (23,887,915 ) (15,565,905 ) 42,950
-------------- -------------- --------------
Effect of exchange rate changes on cash
and cash equivalents (99,801 ) (250,652 ) (180,867 )
-------------- -------------- --------------
Net increase (decrease) in cash
and cash equivalents 555,411 (880,915 ) (855,150 )
Cash and cash equivalents at beginning of year 2,289,743 3,170,658 4,025,808
-------------- -------------- --------------
Cash and cash equivalents at end of year $2,845,154 $2,289,743 $3,170,658
============== ============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $835,221 $2,645,404 $4,215,266
Income taxes (refund) (12,164,528 ) 793,591 4,831,496
Acquisitions:
Fair value of assets acquired, including
contingent consideration payments 5,528,563 13,222,932 40,506,867
Liabilities assumed 14,814,329
-------------- -------------- --------------
Cash paid, net of cash acquired $5,528,563 $13,222,932 $25,692,538
============== ============== ==============
F-8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
RCM Technologies is a premier provider of business and technology solutions
designed to enhance and maximize the performance of its customers through
the adaptation and deployment of advanced information technology and
engineering services. RCM's offices are located in major metropolitan
centers throughout North America.
The consolidated financial statements are comprised of the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of the
financial statements in conformity with 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.
Cash and Cash Equivalents
The Company considers its holdings of highly liquid money-market
instruments to be cash equivalents if the securities mature within 90 days
from the date of acquisition. These investments are carried at cost, which
approximates fair value.
Allowance for Doubtful Accounts
An allowance against accounts receivables is provided for receivables that
are not expected to be realized. The allowance is established based on
historical experience and for any receivables that are known or estimated
to be un- collectible.
Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line method at rates calculated to provide for retirement of
assets at the end of their estimated useful lives. The annual rates are 20%
for computer hardware and software as well as furniture and office
equipment. Leasehold improvements are amortized over the shorter of the
estimated life of the asset or the lease term.
Goodwill
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 is
reflected in the consolidated balance sheets as goodwill. Goodwill, net of
amortization, at December 31, 2002 and 2001 was $36,653,000 and
$62,499,000, respectively, and was being amortized on a straight-line
method over twenty years effective January 1, 2001. Effective January 1,
2002, all previously recognized goodwill and intangible assets with
indefinite lives are no longer subject to amortization. The amortization
period prior to January 1, 2001 was 40 years. Amortization expense for the
years ended December 31, 2002 and 2001 and 2000 was $-0-, $6,293,000 and
$5,494,000, respectively.
F-9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill (Continued)
The Company performed an impairment review in accordance with the
requirements of SFAS No. 142 for the calendar year 2002 and in accordance
with SFAS No. 121 for calendar years 2001 and 2000. During the fourth
quarter of calendar 2002 and 2001 and the third quarter of calendar 2000,
the reviews indicated that there was an impairment of value, which resulted
in a $30.0 million and $35.0 million and $35.3 million charge to expense
for the years ended December 31, 2002 and 2001 and 2000, respectively, in
order to properly reflect the appropriate carrying value of goodwill.
Change in Accounting Estimate
Effective January 1, 2001, the Company had 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 $3,146,000 or $.29 on a diluted earnings per share
basis, for the year ended December 31, 2001.
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, 2002, 2001and 2000, the Company
capitalized approximately $287,000, $176,000 and $506,000, respectively, of
software costs in conformity with SOP 98-1.
Income Taxes
The Company and its wholly owned subsidiaries file a consolidated federal
income tax return. The Company follows the liability method of accounting
for income taxes. Under this method, deferred income tax assets and
liabilities are determined based on differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable for the period and the change during the period
in deferred tax assets and liabilities.
Revenue Recognition
The Company derives its revenues from several sources. All of the Company's
segments perform staffing services. The Company's Professional Engineering
Services and Information Technology Services segments also perform project
services. The Information Technology Services segment also derives revenue
from permanent placement fees.
F-10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Staffing Services - Revenues derived from staffing services are recorded on
a gross basis as services are performed and associated costs have been
incurred using employees of the Company. In these circumstances, the
Company assumes the risk of acceptability of its employees to its
customers.
Project Services - Project services are generally provided on a
cost-plus-fixed-fee or time-and-material basis. Typically, a customer will
outsource a discrete project or activity and the Company assumes
responsibility for performance of the function or project. The Company
recognizes revenues and associated costs on a gross basis as services are
performed and costs are incurred using its employees. In instances where
project services are provided on a fixed-price basis, and the contract will
extend beyond a 12-month period, revenue is recorded in accordance with the
terms of each contract. In some instances, revenue is billed and recorded
at the time certain milestones are reached, as defined in the contract. In
other instances, revenue is billed and recorded based upon contractual
rates per hour. In addition some contracts contain "Performance Fees"
(bonuses) for completing a contract under budget. Performance fees, if any,
are recorded when the contract is completed and the revenue is reasonably
certain of collection. Some contracts also limit revenues and billings to
maximum amounts. Expenses related to contracts that extend beyond a
12-month period are charged to "Cost of Services" as incurred.
Permanent Placement Fees - The Company earns permanent placement fees. Fees
for placements are recognized at the time the candidate commences
employment. Based upon the Company's historical experience, the Company's
refunds to customers have been immaterial. However, an allowance for such
refunds is recorded in the financial statements. Revenues are recorded on a
gross basis as a component of revenue.
During 2002, one customer accounted for 12.2% of the Company's revenues.
During 2001 and 2000 no single customer accounted for more than 6% of the
Company's revenues.
In January 2002, the Emerging Issues Task Force of the FASB (the EITF)
issued Consensus No. 01-14 "Income Statement Characterization of
Reimbursements Received for `Out-of-Pocket' Expenses Incurred". This
consensus requires that certain reimbursable costs incurred and re-billed
to customers be included in both revenues and cost of services, rather than
"netting" these amounts in revenues. EITF Consensus 01-14 is effective for
fiscal years commencing after December 15, 2001. The Company has
implemented this Consensus for the year 2002 and appropriately reclassified
prior periods. This Consensus did not affect the financial position or net
earnings, and is not expected to have a material effect on revenues and
cost of services.
Foreign Currency Translation
The Company's foreign subsidiary uses local currency as the functional
currency. Net assets are translated at year-end rates while revenues and
expenses are translated at average exchange rates. Adjustments resulting
from these translations are reflected in "Accumulated Other Comprehensive
Loss" in shareholders' equity. Gains and losses arising from foreign
currency transactions are reflected in the consolidated statements of
earnings.
F-11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
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:
Year Ended Year Ended Year Ended
December 31, December December
2002 31, 2001 31, 2000
--------------- ------------- -------------
Basic average shares outstanding 10,585,503 10,519,701 10,499,305
Dilutive effect of stock options
--------------- ------------- -------------
Dilutive shares 10,585,503 10,519,701 10,499,305
=============== ============= =============
Options to purchase 2,474,214 shares of common stock at prices ranging from
$3.00 to $15.31 per share were outstanding during the year ended December
31, 2002, but were not included in the computation of diluted EPS because
of net loss incurred in 2002.
Options to purchase 2,415,780 shares of common stock at prices ranging from
$3.00 to $15.31 per share were outstanding during the year ended December
31, 2001, but were not included in the computation of diluted EPS because
of net loss incurred in 2001.
Options to purchase 1,367,795 shares of common stock at prices ranging from
$3.00 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.
Stock-Based Compensation
The Company accounts for stock options under SFAS No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123
permits entities to continue accounting for employee stock options and
similar equity instruments under Accounting Principles Board (APB) Opinion
25, Accounting for Stock Issued to Employees. Entities that continue to
account for stock options using APB Opinion 25 are required to make pro
forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
F-12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation (Continued)
At December 31, 2002, the Company has four stock-based employee
compensation plans, which are more fully described in note 10. The Company
accounts for the plans under the recognition and measurement principles of
APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Stock-based employee compensation costs are not reflected
in net loss, as all options granted under the plan had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123, to stock-based employee compensation (in thousands, except
per share amounts).
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
---------------- ---------------------------------
Net loss:
As reported ($24,135,930) ($18,755,969) ($21,896,386)
Pro forma (25,665,341) ($21,768,692) ($22,600,103)
Diluted loss per share:
As reported ($2.28) ($1.78) ($2.09)
Pro forma ($2.42) ($2.07) ($2.15)
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
2002, 2001 and 2000, respectively: expected volatility of 49% in 2002 and
70% in 2001 and 2000; risk-free interest rates of 4.06%, 5.91% and 5.91%;
and expected lives of 5 years. The weighted-average per share fair value of
options granted during fiscal years 2002, 2001 and 2000 was $2.18, $4.66
and $4.22, respectively.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising expense was
$576,000, $722,000, and $1,871,000 for the years ended December 31, 2002,
2001 and 2000, respectively.
Fair Value of Financial Instruments
The carrying value of significant financial instruments approximates fair
value because of the nature and characteristics of its financial
instruments. The Company's financial instruments are accounts receivable,
accounts payable, note payable and investments held in the deferred
compensation plan. The Company does not have any off-balance sheet
financial instruments or derivatives.
F-13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses and disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
The Company has risk participation arrangements with respect to workers
compensation and health care insurance. The amounts included in the
Company's costs related to this risk participation are estimated and can
vary based on changes in assumptions, the Company's claims experience or
the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty
relating to the performance of the U.S. economy, competition, demand for
the Company's services, adverse litigation and claims and the hiring,
training and retention of key employees.
Reclassifications
Certain prior year financial statement amounts have been reclassified to be
consistent with the presentation for the current year.
New Accounting Standards
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 fiscal years beginning after
December 15, 2001. SFAS No. 142 includes requirements to test goodwill and
indefinite lived intangible assets for impairment rather than amortize
them; accordingly, the Company no longer amortizes goodwill, thereby
eliminating an annual amortization charge of approximately $4.7 million.
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.
The transitional impairment testing was completed during the second quarter
of 2002, and as of January 1, 2002, the transition date, there was no
impairment of goodwill.
For purposes of the annual impairment testing, the Company determined the
fair value of its reporting units using and relative market multiples for
comparable businesses, as of November 30, 2002. The Company compared the
fair value of each of its reporting units to their respective carrying
values, including related goodwill, which resulted in an impairment loss of
approximately $30 million.
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 $967,000
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.
F-14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards (Continued)
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.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires companies
to recognize costs associated with exit or disposal activities when they
are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS 146 is effective prospectively for exit and disposal activities
initiated after December 31, 2002. As the provisions of SFAS 146 are to be
applied prospectively after the adoption date, the Company cannot determine
the potential effects that the adoption of SFAS 146 will have on its
consolidated financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS 148 amends SFAS 123
"Accounting for Stock-Based Compensation," to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148
amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS 148 is effective for fiscal
years beginning after December 15, 2002. The expanded annual disclosure
requirements and the transition provisions are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002. Management does not expect the
adoption of SFAS 148 to have a material effect on the Company's financial
position, results of operations, or cash flows.
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 ($967,000 net of income tax benefit of $644,000) for the year ended
December 31, 2002, or $.09 per share and $33,400 ($20,000 net of income tax
benefit of $13,400) for the year ended December 31, 2001, or $0.0 per share
and income of $86,600 ($52,000 net of income tax of $34,600) for the year
ended December 31, 2000, or $0.0 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 operations for each of
the three years in the period ended December 31, 2002. The Company has not
discontinued its commercial services business segment. The financial
statements for the comparative periods have been reclassified for
comparative purposes.
F-15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
3. UNUSUAL ITEMS
During the years ended December 31, 2002 and 2001 and 2000, the Company
recorded the following unusual items:
In Millions 2002 2001 2000
-----------
--------- --------- ---------
Restructuring charge $1.4
Other nonrecurring charges 2.1
Litigation charge $9.7
--------- --------- ---------
$9.7 $ $3.5
========= ========= =========
Restructuring Charge
The restructuring charge of $1.4 million for the year ended December 31,
2000 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 for the year ended December 31,
2000 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.
Litigation Charge
In 1998, two shareholders, who were formerly officers and directors of the
Company, filed suit against the Company alleging wrongful termination of
their employment, failure to make required severance payments, wrongful
conduct by the Company in connection with the grant of stock options, and
wrongful conduct by the Company resulting in the non-vestiture of their
option grants. The complaint also alleged that the Company wrongfully
limited the number of shares of the Company's common stock that could have
been sold by the plaintiffs under a Registration Rights Agreement entered
into in connection with the underlying acquisition transaction pursuant to
which the plaintiffs became shareholders of the Company. The complaint
sought damages of approximately $480,000 on the severance pay claim. 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 the plaintiffs sold their shares during that period and
thereafter.
F-16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
3. UNUSUAL ITEMS (CONTINUED)
Litigation Charge (Continued)
The claim relating to the wrongful termination of the employment of one of
the plaintiffs and the claims of both plaintiffs concerning the grant of
stock options were resolved in binding arbitration in early 2002. A trial
on the remaining claims commenced on December 2, 2002 and a verdict was
returned on January 24, 2003. The claims adjudicated at the trial were: (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, on which a verdict awarding damages against the
Company of $7.6 million was returned; (ii) the claim for the alleged
wrongful termination of one of the plaintiffs, which was dismissed by the
trial judge; (iii) that same plaintiff's claim of entitlement to severance
pay of $230,000 under his employment agreement, which was rejected by the
jury in a verdict that the plaintiff will likely seek to set aside; and
(iv) the claims by both plaintiffs for the alleged wrongful prevention of
stock option vestiture, which were rejected by the jury. The Company's
motion to strike all claims for punitive damages was granted.
In connection with this litigation, the Company incurred $9.7 million of
litigation charges at December 31, 2002, which includes the jury award of
$7.6 million, professional fees of $1.1 million and an estimate of $1.0
million for attorney fees and pre-judgment interest.
4. ACQUISITIONS
During the three year period ended December 31, 2002, the Company acquired
3 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.
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. As of December 31, 2002, the Company estimates that the sum
of the Deferred Consideration and Earnouts to be as follows:
Year Ending Amount
---------------- ----------------
2003 $1,900,000
================
The Deferred Consideration and Earnouts, when paid, will be recorded as
additional purchase consideration and added to intangible assets on the
consolidated balance sheet. The Company's acquisition activities are as
follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
---------------- ---------------- ---------------
Number of acquisitions 3
Consideration paid:
Cash at closing $10,375,000
Deferred consideration payments $5,529,000 $13,200,000 $13,800,000
F-17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
4. ACQUISITIONS (CONTINUED)
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 Year Ended
December 31, December 31, December 31,
2002 2001 2000
---------------- ---------------- ---------------
Revenues $186,651,000 $234,739,000 $305,444,000
Operating income before goodwill
impairment and unusual items 12,066,000 12,318,000 18,554,000
Impairment of goodwill (29,990,000) ( 34,993,000) (35,335,000)
Unusual items (9,718,000) (3,472,000)
Net loss ($24,136,000) ($18,756,000) ($21,101,000)
Loss per share, basic and diluted ($2.28) ($1.78) ($2.09)
5. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
December 31,
----------------------------------
2002 2001
--------------- ----------------
Equipment and furniture $2,370,922 $3,370,458
Computer equipment and software 6,767,050 7,197,481
Leasehold improvements 570,372 563,811
--------------- ----------------
9,708,344 11,131,750
Less: accumulated depreciation and
amortization 3,818,092 4,282,985
--------------- ----------------
$5,890,252 $6,848,765
=============== ================
6. GOODWILL AND OTHER INTANGIBLES
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and
Other Intangible Assets." SFAS 142 includes requirements to test Goodwill
and indefinite lived intangible assets for impairment rather than amortize
them; accordingly, the Company no longer amortizes Goodwill and indefinite
lived intangible assets, thereby eliminating annual amortization of
approximately $4.7 million.
SFAS 142 also requires the Company 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. The transitional
impairment testing was completed during the second quarter of 2002, and as
of January 1, 2002, the transition date, there was no impairment of
goodwill.
Annual Impairment Test
As a result of the softness experienced in the IT sector and the resultant
revenue decline, management had been closely monitoring the operating
results of its IT branches throughout the year, instituting significant
reductions in selling, general and administrative expenses and increasing
efforts to revitalize sales levels.
F-18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001and 2000
6. GOODWILL AND OTHER INTANGIBLES (CONTINUED)
Annual Impairment Test (Continued)
However, during the fourth quarter, given the current economic environment
and continued reduction of capital spending on technology, management
determined that operating performance of certain of its branches indicated
that the possibility of impairment of goodwill arising at acquisition might
be impaired.
The Company performed its annual impairment test as of November 30, 2002 in
accordance with SFAS No. 142. The Company determined the fair value of its
reporting units using relative market multiples for comparable businesses
and discounted cash flow models. The Company compared the fair value of
each of its reporting units to their respective carrying values, including
related goodwill. The analysis revealed that goodwill, amounting to
approximately $30.0 million ($24.7 million after taxes) had been impaired
and, therefore, would not be recoverable through future profitable
operations. The write-off of goodwill included the complete write-off of
goodwill associated with four of the Company's reporting units and a
partial write-off of goodwill associated with one of the Company's
reporting units. There can be no assurance that future goodwill impairment
tests will not result in further impairment charges. For the years ended
December 31, 2001 and 2000, the Company performed an impairment review in
accordance with SFAS No. 121 which resulted in a $35.0 million and $35.3
million charge to expense, respectively.
The changes in the carrying amount of goodwill for the years ended December
31, 2002 and 2001 are as follows (in thousands):
Information Professional Commercial
Technology Engineering Services Total
-------------- ------------- ------------- -------------
Balance as of December 31, 2000 $78,228 $8,889 $1,397 $88,514
Goodwill acquired during the year 13,833 1,417 15,250
Amortization of goodwill (5,587 ) (672 ) (13 ) (6,272 )
Goodwill impairment losses (30,044 ) (4,949 ) (34,993 )
-------------- ------------- ------------- -------------
Balance as of December 31, 2001 56,430 4,685 1,384 62,499
Goodwill acquired during the year 2,686 2,843 5,529
Goodwill impairment losses (29,990 ) (29,990 )
Goodwill written off related to
sale of business unit (1,384 ) (1,384 )
-------------- ------------- ------------- -------------
Balance as of December 31, 2002 $29,126 $7,528 $ $36,654
============== ============= ============= =============
The following table reflects the components of intangible assets, excluding
Goodwill (in thousands):
December 31, 2002 December 31, 2001
-------------------------------- ---------------------------------
Gross Accumulated Gross Accumulated
Carrying Carrying
Amount Amortization Amount Amortization
Amortized intangible assets
Non-compete agreement $311 $211 $311 $190
==== ==== ==== ====
Estimated amortization expense on intangible assets for each of the next
five years is approximately $21,000.
F-19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001and 2000
6. GOODWILL AND OTHER INTANGIBLES (CONTINUED)
Reported net loss, exclusive of goodwill amortization that is related to
goodwill that is no longer amortized, would have been (in thousands):
Year Ended December 31,
------------------------------------------------
2002 2001 2000
-------------- ------------ -------------
Reported net loss ($24,136 ) ($18,756 ) ($21,896 )
Add back: goodwill amortization,
net of tax 5,385 4,390
-------------- ------------ -------------
Adjusted net loss ($24,136 ) ($13,371 ) ($17,506 )
============== ============ =============
Basic earnings per common share:
Reported net loss ($2.28 ) ($1.78 ) ($2.09 )
Goodwill amortization .51 .42
-------------- ------------ -------------
Adjusted net loss ($2.28 ) ($1.27 ) ($1.67 )
============== ============ =============
Diluted earnings per common share:
Reported net loss ($2.28 ) ($1.78 ) ($2.09 )
Goodwill amortization .51 .42
-------------- ------------ -------------
Adjusted net loss ($2.28 ) ($1.27 ) ($1.67 )
============== ============ =============
7. ACCOUNTS PAYABLE
Accounts payable and accrued expenses consist of the following at December
31, 2002 and 2001.
2002 2001
--------------- --------------
Accounts payable - trade $5,056,539 $5,338,633
Due to sellers 1,072,190 2,715,243
Reserve for litigation 8,600,000 600,000
--------------- --------------
Total $14,728,729 $8,653,876
=============== ==============
8. NOTE PAYABLE
The Company and its subsidiaries entered into an amended and restated loan
agreement on May 31, 2002 with Citizens Bank of Pennsylvania,
administrative agent for a syndicate of banks, which provides for a $40.0
million Revolving Credit Facility (the "Revolving Credit Facility") (See
Note 9) 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.
F-20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001and 2000
8. NOTE PAYABLE (CONTINUED)
The Revolving Credit Facility expires in August 2004. The weighted average
interest rates under the Revolving Credit Facility and Term Loan Facility
for the year ended December 31, 2002 and 2001 were 4.06% and 6.49%,
respectively. The amounts outstanding under the Revolving Credit Facility
at December 31, 2002 and 2001 were $7.4 million and $31.5 million,
respectively.
9. NOTE PAYABLE - SUBSEQUENT EVENT
The Company and its subsidiaries entered into an amended and restated loan
agreement on February 26, 2003 with Citizens Bank (Note 8) which reduced
the Revolving Credit Facility to $25.0 million.
10. SHAREHOLDERS' EQUITY
Common Shares Reserved
Shares of unissued common stock were reserved for the following purposes:
December 31,
------------------------------
2002 2001
------------- --------------
Exercise of options outstanding 2,474,214 2,415,780
Future grants of options 713,031 799,665
------------- --------------
Total 3,187,245 3,215,445
============= ==============
Incentive Stock Option Plans
1992 Incentive Stock Option Plan (the 1992 Plan)
The 1992 Plan, approved by the Company's stockholders in April 1992, and
amended in April 1998, provides for the issuance of up to 100,000 shares of
common stock to officers, directors and key employees of the Company and
its subsidiaries, through February 13, 2002, at which time the 1992 Plan
expired. The options issued 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. The Compensation
Committee of the Board of Directors determines the vesting period at the
time of grant. As of December 31, 2002, 382,920 options were outstanding.
1994 Non-employee Directors Stock Option Plan (the 1994 Plan)
The 1994 Plan, approved by the Company's stockholders in May 1994, and
amended in April 1998, provides for issuance of up to 110,000 shares of
common stock to non-employee directors of the Company through July 19,
2002. Options are granted at fair market value at the date of grant, and
the exercise of options is contingent upon service as a director for a
period of one year. Options granted terminate when an optionee ceases to be
a Director of the Company. At December 31, 2002, 30,000 options are
available for future grants, and 80,000 options were outstanding.
1996 Executive Stock Option Plan (the 1996 Plan)
The 1996 Plan, approved by the Company's stockholders in August 1996 and
amended in April 1999, provides for issuance of up to 1,250,000 shares of
common stock to officers and key employees of the Company and its
subsidiaries through January 1, 2006. Options are generally granted at fair
market value at the date of grant. The Compensation Committee of the Board
of Directors determines the vesting period at the time of grant. At
December 31, 2002, 53,447 options are available for future grants, and
1,141,378 options were outstanding.
F-21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
10. SHAREHOLDERS' EQUITY (CONTINUED)
Incentive Stock Option Plans (Continued)
2000 Employee Stock Incentive Plan (the 2000 Plan)
The 2000 Plan, approved by the Company's stockholders in April 2001,
provides for issuance of up to 1,500,000 shares of the Company's common
stock to officers and key employees of the Company and its subsidiaries or
to consultants and advisors utilized by the Company. The Compensation
Committee of the Board of Directors may award incentive stock options or
non-qualified stock options, as well as stock appreciation rights, and
determines the vesting period at the time of grant. At December 31, 2002,
629,584 options are available for future grants, and 869,916 options were
outstanding.
Transactions related to all stock options are as follows:
Year Weighted- Year Weighted- Year Weighted-
Ended Average Ended Average Ended Average
December 31, Exercise December 31, Exercise December 31, Exercise
2002 Price 2001 Price 2000 Price
--------------- ------------- --------------- ------------ --------------- -------------
Outstanding options 2,415,780 $7.53
At beginning of year 2,039,539 $8.85 1,359,170 $10.23
Granted 325,500 4.57 593,999 3.08 791,974 7.03
Forfeited (266,161 ) 6.82 (217,758 ) 7.59 (108,179 ) 12.54
Exercised (905 ) 3.06 (3,426 ) 12.54
--------------- --------------- ---------------
Outstanding options 2,474,214 $7.15
At end of year 2,415,780 $7.53 2,039,539 $8.85
=============== =============== ===============
Exercisable options
At end of year 1,663,715 1,580,565 1,367,795
=============== =============== ===============
Option grant price $3.00
per share $3.00 $3.00
to $15.31 to $15.31 to $20.13
The following table summarizes information about stock options outstanding
at December 31, 2002:
--------------- -----------------------------------------------------------------------------------
Weighted-Average
Range of Number of Remaining Weighted-Average
Exercise Outstanding Contractual Life Exercise Price
Prices Options
--------------- --------------------------------------------------------- -------------------------
$ 3.00 - $ 4.40 691,716 8.4 years $ 3.30
$ 4.70 - $ 7.05 443,200 8.3 years $ 4.78
$ 7.13 - $10.63 839,540 4.3 years $ 8.34
$11.25 - $15.31 499,758 6.3 years $12.84
F-22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
10. SHAREHOLDERS' EQUITY (CONTINUED)
Employee Stock Purchase Plan
The Company implemented an Employee Stock Purchase Plan (the "Purchase
Plan") with shareholder approval, effective January 1, 2001. Under the
Purchase Plan, employees meeting certain specific employment qualifications
are eligible to participate and can purchase shares of Common Stock
semi-annually through payroll deductions at the lower of 85% of the fair
market value of the stock at the commencement or end of the offering
period. The purchase plan permits eligible employees to purchase common
stock through payroll deductions for up to 10% of qualified compensation.
During the year ended December 31, 2002, there were 53,410 shares issued
under the Purchase Plan for net proceeds of $190,555. As of December 31,
2002, 374,480 shares were available for issuance under the Purchase Plan.
11. 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, 2002, 2001 and 2000 were $0, $457,000
and $694,000, respectively.
Nonqualified Defined Compensation Plan
The Company implemented with shareholder approval a nonqualified deferred
compensation plan, effective January 1, 2001 for officers and certain other
management employees. The plan allows for compensation deferrals for its
participants and a discretionary company contribution, subject to approval
of the Board of Directors. As of December 31, 2002, the fair value of the
assets held in trust under the deferred compensation plan was $393,000.
12. 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, 2002, Mr. Kopyt would have been entitled
to cash payments of approximately $3.2 million (representing salary and
excise tax payments).
F-23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
12. COMMITMENTS (CONTINUED)
Severance Agreement
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 December 31, 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 $1.4 million, inclusive of
employee benefits.
Operating Leases
The Company leases office facilities and various equipment under
noncancellable leases expiring at various dates through June 2012. Certain
leases are subject to escalation clauses based upon changes in various
factors. The minimum future annual operating lease commitments for leases
with noncancellable terms in excess of one year, exclusive of escalation,
are as follows:
Year ending December 31, Amount
----------------------------- -----------------
2003 $2,094,000
2004 1,791,000
2005 1,118,000
2006 1,078,000
2007 1,028,000
Thereafter 3,636,000
-----------------
Total $10,745,000
=================
Rent expense for the years ended December 31, 2002, 2001 and 2000 was
$3,245,000, $2,633,000 and $3,175,000, respectively.
The Company subleases space at various office locations under
non-cancellable lease agreements. During fiscal 2002 revenues of
approximately $105,000 were recognized under these leasing arrangements.
13. 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-24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
14. INCOME TAXES
The components of income tax expense (credit) are as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2002 2001 2000
----------------- ----------------- ----------------
Current
Federal ($1,913,315) ($2,180,666)
State and local 323,650 (325,393)
Foreign $ 974,073 2,187,502 334,666
----------------- ----------------- ----------------
974,073 597,837 (2,171,393)
----------------- ----------------- ----------------
Deferred
Federal (6,246,119) (6,456,915) (1,297,000)
State and local (362,380) (152,518)
Foreign
----------------- ----------------- ----------------
(6,246,119) (6,819,295) (1,449,518)
----------------- ----------------- ----------------
Total ($5,272,046) ($6,221,458) ($3,620,911)
================= ================= ================
The income tax provisions reconciled to the tax computed at the statutory
Federal rate was:
2002 2001 2000
---------------- ----------------- ---------------
Tax at statutory rate (credit) (34.0)% (34.0)% (34.0)%
State income taxes, net of Federal
income tax benefit (1.7)
Foreign income tax effect 3.3 8.7 1.9
Non-deductible unusual charges 15.7 4.0 20.3
Other, net (2.9) (1.9) (2.4)
---------------- ----------------- ---------------
Total income tax expense (17.9)% (24.9)% (14.2)%
================ ================= ===============
At December 31, 2002 and 2001, deferred tax assets and liabilities consists
of the following:
Deferred tax assets: 2002 2001
---------------- -----------------
Net operating loss carryforward $3,019,712 $8,268,813
Allowance for doubtful accounts 691,600 695,000
Reserves and accruals 195,153
Litigation reserve 3,400,000
---------------- -----------------
7,306,465 8,963,813
Deferred tax liability:
Goodwill (368,746)
---------------- -----------------
6,937,719 8,963,813
Less: valuation allowance (691,600) (695,000)
---------------- -----------------
$6,246,119 $8,268,813
================ =================
At December 31, 2002, the Company had a net operating loss carryforward
("NOL") for U.S. Federal Income Tax purposes of approximately $7.5 million.
The Company can utilize the NOL to offset future U.S. consolidated federal
taxable income. The NOL, if unused, would expire in the year 2022.
F-25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
14. INCOME TAXES (CONTINUED)
At December 31, 2001, the Company had recorded, based on the law at that
time, a deferred tax asset of $8,268,813 (current - $5,600,000; long-term -
$2,668,813), representing the tax effect of net operating loss carry
forwards. As a result of 2002 tax law changes increasing the loss carryback
period from 3 to 5 years, all deferred tax assets recorded at December 31,
2001 were realized in the second quarter of 2002.
15. INTEREST EXPENSE, NET OF INTEREST INCOME
Interest expense, net of interest income consisted of the following:
Year Ended December 31,
-----------------------
2002 2001 2000
----------------- ---------------- -------------------
Interest expense ($770,404) ($2,586,473) ($3,992,911)
Interest income 598,504 297,377 315,334
----------------- ---------------- -------------------
($171,900) ($2,289,096) ($3,677,577)
================= ================ ===================
16. 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 2002 Technology Engineering Services Corporate Total
---------------- ----------------- --------------- ---------------- ---------------
Revenue $111,270 $55,979 $19,402 $186,651
Operating expenses (1) 103,190 51,275 18,841 173,306
---------------- ----------------- --------------- ---------------- ---------------
EBITDA (1) (2) 8,080 4,704 561 13,345
Unusual charges 29,990 9,718 39,708
Depreciation 793 393 72 1,258
Amortization 17 4 21
---------------- ----------------- --------------- ---------------- ---------------
($9,718)
Operating (loss) income (1)(3) ($22,720) $4,307 $489 ($27,642)
================ ================= =============== ================ ===============
Total assets $46,375 $19,929 $4,913 $18,760 $89,977
Capital expenditures $101 $162 $364 $627
F-26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
16. SEGMENT INFORMATION (CONTINUED)
Information Professional Commercial
Fiscal 2001 Technology Engineering Services Corporate Total
---------------- ----------------- --------------- ---------------- ---------------
Revenue $165,568 $47,119 $22,052 $234,739
Operating expenses (1) 151,955 41,648 21,401 215,004
---------------- ----------------- --------------- ---------------- ---------------
EBITDA (1) (2) 13,613 5,471 651 19,735
Unusual charges 30,044 4,949 34,993
Depreciation 794 276 55 1,125
Amortization 5,587 672 34 6,293
---------------- ----------------- --------------- ---------------- ---------------
Operating (loss) income(1) (3) ($22,812) ($426) $562 ($22,676)
================ ================= =============== ================ ===============
Total assets $85,306 $15,999 $5,489 $24,362 $131,156
Capital expenditures $426 $173 $1,201 $1,800
Information Professional Commercial
Fiscal 2000 Technology Engineering Services Corporate Total
---------------- ----------------- --------------- ---------------- ---------------
Revenue $236,737 $43,595 $25,112 $305,444
Operating expenses (1) 216,606 41,161 24,126 281,893
---------------- ----------------- --------------- ---------------- ---------------
EBITDA (1) (2) 20,131 2,434 986 23,551
Unusual charges 36,913 1,894 38,807
Depreciation 848 277 27 1,152
Amortization 4,821 630 43 5,494
---------------- ----------------- --------------- ---------------- ---------------
Operating (loss) income (1)(3) ($ 22,451) ($ 367) $916 ($ 21,902)
================ ================= =============== ================ ===============
Total assets $131,414 $17,591 $6,433 $18,831 $174,269
Capital expenditures $827 $205 $56 $633 $1,721
(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.
F-27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
16. SEGMENT INFORMATION (CONTINUED)
The following reconciles consolidated operating loss to the Company's
pretax loss (in thousands):
Year Ended December 31,
---------- ------------
2002 2001 2000
---------------- ---------------- ----------------
Consolidated operating loss ($27,642) ($22,676) ($21,902)
Interest expense, net of interest income (155) (2,268) (3,702)
---------------- ---------------------------------
Consolidated pretax loss from continuing ($27,797) ($24,944) ($25,604)
operations
================ ================ ================
The Company derives a substantial majority of its revenue from companies
headquartered in the United States. In calendar year 2000 and 2001, no
single customer exceeded 6% of the Company's revenue. In calendar year
2002, two customers accounted for 12.2% and 6.6%, respectively, of the
Company's revenues. Revenues from Canadian operations for the years ended
December 31, 2002, 2001 and 2002 were $27.8 million, $24.2 million and
$22.7 million, respectively.
17. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended December 31, 2002
Diluted
Gross Net Net Income (Loss)
Sales Profit Income (Loss) Per Share (a)
------------------- ----------------- ------------------- --------------------
1st Quarter $47,774,202 $12,461,021 $2,144,587 $.20
2nd Quarter 47,305,894 11,738,910 2,113,487 .20
3rd Quarter 46,227,581 11,866,082 966,274 .09
4th Quarter 45,342,939 10,598,848 (29,360,278 ) (2.77)
------------------- ----------------- ------------------- --------------------
Total $186,650,616 $46,664,861 ($24,135,930 ) ($2.28)
=================== ================= =================== ====================
Year Ended December 31, 2001
Diluted
Gross Net Net Income (Loss)
Sales Profit Income (Loss) Per Share (a)
------------------- ----------------- ------------------- --------------------
1st Quarter $67,227,333 $17,992,539 $1,150,944 $.11
2nd Quarter 61,169,114 16,403,508 1,352,116 .13
3rd Quarter 55,702,416 14,615,257 758,796 .07
4th Quarter 50,640,203 13,564,436 (22,017,825 ) (2.09)
------------------- ----------------- ------------------- --------------------
Total $234,739,066 $62,575,740 ($18,755,969 ) ($1.78)
=================== ================= =================== ====================
(a) Each quarterly amount is based on separate calculations of weighted
average shares outstanding.
F-28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001and 2000
18. CONTINGENCIES
The Company is a party to two lawsuits and three claims from various
persons from whom the Company acquired stock or assets in five separate
acquisitions that occurred in the years 1998 through 2000. The lawsuits and
claims are not related to one another. The lawsuits and claims arise from
allegations of wrongful termination and/or failure of the Company to pay
deferred consideration under the relevant acquisition agreements. The range
of possible loss for the aforementioned lawsuits and claims, when
considered collectively, is from $-0- to approximately $7.6 million. In the
opinion of management and based upon the advice of counsel, the Company has
meritorious defenses to the lawsuits and claims that should serve to defeat
or diminish the Company's potential liability. 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 were formerly officers and
directors of the Company, filed suit against the Company alleging wrongful
termination of their employment, failure to make required severance
payments, wrongful conduct by the Company in connection with the grant of
stock options, and wrongful conduct by the Company resulting in the
non-vestiture of their option grants. The complaint also alleged that the
Company wrongfully limited the number of shares of the Company's common
stock that could have been sold by the plaintiffs under a Registration
Rights Agreement entered into in connection with the underlying acquisition
transaction pursuant to which the plaintiffs became shareholders of the
Company. The complaint sought damages of approximately $480,000 on the
severance pay claim.. 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 the plaintiffs sold
their shares during that period and thereafter.
The claim relating to the wrongful termination of the employment of one of
the plaintiffs and the claims of both plaintiffs concerning the grant of
stock options were resolved in binding arbitration in early 2002. A trial
on the remaining claims commenced on December 2, 2002 and a verdict was
returned on January 24, 2003. The claims adjudicated at the trial were: (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, on which a verdict awarding damages against the
Company of $7.6 million was returned; (ii) the claim for the alleged
wrongful termination of one of the plaintiffs, which was dismissed by the
trial judge; (iii) that same plaintiff's claim of entitlement to severance
pay of $230,000 under his employment agreement, which was rejected by the
jury in a verdict that the plaintiff will likely seek to set aside; and
(iv) the claims by both plaintiffs for the alleged wrongful prevention of
stock option vestiture, which were rejected by the jury. The Company's
motion to strike all claims for punitive damages was granted. Management
believes, based upon the advice of counsel, that there is a substantial
likelihood that the jury's verdict on damages will either be vacated
entirely or reduced significantly by the court on post-trial motions, which
the Court will likely rule upon in March, 2003. The Company further intends
to appeal any judgment that eventually may be entered in favor of the
plaintiffs.
As a result of the verdict, the Company accrued $8.6 million at December
31, 2002, which includes a $1.0 million estimate for attorney fees and
pre-judgment interest.
F-29
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,
2002 and 2001 and the related consolidated statements of operations, changes in
shareholders' equity, comprehensive loss and cash flows for each of the years in
the three year period ended December 31, 2002. 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, 2002 and 2001 and the
consolidated results of their operations and their consolidated cash flows for
each of the years in the three year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States.
As discussed in note 6 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill
and other Intangible Assets, on January 1, 2002.
We have also audited Schedules I and II of RCM Technologies, Inc. and
Subsidiaries as of December 31, 2002 and 2001 and for each of the years in the
three year period ended December 31, 2002. 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 11, 2003, except for Note 9
as to which the date is February 26, 2003
F-30
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
December 31, 2002 and 2001
ASSETS
2002 2001
--------------- ----------------
Current assets
Prepaid expenses and other assets $ 6,509 $ 2,970
--------------- ----------------
Other assets
Long-term receivables from affiliates 59,519,789 83,337,402
--------------- ----------------
Total assets $59,526,298 $83,340,372
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
2002 2001
--------------- ----------------
Current liabilities
Accounts payable and accrued expenses $ 280,144 $ 50,572
--------------- ----------------
Shareholders' equity
Common stock 531,304 528,588
Foreign currency translation adjustment (584,084) (484,283)
Additional paid in capital 93,935,938 93,746,569
Accumulated deficit (34,637,004) (10,501,074)
--------------- ----------------
Total shareholders' equity 59,246,154 83,289,800
--------------- ----------------
Total liabilities and shareholders' equity $59,526,298 $83,340,372
=============== ================
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-31
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
--------------- ---------------- ---------------
Operating expenses
Administrative $1,753,587 $ 807,699 $ 534,662
--------------- ---------------- ---------------
Operating loss (1,753,587) (807,699) (534,662)
Management fee income 1,753,587 807,699 534,662
--------------- ---------------- ---------------
Income before income in subsidiaries
Shares in loss in subsidiaries (24,135,930) (18,755,969) (21,896,386)
--------------- ---------------- ---------------
Net loss ($24,135,930) ($18,755,969) ($21,896,386)
=============== ================ ===============
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-32
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------------- ---------------- ----------------
Cash flows from operating activities:
Net loss ($24,135,930) ($18,755,969) ($21,896,386)
----------------- ---------------- ----------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Share in deficiency in assets
of subsidiaries 24,135,930 18,755,969 21,896,386
Changes in operating assets and liabilities:
Prepaid expenses and other assets (3,539) 59,470 (56,971)
Accounts payable and accrued expenses 229,572 (1,828) (61,568)
----------------- ---------------- ----------------
24,361,963 18,813,611 21,777,847
----------------- ---------------- ----------------
Net cash provided by (used in)
operating activities 226,033 57,642 (118,539)
----------------- ---------------- ----------------
Cash flows from investing activities:
Decrease in deposits 5,695
Decrease (increase) in long-term
receivables from subsidiaries (318,317) (46,780) 247,605
----------------- ---------------- ----------------
Net cash provided by (used in) investing
activities (318,317) (41,085) 247,605
----------------- ---------------- ----------------
Cash flows from financing activities:
Employee stock purchase plan 190,556 234,095
Exercise of stock options 1,529 42,951
----------------- ---------------- ----------------
Net cash provided by financing activities 192,085 234,095 42,951
----------------- ---------------- ----------------
Effect of exchange rate changes on cash and
cash equivalents (99,801) (250,652) (180,867)
----------------- ---------------- ----------------
Net increase (decrease) in cash and equivalents (8,850)
Cash and equivalents at beginning of year 8,850
----------------- ---------------- ----------------
Cash and equivalents at end of year $ $ $
================= ================ ================
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-33
SCHEDULE II
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 31, 2002, 2001 and 2000
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, 2002
Allowance for doubtful
accounts on trade
receivables $1,795,000 $1,941,000 $2,187,000 $1,549,000
Year Ended December 31, 2001
Allowance for doubtful
accounts on trade
receivables $1,875,000 $989,000 $1,069,000 $1,795,000
Year Ended December 31, 2000
Allowance for doubtful
accounts on trade
receivables $1,014,000 $1,101,000 $240,000 $1,875,000
F-34
EXHIBIT INDEX
(10)(k) Amendment And Modification to Amended And Restated Loan and Security
Agreement dated December 30, 2002, between RCM Technologies, Inc. and
all of its Subsidiaries and Citizens Bank of Pennsylvania , as
Administrative Agent and Arranger.
(10)(l) Second Amendment And Modification to Amended And Restated Loan and
Security Agreement dated February 26, 2003, between RCM Technologies,
Inc. and all of its Subsidiaries and Citizens Bank of Pennsylvania ,
as Administrative Agent and Arranger.
(11) Computation of Loss Per Share.
(21) Subsidiaries.
(23) Consent of Grant Thornton LLP.
99.1 Certification Pursuant To 18 U.S.C. Section 1350,
As Adopted Pursuant To Section 906 Of TheSarbanes-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.
EXHIBIT 11
COMPUTATION OF LOSS PER COMMON SHARE
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
--------------- -------------- --------------
Diluted earnings
Net loss applicable to common
stock ($24,135,930 ) ($18,755,969 ) ($21,896,386 )
=============== ============== ==============
Shares
Weighted average number of common
shares outstanding 10,585,503 10,519,701 10,499,305
Common stock equivalents
--------------- -------------- --------------
Total 10,585,503 10,519,701 10,499,305
=============== ============== ==============
Diluted loss per common share ($2.28 ) ($1.78 ) ($2.09 )
=============== ============== ==============
Basic
Net loss applicable to common
stock ($24,135,930 ) ($18,755,969 ) ($21,896,386 )
=============== ============== ==============
Shares
Weighted average number of common
shares outstanding 10,585,503 10,519,701 10,499,305
=============== ============== ==============
Basic loss per common share ($2.28 ) ($1.78 ) ($2.09 )
=============== ============== ==============
EXHIBIT 21
SUBSIDIARIES
Business Support Group of Michigan, Inc.
Cataract, Inc.
Programming Alternatives of Minnesota, Inc.
RCMT Delaware, Inc.
RCM Technologies (USA), Inc.
Software Analysis & Management, Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
RCM Technologies, Inc.
We have issued our report dated February 11, 2003 accompanying the
consolidated financial statements and schedules included in the Annual Report of
RCM Technologes, Inc. and Subsidiaries on Form 10-K for the year ended December
31, 2002. We hereby consent to the incorporation by reference of said report in
the Registration Statements of RCM Technologies, Inc. on Forms S-8, (File No.
33-61306, effective April 21, 1993, File No. 33-80590, effective June 22, 1994,
File No. 333-52206, effective December 19, 2000 and File No. 333-52480,
effective December 21, 2000.)
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
February 26, 2003
Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM
Technologies, Inc. (the "Company") for the year ended December 31,
2002 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Leon Kopyt, President & Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, to my knowledge that:
(1) The Report fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934 (15 U.S.C.
section 78m(a)); and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Leon Kopyt
----------------------
Leon Kopyt
Chief Executive Officer
February 26, 2003
Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM
Technologies, Inc. (the "Company") for the year ended December 31,
2002 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Stanton Remer, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act
of 2002, to my knowledge, that:
(1) The Report fully complies with the requirements of Section
13(a) of the Securities Exchange Act of 1934 (15 U.S.C.
section 78m(a)); and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and result of
operations of the Company.
/s/ Stanton Remer
----------------------
Stanton Remer
Chief Financial Officer
February 26, 2003