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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-10245
RCM TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
Nevada 95-1480559
(State of Incorporation) (I.R.S. Employer Identification No.)
2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
(Address of Principal Executive Offices) (Zip Code)
(856) 486-1777
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- ----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) YES NO X
--- ---
Indicate the number of shares outstanding of the Registrant's common stock, as
of the latest practicable date.
Common Stock, $0.05 par value, 10,626,076 shares
outstanding as of May 1, 2003
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2003 (Unaudited)
and December 31, 2002 (Audited) 3
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Three-Month Periods Ended March 31, 2003 and 2002 5
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Three-Month Period Ended March 31, 2003 7
Unaudited Consolidated Statements of Cash Flows for the Three-
Month Periods Ended March 31, 2003 and 2002 8
Notes to Unaudited Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 27
Item 4 - Controls and Procedures 27
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 28
Item 6 - Exhibits and Reports on Form 8-K 29
Certification 30
Signatures 32
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2003 and December 31, 2002
ASSETS
March 31, December 31,
2003 2002
--------------- ---------------
Unaudited
--------------- ---------------
Current assets
Cash and cash equivalents $3,126,815 $2,845,154
Accounts receivable, net of allowance for doubtful accounts
of $1,565,000 (March 31, 2003) and $1,549,000
(December 31, 2002), respectively 38,412,874 31,753,934
Income tax refund receivable 1,808,134 3,766,585
Prepaid expenses and other current assets 1,592,709 2,635,304
Deferred tax assets 4,100,662 6,246,119
--------------- ---------------
Total current assets 49,041,194 47,247,096
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 9,661,320 9,708,344
Less: accumulated depreciation and amortization 3,991,200 3,818,092
--------------- ---------------
5,670,120 5,890,252
--------------- ---------------
Other assets
Deposits 81,142 86,590
Goodwill 38,007,233 36,653,595
Intangible assets, net of accumulated amortization
of $216,000 (March 31, 2003) and $211,000
(December 31, 2002), respectively 94,471 99,655
Deferred tax assets 1,366,887
--------------- ---------------
39,549,733 36,839,840
--------------- ---------------
Total assets $94,261,047 $89,977,188
=============== ===============
3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
March 31, 2003 and December 31, 2002
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 31,
2003 2002
--------------- ---------------
Unaudited
--------------- ---------------
Current liabilities
Note payable $4,300,000 $7,420,000
Accounts payable and accrued expenses 18,453,815 14,728,729
Accrued payroll 6,386,275 4,363,024
Payroll and withheld taxes 399,067 193,850
Income taxes payable 3,774,975 4,025,431
--------------- ---------------
Total current liabilities 33,314,132 30,731,034
--------------- ---------------
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 shares issued and outstanding 531,304 531,304
Accumulated other comprehensive loss ( 237,271) ( 584,084)
Additional paid-in capital 93,935,938 93,935,938
Accumulated deficit ( 33,283,056) ( 34,637,004)
--------------- ---------------
60,946,915 59,246,154
--------------- ---------------
Total liabilities and shareholders' equity $94,261,047 $89,977,188
=============== ===============
4
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
-------------- --------------
Revenues $50,650,469 $47,774,202
Cost of services 39,845,409 35,313,181
-------------- --------------
Gross profit 10,805,060 12,461,021
-------------- --------------
Operating costs and expenses
Selling, general and administrative 8,199,767 8,431,715
Depreciation 291,028 302,315
Amortization 5,184 5,181
-------------- --------------
8,495,979 8,739,211
-------------- --------------
Operating income 2,309,081 3,721,810
-------------- --------------
Other (expenses) income
Interest expense, net of interest income ( 51,267 ) ( 267,953 )
Gain on foreign currency transactions 32,623 2,940
-------------- --------------
( 18,644 ) ( 265,013 )
-------------- --------------
Income from continuing operations before income taxes 2,290,437 3,456,797
Income taxes 936,489 1,302,690
-------------- --------------
Income from continuing operations 1,353,948 2,154,107
Loss from discontinued operations
net of tax benefit of $6,300 ( 9,520 )
-------------- --------------
Net income 1,353,948 2,144,587
Other Comprehensive income (loss)
Foreign currency translation adjustment 346,813 ( 35,991 )
-------------- --------------
Comprehensive income $1,700,761 $2,108,596
============== ==============
5
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED)
Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
--------------- --------------
Basic earnings per share
Income from continuing operations $.13 $.20
Loss from discontinued operations
Basic earnings per share $.13 $.20
==== ====
Weighted average number of common shares outstanding 10,626,076 10,571,761
========== ==========
Diluted earnings per share
Income from continuing operations $.13 $.20
Loss from discontinued operations
Diluted earnings per share $.13 $.20
==== ====
Weighted average number of common
and common equivalent shares outstanding 10,663,662 10,813,265
========== ==========
(includes dilutive securities relating to options
of 37,586 and 241,504 in 2003 and 2002, respectively)
6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Three Months Ended March 31, 2003
(Unaudited)
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Retained
------------
Loss Capital Earnings Total
Shares Amount
Balance, January 1, 2003 10,626,076 $531,304 ($584,084) $93,935,938 ($34,637,004) $59,246,154
Translation adjustment 346,813 346,813
Net income 1,353,948 1,353,948
---------- -------- -------- ----------- --------- ---------
Balance, March 31, 2003 10,626,076 $531,304 ($237,271) $93,935,938 ($33,283,056) $60,946,915
========== ======== ========== =========== ============ ===========
7
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002
(Unaudited)
2003 2002
--------------- --------------
Cash flows from operating activities:
Income from continuing operations $1,353,948 $2,154,107
--------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Loss on discontinued operations ( 9,520)
Depreciation and amortization 296,212 307,496
Provision for losses on accounts receivable 16,000 ( 117,000)
Changes in assets and liabilities:
Accounts receivable ( 6,674,940) 4,905,121
Income tax refund receivable 2,256,670 2,953,342
Deferred tax asset 480,352 1,115,902
Prepaid expenses and other current assets 1,042,592 847,989
Accounts payable and accrued expenses 3,725,084 ( 2,367,473)
Accrued payroll 2,023,253 1,333,682
Payroll and withheld taxes 205,219 ( 42,590)
Income taxes payable ( 250,457) ( 2,199,149)
--------------- --------------
Total adjustments 3,119,985 6,727,800
--------------- --------------
Net cash provided by operating activities 4,473,933 8,881,907
--------------- --------------
8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2003 and 2002 - (Continued)
(Unaudited)
2003 2002
--------------- --------------
Cash flows from investing activities:
Property and equipment acquired ( 70,895) ( 131,512)
Decrease (increase) in deposits 5,448 ( 4,326)
Purchase of acquired companies including
contingent consideration, net of cash acquired ( 1,353,638) ( 534,012)
--------------- --------------
Net cash used in investing activities ( 1,419,085) ( 669,850)
--------------- --------------
Cash flows from financing activities:
Repayments of note payable ( 3,120,000) ( 6,600,000)
--------------- --------------
Net cash used in financing activities ( 3,120,000) ( 6,600,000)
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents 346,813 ( 35,993)
--------------- --------------
Increase in cash and cash equivalents 281,661 1,576,064
Cash and cash equivalents at beginning of period 2,845,154 2,289,743
--------------- --------------
Cash and cash equivalents at end of period $3,126,815 $3,865,807
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $53,485 $258,667
Income taxes refund ( $1,468,990) ( $1,681,660)
9
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). This Quarterly Report on Form 10-Q should be
read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 2002. Certain information and footnote disclosures
which are normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to SEC rules and regulations. The information reflects all
normal and recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial position of the Company,
and its results of operations for the interim periods set forth herein. The
results for the three months ended March 31, 2003 are not necessarily
indicative of the results to be expected for the full year.
2. Discontinued Operations
In August 2002, the Company sold a reporting unit in the commercial
services business segment for $100,000, which resulted in a loss of $1.6
million ($967,000 net of income tax benefit of $644,000) for the year ended
December 31, 2002, or $.09 per share and $15,800 ($9,500 net of income tax
benefit of $6,300) for the three months ended March 31, 2002, 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 the three months ended March 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.
3. New Accounting Standards
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 $9,520 in
Discontinued Operations on the Consolidated Statement of Income and
Comprehensive Income for the three month period ended March 31, 2002,
relating to the sale of a reporting unit.
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. The adoption of SFAS 148 did not
have a material effect on the Company's consolidated financial position,
results of operations, or cash flows.
10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. New Accounting Standards - (Continued)
In November 2002, FASB Interpretation 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), was issued. FIN 45 requires a guarantor
entity, at the inception of a guarantee covered by the measurement
provisions of the interpretation, to record a liability for the fair value
of the obligation undertaken in issuing the guarantee. The Company
previously did not record a liability when guaranteeing obligations unless
it became probable that the Company would have to perform under the
guarantee. FIN 45 applies prospectively to guarantees the Company issues or
modifies subsequent to December 31, 2002, but has certain disclosure
requirements effective for interim and annual periods ending after December
15, 2002. The Company has not historically issued guarantees and does not
anticipate FIN 45 will have a material effect on its 2003 consolidated
financial statements.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the
application of Accounting Research Bulletin 51, Consolidated Financial
Statements, for certain entities that do not have sufficient equity at risk
for the entity to finance its activities without additional subordinated
financial support from other parties or in which equity investors do not
have the characteristics of a controlling financial interest ("variable
interest entities"). Variable interest entities within the scope of FIN 46
will be required to be consolidated by their primary beneficiary. The
primary beneficiary of a variable interest entity is determined to be the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected returns, or both. FIN 46 applies immediately to
variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that
date. It applies in the first fiscal year or interim period beginning after
June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. The adoption of
FIN 46 did not have material effect on the Company's consolidated financial
position, results of operations, or cash flows.
4. Note Payable
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 $25.0 million Revolving Credit Facility (the
"Revolving Credit 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 at
each incremental borrowing. These alternatives are: LIBOR (London Interbank
Offered Rate), plus applicable margin, or the agent bank's prime rate.
All borrowings under the Revolving Credit Facility are collateralized by
all of the assets of the Company and its subsidiaries and a pledge of the
stock of its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants, such as restrictions on the
Company's ability to pay dividends.
The Revolving Credit Facility expires in August 2004. The weighted average
interest rates under the Revolving Credit Facility for the three months
ended March 31, 2003 and 2002 were 3.07% and 3.72%, respectively. The
amounts outstanding under the Revolving Credit Facility at March 31, 2003
and December 31, 2002 were $4.7 million and $7.4 million, respectively.
11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
Three Months Ended
March 31,
-----------------------------
2003 2002
------------ -------------
Interest expense ($62,066) ($288,344)
Interest income 10,799 20,391
------------ -------------
($51,267) ($267,953)
============ =============
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.
SFAS 142 also requires the Company to perform a goodwill impairment test on
at least an annual basis. For purposes of its 2002 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 as of December
31, 2002. Future changes in the industry could impact the market multiples
of comparable businesses, and consequently could impact the results of
future annual impairment tests.
The changes in the carrying amount of goodwill for the periods ended March
31, 2003 and 2002 are as follows (in thousands):
Information Professional Commercial
Technology Engineering Services Total
------------- ------------- ------------ --------
Balance as of December 31, 2002 $29,126 $7,528 $36,654
Goodwill acquired during the period
Contingent consideration earnouts 1,353 1,353
Goodwill impairment losses
------------- ------------- ------------ --------
Balance as of March 31, 2003 $30,479 $7,528 $38,007
============= ============= ============ ========
7. Accounts Payable
Accounts payable and accrued expenses consist of the following at March 31,
2003 and December 31, 2002:
March 31, December 31,
2003 2002
--------------- ----------------
Accounts payable and other accrued
expenses $8,374,534 $5,056,539
Due to sellers 1,000,000 1,072,190
Reserve for litigation 9,079,281 8,600,000
--------------- ----------------
Total $18,453,815 $14,728,729
=============== ================
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. Shareholders' Equity
Common Shares Reserved
Shares of unissued common stock were reserved for the following purposes:
March 31, December 31,
------------- ---------------
2003 2002
------------- ---------------
Exercise of options outstanding 2,466,314 2,474,214
Future grants of options 650,931 713,031
------------- ---------------
Total 3,117,245 3,187,245
============= ===============
9. 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.
At March 31, 2003, the Company has four stock-based employee compensation
plans. 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 earnings, 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 earnings and earnings 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).
Three Months Ended March 31,
---------------------------------
2003 2002
--------------- --------------
Net income, as reported $1,353,948 $2,144,587
Less: stock-based compensation costs
determined under fair value based
method for all awards 466,371 382,353
Net income, pro forma 887,577 1,762,234
Earnings per share of common stock-basic:
As reported .13 .20
Pro forma .08 .17
Earnings per share of common stock-diluted:
As reported .13 .20
Pro forma $.08 $.16
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. Stock -Based Compensation (Continued)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2002: expected volatility of 49%; risk-free
interest rate of 4.06%; and expected lives of 5 years. There have been no
grants in 2003.
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 per individual 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 March 31, 2003 options to purchase
381,070 shares stock 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 March 31, 2003, options to purchase 30,000
shares of common stock are available for future grants, and options to
purchase 80,000 shares of common stock 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 March
31, 2003, options to purchase 56,497 shares of common stock are available
for future grants, and options to purchase 1,138,328 shares of common stock
were outstanding.
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 March 31, 2003,
options to purchase 632,584 shares of common stock are available for future
grants, and options to purchase 866,916 shares of common stock were
outstanding.
10. Segment Information
The Company has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes
standards for companies to report information about operating segments,
geographic areas and major customers. The adoption of SFAS 131 has no
effect on the Company's consolidated financial position, consolidated
results of operations or liquidity.
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Segment Information (Continued)
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):
Three Months Ended Information Professional Commercial Corporate Total
March 31, 2003 Technology Engineering Services
------------- ------------- ------------ ------------ ----------
Revenue $26,249 $19,994 $4,407 $50,650
Operating expenses 24,534 19,236 4,275 48,045
------------- ------------- ------------ ------------ ----------
EBITDA (1) 1,715 758 132 2,605
Depreciation 146 130 15 291
Amortization of intangibles 2 3 5
------------- ------------- ------------ ------------ ----------
Operating income $1,567 $625 $117 $2,309
============= ============= ============ ============ ==========
Total assets $51,947 $21,435 $5,833 $15,046 $94,261
Capital expenditures $71 $71
Three Months Ended Information Professional Commercial
March 31, 2002 Technology Engineering Services Corporate Total
-------------- -------------- ------------- ------------ ----------
Revenue $30,809 $11,884 $5,081 $47,774
Operating expenses 27,677 11,073 4,995 43,745
-------------- -------------- ------------- ------------ ----------
EBITDA (1) 3,132 811 86 4,029
Depreciation 195 90 17 302
Amortization of intangibles 4 1 5
-------------- -------------- ------------- ------------ ----------
Operating income $2,933 $ 720 $ 69 $ 3,722
============== ============== ============= ============ ==========
Total assets $85,494 $11,214 $5,427 $21,254 $123,389
Capital expenditures $132 $132
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Segment Information (Continued)
(1) As used in this report, EBITDA means earnings before interest, income
taxes, depreciation, amortization, extraordinary charges, non-recurring
charges and other non-cash items. EBITDA, as presented, represents a useful
measure of assessing the performance of operating activities, as it
reflects earnings trends without the impact of certain non-cash and
unusual charges or income. EBITDA is also used by creditors in assessing
debt covenant compliance. Although security analysts frequently use EBITDA
in the evaluation of companies, it is not necessarily comparable to other
similarly titled captions of other companies due to potential
inconsistencies in the method of calculation. EBITDA is not intended as an
alternative to cash flow provided by operating activities as a measure of
liquidity, as an alternative to net income as an indicator of operating
performance, nor as an alternative to any other measure of performance in
conformity with generally accepted accounting principles.
11. Contingencies
The Company is a party to two lawsuits and two claims from various persons
from whom the Company acquired stock or assets in four separate
acquisitions that occurred in the years 1998 through 2000. The lawsuits and
claims are not related to one another. The lawsuits and claims 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 $7.0 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 heard in March 2003 and will likely rule upon in May 2003. The
Company further intends to appeal any inappropriate or excess judgment that
eventually may be entered in favor of the plaintiffs.
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Contingencies (Continued)
As a result of the verdict, the Company accrued a reserve of $8.6 million
as of December 31, 2002, which includes a $1.0 million estimate for
attorneys' fees and pre-judgment interest.
12. Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements. Actual results could differ from
those estimates. Such estimates include the Company's litigation accrual
and the Company's estimates of reserves such as the allowance for doubtful
accounts receivable.
13. Reclassifications
Certain reclassifications have been made to the 2002 interim financial
statements to conform to the 2003 interim presentation.
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other 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, the use by businesses of
outsourced solutions, such as those offered by the Company, in connection with
such adoption and the outcome of litigation involving the Company. 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.
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview
RCM Technologies is a premier provider of business and technology solutions
designed to enhance and maximize the performance of its customers through
the adaptation and deployment of advanced information technology and
engineering services. RCM is an innovative leader in the design,
development and delivery of these services to 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 adverse impact on RCM's revenues.
The Company's management believes that most companies have recognized the
importance of the Internet and information management technologies to
compete 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 a demand for outsourcing. The Company
believes that its clients, as well as entities that may be potential
clients, are continuing to evaluate the potential for outsourcing business
critical applications and entire business functions.
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview - (Continued)
The Company presently realizes revenues from client engagements that range
from the placement of contract and temporary technical consultants to
project assignments that entail the delivery of end-to-end solutions. These
services are primarily provided to the client at hourly rates that are
established for each of the Company's consultants based upon their skill
level, experience and the type of work performed. The Company also provides
project management and consulting work which are billed either by an agreed
upon fixed fee or hourly rates, or a combination of both. The billing rates
and profit margins for project management and solutions work are higher
than those for professional consulting services. The Company generally
endeavors to expand its sales of higher margin solution and project
management services. During the three months ended March 31, 2003, the
Company was a general contractor on a major project and in connection with
this project, the Company subcontracted certain tasks outside of the
Company's core competencies as agreed upon with the customer.
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 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. In certain cases, the Company may utilize other companies and
their employees to fulfill customer requirements. In these cases the
Company receives an administrative fee for arranging for, billing for and
collecting the billings related to these companies. The customer is
typically responsible for assessing the work of these companies who have
responsibility for acceptability of their personnel to the customer. Under
these circumstances, the Company's reported revenues are net of associated
costs (effectively the administrative fee).
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Revenue Recognition (Continued)
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.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of
operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments
that affect the reported amount of assets and liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities at
the date of the Company's financial statements. Actual results may differ
from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in
materially different results under different assumptions and conditions.
The Company believes that its critical accounting policies include those
described below.
Accounts Receivable
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based on payment history and the customer's current
credit worthiness, as determined by a review of their current credit
information. The Company continuously monitors collections and payments
from its customers and maintains a provision for estimated credit losses
based on historical experience and any specific customer collection issues
that have been identified. While such credit losses have historically been
within the Company's expectations and the provisions established, the
Company cannot guarantee that it will continue to experience the same
credit loss rates that it has in the past.
21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Goodwill and Intangibles
Pursuant to the adoption of SFAS 142, the Company changed its accounting
policy related to goodwill and intangible assets, effective January 1,
2002. Goodwill and indefinite-lived intangible assets are no longer
amortized but are subject to periodic impairment assessment.
SFAS 142 also requires the Company to perform a goodwill impairment test on
at least an annual basis. For purposes of its 2002 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 as of December
31, 2002. 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. Based on the results of future impairment testing,
the Company could be required to incur further impairment losses.
22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
A summary of operating results for the Three Months ended March 31, 2003 and
2002 is as follows (in thousands, except for earnings per share data):
2003 2002
----------------------- ------------------------
% of % of
Amount Revenue Amount Revenue
---------- ---------- ---------- -----------
Revenues $50,650 100.0% $47,774 100.0%
Cost of services 39,845 78.7 35,313 73.9
---------- ---------- ---------- -----------
Gross profit 10,805 21.3 12,461 26.1
---------- ---------- ---------- -----------
Selling, general and administrative 8,200 16.2 8,432 17.6
Depreciation and amortization 296 .6 307 .6
---------- ---------- ---------- -----------
8,496 16.8 8,739 18.2
---------- ---------- ---------- -----------
Operating income 2,309 4.6 3,722 7.8
Other expense 19 .1 265 .5
---------- ---------- ---------- -----------
Income from continuing operations before
income taxes 2,290 4.5 3,457 7.3
Income taxes 936 1.8 1,302 2.7
---------- ---------- ---------- -----------
Income from continuing operations 1,354 2.7 2,155 4.6
Loss from discontinued operations,
Net of taxes 10 .1
---------- ---------- ---------- -----------
Net income $1,354 2.7% $2,145 4.5%
========== ========== ========== ===========
Earnings per share
Basic and Diluted:
Income from continuing operations $.13 $.20
Loss from discontinued operations
---------- ----------
Net income $.13 $.20
========== ==========
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.
Revenues. Revenues increased 6.0%, or $2.9 million, for the three months ended
March 31, 2003 as compared to the same period in the prior year (the "comparable
prior year period"). The revenue increase was primarily attributable to
increased revenues in the Professional Engineering Segment. Management
attributes this increase primarily to an increase in subcontracted revenues on a
major project with respect to which RCM is the general contractor. Subcontracted
revenues recognized by RCM for the three months ended March 31, 2003 were
approximately $5.6 million as compared to $430,000 for the comparable prior year
period. RCM, as general contractor on this major project, subcontracts certain
tasks outside of RCM's core competencies as agreed upon with RCM's customer.
Cost of Services. Cost of services increased 12.8%, or $4.5 million, for the
three months ended March 31, 2003 as compared to the comparable prior year
period. This increase was primarily due to an increase in subcontractor costs
associated with increased revenues experienced during the three months ended
March 31, 2003. Cost of services as a percentage of revenues increased to 78.7%
for the three months ended March 31, 2003 from 73.9% for the comparable prior
year period. This increase was primarily attributable to an increase of the
Company's revenues being derived from Professional Engineering services, which
have historically had lower gross profit margins.
23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended March 31, 2003 Compared to Three Months
Ended March 31, 2002 - (Continued)
Selling, General and Administrative. Selling, general and administrative
expenses decreased 2.8%, or $232,000, for the three months ended March 31, 2003
as compared to the comparable prior year period. This decrease was primarily
attributable to ongoing cost cutting initiatives. SGA expenses as a percentage
of revenues were 16.2% for the three months ended March 31, 2003 as compared to
17.6% for the comparable prior year period.
Depreciation and Amortization. Depreciation and amortization decreased 3.6%, or
$11,000, for the three months ended March 31, 2003 as compared to the comparable
prior year period. This decrease was primarily due to write down of impaired
assets in periods since March 31, 2002.
Other Expense. Other expense consists principally of interest expense, net of
interest income. For the three months ended March 31, 2003, actual interest
expense of $62,000 was offset by $11,000 of interest income, which was
principally earned from short-term money market deposits. Interest expense, net,
decreased $216,700 for the three months ended March 31, 2003 as compared to the
comparable prior year period. This decrease was primarily due to the cash
derived from operating activities, which was used to reduce interest-bearing
debt as well as a reduction in interest rates on borrowed funds..
Income Tax. Income tax expense decreased 28.1%, or $367,000, for the three
months ended March 31, 2003 as compared to the comparable prior year period.
This decrease was attributable to a lower level of income before taxes for the
three months ended March 31, 2003 compared to the comparable prior year period.
The effective tax rate was 40.9%, for the three months ended March 31, 2003 as
compared to 37.7% for the comparable prior year period. The increase was
attributable to a higher portion of foreign taxable income, which has higher
income tax rates than rates in United States in 2003 as compared to 2002.
Loss from Discontinued Operations. In August 2002, the Company sold a reporting
unit in the commercial services business segment for $100,000, which resulted in
a loss of $1.6 million ($967,000 net of income tax benefit of $644,000) for the
year ended December 31, 2002, or $0.09 per share and $15,800 ($9,500 net of
income tax benefit of $6,300) for the three months ended March 31, 2002, 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 months in the period ended March
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.
Liquidity and Capital Resources
Operating activities provided $4.5 million of cash for the three months ended
March 31, 2003 as compared to operating activities providing $8.9 million of
cash for the comparable 2002 period. The decrease in cash provided by operating
activities was primarily attributable to an increase in accounts receivable
which was partially offset by an increase in accounts payable. Accounts
receivable increased approximately $6.7 million since December 31, 2002 of which
$3.8 million increase was from one customer and from whom approximately $4.2
million was received subsequent to March 31, 2003.
Investing activities used $1.4 million for the three months ended March 31, 2003
as compared to $670,000 for the comparable 2002 period. The increase in the use
of cash for investing activities for the fiscal 2002 as compared to the
comparable period was primarily attributable to an increase in deferred
consideration payments.
Financing activities, which consisted of debt reduction, used $3.1 million in
2003 as compared to financing activities using $6.6 million for the comparable
2002 period.
24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources (Continued)
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 $25.0 million Revolving Credit Facility (the "Revolving Credit
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 at each incremental borrowing. 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.
All borrowings under the Revolving Credit Facility are collateralized by all of
the assets of the Company and its subsidiaries and a pledge of the stock of its
subsidiaries. The Revolving Credit Facility also contains various financial and
non-financial covenants, such as restrictions on the Company's ability to pay
dividends. The Revolving Credit Facility expires in August 2004. The weighted
average interest rates for the three months ended March 31, 2003 and 2002 were
3.07% and 3.72%, respectively. The amounts outstanding under the Revolving
Credit Facility at March 31, 2003 and December 31, 2002 were $4.3 million and
$7.4 million, respectively. At March 31, 2003, the Company had availability
(including amounts outstanding) under the Revolving Credit Facility of $20.6
million.
The Company anticipates that its primary uses of capital in future periods will
be for working capital purposes. Funding for any future acquisitions will be
derived from 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 11 (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 currently sufficient to allow 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.
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 March 31, 2003, the Company has a deferred tax asset totaling $5.5 million,
primarily representing the tax effect of the net operating loss carry forwards,
and the litigation reserve. The Company expects to utilize the current portion
of the deferred tax asset during the year ended December 31, 2003.
25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity And Capital Resources (Continued)
The Company's contractual obligations as of March 31, 2003 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) $4,300 $4,300
Operating Leases 9,993 $1,762 2,909 $1,860 $3,462
----------- ------------ ------------ ------------ -------------
Total Obligations $14,293 $1,762 $7,209 $1,860 $3,462
=========== ============ ============ ============ =============
(1) The Revolving Credit Facility agreement expires in August 2004.
26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 3. 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 March 31, 2003, 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 three months ended March 31, 2003 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 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on an evaluation conducted within 90 days prior to the filing
date of this Quarterly Report on Form 10-Q, that the Company's disclosure
controls and procedures have functioned effectively so as to provide those
officers the information necessary to evaluate whether:
(i) this Quarterly Report on Form 10-Q contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this Quarterly Report on Form 10-Q, and
(ii)the financial statements, and other financial information included in
this Quarterly Report on Form 10-Q, fairly present in all material
respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this Quarterly
Report on Form 10-Q.
There have been no significant changes in the Company's internal controls or in
other factors since the date of the Chief Executive Officer's and Chief
Financial Officer's evaluation that could significantly affect these internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
27
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to two lawsuits and two claims from various persons
from whom the Company acquired stock or assets in four separate
acquisitions that occurred in the years 1998 through 2000. The lawsuits and
claims are not related to one another. The lawsuits and claims 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 $7.0 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 heard in March 2003 and will likely rule upon in May 2003. The
Company further intends to appeal any inappropriate or excess judgment that
eventually may be entered in favor of the plaintiffs.
As a result of the verdict, the Company accrued a reserve of $8.6 million
as of December 31, 2002, which includes a $1.0 million estimate for
attorneys' fees and pre-judgment interest.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002.
(b) Reports on Form 8-K
None
29
CERTIFICATION
I, Leon Kopyt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 1, 2003
/s/ Leon Kopyt
--------------------------
Leon Kopyt
Chief Executive Officer
30
CERTIFICATION
I, Stanton Remer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons fulfilling the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 1, 2003
/s/ Stanton Remer
-------------------------
Stanton Remer
Chief Financial Officer
31
RCM TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RCM Technologies, Inc.
Date: May 1, 2003 By:/s/ Stanton Remer
--- ------- -----
Stanton Remer
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the Registrant)
32