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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 June 30, 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 class of common
stock, as of the latest practicable date.
Common Stock, $0.05 par value, 10,647,247 sharesoutstanding as of August 6,2003.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2003 (Unaudited)
and December 31, 2002 3
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Six-Month Periods Ended June 30, 2003 and 2002 5
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Three-Month Periods Ended June 30, 2003 and 2002 7
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Six-Month Period Ended June 30, 2003 9
Unaudited Consolidated Statements of Cash Flows for the Six-
Month Periods Ended June 30, 2003 and 2002 10
Notes to Unaudited Consolidated Financial Statements 12
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 35
Item 4 - Controls and Procedures 35
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 36
Item 6 - Exhibits and Reports on Form 8-K 37
Signatures 38
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2003 and December 31, 2002
ASSETS
June 30, December 31,
2003 2002
--------------- ---------------
(Unaudited)
Current assets
Cash and cash equivalents $ 478,722 $2,845,154
Accounts receivable, net of allowance for doubtful accounts
of $1,770,000 (June 30, 2003) and $1,549,000
(December 31, 2002), respectively 42,498,966 31,753,934
Income tax refund receivable 2,791,674 3,766,585
Prepaid expenses and other current assets 1,996,249 2,635,304
Deferred tax assets 2,293,144 6,246,119
--------------- ---------------
Total current assets 50,058,755 47,247,096
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 9,753,371 9,708,344
Less: accumulated depreciation and amortization 4,277,361 3,818,092
--------------- ---------------
5,476,010 5,890,252
--------------- ---------------
Other assets
Deposits 83,505 86,590
Goodwill 38,007,233 36,653,595
Intangible assets, net of accumulated amortization
of $221,400 (June 30, 2003) and $211,000
(December 31, 2002) respectively 89,287 99,655
Deferred tax assets 1,194,680
--------------- ---------------
39,374,705 36,839,840
--------------- ---------------
Total assets $94,909,470 $89,977,188
=============== ===============
3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
June 30, 2003 and December 31, 2002
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 31,
2003 2002
--------------- ---------------
(Unaudited)
Current liabilities
Note payable $3,300,000 $7,420,000
Accounts payable and accrued expenses 18,249,932 14,728,729
Accrued payroll 5,578,859 4,363,024
Payroll and withheld taxes 499,825 193,850
Income taxes payable 3,736,371 4,025,431
--------------- ---------------
Total current liabilities 31,364,987 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; 10,647,247 and
10,626,076 shares issued and outstanding
at (June 30, 2003) and (December 31, 2002), respectively 532,362 531,304
Accumulated other comprehensive income (loss) 353,722 ( 584,084)
Additional paid-in capital 94,005,997 93,935,938
Accumulated deficit ( 31,347,598) ( 34,637,004)
--------------- ---------------
63,544,483 59,246,154
--------------- ---------------
Total liabilities and shareholders' equity $94,909,470 $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
Six Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
-------------- --------------
Revenues $105,869,383 $89,272,100
Cost of services 83,670,507 65,072,170
-------------- --------------
Gross profit 22,198,876 24,199,930
-------------- --------------
Operating costs and expenses
Selling, general and administrative 16,474,010 16,767,606
Depreciation 593,648 609,515
Amortization 10,368 10,362
-------------- --------------
17,078,026 17,387,483
-------------- --------------
Operating income 5,120,850 6,812,447
-------------- --------------
Other (expenses) income
Interest expense, net of interest income ( 76,752 ) 31,096
Gain on foreign currency transactions 134,965 5,107
-------------- --------------
58,213 36,203
-------------- --------------
Income from continuing operations before income taxes 5,179,063 6,848,650
Income taxes 1,889,657 2,574,243
-------------- --------------
Income from continuing operations 3,289,406 4,274,407
Loss from discontinued operations
net of tax benefit of $10,888 16,333
-------------- --------------
Net income 3,289,406 4,258,074
Other comprehensive income (loss)
Foreign currency translation adjustment 937,806 ( 37,531 )
-------------- --------------
Comprehensive income $ 4,227,212 $4,220,543
============== ==============
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)
Six Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
--------------- --------------
Basic earnings per share
Income from continuing operations $.31 $.40
Loss from discontinued operations
Basic earnings per share $.31 $.40
==== ====
Weighted average number of common shares outstanding 10,626,076 10,572,146
========== ==========
Diluted earnings per share
Income from continuing operations $.31 $.40
Loss from discontinued operations
Diluted earnings per share $.31 $.40
==== ====
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options
of 20,177 and 202,966 in 2003 and 2002, respectively) 10,646,253 10,775,112
========== ==========
6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
-------------- --------------
Revenues $55,218,914 $44,378,181
Cost of services 43,825,098 32,639,272
-------------- --------------
Gross profit 11,393,816 11,738,909
-------------- --------------
Operating costs and expenses
Selling, general and administrative 8,274,243 8,335,891
Depreciation 302,620 307,200
Amortization 5,184 5,181
-------------- --------------
8,582,047 8,648,272
-------------- --------------
Operating income 2,811,769 3,090,637
-------------- --------------
Other (expenses) income
Interest expense, net of interest income ( 25,485 ) 299,049
Gain on foreign currency transactions 102,342 2,167
-------------- --------------
76,857 301,216
-------------- --------------
Income from continuing operations before income taxes 2,888,626 3,391,853
Income taxes 953,168 1,271,553
-------------- --------------
Income from continuing operations 1,935,458 2,120,300
Loss from discontinued operations
net of tax benefit of $4,540 6,813
-------------- --------------
Net income 1,935,458 2,113,487
Other comprehensive income (loss)
Foreign currency translation adjustment 590,993 ( 1,540 )
-------------- --------------
Comprehensive income $2,526,451 $2,111,947
============== ==============
7
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED)
Three Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
--------------- --------------
Basic earnings per share
Income from continuing operations $.18 $.20
Loss from discontinued operations
Basic earnings per share $.18 $.20
==== ====
Weighted average number of common shares outstanding 10,626,076 10,572,527
========== ==========
Diluted earnings per share
Income from continuing operations $.18 $.20
Loss from discontinued operations
Diluted earnings per share $.18 $.20
==== ====
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options
of 6,832 and 242,252 in 2003 and 2002, respectively) 10,632,908 10,814,779
========== ==========
8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Six Months Ended June 30, 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
Issuance of stock under
stock purchase plan 21,171 1,058 70,059 71,117
Translation adjustment 937,806 937,806
Net income 3,289,406 3,289,406
---------- -------- ---------- ----------- ------------- -----------
Balance, June 30, 2003 10,647,247 $532,362 $353,722 $94,005,997 ($31,347,598) $63,544,483
========== ======== ======== =========== ============ ===========
9
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2002
(Unaudited)
2003 2002
--------------- --------------
Cash flows from operating activities:
Net income $3,289,406 $4,258,074
--------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 604,017 619,877
Provision for losses on accounts receivable 221,000 ( 327,000)
Changes in assets and liabilities:
Accounts receivable ( 10,966,033) 5,199,108
Income tax refund receivable 1,273,129 ( 8,031,043)
Deferred tax asset 2,460,077 7,687,553
Prepaid expenses and other current assets 639,054 ( 823,401)
Accounts payable and accrued expenses 3,521,202 ( 2,241,976)
Accrued payroll 1,215,838 ( 165,065)
Payroll and withheld taxes 305,978 238,010
Income taxes payable ( 289,062) 3,364,481
--------------- --------------
Total adjustments ( 1,014,800) 5,520,544
--------------- --------------
Net cash provided by operating activities $2,274,606 $9,778,618
--------------- --------------
10
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2003 and 2002 - (Continued)
(Unaudited)
2003 2002
--------------- --------------
Cash flows from investing activities:
Property and equipment acquired ( $179,408) ( $ 338,346)
Decrease in deposits 3,085 39,960
Contingent consideration ( 1,353,638) ( 3,314,791)
--------------- --------------
Net cash used in investing activities ( 1,529,961) ( 3,613,177)
--------------- --------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 71,117 99,381
Repayments of note payable ( 4,120,000) ( 6,600,000)
Exercise of stock options 765
--------------- --------------
Net cash used in financing activities ( 4,048,883) ( 6,499,854)
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents 937,806 ( 37,531)
--------------- --------------
Decrease in cash and cash equivalents ( 2,366,432) ( 371,944)
Cash and cash equivalents at beginning of period 2,845,154 2,289,743
--------------- --------------
Cash and cash equivalents at end of period $478,722 $1,917,799
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $92,475 $501,796
Income taxes (refund) ( $1,554,488) $650,269
11
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). This Quarterly Report on Form 10-Q should be
read in conjunction with the Company's Annual Report on Form 10-K for the
year ended December 31, 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 and six months ended June 30, 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 $27,200 ($16,300 net of income
tax benefit of $10,900) for the six months ended June 30, 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 six months and three months ended June
30, 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 January 2002, 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, 2002, 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, 2002, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2002. The adoption of
FIN 46 did not have a material effect on the Company's consolidated
financial position, results of operations, or cash flows.
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.
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. New Accounting Standards - (Continued)
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.
On May 15, 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). Many of those instruments were previously classified as
equity.
SFAS No. 150 affects the issuer's accounting for three types of
freestanding financial instruments:
o mandatorily redeemable shares, which the issuing company is obligated
to buy back in exchange for cash or other assets;
o instruments that do or
may require the issuer to buy back some of its shares in exchange for
cash or other assets, including put options and forward purchase
contracts; and
o obligations that can be settled with shares, the monetary value of
which is fixed, tied solely or predominantly to a variable such as
a market index, or varies inversely with the value of the issuers'
shares.
SFAS No. 150 does not apply to features embedded in a financial instrument
that is not a derivative in its entirety.
Most of the guidance in SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS No. 150 is not expected to have a material
effect on the Company's consolidated financial position, results of
operations, or cash flows.
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Note Payable
On May 31, 2002, the Company and its subsidiaries entered into an amended
and restated loan agreement, which was 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: (i)
LIBOR (London Interbank Offered Rate), plus applicable margin, or (ii) 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 six months ended
June 30, 2003 and 2002 were 3.1% and 3.89%, respectively. The amounts
outstanding under the Revolving Credit Facility at June 30, 2003 and
December 31, 2002 were $3.3 million and $7.4 million, respectively. At June
30, 2003, the Company had availability (including amounts outstanding)
under the Revolving Credit Facility of $21.6 million.
The Company anticipates that it will need to borrow approximately $7.6
million under its Revolving Credit Facility in order to post a collateral
bond related to the $7.6 million verdict returned in January 2003 (see note
11).
5. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Interest expense ($104,851) ($538,082) ($42,785) ($249,738)
Interest income 28,099 569,178 17,300 548,787
------------- ------------- ------------- -------------
($ 76,752) ($ 31,096) ($25,485) $299,049
============= ============= ============= =============
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 period ended June
30, 2003 are as follows (in thousands):
Information Professional
Technology Engineering Total
------------- ------------- ---------
Balance as of December 31, 2002 $29,126 $7,528 $36,654
Contingent consideration earnouts 1,353 1,353
------------- ------------- ---------
Balance as of June 30, 2003 $30,479 $7,528 $38,007
============= ============= =========
7. Accounts Payable
Accounts payable and accrued expenses consist of the following at June 30,
2003 and December 31, 2002:
June 30, December 31,
2003 2002
--------------- ----------------
Accounts payable and other accrued expenses $9,446,554 $5,056,539
Due to sellers 1,072,190
Reserve for litigation 8,803,378 8,600,000
--------------- ----------------
Total $18,249,932 $14,728,729
=============== ================
15
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:
June 30, December 31,
------------- ---------------
2003 2002
------------- ---------------
Exercise of options outstanding 2,367,214 2,474,214
Future grants of options 807,081 713,031
------------- ---------------
Total 3,174,295 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
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 June 30, 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).
Six Months Three Months
Ended June 30, Ended June 30,
---------------------- ----------------------
----------------------
2003 2002 2003 2002
---------- --------- ---------- ---------
Net income, as reported $3,289 $4,258 $1,935 $2,113
Less: stock-based compensation costs
determined under fair value based
method for all awards 622 765 156 382
Net income, pro forma 2,667 3,493 1,779 1,731
Earnings per share of common stock-basic:
As reported $.31 $.40 $.18 $.20
Pro forma $.25 $.33 $.17 $.16
Earnings per share of common stock-diluted:
As reported $.31 $.40 $.18 $.20
Pro forma $.25 $.32 $.17 $.16
16
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 2003: expected volatility of 45%; risk-free
interest rate of 2.11%; and expected lives of 5 years. There were 10,000
stock options granted during the three months ended June 30, 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 for each of these options. As of June
30, 2003, options to purchase 369,970 shares of common 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 February 19,
2004. 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 June 30, 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 June
30, 2003, options to purchase 56,997 shares of common stock are available
for future grants, and options to purchase 1,137,828 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 June 30, 2003,
options to purchase 720,084 shares of common stock are available for future
grants, and options to purchase 779,416 shares of common stock were
outstanding.
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
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):
Six Months Ended Information Professional Commercial
June 30, 2003 Technology Engineering Services Corporate Total
--------------- ------------ -------------- ------------- -------------
Revenue $52,066 $44,568 $9,235 $105,869
Operating expenses 48,108 43,107 8,929 100,144
--------------- ------------ -------------- ------------- -------------
EBITDA (1) 3,958 1,461 306 5,725
Depreciation 286 278 30 594
Amortization of intangibles 4 5 1 10
--------------- ------------ -------------- ------------- -------------
Operating income 3,668 1,178 275 5,121
Interest (expense), net of
interest income 38 32 7 77
(Gain) on foreign currency
transactions (2 ) (133 ) (135)
Income taxes 1,325 466 99 1,890
--------------- ------------ -------------- -------------
Net income $2,307 $813 $169 $3,289
=============== ============ ============== =============
Total assets $52,339 $25,107 $5,849 $11,614 $94,909
Capital expenditures $179 $179
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Segment Information (Continued)
Six Months Ended Information Professional Commercial
June 30, 2002 Technology Engineering Services Corporate Total
--------------- ------------ -------------- ------------- -------------
Revenue $55,467 $23,497 $10,308 $89,272
Operating expenses 50,357 21,464 10,019 81,840
--------------- ------------ -------------- ------------- -------------
EBITDA (1) 5,110 2,033 289 7,432
Depreciation 385 190 34 609
Amortization of intangibles 10 1 11
--------------- ------------ -------------- ------------- -------------
Operating income 4,715 1,842 255 6,812
Interest (income), net of
interest expense (19 ) (8 ) (4 ) (31)
(Gain) on foreign currency
transactions (5 ) (5)
Loss on discontinued
operations 16 16
Income taxes 1,779 697 98 2,574
--------------- ------------ -------------- -------------
Net income $2,955 $1,158 $145 $4,258
=============== ============ ============== =============
Total assets $86,420 $13,430 $6,314 $23,152 $129,316
Capital expenditures $338 $338
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Segment Information (Continued)
Three Months Ended Information Professional Commercial
June 30, 2003 Technology Engineering Services Corporate Total
---------------- --------------- --------------- ------------- ---------------
Revenue $25,817 $24,575 $4,827 $55,219
Operating expenses 23,574 23,871 4,654 52,099
---------------- --------------- --------------- ------------- ---------------
EBITDA (1) 2,243 704 173 3,120
Depreciation 139 149 15 303
Amortization of intangibles 2 3 5
---------------- --------------- --------------- ------------- ---------------
Operating income 2,102 552 158 2,812
Interest expense, net of
interest (income) 12 12 2 26
(Gain) on foreign currency (102
transactions (102) )
Income taxes 690 212 51 953
---------------- --------------- --------------- ---------------
Net income $1,400 $430 $105 $1,935
================ =============== =============== ===============
Total assets $52,339 $25,107 $5,849 $11,614 $94,909
Capital expenditures $109 $109
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Segment Information (Continued)
Three Months Ended Information Professional Commercial
June 30, 2002 Technology Engineering Services Corporate Total
---------------- -------------- ---------------- ------------- ---------------------
Revenue $26,479 $12,602 $5,297 $44,378
Operating expenses 24,489 11,377 5,109 40,975
---------------- -------------- ---------------- ------------- ---------------------
EBITDA (1) 1990 1,225 188 3,403
Depreciation 191 99 17 307
Amortization of
intangibles 5 5
---------------- -------------- ---------------- ------------- ---------------------
Operating income 1,794 1,126 171 3,091
Interest (income), net
of interest expense (178) (85) (36) (299)
(Gain) on foreign
currency transactions (2) (2)
Loss on discontinued
operations 7 7
Income taxes 739 455 78 1,272
---------------- -------------- ---------------- ---------------------
Net income $1,233 $758 $122 $2,113
================ ============== ================ =================
Total assets $86,420 $13,430 $6,314 $23,152 $129,316
Capital expenditures $206 $206
(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. We believe that EBITDA, as presented, represents a useful
measure of assessing the performance of our operating activities, as it reflects
our earnings trends without the impact of certain non-cash and unusual charges
or income. EBITDA is also used by our creditors in assessing debt covenant
compliance. We understand that, 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 our operating performance, nor as an alternative
to any other measure of performance in conformity with generally accepted
accounting principles.
21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Contingencies
The Company is a party to two lawsuits and one claim from various persons from
whom the Company acquired stock or assets in three separate acquisitions that
occurred in the years 1998 through 1999. The lawsuits and claim are not related
to one another. The lawsuits and claim 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 claim, when considered collectively, is from $-0- to
approximately $5.3 million. In the opinion of management and based upon the
advice of counsel, the Company has meritorious defenses to the lawsuits and
claim that should serve to defeat or diminish the Company's potential liability.
However, if material adverse determinations on either the lawsuits or claim 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 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 2003. A trial on the
remaining claims commenced on December 2, 2002 and a verdict was returned on
January 24, 2003. On the claims by both plaintiffs, concerning the alleged
wrongful limiting of the number of shares that they could sell during the
12-month period ended March 11, 1999, a verdict awarding damages of $7.6 million
against the Company was returned. On June 23, 2003, the trial judge denied the
Company's post-trial motions that challenged the jury's verdict and the trial
judge also upheld the jury's verdict. On August 4, 2003, the trial judge entered
a judgment in favor of the plaintiffs for $7.6 million in damages and awarded
plaintiffs $172,000 in prejudgment interest (which will continue to accrue on
the damages portion of the judgment after August 4, 2003 at the rate of 5% per
annum). The Company intends promptly to appeal from, and seek a stay pending
appeal of that judgment.
As a result of the verdict, the Company accrued a reserve of $8.6 million as of
December 31, 2002, which included a $1.0 million estimate for attorneys' fees
and interest.
22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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.
23
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 (at both the trial
and appellate levels) 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 litigation 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.
24
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 a variety of industries. 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 Professional 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 the
banking and finance, healthcare, insurance, aerospace, pharmaceutical,
telecommunications, utility, technology, manufacturing, distribution and
government sectors. The Company believes it offers a range of services that
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, including major
metropolitan centers. 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.
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, and future prospective clients, are continuing
to evaluate the potential for outsourcing business critical applications
and entire business functions.
25
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 solutions and project
management services.
The majority of the Company's services are provided under purchase orders.
Contracts are utilized on more of the complex assignments where the
engagements are for longer terms or where precise documentation on the
nature and scope of the assignment is necessary. Contracts, although they
normally relate to longer-term and more complex engagements, generally do
not obligate the customer to purchase a minimum level of services and are
generally terminable by the customer on 60 to 90 days' notice. Revenues are
recognized when services are provided.
Costs of services consist primarily of salaries and compensation-related
expenses for billable consultants, including payroll taxes, employee
benefits and 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. Acquisitions have been accounted
for under the purchase method of accounting for financial reporting
purposes and have created goodwill.
26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
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.
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).
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. The Company guarantees its permanent placements for ninety
days. In the event a candidate is not retained for the ninety day period,
the Company will provide a suitable replacement candidate. In the event a
replacement candidate cannot be located, the Company will provide a refund
to the client. An allowance for refunds, based upon the Company's
historical experience, is recorded in the financial statements. Revenues
are recorded on a gross basis as a component of revenue.
27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
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.
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 incur further impairment losses.
28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Six Months Ended June 30, 2003 Compared to Six Months Ended June 30, 2002
A summary of operating results for the six months ended June 30, 2003 and 2002
is as follows (in thousands, except for earnings per share data):
2003 2002
---------------------- -----------------------
% of % of
Amount Revenue Amount Revenue
---------- ---------- --------- ----------
Revenues $105,869 100.0% $89,272 100.0%
Cost of services 83,671 79.0 65,072 72.9
---------- ---------- --------- ----------
Gross profit 22,199 21.0 24,200 27.1
---------- ---------- --------- ----------
Selling, general and administrative 16,474 15.6 16,768 18.8
Depreciation and amortization 604 .6 620 .7
---------- ---------- --------- ----------
17,078 16.2 17,388 19.5
---------- ---------- --------- ----------
Operating income 5,121 4.8 6,812 7.6
Other (expense) income 58 .1 36
---------- ---------- --------- ----------
Income from continuing operations before
income taxes 5,179 4.9 6,848 7.6
Income taxes 1,890 1.8 2,574 2.9
---------- ---------- --------- ----------
Income from continuing operations 3,289 3.1 4,274 4.8
Loss from discontinued operations,
net of taxes 16
---------- ---------- --------- ----------
Net income $ 3,289 3.1% $4,258 4.8%
========== ========== ========= ==========
Earnings per share
Basic and Diluted:
Income from continuing operations $.31 $.40
Loss from discontinued operations
---------- ---------
Net income $.31 $.40
========== =========
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 18.6%, or $16.6 million, for the six months ended
June 30, 2003 as compared to the same period in the prior year (the "comparable
prior year period"). The revenue increase was 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, which RCM refers to as
"subcontracted revenues". Subcontracted revenues recognized by RCM for the six
months ended June 30, 2003 were approximately $14.3 million as compared to $1.4
million 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.
29
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Six Months Ended June 30, 2003 Compared to Six Months Ended
June 30, 2002 - (Continued)
Cost of Services. Cost of services increased 28.6%, or $18.6 million, for the
six months ended June 30, 2003 as compared to the comparable prior year period.
This increase was primarily due to an increase in subcontractor costs associated
with increased subcontracted revenues experienced during the six months ended
June 30, 2003. Cost of services as a percentage of revenues increased to 79.0%
for the six months ended June 30, 2003 from 72.9% 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.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 1.8%, or $294,000, for the six months ended June 30, 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 15.6% for the six months ended June 30, 2003 as compared to
18.8% for the comparable prior year period.
Depreciation and Amortization. Depreciation and amortization decreased 2.6%, or
$16,000, for the six months ended June 30, 2003 as compared to the comparable
prior year period. This decrease was primarily due to write down of impaired
fixed assets in periods since June 30, 2002.
Other Expense. Other expense consists of interest expense, net of interest
income and gains on foreign currency transactions. For the six months ended June
30, 2003, actual interest expense of $104,900 was offset by $28,100 of interest
income, which was principally earned from short-term money market deposits.
Interest expense, net, increased $107,800 for the six months ended June 30, 2003
as compared to the comparable prior year period. This increase was primarily due
to interest income earned from an income tax refund in the six months ended June
30, 2002. The comparative increase was mitigated by cash derived from operating
activities, which was used to reduce interest-bearing debt, as well as a
reduction in interest rates on borrowed funds. Gains on foreign currency
transactions increased $129,900 as a result of the strengthening of the Canadian
Dollar as compared to the U.S. Dollar.
Income Tax. Income tax expense decreased 26.6%, or $684,000, for the six months
ended June 30, 2003 as compared to the comparable prior year period. This
decrease was attributable to a lower level of income before taxes for the six
months ended June 30, 2003 as compared to the comparable prior year period. The
effective tax rate was 36.5%, for the six months ended June 30, 2003 as compared
to 37.6% for the comparable prior year period. The decrease in the effective tax
rate was attributable to a higher portion of foreign taxable income, which had a
lower effective income tax rate due to a reversal of foreign taxes in the prior
year.
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 $.09 per share and $27,200 ($16,300 net of
income tax benefit of $10,900) for the six months ended June 30, 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 six months and three months ended June 30,
2002. The Company has not discontinued its commercial services business segment.
The financial statements for the comparative periods have been reclassified for
comparative purposes.
30
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended June 30, 2003 Compared to three months Ended June 30, 2002
A summary of operating results for the three months ended June 30, 2003 and 2002
is as follows (in thousands, except for earnings per share data):
2003 2002
---------------------- -----------------------
% of % of
Amount Revenue Amount Revenue
--------- ---------- --------- ----------
Revenues $55,219 100.0% $44,378 100.0%
Cost of services 43,825 79.4 32,639 73.6
--------- ---------- --------- ----------
Gross profit 11,394 20.6 11,739 26.4
--------- ---------- --------- ----------
Selling, general and administrative 8,274 15.0 8,336 18.8
Depreciation and amortization 308 .5 312 .7
--------- ---------- --------- ----------
8,582 15.5 8,648 19.5
--------- ---------- --------- ----------
Operating income 2,812 5.1 3,091 6.9
Other (expense) income 77 .1 301 .7
--------- ---------- --------- ----------
Income from continuing operations before
income taxes 2,889 5.2 3,392 7.6
Income taxes 953 1.7 1,272 2.8
--------- ---------- --------- ----------
Income from continuing operations 1,936 3.5 2,120 4.8
Loss from discontinued operations,
net of taxes 7
--------- ---------- --------- ----------
Net income $1,936 3.5% $2,113 4.8%
========= ========== ========= ==========
Earnings per share
Basic and Diluted:
Income from continuing operations $.18 $.20
Loss from discontinued operations
--------- ---------
Net income $.18 $.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 24.4%, or $10.8 million, for the three months ended
June 30, 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 June 30, 2003 were
approximately $8.7 million as compared to $1.0 million 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.
31
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended June 30, 2003 Compared to Three Months Ended
June 30, 2002 - (Continued)
Cost of Services. Cost of services increased 34.3%, or $11.2 million, for the
three months ended June 30, 2003 as compared to the comparable prior year
period. This increase was primarily due to an increase in subcontractor costs
associated with increased subcontracted revenues experienced during the three
months ended June 30, 2003. Cost of services as a percentage of revenues
increased to 79.4% for the three months ended June 30, 2003 from 73.6% for the
comparable prior year period. This increase was primarily attributable to an
increase of the Company's revenues being derived from Professional Engineering
services, which have historically had lower gross profit margins.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 0.7%, or $62,000, for the three months ended June 30, 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 15.0% for the three months ended June 30, 2003 as compared to
18.8% for the comparable prior year period.
Depreciation and Amortization. Depreciation and amortization decreased 1.3%, or
$4,000, for the three months ended June 30, 2003 as compared to the comparable
prior year period. This decrease was primarily due to write down of impaired
fixed assets in periods since June 30, 2003.
Other Expense. Other expense consists of interest expense, net of interest
income and gains on foreign currency transactions. For the three months ended
June 30, 2003, actual interest expense of $42,800 was offset by $17,100 of
interest income, which was principally earned from short-term money market
deposits. Interest expense, net, increased $324,500 for the three months ended
June 30, 2003 as compared to the comparable prior year period. This increase was
primarily due to interest income earned from an income tax refund in the three
months ended June 30, 2002. The comparative increase was mitigated by cash
derived from operating activities, which was used to reduce interest-bearing
debt, as well as a reduction in interest rates on borrowed funds. Gains on
foreign currency transactions increased $100,200 as a result of the
strengthening of the Canadian Dollar as compared to the U.S. Dollar.
Income Tax. Income tax expense decreased 25.1%, or $319,000, for the three
months ended June 30, 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 June 30, 2003 as compared to the comparable prior year period. The
effective tax rate was 33.0%, for the three months ended June 30, 2003 as
compared to 37.5% for the comparable prior year period. The decrease in the
effective tax rate was attributable to a higher portion of foreign taxable
income, which had a lower effective income tax rate due to a reversal of foreign
taxes in the prior year.
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 $.09 per share and $11,400 ($6,800 net of
income tax benefit of $4,500) for the three months ended June 30, 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 six months and three months ended June 30,
2002. The Company has not discontinued its commercial services business segment.
The financial statements for the comparative periods have been reclassified for
comparative purposes.
32
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources
Operating activities provided $2.3 million of cash for the six months ended June
30, 2003 as compared to operating activities providing $9.8 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 $11.0 million since December 31, 2002 of
which $4.9 million of the increase was from one customer, and from whom
approximately $5.5 million was received subsequent to June 30, 2003.
Investing activities used $1.5 million for the six months ended June 30, 2003 as
compared to $3.6 million for the comparable 2002 period. The decrease in the use
of cash for investing activities for fiscal 2003 as compared to the
comparable period was primarily attributable to a decrease in deferred
consideration payments.
Financing activities, which consisted of debt reduction, used $4.0 million in
2003 as compared to financing activities using $6.5 million for the comparable
2002 period.
On May 31, 2002, the Company and its subsidiaries entered into an amended and
restated loan agreement which was further amended 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: (i) LIBOR (London Interbank
Offered Rate), plus applicable margin, or (ii) 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 six months ended June 30, 2003 and 2002 were 3.1%
and 3.89%, respectively. The amounts outstanding under the Revolving Credit
Facility at June 30, 2002 and December 31, 2002 were $3.3 million and $7.4
million, respectively. At June 30, 2003, the Company had availability (including
amounts outstanding) under the Revolving Credit Facility of $21.6 million.
The Company anticipates that its primary use 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 it will need to borrow approximately $7.6 million
under its Revolving Credit Facility in order to post a collateral bond related
to the $7.6 million verdict returned in January 2003. The Company believes that
its borrowing base is currently sufficient to allow this additional borrowing.
33
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 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 June 30, 2003, the Company has a deferred tax asset totaling $3.5 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 period ended June 30, 2004.
The Company's contractual obligations as of June 30, 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) $3,300 $3,300
Operating Leases 9,763 $1,047 4,052 $2,644 $2,020
----------- ------------ ------------ ------------ -------------
Total Obligations $13,063 $1,047 $7,352 $2,644 $2,020
=========== ============ ============ ============ =============
(1) The Revolving Credit Facility agreement expires in August 2004.
34
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 June 30, 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 six months ended June 30, 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.
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the Company's disclosure controls and procedures as of the end of the period
covered by this report, and they have concluded that these controls and
procedures are effective.
(b) Changes in Internal Control Over Financial Reporting
There have been no significant changes in internal control over financial
reporting that occurred during the quarter ended June 30, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
35
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to two lawsuits and one claim from various persons from
whom the Company acquired stock or assets in three separate acquisitions that
occurred in the years 1998 through 1999. The lawsuits and claim are not related
to one another. The lawsuits and claim 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 claim, when considered collectively, is from $-0- to
approximately $5.3 million. In the opinion of management and based upon the
advice of counsel, the Company has meritorious defenses to the lawsuits and
claim that should serve to defeat or diminish the Company's potential liability.
However, if material adverse determinations on either the lawsuits or claim 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 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 2003. A trial on the
remaining claims commenced on December 2, 2002 and a verdict was returned on
January 24, 2003. On the claims by both plaintiffs, concerning the alleged
wrongful limiting of the number of shares that they could sell during the
12-month period ended March 11, 1999, a verdict awarding damages of $7.6 million
against the Company was returned. On June 23, 2003, the trial judge denied the
Company's post-trial motions that challenged the jury's verdict and the trial
judge also upheld the jury's verdict. On August 4, 2003, the trial judge entered
a judgment in favor of the plaintiffs for $7.6 million in damages and awarded
plaintiffs $172,000 in prejudgment interest (which will continue to accrue on
the damages portion of the judgment after August 4, 2003 at the rate of 5% per
annum). The Company intends promptly to appeal from, and seek a stay pending
appeal of that judgment.
As a result of the verdict, the Company accrued a reserve of $8.6 million as of
December 31, 2002, which included a $1.0 million estimate for attorneys' fees
and interest.
36
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certifications of Chief Executive Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.
31.2 Certifications of Chief Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.
32.1 Certifications of Chief Executive Officer Required by
Rule 13a-14(b) of the Securities Exchange Act of
1934, as amended. (This exhibit shall not be deemed
"filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise
subject to the liability of that section. Further,
this exhibit shall not be deemed to be incorporated
by reference into any filing under the Securities Act
of 1933, as amended, or the Securities Exchange Act
of 1934, as amended.)
32.2 Certifications of Chief Financial Officer Required by
Rule 13a-14(b) of the Securities Exchange Act of
1934, as amended. (This exhibit shall not be deemed
"filed" for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise
subject to the liability of that section. Further,
this exhibit shall not be deemed to be incorporated
by reference into any filing under the Securities Act
of 1933, as amended, or the Securities Exchange Act
of 1934, as amended.)
(b) Reports on Form 8-K
Current Report on Form 8-K dated April 30, 2003 reporting items 7 and 9
and containing as an Exhibit the Press Release dated April 30, 2003
issued by the Company.
37
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: August 7, 2003 By:/s/ Stanton Remer
--- ------- -----
Stanton Remer
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the Registrant)
38