UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 shares outstanding as
of November 5 2003.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2003 (Unaudited)
and December 31, 2002 3
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Nine-Month Periods Ended September 30, 2003 and 2002 5
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Three-Month Periods Ended September 30, 2003 and 2002 7
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Nine-Month Period Ended September 30, 2003 9
Unaudited Consolidated Statements of Cash Flows for the Nine-
Month Periods Ended September 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
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
ASSETS
September 30, December 31,
2003 2002
--------------- ---------------
(Unaudited)
Current assets
Cash and cash equivalents $ 4,796,141 $2,845,154
Accounts receivable, net of allowance for doubtful accounts
of $1,860,000 (September 30, 2003) and $1,549,000
(December 31, 2002), respectively 42,188,625 31,753,934
Income tax refund receivable 331,721 3,766,585
Restricted cash 8,295,625 -
Prepaid expenses and other current assets 1,367,511 2,635,304
Deferred tax assets 2,878,479 6,246,119
--------------- ---------------
Total current assets 59,858,102 47,247,096
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 9,656,858 9,708,344
Less: accumulated depreciation and amortization 4,385,552 3,818,092
--------------- ---------------
5,271,306 5,890,252
--------------- ---------------
Other assets
Deposits 110,481 86,590
Goodwill 38,007,233 36,653,595
Intangible assets, net of accumulated amortization
of $231,700 (September 30, 2003) and $211,000
(December 31, 2002) respectively 78,919 99,655
--------------- ---------------
38,196,633 36,839,840
--------------- ---------------
Total assets $103,326,041 $89,977,188
=============== ===============
3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
September 30, 2003 and December 31, 2002
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
2003 2002
--------------- ---------------
(Unaudited)
Current liabilities
Line of credit $ 7,300,000 $7,420,000
Accounts payable and accrued expenses 18,613,907 14,728,729
Accrued payroll 7,567,857 4,363,024
Payroll and withheld taxes 590,774 193,850
Income taxes payable 3,962,465 4,025,431
--------------- ---------------
Total current liabilities 38,035,003 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 (September 30, 2003) and (December 31, 2002), respectively 532,362 531,304
Accumulated other comprehensive income (loss) 283,625 ( 584,084)
Additional paid-in capital 94,005,997 93,935,938
Accumulated deficit ( 29,530,946) ( 34,637,004)
--------------- ---------------
65,291,038 59,246,154
--------------- ---------------
Total liabilities and shareholders' equity $103,326,041 $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
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
-------------- --------------
Revenues $161,093,773 $133,014,345
Cost of services 127,350,373 96,948,334
-------------- --------------
Gross profit 33,743,400 36,066,011
-------------- --------------
Operating costs and expenses
Selling, general and administrative 24,809,503 25,064,045
Depreciation 893,540 927,046
Amortization 20,736 15,543
-------------- --------------
25,723,779 26,006,634
-------------- --------------
Operating income 8,019,621 10,059,377
-------------- --------------
Other expenses (income)
Interest expense, net of interest income 180,261 69,625
(Gain) loss on foreign currency transactions ( 116,407 ) 34,780
-------------- --------------
63,854 104,405
-------------- --------------
Income from continuing operations before income taxes 7,955,767 9,954,972
Income taxes 2,849,709 3,766,212
-------------- --------------
Income from continuing operations 5,106,058 6,188,760
Loss from discontinued operations
net of tax benefit of $643,000 964,412
-------------- --------------
Net income 5,106,058 5,224,348
Other comprehensive (loss) income
Foreign currency translation adjustment 867,709 ( 12,667 )
------- ------
Comprehensive income $5,973,767 $5,211,681
========== ==========
5
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED)
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
--------------- --------------
Basic earnings per share
Income from continuing operations $.48 $.58
Loss from discontinued operations .09
---- ---
Basic earnings per share $.48 $.49
==== ====
Weighted average number of common shares outstanding 10,633,211 10,581,084
========== ==========
Diluted earnings per share
Income from continuing operations $.48 $.57
Loss from discontinued operations .09
---- -- ---
Diluted earnings per share $.48 $.48
==== ====
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options
of 81,438 and 213,636 in 2003 and 2002, respectively) 10,714,649 10,794,720
========== ==========
6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
-------------- --------------
Revenues $55,224,390 $43,743,213
Cost of services 43,679,866 31,877,131
-------------- --------------
Gross profit 11,544,524 11,866,082
-------------- --------------
Operating costs and expenses
Selling, general and administrative 8,335,493 8,296,441
Depreciation 299,892 317,531
Amortization 10,368 5,181
-------------- --------------
8,645,753 8,619,153
-------------- --------------
Operating income 2,898,771 3,246,929
-------------- --------------
Other expenses
Interest expense, net of interest income 103,509 100,721
Loss on foreign currency transactions 18,558 39,887
-------------- --------------
122,067 140,608
-------------- --------------
Income from continuing operations before income taxes 2,776,704 3,106,321
Income taxes 960,052 1,191,857
-------------- --------------
Income from continuing operations 1,816,652 1,914,464
Loss from discontinued operations
net of tax benefit of $632,000 948,190
-------------- --------------
Net income 1,816,652 966,274
Other comprehensive income (loss)
Foreign currency translation adjustment (70,097 ) 24,864
-------------- --------------
Comprehensive income $ 1,746,555 $ 991,138
============== ==============
7
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED)
Three Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
--------------- --------------
Basic earnings per share
Income from continuing operations $.17 $.18
Loss from discontinued operations .09
---- ---
Basic earnings per share $.17 $.09
==== ====
Weighted average number of common shares outstanding 10,633,211 10,581,600
========== ==========
Diluted earnings per share
Income from continuing operations $.17 $.18
Loss from discontinued operations .09
---- ---
Diluted earnings per share $.17 $.09
==== ====
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options
of 166,646 and 182,720 in 2003 and 2002, respectively) 10,799,857 10,764,321
========== ==========
8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 2003
(Unaudited)
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Accumulated
------------
Shares Amount Loss Capital Deficit Total
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 867,709 867,709
Net income 5,106,058 5,106,058
---------- -------- ---------- ----------- ------------- -----------
Balance, September 30, 2003 10,647,247 $532,362 $283,625 $94,005,997 ($29,530,946) $65,291,038
========== ======== ======== =========== ============ ===========
9
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
--------------- --------------
Cash flows from operating activities:
Income from continuing operations $5,106,058 $ 6,188,760
--------------- --------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Loss from discontinued operations 964,412
Depreciation and amortization 914,276 942,589
Provision for losses on accounts receivable 311,000 ( 194,000)
Changes in assets and liabilities:
Accounts receivable ( 10,745,691) 6,609,159
Income tax refund receivable 3,733,083 6,810,092
Restricted cash ( 8,295,625)
Deferred tax asset 3,069,422 7,735,613
Prepaid expenses and other current assets 1,267,789 ( 1,216,287)
Accounts payable and accrued expenses 3,885,180 ( 2,137,402)
Accrued payroll 3,204,835 1,367,113
Payroll and withheld taxes 396,924 23,787
Income taxes payable ( 62,967) 2,077,631
--------------- --------------
Total adjustments ( 2,321,774) 22,982,707
--------------- --------------
Net cash provided by operating activities $2,784,284 $29,171,467
--------------- --------------
10
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2003 and 2002 - (Continued)
(Unaudited)
2003 2002
--------------- --------------
Cash flows from investing activities:
Proceeds on sale of reporting unit $ 100,000
Property and equipment acquired ( 274,594) ( 442,347)
(Increase) decrease in deposits ( 23,891) 65,043
Contingent consideration ( 1,353,638) ( 4,454,747)
--------------- --------------
Net cash used in investing activities ( 1,652,123) ( 4,732,051)
--------------- --------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 71,117 99,381
Exercise of stock options - 1,530
Net repayments of line of credit ( 120,000) ( 22,270,000)
--------------- --------------
Net cash used in financing activities ( 48,883) ( 22,169,089)
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents 867,709 ( 12,667)
--------------- --------------
Increase in cash and cash equivalents 1,950,987 2,257,660
Cash and cash equivalents at beginning of period 2,845,154 2,289,743
--------------- --------------
Cash and cash equivalents at end of period $4,796,141 $4,547,403
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $156,896 $726,973
Income taxes (refund) ( $3,889,829) ( $12,762,617)
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 nine months ended September 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 $1.6 million ($964,400 net of
income tax benefit of $643,000) for the nine months ended September 30,
2002, or $.09 per share. In accordance with Statement of Financial
Accounting Standards (SFAS) 144, the loss is presented as a loss from
discontinued operations in the statements of operations for the nine months
and three months ended September 30, 2002. The Company has not discontinued
its commercial services business segment.
3. New Accounting Standards
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. The adoption of SFAS 146 did not have a
material effect on the Company's consolidated financial position, results
of operations, or cash flows.
In November 2002, FASB Interpretation 45 (FIN 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.
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 (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.
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 a material effect on the Company's consolidated
financial position, results of operations, or cash flows.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS 150 established standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). SFAS
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. This statement did not
have a material impact on the Company's financial position or results of
operations.
4. Line of Credit
On May 31, 2002, the Company and its subsidiaries entered into an amended
and restated loan agreement, which was further amended on October 1, 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.
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. Line of Credit (Continued)
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 nine months
ended September 30, 2003 and 2002 were 3.24% and 3.78%, respectively. The
amounts outstanding under the Revolving Credit Facility at September 30,
2003 and December 31, 2002 were $7.3 million and $7.4 million,
respectively. At September 30, 2003, the Company had availability
(including amounts outstanding) under the Revolving Credit Facility of
$17.7 million.
5. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
------------------------------ ------------------------------
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Interest expense ($227,926) ($653,079) ($123,075) ($114,997)
Interest income 47,665 583,454 19,566 14,276
------------- ------------- ------------- -------------
($180,261) ($69,625) ($103,509) ($100,721)
============= ============= ============= =============
6. Goodwill and Other Intangibles
SFAS 142 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. There have been no events through September 30,
2003, which have indicated a need to perform the impairment test prior to
the Company's annual test date.
The changes in the carrying amount of goodwill for the period ended
September 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 September 30, 2003 $30,479 $7,528 $38,007
============= ============= =========
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Accounts Payable
Accounts payable and accrued expenses consist of the following at September
30, 2003 and December 31, 2002:
September 30, December 31,
2003 2002
----------------- ----------------
Accounts payable and other accrued
expenses $10,058,880 $5,056,539
Due to sellers - 1,072,190
Reserve for litigation 8,555,027 8,600,000
----------------- ----------------
Total $18,613,907 $14,728,729
================= ================
8. Shareholders' Equity
Common Shares Reserved
Shares of unissued common stock were reserved for the following purposes:
September 30, December 31,
----------------- ----------------
2003 2002
----------------- ----------------
Option exchange for restricted shares (See note 13) 607,945
Exercise of options outstanding 2,572,539 2,474,214
Future grants of options 598,081 713,031
----------------- ----------------
Total 3,778,565 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.
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. Stock - Based Compensation (Continued)
At September 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).
Nine Months Three Months
Ended September 30, Ended September 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- --------- ---------- ---------
Net income, as reported $5,106 $5,224 $1,816 $966
Less: stock-based compensation costs
determined under fair value based
method for all awards 807 1,147 245 382
Net income, pro forma 4,239 4,077 1,571 584
Earnings per share of common stock-basic:
As reported $.48 $.49 $.17 $.09
Pro forma $.40 $.39 $.15 $.06
Earnings per share of common stock-diluted:
As reported $.48 $.48 $.17 $.09
Pro forma $.40 $.38 $.15 $.05
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 56%; risk-free
interest rate of 3.37%; and expected lives of 5 years. There were 220,000
stock options granted during the nine months ended September 30, 2003.
Incentive Stock Option Plans
The Company is in the process of an offer to exchange all of the
outstanding stock options held by the employees and directors with a strike
price of $7.00 or greater for shares of restricted stock. See Note 13.
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 September 30,
2003 options to purchase 366,295 shares stock were outstanding.
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
9. Stock - Based Compensation (Continued)
Incentive Stock Option Plans (Continued)
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 September 30, 2003, options to purchase
110,000 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
September 30, 2003, options to purchase 1,997 shares of common stock are
available for future grants, and options to purchase 1,192,828 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 September 30, 2003,
options to purchase 596,084 shares of common stock are available for future
grants, and options to purchase 903,416 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):
Nine Months Ended Information Professional Commercial
September 30, 2003 Technology Engineering Services Corporate Total
-------------- ------------- -------------- ------------ ------------
Revenue $77,170 $69,876 $14,048 $161,094
Operating expenses 71,713 66,780 13,667 152,160
-------------- ------------- -------------- ------------ ------------
EBITDA (1) 5,457 3,096 381 8,934
Depreciation 438 406 49 893
Amortization of
intangibles 9 10 2 21
-------------- ------------- -------------- ------------ ------------
Operating income 5,010 2,680 330 8,020
Interest expense, net
of interest income 86 78 16 180
Gain on foreign
currency transactions (116 ) (116 )
Income taxes 1,764 974 112 2,850
-------------- ------------- -------------- ------------
Net income $3,160 $1,744 $202 $5,106
============== ============= ============== ============
Total assets $51,854 $25,366 $5,755 $20,351 $103,326
Capital expenditures $275 $275
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Segment Information (Continued)
Nine Months Ended Information Professional Commercial
September 30, 2002 Technology Engineering Services Corporate Total
--------------- ------------- -------------- ------------- -------------
Revenue $80,186 $37,781 $15,047 $133,014
Operating expenses 73,441 33,987 14,584 122,012
--------------- ------------- -------------- ------------- -------------
EBITDA (1) 6,745 3,794 463 11,002
Depreciation 586 289 52 927
Amortization of intangibles 13 3 16
--------------- ------------- -------------- ------------- -------------
Operating income 6,146 3,502 411 10,059
Interest expense, net of
interest income 42 20 8 70
Loss on foreign currency
transactions 35 35
Loss on discontinued
operations 964 964
Income taxes 2,309 1,304 153 3,766
--------------- ------------- -------------- -------------
Net income (loss) $3,795 $2,143 ($714) $5,224
=============== ============= ============== =============
Total assets $83,287 $15,227 $5,481 $11,731 $115,726
Capital expenditures $442 $442
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Segment Information (Continued)
Three Months Ended Information Professional Commercial
September 30, 2003 Technology Engineering Services Corporate Total
---------------- --------------- --------------- ------------- ---------------
Revenue $25,104 $25,307 $4,813 $55,224
Operating expenses 23,305 24,027 4,683 52,015
---------------- --------------- --------------- ------------- ---------------
EBITDA (1) 1,799 1,280 130 3,209
Depreciation 153 128 19 300
Amortization of intangibles 4 5 1 10
---------------- --------------- --------------- ------------- ---------------
Operating income 1,642 1,147 110 2,899
Interest expense, net of
interest income 47 48 9 104
Loss on foreign currency
transactions 18 18
Income taxes 551 374 35 960
---------------- --------------- --------------- ---------------
Net income $1,044 $707 $66 $1,817
================ =============== =============== ===============
Total assets $51,854 $25,366 $5,755 $20,351 $103,326
Capital expenditures $96 $96
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Segment Information (Continued)
Three Months Ended Information Professional Commercial
September 30, 2002 Technology Engineering Services Corporate Total
---------------- -------------- ---------------- ------------- ---------------------
Revenue $24,718 $14,285 $4,740 $43,743
Operating expenses 23,114 12,497 4,562 40,173
---------------- -------------- ---------------- ------------- -----------------
EBITDA (1) 1,604 1,788 178 3,570
Depreciation 201 98 19 318
Amortization of
intangibles 4 1 5
---------------- -------------- ---------------- ------------- -----------------
Operating income 1,399 1,689 159 3,247
Interest (income), net
of interest expense 57 33 11 101
Loss on foreign currency
transactions 40 40
Loss on discontinued
operations 948 948
Income taxes (refund) 741 892 (441) 1,192
---------------- -------------- ---------------- ---------------------
Net income (loss) $601 $724 ($359) $966
================ ============== ================ =================
Total assets $83,287 $15,227 $5,481 $11,731 $115,726
Capital expenditures $104 $104
(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
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
post-verdict prejudgment interest. Post-judgment interest will continue to
accrue on the damages portion of the judgment after August 4, 2003 (at the
rate of 5% per annum until December 31, 2003 and at the rate of 4% per
annum in 2004). The Company has appealed from, and obtained a stay pending
appeal of, that judgment. In order to secure the stay, the Company made a
cash deposit in lieu of bond of $8.3 million with the Trust Fund of the
Superior Court of New Jersey. This deposit is recorded as restricted cash
on the consolidated balance sheet and earns interest that approximates the
daily federal funds rate. The plaintiffs have cross-appealed from the
Court's denial of pre-verdict prejudgment interest on the damages portion
of the judgment and from the Court's refusal to grant judgment as a matter
of law to one of the plaintiffs on his claim for severance pay in the
amount of $240,000 plus interest.
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.
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.
22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
13. Subsequent Event
In order to enhance long-term value for our shareholders, reduce the number
of options outstanding and improve our ability to retain and provide
incentives to our employees and directors, on September 30, 2003, we filed
with the Securities and Exchange Commission an offer to exchange ("Offer")
all of the outstanding stock options held by our employees and directors
with a strike price of $7.00 or greater for shares of restricted stock and
cash.
Pursuant to the Offer, the maximum number of options that are subject to
the exchange and cancellation is 1,328,273 and would be exchanged for
607,945 shares of restricted common stock and cash consideration equal to
67% of the value of the restricted common stock. The exact value of the
restricted common stock expected to be issued and the cash consideration
expected to be paid will not be known until the exchange date of the offer,
which will be no sooner than November 14, 2003. The value of the restricted
common stock expected to be issued and the amount of cash consideration
expected to be paid will depend on the number of tendered options actually
exchanged and the market value of our common stock at the time of the
exchange.
Assuming 100% participation and using the October 9, 2003 closing price of
$6.54, the total consideration estimated to be charged to operations in the
fourth quarter ended December 31, 2003 would be approximately $6.7 million
($4.0 million, net of a total income tax benefit of $2.7 million). The $6.7
million would be comprised of approximately $4.0 million for restricted
common stock plus $2.7 million in cash consideration. Provided we have
positive taxable income in future periods, this transaction will be
approximately cash flow neutral to us as the combined tax benefits (both
the restricted common stock expected to be issued and the cash
consideration expected to be paid are tax deductible expenses) will be
approximately equal the actual cash consideration expected to be paid to
employees and directors.
All shares of restricted stock issued pursuant to the tender offer will be
fully vested on the stock grant date, but are subject to transfer
restrictions. The transfer restrictions will lapse (i) on the first
anniversary of the stock grant date, anticipated to be November 14, 2003 or
(ii) earlier if we experience a change in control, subject to any
subsequent applicable restrictions and our policies regarding restrictions
on the shares of common stock.
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, the outcome of litigation (at both the trial and appellate
levels) involving the Company and the impact on the Company of its exchange
offer relating to its outstanding stock options. 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.
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 operational 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 commercial and
government sectors for more than 30 years. 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 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. The Company 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.
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.
26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
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.
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.
27
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 incur further impairment losses.
Recent Developments
In order to enhance long-term value for our shareholders, reduce the number
of options outstanding and improve our ability to retain and provide
incentives to our employees and directors, on September 30, 2003, we filed
with the Securities and Exchange Commission an offer to exchange ("Offer")
all of the outstanding stock options held by our employees and directors
with a strike price of $7.00 or greater for shares of restricted stock and
cash.
Pursuant to the Offer, the maximum number of options that are subject to
the exchange and cancellation is 1,328,273 and would be exchanged for
607,945 shares of restricted common stock and cash consideration equal to
67% of the value of the restricted common stock. The exact value of the
restricted common stock expected to be issued and the cash consideration
expected to be paid will not be known until the exchange date of the offer,
which will be no sooner than November 14, 2003. The value of the restricted
common stock expected to be issued and the amount of cash consideration
expected to be paid will depend on the number of tendered options actually
exchanged and the market value of our common stock at the time of the
exchange.
Assuming 100% participation and using the October 9, 2003 closing price of
$6.54, the total consideration estimated to be charged to operations in the
fourth quarter ended December 31, 2003 would be approximately $6.7 million
($4.0 million, net of a total income tax benefit of $2.7 million). The $6.7
million would be comprised of approximately $4.0 million for restricted
common stock plus $2.7 million in cash consideration. Provided we have
positive taxable income in future periods, this transaction will be
approximately cash flow neutral to us as the combined tax benefits (both
the restricted common stock expected to be issued and the cash
consideration expected to be paid are tax deductible expenses) will be
approximately equal the actual cash consideration expected to be paid to
employees and directors.
All shares of restricted stock issued pursuant to the tender offer will be
fully vested on the stock grant date, but are subject to transfer
restrictions. The transfer restrictions will lapse (i) on the first
anniversary of the stock grant date, anticipated to be November 14, 2003 or
(ii) earlier if we experience a change in control, subject to any
subsequent applicable restrictions and our policies regarding restrictions
on the shares of common stock.
28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002
A summary of operating results for the nine months ended September 30, 2003 and
2002 is as follows (in thousands, except for earnings per share data):
2003 2002
---------------------- -----------------------
% of % of
Amount Revenue Amount Revenue
---------- ---------- ---------- ----------
Revenues $161,094 100.0% $133,014 100.0%
Cost of services 127,350 79.1 96,948 72.9
---------- ---------- ---------- ----------
Gross profit 33,744 20.9 36,066 27.1
---------- ---------- ---------- ----------
Selling, general and administrative 24,810 15.4 25,064 18.8
Depreciation and amortization 914 .6 943 .7
---------- ---------- ---------- ----------
25,724 16.0 26,007 19.5
---------- ---------- ---------- ----------
Operating income 8,020 4.9 10,059 7.6
Other expense 64 104 .1
---------- ---------- ---------- ----------
Income from continuing operations before
income taxes 7,956 4.9 9,955 7.5
Income taxes 2,850 1.7 3,766 2.8
---------- ---------- ---------- ----------
Income from continuing operations 5,106 3.2 6,189 4.7
Loss from discontinued operations,
net of taxes 965 .7
---------- ---------- ---------- ----------
Net income $5,106 3.2% $5,224 4.0%
========== ========== ========== ==========
Earnings per share
Diluted:
Income from continuing operations $.48 $.57
Loss from discontinued operations (.09 )
---------- ----------
Net income $.48 $.48
========== ==========
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 21.1%, or $28.1 million, for the nine months ended
September 30, 2003 as compared to the same period in the prior year (the
"comparable prior year period"). The revenue increase was principally
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 nine months ended September 30, 2003 were
approximately $22.6 million as compared to $3.0 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.
29
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended September 30, 2003 Compared to Nine Months
Ended September 30, 2002 - (Continued)
Cost of Services. Cost of services increased 31.4%, or $30.4 million, for the
nine months ended September 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 nine
months ended September 30, 2003. Cost of services as a percentage of revenues
increased to 79.1% for the nine months ended September 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 1.0%, or $254,000, for the nine months ended September 30,
2003 as compared to the comparable prior year period. This decrease was
primarily attributable to ongoing cost cutting and containment initiatives. SGA
expenses as a percentage of revenues were 15.4% for the nine months ended
September 30, 2003 as compared to 18.8% for the comparable prior year period.
Depreciation and Amortization. Depreciation and amortization decreased 3.1%, or
$29,000, for the nine months ended September 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 September 30, 2002.
Other Expense. Other expense consists of interest expense, net of interest
income and gains on foreign currency transactions. For the nine months ended
September 30, 2003, actual interest expense of $228,000 was offset by $48,000 of
interest income, which was principally earned from short-term money market
deposits. Interest expense, net, increased $111,000 for the nine months ended
September 30, 2003 as compared to the comparable prior year period. This
increase was primarily due to interest on a post judgment verdict of $7.6
million (see note 11). 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 $151,200 because of the strengthening of the
Canadian Dollar as compared to the U.S. Dollar.
Income Tax. Income tax expense decreased 24.3%, or $916,000, for the nine months
ended September 30, 2003 as compared to the comparable prior year period. This
decrease was attributable to a lower level of income before taxes for the nine
months ended September 30, 2003 compared to the comparable prior year period.
The effective tax rate was 35.8%, for the nine months ended September 30, 2003
as compared to 37.8% for the comparable prior year period. The decrease in
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 for the nine months ended September 30, 2002, or $.09 per
share ($964,000 net of income tax benefit of $643,000). 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 nine
months ended September 30, 2002. The Company continues to operate its commercial
services business segment.
30
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended September 30, 2003 Compared to Three Months
Ended September 30, 2002
A summary of operating results for the three months ended September 30, 2003 and
2002 is as follows (in thousands, except for earnings per share data):
2003 2002
---------------------- -----------------------
% of % of
Amount Revenue Amount Revenue
--------- ---------- --------- ----------
Revenues $55,224 100.0% $43,743 100.0%
Cost of services 43,680 79.1 31,877 72.9
--------- ---------- --------- ----------
Gross profit 11,544 20.9 11,866 27.1
--------- ---------- --------- ----------
Selling, general and administrative 8,335 15.1 8,296 19.0
Depreciation and amortization 310 .6 323 .7
--------- ---------- --------- ----------
8,645 15.7 8,619 19.7
--------- ---------- --------- ----------
Operating income 2,899 5.2 3,247 7.4
Other expense 122 .2 141 .3
--------- ---------- --------- ----------
Income from continuing operations before
income taxes 2,777 5.0 3,106 7.1
Income taxes 960 1.7 1,192 2.7
--------- ---------- --------- ----------
Income from continuing operations 1,817 3.3 1,914 4.4
Loss from discontinued operations,
net of taxes 948 2.2
--------- ---------- --------- ----------
Net income $1,817 3.3% $966 2.2%
====== === ==== ===
Earnings per share
Diluted
Income from continuing operations $.17 $18
Loss from discontinued operations (.09 )
--------- ---------
Net income $.17 $.09
========= =========
The above summary is not a presentation of results of operations under generally
accepted accounting principles and should not be considered in isolation or as
an alternative to results of operations as an indication of the Company's
performance.
Revenues. Revenues increased 26.2%, or $11.5 million, for the three months ended
September 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 September 30, 2003 were
approximately $8.3 million as compared to $1.6 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 September 30, 2003 Compared to Three Months
Ended September 30, 2002 - (Continued)
Cost of Services. Cost of services increased 37.0%, or $11.8 million, for the
three months ended September 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 September 30, 2003. Cost of services as a percentage of revenues
increased to 79.1% for the three months ended September 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 increased 0.5%, or $39,000, for the three months ended September 30,
2003 as compared to the comparable prior year period. This increase was
primarily attributable to increased selling expenses associated with increased
sales in the Information Technology sector, which were offset by ongoing cost
cutting and cost containment initiatives. SGA expenses as a percentage of
revenues were 15.1% for the three months ended September 30, 2003 as compared to
19.0% for the comparable prior year period.
Depreciation and Amortization. Depreciation and amortization decreased 4.0%, or
$13,000, for the three months ended September 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 September 30, 2002.
Other Expense. Other expense consists of interest expense, net of interest
income and gains on foreign currency transactions. For the three months ended
September 30, 2003, actual interest expense of $123,000 was offset by $19,600 of
interest income, which was principally earned from short-term money market
deposits. Interest expense, net, decreased $2,800 for the three months ended
September 30, 2003 as compared to the comparable prior year period. This
increase was primarily due to interest on a post judgment verdict of $7.6
million (see note 11). 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 decreased $21,300 because of the strengthening of the
Canadian Dollar as compared to the U.S. Dollar was greater in the second quarter
as compared to the third quarter.
Income Tax. Income tax expense decreased 19.5%, or $232,000, for the three
months ended September 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 September 30, 2003 compared to the comparable prior year
period. The effective tax rate was 34.6%, for the three months ended September
30, 2003 as compared to 38.4% for the comparable prior year period. The decrease
in 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 ($948,200 net of income tax benefit of $632,000) for the
three months ended September 30, 2002, or $.09 per share. In accordance with
Statement of Financial Accounting Standards (SFAS) 144, the loss is presented as
a loss from discontinued operations in the statements of operations for the
three months ended September 30, 2002. The Company continues to operate its
commercial services business segment.
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 $2.8 million of cash for the nine months ended
September 30, 2003 as compared to operating activities providing $29.2 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 and restricted cash which was partially offset by an increase in
accounts payable, accrued payroll and payroll and withheld taxes and a decrease
in income tax refund receivable, deferred tax asset and prepaid expenses and
other current assets.
Investing activities used $1.7 million for the nine months ended September 30,
2003 as compared to $4.7 million for the comparable 2002 period. The decrease in
the use of cash for investing activities for the fiscal 2003 as compared to the
comparable period was primarily attributable to a decrease in deferred
consideration payments.
Financing activities principally consisted of debt reduction of $120,000 in 2003
as compared to financing activities using $22.3 million for debt reduction for
the comparable 2002 period. The Company incurred $6.8 million of borrowed funds
to finance the aforementioned cash deposit in lieu of bond.
On May 31, 2002, the Company and its subsidiaries entered into an amended and
restated loan agreement which was further amended on October 1, 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 nine months ended September 30, 2003 and 2002
were 3.24% and 3.78%, respectively. The amounts outstanding under the Revolving
Credit Facility at September 30, 2002 and December 31, 2002 were $7.3 million
and $7.4 million, respectively. At September 30, 2003, the Company had
availability (including amounts outstanding) under the Revolving Credit Facility
of $17.6 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.
On September 30, 2003, the Company filed with the Securities and Exchange
Commission an offer to exchange 1,328,273 stock options for 607,945 shares of
restricted common stock and cash consideration equal to 67% of the value of the
restricted common stock. The exact value of the restricted common stock expected
to be issued and the cash consideration expected to be paid will not be known
until the exchange date of the offer, which will be no sooner than November 14,
2003. The value of the restricted common stock expected to be issued and the
amount of cash consideration expected to be paid will depend on the number of
tendered options actually exchanged and the market value of RCM's common stock
at the time of the exchange.
Assuming 100% participation and using the October 9, 2003 closing price of
$6.54, the total consideration estimated to be charged to operations in the
fourth quarter ended December 31, 2003 would be approximately $6.7 million ($4.0
million, net of a total income tax benefit of $2.7 million). The $6.7 million
would be comprised of approximately $4.0 million for restricted common stock
plus $2.7 million in cash consideration.
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 immediate funding of the cash consideration will be derived from funds
borrowed from the Revolving Credit Facility. The Company believes that its
borrowing base is currently sufficient to allow this additional borrowing.
Provided the Company has positive taxable income in future periods, this
transaction will be approximately cash flow neutral to the Company as the
combined tax benefits from the restricted common stock expected to be issued and
the cash consideration expected to be paid will be approximately equal the cash
consideration expected to be paid.
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 September 30, 2003, the Company has a deferred tax asset totaling $2.9
million, primarily representing the tax effect of the net operating loss carry
forwards, and the litigation reserve. The Company expects to utilize the
deferred tax asset during the twelve months ended September 30, 2004.
The Company's contractual obligations as of September 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) $7,300 $7,300
Operating Leases 10,696 738 $5,174 $1,956 $2,828
----------- ------------ ------------ ------------ -------------
Total Obligations $17,996 $8,038 $5,174 $1,956 $2,828
=========== ============ ============ ============ =============
(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 September 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 25 basis points) increase in interest rates on its variable debt
(using average debt balances during the nine months ended September 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
An evaluation of the effectiveness, as of the end of the period covered by this
report, of the design and operation of the Registrant's disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) was carried out under the supervision and with the
participation of the Registrant's management, including its Chief Executive
Officer and Chief Financial Officer. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that those disclosure
controls and procedures were adequate to ensure that information required to be
disclosed by the Registrant in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Commission's rules and forms.
35
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
post-verdict prejudgment interest. Post-judgment interest will continue to
accrue on the damages portion of the judgment after August 4, 2003 (at the
rate of 5% per annum until December 31, 2003 and at the rate of 4% per
annum in 2004). The Company has appealed from, and obtained a stay pending
appeal of, that judgment. In order to secure the stay, the Company made a
cash deposit in lieu of bond of $8.3 million with the Trust Fund of the
Superior Court of New Jersey. This deposit is recorded as restricted cash
on the consolidated balance sheet and earns interest that approximates the
daily federal funds rate. The plaintiffs have cross-appealed from the
Court's denial of pre-verdict prejudgment interest on the damages portion
of the judgment and from the Court's refusal to grant judgment as a matter
of law to one of the plaintiffs on his claim for severance pay in the
amount of $240,000 plus interest.
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
10 Third Amendment And Modification to Amended And Restated
Loan and Security Agreement dated October 1, 2003,
between RCM Technologies, Inc. and all of its Subsidiaries
and Citizens Bank of Pennsylvania , as Administrative Agent
and Arranger (filed herewith).
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 August 6, 2003 reporting items 7 and 9 and
containing as an Exhibit the Press Release dated August 6, 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: November 6, 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