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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 October 2, 2004
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, 11,351,365 shares outstanding as of
November 11, 2004.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of October 2, 2004 (Unaudited)
and December 27, 2003 3
Unaudited Consolidated Statements of Income and Comprehensive
Income for the Forty Weeks Ended October 2, 2004 and
Thirty-Nine Weeks Ended September 27, 2003 5
Unaudited Consolidated Statements of Income and Comprehensive Income
for the Thirteen Weeks Ended October 2, 2004 and September 27, 2003 7
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Forty Weeks Ended October 2, 2004 9
Unaudited Consolidated Statements of Cash Flows for the Forty Weeks Ended
October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003 10
Notes to Unaudited Consolidated Financial Statements 12
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 25
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 39
Item 4 - Controls and Procedures 39
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 40
Item 6 - Exhibits and Reports on Form 8-K 42
Signatures 43
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 2, 2004 and December 27, 2003
ASSETS
October 2, December 27,
2004 2003
--------------- ---------------
(Unaudited)
Current assets
Cash and cash equivalents $2,916,441 $5,152,499
Accounts receivable, net of allowance for doubtful accounts
of $1,917,000 (October 2, 2004) and $1,854,000
(December 27, 2003), respectively 37,614,357 36,269,369
Restricted cash 8,295,625 8,295,625
Prepaid expenses and other current assets 1,396,966 2,099,206
Deferred tax assets 4,598,373 4,598,373
--------------- ---------------
Total current assets 54,821,762 56,415,072
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 9,383,166 9,564,939
Less: accumulated depreciation and amortization 4,881,334 4,435,164
--------------- ---------------
4,501,832 5,129,775
--------------- ---------------
Other assets
Deposits 121,214 82,958
Goodwill 38,007,233 38,007,233
Intangible assets, net of accumulated amortization
of $293,663 and $242,249 at October 2, 2004 and
December 27, 2003, respectively 17,138 68,551
--------------- ---------------
38,145,585 38,158,742
--------------- ---------------
Total assets $97,469,179 $99,703,589
=============== ===============
3
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
October 2, 2004 and December 27, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
October 2, December 27,
2004 2003
--------------- ---------------
(Unaudited)
Current liabilities
Line of credit $4,900,000 $7,300,000
Accounts payable and accrued expenses 12,067,408 15,574,036
Accrued compensation 5,566,223 5,456,330
Payroll and withheld taxes 902,796 171,030
Income taxes payable 4,088,665 4,026,097
--------------- ---------------
Total current liabilities 27,525,092 32,533,493
--------------- ---------------
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; 11,351,365 and
11,285,279 shares issued and outstanding
at October 2, 2004 and December 27, 2003, respectively 567,568 564,264
Accumulated other comprehensive income 642,845 556,795
Additional paid-in capital 98,160,760 97,906,888
Accumulated deficit (29,427,086) (31,857,851)
--------------- ---------------
69,944,087 67,170,096
--------------- ---------------
Total liabilities and shareholders' equity $97,469,179 $99,703,589
=============== ===============
4
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003
(Unaudited)
2004 2003
-------------- -------------
Revenues $127,554,978 $161,093,773
Cost of services 96,864,263 127,350,373
-------------- -------------
Gross profit 30,690,715 33,743,400
-------------- -------------
Operating costs and expenses
Selling, general and administrative 25,649,389 24,809,503
Depreciation and amortization 905,224 914,276
-------------- -------------
26,554,613 25,723,779
-------------- -------------
Operating income 4,136,102 8,019,621
-------------- -------------
Other (expenses) income
Interest expense, net of interest income (351,539) (180,261)
(Loss) gain on foreign currency transactions (4,266) 116,407
-------------- -------------
(355,805 ) (63,854 )
-------------- -------------
Income before income taxes 3,780,297 7,955,767
Income taxes 1,349,532 2,849,709
-------------- -------------
Net income 2,430,765 5,106,058
Other comprehensive income
Foreign currency translation adjustment 86,050 867,709
-------------- -------------
Comprehensive income $2,516,815 $5,973,767
============== =============
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)
Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003
(Unaudited)
2004 2003
--------------- ---------------
Basic earnings per share
Basic earnings per share $.21 $.48
==== ====
Weighted average number of common shares outstanding 11,315,707 10,633,211
========== ==========
Diluted earnings per share
Diluted earnings per share $.21 $.48
==== ====
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options
of 396,248 and 81,438 in 2004 and 2003, respectively) 11,711,955 10,714,649
========== ==========
6
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Thirteen Weeks Ended October 2, 2004 and September 27, 2003
(Unaudited)
2004 2003
-------------- --------------
Revenues $40,933,476 $55,224,390
Cost of services 30,969,538 43,679,866
-------------- --------------
Gross profit 9,963,938 11,544,524
-------------- --------------
Operating costs and expenses
Selling, general and administrative 8,322,372 8,335,493
Depreciation and amortization 305,494 310,260
-------------- --------------
8,627,866 8,645,753
-------------- --------------
Operating income 1,336,072 2,898,771
-------------- --------------
Other (expenses) income
Interest expense, net of interest income (118,952) (103,529)
Gain (loss) on foreign currency transactions 3,522 (18,558)
-------------- --------------
(115,430) (122,067)
-------------- --------------
Income before income taxes 1,220,642 2,776,704
Income taxes 455,128 960,052
-------------- --------------
Net income 765,514 1,816,652
Other comprehensive income (loss)
Foreign currency translation adjustment 309,708 (70,097 )
-------------- --------------
Comprehensive income $1,075,222 $1,746,555
============== ==============
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)
Thirteen Weeks Ended October 2, 2004 and September 27, 2003
(Unaudited)
2004 2003
--------------- ---------------
Basic earnings per share
Basic earnings per share $.07 $.17
==== ====
Weighted average number of common shares outstanding 11,315,707 10,633,211
========== ==========
Diluted earnings per share
Diluted earnings per share $.07 $.17
==== ====
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to options
of 300,349 and 166,646 in 2004 and 2003, respectively) 11,638,037 10,799,857
========== ==========
8
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Forty Weeks Ended October 2, 2004
(Unaudited)
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Accumulated
------------ Income Capital Deficit Total
Shares Amount
Balance, December 27, 2003 11,285,279 $564,264 $556,795 $97,906,888 ($31,857,851) $67,170,096
Issuance of stock
under employee
stock purchase plan 15,002 750 80,861 81,611
Exercise of stock options 51,084 2,554 173,011 175,565
Translation adjustment 86,050 86,050
Net income 2,430,765 2,430,765
---------- ------- ------- ---------- --------- ---------
Balance, October 2, 2004 11,351,365 $567,568 $642,845 $98,160,760 ($29,427,086) $69,944,087
========== ======== ======== =========== ============= ===========
9
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003
(Unaudited)
2004 2003
--------------- --------------
Cash flows from operating activities:
Net income $2,430,765 $5,106,058
--------------- --------------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 905,224 914,276
Provision for losses on accounts receivable 63,000 311,000
Changes in assets and liabilities:
Accounts receivable (1,407,988) (10,745,691)
Income tax refund receivable 3,733,083
Restricted cash (8,295,625)
Deferred tax asset 3,069,422
Prepaid expenses and other current assets 702,240 1,267,789
Accounts payable and accrued expenses (3,506,634) 3,885,180
Accrued compensation 109,893 3,204,835
Payroll and withheld taxes 725,765 396,924
Income taxes payable 62,568 (62,967)
--------------- --------------
Total adjustments (2,345,932) (2,321,774)
--------------- --------------
Net cash provided by operating activities $84,833 $2,784,284
--------------- --------------
10
The accompanying notes are an integral part of these
financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks
Ended September 27, 2003 - (Continued)
(Unaudited)
2004 2003
--------------- --------------
Cash flows from investing activities:
Property and equipment acquired ($225,861) ($274,594)
Increase in deposits (38,256) (23,891)
Contingent consideration (1,353,638)
--------------- --------------
Net cash used in investing activities (264,117) (1,652,123)
--------------- --------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 81,611 71,117
Exercise of stock options 175,565
Net repayments of line of credit (2,400,000) (120,000)
--------------- --------------
Net cash used in financing activities (2,142,824) (48,883)
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents 86,050 867,709
--------------- --------------
(Decrease) increase in cash and cash equivalents (2,236,058) 1,950,987
Cash and cash equivalents at beginning of period 5,142,499 2,845,154
--------------- --------------
Cash and cash equivalents at end of period $2,916,441 $4,796,141
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $157,901 $156,896
Income taxes (refund) $1,181,377 ($3,889,829)
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 27, 2003. 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 consolidated financial position of
the Company, and its consolidated results of operations for the interim
periods set forth herein. The results for the forty weeks ended October 2,
2004 are not necessarily indicative of the results to be expected for the
full year.
2. Fiscal Year
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to December 31. A 53-week year occurs periodically. The
fiscal year ended 2004 is a 53-week reporting year. The third quarter of
2003, year ended 2003 and the third quarter of 2004 ended on the following
dates, respectively:
Period Ending Weeks in Quarter Weeks in Year to Date
September 27, 2003 Thirteen Thirty-nine
December 27, 2003 Thirteen Fifty-two
October 2, 2004 Thirteen Forty
3. Use of Estimates and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses and disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
The Company has risk participation arrangements with respect to workers
compensation and health care insurance. The amounts included in the
Company's costs related to this risk participation are estimated and can
vary based on changes in assumptions, the Company's claims experience or
the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty
relating to the performance of the U.S. economy, competition, demand for
the Company's services, adverse litigation and claims, and the hiring,
training and retention of key employees.
12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. New Accounting Standards
In January 2003, the Financial Accounting Standards Board ("FASB") released
Interpretation No. 46 Consolidation of Variable Interest Entities ("FIN
46") which requires that all primary beneficiaries of Variable Interest
Entities ("VIE") consolidate that entity. FIN 46 was effective immediately
for VIEs created after January 31, 2003 and to VIEs 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 VIEs in which an enterprise
holds a variable interest it acquired before February 1, 2003. In December
2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some
of the provisions of the interpretation and to defer the effective date of
implementation for certain entities. Under the guidance of FIN 46R,
entities that do not have interests in structures that are commonly
referred to as special purpose entities are required to apply the
provisions of the interpretation in financial statements for periods ending
after March 14, 2004. The Company does not have interests in special
purpose entities and the adoption of FIN 46R did not have a material impact
on the Company's consolidated financial position, results of operations, or
cash flows.
5. 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 July 27, 2004,
with Citizens Bank of Pennsylvania, administrative agent for a syndicate of
banks. This agreement 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 90 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 the Company's 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 2006. The weighted average
interest rates under the Revolving Credit Facility for the forty weeks
ended October 2, 2004 and thirty-nine weeks ended September 27, 2003 were
2.84% and 3.24%, respectively. The amounts outstanding under the Revolving
Credit Facility at October 2, 2004 and December 27, 2003 were $4.9 million
and $7.3 million, respectively. At October 2, 2004, the Company had
availability (after deducting amounts outstanding) under the Revolving
Credit Facility of $20.0 million.
6. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
----------------------------------- -----------------------------------
Thirty-Nine Thirteen Thirteen
Forty Weeks Weeks Ended Weeks Ended Weeks Ended
Ended October September 27, October 2, September 27,
2, 2004 2003 2004 2003
---------------- ------------------ --------------- -------------------
Interest expense ($398,844) ($227,926) ($129,466) ($123,075)
Interest income 47,305 47,665 10,514 19,566
---------------- ------------------ --------------- -------------------
($351,539) ($180,261) ($118,952) ($103,509)
================ ================== =============== ===================
13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
7. Goodwill
Statement of Financial Accounting Standards ("SFAS") 142 requires the
Company to perform a goodwill impairment test on at least an annual basis.
For purposes of its 2003 annual impairment testing, the Company determined
the fair value of its reporting units using relative market multiples for
comparable businesses, as of November 30, 2003. The Company compared the
fair value of each of its reporting units to their respective carrying
values, including related goodwill. The results of the 2003 impairment
testing indicated no impairment to goodwill. 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 in fiscal year 2004 through October 2, 2004 that
have indicated a need to perform the impairment test prior to the Company's
annual test date.
There are no changes in the carrying amount of goodwill for the forty week
period ended October 2, 2004.
8. Accounts Payable
Accounts payable and accrued expenses consisted of the following at October
2, 2004 and December 27, 2003:
October 2, December 27,
2004 2003
--------------- ----------------
(Unaudited)
Accounts payable and other accrued expenses $3,926,381 $7,216,885
Reserve for litigation 8,141,027 8,357,151
--------------- ----------------
Total $12,067,408 $15,574,036
=============== ================
9. Shareholders' Equity
Common Shares Reserved
Shares of unissued common stock were reserved for the following purposes:
October 2, December 27,
2004 2003
-------------- ----------------
(Unaudited)
Exercise of options outstanding 1,196,083 1,214,916
Future grants of options 991,536 1,074,287
-------------- ----------------
Total 2,187,619 2,289,203
============== ================
14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. 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 October 2, 2004, the Company had 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
plans 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).
Forty Thirty-Nine Thirteen Weeks Thirteen
Weeks Ended Weeks Ended Weeks Ended
October 2, September 27, Ended October September 27,
2004 2003 2, 2004 2003
--------------- ---------------- ---------------- ---------------
Net income, as reported $2,431 $5,106 $766 $1,816
Less: stock-based compensation costs
determined under fair value based
method for all awards 254 807 85 245
Net income, pro forma $2,177 $4,239 $681 $1,571
Earnings per share of common stock-basic:
As reported $.21 $.48 $.07 $.17
Pro forma $.19 $.40 $.06 $.15
Earnings per share of common stock-diluted:
As reported $.21 $.48 $.07 $.17
Pro forma $.19 $.40 $.06 $.15
15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Stock - Based Compensation (Continued)
The pro forma compensation cost using the fair value-based method under
SFAS No. 123 includes valuations related to stock options granted since
January 1, 1995 using the Black-Scholes Option Pricing Model. The pro forma
stock based compensation cost for September 27, 2003 has been adjusted. The
weighted average fair value of options granted using the Black-Scholes
Option Pricing Model during the forty weeks ended October 2, 2004 has been
estimated using the following assumptions: risk free interest rate of 4.0%,
expected life of options of five years, and expected stock volatility of
60.2%. The weighted average fair value per option granted was $4.86 for the
149,000 options granted during the forty weeks ended October 2, 2004.
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 10 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. At October 2, 2004,
options to purchase 92,855 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, at which time the 1994 Plan expired. Options were 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. Unvested
options terminate when an optionee ceases to be a director of the Company.
At October 2, 2004, options to purchase 70,000 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 October
2, 2004, options to purchase 922,980 shares of common stock were available
for future grants, and options to purchase 249,145 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 of 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 October 2, 2004, options to
purchase 68,556 shares of common stock are available for future grants, and
options to purchase 784,083 shares of common stock were outstanding.
16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Stock - Based Compensation (Continued)
Employee Stock Purchase Plan
The Company implemented an Employee Stock Purchase Plan (the "Purchase
Plan") with shareholder approval, effective January 1, 2002. Under the
Purchase Plan, employees meeting certain specific employment qualifications
are eligible to participate and can purchase shares of common stock
semi-annually through payroll deductions at the lower of 85% of the fair
market value of the stock at the commencement or end of the offering
period. The purchase plan permits eligible employees to purchase common
stock through payroll deductions for up to 10% of qualified compensation.
During the forty weeks ended October 2, 2004 and the thirty-nine weeks
ended September 27, 2003, there were 15,002 and 21,171 shares issued under
the Purchase Plan, respectively. At October 2, 2004, there were 320,004
shares available for issuance under the Purchase Plan.
17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information
The Company has adopted SFAS No. 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):
Forty Weeks Ended Information Professional Commercial
October 2, 2004 Technology Engineering Services Corporate Total
--------------- -------------- -------------- ------------- -------------
Revenue $70,439 $38,886 $18,230 $127,555
Operating expenses (1) 67,077 36,865 18,576 122,518
--------------- -------------- -------------- ------------- -------------
EBITDA (2) 3,362 2,021 (346 ) 5,037
Depreciation 468 305 81 854
Amortization of intangibles 15 32 4 51
--------------- -------------- -------------- ------------- -------------
Operating income (loss) 2,879 1,684 (431 ) 4,132
Interest expense, net of
interest income 194 107 51 352
Income taxes (benefit) 958 563 (172 ) 1,349
--------------- -------------- -------------- -------------
Net income (loss) $1,727 $1,014 ($310 ) $2,431
=============== ============== ============== =============
Total assets $50,226 $21,558 $6,254 $19,431 $97,469
Capital expenditures $14 $45 $15 $152 $226
18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information (Continued)
Thirty-Nine Weeks Information Professional Commercial
Ended September 27, 2003 Technology Engineering Services Corporate Total
--------------- ------------ -------------- ------------- -------------
Revenue $77,170 $69,876 $14,048 $161,094
Operating expenses (1) (3) 71,713 66,664 13,667 152,044
--------------- ------------ -------------- ------------- -------------
EBITDA (2) 5,457 3,212 381 9,050
Depreciation 438 406 49 893
Amortization of intangibles 9 10 2 21
--------------- ------------ -------------- ------------- -------------
Operating income 5,010 2,796 330 8,136
Interest expense, net of
interest income 86 78 16 180
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
19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information (Continued)
Thirteen Weeks Ended Information Professional Commercial
October 2, 2004 Technology Engineering Services Corporate Total
---------------- --------------- --------------- ------------- ---------------
Revenue $22,803 $11,966 $6,164 $40,933
Operating expenses (1) 21,550 11,482 6,256 39,288
---------------- --------------- --------------- ------------- ---------------
EBITDA (2) 1,253 484 (92) 1,645
Depreciation 159 100 29 288
Amortization of intangibles 5 11 1 17
---------------- --------------- --------------- ------------- ---------------
Operating income (loss) 1,089 373 (122) 1,340
Interest expense, net of
interest income 66 35 18 119
Income taxes (benefit) 381 139 (65) 455
---------------- --------------- --------------- ---------------
Net income (loss) $642 $199 ($75) $766
================ =============== =============== ===============
Total assets $50,226 $21,558 $6,254 $19,431 $97,469
Capital expenditures $14 $45 $15 $74
20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information (Continued)
Thirteen Weeks Ended Information Professional Commercial
September 27, 2003 Technology Engineering Services Corporate Total
---------------- --------------- --------------- ------------- ---------------
Revenue $25,104 $25,307 $4,813 $55,224
Operating expenses (1) (3) 24,045 4,683 52,033
---------------- --------------- --------------- ------------- ---------------
EBITDA (2) 1,799 1,262 130 3,191
Depreciation 153 128 19 300
Amortization of intangibles 4 5 1 10
---------------- --------------- --------------- ------------- ---------------
Operating income 1,642 1,129 110 2,881
Interest expense, net of
interest income 47 48 9 104
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
(1) Operating expenses excludes depreciation and amortization.
(2) EBITDA means earnings before interest income, interest expense,
depreciation, amortization and income taxes. 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.
(3) Certain reclassifications have been made to 2003 segment data to conform to
2004 presentation.
21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
11. Segment Information (Continued)
The Company is domiciled in the U. S. and its segments operate in the U. S. and
Canada. Revenues and fixed assets by geographic area as of and for the forty
weeks ended October 2, 2004 and the thirty-nine weeks ended September 27, 2003
are as follows (in thousands):
Forty Weeks Thirty-Nine
Ended Weeks Ended
October 2, 2004 September 27,
2003
----------------- ----------------
Revenues
U. S. $112,266 $114,153
Canada 15,289 46,941
----------------- ----------------
$127,555 $161,094
================= ================
Fixed Assets
U. S. $4,260 $5,084
Canada 242 392
----------------- ----------------
$4,502 $5,476
================= ================
Revenues by geographic area for thirteen weeks ended October 2, 2004 and the
thirteen weeks ended September 27, 2003 are as follows (in thousands):
Fourteen Thirteen
Weeks Ended Weeks Ended
October 2, 2004 September 27,
2003
---------------- ---------------
Revenues
U. S. $36,446 $38,458
Canada 4,487 16,766
---------------- ---------------
$40,933 $55,224
================ ===============
22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. Contingencies
In late 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 2002. 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 limitation by the Company of the number of shares that
the plaintiffs 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 verdict and upheld the 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
pre-judgment 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 27, 2003 and at the rate of 4% per annum in 2004).
The Company has appealed to the Appellate Division of the Superior Court of
New Jersey 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 at a rate 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 August 4,
2003 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. The briefing phase of the appeal was concluded
in April 2004. The timing of a ruling on the appeal cannot be predicted at
this time.
In connection with this litigation, the Company accrued $9.7 million of
litigation charges at December 31, 2002, which included the jury award of
$7.6 million, professional fees of $1.1 million and an estimate of $1.0
million for attorney fees and pre-judgment interest. As of October 2, 2004,
the accrued litigation reserve was $8.1 million.
In addition, in November 2002 the Company brought suit in the Superior
Court of New Jersey on professional liability claims against the attorneys
and law firms who served as its counsel in the above-described acquisition
transaction and in its subsequent dealings with the plaintiffs concerning
their various relationships with the Company resulting from that
transaction. In its lawsuit against the former counsel, the Company is
seeking complete indemnification (1)of its costs and counsel fees incurred
in defending itself against the claims of the plaintiffs; (2) any sums for
which the Company is ultimately determined to be liable to the plaintiffs;
and (3) its costs and counsel fees incurred in the prosecution of the legal
malpractice action itself. That litigation has been temporarily stayed in
the Law Division at the request of the defendants until at least January
10, 2005 while the appeal of the underlying action goes forward in the
Appellate Division of the Superior Court.
23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
12. Contingencies (Continued)
The Company is also subject to other pending legal proceedings and claims
that arise from time to time in the ordinary course of its business, which
may or may not be covered by insurance.
The litigation and other claims previously noted are subject to inherent
uncertainties and management's view of these matters may change in the
future. Were an unfavorable final outcome to occur, there exists the
possibility of a material adverse impact on the Company's consolidated
financial position and the consolidated results of operations for the
period in which the effect becomes reasonably estimable.
24
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 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 that 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) uncertainties in 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 trends or circumstances after the date they are made or to reflect
the occurrence of unanticipated events.
25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview
RCM participates in a market that is cyclical in nature and sensitive to
economic changes. As a result, the impact of economic changes on revenues
and operations can be significant. The Company's consolidated revenues have
declined 20.8%, or $33.5 million, for the forty weeks ended October 2, 2004
as compared to the same period in the prior year. The reduction in revenues
is primarily attributable to the conclusion of two major contracts in 2003,
as well as reduced capital spending by customers, strong competitive
pricing pressures and the challenging economic environment.
During the latter portion of the 1990's RCM made significant personnel and
infrastructure investments to support a high-growth strategy through
broad-based market penetration and acquisitions. The dramatic slowdown in
the United States economy, which began during 2000, prompted management to
reconsider its strategy. In that regard, the Company initiated reductions
in its staff personnel and office requirements in response to the decrease
in sales volume in year 2001. Since that time, management has continued to
monitor its operating cost structure in order to maintain a cost benefit
relationship with revenues. In addition, there has been an ongoing focus on
working capital management and cash flows. These efforts have resulted in
an improvement in accounts receivable collections, debt reduction and
improved cash flows. Furthermore, the Company has improved discipline in
its marketing and sales strategies by providing a more cohesive and
relevant marketing and sales approach to new and existing customers and now
focuses on growth in targeted vertical markets and in service offerings
providing greater revenue opportunities.
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, the Company continues to believe that 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 current clients and prospective future clients are continuing to
evaluate the potential for outsourcing business critical applications and
entire business functions.
The Company provides project management and consulting services which are
billed based on either an agreed upon fixed fee or hourly rates, or a
combination of both. The billing rates and profit margins for project
management and solutions services 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 Company also
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.
26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview (Continued)
The majority of the Company's services are provided under purchase orders.
Contracts are utilized on certain of the more complex assignments where the
engagements are for longer terms or where precise documentation on the nature
and scope of the assignment is necessary. Although contracts normally relate to
longer-term and more complex engagements, they 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 financial statements are prepared in accordance with generally accepted
accounting principles, which require management to make subjective decisions,
assessments, and estimates about the effect of matters that are inherently
uncertain. As the number of variables and assumptions affecting the judgments
increases, such judgments become even more subjective. While management believes
that its assumptions are reasonable and appropriate, actual results may be
materially different than estimated. The Company has identified certain critical
accounting policies, described below, that require significant judgment to be
exercised by management.
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.
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 the performance of such project or activity. 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.
27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Revenue Recognition (Continued)
Staffing Services - Revenues derived from staffing services are recorded on a
gross basis as services are performed and associated costs have been incurred
using employees of the Company. In these circumstances, the Company assumes the
risk of acceptability of its employees to its customers. 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).
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 on a prorate basis for 90 days. In
the event a candidate is not retained for the 90-day period, the Company will
provide a suitable replacement candidate. In the event a replacement candidate
cannot be located, the Company will provide a prorated 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's accounts receivable are primarily due from trade customers. Credit
is extended based on evaluation of customers' financial condition and,
generally, collateral is not required. Accounts receivable payment terms vary
and are stated in the financial statements at amounts due from customers net of
an allowance for doubtful accounts. Accounts outstanding longer than the payment
terms are considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade accounts
receivable are past due, the Company's previous loss history, the customer's
current ability to pay its obligation to the Company, and the condition of the
general economy and the industry as a whole. The Company writes off accounts
receivable when they become uncollectible, and payments subsequently received on
such receivables are credited to the allowance for doubtful accounts.
Goodwill and Intangibles
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." Accordingly, the Company discontinued amortizing goodwill
and began applying the specific guidance contained in that Statement to evaluate
the carrying value and recoverability of its goodwill by evaluating the fair
market value of the reporting units within which goodwill resides. The process
of estimating fair value, in part, relies on the use of forecasts to estimate
future cash flows expected from a reporting unit as well as the use of market
multiples in determining fair market value. In order to estimate future cash
flows, management must make subjective judgments based on reasonable supportable
assumptions and projections. The time periods for estimating future cash flows
are lengthy, which increases the risk that actual future results could
significantly deviate from estimates. Changes in future market conditions, the
Company's strategy, or other factors could impact upon the future values of
these reporting units, which could result in future impairment charges.
28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Accounting for Stock Options
The Company has used stock options to attract, retain and reward employees for
long-term service. Generally accepted accounting principles allow alternative
methods of accounting for these awards. The Company has chosen to account for
its stock plans (including stock option plans) under APB Opinion 25, "Accounting
for Stock Issued to Employees." Since option exercise prices reflect the market
value per share of the Company's stock upon grant, no compensation expense
related to stock options is reflected in the Company's income statement. SFAS
No. 123, "Accounting for Stock-Based Compensation," prescribes the alternative
method of accounting for stock options. Had SFAS 123 been adopted, the Company
would have recorded additional pre-tax costs of approximately $85,000 and
$254,000 for the thirteen weeks and forty weeks ended October 2, 2004,
respectively. The pro forma compensation cost was calculated using the
Black-Scholes Options Pricing Model, which includes estimates based on
assumptions for the risk-free interest rate, life of options and stock price
volatility and is based upon freely traded options. Changes in the underlying
assumptions could impact the pro forma compensation cost.
Accounting for Income Taxes
In establishing the provision for income taxes and deferred income tax assets
and liabilities, and valuation allowances against deferred tax assets, the
Company makes judgments and interpretations based on enacted tax laws, published
tax guidance and estimates of future earnings. As of December 27, 2003 and
October 2, 2004, the Company had total net deferred tax assets of $4.6 million.
This included $936,000 relating primarily to federal and state net operating
loss carry forwards. Realization of deferred tax assets is dependent upon the
likelihood that future taxable income will be sufficient to realize these
benefits over time, and the effectiveness of tax planning strategies in the
relevant tax jurisdictions. In the event that actual results differ from these
estimates and assessments, additional valuation allowances may be required.
Forward-looking Information
The Company's growth prospects are influenced by broad economic trends. The pace
of customer capital spending programs, new product launches and similar
activities have a direct impact on the need for consulting and engineering
services as well as temporary and permanent employees. Should the U.S. economy
decline, the Company's operating performance could be adversely impacted. The
Company believes that its fiscal discipline, strategic focus on targeted
vertical markets and diversification of service offerings provides some
insulation from adverse trends. However, further declines in the economy could
result in the need for future cost reductions or changes in strategy.
Additionally, changes in government regulations could result in prohibition or
restriction of certain types of employment services or the imposition of new or
additional employee benefits, licensing or tax requirements with respect to the
provision of employment services that may reduce RCM's future earnings. There
can be no assurance that RCM will be able to increase the fees charged to its
clients in a timely manner and in a sufficient amount to cover increased costs
as a result of any of the foregoing.
The employment services market is highly competitive with limited barriers to
entry. RCM competes in global, national, regional and local markets with
numerous consulting, engineering and employment companies. Price competition in
the industries the Company serves is significant, and pricing pressures from
competitors and customers are increasing. RCM expects that the level of
competition will remain high in the future, which could limit RCM's ability to
maintain or increase its market share or profitability.
29
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Forward-looking Information - (Continued)
Certain information in this report, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
forward-looking statements, as such term is defined in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Certain forward-looking statements can be identified by the use of
forward-looking terminology such as, "believes" "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "estimates," or
"anticipates" or the negative thereof or other comparable terminology, or by
discussions of strategy, plans or intentions. Forward-looking statements involve
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. These include risks and
uncertainties such as competitive market pressures, material changes in demand
from larger customers, availability of labor, the Company's performance on
contracts, changes in customers' attitudes toward outsourcing, government
policies or judicial decisions adverse to the staffing industry, and changes in
economic conditions. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
assumes no obligation to update such information.
30
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Forty Weeks Ended October 2, 2004 Compared to Thirty-Nine Weeks Ended
September 27, 2003
A summary of operating results for the fiscal periods ended October 2, 2004 and
September 27, 2003 is as follows (in thousands, except for earnings per share
data):
October 2, 2004 September 27, 2003
---------------------- ------------------------
% of % of
Amount Revenue Amount Revenue
---------- ---------- ---------- ----------
Revenues $127,555 100.0 % $161,094 100.0 %
Cost of services 96,865 75.9 127,350 79.1
---------- ---------- ---------- ----------
Gross profit 30,690 24.1 33,744 20.9
---------- ---------- ---------- ----------
Selling, general and administrative 25,649 20.1 24,810 15.4
Depreciation and amortization 905 .7 914 .6
---------- ---------- ---------- ----------
26,554 20.8 25,724 16.0
---------- ---------- ---------- ----------
Operating income 4,136 3.3 8,020 4.9
Other expense 356 .3 64
---------- ---------- ---------- ----------
Income before income taxes 3,780 3.0 7,956 4.9
Income taxes 1,349 1.1 2,850 1.7
---------- ---------- ---------- ----------
Net income $2,431 1.9 % $5,106 3.2 %
========== ========== ========== ==========
Earnings per share
Basic: $.21 $.48
Diluted: $.21 $.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.
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to December 31. A 53-week year occurs periodically. The fiscal
year ended 2004 is a 53-week reporting year. Therefore, the year to date
reporting period ended October 2, 2004 consists of forty weeks as compared to
the same period in the prior year which ended on September 27, 2003 consisted of
thirty-nine weeks. The following discussion is not adjusted for the additional
one week in fiscal 2004 unless specifically noted otherwise.
Revenues. Revenues decreased 20.8%, or $33.5 million, for the forty weeks ended
October 2, 2004 as compared to the same period in the prior year (the
"comparable prior year period"). The revenue decreased $6.7 million in the
Information Technology ("IT") segment, decreased $31.0 million in the
Professional Engineering ("PE") segment and increased $4.2 million in the
Commercial Services ("CS") segment. Management attributes the overall decrease
to the conclusion in accordance with their terms of two major contracts in the
IT and PE segments in early 2004 as well as a softening of demand for
information technology services, the weak general economy, offshore competition
and widespread pricing pressures. The aggregate revenues from the two major
contracts in fiscal 2003 were $31.9 million. Management reasonably expects
revenues for the remainder of fiscal 2004, which has thirteen weeks and an
additional holiday, as compared to the first forty weeks, to remain consistent
on a prorated basis with the revenues for the forty weeks ended October 2, 2004.
31
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Forty Weeks Ended October 2, 2004 Compared to Thirty-Nine Weeks Ended
September 27, 2003 - (Continued)
Cost of Services. Cost of services decreased 23.9%, or $30.5 million, for the
forty weeks ended October 2, 2004 as compared to the comparable prior year
period. This decrease was primarily due to the decrease in costs associated with
the conclusion of two major contracts in late 2003. Cost of services as a
percentage of revenues decreased to 75.9% for the forty weeks ended October 2,
2004 from 79.1% for the comparable prior year period. This decrease was
primarily attributable to a decrease in subcontracted labor related to low
margin revenues in the PE segment. This subcontracted labor was part of a major
contract which was concluded in late 2003. Management anticipates the ratio of
cost of sales to revenues for the remainder of fiscal 2004 to remain consistent
with the same ratio for the forty weeks ended October 2, 2004.
Selling, General and Administrative. Selling, general and administrative ("SGA")
expenses increased 3.4%, or $839,000, for the fiscal period ended October 2,
2004 as compared to the comparable prior year period. This increase was
primarily attributable to increased healthcare costs, statutory payroll taxes
and one additional week of SGA payroll. SGA expenses as a percentage of revenues
were 20.1% for the forty weeks ended October 2, 2004 as compared to 15.4% for
the comparable prior year period. Management reasonably expects SGA for the
remainder of fiscal 2004, which has thirteen weeks and an additional holiday, to
remain consistent with the SGA as adjusted for the forty weeks ended October 2,
2004.
Depreciation and Amortization. Depreciation and amortization ("DA") decreased
1.0%, or $9,000, for the forty weeks ended October 2, 2004 as compared to the
comparable prior year period.
Other Expense. Other expense consists of interest expense, net of interest
income and gains and losses on foreign currency transactions. For the forty
weeks ended October 2, 2004, actual interest expense of $398,800 was offset by
$47,300 of interest income, which was principally earned from short-term money
market deposits. Interest expense, net, increased $171,300 for the forty weeks
ended October 2, 2004 as compared to the comparable prior year period. This
increase was primarily due to post-verdict, pre-judgment interest on a verdict
against the Company awarding damages of $7.6 million (see note 12). Gains and
losses on foreign currency transactions decreased $112,100 because of the
stabilization of the Canadian Dollar in the forty weeks ended October 2, 2004 as
compared to the strengthening of the Canadian Dollar in relation to the U.S.
Dollar in the comparable prior year period.
Income Tax. Income tax expense decreased 52.7%, or $1.5 million, for the forty
weeks ended October 2, 2004 as compared to the comparable prior year period.
This decrease was attributable to a lower level of income before taxes for the
forty weeks ended October 2, 2004 compared to the comparable prior year period.
The effective tax rate was 35.7% for the forty weeks ended October 2, 2004 as
compared to 35.8% for the comparable prior year period. The decrease in
effective tax rate was attributable to the increased amount of tax deductible
amortization in relation to reduced income before income tax purposes.
32
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Forty Weeks Ended October 2, 2004 Compared to Thirty-Nine Weeks Ended
September 27, 2003 - (Continued)
Segment Discussion (See Footnote 11)
Information Technology ("IT")
IT revenues of $70.4 million in 2004 decreased $6.7 million, or 8.7%, compared
to 2003. The decline was principally attributable to a softening of demand for
information technology services, the weak economy, offshore competition and
widespread pricing pressures. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") for the IT segment was $3.4 million, or 4.8% of
revenues, for 2004 as compared to $5.5 million, or 7.1% of revenues, for 2003.
The EBITDA margin percentage decrease was due to the conclusion of a major IT
contract in early 2004.
Professional Engineering ("PE")
PE revenues of $38.9 million in 2004 decreased $31.0 million, or 44.3%, compared
to 2003. The PE segment EBITDA was $2.0 million, or 5.2% of revenues for 2004 as
compared to $3.2 million, or 4.6% of revenues for 2003. The decrease in revenue
was attributable to the conclusion of a major engineering contract in early 2004
on which RCM had accepted lower margins.
Commercial Services ("CS")
CS revenues of $18.2 million in 2004 increased $4.2 million, or 29.8% compared
to 2003. The increase in revenues for the CS segment was attributable to
improvement in economic activity within this segment. The CS segment EBITDA was
a loss of $346,000, or 1.9% of revenues, as compared to income of $381,000, or
2.7% of revenues, for 2003. The overall decline is principally attributable to
competitive pricing pressures and an unfavorable worker's compensation rating
market in California. The revenues in the CS segment increased in absolute
dollars as compared to the decrease in revenues in the IT and PE segments which
resulted in a larger allocation of corporate overhead burden to the CS segment
as compared to the same period a year ago.
33
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Thirteen Weeks Ended October 2, 2004 Compared to Thirteen Weeks Ended
September 27, 2003
A summary of operating results for the fiscal periods ended October 2, 2004 and
September 27, 2003 is as follows (in thousands, except for earnings per share
data):
October 2, 2004 September 27, 2003
---------------------- -----------------------
% of % of
Amount Revenue Amount Revenue
--------- ---------- --------- ----------
Revenues $40,933 100.0 % $55,224 100.0 %
Cost of services 30,970 75.7 43,680 79.1
--------- ---------- --------- ----------
Gross profit 9,963 24.3 11,544 20.9
--------- ---------- --------- ----------
Selling, general and administrative 8,322 20.3 8,335 15.1
Depreciation and amortization 305 .7 310 .6
--------- ---------- --------- ----------
8,627 21.0 8,645 15.7
--------- ---------- --------- ----------
Operating income 1,336 3.3 2,899 5.2
Other expense 115 .3 122 .2
--------- ---------- --------- ----------
Income before income taxes 1,221 3.0 2,777 5.0
Income taxes 455 1.1 960 1.7
--------- ---------- --------- ----------
Net income $766 1.9 % $1,817 3.3 %
========= ========== ========= ==========
Earnings per share
Basic: $.07 $.17
Diluted: $.07 $.17
========= =========
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.
The Company follows a 52/53 week fiscal reporting calendar ending on the
Saturday closest to December 31.
Revenues. Revenues decreased 25.9%, or $14.3 million, for the thirteen weeks
ended October 2, 2004 as compared to the same period in the prior year (the
"comparable prior year period"). The revenue decreased $2.3 million in the IT
segment, decreased $13.3 million in the PE segment and increased $1.4 million in
the CS segment. Management attributes the overall decrease to the conclusion in
accordance with their terms of two major contracts in the IT and PE segments in
early 2004 as well as a softening of demand for information technology services,
the weak economy, offshore competition and widespread pricing pressures. The
revenues from the two major contracts in fiscal 2003 were $8.3 million.
34
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Thirteen Weeks Ended October 2, 2004 Compared to Thirteen Weeks Ended
September 27, 2003 - (Continued)
Cost of Services. Cost of services decreased 29.1%, or $12.7 million, for the
thirteen weeks ended October 2, 2004 as compared to the comparable prior year
period. This decrease was primarily due to the decrease in costs associated with
the conclusion of two major contracts in late 2003 as well as lower overall
revenues. Cost of services as a percentage of revenues decreased to 75.7% for
the thirteen weeks ended October 2, 2004 from 79.1% for the comparable prior
year period. This decrease was primarily attributable to a decrease in
subcontracted labor related to low margin revenues in the PE segment. This
subcontracted labor was part of a major contract which was concluded in early
2004.
Selling, General and Administrative. SGA expenses decreased 0.2%, or $13,000,
for the thirteen weeks ended October 2, 2004 as compared to the comparable prior
year period. SGA expenses as a percentage of revenues were 20.3% for the
thirteen weeks ended October 2, 2004 as compared to 15.1% for the comparable
prior year period. This percentage increase results from the operating expenses
absorbed by lower revenues.
Depreciation and Amortization. DA decreased 1.6%, or $5,000, for the thirteen
weeks ended October 2, 2004 as compared to the comparable prior year period.
Other Expense. Other expense consists of interest expense, net of interest
income and gains and losses on foreign currency transactions. For the thirteen
weeks ended October 2, 2004, actual interest expense of $129,500 was offset by
$10,500 of interest income, which was principally earned from short-term money
market deposits. Interest expense, net, increased $15,400 for the thirteen weeks
ended October 2, 2004 as compared to the comparable prior year period. This
increase was primarily due to the increased interest rates on borrowed funds.
Gains and losses on foreign currency transactions decreased $22,100 because of
the stabilization of the Canadian Dollar in the thirteen weeks ended October 2,
2004 as compared to the strengthening of the Canadian Dollar in relation to the
U.S. Dollar in the comparable prior year period.
Income Tax. Income tax expense decreased 52.6%, or $505,000, for the thirteen
weeks ended October 2, 2004 as compared to the comparable prior year period.
This decrease was attributable to a lower level of income before taxes for the
thirteen weeks ended October 2, 2004 compared to the comparable prior year
period. The effective tax rate was 37.3% for the thirteen weeks ended October 2,
2004 as compared to 34.6% for the comparable prior year period. The increase in
effective tax rate was attributable to the increased amount of non deductible
expenses in relation to reduced income before income tax purposes.
35
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Thirteen Weeks Ended October 2, 2004 Compared to Thirteen Weeks Ended
September 27, 2003 - (Continued)
Segment Discussion (See Footnote 11)
Information Technology
IT revenues of $22.8 million in 2004 decreased $2.3 million, or 9.2%, compared
to 2003. The decline was principally attributable to a softening of demand for
information technology services, the weak economy, offshore competition and
widespread pricing pressures. The IT segment EBITDA was $1.3 million, or 5.5% of
revenues, for 2004 as compared to $1.8 million, or 7.2% of revenues for 2003.
The EBITDA margin percentage decrease was due to the conclusion of a major IT
contract in early 2004.
Professional Engineering
PE revenues of $12.0 million in 2004 decreased $13.3 million, or 52.7%, compared
to 2003. The PE segment EBITDA was $484,000 or 4.0% of revenues for 2004 as
compared to $1.3 million, or 5.0% of revenues for 2003. The decrease in revenue
was attributable to the conclusion of a major engineering contract in early 2004
on which RCM had accepted lower margins.
Commercial Services
CS revenues of $6.2 million in 2004 increased $1.4 million, or 28.1%, compared
to 2003. The CS segment EBITDA was a loss of $92,000, or 1.5% of revenues, as
compared to income of $130,000, or 2.7% of revenues for 2003. This change
resulted in a larger allocation of corporate overhead burden to the CS segment
as compared to the same period a year ago.
36
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources
The following table summarizes the major captions from the Company's
Consolidated Statements of Cash Flows:
Thirty Nine
Forty Weeks Ended
Weeks Ended September 27,
(In Thousands) October 2, 2004 2003
----------------------------- ------------------ ----------------
Operating Activities $84 $2,784
Investing Activities ($264 ) ($1,652)
Financing Activities ($2,143 ) ($49)
Operating Activities
Operating activities used $84,000 of cash for the forty weeks ended October 2,
2004 as compared to operating activities providing $2.8 million of cash for the
comparable 2003 period. The decrease in cash provided by operating activities
was primarily attributable to decreased earnings, an increase in accounts
receivable, and a decrease in accounts payable and accrued expenses which was
partially offset by a decrease in prepaid expenses and other current assets, an
increase in accrued compensation and payroll and withheld taxes and income taxes
payable. The significant reason for the increase in accounts receivable was the
delay in processing of invoices at one client. Based on current operating
activities and the drivers of those activities, management reasonably expects
that cash will be provided from operating activities for the remainder of fiscal
2004. The Company continues to institute enhanced managerial controls and
standardization over its receivables collection and disbursement processes.
Investing Activities
Investing activities used $264,000 for the forty weeks ended October 2, 2004 as
compared to $1.7 million for the comparable 2003 period. The decrease in the use
of cash for investing activities for 2004 as compared to the comparable 2003
period was primarily attributable to a decrease in deferred consideration
earn-out payments. Cash generated from operating activities has been
conservatively invested and is readily available to fund Company operations.
Financing Activities
Financing activities principally consisted of debt reduction of $2.4 million in
2004 as compared to financing activities using $120,000 for debt reduction for
the comparable 2003 period.
The Company and its subsidiaries entered into an amended and restated loan
agreement on May 31, 2002, which was further amended on July 27, 2004, with
Citizens Bank of Pennsylvania, administrative agent for a syndicate of banks.
This agreement 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 90 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.
37
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources (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 the
Company's 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 2006. The weighted average
interest rates under the Revolving Credit Facility for the forty weeks ended
October 2, 2004 and thirty-nine weeks ended September 27, 2003 were 2.84% and
3.24%, respectively. The amounts outstanding under the Revolving Credit Facility
at October 2, 2004 and December 27, 2003 were $4.9 million and $7.3 million,
respectively. At October 2, 2004, the Company had availability (after deducting
amounts outstanding) under the Revolving Credit Facility of $20.0 million.
The Company anticipates that its primary uses of capital in future periods will
be for working capital purposes. Funding for any long and short term capital
requirements as well as 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 12 (Contingencies) to the financial statements. The outcome of
litigation is subject to inherent uncertainties and management's view of these
matters may change in the future. Were an unfavorable final outcome to occur,
there exists the possibility of a material adverse impact on our financial
position, liquidity, and the results of operations for the period in which the
effect becomes reasonably estimable.
The Company anticipates that if the plaintiffs in the litigation matter, which
is currently being appealed by the Company, are successful in their appeal of
the damages, it would need to borrow funds under its Revolving Credit Facility
in order to satisfy payment of the additional damages. The Company believes that
its borrowing base is sufficient to allow this additional borrowing.
The Company's business strategy is to achieve growth both internally through
operations and externally through strategic acquisitions. The Company from time
to time engages in discussions with potential acquisition candidates. As the
size of the Company and its financial resources increase, however, acquisition
opportunities requiring significant commitments of capital may arise. In order
to pursue such opportunities, the Company may be required to incur debt or issue
potentially dilutive securities in the future. No assurance can be given as to
the Company's future acquisition and expansion opportunities or how such
opportunities will be financed.
The Company does not currently have material commitments for capital
expenditures and does not currently anticipate entering into any such
commitments during the next twelve months. The Company's current commitments
consist primarily of lease obligations for office space. The Company believes
that its capital resources are sufficient to meet its present obligations and
those to be incurred in the normal course of business for the next twelve
months.
At October 2, 2004, the Company had a deferred tax asset totaling $4.6 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 ending October 1, 2005.
38
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
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 October 2, 2004, 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. The Company does not expect any material
loss with respect to its investment portfolio.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, with the participation of its Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act, of 1934, as amended) as of the end of the period
covered by this report. Based on this evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures, as of the end of the period covered by this report, are
functioning effectively to provide reasonable assurance that information
required to be disclosed by the Company in its reports filed or submitted under
the Securities Exchange Act of 1934, as amended is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and is accumulated and communicated to the Company's management,
including its Chief Financial Officer, as appropriate to allow timely
disclosures regarding required disclosures.
It should be noted that the design of any system of controls is based in part on
certain assumptions about the likelihood of future events. A control system, no
matter how well designed and implemented, can provide only reasonable, not
absolute assurance, that the objectives of the control system will be met.
There have been no changes in the Company's internal control over financial
reporting that occurred during the Company's last fiscal quarter and that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
39
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In late 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 2002. 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 limitation by the Company of the number of shares that
the plaintiffs 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 verdict and upheld the 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
pre-judgment 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 27, 2003 and at the rate of 4% per annum in 2004).
The Company has appealed to the Appellate Division of the Superior Court of
New Jersey 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 at a rate 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 August 4,
2003 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. The briefing phase of the appeal was concluded
in April 2004. The timing of a ruling on the appeal cannot be predicted at
this time.
In connection with this litigation, the Company accrued $9.7 million of
litigation charges at December 31, 2002, which included the jury award of
$7.6 million, professional fees of $1.1 million and an estimate of $1.0
million for attorney fees and pre-judgment interest. As of October 2, 2004,
the accrued litigation reserve was $8.1 million.
40
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS (CONTINUED)
In addition, in November 2002 the Company brought suit in the Superior
Court of New Jersey on professional liability claims against the attorneys
and law firms who served as its counsel in the above-described acquisition
transaction and in its subsequent dealings with the plaintiffs concerning
their various relationships with the Company resulting from that
transaction. In its lawsuit against the former counsel, the Company is
seeking complete indemnification (1)of its costs and counsel fees incurred
in defending itself against the claims of the plaintiffs; (2) any sums for
which the Company is ultimately determined to be liable to the plaintiffs;
and (3) its costs and counsel fees incurred in the prosecution of the legal
malpractice action itself. That litigation has been temporarily stayed in
the Law Division at the request of the defendants until at least January
10, 2005 while the appeal of the underlying action goes forward in the
Appellate Division of the Superior Court.
The Company is also subject to other pending legal proceedings and claims
that arise from time to time in the ordinary course of its business, which
may or may not be covered by insurance.
The litigation and other claims previously noted are subject to inherent
uncertainties and management's view of these matters may change in the
future. Were an unfavorable final outcome to occur, there exists the
possibility of a material adverse impact on the Company's consolidated
financial position and the consolidated results of operations for the
period in which the effect becomes reasonably estimable.
41
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.
31.2 Certification of Chief Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.
32.1 Certification 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 Certification 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
The Company furnished to the Securities and Exchange Commission, on August
4, 2004, a Current Report on Form 8-K containing disclosure pursuant to
item 12 of Form 8-K.
42
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 11, 2004 By: /s/ Stanton Remer
-----------------------------
Stanton Remer
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the Registrant)
43
Exhibit 31.1
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATION
I, Leon Kopyt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 11, 2004 /s/ Leon Kopyt
Leon Kopyt
Chief Executive Officer
44
Exhibit 31.2
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
CERTIFICATION
I, Stanton Remer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: November 11, 2004 /s/ Stanton Remer
Stanton Remer
Chief Financial Officer
45
Exhibit 32.1
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Leon Kopyt, President and Chief Executive Officer of
RCM Technologies, Inc., a Nevada corporation (the "Company"), hereby
certify that, to my knowledge:
(1) The Company's periodic report on Form 10-Q for the period ended
October 2, 2004 (the "Form 10-Q") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
* * *
/s/ Leon Kopyt
Leon Kopyt
Chief Executive Officer
Date: November 11, 2004
46
Exhibit 32.2
RCM TECHNOLOGIES, INC.
CERTIFICATIONS REQUIRED BY
RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Stanton Remer, Chief Financial Officer of
RCM Technologies, Inc., a Nevada corporation (the "Company"), hereby certify
that, to my knowledge:
(1) The Company's periodic report on Form 10-Q for the period ended
October 2, 2004 (the "Form 10-Q") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Form 10-Q fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
* * *
/s/ Stanton Remer
Stanton Remer
Chief Financial Officer
Date: November 11, 2004
47