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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ........... to ...........
Commission file number 1-10245
RCM TECHNOLOGIES, INC.
Exact name of registrant as specified in its charter
Nevada 95-1480559
State of Incorporation IRS Employer Identification No.
2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613
Address of principal executive offices
Registrant's telephone number, including area code: (856) 486-1777
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.05
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO__
-----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X ]
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
YES NO X
----- --
The aggregate market value of Common Stock held by non-affiliates of
the Registrant on March 17, 2005 was approximately $68,000,000 based upon the
closing price of the Common Stock on July 3, 2005 on The Nasdaq National Market
of $6.30. The information provided shall in no way be construed as an admission
that any person whose holdings are excluded from the figure is an affiliate or
that any person whose holdings are included is not an affiliate and any such
admission is hereby disclaimed. The information provided is included solely for
record keeping purposes of the Securities and Exchange Commission.
The number of shares of Registrant's Common Stock (par value $0.05 per
share) outstanding as of March, 16, 2005: 11,385,720.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 2005 Annual
Meeting of Stockholders (the "2005 Proxy Statement") are incorporated by
reference into Items 10, 11, 12, 13 and 14 in Part III of this Annual Report on
Form 10-K. If the 2005 Proxy Statement is not filed by May 1, 2005, an amendment
to this Annual Report on Form 10-K setting forth this information will be duly
filed with the Securities and Exchange Commission.
RCM Technologies, Inc.
FORM 10-K
TABLE OF CONTENTS
PART I...................................................................................................... 1
Item 1. Business.................................................................................. 2
Item 2. Properties................................................................................ 13
Item 3. Legal Proceedings......................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders....................................... 15
PART II..................................................................................................... 15
Item 5. Market for Registrant's Common Equity, Related Stock Holder Matters and Issuer Purchases
of Equity Securities...................................................................... 15
Item 6. Selected Consolidated Financial Data...................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................ 31
Item 8. Financial Statements and Supplementary Data............................................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting Financial Disclosure.......... 31
Item 9A. Controls and Procedures................................................................... 31
Item 9B. Other Information......................................................................... 31
PART III.................................................................................................... 32
Item 10. Directors and Executive Officers of the Registrant........................................ 32
Item 11. Executive Compensation.................................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters................................................................................... 32
Item 13. Certain Relationships and Related Transactions............................................ 32
Item 14. Principal Accountant Fees and Services.................................................... 32
PART IV..................................................................................................... 33
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 33
Signatures.............................................................................................. 35
PART I
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 affecting the provision of
information technology and engineering services and solutions and the 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.
1
ITEM 1. BUSINESS
General
RCM Technologies Inc. (RCM or the Company) is a premier provider of
business and technology solutions designed to enhance and maximize the
operational performance of its customers through the adaptation and
deployment of advanced information technology and engineering services. RCM
has been an innovative leader in the design, development and delivery of
these services to commercial and government sectors for more than 30 years.
The Company provides a diversified and extensive range of service offerings
and deliverables. Its portfolio of Information Technology services includes
e-Business, Enterprise Management and Enterprise Application Integration.
RCM's portfolio of Professional Engineering services focuses on Engineering
Design, Technical Support and Project Management and Implementation. The
Company's Commercial Services business unit provides Healthcare contract
professionals as well as Clerical and Light Industrial temporary personnel.
The Company provides its services to clients in a variety of industries
including banking and finance, aerospace, healthcare, pharmaceutical,
utility, technology, manufacturing, distribution and government sectors.
The Company believes it offers a range of services that fosters long-term
client relationships, affords cross-selling opportunities and minimizes the
Company's dependence on any single technology or industry sector. RCM sells
and delivers its services through a network of 35 branch offices located in
selected regions throughout North America.
During the year ended January 1, 2005, approximately 54.9% of RCM's total
revenues were derived from IT services, 30.2% from Engineering services and
the remaining 14.9% from Commercial services. The Company has executed a
regional strategy to better leverage its consulting services offerings.
Demand for the Company's IT consulting services has remained soft since
early 2001 after several years of rapid growth. A decline in revenues and
operating income of certain branch offices resulted in goodwill impairment
charges for the fiscal years ended January 1, 2005 and December 28, 2002.
This demand for the Company's services is significantly impacted by changes
in the general level of economic activity, particularly any negative effect
on technology spending. During periods of reduced economic activity, the
Company may also be subject to increased competition and pricing pressure.
As a result, continued periods of reduced economic activity could have a
material adverse impact on our business and results of operations.
Industry Overview
Businesses today face intense competition, the challenge of constant
technological change, and the ongoing need for business process
optimization. Companies are turning to IT solutions to address these issues
and to compete more effectively. As a result, the ability of an
organization to integrate and align information technologies with new
business objectives has become critical.
Although many companies have recognized the importance of optimizing IT
systems and products to support business processes in order to compete in
today's challenging environment, the process of designing, developing and
implementing IT solutions has become increasingly complex. As a result,
many companies have elected to defer, redefine or cancel investments in new
systems, software and solutions, and are focused on making more effective
use of previous technological investments. The Company's clients are faced
with some of these same decisions. This is resulting in greater uncertainty
and cautiousness in pursuing new technology projects, which had previously
been considered a competitive imperative. Consequently, many clients have
trimmed or redeployed their permanent workforce, thereby reducing the
demand for consulting services. This has had a direct negative impact on
the Company's revenues and earnings.
2
ITEM 1. BUSINESS (CONTINUED)
Industry Overview (Continued)
The current economic environment has further challenged many companies to
evaluate investment or funding choices and business critical applications.
IT managers must integrate and manage computing environments consisting of
multiple computing platforms, operating systems, databases and networking
protocols and off-the-shelf software applications to support business
objectives. Companies also need to keep pace with new developments in
technology, which often render existing equipment and internal skills
obsolete. At the same time, external economic factors have caused many
organizations to focus on core competencies and trim workforces in the IT
management area. Accordingly, these organizations often lack the quantity,
quality and variety of IT skills necessary to design and support IT
solutions. IT managers are charged with supporting increasingly complex
systems and applications of significant strategic value, while working
under budgetary, personnel and expertise constraints within their own
organizations.
The Company believes the strongest demand for IT services is among
middle-market companies, which typically lack the time and technical
resources to satisfy all of their IT needs internally. These companies
typically require sophisticated, experienced IT assistance to achieve their
business objectives and often rely on IT service providers to help
implement and manage their systems. However, many middle-market companies
rely on multiple providers for their IT needs. Generally, the Company
believes that this reliance on multiple providers results from the fact
that larger IT service providers do not target these companies, while
smaller IT service providers lack sufficient breadth of services or
industry knowledge to satisfy all of these companies' needs. The Company
believes this reliance on multiple service providers creates multiple
relationships that are more difficult and less cost-effective to manage
than a single relationship would be and can adversely impact the quality
and compatibility of IT solutions. RCM is structured to provide
middle-market companies an objective, single source for their IT needs.
Business Strategy
RCM is dedicated to providing solutions to meet its clients' business needs
by delivering information technology and professional engineering services.
The Company's objective is to be a recognized leader of specialty
professional consulting services and solutions in major markets throughout
North America. The Company has developed operating strategies to achieve
this objective. Key elements of its growth and operating strategies are as
follows:
Growth Strategy
Full Life Cycle Solution. The Company is building a Full Life Cycle
Solution capability. The goal of the full life cycle strategy is to fully
address a client's project implementation cycle at each stage of its
development. This entails the Company working with its clients from the
initial conceptualization of a project through its design and project
execution, and extending into ongoing management and support of the
delivered product. RCM's strategy is to selectively build projects and
solutions offerings which utilize its extensive resource base. The Company
believes that the effective execution of this strategy will generate
improved margins on the existing resources. The completion of this
service-offering continuum will afford the Company the opportunity to
strengthen long-term client relationships that will further contribute to
the quality of earnings.
In addition to building a Full Life Cycle Solution offering, the Company
will continue to focus on transitioning into higher value oriented services
to increase its margins on its various service lines. The Company will seek
to accomplish these measures through expansion of its client relationships
while at the same time pursuing strategic alliances and partnerships.
3
ITEM 1. BUSINESS (CONTINUED)
Growth Strategy (Continued)
Promote Internal Growth. The Company continues to evolve its internal
growth strategies. Its growth strategy is designed to better serve the
Company's customers, generate higher revenues and achieve greater operating
efficiencies. National and regional sales management programs were designed
and implemented to segregate clients into priority accounts. This process
is improving account coordination so clients can benefit from the wider
array of services offered throughout the Company's service area.
RCM is continuing a company-wide training initiative in which sales
managers and professionals receive advanced sales training. The purpose of
the training, which is a multi-semester program, is to enhance sales skills
and to further assist the sales force in identifying, developing and
closing solution sales.
RCM has adopted an industry-centric approach to sales and marketing. This
initiative recognizes that clients within the same industry sectors tend to
have common business challenges. It therefore allows the Company to present
and deliver enhanced value to those clients in the industrial sectors in
which RCM has assembled the greatest work experience. RCM's consultants
continue to acquire project experience that offers differentiated awareness
of the business challenges that clients in that industry are facing. This
alignment also facilitates and creates additional cross-selling
opportunities. The Company believes this strategy will lead to greater
account penetration and enhanced client relationships.
Operational strategies contributing to RCM's internal productivity include
the delineation of certain new technical practice areas in markets where
its clients had historically known the Company as a contract service
provider. The formation of these practice areas will facilitate the flow of
project opportunities and the delivery of project-based solutions.
Continue Selective Strategic Acquisitions. The industry in which the
Company operates continues to be highly fragmented, and the Company plans
to continue to selectively assess opportunities to make strategic
acquisitions as such opportunities are presented to the Company. The
Company's past acquisition strategy was designed to broaden the scope of
services and technical competencies and grow its Full Life Cycle Solution
capabilities, and the Company would continue to consider such goals in any
future acquisitions. In considering acquisitions, the Company focuses
principally on companies with (i) technologies RCM has targeted for
strategic value enhancement, (ii) margins that will not dilute the margins
now being delivered, (iii) experienced management personnel, (iv)
substantial growth prospects and (v) sellers who desire to join the
Company's management team. To retain and provide incentives for management
of its acquired companies, the Company has generally structured a
significant portion of the acquisition price in the form of multi-tiered
consideration based on growth of operating profitability of the acquired
company over a two to three-year period.
Operating Strategy
Foster a Decentralized Entrepreneurial Environment. A key element of the
Company's operating strategy is to foster a decentralized, entrepreneurial
environment for its employees. The Company fosters this environment by
continuing to build on local market knowledge of each branch's reputation,
customer relationships and expertise. The Company believes an
entrepreneurial business atmosphere allows its branch offices to quickly
and creatively respond to local market demands and enhances the Company's
ability to motivate, attract and retain managers and to maximize growth and
profitability.
Develop and Maintain Strong Customer Relationships. The Company seeks to
develop and maintain strong interactive customer relationships by
anticipating and focusing on its customers' needs. The Company emphasizes a
relationship-oriented approach to business, rather than the transaction or
assignment-oriented approach that the Company believes is used by many of
its competitors. This industry-centric strategy is designed to allow RCM to
further expand its relationships with clients in RCM's targeted sectors.
4
ITEM 1. BUSINESS (CONTINUED)
Operating Strategy (Continued)
To develop close customer relationships, the Company's practice managers
regularly meet with both existing and prospective clients to help design
solutions and identify the resources needed to execute their strategies.
The Company's managers also maintain close communications with their
customers during each project and on an ongoing basis after its completion.
The Company believes that this relationship-oriented approach can result in
greater customer satisfaction and business development expense reduction.
Additionally, the Company believes that by partnering with its customers in
designing business solutions, it can generate new opportunities to
cross-sell additional services that the Company has to offer. The Company
focuses on providing customers with qualified individuals or teams of
experts compatible with the business needs of our customers and makes a
concerted effort to follow the progress of such relationships to ensure
their continued success.
Attract and Retain Highly Qualified Consultants and Technical Resources.
The Company believes it has been successful in attracting and retaining
qualified consultants and contractors by (i) providing stimulating and
challenging work assignments, (ii) offering competitive wages, (iii)
effectively communicating with its candidates, (iv) providing training to
maintain and upgrade skills and (v) aligning the needs of its customers
with the appropriately skilled personnel. The Company believes it has been
successful in retaining these personnel due in part to its use of practice
managers or "ombudsmen" who are dedicated to maintaining contact with, and
monitoring the satisfaction levels of, the Company's consultants while they
are on assignment.
Centralize Administrative Functions. The Company continues to improve its
operational efficiencies by integrating general and administrative
functions at the corporate or regional level, and reducing or eliminating
redundant functions formerly performed at smaller branch offices. This
enables the Company to quickly realize savings and synergies and to
efficiently control and monitor its operations. It also allows local
branches to focus more on growing their sales.
To accomplish this, the Company's financial reporting and accounting
systems are centralized on an SAP operating system into which it has
integrated all of its operating units. During 2004, the Company upgraded
the SAP operating system to SAP R/3 version 4.7. The software has been
configured to allow the performance of all back office functions, including
payroll, project management, project cost accounting, billing, human
resource administration and all financial reporting and consolidation. The
Company believes that this system provides a robust and highly scalable
platform from which to manage daily operations, and has the capacity to
accommodate increased usage.
Information Technology
The Company's Information Technology Group offers responsive, timely and
comprehensive business and information technology consulting and solutions
to support the entire systems applications development and implementation
process. The Company's information technology professionals have expertise
in a variety of technical disciplines, including e-business development,
application integration, network communications, knowledge management and
support of client applications.
The Company has a wide array of service offerings and deliverables within
this spectrum. Within its e-business offering, RCM delivers web strategies,
web enablement of client applications, e-commerce solutions, Intranet
solutions, corporate portals and complete web sites. Within its business
intelligence practice, RCM provides data architecture design, data
warehousing, knowledge management, customer relationship management and
supply chain management solutions. In its enterprise applications area, RCM
delivers software products applications, implementation services,
infrastructure support, integration services, and an array of
post-implementation support services. In its enterprise application
integration work, the Company integrates diverse but related enterprise
applications into unified cohesive operating environments. The Company
believes that its ability to deliver information technology solutions
across a wide range of technical platforms provides an important
competitive advantage.
5
ITEM 1. BUSINESS (CONTINUED)
Information Technology (Continued)
The Company also ensures that its consultants have the expertise and skills
needed to keep pace with rapidly evolving information technologies. The
Company's strategy is to maintain expertise and acquire knowledge in
multiple technologies so it can offer its clients non-biased solutions best
suited to their business needs.
The Company provides its IT services through a number of delivery methods.
These include management consulting engagements, project management of
client efforts, project implementation of client initiatives, outsourcing,
both on and off site, and a full complement of resourcing alternatives.
As of January 1, 2005, the Company had assigned approximately 710
information technology employees and consultants to its customers.
Professional Engineering
The Company's Professional Engineering Group provides personnel to perform
project engineering, computer aided design, and other managed task
technical services either at the site of the customer or, less frequently,
at the Company's own facilities. Representative services include utilities
process and control, electrical engineering design, system engineering
design and analysis, mechanical engineering design, procurement
engineering, civil structural engineering design, computer aided design and
code compliance. The Professional Engineering Group has developed an
expertise in providing engineering, design and technical services to many
customers in the aeronautical, paper products manufacturing and nuclear
power, fossil fuel and electric utilities industries.
The Company believes that the deregulation of the utilities industry and
the aging of nuclear power plants offer the Company an opportunity to
capture a greater share of professional staffing and project management
requirements of the utilities industry both in professional engineering
services and through cross-selling of its information technology services.
Heightened competition, deregulation and rapid technological advances are
forcing the utilities industry to make fundamental changes in its business
process. These pressures have compelled the utilities industry to focus on
internal operations and maintenance activities and to increasingly
outsource their personnel requirements. Additionally, the Company believes
that competitive performance demands from deregulation should increase the
importance of information technology to this industry. The Company believes
that its expertise and strong relationships with certain customers within
the utilities industry position the Company to be a leading provider of
professional services to the utilities industry.
The Company provides its engineering services through a number of delivery
methods. These include managed tasks and resources, complete project
services, outsourcing, both on and off-site, and a full complement of
resourcing alternatives.
As of January 1, 2005, the Company had assigned approximately 460
engineering and technical employees and consultants to its customers.
Commercial Services
The Company's Commercial Services Group consists of Specialty Health Care
and General Support Services.
The Company's Specialty Health Care Group specializes in long-term and
short-term staffing as well as executive search and placement for the
following fields: Rehabilitation (physical therapists, occupational
therapists and speech language pathologists), Nursing, Managed Care, Allied
Health Care, Health Care Management and Medical Office Support. The
Specialty Health Care Group provides services to hospitals, long-term care
facilities, schools, sports medicine facilities and private practices.
Services include in-patient, outpatient, sub-acute and acute care,
multilingual speech pathology, rehabilitation, and geriatric, pediatric and
adult day care. Typical engagements either range from three to six months
or are on a day-to-day shift basis.
6
ITEM 1. BUSINESS (CONTINUED)
Commercial Services (Continued)
The Company's General Support Services Group provides contract and
temporary services, as well as permanent placement services, for full-time
and part-time personnel in a variety of functional areas, including office,
clerical, data entry, secretarial, light industrial, shipping and receiving
and general warehouse. Contract and temporary assignments range in length
from less than one day to several weeks or months.
As of January 1, 2005, the Company had assigned approximately 980
commercial services personnel to its customers.
Branch Offices
The Company's organization consists of six operating regions with 35 branch
offices located in 13 states and territories in the United States, and in
Canada. The regions and services provided by each of the branch offices are
set forth in the table below.
NUMBER OF SERVICES
REGION OFFICES PROVIDED(1)
EAST
Connecticut 2 PE
Maryland 1 IT, CS
Massachusetts 1 IT
New Jersey 2 IT, PE
New York 3 IT, PE, CS
Pennsylvania 1 IT, CS
-
10
GREAT LAKES
Michigan 5 IT, PE
Minnesota 1 IT
Missouri 1 IT
Wisconsin 3 IT, PE
-
10
CENTRAL
Texas 2 IT
-
2
WEST
Northern California 1 IT
Southern California 6 IT, CS
-
7
PUERTO RICO 1 IT
CANADA 5 IT, PE
(1) Services provided are abbreviated as follows: IT - Information
Technology PE - Professional Engineering CS - Commercial Services
7
ITEM 1. BUSINESS (CONTINUED)
Branch Offices (Continued)
Branch offices are primarily located in regions that the Company believes
have strong growth prospects for information technology and engineering
services. The Company's branches are operated in a decentralized,
entrepreneurial manner with most branch offices operating as independent
profit centers. The Company's branch managers are given significant
autonomy in the daily operations of their respective offices and, with
respect to such offices, are responsible for overall guidance and
supervision, budgeting and forecasting, sales and marketing strategies,
pricing, hiring and training. Branch managers are paid on a
performance-based compensation system designed to motivate the managers to
maximize growth and profitability.
The Company believes that substantial portions of the buying decisions made
by users of the Company's services are made on a local or regional basis
and that the Company's branch offices most often compete with local and
regional providers. Since the Company's branch managers are in the best
position to understand their local markets, and customers often prefer
local providers, the Company believes that a decentralized operating
environment enhances operating performance and contributes to employee and
customer satisfaction.
From its headquarter locations in New Jersey, the Company provides its
branch offices with centralized administrative, marketing, finance, MIS,
human resources and legal support. Centralized administrative functions
minimize the administrative burdens on branch office managers and allow
them to spend more time focusing on sales and marketing and practice
development activities.
Our principal sales offices have one General Manager, one sales manager,
three to six sales people, several technical delivery or practice managers
and several recruiters. The General Managers report to Regional Managers
who are responsible for ensuring that performance goals are achieved. The
Company's branch managers meet frequently to discuss "best practices" and
ways to increase the Company's cross selling of its professional services.
The Company's practice managers meet periodically to strategize, maintain
continuity, and identify developmental needs and cross-selling
opportunities.
Sales and Marketing
Sales and marketing efforts are conducted at the local and regional level
through the Company's network of branch offices. The Company emphasizes
long-term personal relationships with customers that are developed through
regular assessment of customer requirements and proactive monitoring of
personnel performance. The Company's sales personnel make regular visits to
existing and prospective customers. New customers are obtained through
active sales programs and referrals. The Company encourages its employees
to participate in national and regional trade associations, local chambers
of commerce and other civic associations. The Company seeks to develop
strategic partnering relationships with its customers by providing
comprehensive solutions for all aspects of a customer's information
technology, engineering and other professional services needs. The Company
concentrates on providing carefully screened professionals with the
appropriate skills in a timely manner and at competitive prices. The
Company regularly monitors the quality of the services provided by its
personnel and obtains feedback from its customers as to their satisfaction
with the services provided.
The Company has elevated the importance of working with and developing its
partner alliances with technology firms. Partner programs are in place with
firms RCM has identified as strategically important to the completeness of
the service offering of the Company. Relations have been established with
firms such as Microsoft, QAD, Mercury, IBM, and Oracle among others. The
partner programs may be managed either at a national level from RCM's
corporate offices or at a regional level from its branch offices.
The Company's larger representative customers include 3M, ADP, Ameriquest,
Bristol Myers Squibb, Bruce Power L.P, Entergy, FlightSafety International,
IBM, MSC Industrial Supply, Ontario Power Generation, Schering Plough,
United Technologies, U.S. Treasury and Wells Fargo. The Company serves
Fortune 1000 companies and many middle market clients. The Company's
relationships with these customers are typically formed at the local or
regional level or, when appropriate, at the corporate level for national
accounts.
8
ITEM 1. BUSINESS (CONTINUED)
Sales and Marketing (Continued)
During 2004, the Company's largest customer accounted for 7.4% of the
Company's revenues. The Company's five and ten largest customers accounted
for approximately 25.4% and 36.9%, respectively, of the Company's revenues
for 2004.
Recruiting and Training
The Company devotes a significant amount of time and resources, primarily
at the branch level, to locating, training and retaining its professional
personnel. Full-time recruiters utilize the Company's proprietary databases
of available personnel, which are cross-indexed by competency and skill to
match potential candidates with the specific project requirements of the
customer. The qualified personnel in the databases are identified through
numerous activities, including networking, referrals, trade shows, job
fairs, schools, newspapers and trade journal advertising, Internet
recruiting services and the Company's website.
The Company believes that a significant element to the Company's success in
retaining qualified consultants and contract personnel is the Company's use
of Consultant Relationship Managers and technical practice managers.
Consultant Relationship Managers are qualified Company personnel dedicated
to maintaining on-site contact with, and monitoring the satisfaction levels
of, the Company's consultants and contract personnel while they are on
assignment. Practice managers are consulting managers responsible for the
technical development and career development of the Company's technical
personnel within the defined practice areas. The Company employs various
methods of technical training and skills development including sending
consultants to application vendor provided courses, the use of
computer-based training tools and on-the-job training through mentoring
programs.
Information Systems
The Company has invested, and is continuing to invest, in its current SAP
R/3 ERP installation. During 2004, the Company upgraded the SAP R/3 system
to version 4.7. The system is housed on a multi redundant Dell PowerEdge
6600 server hardware. The SAP installation resides on a Windows 2003
enterprise server operating system with the database engine being Microsoft
SQL 2000 (SP3A) Enterprise edition. The branch offices of the Company are
networked to the corporate offices via AT&T managed VPN so the SAP
application is accessed securely at all operational locations. This system
supports Company-wide operations such as payroll, billing, human resources,
project systems, accounts receivable, accounts payable, all general ledger
accounting and consolidation reporting functionality.
In addition to SAP, the Company maintains a unified front end system. This
system consists of two elements: the PCR system and the Microsoft CRM
system. The PCR system manages the candidates information in a skills based
database, work order flows, and recruiting reporting on a national basis.
The PCR application is housed on a Dell PowerEdge 1750 with a RAID 5 disk
configuration. The database in which the PCR information is stored is
Microsoft SQL 2000 (SP 3A). The web based system, provided by Main
Sequence, Inc., is customized to RCM's business requirements and is hosted
and maintained at the Company's data center. Each of the service groups
maintains databases to permit efficient tracking of available personnel on
a local basis. This system facilitates efficient matching of customers'
requirements with available technical personnel.
The Microsoft CRM system manages the business sales funnel, which includes
customer contacts, single sales objectives, contact management
functionality for the sales force, and sales reporting on a national basis.
The system is housed on a Dell PowerEdge 1750 with a multi hardware
redundant configuration. The OS is Windows 2003 and the database engine is
Microsoft SQL 2000 (SP 3A). The web based system, provided by Microsoft,
has minor customization and is hosted and maintained at the Company's
headquarters.
9
ITEM 1. BUSINESS (CONTINUED)
Information Systems (Continued)
The company is also reviewing proposals for a Time and Attendance system,
which will augment the SAP application by catering to the needs of its
diverse business offerings and distributed workforce. Anticipated rollout
for this system is expected by mid 2005.
Other Information
Safeguards - Business, Disaster and Contingency Planning
RCM has implemented a number of safeguards to protect the Company from
various system-related risks spanning from warm data center sites to
disaster recovery / business continuity procedures for all satellite
offices. In addition, the company has implemented a multi-tiered approach
to disaster recovery services, and comprehensive application support
frameworks for all business critical applications.
Given the significant amount of data generated in the Company's key
processes including recruiting, sales, payroll and customer invoicing, RCM
has established redundant procedures, functioning on a daily basis, within
the Company's primary data center. This redundancy mitigates the risks
related to hardware application and data loss by utilizing the concept of
live differential backups of servers and desktops to network-attached
storage devices on its backup LAN, culminating in offsite storage at an
independent facility. Controls within the data center environment ensure
that all systems are proactively monitored and data is properly archived.
Additionally, RCM has contracted and brokered strategic relationships with
third-party vendors to meet its recovery objectives in the event of a
system disruption. For example, comprehensive service level agreements
provided by AT&T for RCM's managed firewall, VPN and data circuits
guarantees minimal outages as well as network scalability.
Finally, the Company maintains a comprehensive disaster recovery plan that
outlines the recovery organization structure, roles and procedures,
including site addendum disaster plans for all of its key operating
offices. Corporate IT personnel regulate the maintenance and integrity of
backed-up data throughout the Company.
Competition
The market for IT and engineering services includes a large number of
competitors, is subject to rapid change and is highly competitive. As the
market demand has shifted, many software companies have adopted tactics to
pursue services and consulting offerings making them direct competitors
when in the past they may have been alliance partners. Primary competitors
include participants from a variety of market segments, including publicly
and privately held firms, systems consulting and implementation firms,
application software firms, service groups of computer equipment companies,
facilities management companies, general management consulting firms and
staffing companies. In addition, the Company competes with its clients'
internal resources, particularly where these resources represent a fixed
cost to the client. Such competition may impose additional pricing
pressures on the Company.
The Company believes its principal competitive advantages in the IT and
professional engineering services market include: breadth of services
offered, technical expertise, knowledge and experience in the industry,
quality of service, responsiveness to client needs and speed in delivering
IT solutions.
Additionally, the Company competes for suitable acquisition candidates
based on its differentiated acquisition model, its entrepreneurial and
decentralized operating philosophy, its strong corporate-level support and
resources.
10
ITEM 1. BUSINESS (CONTINUED)
Seasonality
The timing of certain holidays, weather conditions and seasonal vacation
patterns can cause the Company's results of operations to fluctuate. The
Company generally expects to realize higher revenues, operating income and
net income during the second and third quarters and relatively lower
revenues, operating income and net income during the first and fourth
quarters.
Employees
As of January 1, 2005, the Company employed an administrative staff of
approximately 240 people, including certified IT specialists and licensed
professional engineers who, from time to time, participate in IT and
engineering design projects undertaken by the Company. As of January 1,
2005, there were approximately 710 information technology and 460
engineering and technical employees and consultants assigned by the Company
to work on client projects for various periods. As of January 1, 2005,
there were approximately 980 commercial services employees and consultants.
None of the Company's employees are represented by a collective bargaining
agreement. The Company considers its relationship with its employees to be
good.
Risk Factors
The Company's business involves a number of risks, some of which are beyond
its control. The risk and uncertainties described below are not the only
ones the Company faces. Management believes that the most significant of
these risks and uncertainties are as follows:
Economic Trends
The Company's growth and earnings 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 temporary and permanent employees. The Company believes that its fiscal
discipline and strategic focus on targeted vertical markets provides some
insulation from adverse trends. However, further declines in the economy
would adversely affect the Company's operating performance and could result
in the need for future cost reductions or changes in strategy.
Government Regulations
Changes in government regulations could result in prohibition or
restriction of certain types of employment services or the imposition of
new or additional benefits, licensing or tax requirements with respect to
the provision of employment services that may reduce RCM's future earnings.
Highly Competitive Business
The staffing services and outsourcing markets are highly competitive and
have limited barriers to entry. RCM competes in global, national, regional
and local markets with numerous temporary staffing and permanent placement
companies. Price competition in the staffing industry is significant and
pricing pressures from competitors and customers are increasing. In
addition, there is increasing pressure on companies to outsource certain
areas of their business to low cost offshore outsourcing firms. 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.
11
ITEM 1. BUSINESS (CONTINUED)
Dependence Upon Personnel
The Company's operations depend on the continued efforts of its officers
and other executive management. The loss of key officers and members of
executive management may cause a significant disruption to the Company's
business. RCM also depends on the performance and productivity of its local
managers and field personnel. The Company's ability to attract and retain
new business is significantly affected by local relationships and the
quality of service rendered. The loss of key managers and field personnel
may also jeopardize existing client relationships with businesses that
continue to use our services based upon past relationships with local
managers and field personnel, which could cause future revenues to decline
in that event.
Improper Activities of Our Temporary Professionals Could Result in
Damage to Our Business Reputation, Discontinuation of Our
Client Relationships and Exposure to Liability
----------------------------------------------
The Company may be subject to possible claims by our clients related to
errors and omissions, misuse of proprietary information, discrimination and
harassment, theft and other criminal activity, malpractice, and other
claims stemming from the improper activities or alleged activities of our
temporary professionals. There can be no assurance that our current
liability insurance coverage will be adequate or will continue to be
available in sufficient amounts to cover damages or other costs associated
with such claims. Claims raised by clients stemming from the improper
actions of our temporary professionals, even if without merit, could cause
us to incur significant expense associated with the costs or damages
related to such claims. Further, such claims by clients could damage our
business reputation and result in the discontinuation of client
relationships.
Integration of Acquisitions
The Company reviews prospective acquisitions as an element of its growth
strategy. The failure to successfully integrate any future acquisition may
divert management's attention from its core operations or could negatively
affect the Company's ability to timely meet the needs of its customers.
Goodwill Impairments May Have an Adverse Effect on our Results of
Operations
The Company recorded a write down of $2.2 million in 2004 related to
impairment of goodwill. As of January 1, 2005, we had $35.8 million of
goodwill on our balance sheet, which represented 36.8% of our total assets.
This amount primarily represents the remaining excess of the total purchase
price of our acquisitions over the fair value of the net assets acquired.
If we are required to further write down goodwill, the related charge could
materially reduce reported net income or result in a net loss for the
period in which the write down occurs.
Foreign Currency Fluctuations and Changes in Exchange Rates
The Company is exposed to risks associated with foreign currency
fluctuations and changes in exchange rates. RCM's exposure to foreign
currency fluctuations relates to operations in Canada principally conducted
through its Canadian subsidiary. Exchange rate fluctuations affect the U.S.
dollar value of reported earnings derived from the Canadian operations as
well as the carrying value of our investment in the net assets related to
these operations. The Company does not engage in hedging activities with
respect to foreign operations.
Data Center Capacity and Telecommunication Links
The Company's ability to protect its data centers against damage from fire,
power loss, telecommunications failure and other disasters is critical. In
order to provide many of its services, RCM must be able to store, retrieve,
process and manage large databases and periodically expand and upgrade its
capabilities. Any damage to the Company's data centers or any failure of
the Company's telecommunication links that interrupts its operations or
results in an inadvertent loss of data could adversely affect RCM's ability
to meet its customers' needs and their confidence in utilizing RCM for
future services.
12
ITEM 1. BUSINESS (CONTINUED)
Access to Company Information
RCM Technologies, Inc. electronically files its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports with the Securities and Exchange Commission
(SEC). The public may read and copy any of the reports that are filed with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site (http://www.sec.gov) that contains reports,
proxies, information statements, and other information regarding issuers
that file electronically.
RCM Technologies, Inc. makes available, free of charge, through its website
or by responding to requests addressed to the Company's Corporate
Secretary, its annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports filed by
the Company with the SEC pursuant to Sections 13(a) and 15(d) of the
Securities Exchange Act, as amended. These reports are available as soon as
reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. The Company's website
is http://www.rcmt.com. The information contained on the Company's website,
or on other websites linked to the Company's website, is not part of this
document. Reference herein to the Company's website is an inactive text
reference only.
The Company is a Nevada corporation organized in 1971. The address of its
principal executive office is 2500 McClellan Avenue, Suite 350, Pennsauken,
NJ 08109-4613.
ITEM 2. PROPERTIES
The Company provides specialty professional consulting services,
principally performed at various client locations, through 35
administrative and sales offices in 13 states and territories in the United
States, and in Canada. The Company's offices typically consist of 1,000 to
3,000 square feet and are leased by the Company for terms of one to three
years. Offices in larger or smaller markets may vary in size from the
typical office. The Company does not expect that it will be difficult to
maintain or find suitable lease space at reasonable rates in its markets or
in areas where the Company contemplates expansion.
The Company's executive office is located at 2500 McClellan Avenue, Suite
350, Pennsauken, New Jersey 08109-4613. These premises consist of
approximately 9,100 square feet and are leased at a rate of $13.50 per
square foot per annum for a term ending on January 31, 2006.
The Company's operational office is located at 20 Waterview Boulevard, 4th
Floor, Parsippany, NJ 07054-1271. These premises consist of approximately
28,000 square feet and are leased at a rate of $27.50 per square foot per
annum for a term ending on June 30, 2012.
13
ITEM 3. 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 at the rate of 3% per annum in 2005.
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 and oral argument was heard on February 15, 2005. 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 January 1, 2005,
the accrued litigation reserve was $8.2 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 April 4,
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.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended January 1, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock is traded on The Nasdaq National Market under
the Symbol "RCMT". The following table sets forth approximate high and low
sales prices for the two years in the period ended January 1, 2005 as
reported by The Nasdaq National Market:
Common Stock
------------------------
Fiscal 2003 High Low
------- --------
First Quarter................................ $4.08 $2.52
Second Quarter............................... 3.98 2.10
Third Quarter 5.50 3.39
Fourth Quarter............................... $7.69 $4.81
Fiscal 2004
First Quarter................................ $8.06 $6.48
Second Quarter............................... 7.69 3.89
Third Quarter 6.73 3.95
Fourth Quarter............................... $5.15 $4.00
Holders
As of March 1, 2005, the approximate number of holders of record of the
Company's Common Stock was 616. Based upon the requests for proxy
information in connection with the Company's most recent Annual Meeting of
Stockholders, the Company believes the number of beneficial owners of its
Common Stock is approximately 2,693.
Dividends
The Company has never declared or paid a cash dividend on the Common Stock
and does not anticipate paying any cash dividends in the foreseeable
future. It is the current policy of the Company's Board of Directors to
retain all earnings to finance the development and expansion of the
Company's business. Any future payment of dividends will be at the
discretion of the Board of Directors and will depend upon, among other
things, the Company's earnings, financial condition, capital requirements,
level of indebtedness, contractual restrictions and other factors that the
Board of Directors deems relevant. The Revolving Credit Facility (as
defined in Item 7 hereof) prohibits the payment of dividends or
distributions on account of the Company's capital stock without the prior
consent of the majority of the Company's lenders.
15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data was derived from the
Company's Consolidated Financial Statements. The selected historical
consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company, and
notes thereto, included elsewhere herein.
Years Ended
----------------------------------------------------------------------------------------
January 1, December 27, December 28, December 29, December 30,
----------------- ----------------- ----------------------------------------------------
2005 (2) 2003 2002 2001 2000
----------------- ----------------- ----------------------------------------------------
Income Statement
Revenues $169,277,490 $206,605,188 $186,650,616 $234,739,066 $305,444,247
Gross profit 40,973,845 44,594,686 46,664,861 62,575,740 78,045,164
Income before the charges
listed below 4,412,205 6,812,107 8,005,135 9,407,072 11,058,650
Amortization, net of tax (41,000) (18,000) (12,000) (5,385,000) (4,390,000)
Goodwill impairment, net of tax (2,164,338) (24,748,000) (22,758,000) (26,534,000)
Unusual items, net of tax (6,414,000) (2,083,000)
Equity compensation, net of tax (4,014,954)
Income (loss) from continuing
operations 2,206,867 2,779,153 (23,168,865) (18,735,928) (21,948,350)
(Loss) gain from discontinued
operations (967,065) (20,041) 51,964
Net income (loss) $2,206,867 $2,779,153 ($24,135,930) ($18,755,969) ($21,896,386)
Earnings Per Share (1)
Income (loss) from continuing
Operations $.19 $.26 ($2.19) ($1.78) ($2.09)
(Loss) gain from discontinued
Operations (.09)
Net income (loss) (basic
and diluted) $.19 $.26 ($2.28) ($1.78) ($2.09)
---------------- ----------------- ---------------- ----------------- -----------------
January 1, December 27, December 28, December 29, December 30,
2005 (2) 2003 2002 2001 2000
---------------- ----------------- ---------------- ----------------- -----------------
Balance Sheet
Working capital $29,544,955 $23,881,579 $16,516,062 $10,977,131 $56,508,604
Total assets 98,100,933 99,703,589 88,439,784 131,155,945 174,268,828
Long term liabilities 49,483,873
Total liabilities 28,155,897 32,533,493 29,193,630 47,866,145 72,206,502
Shareholders' equity 69,945,036 $67,170,096 $59,246,154 $83,289,800 $102,062,326
(1) Shares used in computing earnings per share:
Basic 11,325,626 10,716,179 10,585,503 10,519,701 10,499,305
Diluted 11,679,811 10,896,305 10,585,503 10,519,701 10,499,305
(2) Year ended January 1, 2005 had fifty-three weeks and all other years had
fifty-two weeks.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
RCM participates in a market that is cyclical in nature and extremely
sensitive to economic changes. As a result, the impact of economic changes
on revenues and operations can be volatile. The Company's consolidated
revenues have declined 45.6% or $142.1 million from a peak of $311 million
in the year ended October 30, 1999.
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 the 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 had 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.
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.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Overview (Continued)
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 accounting
principles generally accepted in the United States, 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 - The Company recognizes revenues in accordance with the
Securities and Exchange Commission, Staff Accounting Bulletin (SAB) Number
104, "Revenue Recognition." SAB 104 clarifies application of U.S. generally
accepted accounting principles to revenue transactions. 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 provided to the customer and costs are incurred using
its employees. The Company, from time to time, enters into contracts
requiring the completion of specific deliverables. The Company recognizes
revenue on these deliverables at the time the client accepts and approves
the deliverables. 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.
Provision for contract losses, if any, is made in the period such losses
are determined. Expenses related to contracts that extend beyond a 12-month
period are charged to Cost of Services as incurred.
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).
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Revenue Recognition (Continued)
Permanent Placement Services - The Company earns permanent placement fees
from providing permanent placement services. Fees for placements are
recognized at the time the candidate commences employment. The Company
guarantees its permanent placements on a prorated 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
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets." Accordingly, the Company
evaluates 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 and supportable assumptions and
projections. The periods for estimating future cash flows are uncertain,
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 have an effect upon the future values of
these reporting units, which could result in future impairment charges.
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
Accounting Principle Board ("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
$321,000, $500,000 and $898,000 for the years ended January 1, 2005,
December 27, 2003 and December 28, 2002, 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 affect
the pro forma compensation cost.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Accounting for Stock Options (Continued)
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), Share-Based Payment, which addresses the accounting for
employee stock options. SFAS No. 123R eliminates the ability to account for
shared-based compensation transactions using APB 25 and generally would
require instead that such transactions be accounted for using a fair
value-based method. SFAS No. 123R also requires that tax benefits
associated with these share-based payments be classified as financing
activities in the statement of cash flow rather than operating activities
as currently permitted. SFAS No. 123R becomes effective for interim or
annual periods beginning after June 15, 2005. Accordingly, the Company is
required to apply SFAS No. 123R beginning fiscal quarter ended October 1,
2005. SFAS No. 123R offers alternative methods of adopting this final rule.
At the present time, the Company has not yet determined which alternative
method it will use.
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
January 1, 2005, the Company had total net deferred tax assets of $5.0
million. This included $1.0 million relating to federal and state net
operating loss carry forwards and $3.2 million for a reserve for litigation
charges. 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.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Results of Operations (In thousands, except for earnings per share data)
Year Ended Year Ended Year Ended
January 1, 2005 December 27, 2003 December 28, 2002
------------------------ ------------------------ -------------------------
% of % of % of Revenue
Amount Revenue Amount Revenue Amount
---------- ------------ ----------- ------------ ----------- -------------
Revenues $169,277 100.0 $206,605 100.0 $186,651 100.0
Cost of services 128,303 75.8 162,010 78.4 139,986 75.0
---------- ------------ ----------- ------------ ----------- -------------
Gross profit 40,974 24.2 44,595 21.6 46,665 25.0
Selling, general and administrative 34,330 20.3 32,558 15.8 33,320 17.9
Depreciation and amortization 1,219 .7 1,223 .6 1,279 .7
Compensation expense for
stock option tender offer 6,692 3.2
Litigation charge 9,718 5.2
Impairment of goodwill 2,164 1.3 29,990 16.1
Other expense, net 450 .3 182 .1 156 .1
Income (loss) from continuing
operations before income taxes 2,811 1.6 3,940 1.9 (27,798) (15.0)
Income taxes (benefit) 604 .3 1,161 .6 (4,629) (2.5)
Income (loss) from continuing operations 2,207 1.3 2,779 1.3 (23,169) (12.5)
Loss from discontinued operations, net
of taxes (967) (.5)
---------- ------------ ----------- ------------ ----------- -------------
Net income (loss) $2,207 1.3 $2,779 1.3 ($24,136) (13.0)
========== ============ =========== ============ =========== =============
Earnings per share
Basic and Diluted:
Income (loss) from continuing operations $.19 $.26 ($2.19)
Discontinued operations ( .09)
---------- ----------- -----------
Net income (loss) $.19 $.26 ($2.28)
========== =========== ===========
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 reporting period
ended January 1, 2005 consists of fifty-three weeks as compared to the same
period in the prior years, which ended on December 27, 2003 and December 28,
2002 consisting of fifty-two weeks. Unless specifically noted otherwise, the
following discussion does not reflect the additional one week in the fiscal year
ended 2004.
Year Ended January 1, 2005 Compared to Year Ended December 27, 2003
Revenues. Revenues decreased 18.1%, or $37.3 million, for the year ended January
1, 2005 as compared to the same period in the prior year (the "comparable prior
year period"). The revenue decreased $8.0 million in the Information Technology
("IT") segment, decreased $35.5 million in the Professional Engineering ("PE")
segment and increased $6.2 million in the Commercial Services ("CS") segment.
Management attributes the overall decrease to the conclusion in accordance with
the 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, offshore
competition and widespread pricing pressures. The aggregate revenues from the
two major contracts in fiscal 2003 were $31.9 million.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended January 1, 2005 Compared to Year Ended December 27, 2003
(Continued)
Cost of Services. Cost of services decreased 20.8%, or $33.7 million, for
the year ended January 1, 2005 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 early 2004. Cost of services
as a percentage of revenues decreased to 75.8% for the year ended January
1, 2005 from 78.4% 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 concluded in early 2004.
Selling, General and Administrative. Selling, general and administrative
("SGA") expenses increased 5.4%, or $1.8 million, for the year ended
January 1, 2005 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 20.3% for the year ended January
1, 2005 as compared to 15.8% for the comparable prior year period. This
increase was primarily attributable to decline revenue of $37.3 million or
18.1%.
Depreciation and Amortization. Depreciation and amortization
decreased 0.3%, or $4,000, for 2004 as compared to 2003.
Other Expense. Other expense consisted of interest expense, net of interest
income and gains and losses on foreign currency transactions. For the year
ended January 1, 2005, actual interest expense of $536,000 was offset by
$61,700 of interest income, which was principally earned from short-term
money market deposits. Interest expense, net, increased $160,000 for the
year ended January 1, 2005 as compared to the comparable prior year period.
This increase was primarily due to an increase in the effective interest
rate on the line of credit for the year ended January 1, 2005 as compared
to the comparable prior year period. Gains on foreign currency transactions
decreased $107,000 because of the stabilization of the Canadian Dollar
during the year ended January 1, 2005 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 47.9%, or $556,000, for the year
ended January 1, 2005 as compared to the comparable prior year period. The
effective tax rate was 21.5% for the year ended January 1, 2005 as compared
to 29.4% for the comparable prior year period. These decreases were
attributable to a nondeductible goodwill impairment charge of $2.2 million
in fiscal year ended January 1, 2005, which was offset by a change in the
valuation allowance. The effective tax rate net of the goodwill charge and
change in valuation allowance is 27.1% for the year ended January 1, 2005
as compared to 29.4% for the comparable prior year. This decrease was
attributable to a decrease in the Canadian income tax rate.
Goodwill Impairment. SFAS 142 requires the Company to perform a goodwill
impairment test on at least an annual basis. For purposes of its 2004, 2003
and 2002 annual impairment testing, the Company determined the fair value
of its reporting units using relative market multiples for comparable
businesses, as of November 30, 2004, 2003 and 2002, respectively. The
analysis revealed that goodwill, amounting to approximately $2.2 million
and $30.0 million ($24.7 million after taxes) had been impaired for the
fiscal years ended January 1, 2005 and December 28, 2002, respectively and
therefore, would not be recoverable through future profitable operations.
The results of the 2003 impairment testing indicated no impairment to
goodwill. There can be no assurance that future goodwill impairment tests
will not result in further impairment charges.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended January 1, 2005 Compared to Year Ended December 27, 2003
(Continued)
Segment Discussion (See Footnote 15)
Information Technology ("IT")
IT revenues of $92.9 million in 2004 decreased $8.0 million, or 7.9%,
compared to 2003. The decline was principally attributable to a softening
of demand for information technology services, offshore competition and
widespread pricing pressures. Earnings before interest, taxes, depreciation
and amortization ("EBITDA") for the IT segment was $2.1 million, or 2.3% of
revenues, for 2004 as compared to $7.3 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")
PE revenues of $51.2 million in 2004 decreased $35.5 million, or 41.0%,
compared to 2003. The PE segment EBITDA was $2.8 million, or 5.5% of
revenues for 2004 as compared to $3.4 million, or 3.9% 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 $25.2 million in 2004 increased $6.2 million, or 32.4%
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 $428,000, or 1.7% of revenues, as compared
to income of $334,000, or 1.8% of revenues, for 2003. The overall decline
is principally attributable to competitive pricing pressures, an
unfavorable worker's compensation rating market in California and start-up
expenses associated with market expansion of the specialty health care
group. 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.
Year Ended December 27, 2003 Compared to Year Ended December 28, 2002
Revenues. Revenues increased 10.7%, or $20.0 million, for 2003 as compared
to 2002. The revenue increase was primarily attributable to increased
revenues in the Professional Engineering segment. Management attributed
this increase primarily to an increase in subcontracted revenues on a major
project with respect to which RCM was the general contractor. Subcontracted
revenues recognized by RCM for 2003 were approximately $24.2 million as
compared to $4.7 million for 2002. RCM, as general contractor on this major
project, subcontracts certain tasks outside of RCM's core competencies as
agreed upon with RCM's customer.
Cost of Services. Cost of services increased 15.7%, or $22.0 million, for
2003 as compared to 2002. This increase was primarily due to an increase in
subcontractor costs associated with increased subcontracted revenues
experienced during 2003. Cost of services as a percentage of revenues
increased to 78.4% for 2003 from 75.0% for 2002. This increase was
primarily attributable to an increase of the Company's revenues being
derived from Professional Engineering services, which have historically had
lower gross profit margins.
Selling, General and Administrative. Selling, general and administrative
("SGA") expenses decreased 2.3%, or $762,000 for 2003 as compared to 2002.
This decrease was primarily attributable to ongoing cost cutting and cost
containment initiatives. SGA expenses as a percentage of revenues were
15.8% for 2003 as compared to 17.9% for 2002.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 27, 2003 Compared to Year Ended December 28, 2002
(Continued)
Depreciation and Amortization. Depreciation and amortization decreased
2.8%, or $35,000, for 2003 as compared to 2002. This decrease was primarily
due to write down of impaired fixed assets prior to 2003.
Other Expense. Other expense consists of interest expense, net of interest
income and gains on foreign currency transactions. For 2003, actual
interest expense of $382,600 was offset by $68,100 of interest income,
which was principally earned from short-term money market deposits. For
2002, actual interest expense of $770,000 was offset by $599,000 of
interest income, which was principally earned from an income tax refund
claim with the Internal Revenue Service. The reduction of actual interest
expense of $387,800 was attributable to lower interest rates as well as
reduced need for average borrowings in 2003. The reduction in interest
expense was mitigated by interest on a post judgment verdict of $7.6
million (see note 17). Gains on foreign currency transactions increased
$115,300 because of the strengthening of the Canadian Dollar as compared to
the U.S. Dollar.
Income Tax. Income tax expense increased 125.2%, or $5.8 million, for
fiscal 2003 as compared to fiscal 2002. This increase was attributable to
the increased level of income before taxes for fiscal 2003 as compared to
fiscal 2002. The effective tax rate was 29.5% for fiscal 2003 as compared
to an effective refund rate of 16.6% for fiscal 2002. The increase was
attributable to a reduction of tax deductible amortization of intangibles
in 2003.
Litigation Charge. In 1998, two shareholders, who were formerly officers
and directors of the Company, filed suit against the Company alleging
wrongful termination of their employment, failure to make required
severance payments, wrongful conduct by the Company in connection with the
grant of stock options, and wrongful conduct by the Company resulting in
the non-vestiture of their option grants. The complaint also alleged that
the Company wrongfully limited the number of shares of the Company's common
stock that could have been sold by the plaintiffs under a Registration
Rights Agreement entered into in connection with the underlying acquisition
transaction pursuant to which the plaintiffs became shareholders of the
Company. The claim under the Registration Rights Agreement sought the
difference between the amount for which plaintiffs could have sold their
RCM shares during the 12-month period ended March 11, 1999, but for the
alleged wrongful limitation on their sales, and the amount for which the
plaintiffs sold their shares during that period and thereafter.
The claim relating to the wrongful termination of the employment of one of
the plaintiffs and the claims of both plaintiffs concerning the grant of
stock options were resolved in binding arbitration in early 2003. A trial
on the remaining claims commenced on December 2, 2002 and a verdict was
returned on January 24, 2003. On the claims by both plaintiffs, concerning
the alleged wrongful limiting of the number of shares that they could sell
during the 12-month period ended March 11, 1999, a verdict awarding damages
of $7.6 million against the Company was returned. On June 23, 2003, the
trial judge denied the Company's post-trial motions that challenged the
jury's verdict and the trial judge also upheld the jury's verdict. On
August 4, 2003, the trial judge entered a judgment in favor of the
plaintiffs for $7.6 million in damages and awarded plaintiffs $172,000 in
post-verdict prejudgment interest. Post-judgment interest will continue to
accrue on the damages portion of the judgment after August 4, 2003 at the
rate of 4% per annum. The Company has appealed from, and obtained a stay
pending appeal of, that judgment. In order to secure the stay, the Company
made a cash deposit in lieu of bond of $8.3 million with the Trust Fund of
the Superior Court of New Jersey. This deposit is recorded as restricted
cash on the consolidated balance sheet and earns interest 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 has been completed. 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 28, 2002, which includes the jury award of
$7.6 million, professional fees of $1.1 million and an estimate of $1.0
million for attorney fees and pre-judgment interest. The after-tax effect
of the litigation on 2002 earnings is $6.4 million.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 27, 2003 Compared to Year Ended December 28, 2002
(Continued)
Goodwill Impairment. The Company performed an impairment review in
accordance with the requirements of SFAS No. 142 for the fiscal years 2003
and 2002. During the fourth quarter of fiscal 2002 the review indicated
that there was an impairment of value, which resulted in a $30.0 million
($24.7 million net of income tax benefit of $5.2 million) charge to expense
for the year ended December 28, 2002 in order to properly reflect the
appropriate carrying value of goodwill. The results of the 2003 impairment
testing indicated no further impairment to goodwill.
Compensation Expense for Stock Option Tender. In order to enhance long-term
value for the shareholders of the Company, reduce the number of options
outstanding and improve the Company's ability to retain and provide
incentives to employees and directors, on September 30, 2003, the Company
made a tender offer to exchange stock options with a strike price of $7.00
or greater for shares of restricted stock and cash.
Upon expiration of the tender offer on November 14, 2003, option holders
participating in the tender offer received 607,777 shares of restricted
stock having an aggregate value of $3.8 million ($6.30 per share) as well
as cash consideration of $2.6 million, which was equal to 67% of the value
of the restricted common stock. Participants surrendered options to
purchase 1,327,973 shares of stock, which represented 100% of all options
eligible to be surrendered. The Company recorded a charge of $6.7 million
($4.0 million after-tax) to equity compensation expense in the fourth
quarter of 2003 due to the tender offer. Provided the Company has positive
U.S. Federal taxable income in future periods, the exchange offer will be
approximately cash flow neutral to the Company as the combined tax benefits
(both the restricted common stock issued and the cash consideration paid
are tax deductible expenses) will be approximately equal the actual cash
consideration paid to employees and directors.
Loss from Discontinued Operations. In August 2002, the Company sold a
reporting unit in the commercial services business segment for $100,000,
which resulted in a loss of $1.6 million ($967,000 net of income tax
benefit of $644,000) or $.09 per share for fiscal 2002. In accordance with
SFAS 144, the loss is presented as a loss from discontinued operations in
the statements of income for fiscal 2002. The tax effected operating
results of the reporting unit sold were losses of $29,000 for fiscal 2002
and are excluded from income from continuing operations.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Year Ended December 27, 2003 Compared to Year Ended December 28, 2002
(Continued)
Segment Discussion (See Footnote 15)
Information Technology ("IT")
IT revenues of $101 million decreased $10.4 million in 2003 or 9.3%
compared to 2002. 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 earnings
before interest, taxes, depreciation and amortization ("EBITDA") was $7.3
million or 7.2% of revenues for 2003 as compared to an EBITDA loss of $21.9
million or 19.7% of revenues for 2002. The EBITDA margin percentage
improvement was due to ongoing cost containment efforts.
Professional Engineering ("PE")
PE revenues of $86.7 million in 2003 increased $30.7 million or 54.9%
compared to 2002. A significant reason for the increase was the revenues
generated from engineering services provided to an electric utility plant
in Canada. The PE segment EBITDA was $3.4 million or 3.9% of revenues for
2003 as compared to $4.7 million or 8.4% of revenues for 2002. The decline
was attributable to subcontracted revenues recognized by RCM for 2003 of
approximately $24.2 million as compared to $4.7 million for 2002. RCM, as
general contractor on this major project, subcontracts certain tasks for
which RCM accepts lower margins.
Commercial Services ("CS")
CS revenues of $19.0 million in 2003 decreased $365,000 or 1.9% compared to
2002. This modest decline was principally attributable to a weak economy.
The CS segment EBITDA was $334,000 or 1.8% of revenues as compared to
$561,000 or 2.8% of revenues for 2002. The overall decline is principally
attributable to competitive pricing pressures and an unfavorable worker's
compensation rating market in California.
26
ITEM 7. 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:
Year Ended Year Ended
(In Thousands) January 1, 2005 December 27, 2003
----------------------------- ------------------ ----------------------
Operating Activities ($424) $2,893
Investing Activities ($494) ($1,782)
Financing Activities ($2,011) $55
Operating Activities
Operating activities used $424,000 of cash for the year ended January 1,
2005 as compared to operating activities providing $2.9 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 and income taxes payable, which was partially offset by a decrease
in prepaid expenses and other current assets, an increase in accrued
payroll and payroll and withheld taxes. The significant reason for the
increase in accounts receivable is the delay in processing of invoices at
one client. Subsequent to January 1, 2005 and through February 15, 2005,
the Company received $1.4 million of the January 1, 2005 accounts
receivables from the aforementioned client. The Company continues to
institute enhanced managerial controls and standardization over its
receivables collection and disbursement processes.
Investing Activities
Investing activities used $494,000 for the year ended January 1, 2005 as
compared to $1.8 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.
Financing Activities
Financing activities principally consisted of debt reduction of $2.4
million for the fiscal year ended January 1, 2005 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.
27
ITEM 7. 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 years ended
January 1, 2005 and December 27, 2003 were 3.99% and 3.67%, respectively.
The amounts outstanding under the Revolving Credit Facility at January 1,
2005 and December 27, 2003 were $4.9 million and $7.3 million,
respectively. At January 1, 2005, the Company had availability for
additional borrowing 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 17 (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 January 1, 2005, the Company had a deferred tax asset totaling $5.0
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 December 31, 2005 by
offsetting the related tax benefits of such assets against tax liabilities
incurred from forecasted taxable income.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Summarized below are the Company's obligations and commitments to make
future payments under lease agreements and debt obligations as of January
1, 2005 (in thousands):
Payments Due by Period
--------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
------------- ------------ ------------ ------------ --------------
Long-Term Debt Obligations (1) $4,900 $4,900
Operating Lease Obligations 9,553 $2,455 3,230 $1,790 $2,078
------------- ------------ ------------ ------------ --------------
Total $14,453 $2,455 $8,130 $1,790 $2.078
============= ============ ============ ============ ==============
(1) The Revolving Credit Facility is for $25.0 million and includes a sub
limit of $2.0 million for letters of credit. The agreement expires in
August 2006. At January 1, 2005 there was an outstanding letter of credit
for $116,000.
Significant employment agreements are as follows:
Employment Agreement
The Company has an employment agreement with its Chief Executive Officer
and President, Leon Kopyt ("Mr. Kopyt"), which currently provides for an
annual base salary of $475,000 and other customary benefits. In addition,
the agreement provides that Mr. Kopyt's annual bonus is based on EBITDA,
defined as earnings before interest, taxes, depreciation and amortization.
As of January 1, 2005, the agreement expires on February 28, 2008. The
agreement is for a rolling term of three years, which automatically extends
each year for an additional one-year period on February 28 of each year.
The employment agreement is terminable by the Company upon Mr. Kopyt's
death or disability, or for "good and severance cause", as defined in the
agreement.
Termination Benefits Agreement
The Company is party to a Termination Benefits Agreement with Mr. Kopyt
amended and restated as of March 18, 1997 (the "Benefits Agreement").
Pursuant to the Benefits Agreement, following a Change in Control (as
defined therein), the remaining term of Mr. Kopyt's employment is extended
for five years (the "Extended Term"). If Mr. Kopyt's employment is
terminated thereafter by the Company other than for cause, or by Mr. Kopyt
for good reason (including, among other things, a material change in Mr.
Kopyt's salary, title, reporting responsibilities or a change in office
location which requires Mr. Kopyt to relocate), then the following
provisions take effect: the Company is obligated to pay Mr. Kopyt a lump
sum equal to his salary and bonus for the remainder of the Extended Term;
and the Company shall be obligated to pay to Mr. Kopyt the amount of any
excise tax associated with the benefits provided to Mr. Kopyt under the
Benefits Agreement. If such a termination had taken place as of January 1,
2005, Mr. Kopyt would have been entitled to cash payments of approximately
$3.2 million (representing salary and excise tax payments).
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources (Continued)
Severance Agreement
The Company is party to a Severance Agreement with Mr. Kopyt, dated June
10, 2002, (the "Severance Agreement"). The agreement provides for certain
payments to be made to Mr. Kopyt and for the continuation of Mr. Kopyt's
employee benefits for a specified time after his service with the Company
is terminated other than "for cause," as defined in the Severance
Agreement. Amounts payable to Mr. Kopyt under the Severance Agreement would
be offset and reduced by any amounts received by Mr. Kopyt after his
termination of employment under his current employment and termination
benefits agreements, which are supplemented and not superseded by the
Severance Agreement. If Mr. Kopyt had been terminated as of January 1,
2005, then under the terms of the Severance Agreement, and after offsetting
any amounts that would have been received under his current employment and
termination benefits agreements, he would have been entitled to cash
payments of approximately $1.3 million, inclusive of employee benefits.
Impact of Inflation
Staffing and project services are generally priced based on mark-ups on
prevailing rates of pay, and as a result are able to generally maintain
their relationship to direct labor costs. Permanent placement services are
priced as a function of salary levels of the job candidates. In 2004,
employee benefit costs, primarily health care costs, rose due to an
increase in the Company's health insurance premiums. After the significant
rise in insurance costs during 2002 and 2003, the Company implemented a
plan to control these costs through higher co-pays and pricing adjustments
during 2004. This strategy allowed the Company to offset a portion of these
costs. The Company is continuing to review its options to further reduce
these costs, which the Company does not believe are representative of
general inflationary trends. Otherwise, inflation has not been a meaningful
factor in the Company's operations.
Recently Issued 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.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment, which addresses the accounting for employee stock options. SFAS
No. 123R eliminates the ability to account for shared-based compensation
transactions using APB 25 and generally would require instead that such
transactions be accounted for using a fair value-based method. SFAS No.
123R also requires that tax benefits associated with these share-based
payments be classified as financing activities in the statement of cash
flow rather than operating activities as currently permitted. SFAS No. 123R
becomes effective for interim or annual periods beginning after June 15,
2005. Accordingly, the Company's is required to apply SFAS No. 123R
beginning fiscal quarter ended October 1, 2005. SFAS No. 123R offers
alternative methods of adopting this final rule. At the present time, the
Company has not yet determined which method it will use.
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and debt instruments, which
primarily consist of its line of credit. The Company does not have any
derivative financial instruments in its portfolio. The Company places its
investments in instruments that meet high credit quality standards. The
Company is adverse to principal loss and ensures the safety and
preservation of its invested funds by limiting default risk, market risk
and reinvestment risk. As of January 1, 2005, the Company's investments
consisted of cash and money market funds. The Company does not use interest
rate derivative instruments to manage its exposure to interest rate
changes. Presently the impact of a 10% (approximately 28 basis points)
increase in interest rates on its variable debt (using average debt
balances during the year ended January 1, 2005 and average interest rates)
would have a relatively nominal impact on the Company's results of
operations. The Company does not expect any material loss with respect to
its investment portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, together with the report of the Company's
independent auditors, begin on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation
of the Company's 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) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that those disclosure controls and procedures were adequate to
ensure that information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the Company's management, including its principal executive
and principal financial officers, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure.
A controls system, no matter how well designed and operated, cannot provide
absolute assurance that the objectives of the controls system are met, and
no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within a company have been detected.
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.
ITEM 9B. OTHER INFORMATION
None
31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in the 2005 Proxy Statement beginning immediately following
the caption "ELECTION OF DIRECTORS" to, but not including, the caption
"EXECUTIVE COMPENSATION" and the additional information in the 2005 Proxy
Statement beginning immediately following the caption "COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT" to, but not including, the caption
"BOARD MEETINGS AND COMMITTEES" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the 2005 Proxy Statement beginning immediately following
the caption "EXECUTIVE COMPENSATION" to, but not including, the caption
"COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS" and the additional
information in the 2005 Proxy Statement beginning immediately following the
caption "COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION" to,
but not including, the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information in the 2005 Proxy Statement beginning immediately following
the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, DIRECTORS AND
MANAGEMENT" to, but not including, the caption "ELECTION OF DIRECTORS" is
incorporated herein by reference.
The table below presents certain information concerning securities issuable
in connection with equity compensation plans that have been approved by the
Company's shareholders and that have not been approved by the Company's
shareholders.
Number of securities
remaining available for
Number of securities to be Weighted-average exercise issuance under equity
issued upon exercise of price of outstanding compensation plans,
outstanding options, options, warrants and excluding securities
Plan category warrants and rights rights reflected in column (a)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans 1,183,583 $4.03 994,236
approved by security
holders...............
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not ____________________
approved by security ____________________ ____________________
holders...............
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
1,183,583 $4.03 994,236
Total.................
- ------------------------------- ---------------------------- ---------------------------- ----------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the 2005 Proxy Statement beginning immediately following
the caption "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information in the 2005 Proxy Statement beginning immediately following the
caption "PRINCIPAL ACCOUNTANT FEES AND SERVICES" is incorporated herein by
reference.
32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statement Schedules -- See "Index to Financial
Statements and Schedules" on F-1.
3. See Item (c) below.
(b) Reports on Form 8-K
The Company furnished to the Securities and Exchange Commission, on
November 10, 2004, a Current Report on Form 8-K containing disclosure
pursuant to item 12 of Form 8-K.
(c) Exhibits
(3)(a) Articles of Incorporation, as amended; incorporated by reference
to Exhibit 3(a) to the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1994.
(3)(b) Amended and Restated Bylaws; incorporated by reference to
Exhibit 3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1997.
(4)(a) Rights Agreement dated as of March 14, 1996, between RCM
Technologies, Inc. and American Stock Transfer & Trust Company, as
Rights Agent; incorporated by reference to Exhibit 4 to the
Registrant's Current Report on Form 8-K dated March 21, 1996 filed
with the Commission on March 22, 1996.
* (10)(a) RCM Technologies, Inc. 1992 Incentive Stock Option Plan;
incorporated by reference to Exhibit A of the Registrant's Proxy
Statement dated March 9, 1992, filed with the Commission on March
9, 1992.
(10)(b) RCM Technologies, Inc. 1994 Non-employee Director Stock Option
Plan; incorporated by reference to the appendix A of the
Registrant's Proxy Statement dated March 3, 1994, filed with the
Commission on March 28, 1994.
* (10)(c) RCM Technologies, Inc. 1996 Executive Stock Option Plan
dated August 15, 1996; incorporated by reference to Exhibit 10(l)
to the Registrant's Annual Report on Form 10-K for the year ended
October 31, 1996, filed with the Commission on January 21, 1997
(the "1996 10-K").
* (10)(d) Second Amended and Restated Termination Benefits Agreement
dated March 18, 1997 between the Registrant and Leon Kopyt;
incorporated by reference to Exhibit 10(g) to the Registrant's
Registration Statement on Form S-1 dated March 21, 1997
(Commission File No. 333-23753).
* (10)(e) Amended and Restated Employment Agreement dated November
30, 1996 between the Registrant, Intertec Design, Inc. and Leon
Kopyt; incorporated by reference to Exhibit 10(g) to the 1996
10-K.
(10)(f) Registration Rights Agreement dated March 11, 1996 by and between
RCM Technologies, Inc. and the former shareholders of The
Consortium; incorporated by reference to Exhibit (c)(2) to the
Registrant's Current Report on Form 8-K dated March 19, 1996,
filed with the Commission on March 20, 1996.
* (10)(g) RCM Technologies, Inc. 2000 Employee Stock Incentive Plan;
incorporated by reference to Exhibit A to the Registrant's Proxy
Statement dated March 3, 2000, filed with the Commission on
February 28, 2000.
(10)(h) Amended and Restated Loan and Security Agreement dated May 31,
2002 between RCM Technologies, Inc. and All of its Subsidiaries
with Citizens Bank of Pennsylvania, as Administrative Agent and
Arranger.
*(10)(i) Severance Agreement dated June 10, 2002 between RCM
Technologies, Inc. and Leon Kopyt.
33
PART IV (CONTINUED)
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(CONTINUED)
(c) Exhibits (Continued)
* (10)(j) Exhibit A To Severance Agreement General Release.
(10)(k) Amendment And Modification to Amended And Restated Loan and
Security Agreement dated December 30, 2002, between RCM
Technologies, Inc. and all of its Subsidiaries and Citizens Bank
of Pennsylvania as Administrative Agent and Arranger.
(10)(l) Second Amendment And Modification to Amended And Restated Loan and
Security Agreement dated February 26, 2003, between RCM
Technologies, Inc. and all of its Subsidiaries and Citizens Bank
of Pennsylvania as Administrative Agent and Arranger.
(10)(m) Third Amendment And Modification to Amended And Restated Loan and
Security Agreement dated October 1, 2003, between RCM
Technologies, Inc. and all of its Subsidiaries and Citizens Bank
of Pennsylvania as Administrative Agent and Arranger.
(10)(n) Fourth Amendment And Modification to Amended And Restated Loan and
Security Agreement dated July 23, 2004, between RCM Technologies,
Inc. and all of its Subsidiaries and Citizens Bank of Pennsylvania
as Administrative Agent and Arranger.
* (10)(o) Compensation Arrangements for Named Executive Officers.
(Filed herein)
* (10)(p) Compensation Arrangements for Directors
(Filed herein)
(11) Computation of Earnings (loss) share.
(21) Subsidiaries of the Registrant.
(23) Consent of Grant Thornton LLP.
31.1 Certifications of Chief Executive Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certifications of Chief Financial Officer Required by
Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 Certifications of Chief Executive Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended.
(This exhibit shall not be deemed "filed" for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.)
32.2 Certifications of Chief Financial Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended.
(This exhibit shall not be deemed "filed" for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, or
otherwise subject to the liability of that section. Further, this
exhibit shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended.)
* Constitutes a management contract or compensatory plan or arrangement.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RCM Technologies, Inc.
Date: March 9, 2005 By:/s/ Leon Kopyt
---------------
Leon Kopyt
Chairman, President, Chief Executive Officer
and Director
Date: March 9, 2005 By:/s/ Stanton Remer
-----------------
Stanton Remer
Executive Vice President,
Chief Financial Officer, Treasurer,
Secretary and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated. This report has been signed below by
Date: March 9, 2005 /s/ Leon Kopyt
--------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: March 9, 2005 /s/ Stanton Remer
-------------------------------
Stanton Remer
Executive Vice President, Chief Financial Officer,
Treasurer, Secretary
(Principal Financial and Accounting Officer) and Director
Date: March 9, 2005 /s/ Norman S. Berson
----------------------------
Norman S. Berson
Director
Date: March 9, 2005 /s/ Robert B. Kerr
-------------------------------
Robert B. Kerr
Director
Date: March 9, 2005 /s/ David Gilfor
-----------------------------
David Gilfor
Director
35
F-1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Consolidated Balance Sheets, January 1, 2005 and December 27, 2003 F-2
Consolidated Statements of Operations,
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002 F-4
Consolidated Statements of Changes in Shareholders' Equity and
Consolidated Statements of Comprehensive Income (Loss),
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002 F-6
Consolidated Statements of Cash Flows,
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002 F-7
Notes to Consolidated Financial Statements F-9
Report of Independent Registered Public Accounting Firm F-30
Schedules I and II F-31
F-1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 2005 and December 27, 2003
ASSETS
January 1, December 27,
2005 2003
--------------- ---------------
Current assets
Cash and cash equivalents $2,401,794 $5,152,499
Accounts receivable, net of allowance for doubtful accounts
of $1,862,000 and $1,854,000 in fiscal 2004
and 2003, respectively 40,535,949 36,269,369
Restricted cash 8,295,625 8,295,625
Prepaid expenses and other current assets 1,503,477 2,099,206
Deferred tax assets 4,964,007 4,598,373
--------------- ---------------
Total current assets 57,700,852 56,415,072
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 9,572,546 9,564,939
Less: accumulated depreciation and amortization 5,153,519 4,435,164
--------------- ---------------
4,419,027 5,129,775
--------------- ---------------
Other assets
Deposits 138,158 82,958
Goodwill 35,842,896 38,007,233
Intangible assets, net of accumulated amortization
of $310,800 and $242,249 in fiscal 2004
and 2003, respectively 68,551
--------------- ---------------
35,981,054 38,158,742
--------------- ---------------
Total assets $98,100,933 $99,703,589
=============== ===============
F-2
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
January 1, 2005 and December 27, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY
January 1, December 27,
2005 2003
--------------- ---------------
Current liabilities
Line of credit $4,900,000 $7,300,000
Accounts payable and accrued expenses 12,242,977 15,574,036
Accrued payroll 6,766,586 5,456,330
Payroll and withheld taxes 1,099,856 177,030
Income taxes payable 3,146,478 4,026,097
--------------- ---------------
Total current liabilities 28,155,897 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; 11,383,470 and
11,285,279 shares issued and outstanding in fiscal
2004 and 2003, respectively 569,173 564,264
Accumulated other comprehensive income 736,128 556,795
Additional paid-in capital 98,290,719 97,906,888
Accumulated deficit (29,650,984) (31,857,851)
--------------- ---------------
69,945,036 67,170,096
--------------- ---------------
Total liabilities and shareholders' equity $98,100,933 $99,703,589
=============== ===============
F-3
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
January 1, December 27, December 28,
2005 2003 2002
--------------- -------------- ---------------
Revenues $169,277,490 $206,605,188 $186,650,616
Cost of services 128,303,645 162,010,502 139,985,755
--------------- -------------- ---------------
Gross profit 40,973,845 44,594,686 46,664,861
--------------- -------------- ---------------
Operating costs and expenses
Selling, general and administrative 34,330,392 32,557,953 33,320,034
Depreciation 1,149,991 1,192,293 1,258,323
Amortization 68,556 31,104 20,720
Compensation expense for stock option tender offer 6,691,590
Impairment of goodwill 2,164,338 29,990,099
Litigation charge 9,717,663
--------------- -------------- ---------------
37,713,277 40,472,940 74,306,839
--------------- -------------- ---------------
Operating income (loss) 3,260,568 4,121,746 (27,641,978 )
--------------- -------------- ---------------
Other (expenses) income
Interest expense, net of interest income (474,420) (314,491) (171,900)
Gain on foreign currency transactions 24,954 132,296 16,967
--------------- -------------- ---------------
(449,466) (182,195) (154,933)
--------------- -------------- ---------------
Income (loss) from continuing operations
before income taxes 2,811,102 3,939,551 (27,796,911)
Income tax expense (benefit) 604,235 1,160,398 (4,628,046)
--------------- -------------- ---------------
Income (loss) from continuing operations 2,206,867 2,779,153 (23,168,865)
Loss from discontinued operations
net of taxes of $644,000 (967,065)
--------------- -------------- ---------------
Net income (loss) $2,206,867 $2,779,153 ($24,135,930)
=============== ============== ===============
F-4
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
January 1, December 27, December 28,
2005 2003 2002
------------- -------------- --------------
Basic earnings (loss) per share
Income (loss) from continuing operations $.19 $.26 ($2.19)
Loss from discontinued operations ( .09)
---- ---- ----------
Net income (loss) $.19 $.26 ($2.28 )
==== ==== ======
Weighted average number of common shares
outstanding 11,325,626 10,716,179 10,585,503
Diluted earnings (loss) per share
Income (loss) from continuing operations $.19 $.26 ($2.19)
Loss from discontinued operations ( .09)
---- ---- ----------
Net income (loss) $.19 $.26 ($2.28)
==== ==== ======
Weighted average number of common and common equivalent shares outstanding
(includes dilutive securities relating to
options of 354,186 in 2004 and 180,126 in 2003) 11,679,812 10,896,305 10,585,503
F-5
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
Accumulated Retained
Other Additional Earnings
Common Stock Comprehensive Paid-in (Accumulated
------------
Shares Amount Income (Loss) Capital Deficit) Total
------ ------ ------------- ------- -------- -----
Balance, December 29, 2001 10,571,761 $528,588 ($484,283 ) $93,746,569 ($10,501,074 ) $83,289,800
Issuance of stock under employee
stock purchase plan 53,410 2,671 187,885 190,556
Exercise of stock options 905 45 1,484 1,529
Translation adjustment (99,801 ) (99,801)
Net loss (24,135,930 ) (24,135,930)
------ ----- ------- ---------- ---------- -----------
Balance, December 28, 2002 10,626,076 531,304 (584,084 ) 93,935,938 (34,637,004 ) 59,246,154
Issuance of stock under employee
stock purchase plan 39,926 1,996 129,419 131,415
Exercise of stock options 11,500 575 42,925 43.500
Issuance of restricted shares
pursuant to stock option tender 607,777 30,389 3,798,606 3,828,995
offer
Translation adjustment 1,140,879 1,140,879
Net income 2,779,153 2,779,153
------- ------ --------- --------- ---------- ---------
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 37,107 1,855 174,365 176,220
Exercise of stock options 61,084 3,054 209,466 212,520
Translation adjustment 179,333 179,333
Net income 2,206,867 2,206,867
---------- ------- -------- ---------- --------- ---------
Balance, January 1, 2005 11,383,470 $569,173 $736,128 $98,290,719 ($29,650,984) $69,945,036
========== ======== ======== =========== =========== ===========
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
January 1, December 27, December 28,
2005 2003 2002
--------------- --------------- ------------------
Net income (loss) $2,206,867 $2,779,153 ($24,135,930 )
Foreign currency translation
adjustment 179,333 1,140,879 (99,801 )
--------------- --------------- ------------------
Comprehensive income (loss) $2,386,200 $3,920,032 ($24,235,731 )
=============== =============== ==================
F-6
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
January 1, December 27, December 28,
2005 2003 2002
-------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $2,206,867 $2,779,153 ($24,135,930 )
-------------- -------------- --------------
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Loss on discontinued operations 967,065
Depreciation and amortization 1,218,547 1,223,397 1,279,043
Provision for allowances on accounts
receivable 8,000 305,000 (246,000 )
Recognition of noncash portion of
compensation expense for stock
tender offer 3,828,995
Goodwill impairment 2,164,338 29,990,099
Deferred tax (365,634 ) (308,106 ) 2,022,694
Changes in assets and liabilities:
Accounts receivable (4,274,580 ) (4,820,435 ) 9,666,894
Income tax refund receivable 3,766,585 3,043,508
Restricted cash (8,295,625 )
Prepaid expenses and other current )
assets 595,726 536,098 (774,602
Accounts payable and accrued expenses (3,331,059 ) 845,307 6,074,855
Accrued payroll 1,310,255 1,093,306 (774,314 )
Payroll and withheld taxes 922,826 (16,820 ) (181,934 )
Income taxes payable (879,619 ) 1,956,518 3,578,189
-------------- -------------- --------------
Total adjustments (2,631,200 ) 114,220 54,645,497
-------------- -------------- --------------
Net cash (used in) provided by operating
activities ($424,333 ) $2,893,373 $30,509,567
-------------- -------------- --------------
F-7
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
January 1, December 27, December 28,
2005 2003 2002
--------------- -------------- --------------
Cash flows from investing activities:
Proceeds on sale of reporting unit $100,000
Property and equipment acquired ($439,246 ) ($431,816 ) (626,978 )
(Increase) decrease in deposits (55,200 ) 3,632 89,101
Contingent consideration (1,353,638 ) (5,528,563 )
--------------- -------------- --------------
Net cash used in investing activities (494,446 ) (1,781,822 ) (5,966,440 )
--------------- -------------- --------------
Cash flows from financing activities:
Net repayments of line of credit (2,400,000 ) (120,000 ) (24,080,000 )
Sale of stock for employee stock purchase plan 176,220 131,415 190,556
Exercise of stock options 212,520 43,500 1,529
--------------- -------------- --------------
Net cash (used in) provided by financing
activities (2,011,260 ) 54,915 (23,887,915 )
--------------- -------------- --------------
Effect of exchange rate changes on cash
and cash equivalents 179,334 1,140,879 (99,801 )
--------------- -------------- --------------
Net (decrease) increase in cash
and cash equivalents (2,750,705 ) 2,307,345 555,411
Cash and cash equivalents at beginning of year 5,152,499 2,845,154 2,289,743
--------------- -------------- --------------
Cash and cash equivalents at end of year $2,401,794 $5,152,499 $2,845,154
=============== ============== ==============
Supplemental cash flow information:
Cash paid for:
Interest $201,101 $244,727 $835,221
Income taxes (refund) 1,753,251 (3,951,320 ) (12,164,528 )
Acquisitions:
Fair value of assets acquired, including
contingent consideration payments 1,353,638 5,528,563
--------------- -------------- --------------
Cash paid, net of cash acquired $1,353,638 $5,528,563
=============== ============== ==============
F-8
The accompanying notes are an integral part of
these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
RCM Technologies is a premier provider of business and technology solutions
designed to enhance and maximize the operational performance of its
customers through the adaptation and deployment of advanced information
technology and engineering services. RCM's offices are located in major
metropolitan centers throughout North America.
The consolidated financial statements are comprised of the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of the
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
Fiscal Periods
The reporting period for the Company is the Saturday closest to the last
day in December. Fiscal year 2004 represents 53 weeks ended January 1,
2005. Fiscal years 2003 and 2002 represent the 52 weeks ended December 27,
2003 and December 28, 2002, respectively. The Company's consolidated
financial statements have historically referred to fiscal years as ending
on December 31. Differences between the Company's fiscal year and a
calendar year have been immaterial. References to years in this annual
report relate to fiscal years rather than calendar years.
Cash and Cash Equivalents
The Company considers its holdings of highly liquid money-market
instruments to be cash equivalents if the securities mature within 90 days
from the date of acquisition. These investments are carried at cost, which
approximates fair value.
Fair Value of Financial Instruments
The Company's carrying value of financial instruments approximates fair
value because of the nature and characteristics of its financial
instruments. The Company does not have any off-balance sheet financial
instruments. The Company does not have derivative products in place to
manage risks related to foreign currency fluctuations for its foreign
operations or for interest rate changes.
Allowance for Doubtful Accounts
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.
F-9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line method at rates calculated to provide for retirement of
assets at the end of their estimated useful lives. The annual rates are 20%
for computer hardware and software as well as furniture and office
equipment. Leasehold improvements are amortized over the shorter of the
estimated life of the asset or the lease term.
Goodwill
The net assets of businesses acquired, which are accounted for as
purchases, have been reflected at their fair values at dates of
acquisition. The excess of acquisition costs over such net assets is
reflected in the consolidated balance sheets as goodwill. Goodwill at
January 1, 2005 and December 27, 2003 was $35,843,000 and $38,007,000.
The Company performed an impairment review in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 142
for the fiscal years 2004 and 2003 and 2002. During the fourth quarters of
fiscal years 2004 and 2002, the reviews indicated that there were
impairments of value, which resulted in a $2.2 million and $30.0 million
charge to expense for the fiscal years ended January 1, 2005 and December
28, 2002, respectively, in order to properly reflect the appropriate
carrying value of goodwill. The results of the 2003 impairment testing
indicated no impairment of goodwill.
Software
In accordance with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use," certain costs related to
the development or purchase of internal-use software are capitalized and
amortized over the estimated useful life of the software. During the years
ended January 1, 2005, December 27, 2003 and December 28, 2002, the Company
capitalized approximately $226,000, $114,000 and $287,000, respectively, of
software costs in accordance with SOP 98-1.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes," which requires an asset and liability
approach of accounting for income taxes. SFAS 109 requires assessment of
the likelihood of realizing benefits associated with deferred tax assets
for purposes of determining whether a valuation allowance is needed for
such deferred tax assets. The Company and its wholly owned U.S.
subsidiaries file a consolidated federal income tax return.
Revenue Recognition
The Company derives its revenues from several sources. All of the Company's
segments perform staffing services. The Company's Professional Engineering
Services and Information Technology Services segments also perform project
services. The Information Technology Services segment also derives revenue
from permanent placement fees.
F-10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (Continued)
Project Services - The Company recognizes revenues in accordance with the
Securities and Exchange Commission, Staff Accounting Bulletin (SAB) Number
104, "Revenue Recognition." SAB 104 clarifies application of U.S. generally
accepted accounting principles to revenue transactions. 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 provided to the customer and costs are incurred using
its employees. The Company, from time to time, enters into contracts
requiring the completion of specific deliverables. The Company recognizes
revenue on these deliverables at the time the client accepts and approves
the deliverables. 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.
Provision for contract losses, if any, is made in the period such losses
are determined. Expenses related to contracts that extend beyond a 12-month
period are charged to Cost of Services as incurred.
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 Services - The Company earns permanent placement fees
from providing permanent placement services. Fees for placements are
recognized at the time the candidate commences employment. The Company
guarantees its permanent placements on a prorated 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 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.
Concentration
During 2004, the Company's largest customer accounted for 7.4% of the
Company's revenues. At January 1, 2005 the accounts receivable due from the
largest customer was $7.9 million. The Company's five and ten largest
customers accounted for approximately 25.4% and 36.9%, respectively, of the
Company's revenues for 2004.
During 2003, the Company's largest customer accounted for 22% of the
Company's revenues. At December 27, 2003 the accounts receivable due from
the largest customer was $1.7 million. The Company's five and ten largest
customers accounted for approximately 42% and 52%, respectively, of the
Company's revenues for 2003. However, of the $45.1 million in revenues from
the Company's largest customer, $24.1 million represented "Pass-Through"
revenues where the Company acted as a general contractor and subcontracted
$24.1 million of business at a gross margin of approximately 1.2%. If the
Company adjusted for these pass-through revenues, its largest customer
would have accounted for 11.5% of total revenues. Similarly, the Company's
five and ten largest customers would have accounted for 34.5% and 45.6%,
respectively.
F-11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Foreign Currency Translation
The Company's foreign subsidiary uses Canadian currency as the functional
currency. Net assets are translated at year-end rates while revenues and
expenses are translated at average exchange rates. Adjustments resulting
from these translations are reflected in "Accumulated Other Comprehensive
Income (Loss)" in shareholders' equity. Gains and losses arising from
foreign currency transactions are reflected in the consolidated statements
of operations.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and foreign
currency translation adjustments.
Per Share Data
Basic net income per share is calculated using the weighted-average number
of common shares outstanding during the period. Diluted net income per
share is calculated using the weighted-average number of common shares plus
dilutive potential common shares outstanding during the period. Potential
common shares consist of stock options that are computed using the treasury
stock method. Dilutive securities have not been included in the weighted
average shares used for the calculation of earnings per share in periods of
net loss because the effect of such securities would be anti-dilutive.
Because of the Company's capital structure, all reported earnings pertain
to common shareholders and no other assumed adjustments are necessary.
The number of common shares used to calculate basic and diluted earnings
per share for 2004, 2003 and 2002 was determined as follows:
Year Ended Year Ended Year Ended
January 1, December December
2005 27, 2003 28, 2002
--------------- ------------- -------------
Basic average shares outstanding 11,325,626 10,716,179 10,585,503
Dilutive effect of stock options 354,186 180,126
--------------- ------------- -------------
Dilutive shares 11,679,812 10,896,305 10,585,503
=============== ============= =============
Options to purchase 1,183,583 shares of common stock at prices ranging from
$3.00 to $7.04 per share were outstanding as of January 1, 2005. There were
84,000 options not included in the calculation of common stock equivalents
because the exercise price of the options exceeded the average market price
for the year ended January 1, 2005.
Options to purchase 1,214,916 shares of common stock at prices ranging from
$3.00 to $11.93 per share were outstanding as of December 27, 2003. There
were 428,000 options not included in the calculation of common stock
equivalents because the exercise price of the options exceeded the average
market price for the year ended December 31, 2003.
Options to purchase 2,474,214 shares of common stock at prices ranging from
$3.00 to $15.31 per share were outstanding as of December 28, 2002, but
were not included in the computation of diluted EPS because of net loss
incurred in 2002.
F-12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 January 1, 2005, the Company has four stock-based employee compensation
plans. The Company accounts for the plans under the recognition and
measurement principles of APB No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Stock-based employee compensation
costs are not reflected in net earnings, as all options granted under the
plan had an exercise price equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the
effect on net earnings and earnings per share if the Company had applied
the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation (in thousands, except per share amounts).
January 1, December 27, December 28,
2005 2003 2002
------------ --------------- ---------------
Net income (loss), as reported $2,207 $2,779 ($24,135 )
Less: stock-based compensation costs
determined under fair value based
method for all awards, net of
related tax 321 500 898
Net income (loss), pro forma $1,886 $2,279 ($25,033 )
Income (loss) per share of common stock-basic:
As reported $.19 $.26 ($2.28 )
Pro forma $.16 $.21 ($2.36 )
Income (loss) per share of common stock-diluted:
As reported $.19 $.26 ($2.28 )
Pro forma $.16 $.21 ($2.36 )
F-13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended Jan
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 weighted
average fair value of options granted using Black-Scholes Option Pricing
Model during 2004, 2003, and 2002 has been estimated using the following
assumptions:
Year Ended Year Ended Year Ended
January 1, December 27, December 28,
2005 2003 2002
---------------- ---------------------------------
Risk-free interest rate 3.74% 3.18% 4.06%
Expected life of option 5 years 5 years 5 years
Expected stock price volatility 60% 66% 49%
Expected dividend yield - - -
Weighted-average per share
value granted $2.65 $2.29 $2.18
Advertising Costs
Advertising costs are expensed as incurred. Total advertising expense was
$667,000, $595,000, and $576,000 for the years ended January 1, 2005,
December 27, 2003 and December 28, 2002, respectively.
Use of Estimates and Uncertainties
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
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 is effective immediately for
VIE created after January 31, 2003 and to VIE 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 VIE 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.
F-14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards (Continued)
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123 (revised 2004), Share-Based Payment, which addresses the accounting for
employee stock options. SFAS No. 123R eliminates the ability to account for
shared-based compensation transactions using APB 25 and generally would
require instead that such transactions be accounted for using a fair
value-based method. SFAS No. 123R also requires that tax benefits
associated with these share-based payments be classified as financing
activities in the statement of cash flow rather than operating activities
as currently permitted. SFAS No. 123R becomes effective for interim or
annual periods beginning after June 15, 2005. Accordingly, the Company is
required to apply SFAS No. 123R beginning fiscal quarter ended October 1,
2005. SFAS No. 123R offers alternative methods of adopting this final rule.
At the present time, the Company has not yet determined which alternative
method it will use.
2. DISCONTINUED OPERATIONS
In August 2002, the Company sold a reporting unit in the commercial
services business segment for $100,000, which resulted in a loss of $1.6
million ($967,000 net of income tax benefit of $644,000) for the year ended
December 28, 2002, or $.09 per share. In accordance with SFAS 144, the loss
is presented as a loss from discontinued operations in the statement of
operations for the year in the period ended December 28, 2002.
3. ACQUISITIONS
In connection with certain acquisitions, the Company was obligated to pay
contingent consideration to the selling shareholders upon the acquired
businesses achieving certain earnings targets over periods ranging from 2-3
years. The Deferred Consideration and Earnouts, when paid, were recorded as
additional purchase consideration and added to goodwill on the consolidated
balance sheet. The deferred consideration and earnout payments made for
businesses acquired before 2001 were made in years following the year in
which the acquisitions occurred. Cash used in investing activities in the
Consolidated Statements of Cash Flows reflects the year in which the cash
outlay occurred.
As of January 1, 2005, the Company does not have any future contingent
obligations for earnout consideration.
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
January 1, December 27,
2005 2003
--------------- ----------------
Equipment and furniture $1,967,137 $2,154,422
Computers and systems 7,007,352 6,843,934
Leasehold improvements 598,057 566,583
--------------- ----------------
9,572,546 9,564,939
Less: accumulated depreciation and
amortization 5,153,519 4,435,164
--------------- ----------------
$4,419,027 $5,129,775
=============== ================
The Company writes off fully depreciatedassets each year.In fiscal 2004
and 2003 the write offs were $438,000 and $117,000, respectively.
F-15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
5. GOODWILL AND OTHER INTANGIBLES
SFAS 142 requires the Company to perform a goodwill impairment test on at
least an annual basis. For purposes of its 2004, 2003 and 2002 annual
impairment testing, the Company determined the fair value of its reporting
units using relative market multiples for comparable businesses, as of
November 30, 2004, 2003 and 2002, respectively as well as forecasted
operating income and cash flows of each reporting unit as well prospects
for future recovery. The analysis revealed that goodwill, amounting to
approximately $2.2 million and $30.0 million ($24.7 million after taxes)
had been impaired for the fiscal years ended January 1, 2005 and December
28, 2002, respectively and therefore, would not be recoverable through
future profitable operations. These impairment charges were incurred to
bring the carrying value of goodwill associated with each reporting unit in
line with estimated future value. The aforementioned impairments were in
reporting units within the Company's Information Technology business
segment. The results of the 2003 impairment testing indicated no impairment
to goodwill. There can be no assurance that future tests of goodwill
impairment will not result in further impairment charges.
The changes in the carrying amount of goodwill for the years ended January
1, 2005 and December 27, 2003 are as follows (in thousands):
Information Professional Commercial
Technology Engineering Services Total
-------------- ------------- ------------- -------------
Balance as of December 28, 2002 $29,126 $7,528 $36,654
Goodwill acquired during the year 1,353 1,353
-------------- ------------- ------------- -------------
Balance as of December 27, 2003 30,479 7,528 38,007
Goodwill impairment losses (2,164 ) (2,164 )
-------------- ------------- ------------- -------------
Balance as of January 1, 2005 $28,315 $7,528 $35,843
============== ============= ============= =============
The following table reflects the components of intangible assets, excluding
goodwill (in thousands):
January 1, 2005 December 27, 2003
-------------------------------- ---------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets
Non-compete agreement $311 $311 $311 $242
==== ==== ==== ====
6. ACCOUNTS PAYABLE
Accounts payable and accrued expenses consist of the following at January
1, 2005 and December 27, 2003.
January 1, December 27,
2005 2003
--------------- ---------------
Accounts payable - trade $4,024,164 $7,216,885
Reserve for litigation 8,218,813 8,357,151
--------------- ---------------
Total $12,242,977 $15,574,036
=============== ===============
F-16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
7. 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, which provides for a $25.0 million Revolving Credit Facility (the
"Revolving Credit Facility"). Availability under the Revolving Credit
Facility is based on 80% of the aggregate amount of accounts receivable as
to which not more than 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 its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants, such as restrictions on the
Company's ability to pay dividends.
The Revolving Credit Facility expires in August 2006. The weighted average
interest rates under the Revolving Credit Facility for the years ended
January 1, 2005 and December 27, 2003 were 3.99% and 3.67%, respectively.
The amounts outstanding under the Revolving Credit Facility at January 1,
2005 and December 27, 2003 were $4.9 million and $7.3 million,
respectively. At January 1, 2005, the Company had availability for
additional borrowing under the Revolving Credit Facility of $20.0 million.
8. SHAREHOLDERS' EQUITY
Common Shares Reserved
Shares of unissued common stock were reserved for the following purposes:
January 1, December 27,
2005 2003
------------- ---------------
Exercise of options outstanding 1,183,583 1,214,916
Future grants of options 994,236 1,074,287
------------- ---------------
Total 2,177,819 2,289,203
============= ===============
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, provided for the issuance of up to 500,000 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 were intended to be incentive stock
options pursuant to Section 422A of the Internal Revenue Code. The option
terms were not permitted to exceed ten years and the exercise price was not
permitted to 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
determined the vesting period at the time of grant for each of these
options. At January 1, 2005, options to purchase 87,855 shares of common
stock were outstanding.
F-17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
8. SHAREHOLDERS' EQUITY (CONTINUED)
Incentive Stock Option Plans (Continued)
1994 Non-employee Directors Stock Option Plan (the 1994 Plan)
The 1994 Plan, approved by the Company's stockholders in May 1994, and
amended in April 1998, provided 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 granted under the 1994
Plan 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. Options granted under the 1994 Plan terminate when an optionee
ceases to be a Director of the Company. At January 1, 2005, 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 January
1, 2005, options to purchase 922,980 shares of common stock are available
for future grants, and options to purchase 245,645 shares of common stock
were outstanding.
2000 Employee Stock Incentive Plan (the 2000 Plan)
The 2000 Plan, approved by the Company's stockholders in April 2001,
provides for issuance of up to 1,500,000 shares of the Company's common
stock to officers and key employees of the Company and its subsidiaries or
to consultants and advisors utilized by the Company. The Compensation
Committee of the Board of Directors may award incentive stock options or
non-qualified stock options, as well as stock appreciation rights, and
determines the vesting period at the time of grant. At January 1, 2005,
options to purchase 70,556 shares of common stock are available for future
grants, and options to purchase 780,083 shares of common stock were
outstanding.
Transactions related to all stock options are as follows:
Year Weighted- Year Weighted- Year Weighted-
Ended Average Ended Average Ended Average
January 1, Exercise December 27, Exercise December 28, Exercise
2005 Price 2003 Price 2002 Price
--------------- ------------- --------------- ------------ --------------- -------------
Outstanding options 1,214,916 $3.85 2,474,214 $7.15 2,415,780 $7.53
At beginning of year
Granted 149,000 4.86 220,000 3.91 325,500 4.57
Cancellations (119,249 ) 3.49 (1,467,798 ) 9.51 (266,161 ) 6.82
Exercised (61,084 ) 3.48 (11,500 ) 6.93 (905 ) 3.06
--------------- --------------- ---------------
Outstanding options 1,183,583 $4.03 1,214,916 $3.85 2,474,214 $7.15
At end of year
=============== =============== ===============
Exercisable options
At end of year 766,500 432,500 1,663,715
=============== =============== ===============
Option grant price $3.00 $3.00 $3.00
Per share to $7.04 to $11.93 to $15.31
F-18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
8. SHAREHOLDERS' EQUITY (CONTINUED)
Incentive Stock Option Plans (Continued)
The following table summarizes information about stock options outstanding
at January 1, 2005:
--------------- -----------------------------------------------------------------------------------
Weighted-Average
Range of Number of Remaining Weighted-Average
Exercise Outstanding Contractual Life Exercise Price
Prices Options
--------------- --------------------------------------------------------- -------------------------
$3.00 - $4.29 699,683 7.16 years $3.45
$4.70 - $7.04 483,900 6.77 years $4.87
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 year ended January 1, 2005, there were 37,107 shares issued
under the Purchase Plan for net proceeds of $176,220. As of January 1,
2005, there were 297,899 shares available for issuance under the Purchase
Plan.
9. STOCK OPTION TENDER OFFER
In order to enhance long-term value for the shareholders of the Company,
reduce the number of options outstanding and improve the Company's ability
to retain and provide incentives to employees and directors, on September
30, 2003, the Company made a tender offer to exchange stock options with a
strike price of $7.00 or greater for shares of restricted stock and cash.
Upon expiration of the tender offer on November 14, 2003, option holders
participating in the tender offer received in the aggregate 607,777 shares
of restricted stock having an aggregate value of $3.8 million ($6.30 per
share) as well as cash consideration of $2.6 million, which was equal to
67% of the value of the restricted common stock. Participants surrendered
options to purchase 1,327,973 shares of common stock, which represented
100% of all options eligible to be surrendered. The Company recorded a
charge of $6.7 million ($4.0 million after-tax) to compensation expense in
the fourth quarter of 2003 due to the tender offer.
Provided the Company has U.S. Federal taxable income in future periods, the
exchange offer will be approximately cash flow neutral to the Company as
the combined tax benefits (both the value of the restricted common stock
issued and the cash consideration paid are tax deductible expenses) will be
approximately equal the actual cash consideration paid to employees and
directors.
All shares of restricted stock issued pursuant to the tender offer were
fully vested on the stock grant date, but are subject to transfer
restrictions. The transfer restrictions lapsed on the first anniversary of
the stock grant date, November 14, 2004.
F-19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
10. RETIREMENT PLANS
Profit Sharing Plan
The Company maintains a 401(k) profit sharing plan for the benefit of
eligible employees. The 401(k) plan includes a cash or deferred arrangement
pursuant to Section 401(k) of the Internal Revenue Code sponsored by the
Company to provide eligible employees an opportunity to defer compensation
and have such deferred amounts contributed to the 401(k) plan on a pre-tax
basis, subject to certain limitations. The Company at the discretion of the
Board of Directors may make contributions of cash to match deferrals of
compensation by participants. Contributions charged to operations by the
Company for years ended January 1, 2005, December 27, 2003 and December 28,
2002 were $111,000, $91,000 and $0, respectively.
Nonqualified Defined Compensation Plan
The Company implemented with shareholder approval a nonqualified deferred
compensation plan, effective January 1, 2002, for officers and certain
other management employees. The plan allows for compensation deferrals for
its participants and a discretionary company contribution, subject to
approval of the Board of Directors. As of January 1, 2005, the fair value
of the assets held in trust under the deferred compensation plan was
$677,194. The Board of Directors approved the termination of the plan as of
January 14, 2005 and directed the distribution of the assets in the plan to
the participants. The final distribution of the plan assets of $661,981, as
of January 14, 2005, was made on February 4, 2005.
11. COMMITMENTS
Employment Agreement
The Company has an employment agreement with its Chief Executive Officer
and President, Leon Kopyt ("Mr. Kopyt"), which currently provides for an
annual base salary of $475,000 and other customary benefits. In addition,
the agreement provides that Mr. Kopyt's annual bonus is based on EBITDA,
defined as earnings before interest, taxes, depreciation and amortization.
As of January 1, 2005, the agreement expires on February 28, 2008. The
agreement is for a rolling term of three years, which automatically extends
each year for an additional one-year period on February 28 of each year.
The employment agreement is terminable by the Company upon Mr. Kopyt's
death or disability, or for "good and severance cause", as defined in the
agreement.
Termination Benefits Agreement
The Company is party to a Termination Benefits Agreement with its Chief
Executive Officer, Leon Kopyt ("Mr. Kopyt") amended and restated as of
March 18, 1997 (the "Benefits Agreement"). Pursuant to the Benefits
Agreement, following a Change in Control (as defined therein), the
remaining term of Mr. Kopyt's employment is extended for five years (the
"Extended Term"). If Mr. Kopyt's employment is terminated thereafter by the
Company other than for cause, or by Mr. Kopyt for good reason (including,
among other things, a material change in Mr. Kopyt's salary, title,
reporting responsibilities or a change in office location which requires
Mr. Kopyt to relocate), then the following provisions take effect: the
Company is obligated to pay Mr. Kopyt a lump sum equal to his salary and
bonus for the remainder of the Extended Term; and the Company shall be
obligated to pay to Mr. Kopyt the amount of any excise tax associated with
the benefits provided to Mr. Kopyt under the Benefits Agreement. If such a
termination had taken place as of January 1, 2005, Mr. Kopyt would have
been entitled to cash payments of approximately $3.2 million (representing
salary and excise tax payments).
F-20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
11. COMMITMENTS (CONTINUED)
Severance Agreement
The Company is party to a Severance Agreement with Mr. Kopyt, dated June
10, 2002, (the "Severance Agreement"). The agreement provides for certain
payments to be made to Mr. Kopyt and for the continuation of Mr. Kopyt's
employee benefits for a specified time after his service with the Company
is terminated other than "for cause," as defined in the Severance
Agreement. Amounts payable to Mr. Kopyt under the Severance Agreement would
be offset and reduced by any amounts received by Mr. Kopyt after his
termination of employment under his current employment and termination
benefits agreements, which are supplemented and not superseded by the
Severance Agreement. If Mr. Kopyt had been terminated as of January 1,
2005, then under the terms of the Severance Agreement, and after offsetting
any amounts that would have been received under his current employment and
termination benefits agreements, he would have been entitled to cash
payments of approximately $1.3 million, inclusive of employee benefits.
Operating Leases
The Company leases office facilities and various equipment under
non-cancelable leases expiring at various dates through June 2012. Certain
leases are subject to escalation clauses based upon changes in various
factors. The minimum future annual operating lease commitments for leases
with non-cancelable terms in excess of one year, exclusive of operating
escalation charges, are as follows:
Year ending December 31, Amount
----------------------------- -----------------
2005 $2,455,000
2006 1,919,000
2007 1,311,000
2008 903,000
2009 887,000
Thereafter 2,078,000
-----------------
Total $9,553,000
=================
Rent expense for the fiscal years ended January 1, 2005, December 27, 2003
and December 28, 2002 was $3,671,000, $2,666,000 and $3,245,000,
respectively.
The Company subleases space at various office locations under cancelable
lease agreements. During fiscal 2004, 2003 and 2002 revenues of
approximately $109,000, $279,000 and $105,000, respectively, were
recognized under these leasing arrangements.
12. RELATED PARTY TRANSACTIONS
A director of the Company is a shareholder in a law firm that has rendered
various legal services to the Company. Fees paid to the law firm have not
been significant.
F-21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
13. INCOME TAXES
The components of income tax expense (credit) are as follows:
Year Ended Year Ended Year Ended
January 1, December 27, December 28,
2005 2003 2002
----------------- ----------------- ----------------
Current
Federal $30,000
Foreign 939,869 $1,050,056 $974,073
----------------- ----------------- ----------------
969,869 1,050,056 974,073
----------------- ----------------- ----------------
Deferred
Federal (310,789) 93,791 (6,246,119)
State and local (54,845) 16,551
----------------- ----------------- ----------------
(365,634) 110,342 (6,246,119)
----------------- ----------------- ----------------
Total $604,235 $1,160,398 ($5,272,046)
================= ================= ================
The income tax provisions reconciled to the tax computed at the statutory
Federal rate was:
2005 2003 2002
-------------- ------------- -------------
Tax at statutory rate (credit) 34.0% 34.0% (34.0)%
State income taxes, net of Federal
income tax benefit 6.6
Foreign income tax effect 1.7 .5 3.3
Deductible amortization (8.4) (5.9)
Change in valuation allowance (26.5)
Non-deductible charges 11.3 15.7
Other, net 2.8 .9 (2.9)
-------------- ------------- -------------
Total income tax expense 21.5% 29.5% (17.9)%
============== ============= =============
At January 1, 2005 and December 27, 2003, deferred tax assets and
liabilities consist of the following:
Deferred tax assets: 2005 2003
---------------- -----------------
Net operating loss carryforward $982,503 $936,611
Allowance for doubtful accounts 744,800 701,330
Reserves and accruals 149,246 211,762
Litigation reserve 3,219,560 3,450,000
---------------- -----------------
5,096,109 5,299,703
Deferred tax liabilities:
Prepaid expense benefit (132,102)
---------------- -----------------
4,964,007 5,299,703
Valuation allowance (701,330)
---------------- -----------------
Net deferred tax assets $4,964,007 $4,598,373
================ =================
F-22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
13. INCOME TAXES (CONTINUED)
Prior to year ended December 27, 2003, the Company has had two consecutive
loss years. For each of the years in the two-year period ended January 1,
2005, the Company has had profitable years. Therefore, the Company has
determined that a valuation allowance for deferred tax assets is no longer
required as of January 1, 2005.
At January 1, 2005, the Company had a net operating loss carryforward
("NOL") for U.S. Federal Income Tax purposes of approximately $2.5 million.
The Company can utilize the NOL to offset future U.S. consolidated federal
taxable income. In order to utilize the NOL in fiscal year 2005, the
Company would have to generate approximately $3.0 million of operating
income. The NOL amounts, if unused, would expire in the year 2022.
14. INTEREST EXPENSE, NET OF INTEREST INCOME
Interest expense, net of interest income consisted of the following:
January 1, December 27, December 28,
2005 2003 2002
------------- --------------- ----------------
Interest expense ($536,099) ($382,568) ($770,404)
Interest income 61,679 68,077 598,504
------------- --------------- ----------------
($474,420) ($314,491) ($171,900)
============= =============== ================
15. SEGMENT INFORMATION
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS 131"), which establishes standards for
companies to report information about operating segments, geographic areas
and major customers. The adoption of SFAS 131 has no effect on the
Company's consolidated financial position, consolidated results of
operations or liquidity. The accounting policies of each segment are the
same as those described in the summary of significant accounting policies
(see Note 1).
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling, general
and administrative expenses directly attributable to that segment as well
as charges for allocating corporate costs to each of the operating
segments. The following tables reflect the results of the segments
consistent with the Company's management system (in thousands):
F-23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
15. SEGMENT INFORMATION (CONTINUED)
Information Professional Commercial
Fiscal 2004 Technology Engineering Services Corporate Total
----------------- --------------- ---------------- -------------- -----------------
Revenue $92,907 $51,173 $25,198 $169,278
Operating expenses (1) 88,613 48,396 25,626 162,635
Impairment of goodwill 2,164 2,164
----------------- --------------- ---------------- --------------
EBITDA (loss) (1) (2) 2,130 2,827 (428) 4,479
Depreciation 628 407 115 1,150
Amortization of intangibles 20 43 5 68
----------------- --------------- ---------------- -------------- --------------
Operating income 1,482 2,327 (548) 3,261
Interest expense, net of
interest income 261 144 70 475
Gain on foreign currency
transactions (25) (25)
Income taxes (benefit) 262 475 (133) 604
----------------- --------------- ---------------- -------------- --------------
Net income $959 $1,733 ($485) $2,207
================= =============== ================ ============== ==============
Total assets $48,556 $23,275 $6,643 $19,627 $98,101
Capital expenditures $17 $44 $5 $373 $439
F-24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
15. SEGMENT INFORMATION (CONTINUED)
Information Professional Commercial
Fiscal 2003 Technology Engineering Services Corporate Total
--------------- ------------- -------------- ------------ -----------
Revenue $100,872 $86,696 $19,037 $206,605
Operating expenses (1) 93,116 82,838 18,614 194,568
Compensation expense
for stock option tender offer 500 486 89 5,617 6,692
--------------- ------------- -------------- ------------ ------------
EBITDA (loss) (1) (2) 7,256 3,372 334 (5,617 ) 5,345
Depreciation 595 526 71 1,192
Amortization of intangibles 13 15 3 31
--------------- ------------- -------------- ------------ ------------
Operating income 6,648 2,831 260 (5,617 ) 4,122
Interest expense, net of
interest income 153 132 29 314
Gain on foreign currency
transactions (132 ) (132 )
Income taxes (benefit) 1,914 834 68 (1,655 ) 1,161
--------------- ------------- -------------- ------------ ------------
Net income $4,581 $1,997 $163 ($3,962 ) $2,779
=============== ============= ============== ============ ============
Total assets $49,866 $21,330 $5,749 $22,759 $99,704
Capital expenditures $110 $156 $25 $141 $432
F-25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
15. SEGMENT INFORMATION (CONTINUED)
Information Professional Commercial
Fiscal 2002 Technology Engineering Services Corporate Total
------------- ------------- ------------- ----------- ------------
Revenue $111,270 $55,979 $19,402 $186,651
Operating expenses (1) 103,190 51,275 18,841 173,306
Unusual charge 9,718 9,718
Impairment of goodwill 29,990 29,990
------------- ------------- ------------- ----------- ------------
EBITDA (loss) (1) (2) (21,910 4,704 561 (9,718) (26,363)
Depreciation 793 393 72 1,258
Amortization of intangibles 17 4 21
------------- ------------- ------------- ----------- ------------
Operating income(loss)(1)(3) (22,720) 4,307 489 (9,718) (27,642)
Interest expense, net of
interest income 102 52 18 172
Gain on foreign currency
transactions (17 ) (17)
Loss on discontinued
operations 967 967
Income taxes (benefit) (2,848 ) 1,708 (184) (3,304) (4,628)
------------- ------------- ------------- ----------- ------------
Net income ($19,974 ) $2,564 ($312) ($6,414) ($24,136)
============= ============= ============= =========== ============
Total assets $46,375 $19,929 $4,913 $17,223 $88,440
Capital expenditures $101 $162 $364 $627
(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) The operating results of a reporting unit sold in August 2002 are
excluded from operating income of the Commercial Services Business
Segment for all periods presented.
F-26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
15. SEGMENT INFORMATION (CONTINUED)
The following reconciles consolidated operating loss to the Company's
pretax loss (in thousands):
January 1, December 27, December 28,
2005 2003 2002
----------------- --------------- ----------------
Consolidated operating income (loss) $3,261 $4,122 ($27,642)
Interest expense, net of interest income (475) (314) (172)
Gain on foreign currency transactions 25 132 17
----------------- --------------- ----------------
Consolidated pretax income (loss) from
continuing operations $2,811 $3,940 ($27,797)
================= =============== ================
The Company derives a majority of its revenue from companies headquartered
in the United States. In fiscal year 2002, two customers accounted for
12.2% and 6.6%, respectively, of the Company's revenues. During 2003, the
Company's largest customer accounted for 22% of the Company's revenues.
However, of the $45.1 million in 2003 revenues from that customer, $24.1
million represented "pass-through" revenues where the Company acted as a
general contractor. If the Company adjusted for these pass-through
revenues, its largest customer would have accounted for 11.5% of total
revenues. In fiscal year 2004, the Company's largest customer accounted for
7.4% of the Company's revenues. Revenues from Canadian operations for the
years ended January 1, 2005, December 27, 2003 and December 28, 2002 were
$20.0 million, $56.4 million and $31.1 million, respectively.
The Company is domiciled in the United States and its segments operate in
the United States and Canada. Revenues and fixed assets by geographic area
for the years ended January 1, 2005, December 27, 2003, and December 28,
2002 are as follows (in thousands):
January 1, December 27, December 28,
2005 2003 2002
---------------- ---------------- ----------------
Revenues
United States $149,247 $150,245 $155,586
Canada 20,030 56,360 31,065
---------------- ---------------- ----------------
$169,277 $206,605 $186,651
================ ================ ================
Fixed Assets
United States $4,210 $4,788 $5,403
Canada 209 342 487
---------------- ---------------- ----------------
$4,419 $5,130 $5,890
================ ================ ================
F-27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
16. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended January 1, 2005
Diluted
Gross Net Net Income (Loss)
Sales Profit Income (Loss) Per Share (a)
------------------- ----------------- ------------------ --------------------
1st Quarter $41,272,729 $10,027,438 $795,953 $.07
2nd Quarter 45,348,773 10,699,339 869,298 .08
3rd Quarter 40,933,476 9,963,938 765,514 .07
4th Quarter 41,722,512 10,283,130 (223,898 ) (.02)
------------------- ----------------- ------------------ --------------------
Total $169,277,490 $40,973,845 $2,206,867 $.19
=================== ================= ================== ====================
Year Ended December 27, 2003
Diluted
Gross Net Net Income (Loss)
Sales Profit Income (Loss) Per Share (a)
------------------- ----------------- ------------------- --------------------
1st Quarter $50,650,469 $10,805,060 $1,353,948 $.13
2nd Quarter 55,218,914 11,393,816 1,935,458 .18
3rd Quarter 55,224,390 11,544,524 1,816,652 .17
4th Quarter 45,511,415 10,851,286 (2,326,905) (.21)
------------------- ----------------- ------------------- --------------------
Total $206,605,188 $44,594,686 $2,779,153 $.26
=================== ================= =================== ====================
(a) Each quarterly amount is based on separate calculations of weighted
average shares outstanding.
17. 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.
F-28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
17. CONTINGENCIES (CONTINUED)
The claim relating to the wrongful termination of the employment of one of
the plaintiffs and the claims of both plaintiffs concerning the grant of
stock options were resolved in binding arbitration in early 2002. A trial
on the remaining claims commenced on December 2, 2002 and a verdict was
returned on January 24, 2003. 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 at the rate of 3% per annum in 2005.
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 and oral argument was heard on February 15, 2005. 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 January 1, 2005,
the accrued litigation reserve was $8.2 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 April 4,
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 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.
F-29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
RCM Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of RCM
Technologies, Inc. (a Nevada corporation) and Subsidiaries as of January 1, 2005
and December 27, 2003 and the related consolidated statements of operations,
changes in shareholders' equity, comprehensive income (loss) and cash flows for
each of the three years in period ended January 1, 2005 (53 weeks, 52 weeks and
52 weeks, respectively). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of RCM
Technologies, Inc. and Subsidiaries as of January 1, 2005 and December 27, 2003,
and the consolidated results of its operations and its cash flows for each of
the fiscal years in the three year period ended January 1, 2005, in conformity
with accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The Schedules I and II are
presented for purposes of additional analysis and are not a required part of the
basic consolidated financial statements. These schedules have been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, are fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
February 18, 2005
F-30
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
January 1, 2005 and December 27, 2003
ASSETS
January 1, December 27,
2005 2003
--------------- ----------------
Current assets
Prepaid expenses and other assets $29,549 $29,165
--------------- ----------------
Other assets
Long-term receivables from affiliates 70,020,126 67,235,411
--------------- ----------------
Total assets $70,049,675 $67,264,576
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
January 1, December 27,
2005 2003
Current liabilities
Accounts payable and accrued expenses $104,639 $94,480
--------------- ----------------
Shareholders' equity
Common stock 569,173 564,264
Foreign currency translation adjustment 736,128 556,795
Additional paid in capital 98,290,719 97,906,888
Accumulated deficit (29,650,984) (31,857,851)
--------------- ----------------
Total shareholders' equity 69,945,036 67,170,096
--------------- ----------------
Total liabilities and shareholders' equity $70,049,675 $67,264,576
=============== ================
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and Subsidiaries are an intergral part of these statements.
F-31
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
January 1, December 27, December 28,
2005 2003 2002
--------------- ---------------- ---------------
Operating expenses
Administrative $633,198 $464,424 $1,753,587
--------------- ---------------- ---------------
Operating loss (633,198) (464,424) (1,753,587)
Management fee income 633,198 464,424 1,753,587
--------------- ---------------- ---------------
Income before income (loss) in subsidiaries
Equity in earnings (share in loss)
of subsidiaries 2,206,867 2,779,153 (24,135,930)
--------------- ---------------- ---------------
Net income (loss) $2,206,867 $2,779,153 ($24,135,930)
=============== ================ ===============
F-32
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and Subsidiaries are an intergral part of these statements.
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
January 1, December 27, December 28,
2005 2003 2002
----------------- ---------------- ----------------
Cash flows from operating activities:
Net income (loss) $2,206,867 $2,779,153 ($24,135,930)
----------------- ---------------- ----------------
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Recognition of equity compensation 3,828,995
(Equity in) share in deficiency in assets (2,779,153
of subsidiaries (2,206,867) ) 24,135,930
Changes in operating assets and liabilities:
Prepaid expenses and other assets (384) (22,656) (3,539)
Accounts payable and accrued expenses 10,158 (185,665) 229,572
----------------- ---------------- ----------------
(2,197,093) 841,521 24,361,963
----------------- ---------------- ----------------
Net cash provided by operating activities 9,774 3,620,674 226,033
----------------- ---------------- ----------------
Cash flows from investing activities:
Decrease in deposits
Increase in long-term
receivables from subsidiaries (577,847) (4,936,468) (318,317)
----------------- ---------------- ----------------
Net cash used in investing activities (577,847) (4,936,468) (318,317)
----------------- ---------------- ----------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 176,220 131,415 190,556
Exercise of stock options 212,520 43,500 1,529
----------------- ---------------- ----------------
Net cash provided by financing activities 388,740 174,915 192,085
----------------- ---------------- ----------------
Effect of exchange rate changes on cash and
cash equivalents 179,333 1,140,879 (99,801)
----------------- ---------------- ----------------
Net increase in cash and equivalents
Cash and equivalents at beginning of year
----------------- ---------------- ----------------
Cash and equivalents at end of year $ $ $
================= ================ ================
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-33
SCHEDULE II
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
Column A Column B Column C Column D Column E
- -------------------------------------------- ------------- ------------------------------- ------------- -------------
Additions
-------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deduction Period
- -------------------------------------------- ------------- -------------- ------------- ------------- -------------
Year Ended January 1, 2005
Allowance for doubtful
accounts on trade
receivables $1,854,000 $436,000 $428,000 $1,862,000
Year Ended December 27, 2003
Allowance for doubtful
accounts on trade
receivables $1,549,000 $692,000 $387,000 $1,854,000
Year Ended December 28, 2002
Allowance for doubtful
accounts on trade
receivables $1,795,000 $1,941,000 $2,187,000 $1,549,000
F-34
EXHIBIT INDEX
(10) (o) Compensation Arrangements for Named Executive Officers.
(10) (p) Compensation Arrangements for Directors
(11) Computation of Earnings (Loss) Per Share.
(21) Subsidiaries of the Registrant.
(23) Consent of Grant Thornton LLP.
31.1 Certification of Chief Executive Officer Required by Rule 13a-14(b)
of the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer Required by Rule 13a-14(b)
of the Securities Exchange Act of 1934, as amended.
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2003.
32.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2003.
Exhibit 10 (o)
RCM TECHNOLOGIES, INC.
Compensation Arrangements for Named Executive Officers
Brian A. Delle Donne. Chief Operating Officer. Mr. Belle Donne is employed
by the Company on an at-will basis pursuant to an oral agreement. In addition to
standard medical, disability, life insurance, 401(k) and employee stock
incentive benefits available to all eligible employees, he is eligible for the
Executive Medical Supplementary Plan available to the named executive officers,
the Executive Stock Option Plan available to officers and key employees and an
auto allowance available to certain middle managers and above. Mr. Belle Donne
received a base salary of $300,000 in 2004. His bonus is based on a percentage
of divisional Information Technology net operating income above a certain
threshold targets.
Stanton Remer. Executive Vice President & Chief Financial Officer. Mr.
Remer is employed by the Company on an at-will basis pursuant to an oral
agreement. In addition to standard medical, disability, life insurance, 401(k)
and employee stock incentive benefits available to all eligible employees, he is
eligible for the Executive Medical Supplementary Plan available to the named
executive officers, the Executive Stock Option Plan available to officers and
key employees and an auto allowance available to certain middle managers and
above. Mr. Remer received a base salary of $200,000 in 2004. His bonus is
compensated according to a Schedule of Compensation approved by the Compensation
Committee on December 17, 1997, pursuant to which the Company pays a bonus of
..002 of the Company's EBITDA, defined as earnings before income taxes,
depreciation and amortization, on a consolidated basis within 60 days following
the close of the fiscal year. A further bonus of .002 of EBITDA is payable to
Mr. Remer on a discretionary basis.
Rocco Campanelli. Executive Vice President. Mr. Campanelli is employed by
the Company on an at-will basis pursuant to an oral agreement. In addition to
standard medical, disability, life insurance, 401(k) and employee stock
incentive benefits available to all eligible employees, he is eligible for the
Executive Medical Supplementary Plan available to the named executive officers,
the Executive Stock Option Plan available to officers and key employees and an
auto allowance available to certain middle managers and above. Mr. Campanelli
received a base salary of $175,000 in 2004. His bonus is based on a percentage
of divisional Professional Engineering net operating income above a certain
threshold targets.
Kevin D. Miller. Senior Vice President. Mr. Miller is employed by the
Company on an at-will basis pursuant to an oral agreement. In addition to the
standard medical, disability, life insurance, 401(k) and employee stock
incentive benefits available to all eligible employees, he is eligible for the
Executive Medical Supplementary Plan available to the named executive officers,
the Executive Stock Option Plan available to officers and key employees and an
auto allowance available to certain middle managers and above. Mr. Miller
received a base salary of $200,000 in 2004. He is eligible for a discretionary
bonus.
Exhibit 10 (p)
RCM TECHNOLOGIES, INC.
Compensation Arrangements for Directors
Directors who are RCM Technologies, Inc employees are not compensated for their
services as directors.
Non-employee directors, except as set forth below, each receives $24,000 in
annual compensation for service on the Board, payable in equal monthly
installments in cash.
In addition, each non-employee director receives $750 payable in cash for each
in-person meeting of the full Board attended by that director, and $300 for each
meeting of a committee (in excess of four meetings per year of that committee),
whether in-person or telephonic, attended by that director.
Norman S. Berson, one of the non-employee directors, is of counsel to a law firm
that from time to time performs services for the Company. Fees paid by the
Company to this law firm are not significant or material. Nevertheless, Mr.
Berson has voluntarily declined to accept compensation for his service on the
Board.
EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
Years Ended January 1, 2005, December 27, 2003 and December 28, 2002
January 1, December 27, December 28,
2005 2003 2002
--------------- -------------- --------------
Diluted earnings (loss)
Net income (loss) applicable to common
stock $2,206,867 $2,779,153 ($24,135,930)
=============== ============== ==============
Shares
Weighted average number of common
shares outstanding 11,325,626 10,716,179 10,585,503
Common stock equivalents 354,186 180,126
--------------- -------------- --------------
Total 11,679,811 10,896,305 10,585,503
=============== ============== ==============
Diluted earnings (loss) per common share $.19 $.26 ($2.28)
=============== ============== ==============
Basic
Net income (loss) applicable to common
stock $2,206,867 $2,779,153 ($24,135,930)
=============== ============== ==============
Shares
Weighted average number of common
shares outstanding 11,325,626 10,716,179 10,585,503
=============== ============== ==============
Basic earnings (loss) per common share $.19 $.26 ($2.28)
=============== ============== ==============
EXHIBIT 21
SUBSIDIARIES
Business Support Group of Michigan, Inc.
Cataract, Inc.
Programming Alternatives of Minnesota, Inc.
RCMT Delaware, Inc.
RCM Technologies (USA), Inc.
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
RCM Technologies, Inc.
We have issued our report dated February 18, 2005, accompanying the consolidated
financial statements and schedules included in the Annual Report of RCM
Technologies, Inc. and Subsidiaries on Form 10-K for the year ended January 1,
2005. We hereby consent to the incorporation by reference of said report in the
Registration Statements of RCM Technologies, Inc. on Forms S-8 (File No.
33-61306, effective April 21, 1993, File No. 33-80590, effective June 22, 1994,
File No. 333-52206, effective December 19, 2000 and File No. 333-52480,
effective December 21, 2000).
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
Febraury 18, 2005
Exhibit 31.1
CERTIFICATION
I, Leon Kopyt, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this 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 annual 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 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 function):
(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: March 17, 2005
/s/ Leon Kopyt
-------------------------------
Leon Kopyt
Chairman and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Stanton Remer, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this 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 annual 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 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 function):
(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: March 17, 2005
/s/ Stanton Remer
------------------------------
Stanton Remer
Executive Vice President
Chief Financial Officer, Treasurer and Secretary
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the
"Company") for the year ended January 1, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Leon Kopyt, President
& Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to
my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended (15 U.S.C. section 78m(a)); and (2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Leon Kopyt
----------------------
Leon Kopyt
Chief Executive Officer
March 17, 2005
A signed original of this written statement required by Section 906 has been
provided to RCM Technologies, Inc. and will be retained by RCM Technologies,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the
"Company") for the year ended January 1, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Stanton Remer, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended (15 U.S.C. section 78m(a)); and (2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Stanton Remer
----------------------
Stanton Remer
Executive Vice President
Chief Financial Officer
March 17, 2005
A signed original of this written statement required by Section 906 has been
provided to RCM Technologies, Inc. and will be retained by RCM Technologies,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.