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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
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: (609) 486-1777
Securities registered pursuant to Section 12(b) of the Act:
Title of each class on which registered Name of each exchange
None None
Securities registered pursuant to Section 12(g) ofthe 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. [ ]
The aggregate market value of Common Stock held by non-affiliates (all
persons other than executive officers or directors) of the Registrant on January
11, 1999 was approximately $240,600,000 based upon the closing sale price per
share of the Common Stock on such date on The Nasdaq National Market of $23.13.
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 $.05 per
share) outstanding as of January 11, 1999: 10,475,576.
Documents Incorporated by Reference
Portions of the Proxy Statement for the Registrant's 1999 Annual
Meeting of Stockholders ("1999 Proxy Statement") are incorporated by reference
into Items 10,11,12 and 13 in Part III. The 1999 Proxy Statement has not been
filed as of the date of filing of this Annual Report on Form 10-K.
1
Cautionary Statement for Purposes of the "Safe Harbor" of the Private
Securities Litigation Reform Act of 1995
Certain statements included herein and in other Company reports and public
filings are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned that such
forward-looking statements, 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 in such forward-looking statements.
Such risks and uncertainties include, without limitation: (i) unemployment
and general economic conditions associated with the placement of temporary
staffing personnel; (ii) the Company's ability to continue to attract,
train and retain personnel qualified to meet the staffing 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 proforma
financial information and the underlying assumptions relating to
acquisitions and acquired businesses; (v) 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; (vi) 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; (vii) the Company's ability to obtain financing on
satisfactory terms; (viii) the reliance of the Company upon the continued
service of its executive officers; (ix) the Company's ability to remain
competitive in national, regional and local markets; (x) the Company's
ability to retain several of its key clients; (xi) the Company's ability to
maintain its unemployment insurance premiums and workers compensation
premiums; (xii) the risk of claims 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; and (xv) other economic, competitive and governmental
factors affecting the Company's operations, market, products and services.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date made. The Company undertakes no
obligation to publicly release the results of any revision of these
forward-looking statements to reflect these ends or circumstances after the
date they are made or to reflect the occurrence of unanticipated events.
2
PART I
Item 1. Business
GENERAL
The Company is a multi-regional provider of information technology and
other professional staffing services through its 53 branch offices located
in 21 states. The Company's Information Technology Group offers responsive,
timely and comprehensive information technology staffing 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 enterprise software,
network communications, database design and development and client server
migration. The Company also offers professional engineering staffing and
project management services, through its Professional Engineering Group,
for a variety of engineering disciplines, such as aeronautical,
electro-mechanical, nuclear and computer science. The Company is also
engaged in the specialty healthcare and general support sectors of the
staffing industry. Representative customers include AT&T, Bell Atlantic,
Chase Manhattan Bank, Liberty Mutual Insurance, MCI, Merck, Merrill Lynch,
Northeast Utilities and 3M.
INDUSTRY OVERVIEW
The staffing industry has experienced rapid growth in recent years.
According to Staffing Industry Report, revenues in the domestic temporary
staffing industry have grown from $24.6 billion in 1992 to an estimated
$53.7 billion in 1997, a five-year compound annual growth rate of 17%. This
growth has been driven by a change in the role of temporary staffing in
corporations. Initially thought of as a short-term solution for peak
production periods and as a temporary replacement for full-time personnel,
the staffing industry is now considered an effective tool for helping
companies manage their investment in human resources. Companies now use
temporary personnel for varying lengths of time to respond to increasingly
complex assignments. The shift towards contract personnel allows companies
to expand and contract employee levels based on current needs, thus
converting fixed labor costs into controllable variable costs while still
maintaining a high degree of employee skill level. Relying on temporary
staffing companies also reduces the costs associated with recruiting,
training and terminating employees. In addition, changing government
regulations concerning such items as employee benefits, health insurance
and retirement plans have significantly increased employment costs related
to permanent employees. In response, an increasing number of companies are
turning to temporary staffing as a method of maintaining high employee
skill level while controlling labor costs.
According to Staffing Industry Report, information technology is the
fastest growing sector within the temporary staffing industry, growing at a
24% five-year compound annual growth rate from 1992 to 1997. In recent
years, businesses have become increasingly dependent on the use of computer
systems to manage operations, automate routine tasks and disseminate
information throughout the company. As companies have increased their
investments in technology in order to remain competitive, the complexity
and rapid development of new technologies have driven the need for
increased levels of technical support. Faced with the challenge of
developing and supporting these updated systems, companies are turning to
information technology staffing services to provide technical support.
Utilizing outside information technology personnel allows a company to
focus on core operations, minimize its investment in its internal
information technology workforce and obtain technical support from
professionals with expertise in current technologies.
The staffing industry is highly fragmented, with over 7,000 companies in
the United States. The industry is currently experiencing a trend toward
consolidation as large companies seek to reduce the number of vendors and
look to staffing companies that offer a wide range of services over a broad
geographic area. In addition, the demand for employees skilled in new
technologies exceeds the supply of qualified personnel. As employers find
it more difficult to locate full-time candidates with special skills, they
increasingly turn to temporary staffing companies to fill these needs. The
Company believes these industry conditions are making it more difficult for
small staffing companies to compete due to limited recruiting and placement
capabilities, limited working capital and limited management resources.
These factors are expected to accelerate the industry's consolidation
trend.
3
BUSINESS STRATEGY
RCM is dedicated to providing solutions to meet its customers' information
technology and other professional staffing needs. The Company's objective is to
be a leading provider of these specialty professional staffing services in
selected regions throughout the United States. The Company has developed
interrelated growth and operating strategies to achieve this objective. Key
elements of its growth and operating strategies are as follows:
GROWTH STRATEGY
Focus on Information Technology and Other Professional Staffing Services. The
Company will continue to focus on providing information technology staffing
services, the fastest growing sector of the temporary staffing industry, as well
as other professional staffing services. According to Staffing Industry Report,
revenues from information technology staffing services grew at a 24% five-year
compound annual growth rate from 1992 through 1997. In addition to high growth
rates, the Company believes that information technology and other professional
staffing services offer more attractive profit margins than traditional staffing
services. As the Company has transitioned its business mix to information
technology and other professional staffing services, and away from general
support staffing, it has experienced substantial margin improvement. The
Company's operating profit margin for the year ended October31, 1998 was 8.2% as
compared to 3.2% in fiscal 1995, when approximately half of the Company's
revenue was derived from general support staffing and the Company did not offer
information technology staffing services. The Company also believes that
information technology and other professional staffing services are less
cyclical than traditional staffing services.
Strengthen Market Presence in Selected Regions Throughout the Country. The
Company believes that a substantial amount of the total market for information
technology and other professional staffing services is located in certain high
growth regions in the United States. The Company's strategy is to expand into,
and strengthen its existing presence in, such high density, high growth regions.
Once established in a region, the Company concentrates on local and regional
accounts, as opposed to national accounts, and therefore competes primarily
against local and regional staffing companies with limited services, resources
and capabilities. The Company utilizes its mix of information technology and
other professional service offerings, recruiting and placement capabilities and
financial resources to distinguish itself from its competition and to achieve
significant customer penetration and retention. The Company enters new regions
by acquiring strong local or regional companies and improving their ability to
compete through the addition of the Company's resources.
Continue Strategic Acquisitions. The Company has acquired 18 information
technology and other professional staffing companies since the beginning of
fiscal 1996. The staffing industry continues to be highly fragmented, and the
Company plans to continue its aggressive acquisition program. The Company's
acquisition strategy is designed to strengthen its presence in its existing
markets, expand into new geographic regions and add complementary service
offerings or offer new professional staffing services. In targeting
acquisitions, the Company focuses on companies with (i) annual revenues of $35
million or less, (ii) a history of profitable operations and experienced
management personnel, (iii) substantial growth prospects and (iv) sellers who
desire to join the Company's management team. To retain and provide incentives
for management of its acquired companies, the Company typically structures 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. The Company believes its success in completing
acquisitions is due to its entrepreneurial and decentralized operating
philosophy, its strong corporate-level support and resources, its status as a
public company and its ability to offer management of the acquired companies an
opportunity to join and participate in the growth of a rapidly growing provider
of information technology and other professional staffing services.
4
GROWTH STRATEGY - (Continued)
Promote Internal Growth. The Company is experiencing strong internal growth. For
the year ended October 31, 1998, the Company's internal revenue growth was 26%
over the comparable prior-year period. The Company believes its high levels of
internal growth are a result of the Company's transition to information
technology and other professional staffing services, its location in strong
operating regions and its strategy of acquiring companies with strong growth
prospects and integrating their administrative functions to permit management to
focus on increasing sales. The Company plans to maintain high levels of internal
growth by increasing sales to existing customers, developing new customer
relationships and cross-selling its professional staffing services. The Company
believes approximately 50% of its current customers are users of both outsourced
information technology and professional engineering services. The Company has
increased its efforts to cross-sell its information technology and professional
engineering services. As an example of cross-selling, the Company has
successfully provided the services of its Information Technology Group to the
utility industry customer base of its Professional Engineering Group.
Migrate Product Offerings to Higher Value Added Services. The Company's
strategic transition to a provider of information technology and other
professional staffing services was designed to move the Company into higher
growth and higher margin sectors of the staffing industry. For the year ended
October 31, 1998, 86% of the Company's revenues were generated by information
technology and professional engineering staffing services. The Company believes
it now has the opportunity to offer higher value-added services such as project
management and consulting services to its professional staffing services
customer base. The Company currently derives a substantial percentage of its
professional engineering services revenues from project management work. The
Company plans to use the project management expertise of its Professional
Engineering Group to assist its Information Technology Group in expanding its
sales of higher margin consulting and project management services. The billing
rates and profit margins for project work and consulting services are higher
than those received for staffing services. The Company intends to achieve this
migration to higher value-added services through the internal sharing of its
engineering project management expertise as well as through acquisitions.
ACQUISITION PROGRAM
Since fiscal 1996, the Company has pursued an aggressive growth strategy
designed to transition the Company's business from general support staffing to
higher growth, higher margin professional staffing services, particularly
information technology. The Company has implemented this strategy through the
acquisition of 18 information technology or professional engineering staffing
services companies, aggregating $158.1 million in revenues for their respective
latest twelve months prior to the acquisition. Through these acquisitions, the
Company has achieved substantial revenue growth, improved its operating
profitability and repositioned itself as a provider of information technology
and other professional staffing services. A key element of the Company's growth
strategy is to continue to pursue strategic acquisitions. The Company believes
that its success in completing acquisitions is due to its entrepreneurial and
decentralized operating philosophy, its strong corporate-level support and
resources, its status as a public company and its ability to offer management of
the acquired companies an opportunity to join and participate in the growth of a
rapidly growing provider of information technology and other professional
staffing services. See "Business -- Growth Strategy."
5
ACQUISITION PROGRAM - (Continued)
The following table provides a summary of the acquisitions completed by the
Company since fiscal 1996:
NUMBER
DATE ACQUIRED COMPANY OF OFFICES HEADQUARTERS SERVICES (1) REVENUES (2)
- ------------- ------- ---------- ------------ ------------ ------------
(IN MILLIONS)
3/11/96 The Consortium 5 Fairfield, NJ IT, SH, GS 26.0
5/1/96 The Consortium of Maryland, Inc. 1 Bethesda, MD IT 5.6
9/13/96 Performance Staffing, Inc. 4 Louisville, KY PE 2.3
11/4/96 Programming Alternatives of 2 Minneapolis, MN IT 9.4
Minnesota, Inc.
4/1/97 Programming Resources Unlimited 1 Wayne, PA IT 2.4
8/4/97 Camelot Contractors Limited 1 Manchester, NH IT 16.2
9/29/97 Austin Nichols Technical 1 Kansas City, MO IT, PE 4.9
Temporaries, Inc.
9/29/97 J.D. Karin Consulting Services, 1 Flanders, NJ IT 4.9
Inc.
1/4/98 Northern Technical Services, Inc. 3 Milwaukee, WI IT 12.6
2/2/98 Staffworks, Inc. 2 Stanhope, NJ IT 12.6
2/2/98 Global Technology Solutions, Inc. 1 Sacramento, CA IT 5.5
7/1/98 Software Analysis & Management
Company, Inc. 10 Orange, CA IT 19.6
8/1/98 Integrity Systems Professionals,
Inc. 2 Grand Rapids, MI IT 3.0
9/15/98 Systems Group, Inc. 1 Minneapolis, MN IT 10.0
10/15/98 BIT Consulting, Inc. 1 Philadelphia, PA IT 4.4
* 11/1/98 Insight Consulting Group, Inc. 1 Morristown, NJ IT 3.0
* 11/15/98 Procon Inc. 3 Detroit, MI IT 12.2
* 12/1/98 Encompass Business Solutions 1 Huntington Beach, CA IT 3.5
41 $158.1
== ======
* Completed after fiscal 1998
(1) Services provided are abbreviated as follows:
IT - Information Technology PE - Professional Engineering SH - Specialty
Healthcare GS - General Support
(2) Represents approximate revenues in the latest 12 months prior to the date of
acquisition.
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 the names, reputations and customer relationships of
acquired companies and by sharing their operating policies, procedures and
expertise with other branch locations to develop new ideas to best serve the
prospects of the Company. 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 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 used by many of its competitors. To develop close
customer relationships, the Company's branch managers regularly meet with both
existing and prospective clients to help design solutions for, and identify the
resources needed to execute, their strategies. The Company's branch 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 results in greater customer satisfaction and
reduced business development expense. Additionally, the Company believes that by
partnering with its customers to design flexible staffing programs that can be
expanded, contracted or redirected into other specialty areas, it can generate
new opportunities to service their staffing requirements. The Company focuses on
providing
6
OPERATING STRATEGY - (Continued)
customers with qualified individuals compatible with the needs of such customers
and makes a concerted effort to follow the progress of such relationships to
ensure their continued success.
Attract and Retain High Quality Contract and Temporary Personnel. The Company
believes it has been successful in attracting and retaining qualified contract
and temporary personnel 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 has been successful in retaining qualified contract and
temporary personnel due in part to its use of qualified personnel designated as
"ombudsmen" who are dedicated to maintaining contact with, and monitoring the
satisfaction levels of, the Company's contract and temporary personnel, while
they are on assignment.
Centralize Administrative Functions. The Company seeks to maximize its
operational efficiencies by integrating general and administrative functions at
the corporate level, and reducing or eliminating redundant functions and
facilities at acquired companies, typically within three months of an
acquisition. This enables the Company to quickly realize potential savings and
synergies, efficiently control and monitor its operations and allows acquired
companies to focus on growing their sales and operations.
OPERATIONS
The Company provides information technology and other professional staffing
services through the following groups: Information Technology, Professional
Engineering, General Support and Specialty Healthcare.
INFORMATION TECHNOLOGY
The Company's Information Technology Group offers responsive, timely and
comprehensive information technology staffing 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 enterprise software, network communications, database
design and development and client server migration.
In the course of a customer's systems applications project, the Information
Technology Group may prepare project plans, assist users in defining high level
functional specifications, perform system analysis and detailed design, select
and configure hardware, create custom application programs, develop migration
plans to move to a new operating platform or system, install and test the
system, obtain user acceptance, draft user documentation, train the customer's
employees to use the system and support, maintain and fine-tune the system on an
ongoing basis. In addition, the Information Technology Group supports a wide
variety of operating systems, programming languages, software tools and database
management applications, including UNIX, Windows, Solaris, Novell, Netware,
Sybase, Informix, Lotus Notes, Clipper, Visual Basic, Visual C++, Cobol II, CICS
and Fortran. The Company believes that its ability to provide information
technology staffing for a full range of such services provides an important
competitive advantage. The Company also strives to ensure that its consultants
have the expertise and skills needed to keep pace with rapidly evolving
information technologies.
Customers typically require the Company's services in order to fill gaps in
their range of professional staffing needs or to augment existing personnel in
response to expanded business needs. Engagements average in duration from three
to 12 months. The following are examples of the types of services that were
provided by the Company's Information Technology Group as of the date of the
filing of this Report:
o The Company provided 20 professionals to a large HMO to provide system
development, implementation, support, project management and training for
remote access capability. This system enables the HMO's remote personnel
and customers to access the HMO's main computing systems. The Company is
currently providing eight network engineers to develop and implement a new
high security firewall for the HMO's external network and computing
systems.
7
INFORMATION TECHNOLOGY - (Continued)
o The Company provided five professionals to a major Mid-Atlantic utility for
a project designed to improve internet and intranet connectivity through
site evaluation and design, including security analysis, installation and
support to ensure fully functional transitions. This relationship was
developed through the Company's Professional Engineering Group.
o The Company provided 20 programming professionals to a multi-national bank
holding company to write custom software for a variety of business analysis
and programming applications. These programs are being developed to conform
to a number of different platforms and environments, including IBM
mainframe, UNIX, AS400, OS2 and Novell.
o The Company provided 25 professionals to a national communications
conglomerate to evaluate the viability and advisability of downsizing an
application to the client/server platform. The engagement entailed
analyzing the system against requirements, surveying system users to assess
satisfaction, assessing the system's suitability for client server
implementation, and preliminary evaluation of off-the-shelf systems.
As of October 31, 1998, approximately 1,400 information technology personnel
were employed by the Company.
PROFESSIONAL ENGINEERING
The Professional Engineering Group provides personnel to perform project
engineering, computer aided design, and other 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 also developed an expertise in providing engineering, design and
technical services to many customers in the aeronautical, paper and paper
products manufacturing industries and the nuclear power, fossil fuel and
electric utility 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
significant 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 increased 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 engagements of the Professional Engineering Group generally vary in duration
from three to 12 months. The following are examples of the types of services
that were provided by the Company's Professional Engineering Group as of the
date of the filing of this Report:
o The Company provided 50 contract engineers to a New England utility
involved in the restart of three major electrical generating stations. The
Company's engineers are reviewing platform design documentation, updating
safety analysis reports and establishing and documenting correct plant
configuration to be in accordance with applicable regulatory requirements.
o The Company provided 30 engineers to a major Canadian power producer who
recently initiated a long-term organizational and plant improvement
program. The Company's engineers are providing their expertise in the areas
of regulatory compliance, performance assurance and emergency planning. As
a result of this initial engagement, the Company also placed several
information technology professionals with this Canadian power provider.
8
PROFESSIONAL ENGINEERING - (Continued)
o The Company provided 30 engineers to a large manufacturer of personal
hygiene and tissue products. The Company's engineers are designing mill
equipment used to convert paper into products and assisting with evaluating
configuration of management processes to install, operate and support
production facilities.
o The Company provided five engineers to a major Mid-Atlantic based
telecommunications company to provide telecommunication systems redesign.
This relationship was developed through the Company's Information
Technology Group.
As of October 31, 1998, approximately 500 engineering personnel were employed by
the Company.
GENERAL SUPPORT
The General Support 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.
The General Support Group has been awarded multi-year contracts by such
customers as AT&T, First National Bank of Chicago, Mellon Bank and Sears.
SPECIALTY HEALTHCARE
The Specialty Healthcare Group provides skilled, licensed healthcare
professionals, primarily physical therapists, occupational therapists and speech
language pathologists. The Specialty Healthcare Group provides services to
hospitals, nursing homes, pre-schools, sports medicine facilities and private
practices. Services include: in-patient, out-patient, subacute and acute care,
rehabilitation, geriatric, pediatric and adult day care. The Specialty
Healthcare Group does not provide nursing or home healthcare services. Typical
engagements range either from three to six months or are on a day-to-day shift
basis.
9
BRANCH OFFICES
The Company's branch organization consists of four operating regions with 53
offices located in 21 states. The region of, and services provided by, each
branch office are set forth in the table below.
NUMBER OF
REGION OFFICES SERVICES PROVIDED(1)
NORTHEAST
Connecticut................................. 3 PE, GS
Maryland.................................... 1 IT
New Hampshire............................... 1 IT
New Jersey.................................. 9 IT, PE, SH, GS
New York.................................... 2 IT, PE, SH
Pennsylvania................................ 5 IT, PE, GS
-
21
MIDWEST
Indiana..................................... 1 GS
Kentucky.................................... 2 PE, GS
Michigan.................................... 3 IT, PE
Minnesota................................... 2 IT
Missouri.................................... 1 IT, PE
Wisconsin................................... 3 IT, PE
-
12
SOUTHEAST
Alabama..................................... 1 IT
Georgia..................................... 1 PE
North Carolina.............................. 1 PE
South Carolina.............................. 1 PE
Virginia.................................... 1 IT
-
5
WEST
Arizona..................................... 2 IT, PE
Colorado.................................... 1 IT
Nevada...................................... 1 IT
Northern California......................... 2 IT
Southern California......................... 9 IT, GS
-
15
(1) Services provided are abbreviated as follows:
IT -- Information Technology
PE -- Professional Engineering
SH -- Specialty Healthcare
GS -- General Support
Branch offices are primarily located in regions which the Company believes have
strong growth prospects for information technology and other professional
staffing services. The Company's branches are operated in a decentralized,
entrepreneurial manner with each branch office as an independent profit center.
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.
10
BRANCH OFFICES - (Continued)
The Company believes that a substantial portion of the buying decisions made by
users of information technology and other professional staffing 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 the local and regional
information technology and other professional staffing markets, and customers
often prefer local providers, the Company believes that a decentralized
operating environment maximizes operating performance and contributes to
employee and customer satisfaction.
From its headquarters in Pennsauken, New Jersey, the Company provides its branch
offices with centralized administrative, marketing, finance 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 activities. The Company believes that its ability to rapidly integrate
the administrative functions of its acquisitions has greatly enhanced its
internal growth.
The Company's branch managers report to product-line general managers. General
managers meet with branch managers on a regular basis to identify "best
practices" for the various sales and marketing and recruiting processes and
assist the branch managers in implementing these best practices. The Company's
branch managers meet every three to six months to discuss "best practices" and
ways to increase the Company's cross-selling of its professional services.
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 which 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 staffing
solutions for all aspects of a customer's information technology and other
professional staffing needs. The Company also concentrates on providing
carefully screened professionals with the appropriate skills in a timely manner
and at competitive prices. The Company constantly monitors the quality of the
services provided by its personnel and obtains feedback from its customers as to
their satisfaction with the services provided.
Representative customers include AT&T, Bell Atlantic, Chase Manhattan Bank,
Liberty Mutual Insurance, MCI, Merck, Merrill Lynch, Northeast Utilities and 3M.
Although the Company serves numerous Fortune 500 companies, the Company's
relationships with these customers is typically formed at the local or regional
level as the Company does not actively solicit national contracts, which
typically have lower margins.
During fiscal 1998, no one customer accounted for more than 5% of the Company's
revenues. The Company's five and ten largest customers accounted for
approximately 14.9% and 22.4%, respectively, of the Company's revenues for
fiscal 1998.
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 staffing
personnel. Full-time recruiters utilize the Company's proprietary database of
available personnel, which is cross-indexed by skill to match potential
candidates with the specific requirements of the customer. The qualified
personnel in the databases are identified through numerous activities, including
networking, referrals, the internet, job fairs, newspaper and trade journal
advertising, attendance at industry shows and presentations. The Company also
has several recruiters dedicated to recruiting highly skilled, highly
sought-after information technology personnel from international locations such
as Australia, Canada, England, India, Mexico, New Zealand, South Korea and other
European and Southeast Asian countries. International recruits are available to
all branch office locations through the Company's corporate headquarters.
11
RECRUITING AND TRAINING - (Continued)
The Company routinely performs verification of education and employment, as well
as personal and professional reference checks. As potential candidates are
identified, each individual participates in an extensive qualification process.
An in-house interview of the candidate is typically conducted by both the
recruiting and sales staff and candidates are evaluated and qualified by a
member of the Company's technical staff. Upon placement with the appropriate
customer, the employee is continually monitored and supervised to ensure
competent, timely and professional performance. Regular on-site visits by the
Company's representatives are made and the employees and their supervisors are
contacted. Professionals complete weekly status reports which are signed by
their supervisors and report regularly on the status of their projects in order
to identify and eliminate potential problems and issues which may arise. Exit
interviews are conducted upon completion of an assignment and the customer is
invited to confirm that all parties are satisfied with the work completed. The
Company also offers educational programs to upgrade the skills of its personnel,
particularly within its Information Technology Group.
The Company believes that a significant element to the Company's success in
retaining qualified contract and temporary personnel is the Company's use of
"ombudsmen." Ombudsmen are qualified Company personnel dedicated to maintaining
contact with, and monitoring the satisfaction levels of the Company's contract
and temporary personnel, while they are on assignment.
INFORMATION SYSTEMS
The Company has invested, and intends to continue to invest, substantial
resources to develop systems that will enable it to deliver quality financial
and operating data to management, provide timely and accurate customer billing
and centrally manage its operations. The Company's internal information system
is linked to all of the Company's offices. This system supports Company-wide
operations such as payroll, billing, accounting and sales and management
reports. Additionally, each of the four service groups has separate databases to
permit efficient tracking of available personnel on a local basis. These
databases facilitate efficient matching of customers' requirements with
available temporary staffing personnel. For acquired companies, administrative
functions are integrated into the Company's information system and personnel
databases are updated accordingly. The Company typically completes this process
within three months of the acquisition.
The Company is in the process of installing a state-of-the art enterprise wide
financial reporting system. The new system is year 2000 compliant and will
expand management reporting capabilities and provide the flexibility necessary
for the Company's acquisition strategy.
COMPETITION
The staffing industry is highly competitive and fragmented, consisting of more
than 7,000 companies. There are limited barriers to entry and new competitors
frequently enter the market. The Company's principal competitors are generally
local or regional independent staffing companies that are located in the
Company's various regional markets. The Company also encounters competition from
international and national companies. Certain of the Company's competitors have
more established operations and greater marketing, financial and other resources
than the Company.
Additionally, the Company competes for suitable acquisition candidates based on
its entrepreneurial and decentralized operating philosophy, its strong
corporate-level support and resources, its status as a public company and its
ability to offer management of the acquired companies an opportunity to
participate in the growth of a rapidly growing provider of information
technology and other professional staffing services.
12
EMPLOYEES
As of October 31, 1998, the Company employed on its permanent staff
approximately 367 persons, including licensed professional engineers who, from
time to time, participate in engineering and design projects undertaken by the
Company. During the twelve months ended October 31, 1998, approximately 1,350
engineering and technical personnel and 2,600 information technology personnel
were employed by the Company to work on client projects for various periods of
time. The Company also employed approximately 10,200 temporary personnel during
the year. None of the Company's employees, including its temporary employees,
are represented by a collective bargaining agreement. The Company considers its
relationship with its employees to be good.
Item 2. Properties
As of October 31, 1998, the Company provided specialty professional staffing
services through 53 offices in 21 states. Typically, these offices consist of
1,500 to 2,500 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 maintaining or finding suitable
lease space at reasonable rates in its markets or in areas where the Company
contemplates expansion will be difficult.
The Company's executive and administrative offices are 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 $11.50 per square
foot per month for a term ending on January 31, 2003.
Item 3. Legal Proceedings
On November 6, 1998, Barry Meyers and Martin Blaire, two former officers and
directors of the Company, filed suit against the Company in the Superior Court
for the State of New Jersey, Law Division, Bergen County, alleging wrongful
termination of their employment, failure to make severance payments, wrongful
conduct by the Company in connection with the grant of Stock Options to the
plaintiffs and wrongfully limited the number of shares of Company stock that
could be sold by the plaintiffs. The suit asks for damages of approximately
$471,000 plus other unspecified amounts. Management believes the suit is without
merit and intends to defend the claim vigorously.
From time to time, other disagreements with individual employees and
disagreements as to the interpretation, effect or nature of individual
agreements arise in the ordinary course of business and may result in legal
proceedings being commenced against the Company. Other than as set forth above,
the Company is not currently involved in any litigation or proceedings which are
material, either individually or in the aggregate, and, to the Company's
knowledge, no other legal proceedings of a material nature involving the Company
are currently contemplated by any individuals, entities or governmental
authorities.
The principal risks that the Company insures against are workers' compensation,
personal injury, property damage, professional malpractice, errors and
omissions, and fidelity losses. The Company maintains insurance in such amounts
and with such coverages and deductibles as management believes are reasonable
and prudent.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to the vote of security holders during the
fourth quarter ended October 31, 1998.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is traded on the Nasdaq National Market under the
Symbol "RCMT". Prior to June 10, 1997, the Company's Common Stock was traded on
The Nasdaq SmallCap Market. The following table sets forth approximate high and
low sales prices by fiscal quarters for the periods indicated, as reported by
the market on which it was traded:
Common Stock
Fiscal 1997 High Low
First Quarter.................................$ 10.38 $ 7.00
Second Quarter................................ 9.75 6.25
Third Quarter................................. 11.75 6.88
Fourth Quarter................................ 16.63 11.88
Fiscal 1998
First Quarter.................................$ 18.50 $ 14.38
Second Quarter................................ 30.13 16.13
Third Quarter................................. 26.75 17.38
Fourth Quarter................................ 18.25 10.75
Holders
As of January 11, 1999, the approximate number of holders of record of the
Company's Common Stock was 1,440. 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 exceeds
5,900.
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 (the "Revolving Credit Facility") which the Company maintains
with Mellon Bank, N.A. prohibits the payment of dividends or distributions on
account of the capital stock without the prior consent of Mellon Bank, N.A.
14
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. The pro forma consolidated
financial data gives effect to the acquisition of all businesses acquired
by the Company through December 31, 1998, as if such acquisitions were
completed as of November 1, 1997. The pro forma results of operations are
not necessarily indicative of the results that would have occurred had the
acquisitions been consummated as of the beginning of the period or that
might be attained in the future.
Years Ended October 31,
Pro Forma
1998 1998 1997 1996 1995 1994
---------------- ----------------- ---------------------------------------------------------------------
Income Statement
Revenues $252,413,000 $201,452,318 $113,959,093 $61,039,173 $26,915,737 $29,238,995
Gross profit 62,776,553 48,424,223 27,126,745 12,259,287 4,536,920 5,376,106
Income from
continuing operations 11,789,493 9,796,705 4,839,933 2,367,939 849,105 1,426,005
Loss from discontinued
operations ( 362,500)
Net income 11,789,493 9,796,705 4,477,433 2,367,939(2) 849,105 (2) 1,426,005(2)
Earnings Per Share (1)
Income from continuing
operations (diluted) 1.29 1.07 .76 .55(2) .28 (2) .49(2)
Loss from discontinued
operations (diluted) (.06 )
Net income (diluted) 1.29 1.07 .70 .55(2) .28 (2) .49(2)
Net income (basic) 1.34 1.11 .74 .56(2) .29 (2) .49(2)
October 31,
1998 1997 1996 1995 1994
----------------- ---------------------------------------------------------------------
Balance Sheet
Working capital $53,672,589 $17,279,115 $6,771,434 $3,327,904 $5,200,609
Total assets 117,067,151 54,082,596 24,406,620 10,301,555 6,546,839
Long-term liabilities 308,129 562,312 35,496
Total liabilities 10,395,024 9,470,611 8,186,510 2,774,970 1,069,359
Stockholders' equity $106,672,127 $44,611,985 $16,220,110 $7,526,585 $5,477,480
(1) Shares used in computing earnings per share
Basic 8,787,334 6,068,713 4,247,907 2,933,819 2,875,077
Diluted 9,151,903 6,361,181 4,320,571 3,007,969 2,930,276
(2) The net income for the years ended October 31, 1996, 1995 and 1994 has
been calculated after taking into account the effect of the then available
net operating loss ("NOL") carryforward. Without giving effect to the NOL
carryforward, the Company's earnings per share, on a fully taxed basis, would
have been $.38, $.18 and $.32, respectively.
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a multi-regional provider of information technology and
other professional staffing services through its 53 branch offices located
in 21 states.
Since fiscal 1995, the Company has pursued an aggressive growth strategy
designed to transition the Company's business from general support staffing
services to higher growth, higher margin professional staffing services,
particularly information technology. In fiscal 1995, approximately half of
the Company's revenues were derived from general support staffing and the
Company did not offer information technology services. For the year ended
October 31, 1998, information technology services contributed 62.4% of the
Company's revenues. Since the beginning of fiscal 1996, the Company has
acquired 18 information technology or professional engineering staffing
services companies, aggregating $158.1 million in revenues for their
respective latest twelve months prior to acquisition. Through these
acquisitions, the Company has achieved substantial revenue growth, improved
its operating profitability and repositioned itself as a provider of
information technology and other professional staffing services.
The Company realizes revenues from the placement of contract and temporary
staffing personnel. These services are primarily provided to the customer
at hourly rates that are established for each of the Company's staffing
personnel, based upon their skill level and experience and the type of work
performed. Hourly billing rates for staffing services range from $60 to $85
for the Information Technology Group, $50 to $75 for the Professional
Engineering Group, $8 to $18 for the General Support Group, and $40 to $70
for the Specialty Healthcare Group. The Company also provides project
management and consulting work, primarily in the Professional Engineering
Group, which are billed either by agreed upon fee or hourly rates, or a
combination of both. The billing rates and profit margins for project
management and consulting work are higher than those received for
professional staffing services. Hourly billing rates for project management
work range from $125 to $185 within the Information Technology Group and
$110 to $155 within the Professional Engineering Group. The Company plans
to expand its sales of higher margin consulting and project management
services.
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. Contracts, although they
normally relate to longer-term and more complex engagements, generally do
not obligate the customer to purchase a minimum level of services and are
generally terminable by the customer on 60 to 90 days notice. Revenues are
recognized when services are provided.
Costs of services consist primarily of salaries and compensation-related
expenses for billable staffing personnel, including payroll taxes, employee
benefits, worker's compensation and other insurance. Principally all of the
billable personnel are treated by the Company as employees. Selling,
general and administrative expenses consist primarily of salaries and
benefits of personnel responsible for operating activities and include
corporate overhead expenses. Corporate overhead expenses relate to salaries
and benefits of personnel responsible for corporate activities, including
the Company's acquisition program and corporate marketing, administrative
and reporting responsibilities. The Company records these expenses when
incurred. Depreciation relates primarily to the fixed assets of the
Company. Amortization relates principally to the goodwill resulting from
the Company's acquisitions. These acquisitions have been accounted for
under the purchase method of accounting for financial reporting purposes
and have created goodwill which is being amortized over 40-year periods.
16
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Results of Operations
Years Ended October 31,
1998 1997 1996
------------------------------------------------------------------------
% of % of % of
Amount Revenue Amount Revenue Amount Revenue
Revenues $201,452,318 100.0% $113,959,093 100.0% $61,039,173 100.0%
Cost of services 153,028,095 76.0 86,832,348 76.2 48,779,886 79.9
------------- ------ ------------- ------ ----------- ------
Gross profit 48,424,223 24.0 27,126,745 23.8 12,259,287 20.1
Selling, general and
administrative 30,460,647 15.1 18,068,899 15.9 8,914,102 14.6
Depreciation and amortization 1,454,416 .7 572,279 .5 329,680 .5
Interest expense,
net of interest income 235,044 .1 184,645 .2 163,695 .3
--------------- -------- --------------- -------- ------------- --------
Income before income taxes 16,744,204 8.3 8,300,922 7.3 2,821,478 4.6
Income taxes 6,947,499 3.4 3,460,989 3.0 453,539 .7
-------------- ------- -------------- ------- ------------- --------
Income from continuing
operations 9,796,705 4.8 4,839,933 4.3 2,367,939 3.9
Loss from discontinued
operations 362,500 .4
--------------------------- --------------- -----------------------------------
Net income $ 9,796,705 4.8% $ 4,477,433 3.9% $2,367,939(1) 3.9%
============= ======= ============= ======= ========== =======
Earnings per share:
Income from continuing
operations $1.07 $.76 $.55(1)
Loss from discontinued
operations (.06)
--------- ---- -------
Net income $1.07 $.70 $.55(1)
===== ==== ====
(1) The net income for the years ended October 31, 1996 has been calculated
after taking into account the effect of the then available net operating
loss ("NOL") carryforward. Without giving effect to the NOL carryforward,
the Company's earnings per share, on a fully taxed basis, would have been
$.38.
Year Ended October 31, 1998 Compared to Year Ended October 31, 1997
Revenues. Revenues increased 76.8%, or $87.5 million, for fiscal 1998, as
compared to fiscal 1997. Revenue growth was primarily attributable to
acquisitions and internal growth. The Company completed seven acquisitions
in fiscal 1998, aggregating $67.7 million in revenues for their respective
latest twelve months prior to acquisition.
Cost of Services. Cost of services increased 76.2%, or $66.2 million, for
fiscal 1998 as compared to fiscal 1997. This increase was primarily due to
increased salaries and compensation associated with the increased revenues
experienced during fiscal 1998. Cost of services as a percentage of
revenues decreased to 76.0% for fiscal 1998 from 76.2% for fiscal 1997.
This decline was primarily attributable to the continued increase of the
Company's revenues being derived from information technology and other
professional staffing services.
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Year Ended October 31, 1998 Compared to Year Ended October 31, 1997
(Continued)
Selling, General and Administrative. Selling, general and administrative
expenses increased 68.6%, or $12.4 million, for fiscal 1998 as compared to
fiscal 1997. This increase was attributable principally to a 76.8% increase
in revenues which required additional administrative, marketing and as
sales expenses in fiscal 1998 as compared to fiscal 1997. Selling, general
and administrative expenses as a percentage of revenues decreased to 15.1%
for fiscal 1998 as compared to 15.9% for fiscal 1997. This decrease in
percentage was attributable principally to operating leverage achieved by
the spreading of selling, general and administrative overhead expenses over
a larger revenue base in fiscal 1998.
Depreciation and Amortization. Depreciation and amortization increased
154.1%, or $882,000, for fiscal 1998 as compared to fiscal 1997. This
increase was primarily due to the amortization of intangible assets
acquired in connection with the acquisitions completed during fiscal 1998
and 1997.
Interest Expense, Net of Interest Income. Actual interest expense of
$422,600 for fiscal 1998 was offset by $657,600 of interest income, which
was earned from the investment in interest bearing deposits of the net
proceeds of the Company's public offering in June 1998, after the repayment
of bank debt. Interest expense decreased 4.9%, or $21,800, for fiscal 1998
as compared to fiscal 1997. This decrease was due to the decreased
borrowing requirements necessary to fund working capital required of
acquired companies.
Income Tax. Income tax expense increased 100.7%, or $3.5 million, for
fiscal 1998 as compared to fiscal 1997. This increase was primarily due
to increased levels of net income.
Year Ended October 31, 1997 Compared to Year Ended October 31, 1996
Revenues. Revenues increased 86.7%, or $52.9 million, for fiscal 1997, as
compared to fiscal 1996. Revenue growth was primarily attributable to
acquisitions and internal growth. The Company completed five acquisitions
in fiscal 1997, aggregating $37.8 million in revenues for their respective
latest twelve months prior to acquisition.
Cost of Services. Cost of services increased 78.0%, or $38.0 million, for
fiscal 1997 as compared to fiscal 1996. This increase was primarily due to
increased salaries and compensation associated with the increased revenues
experienced during this period. Cost of services as a percentage of
revenues decreased to 76.2% for fiscal 1997 from 79.9% for fiscal 1996.
This decline was primarily attributable to a greater percentage of the
Company's revenues being derived from information technology and other
professional staffing services.
Selling, General and Administrative. Selling, general and administrative
expenses increased 102.7%, or $9.2 million, for fiscal 1997 as compared to
fiscal 1996. This increase resulted from the change in the mix of the
business during the period which required higher marketing, sales,
recruiting and administrative expenses than fiscal 1996. Selling, general
and administrative expenses as a percentage of revenues increased to 15.9%
for fiscal 1997 from 14.6% in fiscal 1996, primarily attributable to the
increased sales, recruiting and administrative expenses necessary to
support the Company's continued growth within the information technology
sector. Corporate overhead expenses as a percentage of revenues decreased
to 2.7% of revenues in fiscal 1997 from 4.0% in fiscal 1996, as these costs
were spread over a larger revenue base.
Depreciation and Amortization. Depreciation and amortization increased
73.6%, or $242,600, for fiscal 1997 as compared to fiscal 1996. This
increase was primarily due to the amortization of intangible assets
acquired in connection with the acquisitions.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Year Ended October 31, 1997 Compared to Year Ended October 31, 1996
(Continued)
Other Income Expense, Net of Interest Income. Actual interest expense of
$444,300 for fiscal 1997 was partially offset by $259,700 of interest
income, which was earned from the investment in interest bearing deposits
of the net proceeds of the Company's public offering in June 1997, after
the repayment of bank debt. Interest expense increased 171.3%, or $280,500,
for fiscal 1997 as compared to fiscal 1996. This increase was due to the
increased borrowings necessary to provide the funds required for certain of
the Company's acquisitions as well as to refinance the working capital debt
of some of the acquired companies.
Income Tax. Income tax expense increased 663.1%, or $3.0 million, for
fiscal 1997 as compared to fiscal 1996. This increase was due to an
increase in the effective tax rate from 16.1% to 41.7% and increased levels
of net income. The increase in the effective tax rate was primarily due to
the utilization of principally all of the remaining net operating loss
carryforward which offset net income in prior periods.
Loss From Discontinued Operations. In fiscal 1997, the Company incurred a
one-time charge of $362,500 in connection with the settlement of a claim
relating to the Company's former operation of a materials recovery facility
prior to 1977. This segment of the Company's business was otherwise
discontinued in fiscal 1992.
19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Liquidity and Capital Resources
Operating activities used $2.2 million and $3.8 million of cash during
fiscal 1998 and fiscal 1997, respectively. The uses of cash for operating
activities in fiscal 1998 and 1997 was primarily attributable to an
increase in accounts receivable which was partially offset by increased
levels of profitability and depreciation and amortization associated with
the acquisitions that were completed during the three years ended October
31, 1998.
Investing activities utilized $26.8 million and $17.9 million in fiscal
1998 and fiscal 1997, respectively. During fiscal 1998, the Company
invested $26.0 million in cash in the purchase of seven staffing companies.
During fiscal 1997, the Company invested $17.4 million in cash in the
purchase of five staffing companies. During fiscal 1996, the Company
invested $1.0 million in cash in the purchase of three staffing companies.
These acquisitions collectively resulted in goodwill of approximately $47.4
million which is generally amortized over a period of forty years.
Financing activities provided $50.3 million, $22.6 million and $2.8 million
for fiscal 1998, fiscal 1997 and fiscal 1996, respectively.
During fiscal 1998, the Company derived $2.3 million from the issuance of
153,209 shares of Common Stock upon the exercise of Class C Warrants. The
Warrants were issued in a public offering undertaken by the Company during
1989, and after several extensions, expired on April 30, 1998.
On June 13, 1997, the Company completed a public offering of 2,875,000
shares of Common Stock, of which, 2,698,187 shares were sold by the Company
and 176,813 shares were sold by certain selling stockholders. The net
proceeds to the Company after offering costs were $23,271,723.
On June 3, 1998, the Company completed a public offering of 2,700,000
shares of its Common Stock, of which, 2,509,980 shares were sold by the
Company and 190,020 shares were sold by certain selling stockholders. The
net proceeds to the Company after offering costs were $49,291,445.
On August 19, 1998, the Company and its subsidiaries entered into an
agreement with Mellon Bank N.A., administrative agent for a syndicate of
banks, which provides for a $75.0 million Revolving Credit Facility.
Borrowings under the Revolving Credit Facility bear interest at the
Company's option, at LIBOR (London Interbank Offered Rate), plus applicable
margin or the agent bank's prime rate. Borrowings under the Revolving
Credit Facility are collateralized by all of the assets of the Company and
its subsidiaries and a pledge of all of the stock of its subsidiaries. The
Revolving Credit Facility also contains various financial and non-financial
covenants. The Revolving Credit Facility expires August 2001. There were no
amounts outstanding under the Revolving Credit Facility at October 31,
1998.
The Company anticipates that its primary uses of capital in future periods
will be for acquisitions and the funding of increases in accounts
receivable. Funding for further acquisitions will be derived from the
Revolving Credit Facility, funds generated through operations, or future
financing transactions.
The Company's business strategy is to achieve growth both internally
through operations and externally through strategic acquisitions. The
Company's liquidity and capital resources may be affected in the future as
the Company continues to grow through implementation of this strategy which
may involve acquisitions facilitated through the use of cash and/or debt
and equity securities.
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Liquidity and Capital Resources (Continued)
The Company does not, as of the date of this Report, have material
commitments for capital expenditures and does not anticipate entering into
any such commitments during the next twelve months. The Company continues
to evaluate acquisitions of various businesses which are complementary to
its current operations. 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.
Seasonal Variations
The Company's quarterly operating results are affected primarily by the
number of billing days in the quarter and the seasonality of its customers'
businesses. The Company usually experiences higher revenues in its fourth
quarter due to increased economic activity and experiences lower revenues
in the first four months of the following year, showing gradual improvement
over the remainder of the year.
Impact of Inflation
The effects of inflation on the Company's operations were not significant
during the periods presented.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which is
effective for all periods beginning after December 15, 1997. SFAS 131
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the
enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas
in which they operate, and their major customers. Management is currently
evaluating the impact of the disclosure requirements of this statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement No. 133 establishes
accounting and reporting standards for derivative instruments and for
hedging activities and is effective for years beginning after June 15,
1999. The Company will determine the extent to which SFAS No. 133 applies
and adopt the standards established as required.
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Year 2000 Readiness Disclosure
Many existing computer systems use only two digits to identify a year with
the assumption that the first two digits of every year are "19". With the
year 2000 approaching, computer systems that are not Year 2000 compliant
will read the year 2000 as 1900 may malfunction. The Company's program to
assess the extent of issues related to Year 2000 compliance and to develop
and implement solutions for those issues is being directed by senior
management with the Company's Chief Technology Officer having primary
responsibility for the coordination, remediation, implementation
contingency planning efforts. Designated personnel at the Company's
headquarters and at each of the Company's operating locations have been
assigned Year 2000 compliance responsibilities.
The program is focused on internal information technology systems,
computer-aided design systems, non-IT systems (equipment with embedded
micro processors), facilities and the status of compliance by larger
customers, service providers, suppliers and other key third parties. The
program involves the following phases:
Assessment, Remediation Planning, Contingency Planning,
Remediation/Replacement Implementation and Compliance Testing.
The internal IT systems compliance issues are most critical and relate to
the Company's financial systems, computer networks and communications
systems and personnel recruiting and human resource systems. Corporate
level personnel have responsibility to insure that all financial, network
and communication systems will be Year 2000 compliant as well as
determining the status of compliance by larger customers, suppliers and
other key third parties. Personnel recruiting and human resource tracking
systems for billable resources are being evaluated and remediated by local
branch management under the coordination of the Corporate Chief Technology
Officer.
Year 2000 compliance related to internal financial systems is being
addressed in two ways. The Company has decided to replace its primary
financial system with a state-of-the-art integrated enterprise-wide system.
This decision was driven by the need for enhanced processing, control and
reporting capabilities using current technologies. Based on representations
and warranties of the vendor, the Company believes that the new system will
be Year 2000 compliant and is expected to be operational by the third
quarter of 1999. In addition, the existing primary system and other
ancillary systems have been evaluated for Year 2000 compliance and the
required remediation and testing are underway. These efforts are scheduled
to be concluded by early 1999.
With respect to larger customers, suppliers and other key third parties,
questionnaire surveys are being distributed for use in assessing their
state of compliance in order to develop contingency plans in case of
non-compliance. Customers and suppliers with whom there is electronic
interchange of data are of primary focus to insure that both the Company
and those parties are Year 2000 compliant with respect to such
interchanges. The Company does not believe the consequences of
non-compliance of third party suppliers and customers would be material due
to the limited exposure the Company has assessed to these parties.
The responsibility for identifying and assessing compliance issues and then
implementing solutions for computer-aided design systems, non-IT systems,
facilities, and the status of compliance by suppliers and other third
parties, rests primarily with each operating office. Solutions for Year
2000 issues related to computer-aided design systems, non-IT systems and
facilities will, of necessity, come from vendors and others providing the
related services. The Company, however, plans to identify compliance issues
and monitor remediation or replacement efforts. With respect to local
suppliers and third parties, the Company has also distributed questionnaire
surveys in order to assess their state of compliance in order to develop
contingency plans in case of non-compliance. The identification and
assessment process is well underway with the expectation that solutions
will be in place by the second quarter of 1999.
The cost of the Company's Year 2000 and enterprise wide solution
implementation program is expected to be approximately $1.2 million,
approximately $600,000 of which has been incurred as of the date of the
filing of this Report. This amount includes costs associated with the new
financial system and the new personnel recruiting and human resource
systems described above. These systems already were scheduled for
implementation and their implementation was not accelerated because of Year
2000 issues.
22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (Continued)
Year 2000 Readiness Disclosure - (Continued)
The Company believes that its program to address Year 2000 compliance is on
schedule for completion before the end of 1999. However, there can be no
assurance that there will be no material impact as a result of Year 2000
issues, particularly considering the dependence and interdependence that
exists with third parties and that resources for remediation and
replacement may not be available in the required time frame. Since the
Company has a greater level of control over implementing solutions to Year
2000 issues relating to its internal systems, it is more likely that
adverse impacts on the Company could originate with third parties rather
than from the Company's inability to have its internal systems Year 2000
compliant. If issues related to internal systems are not resolved before
the end of 1999, the consequences to the Company could be material.
The Company is in the process of developing a most reasonably likely worst
case Year 2000 scenario. At the appropriate time, but not later than
mid-1999, the Company will determine the extent to which contingency plans
are required.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
Item 8. Financial Statements and Supplemental Data
The Company's financial statements, together with the report of the
Company's independent auditors, begins on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
23
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with regard to this item is incorporated by reference to the
definitive 1999 Proxy Statement under the caption "ELECTION OF DIRECTORS"
and "OTHER INFORMATION - Executive Officers of the Registrant," or in an
Amendment to this Report to be filed with the Securities and Exchange
Commission.
Item 11. Executive Compensation
Information with regard to this item is incorporated herein by reference to
the definitive 1999 Proxy Statement under the caption "ADDITIONAL
INFORMATION - Management Compensation," or in an Amendment to this Report
to be filed with the Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with regard to this item is incorporated herein by reference to
the definitive 1999 Proxy Statement under the caption "PRINCIPAL
STOCKHOLDERS," or in an Amendment to this Report to be filed with the
Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
Information with regard to this item is incorporated herein by reference to
the definitive 1999 Proxy Statement under the caption "ADDITIONAL
INFORMATION - Certain Transactions," or in an Amendment to this Report to
be filed with the Securities and Exchange Commission.
24
PART IV
Item 14. 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.
(b) Reports on Form 8-K
1. RCM Technologies, Inc. Current Report on Form 8-K dated July 23, 1998,
as amended.
(c) Exhibits
(3)(a) Articles of Incorporation, as amended; incorporated by reference
to Exhibit 3(a) of the Registrant's Form 10-K dated October 31,
1994.
(3)(b) Bylaws, as amended; incorporated by reference to Exhibit 3 of the
Registrant's Quarterly Report on Form 10-Q dated January 31, 1996.
(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 of the
Registrant's Current Report on Form 8-K dated March 19, 1996.
(10)(a) Loan and Security Agreement dated August 19, 1998 between RCM
Technologies, Inc. and all of its Subsidiaries and Mellon Bank,
N.A. as Agent.
(10)(b) RCM Technologies, Inc. 1992 Incentive Stock Option Plan;
incorporated by reference to Exhibit A of the Registrant's Proxy
Statement dated April 23, 1992, filed with the Commission on March
9, 1992.
(10)(c) RCM Technologies, Inc. 1994 Non-employee Director Stock Option
Plan; incorporated by reference to Exhibit A of the Registrant's
Proxy Statement dated May 19, 1994, filed with the Commission on
June 22, 1994.
(10)(d) RCM Technologies, Inc. 1996 Executive Stock Option Plan dated
August 15, 1996; incorporated by reference to Exhibit 10(l) of the
1996 the Registrant's Annual Report on Form 10-K dated October 31,
1996 (the "1996 10-K").
* (10)(e) Second Amended and Restated Termination Benefits Agreement
dated March 18, 1997 between the Registrant and Leon Kopyt;
incorporated by reference to Exhibit 10(g) of the Registration
Statement on Form S-1 dated March 21, 1997 (Commission File No.
333-23753) (the"1997 S-1").
* (10)(f) 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) of the 1996
10-K.
(10)(g) Stock Pledge Agreement dated August 30, 1995 by and between the
former shareholders of Cataract, Inc. RCM Technologies, Inc. and
CI Acquisition Corp.; incorporated by reference to Exhibit (c)(5)
of the Registrant's current Report on Form 8-K dated August 30,
1995.
(10)(h) Amended to Stock Pledge Agreement dated December 28, 1998 by and
among RCM Technologies Inc. Cataract, Inc. (F/K/A CI Acquisition
Corp.) and the former shareholders of Cataract, Inc.
(10)(i) 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) of the
Registrant's current Report on Form 8-K dated March 19, 1996.
25
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K -
(Continued)
(11) Computation of Earnings Per Share.
(21) Subsidiaries of the Registrant.
(23) Consent of Grant Thornton, LLP
(27) Financial Data Schedule.
* Constitutes a management contract or compensatory plan or arrangement.
26
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: January 11, 1999 By:/s/ Leon Kopyt
-------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer and
Director
Date: January 11, 1999 By:/s/ Stanton Remer
-----------------------------
Stanton Remer
Chief Financial Officer, Treasurer, Secretary and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: January 11, 1999 /s/ Leon Kopyt
--------------------------------
Leon Kopyt
Chairman, President, Chief Executive Officer
(Principal Executive Officer) and Director
Date: January 11, 1999 /s/ Stanton Remer
-------------------------------
Stanton Remer
Chief Financial Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer)
and Director
Date: January 11, 1999 /s/ Norman S. Berson
----------------------------
Norman S. Berson
Director
Date: January 11, 1999 /s/ Robert B. Kerr
-------------------------------
Robert B. Kerr
Director
Date: January 11, 1999 /s/ Woodrow B. Moats, Jr.
--------------------------
Woodrow B. Moats, Jr.
Director
27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
Consolidated Balance Sheets, October 31, 1998 and 1997 F-2
Consolidated Statements of Income,
Years Ended October 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended October 31, 1998, 1997 and 1996 F-5
Consolidated Statements of Cash Flows,
Years Ended October 31, 1998, 1997 and 1996 F-6
Notes to Consolidated Financial Statements F-8
Independent Auditors' Report F-20
Schedules I and II F-21
F-1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31, 1998 and 1997
ASSETS
1998 1997
---------------- ----------------
Current assets
Cash and cash equivalents $ 22,187,536 $ 918,028
Accounts receivable, net of allowance for doubtful accounts
of $486,000 and $316,000 in 1998 and 1997, respectively 40,680,268 24,850,304
Prepaid expenses and other current assets 1,199,809 673,265
--------- -------
Total current assets 64,067,613 26,441,597
---------- ----------
Property and equipment, at cost
Equipment and leasehold improvements 5,041,184 2,508,680
Less: accumulated depreciation and amortization 2,437,316 1,373,275
--------- ---------
2,603,868 1,135,405
--------- ---------
Other assets
Deposits 145,876 94,149
Intangible assets (net of accumulated amortization
of $1,823,000 and $805,000 in 1998 and 1997,
respectively) 50,249,794 26,411,445
---------- ----------
50,395,670 26,505,594
Total assets $117,067,151 $ 54,082,596
============ = ==========
The accompanying notes are an integral part of these
financial statements.
F-2
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
October 31, 1998 and 1997
LIABILITIES AND SHAREHOLDERS' EQUITY
1998 1997
---------------- ----------------
Current liabilities
Note payable - bank $ 2,000,000
Accounts payable and accrued expenses $ 3,202,625 1,315,937
Accrued payroll 5,505,465 4,501,502
Taxes other than income taxes 1,629,945 665,106
Income taxes payable 56,989 679,937
------ -------
Total current liabilities 10,395,024 9,162,482
---------- ---------
Income taxes payable 308,129
Shareholders' equity
Preferred stock, $1.00 par value; 5,000,000 shares authorized;
no shares issued or outstanding
Common stock, $0.05 par value; 40,000,000 shares authorized; 10,447,525 and
7,582,206 shares issued in 1998 and
1997, respectively 522,376 379,110
Additional paid-in capital 92,997,711 40,877,540
Retained earnings 13,152,040 3,355,335
---------- ---------
106,672,127 44,611,985
Total liabilities and shareholders' equity $117,067,151 $ 54,082,596
=========== = ==========
The accompanying notes are an integral part of these
financial statements.
F-3
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended October 31, 1998, 1997 and 1996
1998 1997 1996
---------------- ---------------- ----------------
Revenues $201,452,318 $113,959,093 $61,039,173
Cost of services 153,028,095 86,832,348 48,779,886
----------- ---------- ----------
Gross profit 48,424,223 27,126,745 12,259,287
---------- ---------- ----------
Operating costs and expenses
Selling, general and administrative 30,460,647 18,068,899 8,914,102
Depreciation and amortization 1,454,416 572,279 329,680
--------- ------- -------
31,915,063 18,641,178 9,243,782
---------- ---------- ---------
Operating income 16,509,160 8,485,567 3,015,505
---------- --------- ---------
Other income (expense)
Interest expense, net of interest income 235,044 ( 184,645) ( 163,695 )
Other, net ( 30,332 )
------
235,044 ( 184,645) ( 194,027 )
------- ------- -------
Income before income taxes 16,744,204 8,300,922 2,821,478
Income taxes 6,947,499 3,460,989 453,539
--------- --------- -------
Income from continuing operations 9,796,705 4,839,933 2,367,939
Loss from discontinued operations, net
of income tax benefit of $262,500 (Note 2) 362,500
-------
Net income $ 9,796,705 $ 4,477,433 $ 2,367,939
= ========= = ========= = =========
Basic earnings per share:
Continuing operations $1.11 $0.80 $0.56
Discontinued operations (0.06)
Net income $1.11 $0.74 $0.56
===== ===== =====
Diluted earnings per share:
Continuing operations $1.07 $0.76 $0.55
Discontinued operations (0.06)
Net income $1.07 $0.70 $0.55
===== ===== =====
The accompanying notes are an integral part of these
financial statements.
F-4
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
Additional
Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock
Balance, October 31, 1995 3,255,024 $162,751 $10,916,692 $( 3,490,037) $( 62,821)
Exercise of stock options 10,000 500 15,438
Issuance of common stock
in connection with acquisitions 1,336,827 66,841 5,242,807
Sale of common stock 276,625 13,832 986,168
Net income 2,367,939
Balance, October 31, 1996 4,878,476 243,924 17,161,105 ( 1,122,098) ( 62,821)
Retirement of Treasury Stock ( 62,800 )( 3,140) ( 59,681) 62,821
Exercise of stock options 4,171 209 23,031
Sale of common stock 2,698,187 134,909 23,136,814
Issuance of common stock
in connection with acquisitions 43,347 2,167 317,312
Issuance of common stock
in connection with legal settlement 20,825 1,041 298,959
Net income 4,477,433
Balance, October 31, 1997 7,582,206 379,110 40,877,540 3,355,335
Exercise of stock options 202,130 10,107 688,607
Exercise of warrants 153,209 7,660 2,265,618
Sale of common stock 2,509,980 125,499 49,165,946
Net income 9,796,705
Balance, October 31, 1998 10,447,525 $522,376 $92,997,711 $13,152,040
========== ======== =========== =========== --------------
The accompanying notes are an integral part of these
financial statements.
F-5
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended October 31, 1998, 1997 and 1996
1998 1997 1996
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 9,796,705 $ 4,477,433 $ 2,367,939
- --------- - --------- - ---------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,454,416 572,279 329,680
Non cash portion of legal settlement 300,000
Provision for losses on accounts
receivable 170,000 239,748 61,000
Changes in assets and liabilities:
Accounts receivable ( 15,999,964) ( 11,104,607) ( 8,522,460 )
Prepaid expenses and other
current assets ( 526,544) ( 137,067) 267,464
Accounts payable and accrued expenses 1,886,688 581,146 262,684
Accrued payroll 1,003,963 1,711,777 1,606,791
Taxes other than income taxes 964,839 232,499 227,113
Income taxes payable ( 931,077) ( 626,685) 1,482,751
------- ------- ---------
( 11,977,679) ( 8,230,910) ( 4,284,977 )
---------- --------- ---------
Net cash used in operating activities ( 2,180,974) ( 3,753,477) ( 1,917,038 )
--------- --------- ---------
The accompanying notes are an integral part of these
financial statements.
F-6
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended October 31, 1998, 1997 and 1996
1998 1997 1996
---------------- ---------------- ----------------
Cash flows from investing activities:
Property and equipment acquired ( 796,905) ( 450,350) ( 128,264 )
Increase in deposits ( 51,727) ( 6,110) ( 44,965 )
Cash paid for acquisitions,
net of cash acquired ( 25,964,323) ( 17,426,351) ( 1,049,433 )
---------- ---------- ---------
Net cash used in investing activities ( 26,812,955) ( 17,882,811) ( 1,222,662 )
---------- ---------- ---------
Cash flows from financing activities:
Net borrowing (repayments) under
short term debt arrangements ( 2,000,000) ( 746,636) 1,832,201
Exercise of warrants 2,273,278
Sale of common stock 49,291,445 23,271,723 1,000,000
Exercise of stock options 698,714 23,240 15,938
------- ------ ------
Net cash provided by financing activities 50,263,437 22,548,327 2,848,139
---------- ---------- ---------
Net increase (decrease) in cash
and cash equivalents 21,269,508 912,039 ( 291,561 )
Cash and cash equivalents at beginning of year 918,028 5,989 297,550
------- ----- -------
Cash and cash equivalents at end of year $ 22,187,536 $ 918,028 $ 5,989
= ========== = ======= = =====
Supplemental cash flow information:
Cash paid for:
Interest expense $ 422,579 $ 444,347 $ 163,811
Income taxes 7,878,576 3,825,174 726,332
Acquisitions:
Fair value of assets acquired 28,794,018 20,929,663 7,302,476
Liabilities assumed 2,829,695 3,503,312 6,253,043
--------- --------- ---------
Cash paid, net of cash acquired $ 25,964,323 $ 17,426,351 $ 1,049,433
= ========== = ========== = =========
The accompanying notes are an integral part of these
financial statements.
F-7
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
Business
RCM Technologies, Inc. (the "Company"), through its wholly-owned
subsidiaries, is a multi-regional provider of Information Technology and
other professional staffing services. The Company provides contract and
temporary personnel in the Information Technology, Professional Engineering
and Technical, Specialty Healthcare and General Support sectors of the
staffing industry to a diversified base of national, regional and local
customers.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated.
Property and Equipment
Depreciation of equipment is provided for in amounts sufficient to relate
the cost of depreciable assets to operations over their estimated useful
lives on the straight-line basis. Estimated useful lives range from five to
ten years. Leasehold improvements are amortized over the lives of the
respective leases or the service lives of the improvements, whichever is
shorter.
Income Taxes
The Company and its wholly-owned subsidiaries file a consolidated federal
income tax return. The Company follows the liability method of accounting
for income taxes. Under this method, deferred income tax assets and
liabilities are determined based on differences between the financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable for the period and the change during the period
in deferred tax assets and liabilities.
Revenue Recognition
Revenue is recognized concurrently with the performance of services. When
the Company enters into long-term contracts for the supply of temporary
personnel, billings are rendered for employee hours worked according to
contractual billing rates.
Profit Sharing Plan
The Company maintains 401(k) plans as of October 31, 1998, for the benefit
of eligible employees. The plans are profit-sharing plans, including a cash
or deferred arrangement pursuant to Section 401(k) of the Internal Revenue
Code of 1986, as amended (the"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 may, at the discretion of the Board of
Directors, make contributions of cash to match deferrals of compensation by
participants. Contributions charged to operations by the Company for fiscal
years ended October 31, 1998, 1997 and 1996 were $88,736, $6,246 and $0,
respectively.
F-8
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies - (Continued)
Cash Equivalents
For purposes of presenting the consolidated statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
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
(goodwill) is reflected in the consolidated balance sheets as Intangible
Assets. Goodwill, net of amortization of $1,823,000 at October 31, 1998 and
$805,000 at October 31, 1997, is being amortized on a straight-line method
over forty years. Amortization expense for goodwill in 1998, 1997, and 1996
was $1,018,000, $411,000 and $211,000, respectively.
Long-Lived Assets, Goodwill and Other Intangible Assets
The Company reviews long-lived assets and certain identifiable intangibles
to be held, used or disposed of, for impairment based on the undiscounted
cash flows from the related assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Fair Value of Financial Instruments
The carrying value of financial instruments approximates fair value. The
Company's financial instruments are accounts receivable, accounts payable
and long-term debt. The Company does not have any off-balance sheet
financial instruments or derivatives.
Comprehensive Income
In June, 1997 the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income. Statement No. 130 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a separate financial
statement. The only component of comprehensive income that applies to the
Company for 1998, 1997 and 1996 is earnings as reported in the
consolidated statement of earnings. Accordingly, a separate financial
statement reflecting comprehensive income is not necessary.
F-9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies - (Continued)
Per Share Data
In February, 1997 the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share. The provisions of Statement No. 128 are
effective for years ending after December 15, 1997. Accordingly, earnings
per share data is presented in accordance with those provisions and prior
year data has been restated. Earnings used to calculate both basic and
diluted earnings per share for all periods are reported earnings in the
Company's consolidated statement of earnings. 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 1998, 1997, and 1996 was determined as follows:
1998 1997 1996
---- ---- ----
Basic
Average shares outstanding 8,787,334 6,068,713 4,247,907
========= ========= =========
Diluted
Shares used for basic 8,787,334 6,068,713 4,247,907
Dilutive effect of stock options 364,569 292,468 72,664
------- ------- ------
9,151,903 6,361,181 4,320,571
========= ========= =========
Options to purchase 19,000 shares of common stock at prices ranging from
$14.00 to $14.50 per share were outstanding during the year ended October
31, 1998, but were not included in the computation of diluted EPS because
their exercise prices were greater than the average market price of the
common shares.
Options to purchase 10,000 shares of common stock at $10.63 per share and
warrants to purchase 157,342 shares of common stock at $15 per share were
outstanding during the year ended October 31, 1997, but were not included
in the computation of diluted EPS because their exercise prices were
greater than the average market price of the common shares.
Warrants to purchase 157,342 shares of common stock at $15 per share were
outstanding during the year ended October 31, 1996, but were not included
in the computation of diluted EPS because the exercise price was greater
than the average market price of the common shares.
F-10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
2. Discontinued Operations
In fiscal 1992, the Company discontinued the operations of an environmental
technology development business. In connection with the discontinued
operations, on September 26, 1997, the Company and Alumax, Inc. entered
into a Settlement Agreement, whereby the Company agreed to settle the
potential controversy by paying $300,000 and issuing 20,825 restricted
shares of its common stock, valued at $300,000 to Alumax, Inc. Professional
fees associated with the settlement were approximately $25,000. The charge
to operations for the year ended October 31, 1997 was $625,000 and the tax
effected result was $362,500, or $.06 per share.
3. Sale of Common Stock
On June 13, 1997, the Company completed a public offering of 2,875,000
shares of Common Stock, of which, 2,698,187 shares were sold by the Company
and 176,813 shares were offered by certain selling stockholders. The public
offering was undertaken pursuant to the terms of a Registration Statement
on Form S-1 originally filed with the Securities and Exchange Commission on
March 21, 1997 and a final Prospectus dated June 10, 1997. The net proceeds
to the Company after offering costs was $23,271,723.
On June 3, 1998, the Company completed a public offering of 2,700,000
shares of Common Stock, of which, 2,509,980 shares were sold by the Company
and 190,020 shares were offered by certain selling stockholders. The public
offering was undertaken pursuant to the terms of a Registration Statement
on Form S-3 originally filed with the Securities and Exchange Commission on
April 29, 1998 and a final Prospectus dated May 29, 1998. The net proceeds
to the Company after offering costs was $49,291,445.
4. Acquisitions
During the three year period ended October 31, 1998, the Company acquired
15 businesses in the staffing and consulting services industry. These
acquisitions, which are summarized below, have been accounted for as
purchases and, accordingly, the results of operations of the acquired
companies have been included in the consolidated results of operations of
the Company from the dates of acquisition.
In connection with certain acquisitions, the Company is obligated to pay
contingent consideration to the selling shareholders upon the acquired
businesses achieving certain earnings targets over periods ranging from 2-3
years. In general, the contingent consideration amounts fall into two
tiers: (a) tier 1 ("Deferred Consideration") - amounts are due, provided
that these acquisitions achieve a base level of earnings which has been
determined at the time of acquisition and (b) tier 2 ("Earnouts") - amounts
are not fixed and are based on the growth in excess of the base level
earnings. The Deferred Consideration payments are anticipated to be as
follows:
Year Ending Amount
----------- --------------
1999 $ 7,300,000
2000 11,150,000
2001 7,890,000
2002 750,000
-------
$ 27,090,000
The Deferred Consideration and Earnouts, when paid, will be recorded as
additional purchase consideration and will be amortized over a 40 year
period. Earnouts cannot be estimated with any certainty.
F-11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
The Company's acquisition activities are as follows:
Year ended October 31,
1998 1997 1996
-------------- -------------- --------------
Number of acquisitions 7 5 3
Consideration paid:
Cash at closing $22,625,000 $18,400,000 $ 621,500
Common stock at closing $318,433 $ 5,399,638
Deferred Consideration payments $15,100,000 $ 7,550,000
Subsequent to October 31, 1998 and prior to December 11, 1998, the
Company's acquisition activities are as follows:
(Unaudited)
Number of acquisitions 3
Consideration paid:
Cash at closing $12,525,000
Deferred Consideration payments $ 5,349,000
The following unaudited results of operations have been prepared assuming the
acquisitions had occurred as of the beginning of the periods presented. Those
results are not necessarily indicative of results of future operations nor of
results that would have occurred had the acquisitions been consummated as of the
beginning of the periods presented.
Year Ended October 31,
1998 1997
------------------ ------------------
Revenues $252,413,000 $204,820,000
Operating income 22,319,000 16,089,000
Income from continuing operations 11,789,000 6,506,000
Loss from discontinued operations (363,000)
Net income 11,789,000 6,143,000
Earnings per share from continuing operations 1.29 .99
Loss per share from discontinued operations (.06)
Earnings per share $1.29 $.93
F-12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
5. Property and Equipment
Property and equipment is comprised of the following: Year Ended October 31,
1998 1997
---------------- ------------
Office equipment $ 4,789,978 $ 2,294,906
Capitalized lease 174,873 174,873
Leasehold improvements 76,333 38,901
--------------- ------------
5,041,184 2,508,680
Less: accumulated depreciation and amortization 2,437,316 1,373,275
------------ ---------
$ 2,603,868 $ 1,135,405
============ =============
6. Note Payable - Bank
On August 19, 1998, the Company and its subsidiaries entered into an
agreement with Mellon Bank N.A., administrative agent for a syndicate of
banks, which provides for a $75 million revolving credit facility (the
"Revolving Credit Facility"). Borrowings under the Revolving Credit
Facility bear interest at the Company's option, at LIBOR (London Interbank
Offered Rate), plus applicable margin, or the agent bank's prime rate.
Borrowing under the Revolving Credit Facility is collateralized by all of
the assets of the Company and its subsidiaries and a pledge of all of the
stock of its subsidiaries. The Revolving Credit Facility also contains
various financial and non-financial covenants. The Revolving Credit
Facility expires August 2001. The weighted average interest rate at October
31, 1998 was 8.30%. There were no amounts outstanding under the Revolving
Credit Facility at October 31, 1998.
Prior to August 19, 1998, the Company and its subsidiaries maintained a
credit facility (the "Credit Facility") in the amount of $20 million with
Mellon Bank, N.A. Borrowing under the Credit Facility was based on 85% of
accounts receivable on which not more than ninety days elapsed since the
date of invoicing. Borrowing under the Credit Facility bore interest, at
the Company's option, at LIBOR (London Interbank Offered Rate) or the
bank's prime rate, plus the applicable margin.
The interest rate charged by the bank at October 31, 1997 was the prime
rate of 8.25%.
7. Shareholders' Equity
Common shares reserved
Shares of unissued common stock were reserved for the following purposes:
October 31,
1998 1997
-------------- --------------
Exercise of warrants 157,342
Exercise of options outstanding 1,021,420 1,087,400
Future grants of options 746,150 382,300
---------- ----------
Total 1,767,570 1,627,042
========= =========
F-13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
7. Shareholders' Equity - (Continued)
Incentive Stock Option Plans
On April 23, 1998, the shareholders approved amendments to the RCM
Technologies, Inc. 1992 Incentive Stock Option Plan ("1992 Plan") and the
1994 Non-Employee Director Stock Option Plan (the "Director Option Plan").
The amendments increase the number of shares of the Company's common stock
issuable under the 1992 Option Plan by 400,000 shares to 500,000 shares and
increase the number of shares issuable under the Director Option Plan by
100,000 shares to 180,000 shares.
On April 23, 1992, the shareholders approved the 1992 Plan. At October 31,
1998, there were 413,720 shares of Common Stock reserved under the 1992
Plan for issuance no later than February 13, 2002 to officers, directors
and key employees of the Company and its subsidiaries. Options under the
1992 Plan are intended to be incentive stock options pursuant to Section
422A of the Internal Revenue Code. The option terms cannot exceed ten years
and the exercise price cannot be less than 100% of the fair market value of
the shares at the time of grant
On May 19, 1994, the shareholders approved the Director Option Plan as a
means of recruiting and retaining nonemployee directors of the Company. At
October 31, 1998, there were 114,000 shares of Common Stock reserved under
the Director Option Plan for issuance no later than July 19, 2004. All
director stock options are granted at fair market value at the date of
grant. The exercise of options granted is contingent upon service as a
director for a period of one year. If the optionee ceases to be a director
of the Company, any option granted shall terminate.
On August 15, 1996, (amended on January 15, 1997) the Board of Directors
approved the RCM Technologies, Inc. 1996 Executive Stock Plan ("1996
Plan"). At October 31, 1998, there were 1,239,850 shares of Common Stock
reserved under the 1996 Plan for issuance not later than August 15, 2006 to
officers and key employees of the Company and its subsidiaries.
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). It applies APB Opinion No. 25 and related interpretations in
accounting for its plans and does not recognize compensation expense for is
stock-based compensation plans. Had compensation cost been determined based
on the fair value of the options at the grant date consistent with SFAS
123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
Year Ended October 31,
-------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
Net earnings:
As reported $ 9,796,705 $ 4,477,433 $ 2,367,939
Pro forma $ 8,096,746 $ 2,542,196 $ 2,235,750
Diluted earnings per share:
As reported $1.07 $.70 $.55
Pro forma $.92 $.39 $.52
These pro forma amounts may not be representative of future disclosures
because they do not take into effect proforma compensation expense related
to grants before November 1, 1995. The fair value of these options is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions for grants in fiscal year
1998, 1997 and 1996, respectively: expected volatility of 30% all;
risk-free interest rates of 5.14%, 6.43% and 6.32%; and expected lives of 5
years. The weighted-average fair value of options granted during fiscal
years 1998, 1997 and 1996 was $4.38, $3.46 and $2.16, respectively.
F-14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
7. Shareholders' Equity - (Continued)
Incentive Stock Option Plans - (Continued)
Transactions related to all stock options are as follows:
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
1998 Price 1997 Price 1996 Price
---------- ----------- ------------ ----------- ------------ -----------
Outstanding options
at beginning of year 1,087,400 $7.46 214,400 $3.54 163,300 $2.63
Granted 239,500 11.23 883,200 8.40 61,100 5.64
Forfeited ( 103,350) 10.13 ( 6,029) 6.68
Exercised ( 202,130) 3.46 ( 4,171) 5.57 ( 10,000) 1.59
----------- --------- --------
Outstanding options
at end of year 1,021,420 $8.86 1,087,400 $7.46 214,400 $3.54
=========== ========= =======
Exercisable options
at October 31, 1,012,420 708,900 141,300
========== ========== =======
Option grant price
per share $3.44 $1.09 $1.09
to $14.50 to $10.625 to $8.13
The following table summarizes information about stock options outstanding
at October 31, 1998:
Weighted-Average
Range of Number of Remaining Weighted-Average
Exercise Prices Outstanding Options Contractual Life Exercise Price
$ 3.44 - $ 5.15 4,000 5.5 years $ 3.44
$ 5.16 - $ 7.73 504,250 8.1 years $ 7.11
$ 7.74 - $ 11.63 474,170 9.0 years $ 10.41
$ 11.67 - $ 17.44 39,000 9.2 years $ 14.00
F-15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
8. Commitments
Termination Benefits Agreement
In December 1993, the Company entered into a Termination Benefits Agreement
with Mr. Kopyt that was subsequently 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): the
Company is obligated to pay Mr. Kopyt a lump sum equal to his salary and
bonus for the remainder of the Extended Term; the exercise price of the
options to purchase 500,000 shares granted to Mr. Kopyt under the 1996
Executive Stock Plan will be reduced to 50% of the average market price of
the Common Stock for the 60 days prior to the date of termination if the
resulting exercise price is less than the original exercise price of $7.125
per share; 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
October 31, 1998, Mr. Kopyt would have been entitled to cash payments of
approximately $3.4 million (representing salary and excise tax payments).
Operating leases
The Company leases office facilities and various equipment under
noncancellable leases expiring at various dates through February 2007.
Certain leases are subject to escalation clauses based upon changes in
various factors. The minimum future annual operating lease commitments for
leases with noncancellable terms in excess of one year, exclusive of
escalation, are as follows:
Year ending October 31, Amount
----------------------- ------
1999 $ 1,570,000
2000 1,252,000
2001 900,000
2002 624,000
2003 279,000
Thereafter 692,000
------------
Total $5,317,000
==========
Rent expense for the years ended October 31, 1998, 1997 and 1996 was
$1,456,000, $814,000 and $498,000, respectively.
F-16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
9. Major Customers
Revenues from major clients for the years ended October 31, 1998, 1997 and
1996 were as follows:
For the year ended October 31, 1998, no one client contributed more
than 5% of total revenues.
For the year ended October 31, 1997, one client contributed $13,069,000
or 11.5% of total revenues. Accounts receivable from the client
represented 4.4% of total accounts receivable at October 31, 1997.
For the year ended October 31, 1996, one client contributed $7,776,000
or 12.7% of total revenues. Accounts receivable from the client
represented 13.3% of total accounts receivable at October 31, 1996.
10. Related Party Transactions
A director of the Company is a shareholder in a law firm that rendered
various legal services to the Company. Fees paid to the law firm have not
been significant.
11. Income Taxes
The components of income tax expense are as follows:
Year ended October 31,
1998 1997 1996
-------------- -------------- --------------
Current
Federal $5,204,332 $2,282,603 $ 48,000
State and local 1,743,167 915,886 405,539
----------- ------------ ---------
Total income tax expense - current $6,947,449 $3,198,489 $453,539
========== ========== ========
The income tax provisions reconciled to the tax computed at the statutory
Federal rate was:
1998 1997 1996
---------- ---------- ----------
Tax at statutory rate 34.0% 34.0 % 34.0%
State income taxes, net of Federal
income tax benefit 6.8 7.9 9.4
Net operating loss carry-overs ( 1.9 ) ( 32.4)
Other, net .4 1.7 5.1
------ ------ ------
41.2% 41.7 % 16.1%
==== ==== =====
F-17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
Significant components of the Company's deferred tax assets at October 31,
1998 and 1997 are as follows:
1998 1997
------------ ------------
Deferred tax assets due to:
Allowance for doubtful accounts $132,000 $132,000
Less: 100% valuation allowance
--------------- ---------------
Total net deferred tax assets $132,000 $132,000
======== ========
12. Selected Quarterly Financial Information (Unaudited)
Year Ended October 31, 1998
Gross Net Income
Sales Profit Net Income Per Share (a)
1st Quarter $ 37,232,243 $ 9,152,239 $ 1,777,401 $.22
2nd Quarter 48,942,175 11,607,585 2,218,751 .27
3rd Quarter 52,008,578 12,323,918 2,590,784 .26
4th Quarter 63,269,322 15,340,481 3,209,769 .30
---------- ---------- --------- ---
Total $ 201,452,318 $ 48,424,223 $ 9,796,705 $1.07
= =========== = ========== = ========= =====
Year Ended October 31, 1997
Gross Net Income
Sales Profit Net Income Per Share (a)
1st Quarter $ 21,150,721 $ 5,099,404 $ 780,987 $.16
2nd Quarter 27,379,979 6,246,111 917,333 .18
3rd Quarter 28,009,367 6,918,940 1,205,928 .19
4th Quarter 37,419,026 8,862,290 1,573,185 .20
-------------- ------------- ----------- -----
Total $113,959,093 $27,126,745 $4,477,433 $.70
============ =========== ========== ====
(a) Total of quarterly amounts do not agree to the annual amount due to
separate quarterly calculations of weighted average shares outstanding.
F-18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
October 31, 1998, 1997 and 1996
13. Interest Expense, Net of Interest Income
Interest expense, net of interest income consisted of the following:
1998 1997 1996
-------------- -------------- --------------
Interest expense ( $422,579) ( $444,347) ( $163,811)
Interest income 657,622 259,702 116
---------- --------- ------------
$235,044 ( $184,645) ( $163,695)
======== ======== ========
14. New Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which is effective for all periods
beginning after December 15, 1997. SFAS No. 131 requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate,
and their major customers. Management is currently evaluating the impact of
the disclosure requirements of this statement.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities
and is effective for years beginning after June 15, 1999. The Company will
determine the extent to which SFAS No. 133 applies and adopt the standards
established as required.
15. Contingency
On November 6, 1998, two former officers of the Company filed suit against
the Company alleging wrongful termination of their employment, failure to
make severance payments, wrongful conduct by the Company in connection with
the grant of Stock Options to the plaintiffs and wrongfully limited the
number of shares of Company stock that could be sold by the plaintiffs. The
suit asks for damages of approximately $471,000 plus other unspecified
amounts. Management believes the suit is without merit and intends to
defend the claim vigorously.
F-19
Independent Auditors' Report
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 October 31,
1998 and 1997 and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audit provides 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 October 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1998 in conformity with generally
accepted accounting principles.
We have also audited Schedules I and II of RCM Technologies, Inc. and
Subsidiaries as of and for each of the three years in the period ended October
31, 1998. In our opinion, these schedules present fairly, in all material
respects, the information required to be set forth therein.
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
December 11, 1998
F-20
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
October 31, 1998 and 1997
ASSETS
1998 1997
------------- -------------
Current assets
Cash $ 2,069 $ 29,803
Prepaid expenses and other assets 9,865 1,601
----- -----
Total current assets 11,934 31,404
------ ------
Other assets
Deposits 5,695 5,695
Long-term receivables from affiliates 106,672,260 44,619,656
----------- ----------
106,677,955 44,625,351
Total assets $106,689,889 $ 44,656,755
============ = ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 17,762 $ 43,770
-------------- -------------
Shareholders' equity
Common stock 522,376 379,110
Additional paid in capital 92,997,711 40,877,540
Retained earnings 13,152,040 3,355,335
------------- -------------
Total shareholders' equity 106,672,127 44,611,985
------------- -------------
Total liabilities and shareholders' equity $106,689,889 $ 44,656,755
============= =============
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc. and
subsidiaries are an integral part of these statements.
F-21
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
Years Ended October 31, 1998, 1997 and 1996
1998 1997 1996
---------------- ---------------- ----------------
Operating expenses
Administrative $ 210,317 $ 166,110 $ 139,280
------------- ------------- -------------
Operating loss ( 210,317) ( 166,110) ( 139,280 )
------------ ------------ ------------
Other expense
Non recurring charge ( 625,000)
Miscellaneous expense ( 10,261 )
------------- ------------- ------------
( 625,000) ( 10,261 )
------------
Loss before management fee income ( 210,317) ( 791,110) ( 149,541 )
Management fee income 210,317 791,110 149,541
------------- ------------- -------------
Income before income taxes
Income taxes
Income before income in subsidiaries
Equity in earnings in subsidiaries 9,796,705 4,477,433 2,367,939
------------- ------------- -------------
Net income $ 9,796,705 $ 4,477,433 $ 2,367,939
============= ============= =============
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc. and
subsidiaries are an integral part of these statements.
F-22
SCHEDULE I
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF CASH FLOWS
Years Ended October 31, 1998, 1997 and 1996
1998 1997 1996
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 9,796,705 $ 4,477,433 $ 2,367,939
------------- ------------- -------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Changes in operating assets and liabilities:
Prepaid expenses and other assets ( 8,264) 131,062 2,274
Accounts payable and accrued expenses ( 26,008) 43,770
( 34,272) 174,832 2,274
------------ ------------- -------------
Net cash provided by operating activities 9,762,433 4,652,265 2,370,213
------------- ------------- -------------
Cash flows from investing activities:
Share in deficiency in assets of
subsidiaries ( 9,796,705) ( 4,477,433) ( 2,367,939 )
------------
Decrease (increase) in long-term
receivables from subsidiaries ( 52,256,899) ( 23,448,518) ( 1,025,065 )
------------ ------------ ------------
Net cash used in
investing activities ( 62,053,604) ( 27,926,011) ( 3,393,004 )
------------ ------------ ------------
Cash flows from financing activities:
Sale of common stock 49,291,445 23,271,723 1,000,000
Exercise of warrants 2,273,278
Exercise of stock options 698,714 23,240 15,938
------------- ------------- -------------
Net cash provided by financing activities 52,263,437 23,294,963 1,015,938
------------- ------------- -------------
Net increase (decrease) in cash and equivalents ( 27,734) 21,217 ( 6,853 )
Cash and equivalents at beginning of year 29,803 8,586 1,733
------------- ------------- -------------
Cash and equivalents at end of year $ 2,069 $ 29,803 $ 8,586
============= ============= =============
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc. and
subsidiaries are an integral part of these statements.
F-23
SCHEDULE II
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended October 31, 1998, 1997 and 1996
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 October 31, 1998
Allowance for doubtful
accounts on trade
receivables $315,748 $170,000 $485,748
Year Ended October 31, 1997
Allowance for doubtful
accounts on trade
receivables $ 76,000 $324,581 $ 84,833 $315,748
Year Ended October 31, 1996
Allowance for doubtful
accounts on trade
receivables $ 15,000 $ 15,320 $ 76,320 $ 76,000
F-24
RCM TECHNOLOGIES, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Years Ended October 31, 1998, 1997 and 1996
1998 1997 1996
------------------ ------------------ ------------------
Diluted earnings
Net income applicable to common stock $ 9,796,705 $ 4,477,433 $ 2,367,939
============= ============= =============
Shares
Weighted average number of common
shares outstanding 8,787,334 6,068,713 4,247,907
Common stock equivalents 364,569 292,468 72,664
------------- ------------- -------------
Total 9,151,903 6,361,181 4,320,571
============= ============= =============
Diluted earnings per common share $1.07 $.70 $.55
===== ==== ====
Basic
Net income applicable to common stock $ 9,796,705 $ 4,477,433 $ 2,367,939
============= ============= =============
Shares
Weighted average number of common
shares outstanding 8,787,334 6,068,713 4,247,907
============= ============= =============
Basic earnings per common share $1.11 $.74 $.56
===== ==== ====
F-25
EXHIBIT INDEX
(10)(h) Amended to Stock Pledge Agreement dated December 28, 1998 by and among
RCM Technologies Inc. Cataract, Inc. (F/K/A CI Acquisition Corp.) and
the former shareholders of Cataract, Inc.
(11) Computation of Earnings Per Share.
(21) Subsidiaries
(23) Consent of Independent Certified Public Accountants.
(27) Financial Data Schedule
EXHIBIT 21
SUBSIDIARIES
Subsidiary State of Incorporation
- ---------- ----------------------
Intertec Design, Inc. New York
Cataract, Inc. Pennsylvania
The Consortium New Jersey
The Consortium of Maryland, Inc. New Jersey
Programming Alternatives of Minnesota, Inc. Minnesota
Camelot Contractors, Limited New Hampshire
Austin Nichols Technical Temporaries, Inc. Missouri
J. D. Karin Consulting Services, Inc. New Jersey
Northern Technical Services, Inc. Wisconsin
Staffworks, Inc. New Jersey
Global Technology Solutions, Inc. California
Integrity Systems Professionals, Inc. Michigan
Software Analysis and Management, Inc. California
* All subsidiaries of the Registrant do business as RCM Technologies, Inc.
EXHIBIT 23
Consent of Independent Certified Public Accountants
Board of Directors
RCM Technologies, Inc.
We have issued our report dated December 11, 1998 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 October
31, 1998. 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, File No. 33-80590 and File No. 33-48089.
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
January 11, 1999