UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31 , 1997
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)
(609) 486-1777
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of the Registrant's class of common
stock, as of the latest practicable date.
CLASS 7,535,801
Common Stock, $.05 par value Outstanding as of August 26, 1997
1
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1 - Consolidated Financial Statements
Page
<S> <C>
Consolidated Balance Sheets as of July 31, 1997 (Unaudited)
and October 31, 1996 (Audited) 3
Unaudited Consolidated Statements of Income for the Nine Month
Periods Ended July 31, 1997 and 1996 5
Unaudited Consolidated Statements of Income for the Three Month 6
Periods Ended July 31, 1997 and 1996
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Nine Month Period Ended July 31, 1997 7
Unaudited Consolidated Statements of Cash Flows for the Nine
Month Periods Ended July 31, 1997 and 1996 8
Notes to Unaudited Consolidated Financial Statements 10
ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 19
ITEM 5 - Other Information 19
ITEM 6 - Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31, 1997 and October 31, 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- ---------
(Unaudited) (Audited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 14,833,368 $ 5,989
Accounts receivable, net of allowance for doubtful accounts
of $300,748 and $76,000 in 1997 and 1996, respectively 19,252,653 13,985,445
Prepaid expenses and other current assets 725,139 404,198
------- -------
Total current assets 34,811,160 14,395,632
---------- ----------
Property and equipment, at cost
Equipment and leasehold improvements 2,275,298 1,644,831
Less: accumulated depreciation and amortization 1,267,695 1,142,740
--------- ---------
1,007,603 502,091
--------- -------
Other assets
Deposits 111,431 88,039
Intangible assets (net of accumulated amortization
of $660,044 and $366,337 in 1997 and 1996,
respectively) 14,221,176 9,420,858
---------- ---------
14,332,607 9,508,897
---------- ---------
Total assets $ 50,151,370 $ 24,406,620
= ========== = ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
July 31, 1997 and October 31, 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
(Unaudited) (Audited)
Current liabilities
<S> <C> <C>
Note payable - bank $ 2,000,000 $ 2,746,636
Accounts payable and accrued expenses 575,768 734,791
Accrued payroll 3,419,518 2,789,725
Taxes other than income taxes 730,662 432,607
Income taxes payable 696,766 920,439
------- -------
Total current liabilities 7,422,714 7,624,198
--------- ---------
Income taxes payable 314,475 562,312
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; 7,514,863 and
4,878,476 shares issued in 1997 and
1996, respectively 375,743 243,924
Additional paid-in capital 40,256,286 17,161,105
Treasury stock, at cost 62,800 shares ( 62,821 )
Retained earnings (accumulated deficit) 1,782,152 ( 1,122,098 )
--------- ---------
42,414,181 16,220,110
Total liabilities and shareholders' equity $ 50,151,370 $ 24,406,620
= ========== = ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
4
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended July 31,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 76,540,067 $ 40,940,265
Cost of services 58,275,612 32,877,999
---------- ----------
Gross profit 18,264,455 8,062,266
---------- ---------
Operating costs and expenses
Selling, general and administrative 12,616,194 5,936,644
Depreciation and amortization 368,503 233,586
------- -------
12,984,697 6,170,250
---------- ---------
Operating income 5,279,758 1,892,016
Interest expense, net of interest income 282,444 107,690
------- -------
Income before income taxes 4,997,314 1,784,326
Income taxes 2,093,066 210,790
--------- -------
Net income $ 2,904,248 $ 1,573,536
= ========= = =========
Net earnings per share $.53 $.38
==== ====
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended July 31,
1997 1996
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 28,009,367 $ 17,378,155
Cost of services 21,090,427 13,579,924
---------- ----------
Gross profit 6,918,940 3,798,231
--------- ---------
Operating costs and expenses
Selling, general and administrative 4,672,356 2,853,964
Depreciation and amortization 130,422 101,116
------- -------
4,802,778 2,955,080
--------- ---------
Operating income 2,116,162 843,151
Interest expense, net of interest income 19,777 56,601
------ ------
Income before income taxes 2,096,385 786,550
Income taxes 890,457 101,613
------- -------
Net income $ 1,205,928 $ 684,937
= ========= = =======
Net earnings per share $.19 $.14
==== ====
</TABLE>
The accompanying notes are an integral part of these
financial statements.
6
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months Ended July 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-in (Accumulated Treasury
Shares Amount Capital Deficit) Stock
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1996 4,878,476 $ 243,924 $17,161,105 ($1,122,098) ($ 62,821)
Exercise of Stock Options 1,000 50 1,044
Sale of Common Stock 2,698,187 134,909 23,153,818
Retirement of Treasury Stock ( 62,800) ( 3,140)( 59,681) 62,821
Net Income 2,904,248
Balance, July 31, 1997 7,514,863 $ 375,743 $40,256,286 $1,782,150 $
========= ========== =========== ========== =
</TABLE>
The accompanying notes are an integral part of these
financial statements.
7
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended July 31,
1997 1996
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,904,249 $ 1,573,536
- --------- - ---------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 368,503 233,586
Provision for losses on accounts
receivable 224,748 30,000
Changes in assets and liabilities:
Accounts receivable ( 4,368,088) ( 553,542 )
Prepaid expenses and other
current assets ( 299,850) 182,222
Accounts payable and accrued expenses ( 358,058) ( 443,791 )
Accrued payroll 254,210 32,383
Taxes other than income taxes 246,560 16,807
Income taxes payable ( 471,510) ( 247,054 )
------- -------
Total adjustments ( 4,403,485) ( 749,389 )
--------- -------
Net cash provided by (used in) operating activities ( 1,499,236) 824,147
--------- -------
</TABLE>
The accompanying notes are an integral part of these
financial statements.
8
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended July 31,
1997 1996
(Unaudited) (Unaudited)
Cash flows from investing activities:
<S> <C> <C>
Increase in intangible assets ($ 218,844) ($ 631,854 )
Property and equipment acquired ( 379,996) ( 79,158 )
Increase in deposits ( 23,392) ( 30,671 )
Cash paid for acquisitions,
net of cash acquired ( 5,594,339) ( 621,500 )
--------- -------
Net cash used in investing activities ( 6,216,571) ( 1,363,183 )
--------- ---------
Cash flows from financing activities:
Sale of common stock 23,288,728 1,000,000
Exercise of stock options 1,094 8,813
Net repayments under short term debt arrangements ( 746,636) ( 671,866 )
Repayments of long term debt ( 84,274 )
------
Net cash provided by financing activities 22,543,186 252,173
---------- -------
Net increase (decrease) in cash and cash equivalents 14,827,379 ( 286,863 )
Cash and cash equivalents at beginning of period 5,989 297,550
----- -------
Cash and cash equivalents at July 31, $ 14,833,368 $ 10,687
= ========== = ======
Supplemental cash flow information:
Cash paid for:
Interest expense $ 393,931 $ 107,690
Income taxes $ 2,489,576 $ 524,917
Acquisitions:
Fair value of assets acquired $ 6,223,325 $ 1,720,498
Liabilities assumed 628,986 1,098,998
------- ---------
Cash paid, net of cash acquired $ 5,594,339 $ 621,500
= ========= = =======
</TABLE>
The accompanying notes are an integral part of these
financial statements.
9
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. General
The accompanying consolidated financial statements have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). This Report on Form 10-Q should be read in
conjunction with the Company's Annual Report on Form 10-K for the year
ended October 31, 1996. Certain information and footnote disclosures which
are normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to SEC rules and regulations. The information reflects all normal
and recurring adjustments which, in the opinion of management, are
necessary for a fair presentation of the financial position of the Company
and its results of operations for the interim periods set forth herein. The
results for the nine months ended July 31, 1997 are not necessarily
indicative of the results to be expected for the full year.
2. 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 offered and 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 $23,288,728.
The Company did not receive any of the proceeds from the sale of the shares
by the selling stockholders.
3. Acquisition
On January 7, 1997, the Company acquired Programming Alternatives of
Minnesota, Inc. ("PAMI"), a Minneapolis, Minnesota-based specialty provider
of information technology personnel, particularly those with high demand
client-server skills. The acquisition was completed effective as of
November 4, 1996 through a stock purchase transaction (the "Purchase")
pursuant to which PAMI became a wholly-owned subsidiary of the Company.
The Purchase consideration paid to the former shareholders of PAMI
consisted of $4,500,000 cash and a $1,625,000 three year promissory note
payable contingent upon PAMI achieving certain base levels of operating
income for each twelve month period following the Purchase during the term
of the note. An additional earn-out payment may be made to the former
shareholders of PAMI at the end of the third anniversary of the Purchase to
the extent that operating income during this period exceeds these base
levels. The Purchase has been accounted for under the purchase method of
accounting. The cost in excess of net assets acquired of $4,483,331 is
included in the Company's Consolidated Balance Sheet as "Intangible Assets"
and is being amortized over a 40 year period.
On April 1, 1997, the Company acquired certain operating assets of
Programming Resources Unlimited ("PRU") for $600,000 cash plus $300,000 of
consideration in the form of a three year promissory note payable upon
attaining certain earnings targets within the three-year period. The
Company also agreed to pay additional consideration to the shareholders of
PRU in the event that during the three-year period the performance of PRU
exceeds the established earnings targets. PRU generated revenues of
approximately $2.4 million during its fiscal year ended December 31, 1996.
Through this transaction, the Company acquired one branch office which
provides information technology staffing services. The cost in excess of
net assets acquired of $582,000 is included in the Company's Consolidated
Balance Sheet as "Intangible Assets" and is being amortized over a 40 year
period.
10
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Acquisition - (Continued)
The following unaudited results of operations have been prepared assuming
that all acquisitions which have occurred since November 1, 1995 had
occurred at 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 acquisition been consummated as of the
beginning of the periods presented.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
July 31, July 31,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Revenues $ 77,530,000 $ 62,606,000 $ 28,009,367 $ 21,968,000
Net income $ 2,947,000 $ 1,786,000 $ 1,206,000 $ 643,000
Earnings per common share $.53 $.37 $.19 $.13
</TABLE>
Proforma net income and earnings per common share are presented on a fully
taxed basis for all periods presented.
4. Income Taxes
The net income for the nine and three months ended July 31, 1996, has been
calculated after taking into account the effect of the then available net
operating loss tax carryforward (NOL). Without giving effect to the NOL,
the Company's earnings per share, on a fully taxed basis, for the nine and
three months ended July 31, 1996 would have been $.25 and $.09 per share,
respectively.
5. Stock Options
On August 15, 1996, the Board of Directors approved the RCM Technologies,
Inc. 1996 Executive Stock Plan ("1996 Plan"). The 1996 Plan, as
subsequently amended on January 15, 1997, authorizes the issuance not later
than August 15, 2006 of up to 1,250,000 shares of Common Stock to officers
and key employees of the Company and its subsidiaries. Effective November
21, 1996, the Chief Executive Officer, Mr. Kopyt, was granted 500,000
options pursuant to the 1996 Plan.
<TABLE>
<CAPTION>
Transactions related to all stock options during the nine months ended July
31, 1997 are as follows:
<S> <C>
Outstanding options, beginning of period....................................... 214,400
Granted........................................................................ 810,000
Forfeited......................................................................( 5,200)
Exercised......................................................................( 1,000)
------------
Outstanding options, end of period............................................. 1,018,200
=========
Exercisable options ........................................................... 714,400
==========
Option grant price per share................................................... $1.25
to $10.125
</TABLE>
11
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings Per Share
Earnings per share is based on the weighted average number of common shares
outstanding during the periods presented. For the nine months ended July
31, 1997 and 1996, the weighted average number of shares outstanding was
5,522,945 and 4,121,307, respectively. For the three months ended July 31,
1997 and 1996, the weighted average number of shares outstanding was
6,486,100 and 4,873,094, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share. Statement
128 supersedes Accounting Principles Board Opinion No. 15, Earnings Per
Share, but is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Therefore, reported earnings
per share for the quarters ended July 31, 1997 and 1996 have been
determined using the principles prescribed by Opinion No. 15. If the
Standards prescribed by Statement 128 were applied for these quarterly
periods, there would be no difference in the reported per share amounts.
7. Interest Expense
Interest expense for the nine months ended July 31, 1997 and 1996 was
$393,931 and $107,690, respectively.
Interest expense for the three months ended July 31, 1997 and 1996 was
$131,264 and $56,601, respectively.
8. Reclassification
Certain items in the 1996 Statement of Income have been reclassified to
conform to 1997 financial statement presentation.
12
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
When used in or incorporated by reference into this Report, the words
"estimate," "project," "intend," "expect" and similar expressions are intended
to identify forward-looking statements regarding events and financial trends
which may affect the Company's future operating results and financial position.
Such statements are subject to risks and uncertainties that could cause the
Company's actual results and financial position to differ materially. Such
factors are set forth in the Company's Annual Report on Form 10-K for the year
ended October 31, 1996, under the heading "Business-Risk Factors."
Overview
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. The Company's business and strategy have
changed dramatically since its inception in 1971. Through 1981, the Company's
business focused on the development of environmental technologies and the
operation of related environmental businesses. In 1981, the Company diversified
its operations through the acquisition of Intertec Design, Inc., a staffing
company that provided technical, clerical and light industrial personnel. Under
current management in 1992, the Company chose to discontinue its environmental
business and from 1992 through 1994 repositioned its core staffing business to
improve profitability and to take advantage of consolidating market dynamics.
Significant revenue growth was experienced beginning in fiscal 1995 as the
Company implemented a growth strategy that resulted in the acquisition of six
businesses in the staffing industry. This resulted in an increase in the
Company's gross margins and net income as the mix of the Company's business
shifted towards the higher margin information technology and specialty
healthcare sectors and as the Company elected to discontinue providing certain
lower margin general support services. General support services, which from
fiscal 1992 to 1994 accounted for approximately 51% of the Company's revenues,
decreased as a percentage of the Company's revenues to approximately 20% during
the nine months ended July 31, 1997. Corresponding increases were experienced in
the Company's information technology and specialty healthcare groups, accounting
for approximately 41% and 5%, respectively, of the Company's revenues during the
nine months ended July 31, 1997.
The Company realizes revenues from the placement of contract and temporary
staffing personnel. These services are normally provided to the customer on a
time and material basis at fixed hourly rates that are established for each of
the Company's staffing personnel, based upon their skill level, experience and
type of work performed. In some instances, billing rates can be adjusted based
upon increases in workmen's compensation, taxes and other agreed upon costs. A
small percentage of the Company's business is presently derived from fixed-bid
projects.
Contracts are utilized on certain of the more complex assignments where the
engagements are for longer terms or where precise documentation of 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. The average length of engagement varies from three
months to one year within the information technology and engineering sectors,
three months to six months within the specialty healthcare sector and one week
to three weeks within the general support sector. Revenues are recognized when
the services are provided.
13
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview - (Continued)
Costs of services consist primarily of salaries and compensation related
expenses for billable staffing personnel, including payroll taxes, employee
benefits, worker's compensation and other insurance. Selling, general and
administrative expenses consist primarily of salaries and benefits of personnel
responsible for operating activities, including certain administrative,
marketing and reporting responsibilities, including legal, accounting and
corporate office overhead. 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 estimated
at $14.6 million which is being amortized over a 40 year period currently
resulting in amortization expense aggregating approximately $365,000 annually.
The Company's net income for each of the three fiscal years in period ended
October 31, 1996, has been determined after giving effect to the utilization of
a net operating loss carryforward. This effectively reduced to a minimal amount
federal tax accruals during those periods and subjected the Company to composite
tax rates of between 9.9% and 16.1%, principally as a result of state income
taxes. During and through fiscal 1996, the Company had utilized principally all
of its net operating loss carryforward and, accordingly, expects that for the
foreseeable future its net income will be subject to taxation at full federal
and state rates.
Liquidity and Capital Resources
The Company has historically funded its capital requirements with cash generated
from operations and advances under its outstanding credit facility. 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 offered and 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 $23,288,728. The Company at July 31, 1997, had
approximately $14,833,000 in cash and equivalents. The net offering proceeds
through July 31, 1997, have been used to retire bank debt and for other working
capital requirements.
During the nine months ended July 31, 1997, operating activities used $1.5
million of cash compared to $.8 million provided by operating activities during
the comparable period in fiscal 1996. The increased use of cash used in
operating activities of $2.3 million was primarily attributable to an increase
in accounts receivable of $4.4 million from October 31, 1996. The increase was
partially offset by increased levels of profitability along with an increase in
depreciation and amortization during the comparable period in fiscal 1996.
Cash used in investing activities was $6.2 million for the nine months ended
July 31, 1997. In January 1997, the Company purchased Programming Alternatives
of Minnesota, Inc. ("PAMI") for $4.5 million in cash and a three year contingent
promissory note. In addition, the acquisition of PAMI required the use of
$660,000 in working capital funds. In April 1997, the Company acquired
Programming Resources Unlimited ("PRU") for $600,000 in cash and a three year
contingent promissory note. During fiscal 1996, the Company purchased three
staffing companies which required $1.0 million of cash as part of the purchase
price. During fiscal 1995, the Company purchased two staffing companies which
required $2.3 million in cash as part of the purchase price. The Company
financed the cash portion of the acquisitions with internal funds and bank
borrowings. These acquisitions collectively resulted in goodwill estimated at
$14.6 million which is being amortized at approximately $365,000 per year.
14
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources - (Continued)
Net cash provided by financing activities was $22.5 million and $.2 million for
the nine months ended July 31, 1997 and 1996, respectively. The increase was
attributable to the net proceeds of the Company's recent offering of Common
Stock.
On December 19, 1996, the Company and its subsidiaries entered into an amended
and restated loan agreement with Mellon Bank, N.A. providing for a credit
facility of up to $20,000,000 (the "Revolving Credit Facility") which expires on
June 30, 1999. The Revolving Credit Facility is collateralized by accounts
receivable, contract rights and furniture and fixtures together with unlimited
guarantees from the Company. The Revolving Credit Facility requires the Company
and its subsidiaries to meet certain financial objectives and maintain certain
financial covenants with respect to net income, effective net worth, working
capital, senior indebtedness to effective net worth ratios, capital
expenditures, current assets to current liabilities ratios, consolidated working
capital and consolidated tangible net worth. At October 31, 1996, and July 31,
1997, the Company and its subsidiaries were in compliance with all financial
covenants contained within the Revolving Credit Facility.
Advances under the Revolving Credit Facility are to be used to meet cash flow
requirements for the subsidiaries as well as operating expenses for the Company.
Borrowing under the Revolving Credit Facility is based on 85% of accounts
receivable on which not more than ninety days have elapsed since the date of
invoicing. The interest rate charged by the bank under the Revolving Credit
Facility is based on the London Interbank Offered Rate ("LIBOR") plus 2.25%.
The Company anticipates that its primary uses of capital in future periods will
be for acquisitions and the funding of increases in accounts receivables. The
Company believes that the net proceeds from its recent public offering of Common
Stock on June 13, 1997, (See Note 2) and borrowings under the Revolving Credit
Facility and any net cash flow from operations will be sufficient to meet the
Company's capital needs for at least the next twelve months.
Prior to 1977, the Company operated a facility located in Fontana, California
(the "Facility") at which it processed certain materials to recover aluminum.
The property on which the Facility was located (the "Property") was owned by a
former shareholder and officer ("Former Officer") of the Company. In 1977, the
Company sold certain assets (the "1977 Transaction") utilized in its operation
to a company (the "Purchaser") that continued processing similar materials at
the Facility until 1982. As part of the 1977 Transaction, the Company was
permitted to store on the Property an existing stockpile of aluminum oxide
materials (the "Stockpile") which was available for consumption in the
Purchaser's operations. From 1977 to 1980, the Purchaser utilized a significant
amount of material from the Stockpile in its operations. Material generated by
the Purchaser's operations were also added to the Stockpile. The Purchaser
acquired the Property in 1985 from the Former Officer.
Purportedly in response to an order from a state environmental agency (which,
along with a subsequent order, is referred to herein as the "Order") relating to
potential ground water degradation, the Purchaser performed a number of actions,
including, in 1992, disposal of the then existing Stockpile at an approximate
cost of $5.6 million. The Purchaser has sought contribution from the Company for
its proportionate share of the disposal costs, as well as anticipated
maintenance costs of approximately $700,000, on common law grounds and pursuant
to certain federal and state environmental laws. Based upon, among other things,
an analysis of environmental studies performed before and after the 1977
Transaction as well as a review of the compliance records of the state
environmental agency, the Company has concluded that: (i) the Facility was in
material compliance with all applicable federal and state environmental laws at
the time of the 1977 Transaction; (ii) the Purchaser was cited for numerous
violations of applicable environmental laws after the 1977 Transaction, thus,
any violations of laws after 1977, including any consequent remediation and
disposal obligations, were likely the responsibility of the Purchaser; (iii)
neither the costs incurred by the Purchaser, nor the events leading up to the
incurrence of these costs, appear to support a claim under federal environmental
laws; (iv) certain actions taken and costs incurred by the Purchaser may not
have been necessary or required to comply with the
15
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources - (Continued)
Order; (v) liability, if any, would only apply to the minority percentage of the
Stockpile attributable to the Company's operations; and (vi) the Purchaser's
contribution claims for costs incurred in 1992 and earlier in response to the
Order may be barred under the statute of limitations relating to the state law
claims.
The Company believes it has meritorious defenses to the Purchaser's claims and,
in management's opinion, the Company's exposure under the claims is not likely
to have a materially adverse impact on the Company's overall financial
condition. There can be no assurance, however, that the Company will not incur
material expenses and costs in connection with the defense and resolution of any
claims brought by the Purchaser or that the Company will not ultimately be
responsible for certain of the costs incurred by the Purchaser, which may
include pre- and post-judgment interest, in an amount that may be material to
the Company. Furthermore, since the Company has not established any reserves in
connection with such claims, any such liability, if at all, would be recorded as
an expense in the period incurred or estimated. This amount, even if not
material to the Company's overall financial condition, could adversely affect
the Company's results of operations in the period recorded. Management intends
to vigorously oppose any such claims.
<TABLE>
<CAPTION>
Results of Operations - Nine Months Ended July 31, 1997, Compared to Nine Months Ended July 31, 1996
Nine Months Ended July 31,
1997 1996
% Of % Of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
Revenues $ 76,540,067 100.0% $ 40,940,265 100.0%
Cost of services 58,275,612 76.1 32,877,999 80.3
Gross profit 18,264,455 23.9 8,062,266 19.7
Selling, general and administrative 12,616,194 16.5 5,936,664 14.5
Depreciation and amortization 368,503 .5 233,586 .6
Operating income 5,279,758 6.9 1,892,016 4.6
Interest expense, net of interest income 282,444 .4 107,690 .3
Income before income taxes 4,997,314 6.5 1,784,326 4.3
Income taxes 2,093,066 2.7 210,790 .5
Net income $ 2,904,248 3.8% $ 1,573,536 3.8%
Earnings per share $.53 $.38
</TABLE>
Revenues. Revenues increased 87.0%, or $35.6 million, for the nine months ended
July 31, 1997, as compared to the comparable prior year period. Of this
increase, approximately $20.7 million was attributable to revenue growth through
acquisitions and approximately $14.9 million was from internal growth. The
internal growth rate for the nine months ended July 31, 1997 was 23.8%.
Cost of Services. Cost of services increased 77.2% , or $25.4 million, for the
nine months ended July 31, 1997 as compared to the equivalent prior year period.
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 76.1% for the nine months
ended July 31, 1997, from 80.3% for the comparable prior year period. This
decline was primarily attributable to a greater percentage of the Company's
revenues being derived from specialty staffing services.
16
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended July 31, 1997,
Compared to Nine Months Ended July 31, 1996 - (Continued)
Selling, General and Administrative. Selling, general and administrative
expenses increased 112.5%, or $6.7 million, for the nine months ended July 31,
1997, as compared to the comparable prior year period. This increase resulted
from the change in the mix of the business during the nine months ended July 31,
1997, which required higher marketing, sales, recruiting and administrative
expenses than the comparable prior year period. Selling, general and
administrative expenses as a percentage of revenues increased to 16.5% for the
nine months ended July 31, 1997, from 14.5% in the comparable prior year period,
primarily attributable to the increased sales, recruiting and administrative
expenses necessary to support the Company's continued growth within the
information technology sector.
Depreciation and Amortization. Depreciation and amortization increased 57.8%, or
$134,900, for the nine months ended July 31, 1997, as compared to the comparable
prior year period. This increase was primarily due to the amortization of
intangible assets incurred in connection with the acquisitions.
Interest Expense, Net of Interest Income. Actual interest expense of $393,931
for the nine months ended July 31, 1997, was partially offset by $111,487 of
interest income, that was earned from the investment in interest bearing
deposits of the net proceeds of the Company's recent public offering after the
retirement of bank debt. Interest expense increased 265.8%, or $286,000, for the
nine months ended July 31, 1997, as compared to the comparable prior year
period. 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 893.0%, or $1.9 million for the nine
months ended July 31, 1997, as compared to the comparable prior year period.
This increase was due to an increase in the effective tax rate from 11.8% to
41.8% 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.
<TABLE>
<CAPTION>
Three Months Ended July 31, 1997, Compared to Three Months Ended July 31, 1996
Three Months Ended July 31,
1997 1996
% Of % Of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
Revenues $ 28,009,367 100.0% $ 17,378,155 100.0%
Cost of services 21,090,427 75.3 13,579,924 78.1
Gross profit 6,918,940 24.7 3,798,231 21.9
Selling, general and administrative 4,672,356 16.7 2,853,964 16.4
Depreciation and amortization 130,422 .5 101,116 .6
Operating income 2,116,162 7.6 843,151 4.9
Interest expense, net of interest income 19,777 .1 56,601 .3
Income before income taxes 2,096,385 7.5 786,550 4.5
Income taxes 890,457 3.2 101,613 .6
Net income $ 1,205,928 4.3% $ 684,937 3.9%
Earnings per share $.19 $.14
</TABLE>
17
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended July 31, 1997,
Compared to Three Months Ended July 31, 1996 - (Continued)
Revenues. Revenues increased 61.2%, or $10.6 million, for the three months ended
July 31, 1997, as compared to the comparable prior year period. Of this
increase, approximately $4.6 million was attributable to revenue growth through
acquisitions and approximately $6.0 million was from internal growth. The
internal growth rate when comparing the three months ended July 31, 1997 with
the three months ended July 31, 1996 was 27.5%.
Cost of Services. Cost of services increased 55.3% , or $7.5 million, for the
three months ended July 31, 1997 as compared to the equivalent prior year
period. 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 75.3% for the three months
ended July 31, 1997, from 78.1% for the comparable prior year period. This
decline was primarily attributable to a greater percentage of the Company's
revenues being derived from specialty staffing services.
Selling, General and Administrative. Selling, general and administrative
expenses increased 63.7%, or $1.8 million, for the three months ended July 31,
1997, as compared to the comparable prior year period. This increase resulted
from the change in the mix of the business during the three months ended July
31, 1997, which required higher marketing, sales, recruiting and administrative
expenses than the comparable prior year period. Selling, general and
administrative expenses as a percentage of revenues increased to 16.7% for the
three months ended July 31, 1997, from 16.4% in the comparable prior year
period, primarily attributable to the increased sales, recruiting and
administrative expenses necessary to support the Company's continued growth
within the information technology sector.
Depreciation and Amortization. Depreciation and amortization increased 29.0%, or
$29,300, for the three months ended July 31, 1997, as compared to the comparable
prior year period. This increase was primarily due to the amortization of
intangible assets incurred in connection with the acquisitions that occurred
after the first quarter of fiscal 1996.
Interest Expense, Net of Interest Income. Actual interest expense of $131,264
for the three months ended July 31, 1997, was partially offset by $111,487 of
interest income, that was earned from the investment in interest bearing
deposits of the net proceeds of the Company's recent public offering after the
retirement of bank debt.
Interest expense increased 131.9%, or $74,700, for the three months ended July
31, 1997, as compared to the comparable prior year period. 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 776.3%, or $789,000 for the three
months ended July 31, 1997, as compared to the comparable prior year period.
This increase was due to an increase in the effective tax rate from 12.9% to
42.5% 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.
18
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any material legal proceedings. The
Company has been named in Orders relating to the storage of certain
materials at a former Company facility located in Fontana, California.
For additional information with regard to this matter, see Part I of
this report, Managements' Discussion and Analysis of Financial
Condition and Results of Operations.
19
<PAGE>
PART II
OTHER INFORMATION - CONTINUED
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of earnings per share.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
None
20
<PAGE>
RCM TECHNOLOGIES, INC.
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.
(Registrant)
Date: August 26, 1997 By:/s/ Leon Kopyt
--------------
Leon Kopyt
Chairman, President, Chief Executive Officer
and Director
Date: August 26, 1997 By:/s/ Stanton Remer
-----------------
Stanton Remer
Chief Financial Officer, Treasurer, Secretary
and Director
21
<PAGE>
EXHIBIT 11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Nine Months Ended July 31, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months Ended July 31,
1997 1996
Fully diluted earnings
<S> <C> <C>
Net income applicable to common stock $ 2,904,248 $ 1,573,536
= ========= = =========
Shares
Weighted average number of shares
outstanding 5,290,599 4,058,189
Common stock equivalents 232,346 63,118
------- ------
Total 5,522,945 4,121,307
========= =========
Fully diluted earnings per common share $.53 $.38
==== ====
Primary earnings
Net income applicable to common stock $ 2,904,248 $ 1,573,536
= ========= = =========
Shares
Weighted average number of shares
outstanding 5,290,599 4,058,189
Common stock equivalents 175,252 63,118
------- ------
Total 5,465,851 4,121,307
========= =========
Primary earnings per common share $.53 $.38
==== ====
22
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE SUMMARY FINANCIAL INFORMATION IS EXTRACTED FROM THE FINANCIAL
STATEMENTS FOR THE NINE MONTHS ENDED JULY 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000700841
<NAME> RCM TECHNOLOGIES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 14,833,368
<SECURITIES> 0
<RECEIVABLES> 19,553,401
<ALLOWANCES> 300,748
<INVENTORY> 0
<CURRENT-ASSETS> 34,811,160
<PP&E> 2,275,298
<DEPRECIATION> 1,267,695
<TOTAL-ASSETS> 50,151,370
<CURRENT-LIABILITIES> 7,422,714
<BONDS> 0
0
0
<COMMON> 375,743
<OTHER-SE> 42,038,438
<TOTAL-LIABILITY-AND-EQUITY> 50,151,370
<SALES> 76,540,067
<TOTAL-REVENUES> 76,540,067
<CGS> 58,275,612
<TOTAL-COSTS> 71,260,309
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 393,931
<INCOME-PRETAX> 4,997,314
<INCOME-TAX> 2,093,066
<INCOME-CONTINUING> 2,904,248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,904,248
<EPS-PRIMARY> .53
<EPS-DILUTED> .53
</TABLE>
