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, 1999
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)
(856) 486-1777
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of the Registrant's class of common
stock, as of the latest practicable date.
CLASS 10,496,225
Common Stock, $0.05 par value Outstanding as of September 13, 1999
1
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1 - Consolidated Financial Statements
Page
Consolidated Balance Sheets as of July 31, 1999 (Unaudited)
and October 31, 1998 (Audited) 3
Unaudited Consolidated Statements of Income for the Nine-Month
Periods Ended July 31, 1999 and 1998 5
Unaudited Consolidated Statements of Income for the Three-Month
Periods Ended July 31, 1999 and 1998 6
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Nine-Month Period Ended July 31, 1999 7
Unaudited Consolidated Statements of Cash Flows for the Nine-
Month Periods Ended July 31, 1999 and 1998 8
Notes to Unaudited Consolidated Financial Statements 10
ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II - OTHER INFORMATION
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, 1999 and October 31, 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
(Unaudited) (Audited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 1,395,687 $ 22,187,536
Accounts receivable, net of allowance for doubtful accounts
of $805,000 and $486,000 in 1999 and 1998, respectively 66,364,143 40,680,268
Prepaid expenses and other current assets 2,748,738 1,199,809
--------- ---------
Total current assets 70,508,568 64,067,613
---------- ----------
Property and equipment, at cost
Equipment and leasehold improvements 7,981,752 5,041,184
Less: accumulated depreciation and amortization 2,562,931 2,437,316
--------- ---------
5,418,821 2,603,868
--------- ---------
Other assets
Deposits 190,684 145,876
Intangible assets (net of accumulated amortization
of $3,349,000 and $1,823,000 in 1999 and 1998,
respectively)
Goodwill 92,245,484 50,014,978
Other deferred charges 176,317 234,816
------- -------
92,612,485 50,395,670
Total assets $ 168,539,874 $ 117,067,151
= =========== = ===========
</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, 1999 and October 31, 1998
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
(Unaudited) (Audited)
Current liabilities
<S> <C> <C>
Accounts payable and accrued expenses $ 5,117,399 $ 3,202,625
Accrued payroll 10,167,054 5,505,465
Taxes other than income taxes 1,833,152 1,629,945
Income taxes payable 1,295,366 56,989
--------- ------
Total current liabilities 18,412,971 10,395,024
---------- ----------
Long-term debt 32,200,000
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; 10,496,225 and
10,447,525 shares issued in 1999 and
1998, respectively 524,811 522,376
Foreign currency translation adjustment ( 161,004)
Additional paid-in capital 93,473,301 92,997,711
Retained earnings 24,089,795 13,152,040
---------- ----------
117,926,903 106,672,127
Total liabilities and shareholders' equity $ 168,539,874 $ 117,067,151
= =========== = ===========
</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,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 229,768,105 $ 138,182,996
Cost of services 174,866,464 105,099,254
----------- -----------
Gross profit 54,901,641 33,083,742
---------- ----------
Operating costs and expenses
Selling, general and administrative 34,203,136 20,872,931
Depreciation and amortization 2,091,541 962,896
--------- -------
36,294,677 21,835,827
Operating income 18,606,964 11,247,915
---------- ---------------
Other income (expense)
Interest (expense), net of interest income ( 265,711) 7,657
Loss on foreign currency translation ( 6,602)
- -----
( 272,313) 7,657
- ------- -----
Income before income taxes 18,334,651 11,255,572
Income taxes 7,396,896 4,668,636
--------- ---------
Net income 10,937,755 6,586,936
Other comprehensive income (expense)
Foreign currency translation adjustment ( 161,004)
- -------
Comprehensive income $ 10,776,751 $ 6,586,936
= ========== = =========
Basic earnings per share $1.04 $.80
Weighted average number of common
shares outstanding 10,480,781 8,238,172
Diluted earnings per share $1.01 $.75
Weighted average number of common
and common equivalent shares
outstanding 10,840,658 8,732,895
</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,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 81,837,199 $ 52,008,578
Cost of services 62,171,688 39,684,660
---------- ----------
Gross profit 19,665,511 12,323,918
------------- -------------
Operating costs and expenses
Selling, general and administrative 12,015,263 7,732,561
Depreciation and amortization 843,428 369,890
------------- -------------
12,858,691 8,102,451
------------- -------------
Operating income 6,806,820 4,221,467
------------- -------------
Other income (expense)
Interest (expense), net of interest income ( 333,535) 198,281
Loss on foreign currency translation ( 9,639) ___________
-------------
( 343,174) 198,281
------------- -------------
Income before income taxes 6,463,646 4,419,748
Income taxes 2,578,905 1,828,964
------------- -------------
Net income 3,884,741 2,590,784
Other comprehensive income (expense)
Foreign currency translation adjustment ( 244,078)
------------- -------------
Comprehensive income $ 3,640,663 $ 2,590,784
============= =============
Basic earnings per share $.37 $.27
Weighted average number of common
shares outstanding 10,495,247 9,476,925
Diluted earnings per share $.36 $.26
Weighted average number of common
and common equivalent shares
outstanding 10,855,124 9,971,684
</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, 1999
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Currency Additional
Common Stock Translation Paid-in Retained
Shares Amount Adjustment Capital Earnings
<S> <C> <C> <C> <C>
Balance, October 31, 1998 10,447,525 $522,376 $92,997,711 $13,152,040
Exercise of stock options 48,700 2,435 475,590
Translation adjustment ( 161,004)
Net income 10,937,755
Balance, July 31, 1999 10,496,225 $524,811 ($161,004) $93,473,301 $24,089,795
========== ======== ========== =========== ===========
</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,
1999 1998
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 10,937,755 $ 6,586,936
------------- -------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,091,541 962,896
Provision for losses on accounts
receivable 319,000 89,700
Changes in assets and liabilities:
Accounts receivable ( 26,002,875) ( 11,404,087 )
Prepaid expenses and other
current assets ( 1,548,929) ( 389,786 )
Accounts payable and accrued expenses 1,914,774 1,533,621
Accrued payroll 4,661,589 1,947,996
Taxes other than income taxes 203,207 1,083,186
Income taxes payable 1,238,377 ( 111,490 )
------------- ------------
Total adjustments ( 17,123,316) ( 6,287,964 )
------------ ------------
Net cash provided by (used in) operating activities ( 6,185,561) 298,972
------------ -------------
</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,
1999 1998
(Unaudited) (Unaudited)
Cash flows from investing activities:
<S> <C> <C>
Property and equipment acquired ($ 3,380,494) ($ 648,812 )
Increase in deposits ( 44,808) ( 53,393 )
Purchase of acquired companies including
contingent consideration, net of cash acquired ( 43,698,007) ( 20,532,439 )
------------ ------------
Net cash used in investing activities ( 47,123,309) ( 21,234,644 )
------------ ------------
Cash flows from financing activities:
Sale of common stock 49,464,739
Exercise of stock options and warrants 478,025 2,870,312
Borrowings long-term debt 32,200,000
------------- -------------
Net cash provided by financing activities 32,678,025 52,335,051
------------- -------------
Effect of exchange rate changes on cash and cash equivalents ( 161,004)
------------ -------------
Increase (decrease) in cash and cash equivalents ( 20,791,849) 31,399,379
Cash and cash equivalents at beginning of period 22,187,536 918,028
------------- -------------
Cash and cash equivalents at July 31, $ 1,395,687 $ 32,317,407
============= =============
Supplemental cash flow information:
Cash paid for:
Interest expense $ 510,759 $ 338,033
Income taxes 6,196,360 4,780,126
The accompanying notes are an integral part of these
financial statements.
</TABLE>
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, 1998. 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, 1999 are not necessarily
indicative of the results to be expected for the full year.
2. Acquisitions
During the period November 1, 1998 through September 1, 1999, the Company
acquired twelve 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:
<TABLE>
<CAPTION>
Year Ending October 31, Amount
----------------------- --------------
<S> <C> <C>
1999 (Three Months) $ 1,500,000
2000 16,200,000
2001 15,400,000
2002-thereafter 8,600,000
-------------
$ 41,700,000
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.
The Company's acquisition activities during the period November 1, 1998
through September 1, 1999 were as follows:
Number of acquisitions 12
Consideration paid:
Cash at closing $42,488,000
Deferred Consideration $28,895,000
</TABLE>
10
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions - (Continued)
The following unaudited results of operations have been prepared assuming
that all acquisitions which have occurred since November 1, 1997 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 acquisitions been consummated as of the
beginning of the periods presented.
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
July 31, July 31,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 256,420,000 $ 214,940,000 $ 84,684,000 $ 74,591,000
Net income 12,429,000 9,117,000 4,005,000 3,664,000
Diluted earnings per share $1.15 $1.04 $.37 $.37
</TABLE>
3. Long-Term Debt
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. The
weighted average interest rate on LIBOR borrowings charged by the bank at
July 31, 1999 was 5.95%.
All borrowings at July 31, 1999 are classified long-term because the
Company intends to refinance maturities as they become due with borrowings
under the Revolving Credit Facility.
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 calls for, among
other matters, the Company to maintain certain financial standards and
prohibits the payment of dividends by the Company without prior consent of
Mellon Bank, N.A.. The Revolving Credit Facility expires August 2001.
4. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
July 31, July 31,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest expense ($510,759) ($338,034) ($368,894) ($131,187)
Interest income 245,048 345,691 35,359 329,468
----------- ----------- ------------ ----------
($265,711) $ 7,657 ($333,535) $198,281
========== ========== ========== ========
</TABLE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
11
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Private Securities Litigation Reform Act Safe Harbor Statement
Certain statements included herein and in other 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. 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 pro forma financial information and the
underlying assumptions relating to acquisitions and acquired businesses; (v)
uncertainties regarding amounts of deferred consideration and earnout payments
to become payable to former shareholders of acquired businesses; (vi) possible
adverse effects on the market price of the Company's Common Stock due to the
resale into the market of significant amounts of Common Stock; (vii) the
potential adverse effect a decrease in the trading price of the Company's Common
Stock would have upon the Company's ability to acquire businesses through the
issuance of its securities; (viii) the Company's ability to obtain financing on
satisfactory terms; (ix) the reliance of the Company upon the continued service
of its executive officers; (x) the Company's ability to remain competitive in
the markets which it serves; (xi) the Company's ability to maintain its
unemployment insurance premiums and workers compensation premiums; (xii) the
risk of claims 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.
Overview
The Company is a national provider of professional services and business
solutions focusing principally in the areas of Information Technology,
Professional Engineering and Government Services through branch offices located
in geographic regions in the United States and Canada.
The Company has pursued an aggressive growth strategy designed to transition the
Company's business from providing stand alone technical resources in a staff
augmentation capacity to higher growth, higher margin project engagements which
provide clients with business solutions that rely on leading edge technologies.
This initiative has been enacted through acquisition and internal development of
technical competencies in project management, web development, data base and
network services, call center technology and ERP. For the nine months ended July
31, 1999, information technology services and engineering services contributed
71.2% and 19.9%, respectively, of the Company's revenues. Since the beginning of
fiscal 1996 through September 1, 1999, the Company has acquired 27 information
technology or professional engineering staffing services companies, aggregating
$214 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 engineering services and solutions.
12
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview - (Continued)
The Company brings this expertise to clients in a variety of diverse sectors
such as Pharmaceutical, Health Care, Aerospace, Telecommunications, Banking and
Finance, Insurance, Utilities and Governmental Units.
The Company realizes revenues from client engagements which range from the
placement of contract and temporary technical consultants to project assignments
which are based on defined deliverables. These services are primarily provided
to the customer at hourly rates that are established for each of the Company's
consultants, based upon their skill level and experience and the type of work
performed. The Company also provides project management and consulting work
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 for professional staffing services. Consequently, the
Company is expanding 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 consultants, including payroll taxes, employee benefits
and insurances. 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 business
development, recruiting, operating activities, training 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.
13
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended July 31, 1999 Compared to Nine Months Ended July 31, 1998
<TABLE>
<CAPTION>
Nine Months Ended July 31,
1999 1998
% of % of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
Revenues $ 229,768,105 100.0% $ 138,182,996 100.0 %
Cost of services 174,866,464 76.1 105,099,254 76.1
Gross profit 54,901,641 23.9 33,083,742 23.9
Selling, general and administrative 34,203,136 14.9 20,872,931 15.1
Depreciation and amortization 2,091,541 .9 962,896 .7
Operating income 18,606,964 8.1 11,247,915 8.1
Interest (expense) income, net ( 265,711 ) ( .1) 7,657
Loss on foreign currency translation ( 6,602 )
Income before income taxes 18,334,651 8.0 11,255,572 8.1
Income taxes 7,396,896 3.2 4,668,636 3.4
Net income $ 10,937,755 4.8% $ 6,586,936 4.8 %
Earnings per share (diluted) $1.01 $.75
===== ====
</TABLE>
Revenues. Revenues increased 66.3%, or $91.6 million, for the nine months ended
July 31, 1999 as compared to the comparable prior year period. Revenue growth
was primarily attributable to acquisitions and internal growth. The Company
completed ten acquisitions in the nine months ended July 31, 1999, aggregating
$65.7 million in revenues for their respective latest twelve months prior to
acquisition. Acquired companies during the nine months ended July 31, 1999 and
1998 contributed $94.0 million in revenues in the nine months ended July 31,
1999 as compared to $19.9 million in revenues in the comparable prior year
period.
Cost of Services. Cost of services increased 66.4%, or $69.8 million, for the
nine months ended July 31, 1999 as compared to the comparable 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 was 76.1% for the nine months ended July
31, 1999 and 1998.
Selling, General and Administrative. Selling, general and administrative
expenses increased 63.9%, or $13.3 million, for the nine months ended July 31,
1999 as compared to the comparable prior year period. This increase was
attributable principally to a 66.3% increase in revenues which required
additional administrative, marketing and sales expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 14.9% for the
nine months ended July 31, 1999 as compared to 15.1% for the comparable prior
year period. 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.
Depreciation and Amortization. Depreciation and amortization increased 117.2%,
or $1.1 million, for the nine months ended July 31, 1999 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 third quarter of fiscal 1998.
14
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended July 31, 1999 Compared to Nine Months Ended July 31, 1998 -
(Continued)
Interest (Expense) Income, Net. For the nine months ended July 31, 1999, actual
interest expense of $511,000 was offset by $245,000 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 retirement of bank
debt. Interest (expense) income, net increased 357%, or $273,000, for the nine
months ended July 31, 1999 as compared to the comparable prior year period. This
increase was due primarily to the borrowing requirements necessary to acquire
ten companies during the nine months ended July 31, 1999.
Income Tax. Income tax expense increased 58.4%, or $2.7 million, for the nine
months ended July 31, 1999 as compared to the comparable prior year period. This
increase was primarily due to increased levels of income.
Three Months Ended July 31, 1999 Compared to Three Months Ended July 31, 1998
<TABLE>
<CAPTION>
Three Months Ended July 31,
1999 1998
% of % of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
Revenues $ 81,837,199 100.0% $ 52,008,578 100.0 %
Cost of services 62,171,688 76.0 39,684,660 76.3
Gross profit 19,665,511 24.0 12,323,918 23.7
Selling, general and administrative 12,015,263 14.7 7,732,561 14.9
Depreciation and amortization 843,428 1.0 369,890 .7
Operating income 6,806,820 8.3 4,221,467 8.1
Interest (expense) income, net ( 333,535 ) ( .4) 198,281 .4
Loss on foreign currency translation ( 9,639 )
Income before income taxes 6,463,646 7.9 4,419,748 8.5
Income taxes 2,578,905 3.2 1,828,964 3.5
Net income $ 3,884,741 4.7% $ 2,590,784 5.0 %
Earnings per share (diluted) $.36 $.26
==== ====
</TABLE>
Revenues. Revenues increased 57.4%, or $29.8 million, for the three months ended
July 31, 1999 as compared to the comparable prior year period. The increase was
primarily due to the acquisition of one company during the three months ended
July 31, 1999, along with internal growth. The Company completed one acquisition
in the three months ended July 31, 1999, aggregating $5.0 million in revenues
for its latest twelve months prior to the acquisition. Acquired companies during
the three months ended July 31, 1999 contributed $24.0 million in revenues in
the three months ended July 31, 1999 as compared to $-0- million in revenues in
the comparable prior year period.
Cost of Services. Cost of services increased 56.7%, or $22.5 million, for the
three months ended July 31, 1999 as compared to the comparable 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 was 76.0% for the three months ended July
31, 1999, as compared to 76.3% in the comparable prior year period. The
percentage decline was primarily attributable to a greater percentage of the
Company's revenues being derived from information technology staffing services.
15
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended July 31, 1999 Compared to Three Months Ended July 31, 1998 -
(Continued)
Selling, General and Administrative. Selling, general and administrative
expenses increased 55.4%, or $4.3 million, for the three months ended July 31,
1999 as compared to the comparable prior year period. This increase was
attributable principally to a 57.4% increase in revenues which required
additional administrative, marketing and sales expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 14.7% for the
three months ended July 31, 1999 as compared to 14.9% for the comparable prior
year period. 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.
Depreciation and Amortization. Depreciation and amortization increased 128.0%,
or $474,000, for the three months ended July 31, 1999 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 third quarter of fiscal 1998.
Interest (Expense) Income, Net. For the three months ended July 31, 1999, actual
interest expense of $369,000 was offset by $35,000 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 retirement of bank debt.
Interest (expense) income, net increased 268.2%, or $532,000, for the three
months ended July 31, 1999 as compared to the comparable prior year period. This
increase was due primarily to the borrowing requirements necessary to acquire
twelve companies since July 31, 1998.
Income Tax. Income tax expense increased 41.0%, or $750,000, for the three
months ended July 31, 1999 as compared to the comparable prior year period. This
increase was primarily due to increased levels of income.
16
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources
Operating activities used $6.2 million of cash for the nine months ended July
31, 1999 as compared to operating activities providing $300,000 of cash for the
nine months ended July 31, 1998. The decrease of $6.3 million was primarily
attributable to an increase in accounts receivable which was partially offset by
increased levels of profitability, accrued payroll, income taxes payable and
withheld payroll taxes and depreciation and amortization associated with the
acquisitions that were completed during the nine months ended July 31, 1999.
Investing activities utilized $47.1 million and $21.2 million in the nine months
ended July 31, 1999 and 1998, respectively. During the nine months ended July
31, 1999, the Company invested $39.1 million in cash in the purchase of ten
consulting companies and $4.6 million of deferred consideration payments. During
the nine months ended July 31, 1998, the Company invested $17.3 million in cash
in the purchase of five consulting companies and $3.2 million of deferred
consideration payments.
Financing activities provided $32.7 million and $52.3 million for the nine
months ended July 31, 1999 and 1998, respectively.
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 (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. The weighted average interest rate on
LIBOR borrowings charged by the bank at July 31, 1999 was 5.95%. 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 calls for, among other matters, the
Company to maintain certain financial standards and prohibits the payment of
dividends by the Company without prior consent of Mellon Bank, N.A. The
Revolving Credit Facility expires August 2001. The amounts outstanding under the
Revolving Credit Facility at July 31, 1999 and October 31, 1998 were $32.2
million and $0, respectively.
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.
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. Deferred Consideration payments to be incurred in
connection with acquisitions is estimated to be $42.0 million through October
31, 2002. 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.
17
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Year 2000 Readiness Disclosure
Many existing older computer systems were designed to store the last two digits
of the year and use this value for all date comparisons. The false assumption of
this design is that the first two digits of the year were always considered to
be '19'. This is commonly referred to as the Y2K or Year 2000 problem. 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 and 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
Company's 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 and
operational systems with a state-of-the-art integrated enterprise resource
planning system SAP R/3. 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 has become operational on August 30,
1999. The remaining non-critical systems will become Y2K compliant by November
1999.
With respect to larger customers, suppliers and other key third parties,
questionnaire surveys have been distributed and collected 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.
18
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Year 2000 Readiness Disclosure - (Continued)
The cost of the Company's Year 2000 and enterprise wide solution implementation
program is expected to be approximately $2.2 million, approximately $1.9 million
of which has been incurred as of the date of the filing of this Report. This
amount includes costs associated with the new financial and operational systems
described previously. These systems already were scheduled for installation and
their implementation was not accelerated because of Year 2000 issues.
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 make 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. However, all Y2K projects have either been completed on schedule or
remain on schedule for completion before the Year 2000.
The Company is in the process of developing a most reasonably likely worst case
Year 2000 scenario. The Company is currently developing contingency plans and
expects such plans to be completed and in place by September 30, 1999.
19
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule. (EDGAR version only)
(b) Reports on Form 8-K
None.
20
<PAGE>
RCM TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RCM Technologies, Inc.
Date: September 13, 1999 By:/s/ Stanton Remer
--- ------- -----
Stanton Remer
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the
Registrant)
<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, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH STATEMENTS. </LEGEND>
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<NAME> RCM TECHNOLOGIES, INC.
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