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 April 30, 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)
(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 10,496,226
Common Stock, $0.05 par value Outstanding as of June 4, 1999
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 April 30, 1999 (Unaudited)
and October 31, 1998 (Audited) 3
Unaudited Consolidated Statements of Income for the Six-Month
Periods Ended April 30, 1999 and 1998 5
Unaudited Consolidated Statements of Income for the Three-Month
Periods Ended April 30, 1999 and 1998 6
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Six-Month Period Ended April 30, 1999 7
Unaudited Consolidated Statements of Cash Flows for the Six-
Month Periods Ended April 30, 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 4 - Submission of Matters to a Vote of Security Holders 20
ITEM 6 - Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
April 30, 1999 and October 31, 1998
ASSETS
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
(Unaudited) (Audited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 2,277,504 $ 22,187,536
Accounts receivable, net of allowance for doubtful accounts
of $641,000 and $486,000 in 1999 and 1998, respectively 62,435,202 40,680,268
Prepaid expenses and other current assets 3,121,867 1,199,809
--------- ---------
Total current assets 67,834,573 64,067,613
---------- ----------
Property and equipment, at cost
Equipment and leasehold improvements 6,310,341 5,041,184
Less: accumulated depreciation and amortization 2,074,022 2,437,316
--------- ---------
4,236,319 2,603,868
--------- ---------
Other assets
Deposits 183,853 145,876
Intangible assets (net of accumulated amortization
of $2,744,000 and $990,000 in 1999 and 1998,
respectively) 88,458,690 50,249,794
---------- ----------
88,642,543 50,395,670
Total assets $ 160,713,435 $ 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
April 30, 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 $ 4,759,585 $ 3,202,625
Accrued payroll 9,416,692 5,505,465
Taxes other than income taxes 2,477,462 1,629,945
Income taxes payable 417,055 56,989
------- ------
Total current liabilities 17,070,794 10,395,024
---------- ----------
Long-term debt 29,500,000
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; 10,483,725 and
10,447,525 shares issued in 1999 and
1998, respectively 524,186 522,376
Foreign currency translation adjustment 83,074
Additional paid-in capital 93,330,326 92,997,711
Retained earnings 20,205,055 13,152,040
---------- ----------
114,142,641 106,672,127
Total liabilities and shareholders' equity $ 160,713,435 $ 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>
Six Months Ended April 30,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 147,930,906 $ 86,174,418
Cost of services 112,694,776 65,414,594
------------- ----------
Gross profit 35,236,130 20,759,824
-------------- ----------
Operating costs and expenses
Selling, general and administrative 22,187,873 13,140,370
Depreciation and amortization 1,248,113 593,006
-------------- -------
23,435,986 13,733,376
Operating income 11,800,144 7,026,448
------------- --------------
Other income (expense)
Interest (expense), net of interest income 67,755 ( 190,624 )
Gain on foreign currency translation 3,037
------------- --------
70,792 ( 190,624 )
--------------- -------
Income before income taxes 11,870,936 6,835,824
Income taxes 4,817,921 2,839,672
------------- ---------
Net income 7,053,015 3,996,152
Other comprehensive income
Foreign currency translation adjustment 83,074
------------- ---------
Comprehensive income $ 7,136,089 $ 3,996,152
============= =============
Basic earnings per share $.67 $.52
Weighted average number of common
shares outstanding 10,473,680 7,631,729
Diluted earnings per share $.65 $.48
Weighted average number of common
and common equivalent shares
outstanding 10,828,248 8,288,012
</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 April 30,
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 80,539,313 $ 48,942,175
Cost of services 61,491,130 37,334,590
---------- ----------
Gross profit 19,048,183 11,607,585
---------- -------------
Operating costs and expenses
Selling, general and administrative 11,902,972 7,326,813
Depreciation and amortization 664,790 341,750
------------- -------------
12,567,762 7,668,563
------------- -------------
Operating income 6,480,421 3,939,022
------------- -------------
Other income (expense)
Interest (expense), net of interest income ( 88,052) ( 151,292 )
Gain on foreign currency translation 3,037 ___________
-------------
( 85,015) ( 151,292 )
------------ ------------
Income before income taxes 6,395,406 3,787,730
Income taxes 2,622,116 1,568,979
------------- -------------
Net income 3,773,290 2,218,751
Other comprehensive income
Foreign currency translation adjustment 83,074
------------- -------------
Comprehensive income $ 3,856,364 $ 2,218,751
============= =============
Basic earnings per share $.36 $.29
Weighted average number of common
shares outstanding 10,480,650 7,651,347
Diluted earnings per share $.35 $.27
Weighted average number of common
and common equivalent shares
outstanding 10,835,218 8,307,630
</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
Six Months Ended April 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Foreign
Currency Additional
Common Stock Translation Paid-in Retained
Shares Amount Adjustment Capital Earnings
<S> <C> <C> <C> <C> <C> <C>
Balance, October 31, 1998 10,445,525 $522,376 $92,997,711 $13,152,040
Exercise of stock options 38,200 1,810 332,615
Translation adjustment 83,074
Net income 7,053,015
Balance, April 30, 1999 10,483,725 $524,186 $ 83,074 $93,330,326 $20,205,055
========== ======== ========= =========== ===========
</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>
Six Months Ended April 30,
1999 1998
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 7,053,015 $ 3,996,152
------------- -------------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,248,113 593,006
Provision for losses on accounts
receivable 155,000 40,000
Changes in assets and liabilities:
Accounts receivable ( 21,909,916) ( 6,366,735 )
Prepaid expenses and other
current assets ( 1,922,058) ( 344,155 )
Accounts payable and accrued expenses 1,556,961 2,322,551
Accrued payroll 3,911,227 ( 149,606 )
Taxes other than income taxes 847,517 1,471,401
Income taxes payable 360,066 ( 334,818 )
------------- ------------
Total adjustments ( 15,753,090) ( 2,768,356 )
------------ ------------
Net cash provided by (used in) operating activities ( 8,700,075) 1,227,796
------------ -------------
</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>
Six Months Ended April 30,
1999 1998
(Unaudited) (Unaudited)
Cash flows from investing activities:
<S> <C> <C>
Increase in intangible assets $ ($ 260,515 )
Property and equipment acquired ( 1,296,890) ( 386,044 )
Increase in deposits ( 37,977) ( 13,501 )
Cash paid for acquisitions,
net of cash acquired ( 39,792,589) ( 11,409,553 )
------------ ------------
Net cash used in investing activities ( 41,127,456) ( 12,069,613 )
------------ ------------
Cash flows from financing activities:
Exercise of stock options and warrants 334,425 2,284,928
Net borrowings under short term debt arrangements 29,500,000 8,062,903
------------- -------------
Net cash provided by financing activities 29,834,425 10,347,831
------------- -------------
Effect of exchange rate changes on cash and cash equivalents 83,074
------------- -------------
Net decrease in cash and cash equivalents ( 19,910,032) ( 493,986 )
Cash and cash equivalents at beginning of period 22,187,536 918,028
------------- -------------
Cash and cash equivalents at April 30, $ 2,277,504 $ 424,042
============= =============
Supplemental cash flow information:
Cash paid for:
Interest expense $ 141,865 $ 190,624
Income taxes 4,803,805 3,042,491
</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, 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 six months ended April 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
2. Acquisitions
During the six months ended April 30, 1999, the Company acquired nine
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 (Six Months) $ 3,400,000
2000 16,290,000
2001 12,908,000
2002-thereafter 5,766,000
-------------
$ 38,364,000
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 six months ended April 30,
1999 were as follows:
Number of acquisitions 9
Consideration paid:
Cash at closing $35,588,000
Deferred Consideration $21,475,000
</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>
Six Months Ended Three Months Ended
April 30, April 30,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 163,570,000 $ 122,560,000 $ 85,250,000 $ 69,780,000
Operating income 14,155,000 10,700,000 7,220,000 6,180,000
Net income 7,877,000 4,314,000 4,050,000 2,760,000
Diluted earnings per share $.73 $.52 $.37 $.33
</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.
Borrowing 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 April 30, 1999 was 5.7%.
All borrowings at April 30, 1999 are classified long-term because the
Company intends to finance maturities as they become due with borrowings
under the Revolving Credit Facility.
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.
4. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
April 30, April 30,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest expense ($141,865) ($190,624) ($122,043) ($151,292)
Interest income 209,620 33,991
--------- ---------- --------- ----------
$ 67,755 ($190,624) ($88,052) ($151,292)
========= ========== ========= ==========
</TABLE>
11
<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
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
national, regional and local markets; (xi) the Company's ability to retain
several of its key clients; (xii) the Company's ability to maintain its
unemployment insurance premiums and workers compensation premiums; (xiii) the
risk of claims made against the Company associated with providing temporary
staffing services; (xiv) the Company's ability to manage significant amounts of
information, and periodically expand and upgrade its information processing
capabilities; (xv) the Company's ability to remain in compliance with federal
and state wage and hour laws and regulations; and (xvi) 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 major 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 six months ended April
30, 1999, information technology services and engineering services contributed
69% and 22%, respectively, of the Company's revenues. Since the beginning of
fiscal 1996, the Company has acquired 24 information technology or professional
engineering staffing services companies, aggregating $221 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 received for professional staffing services. 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)
<TABLE>
<CAPTION>
Six Months Ended April 30, 1999 Compared to Six Months Ended April 30, 1998
Six Months Ended April 30,
1999 1998
% of % of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
Revenues $ 147,930,906 100.0% $ 86,174,418 100.0 %
Cost of services 112,694,776 76.2 65,414,594 75.9
Gross profit 35,236,130 23.8 20,759,824 24.1
Selling, general and administrative 22,187,873 15.0 13,140,370 15.2
Depreciation and amortization 1,248,113 .8 593,006 .7
Operating income 11,800,144 8.0 7,026,448 8.2
Interest (expense) income, net 67,755 ( 190,624) .2
Gain on foreign currency translation 3,037 .2
Income before income taxes 11,870,936 8.0 6,835,824 7.9
Income taxes 4,817,921 3.2 2,839,672 3.3
Net income $ 7,053,015 4.8% $ 3,996,152 4.6 %
Earnings per share (diluted) $.65 $.48
==== ====
</TABLE>
Revenues. Revenues increased 71.7%, or $61.8 million, for the six months ended
April 30, 1999 as compared to the comparable prior year period. The increase was
primarily due to the acquisition of nine companies during the six months ended
April 30, 1999, along with internal growth.
Cost of Services. Cost of services increased 72.3%, or $47.3 million, for the
six months ended April 30, 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 increased to 76.2% for the six months ended
April 30, 1999 from 75.9% for the comparable prior year period. This increase
was primarily due to increased vacation and holiday charges compared to the
prior period.
Selling, General and Administrative. Selling, general and administrative
expenses increased 68.9%, or $9.0 million, for the six months ended April 30,
1999 as compared to the comparable prior year period. This increase was
attributable principally to a 71.7% increase in revenues which required
additional administrative, marketing and sales expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 15.0% for the
comparable six months ended April 30, 1999 as compared to 15.2% for the 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 110.5%,
or $655,000, for the six months ended April 30, 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 second quarter of fiscal 1998.
14
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Six Months Ended April 30, 1999 Compared to Six Months Ended April 30, 1998 -
(Continued)
Interest (Expense) Income, Net. For the six months ended April 30, 1999, actual
interest expense of $142,000 was offset by $210,000 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 decreased 177%, or $156,000, for the six
months ended April 30, 1999 as compared to the comparable prior year period.
This decrease was due primarily to the decreased borrowing requirements
necessary to fund working capital required of acquired companies.
Income Tax. Income tax expense increased 69.7%, or $2.0 million, for the six
months ended April 30, 1999 as compared to the comparable prior year period.
This increase was primarily due to increased levels of income.
<TABLE>
<CAPTION>
Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998
Three Months Ended April 30,
1999 1998
% of % of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
Revenues $ 80,539,313 100.0 % $ 48,942,175 100.0 %
Cost of services 61,491,130 76.3 37,334,590 76.3
Gross profit 19,048,183 23.7 11,607,585 23.7
Selling, general and administrative 11,902,972 14.8 7,326,813 15.0
Depreciation and amortization 664,790 .8 341,750 .7
Operating income 6,480,421 8.0 3,939,022 8.0
Interest (expense) income, net (88,052) (.1) 151,292 .3
Gain on foreign currency translation 3,037
Income before income taxes 6,395,406 7.9 3,787,730 7.7
Income taxes 2,622,116 3.2 1,568,979 3.2
Net income $ 3,773,290 4.7 % $ 2,218,751 4.5 %
Earnings per share (diluted) $.35 $.27
==== ====
</TABLE>
Revenues. Revenues increased 64.6%, or $31.6 million, for the three months ended
April 30, 1999 as compared to the comparable prior year period. The increase was
primarily due to the acquisition of six companies during the three months ended
April 30, 1999, along with internal growth.
Cost of Services. Cost of services increased 64.7%, or $24.2 million, for the
three months ended April 30, 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.
Selling, General and Administrative. Selling, general and administrative
expenses increased 62.5%, or $4.6 million, for the three months ended April 30,
1999 as compared to the comparable prior year period. This increase was
attributable principally to a 64.6% increase in revenues which required
additional administrative, marketing and sales expenses. Selling, general and
administrative expenses as a percentage of revenues decreased to 14.8% for the
comparable three months ended April 30, 1999 as compared to 15.0% for the 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.
15
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998
- (Continued)
Depreciation and Amortization. Depreciation and amortization increased 94.5%, or
$323,000, for the three months ended April 30, 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 second quarter of fiscal 1998.
Interest (Expense) Income, Net. For the three months ended April 30, 1999,
actual interest expense of $122,000 was offset by $34,000 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 decreased 41.8%, or $63,000, for the
three months ended April 30, 1999 as compared to the comparable prior year
period. This decrease was due primarily to the decreased borrowing requirements
necessary to fund working capital required of acquired companies and interest
income earned in interest bearing deposits.
Income Tax. Income tax expense increased 67.1%, or $1,053,000, for the three
months ended April 30, 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 $8.7 million of cash for the six months ended April
30, 1999 as compared to operating activities providing $1.2 million of cash for
the six months ended April 30, 1998. The decrease of $9.9 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 six months ended April 30, 1999.
Investing activities utilized $41.0 million and $12.1 million in the six months
ended April 30, 1999 and 1998, respectively. During the six months ended April
30, 1999, the Company invested $35.6 million in cash in the purchase of nine
consulting companies and $4.2 million of deferred consideration payments. During
the six months ended April 30, 1998, the Company invested $9.8 million in cash
in the purchase of three consulting companies and $1.6 million of deferred
consideration payments.
Financing activities provided $29.8 million and $10.3 million for the six months
ended April 30, 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. 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 April 30, 1999 was 5.7%. 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. The amounts outstanding under the Revolving
Credit Facility at April 30, 1999 and October 31, 1998 were $29.5 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 $38.4 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 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 and 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 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
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 before the end of 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 third quarter of 1999.
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 $1.8 million, approximately $1.1 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.
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. 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 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 21, 1999.
The following actions were taken:
1.) The following directors were elected to serve as Class C
directors on the Board of Directors, and shall serve terms
expiring at the Company's Annual Meeting in 2002, and until
their respective successors shall be elected and qualified.
Tabulated voting results were as follows:
Leon Kopyt (Class C) (For 9,202,781; Withheld 588,228)
Stanton Remer (Class C) (For 9,188,931; Withheld 602,078)
The Class A director of the Company, Norman S. Berson, will
continue to serve on the Board of Directors for a term
expiring at the Company's Annual Meeting in 2000, and until
his successor has been elected and qualified.
Each of the Class B directors of the Company, Robert B. Kerr
and Woodrow B. Moats, Jr., will continue to serve on the Board
of Directors for a term expiring at the Company's Annual
Meeting in 2001, and until his successor has been elected and
qualified.
2.) Approval of the adoption of the Company's Amended and Restated
1996 Executive Stock Plan.
Votes For - 8,022,728; Votes Against - 1,744,819; Abstentions - 23,362
3.) Approval of Grant Thornton LLP as the independent auditing
firm for the Company for the fiscal year ending October 31,
1999.
Votes For - 9,199,833; Votes Against - 579,104; Abstentions - 12,072
20
<PAGE>
PART II
OTHER INFORMATION - CONTINUED
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.
21
<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: June 4, 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>
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