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 September 30, 2000
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 10,499,651
Common Stock, $0.05 par value Outstanding as of November 7, 2000
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Item 1 - Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2000 (Unaudited)
<S> <C> <C> <C>
and December 31, 1999 (Audited) 3
Unaudited Consolidated Statements of Operations and Comprehensive Income
for the Nine-Month Periods Ended September 30, 2000 and 1999 5
Unaudited Consolidated Statements of Operations and Comprehensive Income
for the Three-Month Periods Ended September 30, 2000 and 1999 6
Unaudited Consolidated Statement of Changes in Shareholders'
Equity for the Nine-Month Period Ended September 30, 2000 7
Unaudited Consolidated Statements of Cash Flows for the Nine-
Month Periods Ended September 30, 2000 and 1999 8
Notes to Unaudited Consolidated Financial Statements 10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and December 31, 1999
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
--------------- ---------------
(Unaudited) (Audited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 6,648,352 $ 4,025,808
Accounts receivable, net of allowance for doubtful accounts
Of $1,766,000 (September 30, 2000) and $1,014,000
(December 31, 1999), respectively 70,222,554 66,654,677
Income tax refund receivable 5,281,241
Prepaid expenses and other current assets 4,260,328 3,257,207
Deferred tax assets 2,169,233
--------------- ---------------
Total current assets 88,581,708 73,937,692
--------------- ---------------
Property and equipment, at cost
Equipment and leasehold improvements 9,978,167 9,789,996
Less: accumulated depreciation and amortization 3,849,278 3,151,626
--------------- ---------------
6,128,889 6,638,370
--------------- ---------------
Other assets
Deposits 199,158 205,878
Intangible assets, net of accumulated amortization
of $6,663,000 (September 30, 2000) and $4,437,000
(December 31, 1999), respectively
Goodwill 84,479,366 103,168,944
--------------- ---------------
84,678,524 103,374,822
--------------- ---------------
Total assets $179,389,121 $183,950,884
=============== ===============
</TABLE>
3
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
September 30, 2000 and December 31, 1999
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
--------------- ---------------
(Unaudited) (Audited)
Current liabilities
<S> <C> <C>
Accounts payable and accrued expenses $13,109,808 $ 4,853,763
Accrued payroll 10,789,366 5,640,054
Taxes, other than income taxes 1,592,871 1,269,265
Income taxes payable 196,106 791,173
--------------- ---------------
Total current liabilities 25,688,151 12,554,255
--------------- ---------------
Long-term liabilities
Note payable 52,700,000 47,300,000
Deferred income taxes payable 1,091,937
--------------- ---------------
53,791,937 47,300,000
--------------- ---------------
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; 10,499,651
(September 30, 2000) and 10,496,225
(December 31, 1999) issued and outstanding 524,982 524,811
Accumulated other comprehensive loss ( 264,661) ( 52,764)
Additional paid-in capital 93,516,080 93,473,301
Retained earnings 6,132,632 30,151,281
--------------- ---------------
99,909,033 124,096,629
--------------- ---------------
Total liabilities and shareholders' equity $179,389,121 $183,950,884
=============== ===============
</TABLE>
4
The accompanying notes are an integral part of these financial statements.
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---------------- ---------------
<S> <C> <C>
Revenues $ 224,591,729 $ 242,133,775
Cost of services 165,725,034 182,634,868
---------------- ---------------
Gross profit 58,866,695 59,498,907
---------------- ---------------
Operating costs and expenses
Selling, general and administrative 41,587,387 36,945,663
Depreciation 889,282 646,056
Amortization 4,282,124 1,697,100
Unusual items
Restructuring charge 36,706,712
Non recurring 2,100,000
---------------- ---------------
85,565,505 39,288,819
---------------- ---------------
Operating income (loss) ( 26,698,810) 20,210,088
---------------- ---------------
Other expenses
Interest expense, net of interest income ( 2,846,213) ( 781,138)
Gain (loss) on foreign currency translation ( 4,087) 12,948
---------------- ---------------
( 2,850,300) ( 768,190)
---------------- ---------------
Income (loss) before income taxes ( 29,549,110) 19,441,898
Income taxes (credit) ( 5,530,461) 7,543,218
---------------- ---------------
Net income (loss) ( 24,018,649) 11,898,680
Other comprehensive income
Foreign currency translation adjustment ( 211,897) ( 1,972)
---------------- ---------------
Comprehensive income (loss) ( $24,230,546) $ 11,896,708
================ ===============
Basic earnings (loss) per share ($2.29) $1.14
===== =====
Weighted average number of common
shares outstanding 10,499,188 10,474,225
========== ==========
Diluted earnings (loss) per share ($2.29) $1.10
===== =====
Weighted average number of common
And common equivalent shares outstanding 10,499,188 10,791,443
========== ==========
</TABLE>
5
The accompanying notes are an integral part of these financial statements.
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Three Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------------- --------------
<S> <C> <C>
Revenues $73,656,343 $81,364,630
Cost of services 53,432,537 60,908,458
--------------- --------------
Gross profit 20,223,806 20,456,172
--------------- --------------
Operating costs and expenses
Selling, general and administrative 13,622,483 12,791,686
Depreciation 298,030 262,995
Amortization 1,163,357 647,777
Unusual items
Restructuring charge 36,706,712
Non recurring 2,100,000
--------------- --------------
53,890,582 13,702,458
--------------- --------------
Operating income (loss) ( 33,666,776) 6,753,714
--------------- --------------
Other (expenses) income
Interest expense, net of interest income ( 1,033,118) ( 517,825)
Gain (loss) on foreign currency translation ( 31) 13,815
--------------- --------------
( 1,033,149) ( 504,010)
--------------- --------------
Income (loss) before income taxes ( 34,699,925) 6,249,704
Income taxes (credit) ( 8,282,871) 2,395,976
--------------- --------------
Net income (loss) ( 26,417,054) 3,853,728
Other comprehensive income
Foreign currency translation adjustment ( 42,424) 55,188
--------------- --------------
Comprehensive income (loss) ( $ 26,459,478) $3,908,916
=============== ==============
Basic earnings (loss) per share ($2.52) $.37
===== ====
Weighted average number of common
shares outstanding 10,499,651 10,496,225
========== ==========
Diluted earnings (loss) per share ($2.52) $.36
===== ====
Weighted average number of common
and common equivalent shares outstanding 10,499,651 10,799,970
========== ==========
</TABLE>
6
The accompanying notes are an integral part of these financial statements.
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Nine Months Ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Additional
Common Stock Comprehensive Paid-in Retained
------------
Shares Amount Income (Loss) Capital Earnings
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 10,496,225 $524,811 ($ 52,764) $93,473,301 $30,151,281
3,426 171 42,779
Exercise of stock options
( 211,897)
Translation adjustment
Net loss ________ _______ ________ __________ (24,018,649)
-----------
-
Balance, September 30, 2000 10,499,651 $524,982 ($264,661) $93,516,080 $ 6,132,632
========== ======== ========= =========== ===========
</TABLE>
7
The accompanying notes are an integral part of these financial statements.
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income (loss) ( $24,018,649) $11,898,680
--------------- --------------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 5,171,406 2,343,156
Provision for losses on accounts receivable 752,000 476,000
Restructuring and unusual charge 38,806,712
Changes in assets and liabilities:
Accounts receivable ( 4,319,877) ( 20,585,831)
Income tax refund receivable ( 5,281,241)
Deferred tax asset ( 2,169,233)
Prepaid expenses and other current assets ( 2,005,121) ( 2,971,017)
Accounts payable and accrued expenses 7,695,249 1,193,387
Accrued payroll 4,499,311 2,586,838
Taxes, other than income taxes 323,606 ( 1,134,114)
Income taxes payable 496,870 264,861
--------------- --------------
Total adjustments 43,969,682 ( 17,826,720)
--------------- --------------
Net cash provided by (used in) operating activities 19,951,033 ( 5,928,040)
--------------- --------------
</TABLE>
8
The accompanying notes are an integral part of these financial statements.
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999 - (Continued)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------------- --------------
Cash flows from investing activities:
<S> <C> <C> <C> <C>
Property and equipment acquired ( $ 1,461,122) ( $3,674,323)
(Increase) decrease in deposits 6,720 ( 18,916)
Purchase of acquired companies including
contingent consideration, net of cash acquired ( 21,105,140) ( 35,163,985)
--------------- --------------
Net cash used in investing activities ( 22,559,542) ( 38,857,224)
--------------- --------------
Cash flows from financing activities:
Exercise of stock options 42,950 259,275
Borrowings of long-term debt 5,400,000 37,300,000
--------------- --------------
Net cash provided by financing activities 5,442,950 37,559,275
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents ( 211,897) ( 1,972)
--------------- --------------
Increase (decrease) in cash and cash equivalents 2,622,544 ( 7,227,961)
Cash and cash equivalents at beginning of period 4,025,808 8,423,492
--------------- --------------
Cash and cash equivalents at end of period $6,648,352 $1,195,531
=============== ==============
Supplemental cash flow information:
Cash paid for:
Interest expense $ 3,079,129 $ 685,986
Income taxes $ 2,958,615 $7,078,357
</TABLE>
9
The accompanying notes are an integral part of these financial statements.
<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, 1999 and the two month period ended December 31, 1999.
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 September 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
2. Unusual Items
In the third quarter of 2000, the Company recorded the following unusual
items:
In Millions
Impairment of goodwill $35.3
Restructuring charge 1.4
Other non recurring charges 2.1
-------
$38.8
=====
The income before income taxes, net income and earnings per share on a
diluted basis, exclusive of common stock equivalents, for the nine months
ended September 30, 2000 without the unusual items and its related tax
effect would have been $9.3 million, $4.6 million and $.44 per share,
respectively.
The income before income taxes, net income and earnings per share on a
diluted basis, exclusive of common stock equivalents, for the three months
ended September 30, 2000 without the unusual items and their related tax
effect would have been $4.1 million, $2.2 million and $.21 per share,
respectively.
Impairment of Goodwill
During the third quarter of 2000, the Company performed an impairment
review of goodwill in accordance with the requirements of SFAS No. 121.
This review indicated that there was an impairment of value, which
resulted in $35.3 million charge to expense in order to properly reflect
the appropriate carrying value of goodwill.
Restructuring Charge
The restructuring charge of $1.4 million consists of expenses associated
with the consolidation of certain offices principally lease obligations
for vacated offices as well as a write down of leasehold improvements
and office equipment to its net realizable value for closed offices.
Other non recurring charges
The non recurring charge of $2.1 million consists of expenses associated
with integration of employee benefit plans and vacation plans which were
assumed in connection with the Company's previous completed
acquisitions.
10
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3. Change in Fiscal Year
On January 25, 2000, the Board of Directors of the Company determined to
change the Company's fiscal year from October 31, to December 31. As a
result of this change, the Company has prepared quarterly financial
information as of and for the periods ended March 31, June 30, and
September 30, 2000.
4. Change in Accounting Estimate
Effective January 1, 2000, the Company has changed the amortization period
of goodwill associated with acquisitions from 40 years to 20 years. This
change had the effect of increasing goodwill amortization and reducing net
income by approximately $2,141,000, or $.20 on a diluted earnings per share
basis for the nine months ended September 30, 2000 and $582,000 or $.06 on
a diluted earnings per share basis for the three months ended September 30,
2000.
5. Computation of Earnings Per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding for the periods presented. Diluted earnings per share is
based on the weighted average number of common shares outstanding and
includes the dilutive effect of stock options using the treasury stock
method. Dilutive securities have not been included in the weighted average
shares used for the calculation of earnings per share in periods of net
loss because the effect of such securities would be anti-dilutive.
6. Long Term Debt
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").
The Revolving Credit Facility was amended on September 18, 2000. 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.
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, such as restrictions on the
Company's ability to pay dividends. The Revolving Credit Facility expires
August 2002. The weighted average interest rate at September 30, 2000 was
7.65%. The amounts outstanding under the Revolving Credit Facility at
September 30, 2000 and December 31, 1999 were $52.7 million and $47.3
million, respectively.
7. Interest (Expense) Income, Net
Interest (expense) income, net consisted of the following:
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
--------------------------------------- ---------------------------------------
2000 1999 2000 1999
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest expense ($3,057,579) ($903,569) ($1,129,746) ($545,732)
Interest income 211,366 122,431 96,628 27,907
------------ --------- ---------- ----------
($2,846,213) ($781,138) ($1,033,118) ($517,825)
========== ======== ========== ========
</TABLE>
11
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. Segment Information
The Company has adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which establishes
standards for companies to report information about operating segments,
geographic areas and major customers. The adoption of SFAS 131 has no
effect on the Company's consolidated financial position, consolidated
results of operations or liquidity.
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling, general
and administrative expenses directly attributable to that segment as well
as charges for allocating corporate costs to each of the operating
segments. The following tables reflect the results of the segments
consistent with the Company's management system (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended Information Professional Commercial
September 30, 2000 Technology Engineering Services Corporate Total
--------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $174,380 $29,629 $20,583 $224,592
Operating expenses (1) 159,685 27,933 19,695 207,313
------- ------ ------ -------
EBITDA (1) (2) 14,695 1,696 888 17,279
Depreciation 653 214 22 889
Goodwill amortization 3,743 504 35 4,282
--- ----- ---- -----
Operating income (1) $ 10,299 $ 978 $ 831 $ 12,108
======== ===== ===== ========
Total assets $133,329 $17,641 $6,482 $21,937 $179,389
Capital expenditures $793 $165 $45 $458 $1,461
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1999
<S> <C> <C> <C> <C>
Revenue $174,575 $46,725 $20,834 $242,134
Operating expenses (1) 156,766 43,088 19,727 219,581
------- ------ ------ -------
EBITDA (1) (2) 17,809 3,637 1,107 22,553
Depreciation 473 154 6 633
Goodwill amortization 1,405 292 13 1,710
---- ----- ---- -----
Operating income (1) $ 15,931 $ 3,191 $ 1,088 $ 20,210
======== ======= ======= ========
Total assets $144,605 $17,388 $6,537 $8,928 $177,458
Capital expenditures $256 $207 $15 $3,196 $3,674
</TABLE>
12
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8. Segment Information - Continued
<TABLE>
<CAPTION>
Three Months Ended Information Professional Commercial
September 30, 2000 Technology Engineering Services Corporate Total
--------------- -------------- -------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue $56,668 $ 9,769 $ 7,219 $73,656
Operating expenses (1) 50,907 9,321 6,827 67,055
------ ----- ----- ------
EBITDA (1) (2) 5,761 448 392 6,601
Depreciation 215 81 2 298
Goodwill amortization 1,020 135 8 1,163
---- ----- --- ------
Operating income (1) $ 4,526 $232 $382 $5,140
======= ==== ==== ======
Total assets $133,329 $17,641 $6,482 $21,937 $179,389
Capital expenditures $196 $90 $30 $255 $571
Three Months Ended
September 30, 1999
Revenue $60,721 $14,195 $6,449 $81,365
Operating expenses (1) 54,409 13,193 6,099 73,701
------ ------ ----- ------
EBITDA (1) (2) 6,312 1,002 350 7,664
Depreciation 194 54 2 250
Goodwill amortization 546 111 3 660
---- --- --- --- ------- - ----- ---
Operating income (1) $ 5,572 $ 837 $345 $ 6,754
======= ===== ==== =======
Total assets $144,605 $17,388 $6,537 $8,928 $177,458
Capital expenditures $156 $157 $15 $998 $1,326
</TABLE>
[FN]
(1) Operating expenses, EBITDA and operating income are exclusive of
unusual items in the amount of $38.8 million (see note 2).
<PAGE>
(1) EBITDA consists of earnings before interest income, interest expense, other
non-operating income and expense, income taxes, depreciation and
amortization. EBITDA is not a measure of financial performance under
generally accepted accounting principles and should not be considered in
isolation or as an alternative to net income as an indicator of a company's
performance or to cash flows from operating activities as a measure of
liquidity.
</FN>
13
<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 provision of
information technology and engineering services and solutions, placement of
temporary staffing personnel; (ii) the Company's ability to continue to attract,
train and retain personnel qualified to meet the requirements of its clients;
(iii) the Company's ability to identify appropriate acquisition candidates,
complete such acquisitions and successfully integrate acquired businesses; (iv)
uncertainties regarding pro forma financial information and the underlying
assumptions relating to acquisitions and acquired businesses; (v) uncertainties
regarding amounts of deferred consideration and earnout payments to become
payable to former shareholders of acquired businesses; (vi) possible adverse
effects on the market price of the Company's Common Stock due to the resale into
the market of significant amounts of Common Stock; (vii) the potential adverse
effect a decrease in the trading price of the Company's Common Stock would have
upon the Company's ability to acquire businesses through the issuance of its
securities; (viii) the Company's ability to obtain financing on satisfactory
terms; (ix) the reliance of the Company upon the continued service of its
executive officers; (x) the Company's ability to remain competitive in the
markets 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; (xv) predictions as to the future need for the
Company's services; (xvi) uncertainties relating to the financial information
provided for the period covering January 1, 1999 to September 30, 1999 and from
January 1, 2000 to September 30, 2000; (xvii) uncertainties relating to the
allocation of costs and expenses to each of the Company's operating segments;
and (xviii) 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.
14
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview
RCM Technologies, Inc. ("RCM" or the "Company") is a premier national provider
of Business, Technology and resourcing solutions in information technology
("IT") and professional engineering to customers in corporate and government
sectors. RCM's offices are located in major geographic regions throughout North
America. The Company has grown its information technology competencies in the
areas of e-business, Enterprise Application Integration, Enterprise Resource
Planning ("ERP") support, network and infrastructure support and knowledge
management. RCM's engineering expertise is in the form of technical design,
field engineering, field support, procedures development and project and program
management. The Company delivers its services through various engagement types
ranging from end to end solutions, managed task deliverables and resource
augmentation of client projects. The Company provides its services to clients in
banking & finance, healthcare, insurance, pharmaceutical, telecommunications,
utility, technology, manufacturing & distribution and government sectors. The
Company believes the breadth of services it can provide fosters long-term client
relationships, affords cross-selling opportunities and minimizes the Company's
dependence on any single technology or industry sector.
RCM sells and delivers its services through a network of branch offices located
in selected regions throughout North America. The Company has executed a
geographic expansion and diversification strategy that places it in the major
markets for the services that the Company offers. This strategy has been
accomplished through the combination of a concerted and disciplined acquisition
program, coupled with an organic growth strategy.
Many businesses today are facing intense competition, accelerating technological
change, and widespread business process re-engineering to take advantage of the
Internet's potential to bring them closer to their suppliers and customers.
Increasingly, these companies are also suffering from a shortage of qualified
expert employees who can build these solutions. As a result, the ability of an
organization to effectively compete is critically reliant on its ability to
introduce and integrate these emerging technologies in a timely fashion.
Although many companies have recognized the importance of the Internet and
knowledge management technologies to compete in today's business climate, the
process of designing, developing and implementing these solutions has become
increasingly complex. Companies continue to migrate away from centralized
computing environments toward decentralized, scalable architectures based on
local and wide area networks, the Internet, Intranets, shared databases and
collaborative application software bringing them closer to their clients and
suppliers. These advances have enhanced the ability of companies to benefit from
the application of IT systems and solutions. Consequently, the number of
companies desiring to deploy these systems and solutions and the number of
connected users within these networks are rising rapidly.
As a result of the variety and complexity of these new technologies, IT managers
must integrate and manage computing environments consisting of multiple
computing platforms, operating systems, databases and networking protocols, and
must implement packaged software applications to support business objectives.
Companies also need to continually keep pace with new developments, which often
render existing equipment and internal skills obsolete. At the same time, the
rampant pace of these developments have left many companies unable to keep their
permanent staffs abreast in the technology evolution. Consequently, business
drivers cause IT managers to develop and support increasingly complex systems
and applications of significant strategic value, while working under budgetary,
personnel and expertise constraints within their own organizations. Many have
increasingly turned to consultants to assist them.
15
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Overview - Continued
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 seeking to expand its sales of higher margin
consulting and project management services.
16
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended September 30, 2000 Compared
to Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
A summary of operating results for the nine months ended September 30, 2000 and
1999 is as follows (in thousands, except for earnings per share data):
2000 1999
------------------------- ------------------------
% of % of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
Revenues $ 224,592 100.0% $ 242,134 100.0 %
Cost of services 165,725 73.8 182,635 75.4
---------- ---- ---------- ----
Gross profit 58,867 26.2 59,499 24.6
---------- ---- ---------- ----
Selling, general and administrative 41,587 18.5 36,946 15.3
Depreciation 889 .4 646 .3
---------- ------ ---------- ------
42,476 18.9 37,592 15.6
---------- ---- ---------- ----
Operating income 16,391 7.3 21,907 9.0
Other (expense) income ( 2,850 ) ( 1.3 ) ( 768) ( .3 )
--------- ---- --------- -----
Income before income taxes
and goodwill amortization 13,541 6.0 21,139 8.7
Income taxes 5,583 2.5 8,123 3.3
---------- ---- ---------- ----
Income before goodwill amortization 7,958 3.5 13,016 5.4
Goodwill amortization, net of income tax benefits ( 3,360 ) ( 1.5) ( 1,117) ( .5 )
Restructuring and unusual charges, net of tax
income tax benefits ( 28,617 ) (12.7)
--------- ---- ---------- -------
Net income (loss) ($ 24,019 ) (10.7%) $ 11,899 4.9 %
========= ==== ========== ====
2000 1999
--------- --------
Earnings per share:
-----
Basic:
Income before goodwill amortization $ .76 $ 1.24
Goodwill amortization ( .32 ) ( .10)
Restructuring and unusual charges (2.73 )
---- ----
Net income (loss) $ (2.29 ) $ 1.14
==== ====
Diluted:
Income before goodwill amortization $ .76 $ 1.21
Goodwill amortization ( .32 ) ( .11)
Restructuring and unusual charges (2.73 )
---- ----
Net income (loss) $ (2.29 ) $ 1.10
==== ====
</TABLE>
Revenues. Revenues decreased 7.3%, or $17.5 million, for the nine months ended
September 30, 2000 as compared to the comparable prior year period. Revenue
decline was primarily attributable to a loss of certain engineering contracts
and softness in the Information Technology ("IT") sector. The revenue decline
was mitigated by revenue from acquisitions subsequent to September 30, 1999.
17
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Nine Months Ended September 30, 2000 Compared
to Nine Months Ended September 30, 1999 - (Continued)
Cost of Services. Cost of services decreased 9.3%, or $16.9 million, for the
nine months ended September 30, 2000 as compared to the comparable prior year
period. This decrease was primarily attributable to a decrease in salaries and
compensation associated with decreased revenues, which was partially offset by
an increase in gross margin percentage from Information Technology. Cost of
services as a percentage of revenues decreased to 73.8% for the nine months
ended September 30, 2000 from 75.4% for the comparable prior year period.
Selling, General and Administrative. Selling, general and administrative
expenses increased 12.6%, or $4.6 million, for the nine months ended September
30, 2000 as compared to the comparable prior year period. This increase was
primarily attributable to acquisitions subsequent to September 30, 1999.
Depreciation. Depreciation increased 37.6%, or $243,000, for the nine months
ended September 30, 2000 as compared to the comparable prior year period. This
increase was primarily due to the depreciation of property and equipment
associated with infrastructure improvements that occurred during the Company's
previous fiscal year ended October 31, 1999.
Other (Expense) Income, Net. Other (expense) income consists principally of
interest expense, net of interest income. For the nine months ended September
30, 2000, actual interest expense of $3.1 million was offset by $211,000 of
interest income, which was earned from the investment in interest bearing
deposits. Interest expense, net increased $2.1 million for the nine months ended
September 30, 2000 as compared to the comparable prior year period. This
increase was primarily due to the increased borrowing requirements necessary to
complete acquisitions subsequent to September 30, 1999, as well as to fund
working capital requirements.
Income Tax. Income tax expense decreased 31.3%, or $2.5 million, for the nine
months ended September 30, 2000 as compared to the comparable prior year period.
This decline was attributable to a lower level of income before taxes for the
nine months ended September 30, 2000 compared to the comparable prior year
period.
Goodwill Amortization. Goodwill amortization for the nine months ended September
30, 2000 and 1999 was net of income tax benefit of $922,000 and $580,000,
respectively. The increase was primarily due to the amortization of intangible
assets incurred in connection with the acquisitions that occurred subsequent to
September 30, 1999. See footnote 4 appearing elsewhere in this document.
Restructuring and Non Recurring Charges. In the third quarter of 2000, the
Company recorded an impairment of goodwill in connection with a review of the
carrying value of its goodwill, a restructuring charge associated with the
consolidation of certain offices and certain non recurring items associated with
the integration of employee benefit plans and vacation plans in the amounts of
$35.3 million, $1.4 million and $2.1 million, respectively. Restructuring and
non recurring charges reduced income before the related tax benefits for the
nine months ended September 30, 2000 by $38.8 million and $28.6 million after
the related tax benefits.
18
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended September 30, 2000 Compared
to Three Months Ended September 30, 1999
<TABLE>
<CAPTION>
A summary of operating results for the three months ended September 30, 2000 and
1999 is as follows (in thousands, except for earnings per share data):
2000 1999
------------------------- ------------------------
% of % of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
Revenues $ 73,656 100.0% $ 81,365 100.0%
Cost of services 53,433 72.5 60,909 74.9
-------- ---- --------- ----
Gross profit 20,223 27.5 20,456 25.1
-------- ---- --------- ----
Selling, general and administrative 13,622 18.5 12,792 15.7
Depreciation 298 .4 263 .3
-------- ------ --------- ------
13,920 18.9 13,055 16.0
-------- ---- --------- ----
Operating income 6,303 8.6 7,401 9.1
Other (expense) income ( 1,033 ) 1.4 504 .6
------- ---- --------- -----
Income before income taxes
and goodwill amortization 5,270 7.2 6,897 8.5
Income taxes 2,286 3.1 2,641 3.3
-------- ---- --------- ----
Income before goodwill amortization 2,984 4.1 4,256 52
Goodwill amortization, net of income tax benefits ( 784 ) ( 1.1) ( 402) ( .5 )
-----
Restructuring and unusual charges, net of tax
income tax benefits ( 28,617 ) (38.9)
------- ---- --------- -------
Net income (loss) ($26,417 ) (35.9%) $ 3,854 4.7 %
======= ==== ========= ====
2000 1999
--------- --------
Earnings per share:
-----
Basic:
Income before goodwill amortization $ .28 $ .41
Goodwill amortization ( .07 ) (.04)
Restructuring and unusual charges (2.73 )
---- ---
Net income (loss) $ (2.52 ) $ .37
==== ===
Diluted:
Income before goodwill amortization $ .28 $ .39
Goodwill amortization ( .07 ) (.03)
Restructuring and unusual charges (2.73 )
---- ---
Net income (loss) $ (2.52 ) $ .36
==== ===
</TABLE>
Revenues. Revenues decreased 9.5%, or $7.7 million, for the three months ended
September 30, 2000 as compared to the comparable prior year period. Revenue
decline was primarily attributable to a loss of certain engineering contracts
and softness in the Information Technology ("IT") sector. The revenue decline
was mitigated by revenue from acquisitions subsequent to September 30, 1999.
19
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Three Months Ended September 30, 2000 Compared
to Three Months Ended September 30, 1999 - (Continued)
Cost of Services. Cost of services decreased 12.3%, or $7.5million, for the
three months ended September 30, 2000 as compared to the comparable prior year
period. This decrease was primarily attributable to a decrease in salaries and
compensation associated with decreased revenues, which was partially offset by
an increase in gross margin percentage from Information Technology. Cost of
services as a percentage of revenues decreased to 72.5% for the three months
ended September 30, 2000 from 74.9% for the comparable prior year period.
Selling, General and Administrative. Selling, general and administrative
expenses increased 6.5%, or $830,000, for the three months ended September 30,
2000 as compared to the comparable prior year period. This increase was
primarily attributable to acquisitions subsequent to September 30, 1999.
Depreciation. Depreciation increased 13.3%, or $35,000, for the three months
ended September 30, 2000 as compared to the comparable prior year period. This
increase was primarily due to the depreciation of property and equipment
associated with infrastructure improvements that occurred during the Company's
previous fiscal year ended October 31, 1999.
Other (Expense) Income, Net. Other (expense) income consists principally of
interest expense, net of interest income. For the three months ended September
30, 2000, actual interest expense of $1.1 million was offset by $96,600 of
interest income, which was earned from the investment in interest bearing
deposits. Interest expense, net increased $515,000 for the three months ended
September 30, 2000 as compared to the comparable prior year period. This
increase was primarily due to the increased borrowing requirements necessary to
complete acquisitions subsequent to September 30, 1999, as well as to fund
working capital requirements.
Income Tax. Income tax expense decreased 13.4%, or $355,000, for the three
months ended September 30, 2000 as compared to the comparable prior year period.
This decline was attributable to a lower level of income before taxes for the
three months ended September 30, 2000 compared to the comparable prior year
period.
Goodwill Amortization. Goodwill amortization for the three months ended
September 30, 2000 and 1999 was net of income tax benefit of $379,000 and
$246,000, respectively. The increase was primarily due to the amortization of
intangible assets incurred in connection with the acquisitions that occurred
subsequent to September 30, 1999. See footnote 3 appearing elsewhere in this
document.
Restructuring and Non Recurring Charges. In the third quarter of 2000, the
Company recorded an impairment of goodwill in connection with a review of the
carrying value of its goodwill, a restructuring charge associated with the
consolidation of certain offices and certain non recurring items associated with
the integration of employee benefit plans and vacation plans in the amounts of
$35.3 million, $1.4 million and $2.1 million, respectively. Restructuring and
non recurring charges reduced income before the related tax benefits for the
three months ended September 30, 2000 by $38.8 million and $28.6 million after
the related tax benefits.
Liquidity and Capital Resources
Operating activities provided $19.9 million of cash for the nine months ended
September 30, 2000 as compared to operating activities using $5.9 million of
cash for the nine months ended September 30, 1999. The increase in cash provided
by operating activities was primarily attributable to increased levels of
depreciation and amortization associated with the acquisitions subsequent to
September 30, 1999, an increase in restructuring charges, accounts payable,
accrued expenses and accrued payroll, withheld income taxes and income taxes
payable which was partially offset by increases in accounts receivable, income
tax receivable, deferred tax asset and in prepaid expenses.
20
<PAGE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations - (Continued)
Liquidity and Capital Resources - (Continued)
Investing activities used $22.6 million for the nine months ended September 30,
2000 as compared to using $38.9 million for the comparable prior period. The
reduction cash used of $16.3 million was primarily attributable to a reduction
in acquisition payments and deferred consideration payments.
Financing activities provided $5.4 million and $37.6 million for the nine months
ended September 30, 2000 and 1999, respectively.
The Company and its subsidiaries entered into an agreement with Mellon Bank
N.A., administrative agent for a syndicate of banks, which provides a $75.0
million Revolving Credit Facility (the "Revolving Credit Facility. The Revolving
Credit Facility was amended on September 18, 2000. Borrowing under the Revolving
Credit Facility bears interest at the Company's option, at LIBOR (London
Interbank Offered Rate), plus applicable margin or the agent bank's prime rate.
Borrowings under the Revolving Credit Facility are collateralized by all of the
assets of the Company and its subsidiaries and a pledge of all of the stock of
its subsidiaries. The Revolving Credit Facility also contains various financial
and non-financial covenants. The Revolving Credit Facility expires August 2002.
The amount outstanding under the Revolving Credit Facility at September 30, 2000
was $52.7 million.
The Company anticipates that its primary uses of capital in future periods will
be for acquisitions and the funding of increases in accounts receivables.
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 continues
to engage in discussions with potential acquisition candidates. As the size of
the Company and its financial resources increase, however, acquisition
opportunities requiring significant commitments of capital may arise. In order
to pursue such opportunities, the Company may be required to incur debt or issue
potentially dilutive securities in the future. No assurance can be given as to
the Company's future acquisition and expansion opportunities or how such
opportunities will be financed.
The Company does not currently have material commitments for capital
expenditures and does not anticipate entering into any such commitments during
the next twelve months. The Company's current commitments consist primarily of
lease obligations for office space. The Company believes that its capital
resources are sufficient to meet its present obligations and those to be
incurred in the normal course of business for the next twelve months.
Year 2000 Readiness Disclosure
Since January 1, 2000, the Company has not experienced any significant problems
with its Y2K readiness. The Company believes it has achieved Y2K readiness by
replacing its computer systems with new, Y2K compliant hardware and software.
The new hardware/software system was put into production on September 1, 1999.
The cost of the new system and to be Y2K compliant was approximately $2,900,000.
However, there can be no assurance that there will be no material impact as a
result of Y2K issues, particularly considering the dependence and
interdependence that exists with third parties.
21
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Fifth Amendment and Modification to Loan and Security
Agreement dated September 18, 2000 by and between Mellon
Bank, N.A., as Agent and RCM Technologies, Inc. And All
Of Its Subsidiaries, as Borrower
27 Financial Data Schedule. (EDGAR version only)
(b) Reports on Form 8-K
On January 28, 2000, the Company filed a Current Report on Form
8-K reporting that the Company determined to change its fiscal
year end from October 31 to December 31.
<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: November 7, 2000 By:/s/ Stanton Remer
--- ------- -----
Stanton Remer
Chief Financial Officer,
Treasurer, Secretary and Director
(Principal Financial Officer and
Duly Authorized Officer of the
Registrant)
23
