UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number: 1-10245 RCM TECHNOLOGIES, INC. (Exact name of Registrant as specified in its Charter) Nevada 95-1480559 (State of Incorporation) (I.R.S. Employer Identification No.) 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613 (Address of Principal Executive Offices) (Zip Code) (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. Common Stock, $0.05 par value, 10,571,761 shares outstanding as of May 9, 2002.
<TABLE> <CAPTION> RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION Page Item 1 - Consolidated Financial Statements <S> <C> Consolidated Balance Sheets as of March 31, 2002 (Unaudited) and December 31, 2001 (Audited) 3 Unaudited Consolidated Statements of Income and Comprehensive Income for the Three-Month Periods Ended March 31, 2002 and 2001 5 Unaudited Consolidated Statement of Changes in Shareholders' Equity for the Three-Month Period Ended March 31, 2002 6 Unaudited Consolidated Statements of Cash Flows for the Three- Month Periods Ended March 31, 2002 and 2001 7 Notes to Unaudited Consolidated Financial Statements 9 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 18 Signatures 18 </TABLE> 2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 2002 and December 31, 2001 ASSETS <TABLE> <CAPTION> March 31, December 31, 2002 2001 --------------- --------------- (Unaudited) Current assets <S> <C> <C> Cash and cash equivalents $ 3,865,807 $ 2,289,743 Accounts receivable, net of allowance for doubtful accounts of $1,678,000 (March 31, 2002) and $1,795,000 (December 31, 2001), respectively 36,386,707 41,174,828 Income tax refund receivable 3,856,751 6,810,093 Prepaid expenses and other current assets 2,120,623 2,968,612 Deferred tax assets 5,678,604 5,600,000 --------------- --------------- Total current assets 51,908,492 58,843,276 --------------- --------------- Property and equipment, at cost Equipment and leasehold improvements 10,350,823 11,131,750 Less: accumulated depreciation and amortization 3,672,858 4,282,985 --------------- --------------- 6,677,965 6,848,765 --------------- --------------- Other assets Deposits 180,017 175,691 Intangible assets, net of accumulated amortization of $10,674,200 (March 31, 2002) and $10,669,000 (December 31, 2001), respectively 63,148,230 62,619,400 ---------- ---------- Deferred tax assets 1,474,307 2,668,813 --------------- --------------- 64,802,554 65,463,904 --------------- --------------- Total assets $123,389,011 $131,155,945 ============ ============ </TABLE> 3 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED March 31, 2002 and December 31, 2001 LIABILITIES AND SHAREHOLDERS' EQUITY <TABLE> <CAPTION> March 31, December 31, 2002 2001 --------------- --------------- (Unaudited) Current liabilities <S> <C> <C> Note payable $24,900,000 $31,500,000 Accounts payable and accrued expenses 6,286,403 8,653,876 Accrued payroll 6,471,018 5,137,336 Payroll and withheld taxes 333,194 375,784 Income taxes payable 2,199,149 --------------- --------------- Total current liabilities 37,990,615 47,866,145 --------------- --------------- 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; 10,571,761 shares issued and outstanding 528,588 528,588 Accumulated other comprehensive loss ( 520,274) ( 484,283) Additional paid-in capital 93,746,569 93,746,569 Accumulated deficit ( 8,356,487) ( 10,501,074) --------------- --------------- 85,398,396 83,289,800 --------------- --------------- Total liabilities and shareholders' equity $123,389,011 $131,155,945 =============== =============== </TABLE> 4 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Three Months Ended March 31, 2002 and 2001 (Unaudited) <TABLE> <CAPTION> 2002 2001 ---------------- --------------- <S> <C> <C> Revenues $ 45,109,628 $ 64,653,787 Cost of services 32,599,962 46,581,870 ---------------- --------------- Gross profit 12,509,666 18,071,917 ---------------- --------------- Operating costs and expenses Selling, general and administrative 8,496,230 12,443,828 Depreciation 302,315 235,460 Amortization 5,181 2,043,490 ---------------- --------------- 8,803,726 14,722,778 ---------------- --------------- Operating income 3,705,940 3,349,139 ---------------- --------------- Other expenses Interest expense, net of interest income 267,953 741,821 Gain on foreign currency transactions ( 2,940) ( 4,061) ---------------- --------------- 265,013 737,760 --------------- -------------- Income before income taxes 3,440,927 2,611,379 Income taxes 1,296,340 1,460,435 ---------------- --------------- Net income 2,144,587 1,150,944 Other comprehensive loss Foreign currency translation adjustment ( 35,991) ( 71,233) ---------------- --------------- Comprehensive income $ 2,108,596 $ 1,079,711 ================ =============== Basic earnings per share $.20 $.11 ==== ==== Weighted average number of common shares outstanding 10,571,761 10,499,651 ========== ========== Diluted earnings per share $.20 $.11 ==== ==== Weighted average number of common and common equivalent shares outstanding 10,813,265 10,638,305 ========== ========== </TABLE> 5 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Three Months Ended March 31, 2002 (Unaudited) <TABLE> <CAPTION> Accumulated Other Additional Common Stock Comprehensive Paid-in Retained ------------ Loss Capital Earnings Total Shares Amount <S> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 2002 10,571,761 $528,588 ($484,283) $93,746,569 ($10,501,074) $83,289,800 Translation adjustment ( 35,991) ( 35,991) Net income 2,144,587 2,144,587 ---------- -------- ---------- ----------- ------------- ----------- Balance, March 31, 2002 10,571,761 $528,588 ($520,274) $93,746,569 ($8,356,487) $85,398,396 ========== ======== ========== =========== =========== ========== </TABLE> 6 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2002 and 2001 (Unaudited) <TABLE> <CAPTION> 2002 2001 --------------- -------------- Cash flows from operating activities: <S> <C> <C> Net income $ 2,144,587 $1,150,944 --------------- -------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 307,496 2,278,950 Provision for losses on accounts receivable ( 117,000) 179,000 Changes in assets and liabilities: Accounts receivable 4,905,121 6,847,842 Income tax refund receivable 2,953,342 3,442,906 Deferred tax asset 1,115,902 ( 70,687) Prepaid expenses and other current assets 847,989 648,030 Accounts payable and accrued expenses ( 2,367,473) 1,305,700 Accrued payroll 1,333,682 1,646,209 Payroll and withheld taxes ( 42,590) ( 1,279,442) Income taxes payable ( 2,199,149) ( 817,228) --------------- -------------- Total adjustments 6,737,320 14,181,280 --------------- -------------- Net cash provided by operating activities 8,881,907 15,332,224 --------------- -------------- </TABLE> 7 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2002 and 2001 - (Continued) (Unaudited) <TABLE> <CAPTION> 2002 2001 --------------- -------------- Cash flows from investing activities: <S> <C> <C> <C> <C> Property and equipment acquired ( 131,512) ( $ 383,338) (Increase) decrease in deposits ( 4,326) 11,227 Purchase of acquired companies including contingent consideration, net of cash acquired ( 534,012) ( 2,285,602) --------------- -------------- Net cash used in investing activities ( 669,850) ( 2,657,713) --------------- -------------- Cash flows from financing activities: Repayments of note payable ( 6,600,000) ( 7,400,000) --------------- -------------- Net cash used in financing activities ( 6,600,000) ( 7,400,000) --------------- -------------- Effect of exchange rate changes on cash and cash equivalents ( 35,993) ( 71,233) --------------- -------------- Increase in cash and cash equivalents 1,576,064 5,203,278 Cash and cash equivalents at beginning of period 2,289,743 3,170,658 --------------- -------------- Cash and cash equivalents at end of period $ 3,865,807 $8,373,936 =============== ============== Supplemental cash flow information: Cash paid for: Interest expense $258,667 $ 595,870 Income taxes (refund) ( $1,681,660) ( $ 929,056) </TABLE> 8 The accompanying notes are an integral part of these financial statements.
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 Quarterly Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2001. 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 three months ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year. 2. Goodwill The net assets of businesses acquired, which are accounted for as purchases, have been reflected at their fair values at dates of acquisition. The excess of acquisition costs over such net assets (goodwill) is reflected in the consolidated balance sheets as Intangible Assets. Goodwill, net of amortization, at March 31, 2002 and December 31, 2001 was $63,148,000 and $62,619,000, respectively, and was amortized on a straight-line method over twenty years through December 31, 2001. Amortization expense for the three months ended March 31, 2002 and 2001 was $5,200 and $2,043,000, respectively. On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001; however, certain provisions of this Statement apply to goodwill and other intangible assets acquired between July 1, 2001 and the effective date of SFAS 142. Major provisions of these Statements and their effective dates for the Company are as follows: (1) all business combinations initiated after June 30, 2001 must use the purchase method of accounting. The pooling of interest method of accounting is prohibited except for transactions initiated before July 1, 2001, (2) intangible assets acquired in a business combination must be recorded separately from goodwill if they arise from contractual or other legal rights or are separable from the acquired entity and can be sold, transferred, licensed, rented or exchanged, either individually or as part of a related contract, asset or liability, (3) goodwill, as well as intangible assets with indefinite lives, acquired after June 30, 2001, will not be amortized. Effective January 1, 2002, all previously recognized goodwill and intangible assets with indefinite lives is no longer subject to amortization, (4) effective January 1, 2002, goodwill and intangible assets with indefinite lives will be tested for impairment annually and whenever there is an impairment indicator, (5) all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting. The adoption of SFAS No. 142 had a significant impact on the results of operations of the Company for the three months ended March 31, 2002 by eliminating amortization of goodwill. 3. Note Payable The Company and its subsidiaries entered into an agreement with Citizens Bank (successor to 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 October 10, 2001. Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company. These alternatives are: LIBOR (London Interbank Offered Rate), plus applicable margin, or the agent bank's prime rate. 9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3. Note Payable - (Continued) 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. Management of the Company has commenced negotiations for renewal or replacement of the Revolving Credit Facility. The weighted average interest rates for the three months ended March 31, 2002 and 2001 were 3.72% and 7.27%, respectively. The amounts outstanding under the Revolving Credit Facility at March 31, 2002 and December 31, 2001 were $24.9 million and $31.5 million, respectively. 4. Interest (Expense) Income, Net Interest (expense) income, net consisted of the following: <TABLE> <CAPTION> Three Months Ended March 31, ------------------------------ 2002 2001 -------------- ------------- <S> <C> <C> Interest expense ($288,344) ($851,045) Interest income 20,391 109,224 -------------- ------------- ($267,953) ($741,821) ============== ============= </TABLE> 5. 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> Three Months Ended Information Professional Commercial March 31, 2002 Technology Engineering Services Corporate Total --------------- ------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> Revenue $28,989 $10,894 $5,227 $45,110 Operating expenses 25,868 10,087 5,142 41,097 --------------- ------------- -------------- ------------- ------------- EBITDA (1) 3,121 807 85 4,013 Depreciation 195 90 17 302 Goodwill amortization 4 1 5 --------------- ------------- -------------- ------------- ------------- Operating income $2,922 $ 716 $ 68 $ 3,706 =============== ============= ============== ============= ============= Total assets $85,494 $11,214 $5,427 $20,854 $123,389 Capital expenditures $ 132 $ 132 </TABLE> 10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5. Segment Information - (Continued) <TABLE> <CAPTION> Three Months Ended Information Professional Commercial March 31, 2001 Technology Engineering Services Corporate Total --------------- ------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> Revenue $48,574 $9,921 $6,159 $64,654 Operating expenses 43,781 9,321 5,924 59,026 --------------- ------------- -------------- ------------- ------------- EBITDA (1) 4,793 600 235 5,628 Depreciation 178 48 10 236 Goodwill amortization 1,874 161 8 2,043 --------------- ------------- -------------- ------------- ------------- Operating income $ 2,741 $ 391 $ 217 $ 3,349 =============== ============= ============== ============= ============= Total assets $135,876 $11,894 $5,384 $16,595 $169,749 Capital expenditures $ 158 $ 225 $ 383 <FN> (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> </TABLE> 6. Contingencies The Company has received claims and notices of possible claims from various persons from whom the Company acquired stock or assets in four separate acquisitions that occurred during 1998 and 1999. Such claims and possible claims are not related. These claims and possible claims relate to allegations of wrongful termination and failure of the Company to pay deferred consideration under the relevant acquisition agreements. In the opinion of management, the Company has meritorious defenses to such claims and does not believe that the resolution of such claims should have a material adverse effect on the Company, its financial position, its results of operations or its cash flows. In 1998, two former officers filed suit against the Company alleging wrongful termination of their employment, wrongful failure to make severance payments and wrongful conduct by the Company in connection with the grant and non-vestiture of Stock Options to the plaintiffs. The complaint also alleged that the Company wrongfully limited the number of shares of Company stock that could be sold by the plaintiffs under a Registration Rights Agreement and made various other claims. The plaintiffs' complaint sought damages of approximately $480,000 and further sought additional unliquidated damages. The claims relating to wrongful termination of employment and wrongful conduct by the Company in connection with the grant of Stock Options to the plaintiffs have been resolved in binding arbitration. With respect to the Company's alleged wrongful limiting of the number of shares the plaintiffs could sell and one plaintiff's claim of entitlement to severance pay of $240,000, the Company is awaiting completion of discovery and the fixing of a trial date. The Company is also awaiting the court's ruling on its motion for summary judgment in its favor with respect to the plaintiffs' claims concerning the non-vestiture of their stock options. Substantial damages are being sought on the share-selling limitation and stock option claims; however, the alleged damages are subject to significant reduction by reason of their speculative nature and for having been avoidable losses. Management believes the suit is without merit and will continue to defend the claims vigorously. 11
ITEM 2. MANAGEMENTS'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS OF OPERATIONS 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 which include, among others, statements regarding the Company's intentions as to changes to its product offerings, its concentration or higher margin service areas, its pursuit of strategic alliances, partnerships, clients and acquisitions, the increased use of the SAP platform and the increased propensity of clients to outsource IT functions, 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 and 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 being 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 allocation of costs and expenses to each of the Company's operating segments; and (xvii) other economic, competitive and governmental factors affecting the Company's operations, markets, 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. 12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Overview RCM Technologies is a premier provider of business and technology solutions designed to enhance and maximize the performance of its customers through the adaptation and deployment of advanced information technology and engineering services. RCM is an innovative leader in the design, development and delivery of these services to various industries. RCM's offices are located throughout North America, including many major metropolitan centers. The Company provides a diversified and extensive range of service offerings and deliverables. Its portfolio of Information Technology services includes e-Business, Enterprise Management, Enterprise Application Integration and Supply Chain. RCM's Engineering services focus on Engineering Design, Technical Support, and Project Management and Implementation. The Company's Commercial services business unit provides Healthcare contract professionals as well as Clerical and Light Industrial temporary personnel. The Company provides its services to clients in banking and finance, healthcare, insurance, aerospace, pharmaceutical, telecommunications, utility, technology, manufacturing and distribution and government sectors. The Company believes that the breadth of services 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 regional strategy to better leverage its consulting services offering. The Company has also implemented a reorganization of its Solutions practices to centralize management oversight and to expand the sales and marketing of those services. Many of the Company's clients are facing challenging economic times. This is creating uncertainty in their ability to pursue technology projects, which had previously been considered a competitive imperative. Many clients are laying off their own permanent staff and reducing the demand for consulting services in attempts to maintain profitability. This has had a direct impact on RCM's revenues. Management believes that most companies have recognized the importance of the Internet and information management technologies to competing in today's business climate. However, the uncertain economic environment has curtailed many companies' motivation for rapid adoption of many technological enhancements. The process of designing, developing and implementing software solutions has become increasingly complex. Management believes that Companies today are focused on return on investment analysis in prioritizing the initiatives they undertake. This has had the effect of delaying or totally negating the spending on many emerging new solutions, which management formally anticipated. Nonetheless, 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 existing business objectives. Companies also need to continually keep pace with new developments, which often render existing equipment and internal skills obsolete. Consequently, business drivers cause IT managers to support increasingly complex systems and applications of significant strategic value, while working under budgetary, personnel and expertise constraints. This has given rise to increasing demand for outsourcing. Clients are increasingly evaluating the potential for outsourcing business critical applications and entire business functions. The Company is positioned to take advantage of this accelerating trend. The Company presently realizes revenues from client engagements that range from the placement of contract and temporary technical consultants to project assignments that entail the delivery of end-to-end solutions. These services are primarily provided to the client at hourly rates that are established for each of the Company's consultants based upon their skill level, experience and the type of work performed. The Company also provides project management and consulting work which are billed either by an agreed upon fixed fee or hourly rates, or a combination of both. The billing rates and profit margins for project management and solutions work are higher than those for professional consulting services. The Company has an ongoing effort to expand its sales of higher margin solution and project management services. 13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Overview (Continued) The majority of the Company's services are provided under purchase orders. Contracts are utilized on more of the 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. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities and 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 in 2001 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. See Footnote 2 to financial statements. 14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 A summary of operating results for the three months ended March 31, 2002 and 2001 is as follows (in thousands, except for earnings per share data): <TABLE> <CAPTION> 2002 2001 ------------------------- ------------------------ % of % of Amount Revenue Amount Revenue <S> <C> <C> <C> <C> Revenues $ 45,110 100.0% $ 64,654 100.0 % Cost of services 32,600 72.3 46,582 72.0 -------- ---- --------- ---- Gross profit 12,510 27.7 18,072 28.0 -------- ---- --------- ---- Selling, general and administrative 8,496 18.8 12,444 19.2 Depreciation 302 .7 235 .4 -------- ------ --------- ------ 8,798 19.5 12,679 19.6 -------- ---- --------- ---- Income before other expense (income), income taxes, and amortization of intangibles 3,711 8.2 5,393 8.4 Other expense ( 265 ) .6 ( 738) ( 1.2 ) ------- ---- -------- --- Income before income taxes and amortization of intangibles 3,447 7.6 4,655 7.2 Income taxes 1,299 2.8 1,856 2.9 -------- --- --------- --- Income before amortization of intangibles 2,148 4.8 2,799 4.3 Amortization of intangibles, net of income tax benefits 3 1,648 2.5 -------- --- --------- --- Net income $ 2,145 4.8% $ 1,151 1.8 % ======== === ========= === 2002 2001 ---------- --------- Earnings per share: Basic: Income before amortization of intangibles $.20 $.26 Amortization of intangibles .15 ---- ----- Net income $.20 $.11 ==== ==== Diluted: Income before amortization of intangibles $.20 $.26 Amortization of intangibles .15 ---- ----- Net income $.20 $.11 ==== ==== </TABLE> Revenues. Revenues decreased 30.2%, or $19.5 million, for the three months ended March 31, 2002 as compared to the same period in the prior year (the "comparable prior year period"). Revenue decline was primarily attributable to continued softness in the Information Technology ("IT") sector. Management attributes this softness to overall economic conditions as well as hesitancy by customers to launch new capital spending programs. 15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 - (Continued) Cost of Services. Cost of services decreased 30.0%, or $14.0 million, for the three months ended March 31, 2002 as compared to the comparable prior year period. This decrease was primarily due to a decrease in salaries and compensation associated with decreased revenues experienced during the three months ended March 31, 2002. Cost of services as a percentage of revenues increased to 72.3% for the three months ended March 31, 2002 from 72.0% for the comparable prior year period. This increase was primarily attributable to an increase of the Company's revenues being derived from Professional Engineering services which have historically had lower gross profit margins. Selling, General and Administrative. Selling, general and administrative expenses ("SGA") decreased 31.7%, or $3.9 million, for the three months ended March 31, 2002 as compared to the comparable prior year period. This decrease was primarily attributable to a reduction in revenues and a corresponding reduction in the related variable costs and cost cutting initiatives. SGA expenses as a percentage of revenues was 18.8% for the three months ended March 31, 2002 as compared to 19.2% for the comparable prior year period. Depreciation. Depreciation increased 28.5%, or $67,000, for the three months ended March 31, 2002 as compared to the comparable prior year period. This increase was primarily due to the depreciation and amortization of infrastructure and leasehold improvements incurred since March 31, 2001. Other Expense. Other expense consists principally of interest expense, net of interest income. For the three months ended March 31, 2002, actual interest expense of $288,000 was offset by $20,400 of interest income, which was earned from investments in interest bearing deposits. Interest expense, net decreased $474,000 for the three months ended March 31, 2002 as compared to the comparable prior year period. This decrease was primarily due to the increased cash derived from operating activities, which was used to reduce interest bearing debt by $6.6 million during the three months ended March 31, 2002. Income Tax. Income tax expense decreased 30.1%, or $558,000, for the three months ended March 31, 2002 as compared to the comparable prior year period. This decrease was attributable to a lower level of income before taxes for the three months ended March 31, 2002 compared to the comparable prior year period. Amortization of Intangibles. Amortization of intangibles for the three months ended March 31, 2002 and 2001 was net of income tax benefit of $2,000 and $395,000, respectively. Amortization of intangibles decreased 99.8%, or $1.6 million for the three months ended March 31, 2002 as compared to the comparable prior year period. On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 142, Goodwill and Intangible Assets. SFAS is effective for all fiscal periods beginning after December 15, 2001. In accordance with SFAS 142, for the three months ended March 31, 2002, all previously recognized goodwill and intangible assets with indefinite lives was no longer subject to amortization. Liquidity and Capital Resources Operating activities provided $8.9 million of cash for the three months ended March 31, 2002 as compared to $15.3 million for the comparable period. The decrease in cash provided by operating activities was primarily attributable to decreases in accounts receivable, income tax refund receivable, deferred tax assets, prepaid expenses and other current assets and an increase in accrued payroll, which was partially offset by decreases in accounts payable and accrued expenses, payroll and withheld taxes and income taxes payable. Investing activities used $670,000 for the three months ended March 31, 2002 as compared to $2.7 million for the comparable period. The reduction in the use of cash for the three months ended March 31, 2002 as compared to the comparable period was primarily attributable to a reduction in acquisition and deferred consideration payments. 16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources - (Continued) Financing activities consisting of debt payments of $6.6 million for the three months ended March 31, 2002 as compared to payments of $7.4 million for the comparable period. The Company and its subsidiaries entered into an agreement with Citizens Bank (successor to 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 October 10, 2001. Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company. These alternatives are: 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. Management of the Company has commenced negotiations for renewal or replacement of the Revolving Credit Facility. The weighted average interest rates for the three months ended March 31, 2002 and 2001 were 3.72% and 7.27%, respectively. The amounts outstanding under the Revolving Credit Facility at March 31, 2002 and December 31, 2001 were $24.9 million and $31.5 million, respectively. The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any future acquisitions will be derived from one or more of 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 from time to time engages in discussions with potential acquisition candidates. Should the size of the Company and its financial resources increase, 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 12 months. Although, the Company currently believes that it has sufficient capital resources to meet its anticipated working capital and capital expenditures beyond the next 12 months, unanticipated events and opportunities may make it necessary for the Company to increase its current credit facility or establish new credit facilities or raise capital in public and/or private transactions in order to meet its capital requirements. The Company is involved in several litigation matters. See Note 6 to the Financial Statements. Should a significant number of such matters be resolved against the Company, the Company will need to devote capital it anticipates using for other purposes to such litigation matters, which could result in an increased need for capital. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the Company's exposure to market risk since its Annual Report on Form 10-K for the year ended December 31, 2001. 17
PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None 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: May 9, 2002 By:/s/ Stanton Remer --- ------- ----- Stanton Remer Chief Financial Officer, Treasurer, Secretary and Director (Principal Financial Officer and Duly Authorized Officer of the Registrant) 18