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 June 30, 2001 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,10,539,424 shares outstanding as of July 31, 2001.
<TABLE> <CAPTION> 2 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION Page Item 1 - Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 2001 (Unaudited) <S> <C> and December 31, 2000 (Audited) 3 Unaudited Consolidated Statements of Income and Comprehensive Income for the Six-Month Periods Ended June 30, 2001 and 2000 5 Unaudited Consolidated Statements of Income and Comprehensive Income for the Three-Month Periods Ended June 30, 2001 and 2000 6 Unaudited Consolidated Statement of Changes in Shareholders' Equity for the Six-Month Period Ended June 30, 2001 7 Unaudited Consolidated Statements of Cash Flows for the Six- Month Periods Ended June 30, 2001 and 2000 8 Notes to Unaudited Consolidated Financial Statements 10 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 21 Item 4 - Submission of Matters to a Vote of Security Holders 21 Item 6 - Exhibits and Reports on Form 8-K 21 Signatures 22 </TABLE> 2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 2001 and December 31, 2000 ASSETS <TABLE> <CAPTION> June 30, December 31, 2001 2000 --------------- --------------- (Unaudited) (Audited) Current assets <S> <C> <C> Cash and cash equivalents $ 6,743,580 $ 3,170,658 Accounts receivable, net of allowance for doubtful accounts of $1,719,000 (June 30, 2001) and $1,875,000 (December 31, 2000), respectively 50,381,970 64,032,564 Income tax refund receivable 5,519,481 7,417,258 Prepaid expenses and other current assets 1,830,313 3,161,235 Deferred tax assets 1,483,649 1,449,518 --------------- --------------- Total current assets 65,958,993 79,231,233 --------------- --------------- Property and equipment, at cost Equipment and leasehold improvements 10,334,583 10,238,480 Less: accumulated depreciation and amortization 3,644,679 4,079,857 --------------- --------------- 6,689,904 6,158,623 --------------- --------------- Other assets Deposits 211,268 223,512 Intangible assets, net of accumulated amortization of $11,245,000 (June 30, 2001) and $7,878,000 (December 31, 2000), respectively 96,291,089 88,655,460 -------------- ------------ 96,502,357 88,878,972 --------------- --------------- Total assets $169,151,254 $174,268,828 =============== =============== </TABLE> 3 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED June 30, 2001 and December 31, 2000 LIABILITIES AND SHAREHOLDERS' EQUITY <TABLE> <CAPTION> June 30, December 31, 2001 2000 --------------- --------------- (Unaudited) (Audited) Current liabilities <S> <C> <C> Accounts payable and accrued expenses $20,936,175 $13,610,547 Accrued payroll 7,062,978 7,691,258 Payroll and withheld taxes 271,978 1,311,828 Income taxes payable 75,640 108,996 --------------- --------------- Total current liabilities 28,346,771 22,722,629 --------------- --------------- Long-term liabilities Note payable 34,900,000 47,300,000 Income taxes payable 1,433,831 2,183,873 --------------- --------------- 36,333,831 49,483,873 --------------- --------------- 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; 10,539,424 and 10,499,651 shares issued and outstanding at June 30, 2001 and December 31, 2000, respectively 526,971 524,982 Accumulated other comprehensive loss (461,604) (233,631) Additional paid-in capital 93,647,330 93,516,080 Retained earnings 10,757,955 8,254,895 --------------- --------------- 104,470,652 102,062,326 --------------- --------------- Total liabilities and shareholders' equity $169,151,254 $174,268,828 =============== =============== </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 Six Months Ended June 30, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> 2001 2000 ---------------- --------------- <S> <C> <C> Revenues $123,019,699 $150,935,386 Cost of services 88,469,679 112,292,497 ---------------- --------------- Gross profit 34,550,020 38,642,889 ---------------- --------------- Operating costs and expenses Selling, general and administrative 23,680,387 27,964,904 Depreciation 493,670 591,252 Amortization 3,366,554 3,118,767 ---------------- --------------- 27,540,611 31,674,923 ---------------- --------------- Operating income 7,009,409 6,967,966 ---------------- --------------- Other expenses Interest expense, net of interest income 1,315,629 1,813,095 (Gain) Loss on foreign currency translation ( 10,149) 4,056 ---------------- --------------- 1,305,480 1,817,151 ---------------- Income before income taxes 5,703,929 5,150,815 Income taxes 3,200,869 2,752,410 ---------------- --------------- Net income 2,503,060 2,398,405 Other comprehensive loss Foreign currency translation adjustment ( 227,973) ( 169,473) ---------------- --------------- Comprehensive income $ 2,275,087 $ 2,228,932 ================ =============== Basic earnings per share $.24 $.23 ===== ==== Weighted average number of common shares outstanding 10,499,651 10,498,938 ========== ========== Diluted earnings per share $.23 $.22 ==== ==== Weighted average number of common and common equivalent shares outstanding 10,665,107 10,819,341 ========== ========== </TABLE> 5 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 June 30, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> 2001 2000 ---------------- --------------- <S> <C> <C> Revenues $58,365,909 $75,989,896 Cost of services 41,887,806 56,386,298 ---------------- --------------- Gross profit 16,478,103 19,603,598 ---------------- --------------- Operating costs and expenses Selling, general and administrative 11,236,560 13,908,805 Depreciation 258,209 313,428 Amortization 1,323,064 1,601,727 ---------------- --------------- 12,817,833 15,823,960 ---------------- --------------- Operating income 3,660,270 3,779,638 ---------------- --------------- Other expenses Interest expense, net of interest income 573,809 964,175 (Gain) Loss on foreign currency translation ( 6,089) 6,942 ---------------- --------------- 567,720 971,117 ---------------- --------------- Income before income taxes 3,092,550 2,808,521 Income taxes 1,740,434 1,468,006 ---------------- --------------- Net income 1,352,116 1,340,515 Other comprehensive loss Foreign currency translation adjustment 156,740 169,473 ---------------- --------------- Comprehensive income $1,195,376 $1,171,042 ================ =============== Basic earnings per share $.13 $.13 ==== ==== Weighted average number of common shares outstanding 10,499,651 10,499,651 ========== ========== Diluted earnings per share $.13 $.13 ==== ==== Weighted average number of common and common equivalent shares outstanding 10,736,087 10,618,713 ========== ========== </TABLE> 6 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Six Months Ended June 30, 2001 (Unaudited) <TABLE> <CAPTION> Accumulated Other Common Stock Comprehensive Additional ------------ Paid-in Retained Shares Amount Income (Loss) Capital Earnings <S> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001 10,499,651 $524,982 ($233,631) $93,516,080 $8,254,895 Employee Stock Purchase Plan 39,773 1,989 131,250 Translation adjustment (227,973) Net income _________ ________ _________ __________ 2,503,060 ---- --------- Balance, June 30, 2001 10,539,424 $526,971 ($461,604) $93,647,330 $10,757,955 ========== ======== ========== =========== =========== </TABLE> 7 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> 2001 2000 --------------- -------------- Cash flows from operating activities: <S> <C> <C> Net income $2,503,060 $2,398,405 --------------- -------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 3,860,224 3,710,019 Provision for losses on accounts receivable ( 156,000) 211,000 Changes in assets and liabilities: Accounts receivable 13,806,594 ( 3,379,259) Income tax refund receivable 1,897,777 Deferred tax asset ( 34,131) Prepaid expenses and other current assets 1,330,922 ( 1,891,944) Accounts payable and accrued expenses 709,342 7,374,040 Accrued payroll ( 628,280) 1,291,050 Payroll and withheld taxes ( 1,039,850) ( 48,156) Income taxes payable ( 783,398) 1,465,892 --------------- -------------- Total adjustments 18,963,200 8,732,642 --------------- -------------- Net cash provided by operating activities $21,466,260 $11,131,047 --------------- -------------- </TABLE> 8 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, 2001 and 2000 - (Continued) (Unaudited) <TABLE> <CAPTION> 2001 2000 --------------- -------------- Cash flows from investing activities: <S> <C> <C> <C> <C> Property and equipment acquired ( $1,103,777) ( $ 889,987) Decrease in deposits 12,244 14,270 Purchase of acquired companies including contingent consideration, net of cash acquired ( 4,307,071) ( 19,493,915) --------------- -------------- Net cash used in investing activities ( 5,398,604) ( 20,369,632) --------------- -------------- Cash flows from financing activities: Employee stock purchase plan 133,239 Exercise of stock options 42,950 Borrowings of long-term debt ( 12,400,000) 9,300,000 --------------- -------------- Net cash provided by (used in) financing activities ( 12,266,761) 9,342,950 --------------- -------------- Effect of exchange rate changes on cash and cash equivalents ( 227,973) ( 169,473) --------------- -------------- Increase (decrease) in cash and cash equivalents 3,572,922 ( 65,108) Cash and cash equivalents at beginning of period 3,170,658 4,025,808 --------------- -------------- Cash and cash equivalents at end of period $6,743,580 $3,960,700 =============== ============== Supplemental cash flow information: Cash paid for: Interest expense $1,366,420 $1,932,532 Income taxes $1,700,388 $1,562,086 </TABLE> 9 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, 2000. 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 June 30, 2001 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 June 30, 2001 and December 31, 2000 was $96,291,000 and $88,655,000, respectively, and is being amortized on a straight-line method over twenty years. Amortization expense for the six months ended June 30, 2001 and 2000 was $3,367,000 and $3,119,000, respectively. It is the Company's policy to periodically review the net realizable value of its intangible assets, including goodwill, through an assessment of the estimated future cash flows related to such assets. Each business unit to which these intangible assets relate is reviewed to determine whether future cash flows over the remaining estimated useful lives of the assets provide for recovery of the assets. In the event that assets are found to be carried at amounts that are in excess of estimated undiscounted future cash flows, then the intangible assets are adjusted for impairment to a level commensurate with an undiscounted cash flow analysis of the underlying assets. 3. 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. 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. The weighted average interest rates at June 30, 2001 and December 31, 2000 were 5.69% and 8.33%, respectively. The amounts outstanding under the Revolving Credit Facility at June 30, 2001 and December 31, 2000 were $34.9 million and $47.3 million, respectively. 4. Interest (Expense) Income, Net Interest (expense) income, net consisted of the following: <TABLE> <CAPTION> Six Months Ended June 30, Three Months Ended June 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Interest expense ($1,520,775) ($1,927,836) ($669,731) ($1,028,033) Interest income 205,146 114,741 95,922 63,858 -------------- -------------- -------------- -------------- ($1,315,629) ($1,813,095) ($573,809) ($ 964,175) ============ ============== ============== ============== </TABLE> 10 <page> RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5. Accounts Payable and Accrued Expenses Accounts payable at June 30, 2001 and December 31, 2000 consists of the following: June 30, December 31, 2001 2000 -------------- --------------- Accounts payable $9,718,448 $ 9,009,108 Funds due sellers (1) 11,217,727 4,601,439 -------------- --------------- $20,936,175 $13,610,547 ============== =============== (1) Represents funds due to the shareholders of acquired companies. 6. 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> Six Months Ended Information Professional Commercial June 30, 2001 Technology Engineering Services Corporate Total --------------- ------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> Revenue $90,342 $20,249 $12,429 $ $123,020 Operating expenses 81,972 18,205 11,973 112,150 --------------- ------------- -------------- ------------- ------------- EBITDA (1) 8,370 2,044 456 10,870 Depreciation 369 102 23 494 Goodwill amortization 3,022 327 18 3,367 --------------- ------------- -------------- ------------- ------------- Operating income $ 4,979 $1,615 $ 415 $ $ 7,009 =============== ============= ============== ============= ============= Total assets $126,173 $17,346 $6,154 $ 19,478 $169,151 Capital expenditures $ 379 $ $ $ 725 $ 1,104 </TABLE> 11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. Segment Information - (Continued) <TABLE> <CAPTION> Six Months Ended Information Professional Commercial June 30, 2000 Technology Engineering Services Corporate Total --------------- ------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Revenue $117,713 $19,859 $13,363 $ $150,935 Operating expenses 108,779 18,610 12,868 140,257 --------------- ------------- -------------- ------------- ------------- EBITDA (1) 8,934 1,249 495 10,678 Depreciation 438 133 20 591 Goodwill amortization 2,723 369 27 3,119 --------------- ------------- -------------- ------------- ------------- Operating income $ 5,773 $ 747 $ 488 $ $ 6,968 =============== ============= ============== ============= ============= Total assets $168,167 $17,641 $6,482 $13,317 $205,606 Capital expenditures $ 597 $ 75 $ 15 $ 213 $ 900 </TABLE> <TABLE> <CAPTION> Three Months Ended Information Professional Commercial June 30, 2001 Technology Engineering Services Corporate Total --------------- ------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Revenue $41,768 $10,328 $6,270 $ $58,366 Operating expenses 38,191 8,884 6,050 53,125 --------------- ------------- -------------- ------------- ------------- EBITDA (1) 3,577 1,444 220 5,241 Depreciation 191 54 13 258 Goodwill amortization 1,148 166 9 1,323 --------------- ------------- -------------- ------------- ------------- Operating income $ 2,238 $1,224 $ 199 $ 3,660 =============== ============= ============== ============= ============= Total assets $126,173 $17,346 $6,154 $ 19,478 $169,151 Capital expenditures $ 221 $ $ $ 499 $720 </TABLE> 12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS <TABLE> <CAPTION> 6. Segment Information - (Continued) Three Months Ended Information Professional Commercial June 30, 2000 Technology Engineering Services Corporate Total --------------- ------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Revenue $58,890 $10,024 $7,076 $ $75,990 Operating expenses 53,971 9,474 6,850 70,295 --------------- ------------- -------------- ------------- ------------- EBITDA (1) 4,919 550 226 5,695 Depreciation 236 65 12 313 Goodwill amortization 1,382 203 17 1,602 --------------- ------------- -------------- ------------- ------------- Operating income $ 3,301 $ 282 $ 197 $ $ 3,780 =============== ============= ============== ============= ============= Total assets $168,167 $17,641 $6,482 $13,317 $205,606 Capital expenditures $ 217 $ 60 $ 7 $ 213 $ 505 <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> 7. Recent Accounting Pronouncements On June 29, 2001, the Financial Accounting Standard Board (FASB) approved for issuance Statement of Financial Accounting Standards (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Intangible Assets. Major provisions of these Statements are as follows: 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; 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; goodwill and intangible assets with indefinite lives are not amortized but are tested for impairment annually, except in certain circumstances, and whenever there is an impairment indicator; all acquired goodwill must be assigned to reporting units for purposes of impairment testing and segment reporting; effective January 1, 2002, goodwill will no longer be subject to amortization. Upon adoption of SFAS 142, on January 1, 2002, the Company will no longer amortize goodwill, thereby eliminating annual goodwill amortization of approximately $5.7 million, based on anticipated amortization for 2002. 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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, 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. 14 <page> 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 and engineering technologies. RCM is an innovative leader in the design, development and delivery of e-Business, Enterprise Management and Application Integration, Supply Chain and Engineering services to multiple industries. RCM's offices are located in major metropolitan centers throughout North America. The Company has grown its information technology competencies in the areas of resource augmentation, e-business, Supply Chain Management, Enterprise Application Integration ("EIA"), 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 provides its services to clients in banking and finance, healthcare, insurance, pharmaceutical, telecommunications, utility, technology, manufacturing and distribution and government sectors. The Company believes that 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 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. Most companies have recognized the importance of the Internet and information management technologies to competing in today's business climate. However, the recessionary attitudes have curtailed companies motivation for rapid adoption of many technological enhancements. The process of designing, developing and implementing software solutions has become increasingly complex. 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 were 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, more than ever before, 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 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 solution work are higher than those for professional services. The Company is currently working to expand its sales of higher margin solution and project management services. 15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 <TABLE> <CAPTION> A summary of operating results for the six months ended June 30, 2001 and 2000 is as follows (in thousands, except for earnings per share data): 2001 2000 --------------------- -------------------- % of % of Amount Revenue Amount Revenue -------- -------- -------- ------- <S> <C> <C> <C> <C> Revenues $123,020 100.0% $150,935 100.0% Cost of services 88,470 71.9 112,292 74.4 -------- ---- --------- ---- Gross profit 34,550 28.1 38,643 25.6 -------- ---- --------- ---- Selling, general and administrative 23,680 19.3 27,965 18.5 Depreciation 494 .4 591 .4 -------- ------ --------- ------ 24,174 19.7 28,556 18.9 -------- ---- --------- ---- Operating income 10,376 8.4 10,087 6.7 Other expense ( 1,305 ) ( 1.1) ( 1,817) ( 1.2 ) ------- --- -------- --- Income before income taxes and goodwill amortization 9,070 7.4 8,270 5.5 Income taxes 3,751 3.0 3,296 2.2 -------- --- --------- --- Income before goodwill amortization 5,319 4.4 4,974 3.3 Goodwill amortization, net of income tax benefits 2,816 2.4 2,576 1.7 -------- --- --------- --- Net income $ 2,503 2.0% $ 2,398 1.6% ======== === ========= === 2001 2000 ---------- --------- Earnings per share: Basic: Income before goodwill amortization $.52 $.47 Goodwill amortization .28 .24 ----- ----- Net income $.24 $.23 ==== ==== Diluted: Income before goodwill amortization $.51 $.46 Goodwill amortization .28 .24 ----- ----- Net income $.23 $.22 ==== ==== </TABLE> Revenues. Revenues decreased 18.5%, or $27.9 million, for the six months ended June 30, 2001 as compared to the same period in the prior year (the "comparable prior year period"). Revenue decline was primarily attributable to softness in the Information Technology ("IT") sector. Cost of Services. Cost of services decreased 21.2%, or $23.8 million, for the six months ended June 30, 2001 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 six months ended June 30, 2001. Cost of services as a percentage of revenues decreased to 71.9% for the six months ended June 30, 2001 from 74.4% for the comparable prior year period. This decline was primarily attributable to continuing efforts by the Company to seek higher margin business. 16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 - (Continued) Selling, General and Administrative. Selling, general and administrative expenses decreased 15.3%, or $4.3 million, for the six months ended June 30, 2001 as compared to the comparable prior year period. This decrease was primarily attributable to a reduction in revenues, a corresponding reduction in related variable costs, and cost cutting initiatives. Due to an economic slowdown, the Company experienced, during the six months ended June 30, 2001, bad debt expense of approximately $1.1 million, which was $500,000 in excess of the amount in the comparative prior period. Depreciation. Depreciation decreased 16.4%, or $97,000, for the six months ended June 30, 2001 as compared to the comparable prior year period. This decrease was primarily due to the write down of certain fixed assets to net realizable value in the fiscal year ended December 31, 2000. Other Expense. Other expense consists principally of interest expense, net of interest income. For the six months ended June 30, 2001, actual interest expense of $1.5 million was offset by $205,000 of interest income, which was earned from the investment in interest bearing deposits. Interest expense, net decreased $407,000 for the six months ended June 30, 2001 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. Income Tax. Income tax expense increased 13.8%, or $455,000, for the six months ended June 30, 2001 as compared to the comparable prior year period. This increase was attributable to a higher level of income before taxes and goodwill amortization for the six months ended June 30, 2001 compared to the comparable prior year period. Goodwill Amortization. Goodwill amortization for the six months ended June 30, 2001 and 2000 was net of income tax benefit of $550,000 and $543,000, respectively. Goodwill increased 9.3%, or $240,000 for the six months ended June 30, 2001 as compared to the comparable prior year period. The increase was due primarily to the acceleration of goodwill amortization related to the final payment on a certain acquisition. 17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 <TABLE> <CAPTION> A summary of operating results for the three months ended June 30, 2001 and 2000 is as follows (in thousands, except for earnings per share data): 2001 2000 ------------------------ ----------------------- % of % of Amount Revenue Amount Revenue -------- -------- -------- ------- <S> <C> <C> <C> <C> Revenues $58,366 100.0% $ 75,990 100.0% Cost of services 41,888 71.8 56,386 74.2 ------ ---- --------- ---- Gross profit 16,478 28.2 19,604 25.8 ------ ---- --------- ---- Selling, general and administrative 11,237 19.3 13,909 18.3 Depreciation 258 .4 313 -------- ----- --- .4 11,495 19.7 14,222 18.7 ------ ---- --------- ---- Operating income 4,983 8.5 5,382 7.1 Other expense ( 568) 1.0 ( 971) ( 1.3) --------- --- -------- ---- Income before income taxes and goodwill amortization 4,415 7.6 4,411 5.8 Income taxes 1,894 3.3 1,759 2.3 -------- --- --------- ---- Income before goodwill amortization 2,521 4.3 2,652 3.5 Goodwill amortization, net of income tax benefits 1,169 2.0 1,312 1.7 ----- --- --------- ---- Net income $ 1,352 2.3% $ 1,340 1.8% ======== === ========= ==== 2001 2000 --------- -------- Earnings per share: Basic: Income before goodwill amortization $.26 $.25 Goodwill amortization .13 .12 --- ----- Net income $.13 $.13 ==== ==== Diluted: Income before goodwill amortization $.25 $.25 Goodwill amortization .12 .12 --- ----- Net income $.13 $.13 ==== ==== </TABLE> Revenues. Revenues decreased 23.2%, or $17.6 million, for the three months ended June 30, 2001 as compared to the same period in the prior year (the "comparable prior year period"). Revenue decline was primarily attributable to softness in the Information Technology ("IT") sector. Cost of Services. Cost of services decreased 25.7%, or $14.5 million, for the three months ended June 30, 2001 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 June 30, 2001. Cost of services as a percentage of revenues decreased to 71.8% for the three months ended June 30, 2001 from 74.2% for the comparable prior year period. This decline was primarily attributable to continuing efforts by the Company to seek higher margin business. 18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 - (Continued) Selling, General and Administrative. Selling, general and administrative expenses decreased 19.2%, or $2.7 million, for the three months ended June 30, 2001 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. Due to an economic slowdown, the Company experienced, during the three months ended June 30, 2001, bad debt expense of approximately $557,000, which was $150,000 in excess of the amount in the comparative prior period. Depreciation. Depreciation decreased 17.6%, or $55,000, for the three months ended June 30, 2001 as compared to the comparable prior year period. This decrease was primarily due to the write down of certain fixed assets to net realizable value in the fiscal year ended December 31, 2000. Other Expense. Other expense consists principally of interest expense, net of interest income. For the three months ended June 30, 2001, actual interest expense of $669,700 was offset by $96,000 of interest income, which was earned from the investment in interest bearing deposits. Interest expense, net decreased $390,000 for the three months ended June 30, 2001 as compared to the comparable prior year period. This increase was primarily due to the increased cash derived from operating activities which was used to reduce interest bearing debt. Income Tax. Income tax expense increased 7.7%, or $135,000, for the three months ended June 30, 2001 as compared to the comparable prior year period. This increase was attributable to an increase in taxable income derived from non U.S. sources for the three months ended June 30, 2001 compared to the comparable prior year period. Goodwill Amortization. Goodwill amortization for the three months ended June 30, 2001 and 2000 was net of income tax benefit of $154,000 and $290,000, respectively. Goodwill decreased 10.9%, or $143,000 for the three months ended June 30, 2001 as compared to the comparable prior year period. The decrease was due to the write-down of Intangible Assets prior to December 31, 2000 which was offset by the amortization of earnout payments subsequent to December 2000. Liquidity and Capital Resources Operating activities provided $21.5 million of cash for the six months ended June 30, 2001 as compared to operating activities providing $11.1 million of cash for the six months ended June 30, 2000. The increase in cash provided by operating activities was primarily attributable to decreases in accounts receivable, income tax refund receivable, and prepaid expenses and other current assets, and increases in accounts payable and accrued expenses and accrued payroll, which was partially offset by decreases in accrued payroll, payroll and withheld taxes and income taxes payable, and deferred tax assets and increased levels of depreciation and amortization. Investing activities used $5.4 million for the six months ended June 30, 2001 as compared to $20.4 million for the comparable period. The reduction in the use of cash for investing activities for the six months ended June 30, 2001 as compared to the comparable period was primarily attributable to a reduction in acquisition and deferred consideration payments. Financing activities (principally debt reduction activities) used $12.3 million for the six months ended June 30, 2001 as compared to financing activities providing $9.3 million for the comparable period. 19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources - (Continued) The Company and its subsidiaries are parties to 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. 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. The weighted average interest rates at June 30, 2001 and December 31, 2000 were 5.69% and 8.33%, respectively. The amounts outstanding under the Revolving Credit Facility at June 30, 2001 and December 31, 2000 were $34.9 million and $47.3 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. 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. 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, 2000. 20
PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In its Annual Report on Form 10-K for the year ended December 31, 2001, the Company disclosed that on November 6, 1998, two former officers filed suit against the Company alleging wrongful termination of their employment, failure to make severance payments and wrongful conduct by the Company in connection with the grant and ultimate divestiture of Stock Options to the plaintiffs. The complaint also alleges the Company wrongfully limited the number of shares of Company stock that could be sold by the plaintiffs and makes various other claims including a claim for punitive damages. In the suit, the plaintiffs seek damages of approximately $480,000 plus other unspecified amounts. 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 submitted to binding arbitration; closing arguments in that proceeding have been held and a decision by the arbitrator is expected before the end of the third quarter of 2001. In addition, the court recently denied cross-motions for summary judgment with respect to plaintiff's claims as to the Company allegedly wrongful limiting the number of shares the plaintiffs could sell. The Company expects discovery in the case to continue. Management believes the suit is without merit and has defended the claims vigorously. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS <TABLE> <CAPTION> The Company held its Annual Meeting of Shareholders on June 21, 2001. The following actions were taken: 1.) The following directors were elected to serve as Class B directors on the Board of Directors, and shall serve terms expiring at the Company's Annual Meeting in 2004, and until their respective successors shall be elected and qualified. Tabulated voting results were as follows: <S> <C> <C> Robert B. Kerr (Class B) (For 9,644,160; Withheld 487,050) Woodrow B. Moats, Jr. (Class B) (For 9,644,160; Withheld 487,050) </TABLE> Each of the Class A directors of the Company, Norman Berson and Brian Delle Donne, will continue to serve on the Board of Directors for a term expiring at the Company's Annual Meeting in 2003, and until his successor has been elected and qualified. The Class C directors of the Company, Leon Kopyt and Stanton Remer, will continue to serve on the Board of Directors for a term expiring at the Company's Annual Meeting in 2002, and until his successor has been elected and qualified. <TABLE> <CAPTION> 2.) Approval of the adoption of the Company's 2001 Employee Stock Purchase Plan. <S> <C> <C> <C> Votes For - 9,261,625; Votes Against - 547,914; Abstentions - 321,671 </TABLE> <TABLE> <CAPTION> 3.) Approval of the adoption of the Company's Nonqualified Deferred Compensation Plan. <S> <C> <C> <C> Votes For - 9,035,856; Votes Against -766,642; Abstentions - 328,712 </TABLE> <TABLE> <CAPTION> 4.) Approval of Grant Thornton LLP as the independent auditing firm for the Company for the fiscal year ending December 31, 2001. <S> <C> <C> <C> Votes For - 9,646,600; Votes Against - 464,598; Abstentions - 20,012 </TABLE> 21 <page> PART II OTHER INFORMATION - (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None (b) Reports on Form 8-K None 22
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: July 31, 2001 By:/s/ Stanton Remer --- ------- ----- Stanton Remer Chief Financial Officer, Treasurer, Secretary and Director (Principal Financial Officer and Duly Authorized Officer of the Registrant) 23