UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30 , 1997 Commission file number: 1-10245 RCM TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) Nevada 95-1480559 (State of Incorporation) (IRS Employer Identification No.) 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613 (Address of principal executive offices) (609) 486-1777 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of the Registrant's classes of common stock, as of the latest practicable date. CLASS 7,691,676 Common Stock, $.05 par value Outstanding as of June 13, 1997 1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION Item 1 - Consolidated Financial Statements Page Consolidated Balance Sheets as of April 30, 1997 (Unaudited) and October 31, 1996 (Audited) 3 Unaudited Consolidated Statements of Income for the Six Month Periods Ended April 30, 1997 and 1996 5 Unaudited Consolidated Statements of Income for the Three Month Periods Ended April 30, 1997 and 1996 6 Unaudited Consolidated Statement of Changes in Shareholders' Equity for the Six Month Period Ended April 30, 1997 7 Unaudited Consolidated Statements of Cash Flows for the Six Month Periods Ended April 30, 1997 and 1996 8 Notes to Unaudited Consolidated Financial Statements 10 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION ITEM 1 - Legal Proceedings 18 ITEM 4 - Submission of Matters to a Vote of Security Holders 18 ITEM 5 - Other Information 18 ITEM 6 - Exhibits and Reports on Form 8-K 19 SIGNATURES 20 2
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS April 30, 1997 and October 31, 1996 ASSETS <TABLE> <CAPTION> 1997 1996 ------------ --------- (Unaudited) (Audited) Current assets <S> <C> <C> Cash and cash equivalents $ 34,974 $ 5,989 Accounts receivable, net of allowance for doubtful accounts of $196,000 in 1997 and $76,000 in 1996 18,900,804 13,985,445 Prepaid expenses and other current assets 540,857 404,198 ------- ------- Total current assets 19,476,635 14,395,632 ---------- ---------- Property and equipment, at cost Equipment and leasehold improvements 2,119,582 1,644,831 Less: accumulated depreciation and amortization 1,229,678 1,142,740 --------- --------- 889,904 502,091 ------- ------- Other assets Deposits 84,907 88,039 Intangible assets (net of accumulated amortization of $568,335 and $366,337 in 1997 and 1996, respectively) 14,297,347 9,420,858 ---------- --------- 14,382,254 9,508,897 ---------- --------- Total assets $ 34,748,793 $ 24,406,620 = ========== = ========== </TABLE> The accompanying notes are an integral part of these financial statements. 3
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED April 30, 1997 and October 31, 1996 LIABILITIES AND SHAREHOLDERS' EQUITY <TABLE> <CAPTION> 1997 1996 ---- ---- (Unaudited) (Audited) Current liabilities <S> <C> <C> Note payable - bank $ 9,990,520 $ 2,746,636 Accounts payable and accrued expenses 634,088 734,791 Accrued payroll 3,106,620 2,789,725 Taxes other than income taxes 1,152,803 432,607 Income taxes payable 1,603,720 920,439 --------- ------- Total current liabilities 16,487,751 7,624,198 ---------- --------- Income taxes payable 341,518 562,312 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; 4,816,676 and 4,878,476 shares issued in 1997 and 1996, respectively 240,834 243,924 Additional paid-in capital 17,102,468 17,161,105 Treasury stock, at cost 62,800 shares ( 62,821 ) Retained earnings (accumulated deficit) 576,222 ( 1,122,098 ) ------- --------- 17,919,524 16,220,110 ---------- ---------- Total liabilities and shareholders' equity $ 34,748,793 $ 24,406,620 = ========== = ========== </TABLE> The accompanying notes are an integral part of these financial statements. 4
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Six Months Ended April 30, 1997 1996 ---- ---- (Unaudited) (Unaudited) <S> <C> <C> Revenues $ 48,530,700 $ 23,562,110 Cost of services 37,185,185 19,298,075 ---------- ---------- Gross profit 11,345,515 4,264,035 ---------- --------- Operating costs and expenses Selling, general and administrative 7,943,838 3,082,700 Depreciation and amortization 238,081 132,470 ------- ------- 8,181,919 3,215,170 --------- --------- Operating income 3,163,596 1,048,865 Interest expense 262,667 51,089 ------- ------ Income before income taxes 2,900,929 997,776 Income taxes 1,202,609 109,177 --------- ------- Net income $ 1,698,320 $ 888,599 = ========= = ======= Net earnings per share $.34 $.24 ==== ==== </TABLE> The accompanying notes are an integral part of these financial statements. 5
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended April 30, 1997 1996 ---- ---- (Unaudited) (Unaudited) <S> <C> <C> Revenues $ 27,379,979 $ 13,785,626 Cost of services 21,133,868 11,312,200 ---------- ---------- Gross profit 6,246,111 2,473,426 --------- --------- Operating costs and expenses Selling, general and administrative 4,323,573 1,931,739 Depreciation and amortization 119,452 80,453 ------- ------ 4,443,025 2,012,192 --------- --------- Operating income 1,803,086 461,234 Interest expense 172,478 26,249 ------- ------ Income before income taxes 1,630,608 434,985 Income taxes 713,275 48,249 ------- ------ Net income $ 917,333 $ 386,736 = ======= = ======= Net earnings per share $.18 $.09 ==== ==== </TABLE> The accompanying notes are an integral part of these financial statements. 6
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Six Months Ended April 30, 1997 (Unaudited) <TABLE> <CAPTION> Retained Additional Earnings Common Stock Paid-in (Accumulated Treasury Shares Amount Capital Deficit) Stock <S> <C> <C> <C> <C> <C> <C> <C> Balance, October 31, 1996 4,878,476 $ 243,924 $17,161,105 ($1,122,098) ($ 62,821) Exercise of Stock Options 1,000 50 1,044 Retirement of Treasury Stock ( 62,800) ( 3,140) ( 59,681) 62,821 Net Income 1,698,320 --------- Balance, April 30, 1997 4,816,676 $ 240,834 $17,102,468 $ 576,222 $ ========= ========== =========== ============ = </TABLE> The accompanying notes are an integral part of these financial statements. 7
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Six Months Ended April 30, 1997 1996 ---- ---- (Unaudited) (Unaudited) Cash flows from operating activities: <S> <C> <C> Net income $ 1,698,320 $ 888,599 - --------- - ------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 238,081 132,470 Provision for losses on accounts receivable 120,000 20,000 Changes in assets and liabilities: Accounts receivable ( 3,911,491) ( 1,222,227 ) Prepaid expenses and other current assets ( 115,569) 178,503 Accounts payable and accrued expenses ( 303,457) ( 192,456 ) Accrued payroll ( 58,687) ( 9,283 ) Taxes other than income taxes 668,701 268,855 Income taxes payable 462,486 ( 431,314 ) ------- ------- Total adjustments ( 2,899,936) ( 1,255,452 ) --------- --------- Net cash used in operating activities ( 1,201,616) ( 366,853 ) --------- ------- </TABLE> The accompanying notes are an integral part of these financial statements. 8
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED <TABLE> <CAPTION> Six Months Ended April 30, 1997 1996 ---- ---- (Unaudited) (Unaudited) Cash flows from investing activities: <S> <C> <C> Increase in intangible assets ($ 198,890) ($ 587,337 ) Property and equipment acquired ( 224,279) ( 46,835 ) Decrease (Increase) in deposits 3,132 ( 30,546 ) Cash paid for acquisitions, net of cash acquired ( 5,594,339) ( 621,500 ) --------- ------- Net cash used in investing activities ( 6,014,376) ( 1,286,218 ) --------- --------- Cash flows from financing activities: Sale of common stock 1,000,000 Exercise of stock options 1,094 4,813 Net borrowings under short term debt arrangements 7,243,883 460,966 Repayments of long term debt ( 40,180 ) ------ Net cash provided by financing activities 7,244,977 1,425,599 --------- --------- Net increase (decrease) in cash and cash equivalents 28,985 ( 227,472 ) Cash and cash equivalents at beginning of period 5,989 297,550 ----- ------- Cash and cash equivalents at April 30, $ 34,974 $ 70,078 = ====== = ====== Supplemental cash flow information: Cash paid for: Interest expense $ 262,667 $ 51,089 Income taxes $ 740,122 $ 135,000 Acquisitions Fair value of assets acquired $ 6,223,325 $ 1,720,498 Liabilities assumed 628,986 1,098,998 ------- --------- Cash paid, net of cash acquired $ 5,594,339 $ 621,500 = ========= = ======= </TABLE> The accompanying notes are an integral part of these financial statements. 9
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, 1996. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods set forth herein. The results for the six months ended April 30, 1997 are not necessarily indicative of the results to be expected for the full year. 2. Sale of Common Stock On June 13, 1997, the Company completed a public offering of 2,875,000 shares of Common Stock, of which, 2,698,187 shares were offerred and sold by the Company and 176,813 shares were offered by certain selling stockholders. The public offering was was undertaken pursuant to the terms of a Registration Statment on Form S-1 originally filed with the Securities and Exchange Commission on March 21, 1997 and a final Prospectus dated June 10, 1997. The net proceeds to the Company after estimated offering costs was approximately $23,486,882. The Company did not receive any of the proceeds from the sale of the shares by by the selling stockholders. 3. Acquisition On January 7, 1997, the Company acquired Programming Alternatives of Minnesota, Inc. ("PAMI"), a Minneapolis, Minnesota-based specialty provider of information technology personnel, particularly those with high demand client-server skills. The acquisition was completed effective as of November 4, 1996 through a stock purchase transaction (the "Purchase") pursuant to which PAMI became a wholly-owned subsidiary of the Company. The Purchase consideration paid to the former shareholders of PAMI consisted of $4,500,000 cash and a $1,625,000 three year promissory note payable contingent upon PAMI achieving certain base levels of operating income for each twelve month period following the Purchase during the term of the note. An additional earn-out payment may be made to the former shareholders of PAMI at the end of the third anniversary of the Purchase to the extent that operating income during this period exceeds these base levels. The acquisition has been accounted for under the purchase method of accounting. The cost in excess of net assets acquired of $4,483,331 is included in the Company's Consolidated Balance Sheet as "Intangible Assets" and is being amortized over a 40 year period. On April 1, 1997, the Company acquired certain operating assets of Programming Resources ("PRU") for $600,000 cash plus $300,000 of consideration in the form of a three year promissory note payable upon attaining certain earnings targets within the three-year period. The Company also agreed to pay additional consideration to the shareholders of PRU in the event that during the three-year period the performance of PRU exceeds the established earnings targets. PRU generated revenues of approximately $2.4 million during its fiscal year ended December 31, 1996. Through this transaction, the Company acquired one branch office which provides information technology staffing services. The cost in excess of net assets acquired of $582,000 is included in the Company's Consolidated Balance Sheet as "Intangible Assets" and is being amortized over a 40 year period. The following unaudited results of operations have been prepared assuming that all acquisitions which have occurred since November 1, 1995 had occurred at the beginning of the periods presented. Those results are not necessarily indicative of results of future operations nor of results that would have occurred had the acquisition been consummated as of the beginning of the periods presented. 10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3. Acquisition - (Continued) <TABLE> <CAPTION> Six Months Ended Three Months Ended April 30, April 30, 1997 1996 1997 1996 ---------------- ---------------- ---------------- ---------- <S> <C> <C> <C> <C> Revenues $ 49,521,000 $ 40,639,000 $ 27,776,000 $ 20,972,000 Net income $ 1,741,000 $ 1,143,000 $ 934,000 $ 615,000 Earnings per common share $.35 $.24 $.19 $.13 </TABLE> 4. Income Taxes The net income for the six and three months ended April 30, 1996, has been calculated after taking into account the effect of the then available net operating loss tax carryforward (NOL). Without giving effect to the NOL, the Company's earnings per share, on a fully taxed basis, for the six and three months ended April 30, 1996 would have been $.16 and $.06 per share, respectively. 5. Stock Options On August 15, 1996, the Board of Directors approved the RCM Technologies, Inc. 1996 Executive Stock Plan ("1996 Plan") which authorizes the issuance not later than August 15, 2006 of up to 1,250,000 (effective January 15, 1997) shares of Common Stock to officers and key employees of the Company and its subsidiaries. Effective November 21, 1996, the Chief Executive Officer, Mr. Kopyt, was granted 500,000 options pursuant to the 1996 Plan, of which 250,000 options were not exercisable as of April 30, 1997. <TABLE> <CAPTION> Transactions related to all stock options during the six months ended April 30, 1997 are as follows: <S> <C> Outstanding options, beginning of period......................................... 214,400 Granted.......................................................................... 500,000 Forfeited........................................................................( 4,400) Exercised........................................................................( 1,000) ---------- Outstanding options, end of period............................................... 709,000 ======= Exercisable options ............................................................. 459,000 ======= Option grant price per share..................................................... $1.25 to $8.13 </TABLE> 6. Earnings Per Share Earnings per share is based on the weighted average number of common shares outstanding during the periods presented. For the six months ended April 30, 1997 and 1996, the weighted average number of shares outstanding was 4,962,129 and 3,776,035, respectively. For the three months ended April 30, 1997 and 1996, the weighted average number of shares outstanding was 4,962,420 and 4,193,281, respectively. 11
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 When used in or incorporated by reference into this Report, the words "estimate," "project," "intend," "expect" and similar expressions are intended to identify forward-looking statements regarding events and financial trends which may affect the Company's future operating results and financial position. Such statements are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially. Such factors are set forth in the Company's Annual Report on Form 10-K for the year ended October 31, 1996, under the heading "Business-Risk Factors." Overview The Company provides contract and temporary personnel in the information technology, professional engineering and technical, specialty healthcare and general support sectors of the staffing industry to a diversified base of national, regional and local customers. The Company's business and strategy have changed dramatically since its inception in 1971. Through 1981, the Company's business focused on the development of environmental technologies and the operation of related environmental businesses. In 1981, the Company diversified its operations through the acquisition of Intertec Design, Inc., a staffing company that provided technical, clerical and light industrial personnel. Under current management in 1992, the Company chose to discontinue its environmental business and from 1992 through 1994 repositioned its core staffing business to improve profitability and to take advantage of consolidating market dynamics. Significant revenue growth was experienced beginning in fiscal 1995 as the Company implemented a growth strategy that resulted in the acquisition of six businesses in the staffing industry. This resulted in an increase in the Company's gross margins and net income as the mix of the Company's business shifted towards the higher margin information technology and specialty healthcare sectors and as the Company elected to discontinue providing certain lower margin general support services. General support services, which from fiscal 1992 to 1994 accounted for approximately 51% of the Company's revenues, decreased as a percentage of the Company's revenues to approximately 20% during the six months ended April 30, 1997. Corresponding increases were experienced in the Company's newly acquired information technology and specialty healthcare groups, accounting for approximately 41% and 6%, respectively, of the Company's revenues during the six months ended April 30, 1997. The Company realizes revenues from the placement of contract and temporary staffing personnel. These services are normally provided to the customer on a time and material basis at fixed hourly rates that are established for each of the Company's staffing personnel, based upon their skill level, experience and type of work performed. Billable hourly rates range from an average of approximately $55 - $75 within the information technology group, $30 - $60 in the professional engineering group, $35 - $65 within the specialty healthcare group and $8 - $15 in the Company's general support group. Approximately 90% of the Company's revenues are currently realized on the basis of agreed upon hourly billing rates. In some instances, billing rates can be adjusted based upon increases in workmen's compensation, taxes and other agreed upon costs. A small percentage of the Company's business is presently derived from fixed-bid projects. In view of the diversification of the Company's service offerings, and by drawing upon the skills developed within the Company's engineering and technical group, management intends to develop project management skills within its information technology and other groups and believes that an additional percentage of its business may be derived in the future from larger-scale consulting projects. 12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Overview - (Continued) Approximately 40% of the Company's services are provided under contract. The remainder are provided under purchase orders. Contracts are utilized on certain of the more complex assignments where the engagements are for longer terms or where precise documentation of 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 - 90 days notice. The average length of engagement varies from three months to one year within the information technology and engineering sectors, three months to six months within the specialty healthcare sector and one week to three weeks within the general support sector. Approximately 70% of the Company's services are billed to customers on a weekly basis. The remainder are billed on a bi-weekly and monthly basis based upon the type of project and arrangement with the customer. Revenues are recognized when the services are provided. Costs of services consist primarily of salaries and compensation related expenses for billable staffing personnel, including payroll taxes, employee benefits, worker's compensation and other insurance. Principally all of the billable personnel are treated by the Company as employees, although approximately 5% of information technology personnel are treated as independent contractors. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for operating activities, including certain administrative, marketing and reporting responsibilities, including legal, accounting and corporate office overhead. The Company records these expenses when incurred. Depreciation relates primarily to the fixed assets of the Company. Amortization relates principally to the goodwill resulting from the Company's acquisitions. These acquisitions have been accounted for under the purchase method of accounting for financial reporting purposes and have created goodwill estimated at $14.6 million which is being amortized over a 40 year period currently resulting in amortization expense aggregating approximately $365,000 annually. The Company's net income for each of the three fiscal years in period ended October 31, 1996, has been determined after giving effect to the utilization of a net operating loss carryforward. This effectively reduced to a minimal amount federal tax accruals during those periods and subjected the Company to composite tax rates of between 9.9% and 16.1%, principally as a result of state income taxes. During and through fiscal 1996, the Company had utilized principally all of its net operating loss carryforward and, accordingly, expects that for the foreseeable future its net income will be subject to taxation at full federal and state rates of approximately 40.5%. Liquidity and Capital Resources The Company has historically funded its capital requirements with cash generated from operations and advances under its outstanding credit facility. In addition, during fiscal 1996, the Company secured $1 million through a private placement of its Common Stock. The Company typically maintains minimal cash balances, and at April 30, 1997, had approximately $35,000 in cash. During the six months ended April 30, 1997, operating activities used $1.2 million of cash compared to $.4 million during the comparable period in fiscal 1996. The increased use of cash used in operating activities of $.8 million was primarily attributable to an increase in accounts receivable of $3.9 million for October 31, 1996. The increase was partially offset by increased levels of profitability along with an increase in depreciation and amortization during the comparable period in fiscal 1996. 13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources - (Continued) Cash used in investing activities was $6.0 million for the six months ended April 30, 1997. In January 1997, the Company purchased PAMI for $4.5 million in cash and a three year contingent promissory note. In addition, the acquisition of PAMI required the use of $660,000 in working capital funds. In April 1997, the Company acquired PRU for $600,000 in cash and a three year contingent promissory note. During fiscal 1996, the Company purchased three staffing companies which required $1.0 million of cash as part of the purchase price. During fiscal 1995, the Company purchased two staffing companies which required $2.3 million in cash as part of the purchase price. The Company financed the cash portion of the acquisitions with internal funds and bank borrowings. These acquisitions collectively resulted in goodwill estimated at $14.6 million which is being amortized at approximately $365,000 per year. Net cash provided by financing activities was $7.2 million and $1.4 million for the six months ended April 30, 1997. Cash was primarily provided under the Company's Revolving Credit Facility during the six months ended April 30, 1997. On December 19, 1996, the Company and its subsidiaries entered into an amended and restated loan agreement with Mellon Bank, N.A. providing for a credit facility of up to $20,000,000 (the "Revolving Credit Facility") which expires on June 30, 1999. The Revolving Credit Facility is collateralized by accounts receivable, contract rights and furniture and fixtures together with unlimited guarantees from the Company. The Revolving Credit Facility requires the Company and its subsidiaries to meet certain financial objectives and maintain certain financial covenants with respect to net income, effective net worth, working capital, senior indebtedness to effective net worth ratios, capital expenditures, current assets to current liabilities ratios, consolidated working capital and consolidated tangible net worth. At October 31, 1996, and April 30, 1997, the Company and its subsidiaries were in compliance with all financial covenants contained within the Revolving Credit Facility. Advances under the Revolving Credit Facility are to be used to meet cash flow requirements for the subsidiaries as well as operating expenses for the Company. Borrowing under the Revolving Credit Facility is based on 85% of accounts receivable on which not more than ninety days have elapsed since the date of invoicing. The interest rate charged by the bank, under the revoling credit facility is based on the London Interbank Offered Rate ("LIBOR") plus 2.25%. The Company anticipates that its primary uses of capital in future periods will be for acquisitions and the funding of increases in accounts receivables. The Company believes that the net proceeds from its recent public offerring of Common Stock on June 13, 1997, (See Note 2) and borrowings under the Revolving Credit Facility and any net cash flow from operations will be sufficient to meet the Company's capital needs for at least the next twelve months. Prior to 1977, the Company operated a facility located in Fontana, California (the "Facility") at which it processed certain materials to recover aluminum. The property on which the Facility was located (the "Property") was owned by a former shareholder and officer ("Former Officer") of the Company. In 1977, the Company sold certain assets (the "1977 Transaction") utilized in its operation to a company (the "Purchaser") that continued processing similar materials at the Facility until 1982. As part of the 1977 Transaction, the Company was permitted to store on the Property an existing stockpile of aluminum oxide materials (the "Stockpile") which was available for consumption in the Purchaser's operations. From 1977 to 1980, the Purchaser utilized a significant amount of material from the Stockpile in its operations. Material generated by the Purchaser's operations were also added to the Stockpile. The Purchaser acquired the Property in 1985 from the Former Officer. Purportedly in response to an order from a state environmental agency (which, along with a subsequent order, is referred to herein as the "Order") relating to potential ground water degradation, the Purchaser performed a number of actions, including, in 1992, disposal of the then existing Stockpile at an approximate cost of $5.6 million. The Purchaser has sought 14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources - (Continued) contribution from the Company for its proportionate share of the disposal costs, as well as anticipated maintenance costs of approximately $700,000, on common law grounds and pursuant to certain federal and state environmental laws. Based upon, among other things, an analysis of environmental studies performed before and after the 1977 Transaction as well as a review of the compliance records of the state environmental agency, the Company has concluded that: (i) the Facility was in material compliance with all applicable federal and state environmental laws at the time of the 1977 Transaction; (ii) the Purchaser was cited for numerous violations of applicable environmental laws after the 1977 Transaction, thus, any violations of laws after 1977, including any consequent remediation and disposal obligations, were likely the responsibility of the Purchaser; (iii) neither the costs incurred by the Purchaser, nor the events leading up to the incurrence of these costs, appear to support a claim under federal environmental laws; (iv) certain actions taken and costs incurred by the Purchaser may not have been necessary or required to comply with the Order; (v) liability, if any, would only apply to the minority percentage of the Stockpile attributable to the Company's operations; and (vi) the Purchaser's contribution claims for costs incurred in 1992 and earlier in response to the Order may be barred under the statute of limitations relating to the state law claims. The Company believes it has meritorious defenses to the Purchaser's claims and, in management's opinion, the Company's exposure under the claims is not likely to have a materially adverse impact on the Company's overall financial condition. There can be no assurance, however, that the Company will not incur material expenses and costs in connection with the defense and resolution of any claims brought by the Purchaser or that the Company will not ultimately be responsible for certain of the costs incurred by the Purchaser, which may include pre- and post-judgment interest, in an amount that may be material to the Company. Furthermore, since the Company has not established any reserves in connection with such claims, any such liability, if at all, would be recorded as an expense in the period incurred or estimated. This amount, even if not material to the Company's overall financial condition, could adversely affect the Company's results of operations in the period recorded. Management intends to vigorously oppose any such claims. <TABLE> <CAPTION> Results of Operations - Six Months Ended April 30, 1997, Compared to Six Months Ended April 30, 1996 Six Months Ended April 30, 1997 1996 ---- ---- <S> <C> <C> Revenues $ 48,530,700 $ 23,562,110 Cost of services $ 37,185,185 $ 19,298,075 Gross profit $ 11,345,515 $ 4,264,035 Selling, general and administrative $ 7,943,838 $ 3,082,700 Depreciation and amortization $ 238,081 $ 132,470 Operating income $ 3,163,596 $ 1,048,865 Interest expense $ 262,667 $ 51,089 Income before income taxes $ 2,900,929 $ 997,776 Income taxes $ 1,202,609 $ 109,177 Net income $ 1,698,320 $ 888,599 Earnings per share $.34 $.24 </TABLE> Revenues. Revenues increased 106.0%, or $25.0 million, for the six months ended April 30, 1997, as compared to the comparable prior year period. Of this increase, approximately $17.1 million was attributable to revenue growth through acquisitions that occurred after the first quarter of fiscal 1996 and approximately $7.9 million was from internal growth. Internal growth was experienced in the information technology and healthcare sectors and was offset by discontinued business in the general support sector due to unacceptable margins and workers' compensation rates. 15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Six Months Ended April 30, 1997, Compared to Six Months Ended April 30, 1996 - (Continued) COST OF SERVICES. Cost of services increased 92.7% , or $17.9 million, for the six months ended April 30, 1997 as compared to the equivalent prior year period. This increase was primarily due to increased salaries and compensation associated with the increased revenues experienced during this period. Cost of services as a percentage of revenues decreased to 76.6% for the six months ended April 30, 1997, from 81.9% for the comparable prior year period. This decline was primarily attributable to a greater percentage of the Company's revenues being derived from specialty staffing services. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 157.7%, or $4.9 million, for the six months ended April 30, 1997, as compared to the comparable prior year period. This increase resulted from the change in the mix of the business during the six months ended April 30, 1997, which required higher marketing, sales, recruiting and administrative expenses than the comparable prior year period. Selling, general and administrative expenses as a percentage of revenues increased to 16.4% for the six months ended April 30, 1997, from 13.1% in the comparable prior year period, primarily attributable to the increased sales, recruiting and administrative expenses necessary to support the Company's continued growth within the information technology sector. DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased 79.7%, or $105,600, for the six months ended April 30, 1997, as compared to the comparable prior year period. This increase was primarily due to the amortization of intangible assets incurred in connection with the acquisitions that occurred after the first quarter of fiscal 1996. INTEREST EXPENSE. Interest expense increased 414.1%, or $212,000, for the six months ended April 30, 1997, as compared to the comparable prior year period. This increase was due to the increased borrowings necessary to provide the funds required for certain of the Company's acquisitions as well as to refinance the working capital debt of some of the acquired companies. INCOME TAX. Income tax expense increased 1002.0%, or $1,093,000 for the six months ended April 30, 1997, as compared to the comparable prior year period. This increase was due to an increase in the effective tax rate from 10.9% to 41.5% and increased levels of net income. The increase in the effective tax rate was primarily due to the utilization of principally all of the remaining net operating loss carryforward which offset net income in prior periods. <TABLE> <CAPTION> Three Months Ended April 30, 1997 Compared to Three Months Ended April 30, 1996 Three Months Ended April 30, 1997 1996 <S> <C> <C> Revenues $ 27,379,979 $ 13,785,626 Cost of services $ 21,133,868 $ 11,312,200 Gross profit $ 6,246,111 $ 2,473,426 Selling, general and administrative $ 4,323,573 $ 1,931,739 Depreciation and amortization $ 119,452 $ 80,453 Operating income $ 1,803,086 $ 461,234 Interest expense $ 172,478 $ 26,249 Income before income taxes $ 1,630,608 $ 434,985 Income taxes $ 713,275 $ 48,249 Net income $ 917,333 $ 386,736 Earnings per share $.18 $.09 </TABLE> 16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended April 30, 1997 Compared to Three Months Ended April 30, 1996 - (Continued) Revenues. Revenues increased 98.6%, or $13.6 million, for the three months ended April 30, 1997, as compared to the comparable prior year period. Of this increase, approximately $7.2 million was attributable to revenue growth through acquisitions that occurred after the first quarter of fiscal 1996 and approximately $6.4 million was from internal growth. Internal growth was experienced in the information technology and healthcare sectors and was offset by discontinued business in the general support sector due to unacceptable margins and workers' compensation rates. Cost of Services. Cost of services increased 86.8% , or $9.8 million, for the three months ended April 30, 1997 as compared to the equivalent prior year period. This increase was primarily due to increased salaries and compensation associated with the increased revenues experienced during this period. Cost of services as a percentage of revenues decreased to 77.2% for the three months ended April 30, 1997, from 82.1% for the comparable prior year period. This decline was primarily attributable to a greater percentage of the Company's revenues being derived from specialty staffing services. Selling, General and Administrative. Selling, general and administrative expenses increased 123.8%, or $2.4 million, for the three months ended April 30, 1997, as compared to the comparable prior year period. This increase resulted from the change in the mix of the business during the three months ended April 30, 1997, which required higher marketing, sales, recruiting and administrative expenses than the comparable prior year period. Selling, general and administrative expenses as a percentage of revenues increased to 15.8% for the three months ended April 30, 1997, from 14.0% in the comparable prior year period, primarily attributable to the increased sales, recruiting and administrative expenses necessary to support the Company's continued growth within the information technology sector. Depreciation and Amortization. Depreciation and amortization increased 48.5%, or $38,999, for the three months ended April 30, 1997, as compared to the comparable prior year period. This increase was primarily due to the amortization of intangible assets incurred in connection with the acquisitions that occurred after the first quarter of fiscal 1996. Interest Expense. Interest expense increased 557.0%, or $146,200, for the three months ended April 30, 1997, as compared to the comparable prior year period. This increase was due to the increased borrowings necessary to provide the funds required for certain of the Company's acquisitions as well as to refinance the working capital debt of some of the acquired companies. Income Tax. Income tax expense increased 1378.3%, or $665,000 for the three months ended April 30, 1997, as compared to the comparable prior year period. This increase was due to an increase in the effective tax rate from 11.1% to 43.7% and increased levels of net income. The increase in the effective tax rate was primarily due to the utilization of principally all of the remaining net operating loss carryforward which offset net income in prior periods. 17
PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to any material legal proceedings. The Company has been named in orders relating to the storgae of certain materials at aformer Company facility located in Fontana, California. For additional information with regard to this matter, see Management's Discussion and Analysis. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on April 25, 1997. The following actions were taken: <TABLE> <CAPTION> 1.) The following directors were elected to serve on the Board of Directors until the expiration of their respective terms and until their respective successors shall be elected and qualified. Tabulated voting results were as follows: <S> <C> <C> <C> Norman S. Berson (Class A) (For 4,460,959; Withheld 17,855) Barry S. Meyers (Class A) (For 4,461,499; Withheld 17,315) </TABLE> Each nominee as a Class A director was elected to serve a term expiring at the Company's Annual Meeting in 2000, or until his successor has been elected and qualified. 2.) Approval of Grant Thornton, LLP as the independent auditing firm for the Company for the fiscal year ending October 31, 1997. Votes For - 4,359,318; Votes Against - 18,340 Item 5. Other Information None. 17
PART II OTHER INFORMATION - CONTINUED Item 6. Exhibits and Reports on Form 8-K <TABLE> <CAPTION> (a) Exhibits <S> <C> <C> <C> (2) Stock Purchase Agreement, dated March 31, 1997, between RCM Technologies, Inc., Programming Resources Unlimited, Inc. and Hamson/Ginn, Inc. (3) Amended and Restated Bylaws, Dated June 6, 1997 (11) Computation of earnings per share. (27) Financial Data Schedule. (b) Reports on Form 8-K </TABLE> 19
RCM TECHNOLOGIES, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant) Date: June 13, 1997 By:/s/ Leon Kopyt -------------- Leon Kopyt Chairman, President, Chief Executive Officer and Director Date: June 13, 1997 By:/s/ Stanton Remer ----------------- Stanton Remer Chief Financial Officer, Treasurer, Secretary and Director 20
EXHIBIT 11 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE Six Months Ended April 30, 1997 and 1996 <TABLE> <CAPTION> Six Months Ended April 30, 1997 1996 ---- ---- Fully diluted earnings <S> <C> <C> Net income applicable to common stock $ 1,698,320 $ 888,599 = ========= = ======= Shares Weighted average number of shares outstanding 4,815,947 3,708,221 Common stock equivalents 146,182 67,814 ------- ------ Total 4,962,129 3,776,035 ========= ========= Fully diluted earnings per common share $.34 $.24 ==== ==== Primary earnings Net income applicable to common stock $ 1,698,320 $ 888,599 = ========= = ======= Shares Weighted average number of shares outstanding 4,815,947 3,708,221 Common stock equivalents 94,871 67,814 ------ ------ Total 4,910,818 3,776,035 ========= ========= Primary earnings per common share $.35 $.24 ==== ==== </TABLE> 22