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 September 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 common stock, as of the latest practicable date. Common Stock, $0.05 par value, 10,539,424 shares outstanding as of October 30, 2001.
<TABLE> <CAPTION> RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION Page Item 1 - Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 2001 (Unaudited) <S> <C> and December 31, 2000 3 Unaudited Consolidated Statements of Operations and Comprehensive Income for the Nine-Month Periods Ended September 30, 2001 and 2000 5 Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three-Month Periods Ended September 30, 2001 and 2000 6 Unaudited Consolidated Statement of Changes in Shareholders' Equity for the Nine-Month Period Ended September 30, 2001 7 Unaudited Consolidated Statements of Cash Flows for the Nine- Month Periods Ended September 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 15 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K 22 Signatures 23 </TABLE>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2001 and December 31, 2000 ASSETS <TABLE> <CAPTION> September 30, December 31, 2001 2000 --------------- --------------- (Unaudited) Current assets <S> <C> <C> Cash and cash equivalents $ 7,730,524 $ 3,170,658 Accounts receivable, net of allowance for doubtful accounts of $1,890,000 and $1,875,000, respectively 48,970,674 64,032,564 Income tax refund receivable 1,963,149 7,417,258 Prepaid expenses and other current assets 2,608,551 3,161,235 Deferred tax assets 1,485,009 1,449,518 --------------- --------------- Total current assets 62,757,907 79,231,233 --------------- --------------- Property and equipment, at cost Equipment and leasehold improvements 10,850,808 10,238,480 Less: accumulated depreciation and amortization 3,961,034 4,079,857 --------------- --------------- 6,889,774 6,158,623 --------------- --------------- Other assets Deposits 184,463 223,512 Intangible assets, net of accumulated amortization of $12,694,000 and $7,878,000, respectively Goodwill 95,515,271 88,655,460 --------------- --------------- 95,699,734 88,878,972 --------------- --------------- Total assets $165,347,415 $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 September 30, 2001 and December 31, 2000 LIABILITIES AND SHAREHOLDERS' EQUITY <TABLE> <CAPTION> September 30, December 31, 2001 2000 --------------- --------------- (Unaudited) Current liabilities <S> <C> <C> Note payable $37,400,000 $ Accounts payable and accrued expenses 13,088,906 13,610,547 Accrued payroll 8,127,595 7,691,258 Payroll and withheld taxes 719,714 1,311,828 Income taxes payable 108,996 --------------- --------------- Total current liabilities 59,336,215 22,722,629 --------------- --------------- Long-term liabilities Note payable 47,300,000 Income taxes payable 727,957 2,183,873 --------------- --------------- 727,957 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 issued and outstanding, respectively 526,971 524,982 Accumulated other comprehensive loss ( 379,317) ( 233,631) Additional paid-in capital 93,618,838 93,516,080 Retained earnings 11,516,751 8,254,895 --------------- --------------- 105,283,243 102,062,326 --------------- --------------- Total liabilities and shareholders' equity $165,347,415 $174,268,828 =============== =============== 4 The accompanying notes are an integral part of these financial statements. </TABLE>
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Nine Months Ended September 30, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> 2001 2000 ---------------- --------------- <S> <C> <C> Revenues $176,070,965 $224,591,729 Cost of services 126,872,351 165,725,034 ---------------- --------------- Gross profit 49,198,614 58,866,695 ---------------- --------------- Operating costs and expenses Selling, general and administrative 33,763,320 41,587,387 Depreciation 799,200 889,282 Amortization 4,815,996 4,282,124 Unusual items Restructuring charge 36,706,712 Non recurring 2,100,000 ---------------- --------------- 39,378,516 85,565,505 ---------------- --------------- Operating income (loss) 9,820,098 ( 26,698,810) ---------------- --------------- Other (expenses) income Interest expense, net of interest income ( 1,828,386) ( 2,846,213) Gain (loss) on foreign currency transactions 15,023 ( 4,087) ---------------- --------------- ( 1,813,363) ( 2,850,300) ---------------- --------------- Income (loss) before income taxes 8,006,735 ( 29,549,110) Income taxes (credit) 4,744,879 ( 5,530,461) ---------------- --------------- Net income (loss) 3,261,856 ( 24,018,649) Other comprehensive loss Foreign currency translation adjustment ( 145,686) ( 211,897) ---------------- --------------- Comprehensive income (loss) $ 3,116,170 ( $24,230,546) ================ =============== Basic earnings (loss) per share $.31 ($2.29) ==== ===== Weighted average number of common shares outstanding 10,513,054 10,499,188 ========== ========== Diluted earnings (loss) per share $.30 ($2.29) ==== ===== Weighted average number of common and common equivalent shares outstanding (includes dilutive securities relating to options of 186,298 and 0 in 2001 and 2000, respectively) 10,699,352 10,499,188 ========== ========== </TABLE> 5 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME Three Months Ended September 30, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> 2001 2000 --------------- -------------- <S> <C> <C> Revenues $53,051,269 $73,656,343 Cost of services 38,402,675 53,432,537 --------------- -------------- Gross profit 14,648,594 20,223,806 --------------- -------------- Operating costs and expenses Selling, general and administrative 10,082,933 13,622,483 Depreciation 305,530 298,030 Amortization 1,449,442 1,163,357 Unusual items Restructuring charge 36,706,712 Non recurring 2,100,000 --------------- -------------- 11,837,905 53,890,582 --------------- -------------- Operating income (loss) 2,810,689 ( 33,666,776) --------------- -------------- Other (expenses) income Interest expense, net of interest income ( 512,757) ( 1,033,118) Gain (loss) on foreign currency transactions 4,874 ( 31) --------------- -------------- ( 507,883) ( 1,033,149) --------------- -------------- Income (loss) before income taxes 2,302,806 ( 34,699,925) Income taxes (credit) 1,544,010 ( 8,282,871) --------------- -------------- Net income (loss) 758,796 ( 26,417,054) Other comprehensive income (loss) Foreign currency translation adjustment 82,287 ( 42,424) --------------- -------------- Comprehensive income (loss) $ 841,083 ( $26,459,478) =============== ============== Basic earnings (loss) per share $.07 ($2.52) ==== ===== Weighted average number of common shares outstanding 10,539,675 10,499,651 ========== ========== Diluted earnings (loss) per share $.07 ($2.52) ==== ===== Weighted average number of common and common equivalent shares outstanding and common equivalent shares outstanding (includes dilutive securities relating to options of 330,000 and 0 in 2001 and 2000, respectively) 10,869,675 10,499,651 ========== ========== </TABLE> 6 The accompanying notes are an integral part of these financial statements. <page> RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Nine Months Ended September 30, 2001 (Unaudited) <TABLE> <CAPTION> Accumulated Other Additional Common Stock Comprehensive Paid-in Retained ------------ Shares Amount Income (Loss) Capital Earnings Total ------ ------ ------------- ------- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> Balance, January 1, 2001 10,499,651 $524,982 ($233,631) $93,516,080 $8,254,895 $102,062,326 Employee Stock Purchase Plan 39,773 1,989 102,758 104,747 Translation adjustment (145,686) (145,686) Net income _________ ________ _________ __________ 3,261,856 3,261,856 ------------- -------------- Balance, September 30, 2001 10,539,424 $526,971 ($379,317) $93,618,838 $11,516,751 $105,283,243 ========== ======== ========== =========== =========== ============ </TABLE> 7 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> 2001 2000 --------------- -------------- Cash flows from operating activities: <S> <C> <C> Net income (loss) $3,261,856 ( $24,018,649) --------------- -------------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 5,615,196 5,171,406 Provision for losses on accounts receivable 15,000 752,000 Restructuring and unusual charge 38,806,712 Changes in assets and liabilities: Accounts receivable 15,046,890 ( 4,319,877) Income tax refund receivable 4,481,633 ( 5,281,241) Deferred tax asset ( 35,491) ( 2,169,233) Prepaid expenses and other current assets 552,684 ( 2,005,121) Accounts payable and accrued expenses ( 3,511,834) 7,695,249 Accrued payroll 436,337 4,499,311 Payroll and withheld taxes ( 592,114) 323,606 Income taxes payable ( 592,436) 496,870 --------------- -------------- Total adjustments 21,415,865 43,969,682 --------------- -------------- Net cash provided by operating activities 24,677,721 19,951,033 --------------- -------------- </TABLE> 8 The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2001 and 2000 - (Continued) (Unaudited) <TABLE> <CAPTION> 2001 2000 --------------- -------------- Cash flows from investing activities: <S> <C> <C> <C> <C> Property and equipment acquired ( $1,620,002) ( $1,461,122) Decrease in deposits 39,049 6,720 Purchase of acquired companies including contingent consideration, net of cash acquired ( 8,595,963) ( 21,105,140) --------------- -------------- Net cash used in investing activities ( 10,176,916) ( 22,559,542) --------------- -------------- Cash flows from financing activities: Employee Stock Purchase Plan 104,747 Exercise of stock options 42,950 Borrowings (repayments) of note payable ( 9,900,000) 5,400,000 --------------- -------------- Net cash provided by (used in) financing activities ( 9,795,253) 5,442,950 --------------- -------------- Effect of exchange rate changes on cash and cash equivalents ( 145,686) ( 211,897) --------------- -------------- Increase in cash and cash equivalents 4,559,866 2,622,544 Cash and cash equivalents at beginning of period 3,170,658 4,025,808 --------------- -------------- Cash and cash equivalents at end of period $7,730,524 $6,648,352 =============== ============== Supplemental cash flow information: Cash paid for: Interest expense $1,918,626 $3,079,129 Income taxes $2,399,761 $2,958,615 </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 nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. 2. Unusual Items In the third quarter of 2000, the Company recorded the following unusual items: In Millions Impairment of goodwill $ 35.3 Restructuring charge 1.4 Other non recurring charges 2.1 ------- $38.8 The income before income taxes, net income and earnings per share on a diluted basis, exclusive of common stock equivalents, for the nine months ended September 30, 2000 without the unusual items and its related tax effect would have been $9.3 million, $4.6 million and $.44 per share, respectively. The income before income taxes, net income and earnings per share on a diluted basis, exclusive of common stock equivalents, for the three months ended September 30, 2000 without the unusual items and their related tax effect would have been $4.1 million, $2.2 million and $.21 per share, respectively. Impairment of Goodwill During the third quarter of 2000, the Company performed an impairment review of goodwill in accordance with the requirements of SFAS No. 121. This review indicated that there was an impairment of value, which resulted in $35.3 million charge to expense in order to properly reflect the appropriate carrying value of goodwill. Restructuring Charge The restructuring charge during 2000 of $1.4 million consists of expenses associated with the consolidation of certain offices principally lease obligations for vacated offices as well as a write down of leasehold improvements and office equipment to its net realizable value for closed offices. Other non recurring charges The non recurring charge during 2000 of $2.1 million consists of expenses associated with integration of employee benefit plans and vacation plans which were assumed in connection with the Company's previous completed acquisitions. 10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 3. 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 September 30, 2001 and December 31, 2000 was $95,515,000 and $88,655,000, respectively, and is being amortized on a straight-line method over twenty years. Amortization expense for the nine months ended September 30, 2001 and 2000 was $4,816,000 and $4,282,000, respectively. Amortization expense for the three months ended September 30, 2001 and 2000 was $1,449,000 and $1,163,000, 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. 4. Note Payable 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 in August 2002. Management of the Company anticipates commencing negotiations for renewal or replacement of the Revolving Credit Facility in early 2002. The weighted average interest rates at September 30, 2001 and December 31, 2000 were 5.18% and 8.33%, respectively. The amounts outstanding under the Revolving Credit Facility at September 30, 2001 and December 31, 2000 were $37.4 million and $47.3 million, respectively. 5. Interest (Expense) Income, Net Interest (expense) income, net consisted of the following: <TABLE> <CAPTION> Nine Months Ended Three Months Ended September 30, September 30, ------------------------------- ------------------------------- 2001 2000 2001 2000 -------------- --------------- -------------- -------------- <S> <C> <C> <C> <C> Interest expense ($2,095,981) ($3,057,579) ($ 575,206) ($1,129,746) Interest income 267,595 211,366 62,449 96,628 -------------- --------------- -------------- -------------- ($1,828,386) ($2,846,213) ($ 512,757) ($1,033,118) ============== =============== ============== ============== </TABLE> 11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6. Computation of Earnings Per Share Basic earnings per share is based on the weighted average number of common shares outstanding for the periods presented. Diluted earnings per share is based on the weighted average number of common shares outstanding and includes the dilutive effect of stock options using the treasury stock method. Dilutive securities have not been included in the weighted average shares used for the calculation of earnings per share in periods of net loss because the effect of such securities would be anti-dilutive. 7. Segment Information The Company has adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for companies to report information about operating segments, geographic areas and major customers. The adoption of SFAS 131 has no effect on the Company's consolidated financial position, consolidated results of operations or liquidity. The Company uses earnings before interest and taxes (operating income) to measure segment profit. Segment operating income includes selling, general and administrative expenses directly attributable to that segment as well as charges for allocating corporate costs to each of the operating segments. The following tables reflect the results of the segments consistent with the Company's management system (in thousands): <TABLE> <CAPTION> Nine Months Ended Information Professional Commercial September 30, 2001 Technology Engineering Services Corporate Total --------------- -------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> Revenue $126,395 $31,684 $17,991 $176,070 Operating expenses (1) 115,634 27,687 17,314 160,635 ------- ------ ------ ------- EBITDA (1) (2) 10,761 3,997 677 15,435 Depreciation 580 181 38 799 Goodwill amortization 4,292 499 25 4,816 ----- --- -- ----- Operating income (1) $5,889 $3,317 $614 $9,820 ====== ====== ==== ====== Total assets $123,360 $17,767 $6,359 $17,861 $165,347 Capital expenditures $421 $173 $1,026 $1,620 </TABLE> 12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7. Segment Information - Continued <TABLE> <CAPTION> Nine Months Ended Information Professional Commercial September 30, 2000 Technology Engineering Services Corporate Total --------------- -------------- -------------- ------------- ------------- <S> <C> <C> <C> <C> Revenue $174,380 $29,629 $20,583 $224,592 Operating expenses (1) 159,685 27,933 19,695 207,313 ------- ------ ------ ------- EBITDA (1) (2) 14,695 1,696 888 17,279 Depreciation 653 214 22 889 Goodwill amortization 3,743 504 35 4,282 ----- ----- ---- ----- Operating income (1) $ 10,299 $ 978 $ 831 $ 12,108 ======== ===== ===== ======== Total assets $133,329 $17,641 $6,482 $21,937 $179,389 Capital expenditures $793 $165 $45 $458 $1,461 </TABLE> <TABLE> <CAPTION> Three Months Ended Information Professional Commercial September 30, 2001 Technology Engineering Services Corporate Total --------------- -------------- -------------- -------------- ------------ <S> <C> <C> <C> <C> Revenue $36,053 $11,435 $5,563 $53,051 Operating expenses (1) 33,663 9,481 5,341 48,485 ------ ----- ----- ------ EBITDA (1) (2) 2,390 1,954 222 4,566 Depreciation 210 80 16 306 Goodwill amortization 1,270 171 8 1,449 ----- --- - ----- Operating income (1) $910 $1,703 $198 $2,811 ==== ====== ==== ====== Total assets $123,360 $17,767 $6,359 $17,861 $165,347 Capital expenditures $42 $173 $301 $516 </TABLE> 13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7. Segment Information - Continued <TABLE> <CAPTION> Three Months Ended Information Professional Commercial September 30, 2000 Technology Engineering Services Corporate Total --------------- -------------- -------------- -------------- ------------ <S> <C> <C> <C> <C> Revenue $56,668 $ 9,769 $ 7,219 $73,656 Operating expenses (1) 50,907 9,321 6,827 67,055 ------ ----- ----- ------ EBITDA (1) (2) 5,761 448 392 6,601 Depreciation 215 81 2 298 Goodwill amortization 1,020 135 8 1,163 -- ----- --- --- ------ - -- ----- Operating income (1) $ 4,526 $232 $382 $5,140 ======= ==== ==== ====== Total assets $133,329 $17,641 $6,482 $21,937 $179,389 Capital expenditures $196 $90 $30 $255 $571 <FN> (1) Operating expenses, EBITDA and operating income are exclusive of unusual items during 2000 in the amount of $38.8 million (see note 2). (2) 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> 8. 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. 14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2. 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. 15
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 in major metropolitan centers throughout North America. 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 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. 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 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 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 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. 16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 <TABLE> <CAPTION> A summary of operating results for the nine months ended September 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 $ 176,071 100.0% $ 224,592 100.0% Cost of services 126,872 72.1 165,725 73.8 ---------- ---- ---------- ---- Gross profit 49,199 27.9 58,867 26.2 ---------- ---- ---------- ---- Selling, general and administrative 33,763 19.2 41,587 18.5 Depreciation 799 .4 889 .4 ---------- ------ ---------- ------ 34,562 19.6 42,476 18.9 ---------- ---- ---------- ---- Income before other (expense) income, income taxes, goodwill amortization, and unusual charges 14,637 8.3 16,391 7.3 Other expense ( 1,814 ) ( 1.0) ( 2,850) ( 1.3) --------- ---- --------- ---- Income before income taxes and goodwill amortization 12,823 7.3 13,541 6.0 Income taxes 5,361 3.0 5,583 2.5 ---------- --- ---------- ---- Income before goodwill amortization 7,462 4.3 7,958 3.5 Goodwill amortization, net of income tax benefits ( 4,200 ) ( 2.4) ( 3,360) ( 1.5) Restructuring and unusual charges, net of tax income tax benefits x.x ( 28,617) (12.7) ---------- --- --------- ---- Net income (loss) $ 3,262 1.9% ($ 24,019) (10.7%) ========== === ========= ===== 2001 2000 --------- -------- Earnings per share: Basic: Income before goodwill amortization $ .71 $ .76 Goodwill amortization ( .40 ) ( .32) Restructuring and unusual charges ( 2.73) ------ ------ Net income (loss) $ .31 ($2.29) ====== ===== Diluted: Income before goodwill amortization $ .69 $ .76 Goodwill amortization ( .39 ) ( .32) Restructuring and unusual charges ( 2.73) ------ ----- Net income (loss) $ .30 ($2.29) ====== ===== </TABLE> Revenues. Revenues decreased 21.6%, or $48.5 million, for the nine months ended September 30, 2001 as compared to the same period in the prior year (the "comparable prior year period"). The revenue decline was primarily attributable to softness in the Information Technology ("IT") sector. 17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000 - (Continued) Cost of Services. Cost of services decreased 23.4%, or $38.9 million, for the nine months ended September 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 nine months ended September 30, 2001. Cost of services as a percentage of revenues decreased to 72.1% for the nine months ended September 30, 2001 from 73.8% for the comparable prior year period. This decline was primarily attributable to continuing efforts by the Company to seek higher margin business. Selling, General and Administrative. Selling, general and administrative expenses decreased 18.8%, or $7.8 million, for the nine months ended September 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 nine months ended September 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 10.1%, or $90,000, for the nine months ended September 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 nine months ended September 30, 2001, actual interest expense of $2.1 million was offset by $268,000 of interest income, which was earned from the investment in interest bearing deposits. Interest expense, net decreased $1.0 million for the nine months ended September 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 decreased 4.0%, or $222,000, for the nine months ended September 30, 2001 as compared to the comparable prior year period. This decrease was attributable to a lower level of income before taxes and goodwill amortization for the nine months ended September 30, 2001 compared to the comparable prior year period. Goodwill Amortization. Goodwill amortization for the nine months ended September 30, 2001 and 2000 was net of income tax benefit of $616,000 and $922,000, respectively. Goodwill amortization, net of income tax benefits increased 25.0%, or $840,000 for the nine months ended September 30, 2001 as compared to the comparable prior year period. The increase was due primarily to the shortened amortization period related to contingent consideration paid on a certain acquisition. Restructuring and Non Recurring Charges. In the third quarter of 2000, the Company recorded an impairment of goodwill in connection with a review of the carrying value of its goodwill, a restructuring charge associated with the consolidation of certain offices and certain non recurring items associated with the integration of employee benefit plans and vacation plans in the amounts of $35.3 million, $1.4 million and $2.1 million, respectively. Restructuring and non recurring charges reduced income before the related tax benefits for the nine months ended September 30, 2000 by $38.8 million and $28.6 million after the related tax benefits. 18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 <TABLE> <CAPTION> A summary of operating results for the three months ended September 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 $ 53,051 100.0% $ 73,656 100.0% Cost of services 38,402 72.4 53,433 72.5 -------- ---- --------- ---- Gross profit 14,649 27.6 20,223 27.5 -------- ---- --------- ---- Selling, general and administrative 10,083 19.0 13,622 18.5 Depreciation 306 .6 298 .4 -------- ------ --------- ------ 10,389 19.6 13,920 18.9 -------- ---- --------- ---- Income before other expense, income taxes, goodwill amortization, and unusual charges 4,260 8.0 6,303 8.6 Other (expense) income ( 508 ) 1.0 ( 1,033) 1.4 ------- ----- -------- ---- Income before income taxes and goodwill amortization 3,752 7.0 5,270 7.2 Income taxes 1,609 3.0 2,286 3.1 -------- ----- --------- ---- Income before goodwill amortization 2,143 4.0 2,984 4.1 Goodwill amortization, net of income tax benefits ( 1,384 ) ( 2.6) ( 784) ( 1.1) Restructuring and unusual charges, net of tax income tax benefits x.x ( 28,617) (38.9) -------- --- -------- ---- Net income (loss) $ 759 1.4% ($ 26,417) (35.9%) ======== ===== ======== ===== 2001 2000 --------- -------- Earnings per share: ----- Basic: Income before goodwill amortization $ .20 $ .28 Goodwill amortization ( .13) ( .07) Restructuring and unusual charges ( 2.73) ------ ----- Net income (loss) $ .07 ($2.52) ====== ===== Diluted: Income before goodwill amortization $ .20 $ .28 Goodwill amortization ( .13) ( .07) Restructuring and unusual charges ( 2.73) ------ ------ Net income (loss) $ .07 ($2.52) ====== ===== </TABLE> Revenues. Revenues decreased 28.0%, or $20.6 million, for the three months ended September 30, 2001 as compared to the comparable prior year periods. The revenue decline was primarily attributable to softness in the ("IT") sector. 19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000 - (Continued) Cost of Services. Cost of services decreased 28.1%, or $15.0 million, for the three months ended September 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 September 30, 2001. Cost of services as a percentage of revenues decreased to 72.4% for the three months ended September 30, 2001 from 72.5% for the comparable prior year period. This decline was primarily attributable to continuing efforts by the Company to seek higher margin business. Selling, General and Administrative. Selling, general and administrative expenses decreased 26.0%, or $3.5 million, for the three months ended September 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. Depreciation. Depreciation increased 2.7%, or $8,000, for the three months ended September 30, 2001 as compared to the comparable prior year period. This increase was primarily due to depreciation of equipment related to a corporate relocation. Other Expense. Other expense consists principally of interest expense, net of interest income. For the three months ended September 30, 2001, actual interest expense of $575,200 was offset by $62,400 of interest income, which was earned from the investment in interest bearing deposits. Interest expense, net decreased $520,400 for the three months ended September 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 decreased 29.6%, or $677,000, for the three months ended September 30, 2001 as compared to the comparable prior year period. This decrease was attributable to a decrease in taxable income for the three months ended September 30, 2001 compared to the comparable prior year period. Goodwill Amortization. Goodwill amortization for the three months ended September 30, 2001 and 2000 was net of income tax benefit of $65,000 and $379,000, respectively. Goodwill amortization, net of income tax benefits increased 76.5%, or $600,000 for the three months ended September 30, 2001 as compared to the comparable prior year period. The increase was due to the amortization of earnout payments subsequent to September 30, 2000. Restructuring and Non Recurring Charges. In the third quarter of 2000, the Company recorded an impairment of goodwill in connection with a review of the carrying value of its goodwill, a restructuring charge associated with the consolidation of certain offices and certain non recurring items associated with the integration of employee benefit plans and vacation plans in the amounts of $35.3 million, $1.4 million and $2.1 million, respectively. Restructuring and non recurring charges reduced income before the related tax benefits for the three months ended September 30, 2001 by $38.8 million and $28.6 million after the related tax benefits. Liquidity and Capital Resources Operating activities provided $24.7 million of cash for the nine months ended September 30, 2001 as compared to operating activities providing $20.0 million of cash for the nine months ended September 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 payroll and withheld taxes and income taxes payable, and deferred tax assets and increased levels of depreciation and amortization. 20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources - (Continued) Investing activities used $10.2 million for the nine months ended September 30, 2001 as compared to $22.6 million for the comparable period. The reduction in the use of cash for investing activities for the nine months ended September 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 $9.8 million for the nine months ended September 30, 2001 as compared to financing activities providing $5.4 million for the comparable period. 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"). 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 in August 2002. Management of the Company anticipates commencing negotiations for renewal or replacement of the Revolving Credit Facility in early 2002. The weighted average interest rates at September 30, 2001 and December 31, 2000 were 5.18% and 8.33%, respectively. The amounts outstanding under the Revolving Credit Facility at September 30, 2001 and December 31, 2000 were $37.4 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. 21
PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In its Annual Report on Form 10-K for the year ended December 31, 2000, 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 fourth quarter of 2001. The Company expects discovery in the litigation to continue. Management believes the suit is without merit and has defended the claims vigorously. 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: October 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 <page>