-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LermLCqQVxemGpaBXbOfYm3B3xa0zvp0qGd8C/dbnvexzLfYZC3mkjYO5cewkuY4 31QE338pRcSMdecSUDRtpA== 0000700841-99-000006.txt : 19990607 0000700841-99-000006.hdr.sgml : 19990607 ACCESSION NUMBER: 0000700841-99-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990604 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RCM TECHNOLOGIES INC CENTRAL INDEX KEY: 0000700841 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 951480559 STATE OF INCORPORATION: NV FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10245 FILM NUMBER: 99640832 BUSINESS ADDRESS: STREET 1: 2500 MCCLELLAN AVE STE 350 CITY: PENNSAUKEN STATE: NJ ZIP: 08109 BUSINESS PHONE: 6094861777 MAIL ADDRESS: STREET 1: 2500 MCCLELLAN AVENUE STREET 2: STE 350 CITY: PENNSAUKEN STATE: NJ ZIP: 08109-4613 10-Q 1 SECOND QUARTER 04/30/99 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, 1999 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 class of common stock, as of the latest practicable date. CLASS 10,496,226 Common Stock, $0.05 par value Outstanding as of June 4, 1999 1 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements Page Consolidated Balance Sheets as of April 30, 1999 (Unaudited) and October 31, 1998 (Audited) 3 Unaudited Consolidated Statements of Income for the Six-Month Periods Ended April 30, 1999 and 1998 5 Unaudited Consolidated Statements of Income for the Three-Month Periods Ended April 30, 1999 and 1998 6 Unaudited Consolidated Statement of Changes in Shareholders' Equity for the Six-Month Period Ended April 30, 1999 7 Unaudited Consolidated Statements of Cash Flows for the Six- Month Periods Ended April 30, 1999 and 1998 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 4 - Submission of Matters to a Vote of Security Holders 20 ITEM 6 - Exhibits and Reports on Form 8-K 21 SIGNATURES 22
2 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS April 30, 1999 and October 31, 1998 ASSETS
1999 1998 -------------- -------------- (Unaudited) (Audited) Current assets Cash and cash equivalents $ 2,277,504 $ 22,187,536 Accounts receivable, net of allowance for doubtful accounts of $641,000 and $486,000 in 1999 and 1998, respectively 62,435,202 40,680,268 Prepaid expenses and other current assets 3,121,867 1,199,809 --------- --------- Total current assets 67,834,573 64,067,613 ---------- ---------- Property and equipment, at cost Equipment and leasehold improvements 6,310,341 5,041,184 Less: accumulated depreciation and amortization 2,074,022 2,437,316 --------- --------- 4,236,319 2,603,868 --------- --------- Other assets Deposits 183,853 145,876 Intangible assets (net of accumulated amortization of $2,744,000 and $990,000 in 1999 and 1998, respectively) 88,458,690 50,249,794 ---------- ---------- 88,642,543 50,395,670 Total assets $ 160,713,435 $ 117,067,151 ============= = ===========
The accompanying notes are an integral part of these financial statements. 3 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED April 30, 1999 and October 31, 1998 LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998 (Unaudited) (Audited) Current liabilities Accounts payable and accrued expenses $ 4,759,585 $ 3,202,625 Accrued payroll 9,416,692 5,505,465 Taxes other than income taxes 2,477,462 1,629,945 Income taxes payable 417,055 56,989 ------- ------ Total current liabilities 17,070,794 10,395,024 ---------- ---------- Long-term debt 29,500,000 Shareholders' equity Preferred stock, $1.00 par value; 5,000,000 shares authorized; no shares issued or outstanding Common stock, $0.05 par value; 40,000,000 shares authorized; 10,483,725 and 10,447,525 shares issued in 1999 and 1998, respectively 524,186 522,376 Foreign currency translation adjustment 83,074 Additional paid-in capital 93,330,326 92,997,711 Retained earnings 20,205,055 13,152,040 ---------- ---------- 114,142,641 106,672,127 Total liabilities and shareholders' equity $ 160,713,435 $ 117,067,151 = =========== = ===========
The accompanying notes are an integral part of these financial statements. 4 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended April 30, 1999 1998 (Unaudited) (Unaudited) Revenues $ 147,930,906 $ 86,174,418 Cost of services 112,694,776 65,414,594 ------------- ---------- Gross profit 35,236,130 20,759,824 -------------- ---------- Operating costs and expenses Selling, general and administrative 22,187,873 13,140,370 Depreciation and amortization 1,248,113 593,006 -------------- ------- 23,435,986 13,733,376 Operating income 11,800,144 7,026,448 ------------- -------------- Other income (expense) Interest (expense), net of interest income 67,755 ( 190,624 ) Gain on foreign currency translation 3,037 ------------- -------- 70,792 ( 190,624 ) --------------- ------- Income before income taxes 11,870,936 6,835,824 Income taxes 4,817,921 2,839,672 ------------- --------- Net income 7,053,015 3,996,152 Other comprehensive income Foreign currency translation adjustment 83,074 ------------- --------- Comprehensive income $ 7,136,089 $ 3,996,152 ============= ============= Basic earnings per share $.67 $.52 Weighted average number of common shares outstanding 10,473,680 7,631,729 Diluted earnings per share $.65 $.48 Weighted average number of common and common equivalent shares outstanding 10,828,248 8,288,012
The accompanying notes are an integral part of these financial statements. 5 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended April 30, 1999 1998 (Unaudited) (Unaudited) Revenues $ 80,539,313 $ 48,942,175 Cost of services 61,491,130 37,334,590 ---------- ---------- Gross profit 19,048,183 11,607,585 ---------- ------------- Operating costs and expenses Selling, general and administrative 11,902,972 7,326,813 Depreciation and amortization 664,790 341,750 ------------- ------------- 12,567,762 7,668,563 ------------- ------------- Operating income 6,480,421 3,939,022 ------------- ------------- Other income (expense) Interest (expense), net of interest income ( 88,052) ( 151,292 ) Gain on foreign currency translation 3,037 ___________ ------------- ( 85,015) ( 151,292 ) ------------ ------------ Income before income taxes 6,395,406 3,787,730 Income taxes 2,622,116 1,568,979 ------------- ------------- Net income 3,773,290 2,218,751 Other comprehensive income Foreign currency translation adjustment 83,074 ------------- ------------- Comprehensive income $ 3,856,364 $ 2,218,751 ============= ============= Basic earnings per share $.36 $.29 Weighted average number of common shares outstanding 10,480,650 7,651,347 Diluted earnings per share $.35 $.27 Weighted average number of common and common equivalent shares outstanding 10,835,218 8,307,630
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, 1999 (Unaudited)
Foreign Currency Additional Common Stock Translation Paid-in Retained Shares Amount Adjustment Capital Earnings Balance, October 31, 1998 10,445,525 $522,376 $92,997,711 $13,152,040 Exercise of stock options 38,200 1,810 332,615 Translation adjustment 83,074 Net income 7,053,015 Balance, April 30, 1999 10,483,725 $524,186 $ 83,074 $93,330,326 $20,205,055 ========== ======== ========= =========== ===========
The accompanying notes are an integral part of these financial statements. 7 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended April 30, 1999 1998 (Unaudited) (Unaudited) Cash flows from operating activities: Net income $ 7,053,015 $ 3,996,152 ------------- ------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,248,113 593,006 Provision for losses on accounts receivable 155,000 40,000 Changes in assets and liabilities: Accounts receivable ( 21,909,916) ( 6,366,735 ) Prepaid expenses and other current assets ( 1,922,058) ( 344,155 ) Accounts payable and accrued expenses 1,556,961 2,322,551 Accrued payroll 3,911,227 ( 149,606 ) Taxes other than income taxes 847,517 1,471,401 Income taxes payable 360,066 ( 334,818 ) ------------- ------------ Total adjustments ( 15,753,090) ( 2,768,356 ) ------------ ------------ Net cash provided by (used in) operating activities ( 8,700,075) 1,227,796 ------------ -------------
The accompanying notes are an integral part of these financial statements. 8 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
Six Months Ended April 30, 1999 1998 (Unaudited) (Unaudited) Cash flows from investing activities: Increase in intangible assets $ ($ 260,515 ) Property and equipment acquired ( 1,296,890) ( 386,044 ) Increase in deposits ( 37,977) ( 13,501 ) Cash paid for acquisitions, net of cash acquired ( 39,792,589) ( 11,409,553 ) ------------ ------------ Net cash used in investing activities ( 41,127,456) ( 12,069,613 ) ------------ ------------ Cash flows from financing activities: Exercise of stock options and warrants 334,425 2,284,928 Net borrowings under short term debt arrangements 29,500,000 8,062,903 ------------- ------------- Net cash provided by financing activities 29,834,425 10,347,831 ------------- ------------- Effect of exchange rate changes on cash and cash equivalents 83,074 ------------- ------------- Net decrease in cash and cash equivalents ( 19,910,032) ( 493,986 ) Cash and cash equivalents at beginning of period 22,187,536 918,028 ------------- ------------- Cash and cash equivalents at April 30, $ 2,277,504 $ 424,042 ============= ============= Supplemental cash flow information: Cash paid for: Interest expense $ 141,865 $ 190,624 Income taxes 4,803,805 3,042,491
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, 1998. 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, 1999 are not necessarily indicative of the results to be expected for the full year. 2. Acquisitions During the six months ended April 30, 1999, the Company acquired nine businesses in the staffing and consulting services industry. These acquisitions, which are summarized below, have been accounted for as purchases and, accordingly, the results of operations of the acquired companies have been included in the consolidated results of operations of the Company from the dates of acquisition. In connection with certain acquisitions, the Company is obligated to pay contingent consideration to the selling shareholders upon the acquired businesses achieving certain earnings targets over periods ranging from 2-3 years. In general, the contingent consideration amounts fall into two tiers: (a) tier 1 ("Deferred Consideration") - amounts are due, provided that these acquisitions achieve a base level of earnings which has been determined at the time of acquisition and (b) tier 2 ("Earnouts") - amounts are not fixed and are based on the growth in excess of the base level earnings. The Deferred Consideration payments are anticipated to be as follows:
Year Ending October 31, Amount ----------------------- -------------- 1999 (Six Months) $ 3,400,000 2000 16,290,000 2001 12,908,000 2002-thereafter 5,766,000 ------------- $ 38,364,000 The Deferred Consideration and Earnouts, when paid, will be recorded as additional purchase consideration and will be amortized over a 40-year period. Earnouts cannot be estimated with any certainty. The Company's acquisition activities during the six months ended April 30, 1999 were as follows: Number of acquisitions 9 Consideration paid: Cash at closing $35,588,000 Deferred Consideration $21,475,000
10 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2. Acquisitions - (Continued) The following unaudited results of operations have been prepared assuming that all acquisitions which have occurred since November 1, 1997 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 acquisitions been consummated as of the beginning of the periods presented.
Six Months Ended Three Months Ended April 30, April 30, 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- Revenues $ 163,570,000 $ 122,560,000 $ 85,250,000 $ 69,780,000 Operating income 14,155,000 10,700,000 7,220,000 6,180,000 Net income 7,877,000 4,314,000 4,050,000 2,760,000 Diluted earnings per share $.73 $.52 $.37 $.33
3. Long-Term Debt On August 19, 1998, 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 million Revolving Credit Facility. Borrowing under the Revolving Credit Facility bear interest at the Company's option, at LIBOR (London Interbank Offered Rate), plus applicable margin, or the agent bank's prime rate. The weighted average interest rate on LIBOR borrowings charged by the bank at April 30, 1999 was 5.7%. All borrowings at April 30, 1999 are classified long-term because the Company intends to finance maturities as they become due with borrowings under the Revolving Credit Facility. Borrowing under the Revolving Credit Facility is collateralized by all of the assets of the Company and its subsidiaries and a pledge of all of the stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants. The Revolving Credit Facility expires August 2001. 4. Interest (Expense) Income, Net Interest (expense) income, net consisted of the following:
Six Months Ended Three Months Ended April 30, April 30, 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- Interest expense ($141,865) ($190,624) ($122,043) ($151,292) Interest income 209,620 33,991 --------- ---------- --------- ---------- $ 67,755 ($190,624) ($88,052) ($151,292) ========= ========== ========= ==========
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 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 placement of temporary staffing personnel; (ii) the Company's ability to continue to attract, train and retain personnel qualified to meet the staffing 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 national, regional and local markets; (xi) the Company's ability to retain several of its key clients; (xii) the Company's ability to maintain its unemployment insurance premiums and workers compensation premiums; (xiii) the risk of claims made against the Company associated with providing temporary staffing services; (xiv) the Company's ability to manage significant amounts of information, and periodically expand and upgrade its information processing capabilities; (xv) the Company's ability to remain in compliance with federal and state wage and hour laws and regulations; and (xvi) other economic, competitive and governmental factors affecting the Company's operations, market, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly release the results of any revision of these forward-looking statements to reflect these ends or circumstances after the date they are made or to reflect the occurrence of unanticipated events. Overview The Company is a national provider of professional services and business solutions focusing principally in the areas of Information Technology, Professional Engineering and Government Services through branch offices located in major geographic regions in the United States and Canada. The Company has pursued an aggressive growth strategy designed to transition the Company's business from providing stand alone technical resources in a staff augmentation capacity to higher growth, higher margin project engagements which provide clients with business solutions that rely on leading edge technologies. This initiative has been enacted through acquisition and internal development of technical competencies in project management, web development, data base and network services, call center technology and ERP. For the six months ended April 30, 1999, information technology services and engineering services contributed 69% and 22%, respectively, of the Company's revenues. Since the beginning of fiscal 1996, the Company has acquired 24 information technology or professional engineering staffing services companies, aggregating $221 million in revenues for their respective latest twelve months prior to acquisition. Through these acquisitions, the Company has achieved substantial revenue growth, improved its operating profitability and repositioned itself as a provider of information technology and engineering services and solutions. 12 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Overview - (Continued) The Company brings this expertise to clients in a variety of diverse sectors such as Pharmaceutical, Health Care, Aerospace, Telecommunications, Banking and Finance, Insurance, Utilities and Governmental Units. The Company realizes revenues from client engagements which range from the placement of contract and temporary technical consultants to project assignments which are based on defined deliverables. These services are primarily provided to the customer at hourly rates that are established for each of the Company's consultants, based upon their skill level and experience and the type of work performed. The Company also provides project management and consulting work which are billed either by agreed upon fee or hourly rates, or a combination of both. The billing rates and profit margins for project management and consulting work are higher than those received for professional staffing services. The Company is expanding its sales of higher margin consulting and project management services. The majority of the Company's services 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 on the nature and scope of the assignment is necessary. Contracts, although they normally relate to longer-term and more complex engagements, generally do not obligate the customer to purchase a minimum level of services and are generally terminable by the customer on 60 to 90 days notice. Revenues are recognized when services are provided. Costs of services consist primarily of salaries and compensation-related expenses for billable consultants, including payroll taxes, employee benefits and insurances. Principally all of the billable personnel are treated by the Company as employees. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities, training and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities, including the Company's acquisition program and corporate marketing, administrative and reporting responsibilities. The Company records these expenses when incurred. Depreciation relates primarily to the fixed assets of the Company. Amortization 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 which is being amortized over 40-year periods. 13 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)
Six Months Ended April 30, 1999 Compared to Six Months Ended April 30, 1998 Six Months Ended April 30, 1999 1998 % of % of Amount Revenue Amount Revenue Revenues $ 147,930,906 100.0% $ 86,174,418 100.0 % Cost of services 112,694,776 76.2 65,414,594 75.9 Gross profit 35,236,130 23.8 20,759,824 24.1 Selling, general and administrative 22,187,873 15.0 13,140,370 15.2 Depreciation and amortization 1,248,113 .8 593,006 .7 Operating income 11,800,144 8.0 7,026,448 8.2 Interest (expense) income, net 67,755 ( 190,624) .2 Gain on foreign currency translation 3,037 .2 Income before income taxes 11,870,936 8.0 6,835,824 7.9 Income taxes 4,817,921 3.2 2,839,672 3.3 Net income $ 7,053,015 4.8% $ 3,996,152 4.6 % Earnings per share (diluted) $.65 $.48 ==== ====
Revenues. Revenues increased 71.7%, or $61.8 million, for the six months ended April 30, 1999 as compared to the comparable prior year period. The increase was primarily due to the acquisition of nine companies during the six months ended April 30, 1999, along with internal growth. Cost of Services. Cost of services increased 72.3%, or $47.3 million, for the six months ended April 30, 1999 as compared to the comparable 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 increased to 76.2% for the six months ended April 30, 1999 from 75.9% for the comparable prior year period. This increase was primarily due to increased vacation and holiday charges compared to the prior period. Selling, General and Administrative. Selling, general and administrative expenses increased 68.9%, or $9.0 million, for the six months ended April 30, 1999 as compared to the comparable prior year period. This increase was attributable principally to a 71.7% increase in revenues which required additional administrative, marketing and sales expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 15.0% for the comparable six months ended April 30, 1999 as compared to 15.2% for the prior year period. This decrease in percentage was attributable principally to operating leverage achieved by the spreading of selling, general and administrative overhead expenses over a larger revenue base. Depreciation and Amortization. Depreciation and amortization increased 110.5%, or $655,000, for the six months ended April 30, 1999 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 second quarter of fiscal 1998. 14 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Six Months Ended April 30, 1999 Compared to Six Months Ended April 30, 1998 - (Continued) Interest (Expense) Income, Net. For the six months ended April 30, 1999, actual interest expense of $142,000 was offset by $210,000 of interest income, which was earned from the investment in interest bearing deposits of the net proceeds of the Company's public offering in June 1998, after the retirement of bank debt. Interest (expense) income, net decreased 177%, or $156,000, for the six months ended April 30, 1999 as compared to the comparable prior year period. This decrease was due primarily to the decreased borrowing requirements necessary to fund working capital required of acquired companies. Income Tax. Income tax expense increased 69.7%, or $2.0 million, for the six months ended April 30, 1999 as compared to the comparable prior year period. This increase was primarily due to increased levels of income.
Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998 Three Months Ended April 30, 1999 1998 % of % of Amount Revenue Amount Revenue Revenues $ 80,539,313 100.0 % $ 48,942,175 100.0 % Cost of services 61,491,130 76.3 37,334,590 76.3 Gross profit 19,048,183 23.7 11,607,585 23.7 Selling, general and administrative 11,902,972 14.8 7,326,813 15.0 Depreciation and amortization 664,790 .8 341,750 .7 Operating income 6,480,421 8.0 3,939,022 8.0 Interest (expense) income, net (88,052) (.1) 151,292 .3 Gain on foreign currency translation 3,037 Income before income taxes 6,395,406 7.9 3,787,730 7.7 Income taxes 2,622,116 3.2 1,568,979 3.2 Net income $ 3,773,290 4.7 % $ 2,218,751 4.5 % Earnings per share (diluted) $.35 $.27 ==== ====
Revenues. Revenues increased 64.6%, or $31.6 million, for the three months ended April 30, 1999 as compared to the comparable prior year period. The increase was primarily due to the acquisition of six companies during the three months ended April 30, 1999, along with internal growth. Cost of Services. Cost of services increased 64.7%, or $24.2 million, for the three months ended April 30, 1999 as compared to the comparable prior year period. This increase was primarily due to increased salaries and compensation associated with the increased revenues experienced during this period. Selling, General and Administrative. Selling, general and administrative expenses increased 62.5%, or $4.6 million, for the three months ended April 30, 1999 as compared to the comparable prior year period. This increase was attributable principally to a 64.6% increase in revenues which required additional administrative, marketing and sales expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 14.8% for the comparable three months ended April 30, 1999 as compared to 15.0% for the prior year period. This decrease in percentage was attributable principally to operating leverage achieved by the spreading of selling, general and administrative overhead expenses over a larger revenue base. 15 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998 - (Continued) Depreciation and Amortization. Depreciation and amortization increased 94.5%, or $323,000, for the three months ended April 30, 1999 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 second quarter of fiscal 1998. Interest (Expense) Income, Net. For the three months ended April 30, 1999, actual interest expense of $122,000 was offset by $34,000 of interest income, which was earned from the investment in interest bearing deposits of the net proceeds of the Company's public offering in June 1998, after the retirement of bank debt. Interest (expense) income, net decreased 41.8%, or $63,000, for the three months ended April 30, 1999 as compared to the comparable prior year period. This decrease was due primarily to the decreased borrowing requirements necessary to fund working capital required of acquired companies and interest income earned in interest bearing deposits. Income Tax. Income tax expense increased 67.1%, or $1,053,000, for the three months ended April 30, 1999 as compared to the comparable prior year period. This increase was primarily due to increased levels of income. 16 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources Operating activities used $8.7 million of cash for the six months ended April 30, 1999 as compared to operating activities providing $1.2 million of cash for the six months ended April 30, 1998. The decrease of $9.9 million was primarily attributable to an increase in accounts receivable which was partially offset by increased levels of profitability, accrued payroll, income taxes payable and withheld payroll taxes and depreciation and amortization associated with the acquisitions that were completed during the six months ended April 30, 1999. Investing activities utilized $41.0 million and $12.1 million in the six months ended April 30, 1999 and 1998, respectively. During the six months ended April 30, 1999, the Company invested $35.6 million in cash in the purchase of nine consulting companies and $4.2 million of deferred consideration payments. During the six months ended April 30, 1998, the Company invested $9.8 million in cash in the purchase of three consulting companies and $1.6 million of deferred consideration payments. Financing activities provided $29.8 million and $10.3 million for the six months ended April 30, 1999 and 1998, respectively. On August 19, 1998, 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. Borrowings under the Revolving Credit Facility bear interest, at the Company's option, at LIBOR (London Interbank Offered Rate) plus applicable margin or the agent bank's prime rate. The weighted average interest rate on LIBOR borrowings charged by the bank at April 30, 1999 was 5.7%. Borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of all of the stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants. The Revolving Credit Facility expires August 2001. The amounts outstanding under the Revolving Credit Facility at April 30, 1999 and October 31, 1998 were $29.5 million and $0, respectively. The Company anticipates that its primary uses of capital in future periods will be for acquisitions and the funding of increases in accounts receivable. Funding for further acquisitions will be derived from the Revolving Credit Facility, funds generated through operations or future financing transactions. The Company's business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company's liquidity and capital resources may be affected in the future as the Company continues to grow through implementation of this strategy which may involve acquisitions facilitated through the use of cash and/or debt and equity securities. The Company does not, as of the date of this Report, have material commitments for capital expenditures and does not anticipate entering into any such commitments during the next twelve months. The Company continues to evaluate acquisitions of various businesses which are complementary to its current operations. The Company's current commitments consist primarily of lease obligations for office space. Deferred Consideration payments to be incurred in connection with acquisitions is estimated to be $38.4 million through October 31, 2002. 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. 17 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Year 2000 Readiness Disclosure Many existing computer systems use only two digits to identify a year with the assumption that the first two digits of every year are "19". With the year 2000 approaching, computer systems that are not Year 2000 compliant will read the year 2000 as 1900 and may malfunction. The Company's program to assess the extent of issues related to Year 2000 compliance and to develop and implement solutions for those issues is being directed by senior management with the Company's Chief Technology Officer having primary responsibility for the coordination, remediation, implementation and contingency planning efforts. Designated personnel at the Company's headquarters and at each of the Company's operating locations have been assigned Year 2000 compliance responsibilities. The program is focused on internal information technology systems, computer-aided design systems, non-IT systems (equipment with embedded micro processors), facilities and the status of compliance by larger customers, service providers, suppliers and other key third parties. The program involves the following phases: Assessment, Remediation Planning, Contingency Planning, Remediation/Replacement Implementation and Compliance Testing. The internal IT systems compliance issues are most critical and relate to the Company's financial systems, computer networks and communications systems and personnel recruiting and human resource systems. Corporate level personnel have responsibility to insure that all financial, network and communication systems will be Year 2000 compliant as well as determining the status of compliance by larger customers, suppliers and other key third parties. Personnel recruiting and human resource tracking systems for billable resources are being evaluated and remediated by local branch management under the coordination of the Corporate Chief Technology Officer. Year 2000 compliance related to internal financial systems is being addressed in two ways. The Company has decided to replace its primary financial system with a state-of-the-art integrated enterprise-wide system. This decision was driven by the need for enhanced processing, control and reporting capabilities using current technologies. Based on representations and warranties of the vendor, the Company believes that the new system will be Year 2000 compliant and is expected to be operational by the third quarter of 1999. In addition, the existing primary system and other ancillary systems have been evaluated for Year 2000 compliance and the required remediation and testing are underway. These efforts are scheduled to be concluded before the end of 1999. With respect to larger customers, suppliers and other key third parties, questionnaire surveys are being distributed for use in assessing their state of compliance in order to develop contingency plans in case of non-compliance. Customers and suppliers with whom there is electronic interchange of data are of primary focus to insure that both the Company and those parties are Year 2000 compliant with respect to such interchanges. The Company does not believe the consequences of non-compliance of third party suppliers and customers would be material due to the limited exposure the Company has assessed to these parties. The responsibility for identifying and assessing compliance issues and then implementing solutions for computer-aided design systems, non-IT systems, facilities, and the status of compliance by suppliers and other third parties, rests primarily with each operating office. Solutions for Year 2000 issues related to computer-aided design systems, non-IT systems and facilities will, of necessity, come from vendors and others providing the related services. The Company, however, plans to identify compliance issues and monitor remediation or replacement efforts. With respect to local suppliers and third parties, the Company has also distributed questionnaire surveys in order to assess their state of compliance in order to develop contingency plans in case of non-compliance. The identification and assessment process is well underway with the expectation that solutions will be in place by the third quarter of 1999. 18 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Year 2000 Readiness Disclosure - (Continued) The cost of the Company's Year 2000 and enterprise wide solution implementation program is expected to be approximately $1.8 million, approximately $1.1 of which has been incurred as of the date of the filing of this Report. This amount includes costs associated with the new financial system and the new personnel recruiting and human resource systems described above. These systems already were scheduled for implementation and their implementation was not accelerated because of Year 2000 issues. The Company believes that its program to address Year 2000 compliance is on schedule for completion before the end of 1999. However, there can be no assurance that there will be no material impact as a result of Year 2000 issues, particularly considering the dependence and interdependence that exists with third parties and that resources for remediation and replacement may not be available in the required time frame. Since the Company has a greater level of control over implementing solutions to Year 2000 issues relating to its internal systems, it is more likely that adverse impacts on the Company could originate with third parties rather than from the Company's inability to have its internal systems Year 2000 compliant. If issues related to internal systems are not resolved before the end of 1999, the consequences to the Company could be material. The Company is in the process of developing a most reasonably likely worst case Year 2000 scenario. The Company is currently developing contingency plans and expects such plans to be completed and in place by September 30, 1999. 19 PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on April 21, 1999. The following actions were taken: 1.) The following directors were elected to serve as Class C directors on the Board of Directors, and shall serve terms expiring at the Company's Annual Meeting in 2002, and until their respective successors shall be elected and qualified. Tabulated voting results were as follows: Leon Kopyt (Class C) (For 9,202,781; Withheld 588,228) Stanton Remer (Class C) (For 9,188,931; Withheld 602,078) The Class A director of the Company, Norman S. Berson, will continue to serve on the Board of Directors for a term expiring at the Company's Annual Meeting in 2000, and until his successor has been elected and qualified. Each of the Class B directors of the Company, Robert B. Kerr and Woodrow B. Moats, Jr., will continue to serve on the Board of Directors for a term expiring at the Company's Annual Meeting in 2001, and until his successor has been elected and qualified. 2.) Approval of the adoption of the Company's Amended and Restated 1996 Executive Stock Plan. Votes For - 8,022,728; Votes Against - 1,744,819; Abstentions - 23,362 3.) Approval of Grant Thornton LLP as the independent auditing firm for the Company for the fiscal year ending October 31, 1999. Votes For - 9,199,833; Votes Against - 579,104; Abstentions - 12,072 20 PART II OTHER INFORMATION - CONTINUED Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule. (EDGAR version only) (b) Reports on Form 8-K None. 21 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: June 4, 1999 By:/s/ Stanton Remer --- ------- ----- Stanton Remer Chief Financial Officer, Treasurer, Secretary and Director (Principal Financial Officer and Duly Authorized Officer of the Registrant) EX-27 2 FDS --
5 (Replace this text with the legend) 0000700841 RCM TECHNOLOGIES, INC. 1 U.S. DOLLARS 6-MOS OCT-31-1999 NOV-01-1998 APR-30-1999 1 2,277,504 0 63,076,202 641,000 0 67,834,573 6,310,341 2,074,022 160,713,435 17,070,794 0 0 0 524,186 113,618,455 160,142,641 147,930,906 147,930,906 112,694,776 23,435,986 0 0 141,865 11,870,936 4,817,921 7,053,015 0 0 0 7,053,015 .67 .65
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