-----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, TDlZIVYx1c5GM6sKZwARZ94nPSu3vzMr0cwWUwnASBXGfFCk3I93JHQN+b3tv6V2 LlkSaO34Uz0pZ9f4OyhCRQ== 0000700841-04-000023.txt : 20041112 0000700841-04-000023.hdr.sgml : 20041111 20041112085142 ACCESSION NUMBER: 0000700841-04-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20041002 FILED AS OF DATE: 20041112 DATE AS OF CHANGE: 20041112 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10245 FILM NUMBER: 041135410 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 form10q100204.txt FORM 10Q 100204 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 October 2, 2004 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 by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) YES NO X -- --- Indicate the number of shares outstanding of the Registrant's class of common stock, as of the latest practicable date. Common Stock, $0.05 par value, 11,351,365 shares outstanding as of November 11, 2004. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION Page Item 1 - Consolidated Financial Statements Consolidated Balance Sheets as of October 2, 2004 (Unaudited) and December 27, 2003 3 Unaudited Consolidated Statements of Income and Comprehensive Income for the Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003 5 Unaudited Consolidated Statements of Income and Comprehensive Income for the Thirteen Weeks Ended October 2, 2004 and September 27, 2003 7 Unaudited Consolidated Statement of Changes in Shareholders' Equity for the Forty Weeks Ended October 2, 2004 9 Unaudited Consolidated Statements of Cash Flows for the Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003 10 Notes to Unaudited Consolidated Financial Statements 12 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 39 Item 4 - Controls and Procedures 39 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 40 Item 6 - Exhibits and Reports on Form 8-K 42 Signatures 43
2 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS October 2, 2004 and December 27, 2003
ASSETS October 2, December 27, 2004 2003 --------------- --------------- (Unaudited) Current assets Cash and cash equivalents $2,916,441 $5,152,499 Accounts receivable, net of allowance for doubtful accounts of $1,917,000 (October 2, 2004) and $1,854,000 (December 27, 2003), respectively 37,614,357 36,269,369 Restricted cash 8,295,625 8,295,625 Prepaid expenses and other current assets 1,396,966 2,099,206 Deferred tax assets 4,598,373 4,598,373 --------------- --------------- Total current assets 54,821,762 56,415,072 --------------- --------------- Property and equipment, at cost Equipment and leasehold improvements 9,383,166 9,564,939 Less: accumulated depreciation and amortization 4,881,334 4,435,164 --------------- --------------- 4,501,832 5,129,775 --------------- --------------- Other assets Deposits 121,214 82,958 Goodwill 38,007,233 38,007,233 Intangible assets, net of accumulated amortization of $293,663 and $242,249 at October 2, 2004 and December 27, 2003, respectively 17,138 68,551 --------------- --------------- 38,145,585 38,158,742 --------------- --------------- Total assets $97,469,179 $99,703,589 =============== ===============
3 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED October 2, 2004 and December 27, 2003
LIABILITIES AND SHAREHOLDERS' EQUITY October 2, December 27, 2004 2003 --------------- --------------- (Unaudited) Current liabilities Line of credit $4,900,000 $7,300,000 Accounts payable and accrued expenses 12,067,408 15,574,036 Accrued compensation 5,566,223 5,456,330 Payroll and withheld taxes 902,796 171,030 Income taxes payable 4,088,665 4,026,097 --------------- --------------- Total current liabilities 27,525,092 32,533,493 --------------- --------------- 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; 11,351,365 and 11,285,279 shares issued and outstanding at October 2, 2004 and December 27, 2003, respectively 567,568 564,264 Accumulated other comprehensive income 642,845 556,795 Additional paid-in capital 98,160,760 97,906,888 Accumulated deficit (29,427,086) (31,857,851) --------------- --------------- 69,944,087 67,170,096 --------------- --------------- Total liabilities and shareholders' equity $97,469,179 $99,703,589 =============== ===============
4 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003 (Unaudited)
2004 2003 -------------- ------------- Revenues $127,554,978 $161,093,773 Cost of services 96,864,263 127,350,373 -------------- ------------- Gross profit 30,690,715 33,743,400 -------------- ------------- Operating costs and expenses Selling, general and administrative 25,649,389 24,809,503 Depreciation and amortization 905,224 914,276 -------------- ------------- 26,554,613 25,723,779 -------------- ------------- Operating income 4,136,102 8,019,621 -------------- ------------- Other (expenses) income Interest expense, net of interest income (351,539) (180,261) (Loss) gain on foreign currency transactions (4,266) 116,407 -------------- ------------- (355,805 ) (63,854 ) -------------- ------------- Income before income taxes 3,780,297 7,955,767 Income taxes 1,349,532 2,849,709 -------------- ------------- Net income 2,430,765 5,106,058 Other comprehensive income Foreign currency translation adjustment 86,050 867,709 -------------- ------------- Comprehensive income $2,516,815 $5,973,767 ============== =============
5 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED) Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003 (Unaudited)
2004 2003 --------------- --------------- Basic earnings per share Basic earnings per share $.21 $.48 ==== ==== Weighted average number of common shares outstanding 11,315,707 10,633,211 ========== ========== Diluted earnings per share Diluted earnings per share $.21 $.48 ==== ==== Weighted average number of common and common equivalent shares outstanding (includes dilutive securities relating to options of 396,248 and 81,438 in 2004 and 2003, respectively) 11,711,955 10,714,649 ========== ==========
6 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Thirteen Weeks Ended October 2, 2004 and September 27, 2003 (Unaudited)
2004 2003 -------------- -------------- Revenues $40,933,476 $55,224,390 Cost of services 30,969,538 43,679,866 -------------- -------------- Gross profit 9,963,938 11,544,524 -------------- -------------- Operating costs and expenses Selling, general and administrative 8,322,372 8,335,493 Depreciation and amortization 305,494 310,260 -------------- -------------- 8,627,866 8,645,753 -------------- -------------- Operating income 1,336,072 2,898,771 -------------- -------------- Other (expenses) income Interest expense, net of interest income (118,952) (103,529) Gain (loss) on foreign currency transactions 3,522 (18,558) -------------- -------------- (115,430) (122,067) -------------- -------------- Income before income taxes 1,220,642 2,776,704 Income taxes 455,128 960,052 -------------- -------------- Net income 765,514 1,816,652 Other comprehensive income (loss) Foreign currency translation adjustment 309,708 (70,097 ) -------------- -------------- Comprehensive income $1,075,222 $1,746,555 ============== ==============
7 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - (CONTINUED) Thirteen Weeks Ended October 2, 2004 and September 27, 2003 (Unaudited)
2004 2003 --------------- --------------- Basic earnings per share Basic earnings per share $.07 $.17 ==== ==== Weighted average number of common shares outstanding 11,315,707 10,633,211 ========== ========== Diluted earnings per share Diluted earnings per share $.07 $.17 ==== ==== Weighted average number of common and common equivalent shares outstanding (includes dilutive securities relating to options of 300,349 and 166,646 in 2004 and 2003, respectively) 11,638,037 10,799,857 ========== ==========
8 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY Forty Weeks Ended October 2, 2004 (Unaudited)
Accumulated Other Additional Common Stock Comprehensive Paid-in Accumulated ------------ Income Capital Deficit Total Shares Amount Balance, December 27, 2003 11,285,279 $564,264 $556,795 $97,906,888 ($31,857,851) $67,170,096 Issuance of stock under employee stock purchase plan 15,002 750 80,861 81,611 Exercise of stock options 51,084 2,554 173,011 175,565 Translation adjustment 86,050 86,050 Net income 2,430,765 2,430,765 ---------- ------- ------- ---------- --------- --------- Balance, October 2, 2004 11,351,365 $567,568 $642,845 $98,160,760 ($29,427,086) $69,944,087 ========== ======== ======== =========== ============= ===========
9 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003 (Unaudited)
2004 2003 --------------- -------------- Cash flows from operating activities: Net income $2,430,765 $5,106,058 --------------- -------------- Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 905,224 914,276 Provision for losses on accounts receivable 63,000 311,000 Changes in assets and liabilities: Accounts receivable (1,407,988) (10,745,691) Income tax refund receivable 3,733,083 Restricted cash (8,295,625) Deferred tax asset 3,069,422 Prepaid expenses and other current assets 702,240 1,267,789 Accounts payable and accrued expenses (3,506,634) 3,885,180 Accrued compensation 109,893 3,204,835 Payroll and withheld taxes 725,765 396,924 Income taxes payable 62,568 (62,967) --------------- -------------- Total adjustments (2,345,932) (2,321,774) --------------- -------------- Net cash provided by operating activities $84,833 $2,784,284 --------------- --------------
10 The accompanying notes are an integral part of these financial statements. RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Forty Weeks Ended October 2, 2004 and Thirty-Nine Weeks Ended September 27, 2003 - (Continued) (Unaudited)
2004 2003 --------------- -------------- Cash flows from investing activities: Property and equipment acquired ($225,861) ($274,594) Increase in deposits (38,256) (23,891) Contingent consideration (1,353,638) --------------- -------------- Net cash used in investing activities (264,117) (1,652,123) --------------- -------------- Cash flows from financing activities: Sale of stock for employee stock purchase plan 81,611 71,117 Exercise of stock options 175,565 Net repayments of line of credit (2,400,000) (120,000) --------------- -------------- Net cash used in financing activities (2,142,824) (48,883) --------------- -------------- Effect of exchange rate changes on cash and cash equivalents 86,050 867,709 --------------- -------------- (Decrease) increase in cash and cash equivalents (2,236,058) 1,950,987 Cash and cash equivalents at beginning of period 5,142,499 2,845,154 --------------- -------------- Cash and cash equivalents at end of period $2,916,441 $4,796,141 =============== ============== Supplemental cash flow information: Cash paid for: Interest expense $157,901 $156,896 Income taxes (refund) $1,181,377 ($3,889,829)
11 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 27, 2003. 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 consolidated financial position of the Company, and its consolidated results of operations for the interim periods set forth herein. The results for the forty weeks ended October 2, 2004 are not necessarily indicative of the results to be expected for the full year. 2. Fiscal Year The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. A 53-week year occurs periodically. The fiscal year ended 2004 is a 53-week reporting year. The third quarter of 2003, year ended 2003 and the third quarter of 2004 ended on the following dates, respectively: Period Ending Weeks in Quarter Weeks in Year to Date September 27, 2003 Thirteen Thirty-nine December 27, 2003 Thirteen Fifty-two October 2, 2004 Thirteen Forty 3. Use of Estimates and Uncertainties The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. The Company has risk participation arrangements with respect to workers compensation and health care insurance. The amounts included in the Company's costs related to this risk participation are estimated and can vary based on changes in assumptions, the Company's claims experience or the providers included in the associated insurance programs. The Company can be affected by a variety of factors including uncertainty relating to the performance of the U.S. economy, competition, demand for the Company's services, adverse litigation and claims, and the hiring, training and retention of key employees. 12 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 4. New Accounting Standards In January 2003, the Financial Accounting Standards Board ("FASB") released Interpretation No. 46 Consolidation of Variable Interest Entities ("FIN 46") which requires that all primary beneficiaries of Variable Interest Entities ("VIE") consolidate that entity. FIN 46 was effective immediately for VIEs created after January 31, 2003 and to VIEs in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003 to VIEs in which an enterprise holds a variable interest it acquired before February 1, 2003. In December 2003, the FASB published a revision to FIN 46 ("FIN 46R") to clarify some of the provisions of the interpretation and to defer the effective date of implementation for certain entities. Under the guidance of FIN 46R, entities that do not have interests in structures that are commonly referred to as special purpose entities are required to apply the provisions of the interpretation in financial statements for periods ending after March 14, 2004. The Company does not have interests in special purpose entities and the adoption of FIN 46R did not have a material impact on the Company's consolidated financial position, results of operations, or cash flows. 5. Line of Credit On May 31, 2002, the Company and its subsidiaries entered into an amended and restated loan agreement, which was further amended on July 27, 2004, with Citizens Bank of Pennsylvania, administrative agent for a syndicate of banks. This agreement provides for a $25.0 million Revolving Credit Facility (the "Revolving Credit Facility"). Availability under the Revolving Credit Facility is based on 80% of the aggregate amount of accounts receivable as to which not more than 90 days have elapsed since the date of the original invoice. Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, or (ii) the agent bank's prime rate. All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of the Company's 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 2006. The weighted average interest rates under the Revolving Credit Facility for the forty weeks ended October 2, 2004 and thirty-nine weeks ended September 27, 2003 were 2.84% and 3.24%, respectively. The amounts outstanding under the Revolving Credit Facility at October 2, 2004 and December 27, 2003 were $4.9 million and $7.3 million, respectively. At October 2, 2004, the Company had availability (after deducting amounts outstanding) under the Revolving Credit Facility of $20.0 million. 6. Interest (Expense) Income, Net Interest (expense) income, net consisted of the following: ----------------------------------- ----------------------------------- Thirty-Nine Thirteen Thirteen Forty Weeks Weeks Ended Weeks Ended Weeks Ended Ended October September 27, October 2, September 27, 2, 2004 2003 2004 2003 ---------------- ------------------ --------------- ------------------- Interest expense ($398,844) ($227,926) ($129,466) ($123,075) Interest income 47,305 47,665 10,514 19,566 ---------------- ------------------ --------------- ------------------- ($351,539) ($180,261) ($118,952) ($103,509) ================ ================== =============== ===================
13 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7. Goodwill Statement of Financial Accounting Standards ("SFAS") 142 requires the Company to perform a goodwill impairment test on at least an annual basis. For purposes of its 2003 annual impairment testing, the Company determined the fair value of its reporting units using relative market multiples for comparable businesses, as of November 30, 2003. The Company compared the fair value of each of its reporting units to their respective carrying values, including related goodwill. The results of the 2003 impairment testing indicated no impairment to goodwill. Future changes in the industry could impact the market multiples of comparable businesses, and consequently could impact the results of future annual impairment tests. There have been no events in fiscal year 2004 through October 2, 2004 that have indicated a need to perform the impairment test prior to the Company's annual test date. There are no changes in the carrying amount of goodwill for the forty week period ended October 2, 2004. 8. Accounts Payable Accounts payable and accrued expenses consisted of the following at October 2, 2004 and December 27, 2003:
October 2, December 27, 2004 2003 --------------- ---------------- (Unaudited) Accounts payable and other accrued expenses $3,926,381 $7,216,885 Reserve for litigation 8,141,027 8,357,151 --------------- ---------------- Total $12,067,408 $15,574,036 =============== ================
9. Shareholders' Equity Common Shares Reserved
Shares of unissued common stock were reserved for the following purposes: October 2, December 27, 2004 2003 -------------- ---------------- (Unaudited) Exercise of options outstanding 1,196,083 1,214,916 Future grants of options 991,536 1,074,287 -------------- ---------------- Total 2,187,619 2,289,203 ============== ================
14 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 10. Stock - Based Compensation The Company accounts for stock options under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which contains a fair value-based method for valuing stock-based compensation that measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue accounting for employee stock options and similar equity instruments under Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees. Entities that continue to account for stock options using APB Opinion 25 are required to make pro forma disclosures of net income and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. At October 2, 2004, the Company had four stock-based employee compensation plans. The Company accounts for the plans under the recognition and measurement principles of APB No. 25, Accounting for Stock Issued to Employees, and related interpretations. Stock-based employee compensation costs are not reflected in net earnings, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share amounts).
Forty Thirty-Nine Thirteen Weeks Thirteen Weeks Ended Weeks Ended Weeks Ended October 2, September 27, Ended October September 27, 2004 2003 2, 2004 2003 --------------- ---------------- ---------------- --------------- Net income, as reported $2,431 $5,106 $766 $1,816 Less: stock-based compensation costs determined under fair value based method for all awards 254 807 85 245 Net income, pro forma $2,177 $4,239 $681 $1,571 Earnings per share of common stock-basic: As reported $.21 $.48 $.07 $.17 Pro forma $.19 $.40 $.06 $.15 Earnings per share of common stock-diluted: As reported $.21 $.48 $.07 $.17 Pro forma $.19 $.40 $.06 $.15
15 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 10. Stock - Based Compensation (Continued) The pro forma compensation cost using the fair value-based method under SFAS No. 123 includes valuations related to stock options granted since January 1, 1995 using the Black-Scholes Option Pricing Model. The pro forma stock based compensation cost for September 27, 2003 has been adjusted. The weighted average fair value of options granted using the Black-Scholes Option Pricing Model during the forty weeks ended October 2, 2004 has been estimated using the following assumptions: risk free interest rate of 4.0%, expected life of options of five years, and expected stock volatility of 60.2%. The weighted average fair value per option granted was $4.86 for the 149,000 options granted during the forty weeks ended October 2, 2004. Incentive Stock Option Plans 1992 Incentive Stock Option Plan (the 1992 Plan) The 1992 Plan, approved by the Company's stockholders in April 1992, and amended in April 1998, provides for the issuance of up to 100,000 shares of common stock per individual to officers, directors and key employees of the Company and its subsidiaries through February 13, 2002, at which time the 1992 Plan expired. The options issued are intended to be incentive stock options pursuant to Section 422A of the Internal Revenue Code. The option terms cannot exceed 10 years and the exercise price cannot be less than 100% of the fair market value of the shares at the time of grant. The Compensation Committee of the Board of Directors determines the vesting period at the time of grant for each of these options. At October 2, 2004, options to purchase 92,855 shares of common stock were outstanding. 1994 Non-employee Directors Stock Option Plan (the 1994 Plan) The 1994 Plan, approved by the Company's stockholders in May 1994, and amended in April 1998, provides for issuance of up to 110,000 shares of common stock to non-employee directors of the Company through February 19, 2004, at which time the 1994 Plan expired. Options were granted at fair market value at the date of grant, and the exercise of options is contingent upon service as a director for a period of one year. Unvested options terminate when an optionee ceases to be a director of the Company. At October 2, 2004, options to purchase 70,000 shares of common stock were outstanding. 1996 Executive Stock Option Plan (the 1996 Plan) The 1996 Plan, approved by the Company's stockholders in August 1996 and amended in April 1999, provides for issuance of up to 1,250,000 shares of common stock to officers and key employees of the Company and its subsidiaries through January 1, 2006. Options are generally granted at fair market value at the date of grant. The Compensation Committee of the Board of Directors determines the vesting period at the time of grant. At October 2, 2004, options to purchase 922,980 shares of common stock were available for future grants, and options to purchase 249,145 shares of common stock were outstanding. 2000 Employee Stock Incentive Plan (the 2000 Plan) The 2000 Plan, approved by the Company's stockholders in April 2001, provides for issuance of up to 1,500,000 shares of the Company's common stock to officers and key employees of the Company and its subsidiaries or to consultants and advisors of the Company. The Compensation Committee of the Board of Directors may award incentive stock options or non-qualified stock options, as well as stock appreciation rights, and determines the vesting period at the time of grant. At October 2, 2004, options to purchase 68,556 shares of common stock are available for future grants, and options to purchase 784,083 shares of common stock were outstanding. 16 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 10. Stock - Based Compensation (Continued) Employee Stock Purchase Plan The Company implemented an Employee Stock Purchase Plan (the "Purchase Plan") with shareholder approval, effective January 1, 2002. Under the Purchase Plan, employees meeting certain specific employment qualifications are eligible to participate and can purchase shares of common stock semi-annually through payroll deductions at the lower of 85% of the fair market value of the stock at the commencement or end of the offering period. The purchase plan permits eligible employees to purchase common stock through payroll deductions for up to 10% of qualified compensation. During the forty weeks ended October 2, 2004 and the thirty-nine weeks ended September 27, 2003, there were 15,002 and 21,171 shares issued under the Purchase Plan, respectively. At October 2, 2004, there were 320,004 shares available for issuance under the Purchase Plan. 17 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 11. Segment Information The Company has adopted SFAS No. 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):
Forty Weeks Ended Information Professional Commercial October 2, 2004 Technology Engineering Services Corporate Total --------------- -------------- -------------- ------------- ------------- Revenue $70,439 $38,886 $18,230 $127,555 Operating expenses (1) 67,077 36,865 18,576 122,518 --------------- -------------- -------------- ------------- ------------- EBITDA (2) 3,362 2,021 (346 ) 5,037 Depreciation 468 305 81 854 Amortization of intangibles 15 32 4 51 --------------- -------------- -------------- ------------- ------------- Operating income (loss) 2,879 1,684 (431 ) 4,132 Interest expense, net of interest income 194 107 51 352 Income taxes (benefit) 958 563 (172 ) 1,349 --------------- -------------- -------------- ------------- Net income (loss) $1,727 $1,014 ($310 ) $2,431 =============== ============== ============== ============= Total assets $50,226 $21,558 $6,254 $19,431 $97,469 Capital expenditures $14 $45 $15 $152 $226
18 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 11. Segment Information (Continued)
Thirty-Nine Weeks Information Professional Commercial Ended September 27, 2003 Technology Engineering Services Corporate Total --------------- ------------ -------------- ------------- ------------- Revenue $77,170 $69,876 $14,048 $161,094 Operating expenses (1) (3) 71,713 66,664 13,667 152,044 --------------- ------------ -------------- ------------- ------------- EBITDA (2) 5,457 3,212 381 9,050 Depreciation 438 406 49 893 Amortization of intangibles 9 10 2 21 --------------- ------------ -------------- ------------- ------------- Operating income 5,010 2,796 330 8,136 Interest expense, net of interest income 86 78 16 180 Income taxes 1,764 974 112 2,850 --------------- ------------ -------------- ------------- Net income $3,160 $1,744 $202 $5,106 =============== ============ ============== ============= Total assets $51,854 $25,366 $5,755 $20,351 $103,326 Capital expenditures $275 $275
19 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 11. Segment Information (Continued)
Thirteen Weeks Ended Information Professional Commercial October 2, 2004 Technology Engineering Services Corporate Total ---------------- --------------- --------------- ------------- --------------- Revenue $22,803 $11,966 $6,164 $40,933 Operating expenses (1) 21,550 11,482 6,256 39,288 ---------------- --------------- --------------- ------------- --------------- EBITDA (2) 1,253 484 (92) 1,645 Depreciation 159 100 29 288 Amortization of intangibles 5 11 1 17 ---------------- --------------- --------------- ------------- --------------- Operating income (loss) 1,089 373 (122) 1,340 Interest expense, net of interest income 66 35 18 119 Income taxes (benefit) 381 139 (65) 455 ---------------- --------------- --------------- --------------- Net income (loss) $642 $199 ($75) $766 ================ =============== =============== =============== Total assets $50,226 $21,558 $6,254 $19,431 $97,469 Capital expenditures $14 $45 $15 $74
20 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 11. Segment Information (Continued)
Thirteen Weeks Ended Information Professional Commercial September 27, 2003 Technology Engineering Services Corporate Total ---------------- --------------- --------------- ------------- --------------- Revenue $25,104 $25,307 $4,813 $55,224 Operating expenses (1) (3) 24,045 4,683 52,033 ---------------- --------------- --------------- ------------- --------------- EBITDA (2) 1,799 1,262 130 3,191 Depreciation 153 128 19 300 Amortization of intangibles 4 5 1 10 ---------------- --------------- --------------- ------------- --------------- Operating income 1,642 1,129 110 2,881 Interest expense, net of interest income 47 48 9 104 Income taxes 551 374 35 960 ---------------- --------------- --------------- --------------- Net income $1,044 $707 $66 $1,817 ================ =============== =============== =============== Total assets $51,854 $25,366 $5,755 $20,351 $103,326 Capital expenditures $96 $96 (1) Operating expenses excludes depreciation and amortization. (2) EBITDA means earnings before interest income, interest expense, depreciation, amortization and income taxes. We believe that EBITDA, as presented, represents a useful measure of assessing the performance of our operating activities, as it reflects our earnings trends without the impact of certain non-cash and unusual charges or income. EBITDA is also used by our creditors in assessing debt covenant compliance. We understand that, although security analysts frequently use EBITDA in the evaluation of companies, it is not necessarily comparable to other similarly titled captions of other companies due to potential inconsistencies in the method of calculation. EBITDA is not intended as an alternative to cash flow provided by operating activities as a measure of liquidity, as an alternative to net income as an indicator of our operating performance, nor as an alternative to any other measure of performance in conformity with generally accepted accounting principles. (3) Certain reclassifications have been made to 2003 segment data to conform to 2004 presentation.
21 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 11. Segment Information (Continued) The Company is domiciled in the U. S. and its segments operate in the U. S. and Canada. Revenues and fixed assets by geographic area as of and for the forty weeks ended October 2, 2004 and the thirty-nine weeks ended September 27, 2003 are as follows (in thousands):
Forty Weeks Thirty-Nine Ended Weeks Ended October 2, 2004 September 27, 2003 ----------------- ---------------- Revenues U. S. $112,266 $114,153 Canada 15,289 46,941 ----------------- ---------------- $127,555 $161,094 ================= ================ Fixed Assets U. S. $4,260 $5,084 Canada 242 392 ----------------- ---------------- $4,502 $5,476 ================= ================
Revenues by geographic area for thirteen weeks ended October 2, 2004 and the thirteen weeks ended September 27, 2003 are as follows (in thousands):
Fourteen Thirteen Weeks Ended Weeks Ended October 2, 2004 September 27, 2003 ---------------- --------------- Revenues U. S. $36,446 $38,458 Canada 4,487 16,766 ---------------- --------------- $40,933 $55,224 ================ ===============
22 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 12. Contingencies In late 1998, two shareholders who were formerly officers and directors of the Company filed suit against the Company alleging wrongful termination of their employment, failure to make required severance payments, wrongful conduct by the Company in connection with the grant of stock options, and wrongful conduct by the Company resulting in the non-vestiture of their option grants. The complaint also alleged that the Company wrongfully limited the number of shares of the Company's common stock that could have been sold by the plaintiffs under a Registration Rights Agreement entered into in connection with the underlying acquisition transaction pursuant to which the plaintiffs became shareholders of the Company. The claim under the Registration Rights Agreement sought the difference between the amount for which plaintiffs could have sold their RCM shares during the 12-month period ended March 11, 1999, but for the alleged wrongful limitation on their sales, and the amount for which the plaintiffs sold their shares during that period and thereafter. The claim relating to the wrongful termination of the employment of one of the plaintiffs and the claims of both plaintiffs concerning the grant of stock options were resolved in binding arbitration in early 2002. A trial on the remaining claims commenced on December 2, 2002 and a verdict was returned on January 24, 2003. On the claims by both plaintiffs concerning the alleged wrongful limitation by the Company of the number of shares that the plaintiffs could sell during the 12-month period ended March 11, 1999, a verdict awarding damages of $7.6 million against the Company was returned. On June 23, 2003, the trial judge denied the Company's post-trial motions that challenged the jury verdict and upheld the verdict. On August 4, 2003, the trial judge entered a judgment in favor of the plaintiffs for $7.6 million in damages and awarded plaintiffs $172,000 in post-verdict pre-judgment interest. Post-judgment interest will continue to accrue on the damages portion of the judgment after August 4, 2003 (at the rate of 5% per annum until December 27, 2003 and at the rate of 4% per annum in 2004). The Company has appealed to the Appellate Division of the Superior Court of New Jersey from, and obtained a stay pending appeal of, that judgment. In order to secure the stay, the Company made a cash deposit in lieu of bond of $8.3 million with the Trust Fund of the Superior Court of New Jersey. This deposit is recorded as restricted cash on the consolidated balance sheet and earns interest at a rate that approximates the daily federal funds rate. The plaintiffs have cross-appealed from the Court's denial of pre-verdict prejudgment interest on the damages portion of the August 4, 2003 judgment and from the Court's refusal to grant judgment as a matter of law to one of the plaintiffs on his claim for severance pay in the amount of $240,000 plus interest. The briefing phase of the appeal was concluded in April 2004. The timing of a ruling on the appeal cannot be predicted at this time. In connection with this litigation, the Company accrued $9.7 million of litigation charges at December 31, 2002, which included the jury award of $7.6 million, professional fees of $1.1 million and an estimate of $1.0 million for attorney fees and pre-judgment interest. As of October 2, 2004, the accrued litigation reserve was $8.1 million. In addition, in November 2002 the Company brought suit in the Superior Court of New Jersey on professional liability claims against the attorneys and law firms who served as its counsel in the above-described acquisition transaction and in its subsequent dealings with the plaintiffs concerning their various relationships with the Company resulting from that transaction. In its lawsuit against the former counsel, the Company is seeking complete indemnification (1)of its costs and counsel fees incurred in defending itself against the claims of the plaintiffs; (2) any sums for which the Company is ultimately determined to be liable to the plaintiffs; and (3) its costs and counsel fees incurred in the prosecution of the legal malpractice action itself. That litigation has been temporarily stayed in the Law Division at the request of the defendants until at least January 10, 2005 while the appeal of the underlying action goes forward in the Appellate Division of the Superior Court. 23 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 12. Contingencies (Continued) The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by insurance. The litigation and other claims previously noted are subject to inherent uncertainties and management's view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial position and the consolidated results of operations for the period in which the effect becomes reasonably estimable. 24 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 reports and public filings made by the Company are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the adoption by businesses of new technology solutions, the use by businesses of outsourced solutions, such as those offered by the Company, in connection with such adoption, the outcome of litigation (at both the trial and appellate levels) involving the Company and the impact on the Company of its exchange offer relating to its outstanding stock options. Readers are cautioned that such forward-looking statements, as well as others made by the Company, 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 that 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) uncertainties in 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; (xvii) the costs of conducting and the outcome of litigation involving the Company, and (xviii) 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 trends or circumstances after the date they are made or to reflect the occurrence of unanticipated events. 25 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Overview RCM participates in a market that is cyclical in nature and sensitive to economic changes. As a result, the impact of economic changes on revenues and operations can be significant. The Company's consolidated revenues have declined 20.8%, or $33.5 million, for the forty weeks ended October 2, 2004 as compared to the same period in the prior year. The reduction in revenues is primarily attributable to the conclusion of two major contracts in 2003, as well as reduced capital spending by customers, strong competitive pricing pressures and the challenging economic environment. During the latter portion of the 1990's RCM made significant personnel and infrastructure investments to support a high-growth strategy through broad-based market penetration and acquisitions. The dramatic slowdown in the United States economy, which began during 2000, prompted management to reconsider its strategy. In that regard, the Company initiated reductions in its staff personnel and office requirements in response to the decrease in sales volume in year 2001. Since that time, management has continued to monitor its operating cost structure in order to maintain a cost benefit relationship with revenues. In addition, there has been an ongoing focus on working capital management and cash flows. These efforts have resulted in an improvement in accounts receivable collections, debt reduction and improved cash flows. Furthermore, the Company has improved discipline in its marketing and sales strategies by providing a more cohesive and relevant marketing and sales approach to new and existing customers and now focuses on growth in targeted vertical markets and in service offerings providing greater revenue opportunities. The Company believes that most companies have recognized the importance of the Internet and information management technologies to compete in today's business climate. However, the uncertain economic environment has curtailed many companies' motivation for rapid adoption of many technological enhancements. The process of designing, developing and implementing software solutions has become increasingly complex. The Company believes that many 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 spending on many emerging new solutions, which management formerly anticipated. Nonetheless, the Company continues to believe that 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 a demand for outsourcing. The Company believes that its current clients and prospective future clients are continuing to evaluate the potential for outsourcing business critical applications and entire business functions. The Company provides project management and consulting services which are billed based on either an agreed upon fixed fee or hourly rates, or a combination of both. The billing rates and profit margins for project management and solutions services are higher than those for professional consulting services. The Company generally endeavors to expand its sales of higher margin solutions and project management services. The Company also realizes revenues from client engagements that range from the placement of contract and temporary technical consultants to project assignments that entail the delivery of end-to-end solutions. These services are primarily provided to the client at hourly rates that are established for each of the Company's consultants based upon their skill level, experience and the type of work performed. 26 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Overview (Continued) The majority of the Company's services are provided under purchase orders. Contracts are utilized on 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. Although contracts normally relate to longer-term and more complex engagements, they 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 insurance. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities, including the Company's corporate marketing, administrative and reporting responsibilities and acquisition program. The Company records these expenses when incurred. Depreciation relates primarily to the fixed assets of the Company. Amortization relates to a covenant not to compete resulting from one of the Company's acquisitions. Acquisitions have been accounted for under the purchase method of accounting for financial reporting purposes and have created goodwill. Critical Accounting Policies The financial statements are prepared in accordance with generally accepted accounting principles, which require management to make subjective decisions, assessments, and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgments increases, such judgments become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The Company has identified certain critical accounting policies, described below, that require significant judgment to be exercised by management. Revenue Recognition The Company derives its revenues from several sources. All of the Company's segments perform staffing services. The Company's Professional Engineering Services and Information Technology Services segments also perform project services. The Information Technology Services segment also derives revenue from permanent placement fees. Project Services - Project services are generally provided on a cost-plus-fixed-fee or time-and-material basis. Typically, a customer will outsource a discrete project or activity and the Company assumes responsibility for the performance of such project or activity. The Company recognizes revenues and associated costs on a gross basis as services are performed and costs are incurred using its employees. In instances where project services are provided on a fixed-price basis and the contract will extend beyond a 12-month period, revenue is recorded in accordance with the terms of each contract. In some instances, revenue is billed and recorded at the time certain milestones are reached, as defined in the contract. In other instances, revenue is billed and recorded based upon contractual rates per hour. In addition, some contracts contain "Performance Fees" (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when the contract is completed and the revenue is reasonably certain of collection. Some contracts also limit revenues and billings to maximum amounts. Expenses related to contracts that extend beyond a 12-month period are charged to Cost of Services as incurred. 27 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Revenue Recognition (Continued) Staffing Services - Revenues derived from staffing services are recorded on a gross basis as services are performed and associated costs have been incurred using employees of the Company. In these circumstances, the Company assumes the risk of acceptability of its employees to its customers. In certain cases, the Company may utilize other companies and their employees to fulfill customer requirements. In these cases, the Company receives an administrative fee for arranging for, billing for and collecting the billings related to these companies. The customer is typically responsible for assessing the work of these companies who have responsibility for acceptability of their personnel to the customer. Under these circumstances, the Company's reported revenues are net of associated costs (effectively the administrative fee). Permanent Placement Fees - The Company earns permanent placement fees. Fees for placements are recognized at the time the candidate commences employment. The Company guarantees its permanent placements on a prorate basis for 90 days. In the event a candidate is not retained for the 90-day period, the Company will provide a suitable replacement candidate. In the event a replacement candidate cannot be located, the Company will provide a prorated refund to the client. An allowance for refunds, based upon the Company's historical experience, is recorded in the financial statements. Revenues are recorded on a gross basis as a component of revenue. Accounts Receivable The Company's accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers' financial condition and, generally, collateral is not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company's previous loss history, the customer's current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Goodwill and Intangibles Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets." Accordingly, the Company discontinued amortizing goodwill and began applying the specific guidance contained in that Statement to evaluate the carrying value and recoverability of its goodwill by evaluating the fair market value of the reporting units within which goodwill resides. The process of estimating fair value, in part, relies on the use of forecasts to estimate future cash flows expected from a reporting unit as well as the use of market multiples in determining fair market value. In order to estimate future cash flows, management must make subjective judgments based on reasonable supportable assumptions and projections. The time periods for estimating future cash flows are lengthy, which increases the risk that actual future results could significantly deviate from estimates. Changes in future market conditions, the Company's strategy, or other factors could impact upon the future values of these reporting units, which could result in future impairment charges. 28 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Accounting for Stock Options The Company has used stock options to attract, retain and reward employees for long-term service. Generally accepted accounting principles allow alternative methods of accounting for these awards. The Company has chosen to account for its stock plans (including stock option plans) under APB Opinion 25, "Accounting for Stock Issued to Employees." Since option exercise prices reflect the market value per share of the Company's stock upon grant, no compensation expense related to stock options is reflected in the Company's income statement. SFAS No. 123, "Accounting for Stock-Based Compensation," prescribes the alternative method of accounting for stock options. Had SFAS 123 been adopted, the Company would have recorded additional pre-tax costs of approximately $85,000 and $254,000 for the thirteen weeks and forty weeks ended October 2, 2004, respectively. The pro forma compensation cost was calculated using the Black-Scholes Options Pricing Model, which includes estimates based on assumptions for the risk-free interest rate, life of options and stock price volatility and is based upon freely traded options. Changes in the underlying assumptions could impact the pro forma compensation cost. Accounting for Income Taxes In establishing the provision for income taxes and deferred income tax assets and liabilities, and valuation allowances against deferred tax assets, the Company makes judgments and interpretations based on enacted tax laws, published tax guidance and estimates of future earnings. As of December 27, 2003 and October 2, 2004, the Company had total net deferred tax assets of $4.6 million. This included $936,000 relating primarily to federal and state net operating loss carry forwards. Realization of deferred tax assets is dependent upon the likelihood that future taxable income will be sufficient to realize these benefits over time, and the effectiveness of tax planning strategies in the relevant tax jurisdictions. In the event that actual results differ from these estimates and assessments, additional valuation allowances may be required. Forward-looking Information The Company's growth prospects are influenced by broad economic trends. The pace of customer capital spending programs, new product launches and similar activities have a direct impact on the need for consulting and engineering services as well as temporary and permanent employees. Should the U.S. economy decline, the Company's operating performance could be adversely impacted. The Company believes that its fiscal discipline, strategic focus on targeted vertical markets and diversification of service offerings provides some insulation from adverse trends. However, further declines in the economy could result in the need for future cost reductions or changes in strategy. Additionally, changes in government regulations could result in prohibition or restriction of certain types of employment services or the imposition of new or additional employee benefits, licensing or tax requirements with respect to the provision of employment services that may reduce RCM's future earnings. There can be no assurance that RCM will be able to increase the fees charged to its clients in a timely manner and in a sufficient amount to cover increased costs as a result of any of the foregoing. The employment services market is highly competitive with limited barriers to entry. RCM competes in global, national, regional and local markets with numerous consulting, engineering and employment companies. Price competition in the industries the Company serves is significant, and pricing pressures from competitors and customers are increasing. RCM expects that the level of competition will remain high in the future, which could limit RCM's ability to maintain or increase its market share or profitability. 29 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Forward-looking Information - (Continued) Certain information in this report, including Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements, as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Certain forward-looking statements can be identified by the use of forward-looking terminology such as, "believes" "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates," or "anticipates" or the negative thereof or other comparable terminology, or by discussions of strategy, plans or intentions. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. These include risks and uncertainties such as competitive market pressures, material changes in demand from larger customers, availability of labor, the Company's performance on contracts, changes in customers' attitudes toward outsourcing, government policies or judicial decisions adverse to the staffing industry, and changes in economic conditions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company assumes no obligation to update such information. 30 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Forty Weeks Ended October 2, 2004 Compared to Thirty-Nine Weeks Ended September 27, 2003 A summary of operating results for the fiscal periods ended October 2, 2004 and September 27, 2003 is as follows (in thousands, except for earnings per share data):
October 2, 2004 September 27, 2003 ---------------------- ------------------------ % of % of Amount Revenue Amount Revenue ---------- ---------- ---------- ---------- Revenues $127,555 100.0 % $161,094 100.0 % Cost of services 96,865 75.9 127,350 79.1 ---------- ---------- ---------- ---------- Gross profit 30,690 24.1 33,744 20.9 ---------- ---------- ---------- ---------- Selling, general and administrative 25,649 20.1 24,810 15.4 Depreciation and amortization 905 .7 914 .6 ---------- ---------- ---------- ---------- 26,554 20.8 25,724 16.0 ---------- ---------- ---------- ---------- Operating income 4,136 3.3 8,020 4.9 Other expense 356 .3 64 ---------- ---------- ---------- ---------- Income before income taxes 3,780 3.0 7,956 4.9 Income taxes 1,349 1.1 2,850 1.7 ---------- ---------- ---------- ---------- Net income $2,431 1.9 % $5,106 3.2 % ========== ========== ========== ========== Earnings per share Basic: $.21 $.48 Diluted: $.21 $.48 ========== ==========
The above summary is not a presentation of results of operations under generally accepted accounting principles and should not be considered in isolation or as an alternative to results of operations as an indication of the Company's performance. The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. A 53-week year occurs periodically. The fiscal year ended 2004 is a 53-week reporting year. Therefore, the year to date reporting period ended October 2, 2004 consists of forty weeks as compared to the same period in the prior year which ended on September 27, 2003 consisted of thirty-nine weeks. The following discussion is not adjusted for the additional one week in fiscal 2004 unless specifically noted otherwise. Revenues. Revenues decreased 20.8%, or $33.5 million, for the forty weeks ended October 2, 2004 as compared to the same period in the prior year (the "comparable prior year period"). The revenue decreased $6.7 million in the Information Technology ("IT") segment, decreased $31.0 million in the Professional Engineering ("PE") segment and increased $4.2 million in the Commercial Services ("CS") segment. Management attributes the overall decrease to the conclusion in accordance with their terms of two major contracts in the IT and PE segments in early 2004 as well as a softening of demand for information technology services, the weak general economy, offshore competition and widespread pricing pressures. The aggregate revenues from the two major contracts in fiscal 2003 were $31.9 million. Management reasonably expects revenues for the remainder of fiscal 2004, which has thirteen weeks and an additional holiday, as compared to the first forty weeks, to remain consistent on a prorated basis with the revenues for the forty weeks ended October 2, 2004. 31 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Forty Weeks Ended October 2, 2004 Compared to Thirty-Nine Weeks Ended September 27, 2003 - (Continued) Cost of Services. Cost of services decreased 23.9%, or $30.5 million, for the forty weeks ended October 2, 2004 as compared to the comparable prior year period. This decrease was primarily due to the decrease in costs associated with the conclusion of two major contracts in late 2003. Cost of services as a percentage of revenues decreased to 75.9% for the forty weeks ended October 2, 2004 from 79.1% for the comparable prior year period. This decrease was primarily attributable to a decrease in subcontracted labor related to low margin revenues in the PE segment. This subcontracted labor was part of a major contract which was concluded in late 2003. Management anticipates the ratio of cost of sales to revenues for the remainder of fiscal 2004 to remain consistent with the same ratio for the forty weeks ended October 2, 2004. Selling, General and Administrative. Selling, general and administrative ("SGA") expenses increased 3.4%, or $839,000, for the fiscal period ended October 2, 2004 as compared to the comparable prior year period. This increase was primarily attributable to increased healthcare costs, statutory payroll taxes and one additional week of SGA payroll. SGA expenses as a percentage of revenues were 20.1% for the forty weeks ended October 2, 2004 as compared to 15.4% for the comparable prior year period. Management reasonably expects SGA for the remainder of fiscal 2004, which has thirteen weeks and an additional holiday, to remain consistent with the SGA as adjusted for the forty weeks ended October 2, 2004. Depreciation and Amortization. Depreciation and amortization ("DA") decreased 1.0%, or $9,000, for the forty weeks ended October 2, 2004 as compared to the comparable prior year period. Other Expense. Other expense consists of interest expense, net of interest income and gains and losses on foreign currency transactions. For the forty weeks ended October 2, 2004, actual interest expense of $398,800 was offset by $47,300 of interest income, which was principally earned from short-term money market deposits. Interest expense, net, increased $171,300 for the forty weeks ended October 2, 2004 as compared to the comparable prior year period. This increase was primarily due to post-verdict, pre-judgment interest on a verdict against the Company awarding damages of $7.6 million (see note 12). Gains and losses on foreign currency transactions decreased $112,100 because of the stabilization of the Canadian Dollar in the forty weeks ended October 2, 2004 as compared to the strengthening of the Canadian Dollar in relation to the U.S. Dollar in the comparable prior year period. Income Tax. Income tax expense decreased 52.7%, or $1.5 million, for the forty weeks ended October 2, 2004 as compared to the comparable prior year period. This decrease was attributable to a lower level of income before taxes for the forty weeks ended October 2, 2004 compared to the comparable prior year period. The effective tax rate was 35.7% for the forty weeks ended October 2, 2004 as compared to 35.8% for the comparable prior year period. The decrease in effective tax rate was attributable to the increased amount of tax deductible amortization in relation to reduced income before income tax purposes. 32 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Forty Weeks Ended October 2, 2004 Compared to Thirty-Nine Weeks Ended September 27, 2003 - (Continued) Segment Discussion (See Footnote 11) Information Technology ("IT") IT revenues of $70.4 million in 2004 decreased $6.7 million, or 8.7%, compared to 2003. The decline was principally attributable to a softening of demand for information technology services, the weak economy, offshore competition and widespread pricing pressures. Earnings before interest, taxes, depreciation and amortization ("EBITDA") for the IT segment was $3.4 million, or 4.8% of revenues, for 2004 as compared to $5.5 million, or 7.1% of revenues, for 2003. The EBITDA margin percentage decrease was due to the conclusion of a major IT contract in early 2004. Professional Engineering ("PE") PE revenues of $38.9 million in 2004 decreased $31.0 million, or 44.3%, compared to 2003. The PE segment EBITDA was $2.0 million, or 5.2% of revenues for 2004 as compared to $3.2 million, or 4.6% of revenues for 2003. The decrease in revenue was attributable to the conclusion of a major engineering contract in early 2004 on which RCM had accepted lower margins. Commercial Services ("CS") CS revenues of $18.2 million in 2004 increased $4.2 million, or 29.8% compared to 2003. The increase in revenues for the CS segment was attributable to improvement in economic activity within this segment. The CS segment EBITDA was a loss of $346,000, or 1.9% of revenues, as compared to income of $381,000, or 2.7% of revenues, for 2003. The overall decline is principally attributable to competitive pricing pressures and an unfavorable worker's compensation rating market in California. The revenues in the CS segment increased in absolute dollars as compared to the decrease in revenues in the IT and PE segments which resulted in a larger allocation of corporate overhead burden to the CS segment as compared to the same period a year ago. 33 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Thirteen Weeks Ended October 2, 2004 Compared to Thirteen Weeks Ended September 27, 2003 A summary of operating results for the fiscal periods ended October 2, 2004 and September 27, 2003 is as follows (in thousands, except for earnings per share data):
October 2, 2004 September 27, 2003 ---------------------- ----------------------- % of % of Amount Revenue Amount Revenue --------- ---------- --------- ---------- Revenues $40,933 100.0 % $55,224 100.0 % Cost of services 30,970 75.7 43,680 79.1 --------- ---------- --------- ---------- Gross profit 9,963 24.3 11,544 20.9 --------- ---------- --------- ---------- Selling, general and administrative 8,322 20.3 8,335 15.1 Depreciation and amortization 305 .7 310 .6 --------- ---------- --------- ---------- 8,627 21.0 8,645 15.7 --------- ---------- --------- ---------- Operating income 1,336 3.3 2,899 5.2 Other expense 115 .3 122 .2 --------- ---------- --------- ---------- Income before income taxes 1,221 3.0 2,777 5.0 Income taxes 455 1.1 960 1.7 --------- ---------- --------- ---------- Net income $766 1.9 % $1,817 3.3 % ========= ========== ========= ========== Earnings per share Basic: $.07 $.17 Diluted: $.07 $.17 ========= =========
The above summary is not a presentation of results of operations under generally accepted accounting principles and should not be considered in isolation or as an alternative to results of operations as an indication of the Company's performance. The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. Revenues. Revenues decreased 25.9%, or $14.3 million, for the thirteen weeks ended October 2, 2004 as compared to the same period in the prior year (the "comparable prior year period"). The revenue decreased $2.3 million in the IT segment, decreased $13.3 million in the PE segment and increased $1.4 million in the CS segment. Management attributes the overall decrease to the conclusion in accordance with their terms of two major contracts in the IT and PE segments in early 2004 as well as a softening of demand for information technology services, the weak economy, offshore competition and widespread pricing pressures. The revenues from the two major contracts in fiscal 2003 were $8.3 million. 34 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Thirteen Weeks Ended October 2, 2004 Compared to Thirteen Weeks Ended September 27, 2003 - (Continued) Cost of Services. Cost of services decreased 29.1%, or $12.7 million, for the thirteen weeks ended October 2, 2004 as compared to the comparable prior year period. This decrease was primarily due to the decrease in costs associated with the conclusion of two major contracts in late 2003 as well as lower overall revenues. Cost of services as a percentage of revenues decreased to 75.7% for the thirteen weeks ended October 2, 2004 from 79.1% for the comparable prior year period. This decrease was primarily attributable to a decrease in subcontracted labor related to low margin revenues in the PE segment. This subcontracted labor was part of a major contract which was concluded in early 2004. Selling, General and Administrative. SGA expenses decreased 0.2%, or $13,000, for the thirteen weeks ended October 2, 2004 as compared to the comparable prior year period. SGA expenses as a percentage of revenues were 20.3% for the thirteen weeks ended October 2, 2004 as compared to 15.1% for the comparable prior year period. This percentage increase results from the operating expenses absorbed by lower revenues. Depreciation and Amortization. DA decreased 1.6%, or $5,000, for the thirteen weeks ended October 2, 2004 as compared to the comparable prior year period. Other Expense. Other expense consists of interest expense, net of interest income and gains and losses on foreign currency transactions. For the thirteen weeks ended October 2, 2004, actual interest expense of $129,500 was offset by $10,500 of interest income, which was principally earned from short-term money market deposits. Interest expense, net, increased $15,400 for the thirteen weeks ended October 2, 2004 as compared to the comparable prior year period. This increase was primarily due to the increased interest rates on borrowed funds. Gains and losses on foreign currency transactions decreased $22,100 because of the stabilization of the Canadian Dollar in the thirteen weeks ended October 2, 2004 as compared to the strengthening of the Canadian Dollar in relation to the U.S. Dollar in the comparable prior year period. Income Tax. Income tax expense decreased 52.6%, or $505,000, for the thirteen weeks ended October 2, 2004 as compared to the comparable prior year period. This decrease was attributable to a lower level of income before taxes for the thirteen weeks ended October 2, 2004 compared to the comparable prior year period. The effective tax rate was 37.3% for the thirteen weeks ended October 2, 2004 as compared to 34.6% for the comparable prior year period. The increase in effective tax rate was attributable to the increased amount of non deductible expenses in relation to reduced income before income tax purposes. 35 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Thirteen Weeks Ended October 2, 2004 Compared to Thirteen Weeks Ended September 27, 2003 - (Continued) Segment Discussion (See Footnote 11) Information Technology IT revenues of $22.8 million in 2004 decreased $2.3 million, or 9.2%, compared to 2003. The decline was principally attributable to a softening of demand for information technology services, the weak economy, offshore competition and widespread pricing pressures. The IT segment EBITDA was $1.3 million, or 5.5% of revenues, for 2004 as compared to $1.8 million, or 7.2% of revenues for 2003. The EBITDA margin percentage decrease was due to the conclusion of a major IT contract in early 2004. Professional Engineering PE revenues of $12.0 million in 2004 decreased $13.3 million, or 52.7%, compared to 2003. The PE segment EBITDA was $484,000 or 4.0% of revenues for 2004 as compared to $1.3 million, or 5.0% of revenues for 2003. The decrease in revenue was attributable to the conclusion of a major engineering contract in early 2004 on which RCM had accepted lower margins. Commercial Services CS revenues of $6.2 million in 2004 increased $1.4 million, or 28.1%, compared to 2003. The CS segment EBITDA was a loss of $92,000, or 1.5% of revenues, as compared to income of $130,000, or 2.7% of revenues for 2003. This change resulted in a larger allocation of corporate overhead burden to the CS segment as compared to the same period a year ago. 36 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources The following table summarizes the major captions from the Company's Consolidated Statements of Cash Flows:
Thirty Nine Forty Weeks Ended Weeks Ended September 27, (In Thousands) October 2, 2004 2003 ----------------------------- ------------------ ---------------- Operating Activities $84 $2,784 Investing Activities ($264 ) ($1,652) Financing Activities ($2,143 ) ($49)
Operating Activities Operating activities used $84,000 of cash for the forty weeks ended October 2, 2004 as compared to operating activities providing $2.8 million of cash for the comparable 2003 period. The decrease in cash provided by operating activities was primarily attributable to decreased earnings, an increase in accounts receivable, and a decrease in accounts payable and accrued expenses which was partially offset by a decrease in prepaid expenses and other current assets, an increase in accrued compensation and payroll and withheld taxes and income taxes payable. The significant reason for the increase in accounts receivable was the delay in processing of invoices at one client. Based on current operating activities and the drivers of those activities, management reasonably expects that cash will be provided from operating activities for the remainder of fiscal 2004. The Company continues to institute enhanced managerial controls and standardization over its receivables collection and disbursement processes. Investing Activities Investing activities used $264,000 for the forty weeks ended October 2, 2004 as compared to $1.7 million for the comparable 2003 period. The decrease in the use of cash for investing activities for 2004 as compared to the comparable 2003 period was primarily attributable to a decrease in deferred consideration earn-out payments. Cash generated from operating activities has been conservatively invested and is readily available to fund Company operations. Financing Activities Financing activities principally consisted of debt reduction of $2.4 million in 2004 as compared to financing activities using $120,000 for debt reduction for the comparable 2003 period. The Company and its subsidiaries entered into an amended and restated loan agreement on May 31, 2002, which was further amended on July 27, 2004, with Citizens Bank of Pennsylvania, administrative agent for a syndicate of banks. This agreement provides for a $25.0 million Revolving Credit Facility (the "Revolving Credit Facility"). Availability under the Revolving Credit Facility is based on 80% of the aggregate amount of accounts receivable as to which not more than 90 days have elapsed since the date of the original invoice. Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, or (ii) the agent bank's prime rate. As cash flow permits and depending on interest rate movements, the Company may, from time to time and subject to a nominal prepayment fee, apply available cash flows to reduce the Revolving Credit Facility. 37 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources (Continued) All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of the Company's 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 2006. The weighted average interest rates under the Revolving Credit Facility for the forty weeks ended October 2, 2004 and thirty-nine weeks ended September 27, 2003 were 2.84% and 3.24%, respectively. The amounts outstanding under the Revolving Credit Facility at October 2, 2004 and December 27, 2003 were $4.9 million and $7.3 million, respectively. At October 2, 2004, the Company had availability (after deducting amounts outstanding) under the Revolving Credit Facility of $20.0 million. The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any long and short term capital requirements as well as future acquisitions will be derived from one or more of the Revolving Credit Facility, funds generated through operations, or future financing transactions. The Company is involved in litigation as described in Footnote 12 (Contingencies) to the financial statements. The outcome of litigation is subject to inherent uncertainties and management's view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position, liquidity, and the results of operations for the period in which the effect becomes reasonably estimable. The Company anticipates that if the plaintiffs in the litigation matter, which is currently being appealed by the Company, are successful in their appeal of the damages, it would need to borrow funds under its Revolving Credit Facility in order to satisfy payment of the additional damages. The Company believes that its borrowing base is sufficient to allow this additional borrowing. 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 currently 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. At October 2, 2004, the Company had a deferred tax asset totaling $4.6 million, primarily representing the tax effect of the net operating loss carry forwards, and the litigation reserve. The Company expects to utilize the deferred tax asset during the twelve months ending October 1, 2005. 38 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's investment portfolio and debt instruments, which primarily consist of its line of credit. The Company does not have any derivative financial instruments in its portfolio. The Company places its investments in instruments that meet high credit quality standards. The Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. As of October 2, 2004, the Company's investments consisted of cash and money market funds. The Company does not use interest rate derivative instruments to manage its exposure to interest rate changes. The Company does not expect any material loss with respect to its investment portfolio. ITEM 4. CONTROLS AND PROCEDURES The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act, of 1934, as amended) as of the end of the period covered by this report. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures, as of the end of the period covered by this report, are functioning effectively to provide reasonable assurance that information required to be disclosed by the Company in its reports filed or submitted under the Securities Exchange Act of 1934, as amended is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and is accumulated and communicated to the Company's management, including its Chief Financial Officer, as appropriate to allow timely disclosures regarding required disclosures. It should be noted that the design of any system of controls is based in part on certain assumptions about the likelihood of future events. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute assurance, that the objectives of the control system will be met. There have been no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter and that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 39 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In late 1998, two shareholders who were formerly officers and directors of the Company filed suit against the Company alleging wrongful termination of their employment, failure to make required severance payments, wrongful conduct by the Company in connection with the grant of stock options, and wrongful conduct by the Company resulting in the non-vestiture of their option grants. The complaint also alleged that the Company wrongfully limited the number of shares of the Company's common stock that could have been sold by the plaintiffs under a Registration Rights Agreement entered into in connection with the underlying acquisition transaction pursuant to which the plaintiffs became shareholders of the Company. The claim under the Registration Rights Agreement sought the difference between the amount for which plaintiffs could have sold their RCM shares during the 12-month period ended March 11, 1999, but for the alleged wrongful limitation on their sales, and the amount for which the plaintiffs sold their shares during that period and thereafter. The claim relating to the wrongful termination of the employment of one of the plaintiffs and the claims of both plaintiffs concerning the grant of stock options were resolved in binding arbitration in early 2002. A trial on the remaining claims commenced on December 2, 2002 and a verdict was returned on January 24, 2003. On the claims by both plaintiffs concerning the alleged wrongful limitation by the Company of the number of shares that the plaintiffs could sell during the 12-month period ended March 11, 1999, a verdict awarding damages of $7.6 million against the Company was returned. On June 23, 2003, the trial judge denied the Company's post-trial motions that challenged the jury verdict and upheld the verdict. On August 4, 2003, the trial judge entered a judgment in favor of the plaintiffs for $7.6 million in damages and awarded plaintiffs $172,000 in post-verdict pre-judgment interest. Post-judgment interest will continue to accrue on the damages portion of the judgment after August 4, 2003 (at the rate of 5% per annum until December 27, 2003 and at the rate of 4% per annum in 2004). The Company has appealed to the Appellate Division of the Superior Court of New Jersey from, and obtained a stay pending appeal of, that judgment. In order to secure the stay, the Company made a cash deposit in lieu of bond of $8.3 million with the Trust Fund of the Superior Court of New Jersey. This deposit is recorded as restricted cash on the consolidated balance sheet and earns interest at a rate that approximates the daily federal funds rate. The plaintiffs have cross-appealed from the Court's denial of pre-verdict prejudgment interest on the damages portion of the August 4, 2003 judgment and from the Court's refusal to grant judgment as a matter of law to one of the plaintiffs on his claim for severance pay in the amount of $240,000 plus interest. The briefing phase of the appeal was concluded in April 2004. The timing of a ruling on the appeal cannot be predicted at this time. In connection with this litigation, the Company accrued $9.7 million of litigation charges at December 31, 2002, which included the jury award of $7.6 million, professional fees of $1.1 million and an estimate of $1.0 million for attorney fees and pre-judgment interest. As of October 2, 2004, the accrued litigation reserve was $8.1 million. 40 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS (CONTINUED) In addition, in November 2002 the Company brought suit in the Superior Court of New Jersey on professional liability claims against the attorneys and law firms who served as its counsel in the above-described acquisition transaction and in its subsequent dealings with the plaintiffs concerning their various relationships with the Company resulting from that transaction. In its lawsuit against the former counsel, the Company is seeking complete indemnification (1)of its costs and counsel fees incurred in defending itself against the claims of the plaintiffs; (2) any sums for which the Company is ultimately determined to be liable to the plaintiffs; and (3) its costs and counsel fees incurred in the prosecution of the legal malpractice action itself. That litigation has been temporarily stayed in the Law Division at the request of the defendants until at least January 10, 2005 while the appeal of the underlying action goes forward in the Appellate Division of the Superior Court. The Company is also subject to other pending legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by insurance. The litigation and other claims previously noted are subject to inherent uncertainties and management's view of these matters may change in the future. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on the Company's consolidated financial position and the consolidated results of operations for the period in which the effect becomes reasonably estimable. 41 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 31.1 Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of Chief Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) 32.2 Certification of Chief Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.) (b) Reports on Form 8-K The Company furnished to the Securities and Exchange Commission, on August 4, 2004, a Current Report on Form 8-K containing disclosure pursuant to item 12 of Form 8-K. 42 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: November 11, 2004 By: /s/ Stanton Remer ----------------------------- Stanton Remer Chief Financial Officer, Treasurer, Secretary and Director (Principal Financial Officer and Duly Authorized Officer of the Registrant) 43 Exhibit 31.1 RCM TECHNOLOGIES, INC. CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 CERTIFICATION I, Leon Kopyt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2004 /s/ Leon Kopyt Leon Kopyt Chief Executive Officer 44 Exhibit 31.2 RCM TECHNOLOGIES, INC. CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 CERTIFICATION I, Stanton Remer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of RCM Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 11, 2004 /s/ Stanton Remer Stanton Remer Chief Financial Officer 45 Exhibit 32.1 RCM TECHNOLOGIES, INC. CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 I, Leon Kopyt, President and Chief Executive Officer of RCM Technologies, Inc., a Nevada corporation (the "Company"), hereby certify that, to my knowledge: (1) The Company's periodic report on Form 10-Q for the period ended October 2, 2004 (the "Form 10-Q") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. * * * /s/ Leon Kopyt Leon Kopyt Chief Executive Officer Date: November 11, 2004 46 Exhibit 32.2 RCM TECHNOLOGIES, INC. CERTIFICATIONS REQUIRED BY RULE 13a-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 I, Stanton Remer, Chief Financial Officer of RCM Technologies, Inc., a Nevada corporation (the "Company"), hereby certify that, to my knowledge: (1) The Company's periodic report on Form 10-Q for the period ended October 2, 2004 (the "Form 10-Q") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. * * * /s/ Stanton Remer Stanton Remer Chief Financial Officer Date: November 11, 2004 47 -----END PRIVACY-ENHANCED MESSAGE-----