-----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, KlDg/nhz1XIw+kaHMrEXHlAihkM85pHTeZneBgHyU5vp13ug8V1vYEyxY40UfQvC YXcB1ufvHuL/vX5tjg0sqA== 0000700841-99-000011.txt : 19990914 0000700841-99-000011.hdr.sgml : 19990914 ACCESSION NUMBER: 0000700841-99-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RCM TECHNOLOGIES INC CENTRAL INDEX KEY: 0000700841 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HELP SUPPLY SERVICES [7363] IRS NUMBER: 951480559 STATE OF INCORPORATION: NV FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10245 FILM NUMBER: 99710095 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 THIRD QUARTER 07/31/99 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999 Commission file number: 1-10245 RCM TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) Nevada 95-1480559 (State of Incorporation) (IRS Employer Identification No.) 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613 (Address of principal executive offices) (856) 486-1777 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate the number of shares outstanding of the Registrant's class of common stock, as of the latest practicable date. CLASS 10,496,225 Common Stock, $0.05 par value Outstanding as of September 13, 1999 1 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements Page Consolidated Balance Sheets as of July 31, 1999 (Unaudited) and October 31, 1998 (Audited) 3 Unaudited Consolidated Statements of Income for the Nine-Month Periods Ended July 31, 1999 and 1998 5 Unaudited Consolidated Statements of Income for the Three-Month Periods Ended July 31, 1999 and 1998 6 Unaudited Consolidated Statement of Changes in Shareholders' Equity for the Nine-Month Period Ended July 31, 1999 7 Unaudited Consolidated Statements of Cash Flows for the Nine- Month Periods Ended July 31, 1999 and 1998 8 Notes to Unaudited Consolidated Financial Statements 10 ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION ITEM 6 - Exhibits and Reports on Form 8-K 20 SIGNATURES 21
2 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS July 31, 1999 and October 31, 1998 ASSETS
1999 1998 -------------- -------------- (Unaudited) (Audited) Current assets Cash and cash equivalents $ 1,395,687 $ 22,187,536 Accounts receivable, net of allowance for doubtful accounts of $805,000 and $486,000 in 1999 and 1998, respectively 66,364,143 40,680,268 Prepaid expenses and other current assets 2,748,738 1,199,809 --------- --------- Total current assets 70,508,568 64,067,613 ---------- ---------- Property and equipment, at cost Equipment and leasehold improvements 7,981,752 5,041,184 Less: accumulated depreciation and amortization 2,562,931 2,437,316 --------- --------- 5,418,821 2,603,868 --------- --------- Other assets Deposits 190,684 145,876 Intangible assets (net of accumulated amortization of $3,349,000 and $1,823,000 in 1999 and 1998, respectively) Goodwill 92,245,484 50,014,978 Other deferred charges 176,317 234,816 ------- ------- 92,612,485 50,395,670 Total assets $ 168,539,874 $ 117,067,151 = =========== = ===========
The accompanying notes are an integral part of these financial statements. 3 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - CONTINUED July 31, 1999 and October 31, 1998 LIABILITIES AND SHAREHOLDERS' EQUITY
1999 1998 (Unaudited) (Audited) Current liabilities Accounts payable and accrued expenses $ 5,117,399 $ 3,202,625 Accrued payroll 10,167,054 5,505,465 Taxes other than income taxes 1,833,152 1,629,945 Income taxes payable 1,295,366 56,989 --------- ------ Total current liabilities 18,412,971 10,395,024 ---------- ---------- Long-term debt 32,200,000 Shareholders' equity Preferred stock, $1.00 par value; 5,000,000 shares authorized; no shares issued or outstanding Common stock, $0.05 par value; 40,000,000 shares authorized; 10,496,225 and 10,447,525 shares issued in 1999 and 1998, respectively 524,811 522,376 Foreign currency translation adjustment ( 161,004) Additional paid-in capital 93,473,301 92,997,711 Retained earnings 24,089,795 13,152,040 ---------- ---------- 117,926,903 106,672,127 Total liabilities and shareholders' equity $ 168,539,874 $ 117,067,151 = =========== = ===========
The accompanying notes are an integral part of these financial statements. 4 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended July 31, 1999 1998 (Unaudited) (Unaudited) Revenues $ 229,768,105 $ 138,182,996 Cost of services 174,866,464 105,099,254 ----------- ----------- Gross profit 54,901,641 33,083,742 ---------- ---------- Operating costs and expenses Selling, general and administrative 34,203,136 20,872,931 Depreciation and amortization 2,091,541 962,896 --------- ------- 36,294,677 21,835,827 Operating income 18,606,964 11,247,915 ---------- --------------- Other income (expense) Interest (expense), net of interest income ( 265,711) 7,657 Loss on foreign currency translation ( 6,602) - ----- ( 272,313) 7,657 - ------- ----- Income before income taxes 18,334,651 11,255,572 Income taxes 7,396,896 4,668,636 --------- --------- Net income 10,937,755 6,586,936 Other comprehensive income (expense) Foreign currency translation adjustment ( 161,004) - ------- Comprehensive income $ 10,776,751 $ 6,586,936 = ========== = ========= Basic earnings per share $1.04 $.80 Weighted average number of common shares outstanding 10,480,781 8,238,172 Diluted earnings per share $1.01 $.75 Weighted average number of common and common equivalent shares outstanding 10,840,658 8,732,895
The accompanying notes are an integral part of these financial statements. 5 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended July 31, 1999 1998 (Unaudited) (Unaudited) Revenues $ 81,837,199 $ 52,008,578 Cost of services 62,171,688 39,684,660 ---------- ---------- Gross profit 19,665,511 12,323,918 ------------- ------------- Operating costs and expenses Selling, general and administrative 12,015,263 7,732,561 Depreciation and amortization 843,428 369,890 ------------- ------------- 12,858,691 8,102,451 ------------- ------------- Operating income 6,806,820 4,221,467 ------------- ------------- Other income (expense) Interest (expense), net of interest income ( 333,535) 198,281 Loss on foreign currency translation ( 9,639) ___________ ------------- ( 343,174) 198,281 ------------- ------------- Income before income taxes 6,463,646 4,419,748 Income taxes 2,578,905 1,828,964 ------------- ------------- Net income 3,884,741 2,590,784 Other comprehensive income (expense) Foreign currency translation adjustment ( 244,078) ------------- ------------- Comprehensive income $ 3,640,663 $ 2,590,784 ============= ============= Basic earnings per share $.37 $.27 Weighted average number of common shares outstanding 10,495,247 9,476,925 Diluted earnings per share $.36 $.26 Weighted average number of common and common equivalent shares outstanding 10,855,124 9,971,684
The accompanying notes are an integral part of these financial statements. 6 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Nine Months Ended July 31, 1999 (Unaudited)
Foreign Currency Additional Common Stock Translation Paid-in Retained Shares Amount Adjustment Capital Earnings Balance, October 31, 1998 10,447,525 $522,376 $92,997,711 $13,152,040 Exercise of stock options 48,700 2,435 475,590 Translation adjustment ( 161,004) Net income 10,937,755 Balance, July 31, 1999 10,496,225 $524,811 ($161,004) $93,473,301 $24,089,795 ========== ======== ========== =========== ===========
The accompanying notes are an integral part of these financial statements. 7 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended July 31, 1999 1998 (Unaudited) (Unaudited) Cash flows from operating activities: Net income $ 10,937,755 $ 6,586,936 ------------- ------------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,091,541 962,896 Provision for losses on accounts receivable 319,000 89,700 Changes in assets and liabilities: Accounts receivable ( 26,002,875) ( 11,404,087 ) Prepaid expenses and other current assets ( 1,548,929) ( 389,786 ) Accounts payable and accrued expenses 1,914,774 1,533,621 Accrued payroll 4,661,589 1,947,996 Taxes other than income taxes 203,207 1,083,186 Income taxes payable 1,238,377 ( 111,490 ) ------------- ------------ Total adjustments ( 17,123,316) ( 6,287,964 ) ------------ ------------ Net cash provided by (used in) operating activities ( 6,185,561) 298,972 ------------ -------------
The accompanying notes are an integral part of these financial statements. 8 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
Nine Months Ended July 31, 1999 1998 (Unaudited) (Unaudited) Cash flows from investing activities: Property and equipment acquired ($ 3,380,494) ($ 648,812 ) Increase in deposits ( 44,808) ( 53,393 ) Purchase of acquired companies including contingent consideration, net of cash acquired ( 43,698,007) ( 20,532,439 ) ------------ ------------ Net cash used in investing activities ( 47,123,309) ( 21,234,644 ) ------------ ------------ Cash flows from financing activities: Sale of common stock 49,464,739 Exercise of stock options and warrants 478,025 2,870,312 Borrowings long-term debt 32,200,000 ------------- ------------- Net cash provided by financing activities 32,678,025 52,335,051 ------------- ------------- Effect of exchange rate changes on cash and cash equivalents ( 161,004) ------------ ------------- Increase (decrease) in cash and cash equivalents ( 20,791,849) 31,399,379 Cash and cash equivalents at beginning of period 22,187,536 918,028 ------------- ------------- Cash and cash equivalents at July 31, $ 1,395,687 $ 32,317,407 ============= ============= Supplemental cash flow information: Cash paid for: Interest expense $ 510,759 $ 338,033 Income taxes 6,196,360 4,780,126 The accompanying notes are an integral part of these financial statements.
9 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. General The accompanying consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). This Report on Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended October 31, 1998. Certain information and footnote disclosures which are normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations. The information reflects all normal and recurring adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position of the Company and its results of operations for the interim periods set forth herein. The results for the nine months ended July 31, 1999 are not necessarily indicative of the results to be expected for the full year. 2. Acquisitions During the period November 1, 1998 through September 1, 1999, the Company acquired twelve businesses in the staffing and consulting services industry. These acquisitions, which are summarized below, have been accounted for as purchases and, accordingly, the results of operations of the acquired companies have been included in the consolidated results of operations of the Company from the dates of acquisition. In connection with certain acquisitions, the Company is obligated to pay contingent consideration to the selling shareholders upon the acquired businesses achieving certain earnings targets over periods ranging from 2-3 years. In general, the contingent consideration amounts fall into two tiers: (a) tier 1 ("Deferred Consideration") - amounts are due, provided that these acquisitions achieve a base level of earnings which has been determined at the time of acquisition and (b) tier 2 ("Earnouts") - amounts are not fixed and are based on the growth in excess of the base level earnings. The Deferred Consideration payments are anticipated to be as follows:
Year Ending October 31, Amount ----------------------- -------------- 1999 (Three Months) $ 1,500,000 2000 16,200,000 2001 15,400,000 2002-thereafter 8,600,000 ------------- $ 41,700,000 The Deferred Consideration and Earnouts, when paid, will be recorded as additional purchase consideration and will be amortized over a 40-year period. Earnouts cannot be estimated with any certainty. The Company's acquisition activities during the period November 1, 1998 through September 1, 1999 were as follows: Number of acquisitions 12 Consideration paid: Cash at closing $42,488,000 Deferred Consideration $28,895,000
10 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2. Acquisitions - (Continued) The following unaudited results of operations have been prepared assuming that all acquisitions which have occurred since November 1, 1997 had occurred at the beginning of the periods presented. Those results are not necessarily indicative of results of future operations nor of results that would have occurred had the acquisitions been consummated as of the beginning of the periods presented.
Nine Months Ended Three Months Ended July 31, July 31, 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- Revenues $ 256,420,000 $ 214,940,000 $ 84,684,000 $ 74,591,000 Net income 12,429,000 9,117,000 4,005,000 3,664,000 Diluted earnings per share $1.15 $1.04 $.37 $.37
3. Long-Term Debt On August 19, 1998, the Company and its subsidiaries entered into an agreement with Mellon Bank N.A., administrative agent for a syndicate of banks, which provides for a $75 million Revolving Credit Facility (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest at the Company's option, at LIBOR (London Interbank Offered Rate), plus applicable margin, or the agent bank's prime rate. The weighted average interest rate on LIBOR borrowings charged by the bank at July 31, 1999 was 5.95%. All borrowings at July 31, 1999 are classified long-term because the Company intends to refinance maturities as they become due with borrowings under the Revolving Credit Facility. Borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of all of the stock of its subsidiaries. The Revolving Credit Facility calls for, among other matters, the Company to maintain certain financial standards and prohibits the payment of dividends by the Company without prior consent of Mellon Bank, N.A.. The Revolving Credit Facility expires August 2001. 4. Interest (Expense) Income, Net Interest (expense) income, net consisted of the following:
Nine Months Ended Three Months Ended July 31, July 31, 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- Interest expense ($510,759) ($338,034) ($368,894) ($131,187) Interest income 245,048 345,691 35,359 329,468 ----------- ----------- ------------ ---------- ($265,711) $ 7,657 ($333,535) $198,281 ========== ========== ========== ========
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES 11 Management's Discussion and Analysis of Financial Condition and Results of Operations Private Securities Litigation Reform Act Safe Harbor Statement Certain statements included herein and in other Company reports and public filings are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned that such forward-looking statements, which may be identified by words such as "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," and similar expressions are only predictions and are subject to risks and uncertainties that could cause the Company's actual results and financial position to differ materially. Such risks and uncertainties include, without limitation: (i) unemployment and general economic conditions associated with the placement of temporary staffing personnel; (ii) the Company's ability to continue to attract, train and retain personnel qualified to meet the staffing requirements of its clients; (iii) the Company's ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired businesses; (iv) uncertainties regarding pro forma financial information and the underlying assumptions relating to acquisitions and acquired businesses; (v) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (vi) possible adverse effects on the market price of the Company's Common Stock due to the resale into the market of significant amounts of Common Stock; (vii) the potential adverse effect a decrease in the trading price of the Company's Common Stock would have upon the Company's ability to acquire businesses through the issuance of its securities; (viii) the Company's ability to obtain financing on satisfactory terms; (ix) the reliance of the Company upon the continued service of its executive officers; (x) the Company's ability to remain competitive in the markets which it serves; (xi) the Company's ability to maintain its unemployment insurance premiums and workers compensation premiums; (xii) the risk of claims 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; and (xv) other economic, competitive and governmental factors affecting the Company's operations, market, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly release the results of any revision of these forward-looking statements to reflect these ends or circumstances after the date they are made or to reflect the occurrence of unanticipated events. Overview The Company is a national provider of professional services and business solutions focusing principally in the areas of Information Technology, Professional Engineering and Government Services through branch offices located in geographic regions in the United States and Canada. The Company has pursued an aggressive growth strategy designed to transition the Company's business from providing stand alone technical resources in a staff augmentation capacity to higher growth, higher margin project engagements which provide clients with business solutions that rely on leading edge technologies. This initiative has been enacted through acquisition and internal development of technical competencies in project management, web development, data base and network services, call center technology and ERP. For the nine months ended July 31, 1999, information technology services and engineering services contributed 71.2% and 19.9%, respectively, of the Company's revenues. Since the beginning of fiscal 1996 through September 1, 1999, the Company has acquired 27 information technology or professional engineering staffing services companies, aggregating $214 million in revenues for their respective latest twelve months prior to acquisition. Through these acquisitions, the Company has achieved substantial revenue growth, improved its operating profitability and repositioned itself as a provider of information technology and engineering services and solutions. 12 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Overview - (Continued) The Company brings this expertise to clients in a variety of diverse sectors such as Pharmaceutical, Health Care, Aerospace, Telecommunications, Banking and Finance, Insurance, Utilities and Governmental Units. The Company realizes revenues from client engagements which range from the placement of contract and temporary technical consultants to project assignments which are based on defined deliverables. These services are primarily provided to the customer at hourly rates that are established for each of the Company's consultants, based upon their skill level and experience and the type of work performed. The Company also provides project management and consulting work which are billed either by agreed upon fee or hourly rates, or a combination of both. The billing rates and profit margins for project management and consulting work are higher than those for professional staffing services. Consequently, the Company is expanding its sales of higher margin consulting and project management services. The majority of the Company's services are provided under purchase orders. Contracts are utilized on certain of the more complex assignments where the engagements are for longer terms or where precise documentation on the nature and scope of the assignment is necessary. Contracts, although they normally relate to longer-term and more complex engagements, generally do not obligate the customer to purchase a minimum level of services and are generally terminable by the customer on 60 to 90 days notice. Revenues are recognized when services are provided. Costs of services consist primarily of salaries and compensation-related expenses for billable consultants, including payroll taxes, employee benefits and insurances. Principally all of the billable personnel are treated by the Company as employees. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities, training and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities, including the Company's acquisition program and corporate marketing, administrative and reporting responsibilities. The Company records these expenses when incurred. Depreciation relates primarily to the fixed assets of the Company. Amortization relates principally to the goodwill resulting from the Company's acquisitions. These acquisitions have been accounted for under the purchase method of accounting for financial reporting purposes and have created goodwill which is being amortized over 40-year periods. 13 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Nine Months Ended July 31, 1999 Compared to Nine Months Ended July 31, 1998
Nine Months Ended July 31, 1999 1998 % of % of Amount Revenue Amount Revenue Revenues $ 229,768,105 100.0% $ 138,182,996 100.0 % Cost of services 174,866,464 76.1 105,099,254 76.1 Gross profit 54,901,641 23.9 33,083,742 23.9 Selling, general and administrative 34,203,136 14.9 20,872,931 15.1 Depreciation and amortization 2,091,541 .9 962,896 .7 Operating income 18,606,964 8.1 11,247,915 8.1 Interest (expense) income, net ( 265,711 ) ( .1) 7,657 Loss on foreign currency translation ( 6,602 ) Income before income taxes 18,334,651 8.0 11,255,572 8.1 Income taxes 7,396,896 3.2 4,668,636 3.4 Net income $ 10,937,755 4.8% $ 6,586,936 4.8 % Earnings per share (diluted) $1.01 $.75 ===== ====
Revenues. Revenues increased 66.3%, or $91.6 million, for the nine months ended July 31, 1999 as compared to the comparable prior year period. Revenue growth was primarily attributable to acquisitions and internal growth. The Company completed ten acquisitions in the nine months ended July 31, 1999, aggregating $65.7 million in revenues for their respective latest twelve months prior to acquisition. Acquired companies during the nine months ended July 31, 1999 and 1998 contributed $94.0 million in revenues in the nine months ended July 31, 1999 as compared to $19.9 million in revenues in the comparable prior year period. Cost of Services. Cost of services increased 66.4%, or $69.8 million, for the nine months ended July 31, 1999 as compared to the comparable prior year period. This increase was primarily due to increased salaries and compensation associated with the increased revenues experienced during this period. Cost of services as a percentage of revenues was 76.1% for the nine months ended July 31, 1999 and 1998. Selling, General and Administrative. Selling, general and administrative expenses increased 63.9%, or $13.3 million, for the nine months ended July 31, 1999 as compared to the comparable prior year period. This increase was attributable principally to a 66.3% increase in revenues which required additional administrative, marketing and sales expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 14.9% for the nine months ended July 31, 1999 as compared to 15.1% for the comparable prior year period. This decrease in percentage was attributable principally to operating leverage achieved by the spreading of selling, general and administrative overhead expenses over a larger revenue base. Depreciation and Amortization. Depreciation and amortization increased 117.2%, or $1.1 million, for the nine months ended July 31, 1999 as compared to the comparable prior year period. This increase was primarily due to the amortization of intangible assets incurred in connection with the acquisitions that occurred after the third quarter of fiscal 1998. 14 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Nine Months Ended July 31, 1999 Compared to Nine Months Ended July 31, 1998 - (Continued) Interest (Expense) Income, Net. For the nine months ended July 31, 1999, actual interest expense of $511,000 was offset by $245,000 of interest income, which was earned from the investment in interest bearing deposits of the net proceeds of the Company's public offering in June 1998, after the retirement of bank debt. Interest (expense) income, net increased 357%, or $273,000, for the nine months ended July 31, 1999 as compared to the comparable prior year period. This increase was due primarily to the borrowing requirements necessary to acquire ten companies during the nine months ended July 31, 1999. Income Tax. Income tax expense increased 58.4%, or $2.7 million, for the nine months ended July 31, 1999 as compared to the comparable prior year period. This increase was primarily due to increased levels of income. Three Months Ended July 31, 1999 Compared to Three Months Ended July 31, 1998
Three Months Ended July 31, 1999 1998 % of % of Amount Revenue Amount Revenue Revenues $ 81,837,199 100.0% $ 52,008,578 100.0 % Cost of services 62,171,688 76.0 39,684,660 76.3 Gross profit 19,665,511 24.0 12,323,918 23.7 Selling, general and administrative 12,015,263 14.7 7,732,561 14.9 Depreciation and amortization 843,428 1.0 369,890 .7 Operating income 6,806,820 8.3 4,221,467 8.1 Interest (expense) income, net ( 333,535 ) ( .4) 198,281 .4 Loss on foreign currency translation ( 9,639 ) Income before income taxes 6,463,646 7.9 4,419,748 8.5 Income taxes 2,578,905 3.2 1,828,964 3.5 Net income $ 3,884,741 4.7% $ 2,590,784 5.0 % Earnings per share (diluted) $.36 $.26 ==== ====
Revenues. Revenues increased 57.4%, or $29.8 million, for the three months ended July 31, 1999 as compared to the comparable prior year period. The increase was primarily due to the acquisition of one company during the three months ended July 31, 1999, along with internal growth. The Company completed one acquisition in the three months ended July 31, 1999, aggregating $5.0 million in revenues for its latest twelve months prior to the acquisition. Acquired companies during the three months ended July 31, 1999 contributed $24.0 million in revenues in the three months ended July 31, 1999 as compared to $-0- million in revenues in the comparable prior year period. Cost of Services. Cost of services increased 56.7%, or $22.5 million, for the three months ended July 31, 1999 as compared to the comparable prior year period. This increase was primarily due to increased salaries and compensation associated with the increased revenues experienced during this period. Cost of services as a percentage of revenues was 76.0% for the three months ended July 31, 1999, as compared to 76.3% in the comparable prior year period. The percentage decline was primarily attributable to a greater percentage of the Company's revenues being derived from information technology staffing services. 15 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Three Months Ended July 31, 1999 Compared to Three Months Ended July 31, 1998 - (Continued) Selling, General and Administrative. Selling, general and administrative expenses increased 55.4%, or $4.3 million, for the three months ended July 31, 1999 as compared to the comparable prior year period. This increase was attributable principally to a 57.4% increase in revenues which required additional administrative, marketing and sales expenses. Selling, general and administrative expenses as a percentage of revenues decreased to 14.7% for the three months ended July 31, 1999 as compared to 14.9% for the comparable prior year period. This decrease in percentage was attributable principally to operating leverage achieved by the spreading of selling, general and administrative overhead expenses over a larger revenue base. Depreciation and Amortization. Depreciation and amortization increased 128.0%, or $474,000, for the three months ended July 31, 1999 as compared to the comparable prior year period. This increase was primarily due to the amortization of intangible assets incurred in connection with the acquisitions that occurred after the third quarter of fiscal 1998. Interest (Expense) Income, Net. For the three months ended July 31, 1999, actual interest expense of $369,000 was offset by $35,000 of interest income, which was earned from the investment in interest bearing deposits of the net proceeds of the Company's public offering in June 1998, after the retirement of bank debt. Interest (expense) income, net increased 268.2%, or $532,000, for the three months ended July 31, 1999 as compared to the comparable prior year period. This increase was due primarily to the borrowing requirements necessary to acquire twelve companies since July 31, 1998. Income Tax. Income tax expense increased 41.0%, or $750,000, for the three months ended July 31, 1999 as compared to the comparable prior year period. This increase was primarily due to increased levels of income. 16 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Liquidity and Capital Resources Operating activities used $6.2 million of cash for the nine months ended July 31, 1999 as compared to operating activities providing $300,000 of cash for the nine months ended July 31, 1998. The decrease of $6.3 million was primarily attributable to an increase in accounts receivable which was partially offset by increased levels of profitability, accrued payroll, income taxes payable and withheld payroll taxes and depreciation and amortization associated with the acquisitions that were completed during the nine months ended July 31, 1999. Investing activities utilized $47.1 million and $21.2 million in the nine months ended July 31, 1999 and 1998, respectively. During the nine months ended July 31, 1999, the Company invested $39.1 million in cash in the purchase of ten consulting companies and $4.6 million of deferred consideration payments. During the nine months ended July 31, 1998, the Company invested $17.3 million in cash in the purchase of five consulting companies and $3.2 million of deferred consideration payments. Financing activities provided $32.7 million and $52.3 million for the nine months ended July 31, 1999 and 1998, respectively. On August 19, 1998, the Company and its subsidiaries entered into an agreement with Mellon Bank N.A., administrative agent for a syndicate of banks, which provides for a $75.0 million Revolving Credit Facility (the "Revolving Credit Facility"). Borrowings under the Revolving Credit Facility bear interest, at the Company's option, at LIBOR (London Interbank Offered Rate) plus applicable margin or the agent bank's prime rate. The weighted average interest rate on LIBOR borrowings charged by the bank at July 31, 1999 was 5.95%. Borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of all of the stock of its subsidiaries. The Revolving Credit Facility calls for, among other matters, the Company to maintain certain financial standards and prohibits the payment of dividends by the Company without prior consent of Mellon Bank, N.A. The Revolving Credit Facility expires August 2001. The amounts outstanding under the Revolving Credit Facility at July 31, 1999 and October 31, 1998 were $32.2 million and $0, respectively. The Company anticipates that its primary uses of capital in future periods will be for acquisitions and the funding of increases in accounts receivable. Funding for further acquisitions will be derived from the Revolving Credit Facility, funds generated through operations or future financing transactions. The Company's business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company's liquidity and capital resources may be affected in the future as the Company continues to grow through implementation of this strategy which may involve acquisitions facilitated through the use of cash and/or debt and equity securities. The Company does not, as of the date of this Report, have material commitments for capital expenditures and does not anticipate entering into any such commitments during the next twelve months. The Company continues to evaluate acquisitions of various businesses which are complementary to its current operations. The Company's current commitments consist primarily of lease obligations for office space. Deferred Consideration payments to be incurred in connection with acquisitions is estimated to be $42.0 million through October 31, 2002. The Company believes that its capital resources are sufficient to meet its present obligations and those to be incurred in the normal course of business for the next twelve months. 17 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Year 2000 Readiness Disclosure Many existing older computer systems were designed to store the last two digits of the year and use this value for all date comparisons. The false assumption of this design is that the first two digits of the year were always considered to be '19'. This is commonly referred to as the Y2K or Year 2000 problem. The Company's program to assess the extent of issues related to Year 2000 compliance and to develop and implement solutions for those issues is being directed by senior management with the Company's Chief Technology Officer having primary responsibility for the coordination, remediation, implementation and contingency planning efforts. Designated personnel at the Company's headquarters and at each of the Company's operating locations have been assigned Year 2000 compliance responsibilities. The program is focused on internal information technology systems, computer-aided design systems, non-IT systems (equipment with embedded micro processors), facilities and the status of compliance by larger customers, service providers, suppliers and other key third parties. The program involves the following phases: Assessment, Remediation Planning, Contingency Planning, Remediation/Replacement Implementation and Compliance Testing. The internal IT systems compliance issues are most critical and relate to the Company's financial systems, computer networks and communications systems and personnel recruiting and human resource systems. Corporate level personnel have responsibility to insure that all financial, network and communication systems will be Year 2000 compliant as well as determining the status of compliance by larger customers, suppliers and other key third parties. Personnel recruiting and human resource tracking systems for billable resources are being evaluated and remediated by local branch management under the coordination of the Company's Chief Technology Officer. Year 2000 compliance related to internal financial systems is being addressed in two ways. The Company has decided to replace its primary financial and operational systems with a state-of-the-art integrated enterprise resource planning system SAP R/3. This decision was driven by the need for enhanced processing, control and reporting capabilities using current technologies. Based on representations and warranties of the vendor, the Company believes that the new system will be Year 2000 compliant and has become operational on August 30, 1999. The remaining non-critical systems will become Y2K compliant by November 1999. With respect to larger customers, suppliers and other key third parties, questionnaire surveys have been distributed and collected for use in assessing their state of compliance in order to develop contingency plans in case of non-compliance. Customers and suppliers with whom there is electronic interchange of data are of primary focus to insure that both the Company and those parties are Year 2000 compliant with respect to such interchanges. The Company does not believe the consequences of non-compliance of third party suppliers and customers would be material due to the limited exposure the Company has assessed to these parties. The responsibility for identifying and assessing compliance issues and then implementing solutions for computer-aided design systems, non-IT systems, facilities, and the status of compliance by suppliers and other third parties, rests primarily with each operating office. Solutions for Year 2000 issues related to computer-aided design systems, non-IT systems and facilities will, of necessity, come from vendors and others providing the related services. The Company, however, plans to identify compliance issues and monitor remediation or replacement efforts. 18 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued) Year 2000 Readiness Disclosure - (Continued) The cost of the Company's Year 2000 and enterprise wide solution implementation program is expected to be approximately $2.2 million, approximately $1.9 million of which has been incurred as of the date of the filing of this Report. This amount includes costs associated with the new financial and operational systems described previously. These systems already were scheduled for installation and their implementation was not accelerated because of Year 2000 issues. The Company believes that its program to address Year 2000 compliance is on schedule for completion before the end of 1999. However, there can be no assurance that there will be no material impact as a result of Year 2000 issues, particularly considering the dependence and interdependence that exists with third parties and that resources for remediation and replacement may not be available in the required time frame. Since the Company has a greater level of control over implementing solutions to Year 2000 issues relating to its internal systems, it is more likely that adverse impacts on the Company could originate with third parties rather than from the Company's inability to make its internal systems Year 2000 compliant. If issues related to internal systems are not resolved before the end of 1999, the consequences to the Company could be material. However, all Y2K projects have either been completed on schedule or remain on schedule for completion before the Year 2000. The Company is in the process of developing a most reasonably likely worst case Year 2000 scenario. The Company is currently developing contingency plans and expects such plans to be completed and in place by September 30, 1999. 19 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule. (EDGAR version only) (b) Reports on Form 8-K None. 20 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: September 13, 1999 By:/s/ Stanton Remer --- ------- ----- Stanton Remer Chief Financial Officer, Treasurer, Secretary and Director (Principal Financial Officer and Duly Authorized Officer of the Registrant) EX-27 2 FDS --
5 THIS SCHEDULE SUMMARY FINANCIAL INFORMATION IS EXTRACTED FROM THE FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 0000700841 RCM TECHNOLOGIES, INC. 1 U.S. Dollars 9-Mos Oct-31-1999 Nov-01-1998 Jul-31-1999 1 1,395,687 0 67,169,143 805,000 0 70,508,568 7,981,752 2,562,931 168,539,874 18,412,971 0 0 0 524,811 117,402,092 168,539,874 229,768,105 229,768,105 174,866,464 36,294,677 6,602 0 265,711 18,334,651 7,396,896 10,937,755 0 0 0 10,937,755 1.04 1.01
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