-----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, Uauov3r2TCMaD2dwkk5573MPvfosW1iXGeBGGugRIVUWT/V2LRZbKqn/nnQhEuZo duwkB+/ETj5fM7M9lm1jVQ== 0000950115-97-000758.txt : 19970515 0000950115-97-000758.hdr.sgml : 19970515 ACCESSION NUMBER: 0000950115-97-000758 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19970514 SROS: NASD 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: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-23753 FILM NUMBER: 97604433 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 S-1/A 1 AMENDMENT TO FORM S-1 As filed with the Securities and Exchange Commission, via EDGAR on May 14, 1997 Registration No. 333-23753 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- RCM TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter)
Nevada 7363 95-1480559 ------ -------- ---------- (State or other jurisdiction of (Primary Standard Classification Code (I.R.S. Employer Identification No.) incorporation or organization) Number) 2500 McClellan Avenue Suite 350 Pennsauken, New Jersey 08109-4613
--------------------------------------------------------------- (Address, including zip code, and telephone number, including area code, of registrant's principal executive office and principal place of business) Mr. Leon Kopyt 2500 McClellan Avenue Suite 350 Pennsauken, New Jersey 08109-4613 (609) 486-1777 --------------------------------------------------------------- (Name, address, including zip code, and telephone number, including area code, of agent for service) with a copy to: Stephen M. Cohen, Esquire Mark K. Kessler, Esquire Buchanan Ingersoll Professional Corporation Wolf, Block, Schorr and Solis-Cohen Eleven Penn Center, 14th Floor Twelfth Floor Packard Building 1835 Market Street S.E. Corner 15th & Chestnut Streets Philadelphia, PA 19103 Philadelphia, PA 19102 (215) 665-3873 (215) 977-2576
-------------------- Approximate date of proposed sale to the public: As soon as practicable following effectiveness of this Registration Statement. -------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement in the same offering: [ ] ____________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] ____________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: [ ] ------------------------------------------------ The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. RCM TECHNOLOGIES, INC. ---------------------- CROSS REFERENCE SHEET ---------------------
Registration Statement Item Number and Caption Location in Prospectus or Page - ---------------------------------------------- ------------------------------ 1. Forepart of the Registration Statement and Outside Front Cover Forepart of the Registration Statement; Outside Page of Prospectus................................................ Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.......... Inside Front and Outside Back Cover Pages of Prospectus 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Prospectus Summary; Risk Factors; Summary Charges........................................................... Financial Information 4. Use of Proceeds.................................................. Prospectus Summary; Use of Proceeds 5. Determination of Offering Price.................................. Cover Page of Prospectus; Underwriting 6. Dilution......................................................... Not Applicable 7. Selling Security Holders......................................... Principal and Selling Stockholders 8. Plan of Distribution............................................. Cover Page of Prospectus; Underwriting; Risk Factors 9. Description of Securities to be Registered....................... Outside Front Cover Page of Prospectus; Prospectus Summary; Description of Securities; Underwriting 10. Interest of Named Experts and Counsel............................ Legal Matters; Experts 11. Description of Business.......................................... Business 12. Description of Property.......................................... Business 13. Legal Proceedings................................................ Business 14. Certain Market Information....................................... Price Range of Common Stock and Dividend Policy; Description of Securities 15. Financial Statements............................................. Financial Statements 16. Selected Financial Data.......................................... Selected Financial Data 17. Supplementary Financial Data..................................... Not Applicable 18. Management's Discussion and Analysis of Financial Condition and Management's Discussion and Analysis of Results of Operations............................................. Financial Condition and Results of Operations 19. Disagreements with Accountants................................... Not Applicable 20. Directors and Executive Officers................................. Management 21. Executive Compensation........................................... Management 22. Security Ownership of Certain Beneficial Owners and Management... Principal and Selling Stockholders 23. Certain Relationships and Related Transactions................... Certain Relationships and Related Transactions 24. Statement as to Indemnification.................................. Part II; Item 14 - Indemnification of Directors and Officers
Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. PROSPECTUS SUBJECT TO COMPLETION, DATED MAY 14, 1997 2,500,000 SHARES [LOGO] COMMON STOCK [/R] ------------------------ Of the 2,500,000 shares of Common Stock being offered hereby (the "Offering"), 2,323,187 are being sold by RCM Technologies, Inc. (the "Company") and 176,813 are being sold by certain stockholders of the Company (the "Selling Stockholders"). The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. See "Principal and Selling Stockholders." The Company's Common Stock is presently included on The Nasdaq SmallCap Market under the symbol "RCMT". The Common Stock has been approved for inclusion on The Nasdaq National Market under the symbol "RCMT" subject to completion of this Offering and official notice of issuance. On May 9, 1997, the last reported sale price of the Common Stock was $8.00 per share. See "Price Range of Common Stock and Dividend Policy." ------------------------ PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================================== UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS (1) COMPANY (2) STOCKHOLDERS - ------------------------------------------------------------------------------------------------------------------ Per Share....................................... $ $ $ $ - ------------------------------------------------------------------------------------------------------------------ Total (3)....................................... $ $ $ $ ==================================================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be $475,000. (3) The Company has granted to the Underwriters an option, exercisable for 30 days from the date of the Offering, to purchase up to 375,000 shares of Common Stock, solely to cover over-allotments, if any. If the Underwriters exercise this option in full, the Price to Public will total $__________, the Underwriting Discounts and Commissions will total $___________, and the Proceeds to Company will total $_____________. See "Underwriting." ------------------------ The shares of Common Stock are offered by the Underwriters subject to prior sale, when, as and if issued to and accepted by them, subject to their right to reject any order in whole or in part and to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject offers in whole or in part. It is expected that delivery of certificates for the shares will be made at the offices of Legg Mason Wood Walker, Incorporated, Baltimore, Maryland, on or about _______, 1997. LEGG MASON WOOD WALKER JANNEY MONTGOMERY SCOTT INC. INCORPORATED , 1997 [RCM LOGO] Professional Staffing Specialists [INTERTEC LOGO] [THE CONSORTIUM LOGO] Professional Engineering Information Technology Technical & Scientific PA Specialty Health Care General Support [THE CONSORTIUM LOGO] [PROGRAMMING LOGO] General Support Of Maryland ALTERNATIVES Executive Search Of Minnesota, Inc. SPECIALTIES SPECIALTIES Petrochemical Information Technology C Information Technology Client Server Skills Aeronautical CATARACT, INC. Network Engineering Electronics Oracle/Sybase Automotive SPECIALTIES SPECIALTIES UNIX/C/C++ Electro/Mechanical Professional Engineering PowerBuilder Structural Client Server Skills Technical & Scientific Client Server Skills OT/PT, Speech Therapists CAD/CAM Network Engineering Network Engineering Nursing Oracle/Sybase SPECIALTIES Oracle/Sybase UNIX/C/C++ UNIX/C/C++ PowerBuilder Nuclear Utilities PowerBuilder Fossil Fuel Utilities Process Control Power Generation
OPERATIONS CONDUCTED THROUGH 30 BRANCHES IN 12 STATES CERTAIN PERSONS PARTICIPATING IN THIS OFFERING, MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF THE COMMON STOCK PRIOR TO THE PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, THE PURCHASE OF COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. fOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934 (THE "EXCHANGE ACT"). SEE "UNDERWRITING." PROSPECTUS SUMMARY The following summary is qualified in its entirety by the detailed information and financial statements (including the notes thereto) appearing elsewhere in this Prospectus. Unless otherwise indicated, the information in this Prospectus does not give effect to the exercise of the Underwriters' over-allotment option or an acquisition that occurred after January 31, 1997 as described under "Recent Developments." Investors should carefully consider the information set forth under the caption "Risk Factors." Unless the context otherwise requires, the "Company" or "RCM" refers to RCM Technologies, Inc. and its wholly owned subsidiaries. References to fiscal years are to the respective fiscal years of the Company which end October 31. THE COMPANY The Company is a multi-regional provider of specialty professional staffing services through its 30 branch offices located in 12 states. The Company provides contract and temporary personnel in the information technology, professional engineering and technical, specialty healthcare and general support sectors of the staffing industry to a diversified base of national, regional and local customers. During fiscal 1996, the Company provided an average of 2,600 contract and temporary staffing employees on a daily basis to approximately 700 customers, including a number of Fortune 500 companies, governmental units and public utilities, as well as small to medium-size retail, manufacturing, professional and service organizations. Customers include Air Products & Chemicals, AT&T, Consolidated Edison, Deloitte & Touche, Mt. Sinai Hospital, Northeast Utilities, Sandoz Pharmaceuticals, Sears and United Technologies. In fiscal 1995, the Company implemented an aggressive growth strategy based on management's belief in the expanding market demand and the competitive advantages offered by the Company's blend of specialized professional services. A key element of this strategy is to identify acquisition candidates within specialty professional service sectors which offer higher margins and greater growth potential than traditional staffing services. Since the beginning of fiscal 1995, the Company has achieved significant revenue growth primarily through the acquisition of six staffing companies with combined revenues of approximately $67.7 million in their respective fiscal years prior to the acquisition. These acquisitions shifted the Company's business toward the higher margin information technology and specialty healthcare sectors. During this time, the Company also elected to discontinue providing certain lower margin general support services. General support services, which from fiscal 1992 to 1994 accounted for approximately 51.0% of the Company's revenues, decreased as a percentage of the Company's revenues to 20.5% during the three months ended January 31, 1997. Correspondingly, revenues from the Company's specialty professional services accounted for 79.5% of the Company's revenues during the three months ended January 31, 1997. Prior to implementation of its growth strategy, in fiscal 1994 the Company's revenues and operating income were $29.2 million and $1.6 million, respectively. In fiscal 1996, on a pro forma basis which gives effect to the acquisitions as if they had occurred on November 1, 1995, the Company's revenues and operating income increased to $84.7 million and $4.7 million, respectively. According to the National Association of Temporary Staffing Services, from 1991 to 1995, the U.S. market for temporary staffing services grew at a compound annual rate of approximately 16.0%. Industry revenues during this period increased from approximately $21.5 billion to approximately $45.1 billion. While the staffing industry has grown rapidly in recent years, in 1996 temporary employment represented only 2.2% of the average daily employment of the total U.S. workforce and industry sources anticipate it will increase to 4.0% by the year 2000. The increase in historic and anticipated industry revenues reflects a growing acceptance of contract and temporary work assignments among employers and employees. The Company believes that the demand for specialty staffing services will increase at a faster rate than the staffing industry as a whole, as companies continue to use skilled specialty personnel to provide rapid responses to complex technological challenges without incurring the fixed overhead costs associated with permanent employees. 3 The Company's objective is to become a leading provider of specialty professional staffing services in selected regional markets throughout the United States. Management has designed the Company's blend of service offerings, particularly within the information technology and niche professional engineering sectors, to meet the staffing requirements of many medium and large corporations. The Company intends to expand internally and to make acquisitions both in its existing markets and in markets that are determined by management to have strong growth and specialty staffing requirements. Additionally, the Company believes it can maximize the benefits of its acquisitions by rapidly integrating the general and administrative functions of the acquired companies and fostering a decentralized entrepreneurial environment, thereby allowing existing management to focus on relationships with both its customers and personnel. Service to the general support sector, while not intended as a primary focus of the Company's operations, is expected to continue to supplement the Company's specialty professional services and provide diversification to the Company's customer base and geographic presence. The executive offices of the Company are located at 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109, and its telephone number is (609) 486-1777. RECENT DEVELOPMENTS During April 1997, the Company acquired the operating assets of Programming Resources Unlimited, Inc., ("Programming Resources"), a Wayne, Pennsylvania-based provider of information technology staffing services. For the year ended December 31, 1996, Programming Resources generated revenues of approximately $2.4 million. THE OFFERING Common Stock offered: By the Company.................................................. 2,323,187 shares By the Selling Stockholders..................................... 176,813 shares Total........................................................... 2,500,000 shares Common Stock to be outstanding after the Offering................. 7,139,863 shares(1) Use of Proceeds................................................... For repayment of bank debt, working capital and general corporate purposes, primarily to finance future acquisitions. See "Use of Proceeds." Nasdaq Symbol..................................................... RCMT
- ------------------ (1) Does not include an aggregate of 1,490,000 shares of Common Stock reserved for issuance under the Company's stock option plans. As of May 9, 1997, options to acquire 709,000 shares of Common Stock at exercise prices ranging from $1.09 to $8.13 were outstanding, including options to acquire 250,000 shares which were not exercisable as of the date of this Prospectus. Also does not include 157,342 shares of Common Stock issuable upon the exercise of Class C Warrants of the Company at an exercise price of $15.00 per share. See "Management -- Stock Option Plans" and "Description of Securities -- Class C Warrants." 4 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED JANUARY 31, ------------------------ -------------------------------------------------- 1996 1996 1997 ------------------------ ------------------------ ------------------------ 1994 1995 ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) --------- --------- --------- ------------- --------- ------------- --------- ------------- STATEMENT OF INCOME DATA: Revenues.................... $ 29,239 $ 26,916 $ 61,039 $ 84,665 $ 9,777 $ 19,072 $ 21,151 $ 21,151 Gross profit................ 5,375 4,537 12,259 19,147 1,791 4,141 5,100 5,100 Operating income............ 1,608 857 3,015 4,715 592 943 1,355 1,355 Net income $ 1,426 $ 849 $ 2,368 $ 3,688 $ 502 $ 737 $ 781 $ 757 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income per share........ $ 0.49 $ 0.28 $ 0.55 $ 0.66 $ 0.15 $ 0.14 $ 0.16 $ 0.13 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental net income per share (2)...... $ 0.18 $ 0.38 $ 0.47 $ 0.10 $ 0.10 $ 0.15 $ 0.13 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of shares outstanding........ 2,930 3,008 4,321 5,557 3,277 5,362 4,971 5,719
JANUARY 31, 1997 OCTOBER 31, ------------------------- 1996 ACTUAL AS ADJUSTED(3) --------------- --------- -------------- BALANCE SHEET DATA: Cash and cash equivalents........................................... $ 6 $ 125 $ 12,027 Working capital, exclusive of notes payable-bank.................... 9,518 9,919 21,821 Total assets........................................................ 24,407 30,191 42,093 Long-term debt...................................................... -- -- -- Shareholders' equity................................................ 16,220 17,001 33,903
- ------------------ (1) Assumes that the acquisitions which occurred during and subsequent to the fiscal year ended October 31, 1996 had occurred on November 1, 1995 and gives effect to the reduction of certain redundant operating costs and expenses, excess salaries and non-recurring costs that were identified at the time of the acquisitions. Also gives effect to: (i) the elimination of interest expense associated with the acquisition related debt assumed to be repaid with offering proceeds; and (ii) the issuance of 748,195 shares of Common Stock (at an assumed offering price of $8.00 per share) which, net of estimated underwriting commissions and offering expenses payable by the Company, would be sufficient to repay the acquisition related indebtedness as set forth in "Use of Proceeds." (2) Assumes an effective tax rate of 42%. The Company's effective tax rates for the years ended October 31, 1995 and 1996 and the three months ended January 31, 1996 and 1997 were 10%, 16%, 11% and 39%, respectively, due to the utilization of net operating loss carryforwards. (3) Gives effect to the sale of 2,323,187 shares of Common Stock (at an assumed offering price of $8.00 per share) offered by the Company hereby and the application of the net proceeds therefrom as set forth in "Use of Proceeds." 5 RISK FACTORS An investment in the shares of Common Stock offered by this Prospectus involves a high degree of risk. Prospective purchasers of the shares of Common Stock offered hereby should carefully review the following risk factors as well as the other information set forth in this Prospectus. This Prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Pro forma information contained within this Prospectus, to the extent it is predictive of financial condition and results of operations that would have occurred on the basis of certain stated assumptions, may also be characterized as forward-looking statements. Although forward-looking statements are based on assumptions made, and information believed, by management to be reasonable, no assurance can be given that such statements will prove to be correct. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, projected or expected. Such risks and uncertainties are described under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and in the risk factors set forth below. ABILITY TO ACHIEVE AND MANAGE GROWTH The Company has experienced significant growth since the beginning of fiscal 1995, principally through acquisitions. Continued growth could place additional demands on its administrative, operational and financial resources. The Company's ability to achieve and manage its growth will depend on a number of factors, including the availability of working capital to support such growth, existing and emerging competition, the Company's ability to maintain sufficient profit margins and the strength of demand for contract and temporary personnel in the sectors in which the Company operates. There can be no assurance that the Company will be able to continue to achieve or manage such growth effectively and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Business Strategy." RISKS ASSOCIATED WITH FUTURE ACQUISITIONS A primary element of the Company's growth strategy is to pursue strategic acquisitions that expand or complement the Company's business. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding possible acquisitions. As a result, negotiations may occur from time to time as appropriate opportunities arise. There can be no assurance that the Company will be able to identify additional acquisition candidates on terms favorable to the Company or in a timely manner, enter into acceptable agreements or close any such transactions, and any failure to do so could have a material adverse effect on the Company's ability to sustain its growth. In addition, the Company will compete for acquisitions with other companies. Increased competition for such acquisition candidates could have the effect of increasing the cost of pursuing this growth strategy or could reduce the number of attractive candidates to be acquired. Future acquisitions could divert management's attention from the daily operations of the Company and require additional management, operational and financial resources. Moreover, there is no assurance that the Company will be able to successfully integrate acquisitions into its business or operate such acquisitions at expected levels of revenue or profitability. Acquisitions may also have an adverse short-term effect on the Company's operating results, dependence on retaining key personnel, amortization of acquired intangible assets and risks associated with unanticipated problems, liabilities or contingencies. See "Acquisition Program." The Company may require additional debt or equity financing for future acquisitions, which may not be available at all, or on terms favorable to the Company. To the extent the Company uses shares of Common Stock for all or a portion of the consideration to be paid in future acquisitions, dilution may be experienced by existing stockholders, including the purchasers of Common Stock in this Offering. If the Company does not have cash resources sufficient for such purpose or is not able to use 6 its Common Stock as consideration for acquisitions, its growth through acquisitions could be limited. See "Acquisition Program" and "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources." DEPENDENCE ON KEY CUSTOMERS AND GEOGRAPHIC CONCENTRATION Although the Company provides services to a large number of customers, approximately 24.6% and 21.6% of the Company's revenues in fiscal 1996 and the three months ended January 31, 1997, respectively, were derived from the Company's top five revenue producing customers, with one customer accounting for approximately 12.0% of the Company's revenues in each period. Similarly, a substantial portion of the Company's revenues are currently derived from services provided to customers in the Northeast, Midwest and California regions of the United States. The loss of, or a reduction in, business from any major customers or a deterioration of general economic conditions in these regions could adversely affect the Company. See "Business -- Customers and Marketing." DEPENDENCE ON AVAILABILITY OF QUALIFIED PERSONNEL The Company depends on its ability to attract, train and retain qualified personnel who possess the skills and experience necessary to meet the staffing requirements of its customers. Competition for the services of personnel within all of its professional specialty groups is intense. Competition for information technology personnel is particularly intense and demand for their services has, to date, substantially exceeded their supply. The Company expects such competition to continue. Factors influencing such competition include compensation, benefits, growth opportunities, relationships with other specialty staffing companies and full-time employment opportunities. There can be no assurance that qualified personnel will continue to be available to the Company in sufficient numbers and on terms of employment acceptable to the Company. The inability to attract and retain qualified personnel in sufficient numbers, or to upgrade its base of qualified personnel to keep pace with changing customer needs and emerging technologies, could have a material adverse affect on the Company's business, financial condition and results of operations. See "Business - -- Operations." RELIANCE ON KEY PERSONNEL The Company is highly dependent upon the continued services and experience of its senior members of management, including Leon Kopyt, Chairman and Chief Executive Officer. The loss of the services of Mr. Kopyt or other senior members of management could have a material adverse effect on the Company's business. The Company has employment agreements with Mr. Kopyt and other senior members of management. See "Management -- Executive Compensation." POTENTIAL CLAIMS RELATING TO FORMER OPERATION OF CALIFORNIA FACILITY Prior to 1977, the Company operated a facility located in Fontana, California (the "Facility") at which it processed certain materials to recover aluminum. The property on which the Facility was located (the "Property") was owned by a former shareholder and officer ("Former Officer") of the Company. In 1977, the Company sold certain assets (the "1977 Transaction") utilized in its operation to a Company (the "Purchaser") that continued processing similar materials at the Facility until 1982. As part of the 1977 Transaction, the Company was permitted to store on the Property an existing stockpile of aluminum oxide materials (the "stockpile") which was available for consumption in the Purchaser's operations. From 1977 to 1980, the Purchaser utilized a significant amount of material from the stockpile in its operations. Materials generated by the Purchaser's operations were also added to the stockpile. The Purchaser acquired the Property in 1985 from the Former Officer. Purportedly, in response to an order from a state environmental agency (which, along with a subsequent order, is referred to herein as the "Order") relating to potential ground water degradation, the Purchaser performed a number of actions, including, in 1992, disposal of the existing stockpile at an approximate cost of $5.6 million. The Purchaser has sought contribution from the Company for its proportionate share of the 7 disposal costs, as well as anticipated maintenance costs of approximately $700,000, on common law grounds and pursuant to certain federal and state environmental laws. Based upon, among other things, an analysis of environmental studies performed before and after the 1977 Transaction as well as a review of the compliance records of the state environmental agency, the Company has concluded that: (i) the Facility was in material compliance with all applicable federal and state environmental laws at the time of the 1977 Transaction; (ii) the Purchaser was cited for numerous violations of applicable environmental laws after the 1977 Transaction, thus, any violations of laws after 1977, including any consequent remediation and disposal obligations, were likely the responsibility of the Purchaser; (iii) neither the costs incurred by the Purchaser, nor the events leading up to the incurrence of these costs, appear to support a claim under federal environmental laws; (iv) certain actions taken and costs incurred by the Purchaser may not have been necessary or required to comply with the Order; (v) liability, if any, would only apply to the minority percentage of the stockpile attributable to the Company's operations; and (vi) the Purchaser's contribution claims for costs incurred in 1992 and earlier in response to the Order may be barred under the statute of limitations relating to the state law claims. The Company believes it has meritorious defenses to the Purchaser's claims and, in management's opinion, the Company's exposure under the claims is not likely to have a materially adverse impact on the Company's overall financial condition. There can be no assurance, however, that the Company will not incur material expenses and costs in connection with the defense and resolution of any claims brought by the Purchaser or that the Company will not ultimately be responsible for certain of the costs incurred by the Purchaser, which may include pre- and post-judgment interest, in an amount that may be material to the Company. Furthermore, since the Company has not established any reserves in connection with such claims, any such liability, if at all, would be recorded as an expense in the period incurred or estimated. This amount, even if not material to the Company's overall financial condition, could adversely affect the Company's results of operations in the period recorded. Management intends to vigorously oppose any such claims. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS The Company has experienced, and is expected to continue experiencing, quarterly variations in revenues and operating income as a result of many factors, including the timing of assignments from customers, future acquisitions, hiring of personnel and additional selling, general and administrative expenses incurred to support new business as well as changes in the Company's revenue mix. In connection with certain engineering projects, the Company could incur costs in periods prior to recognizing revenues under those contracts. In addition, the Company must plan its operating expenditures based on revenue forecasts, and a revenue shortfall below such forecast in any quarter would likely adversely affect the Company's operating results for the quarter. While the effects of seasonality of the Company's business have been obscured by its growth through acquisitions, the Company usually experiences lower revenues in its first fiscal quarter due to the slowdown in business associated with the holiday season. INCREASED COSTS OF EMPLOYMENT The Company is required to pay unemployment insurance premiums and workers' compensation benefits for its contract and temporary employees. Unemployment insurance premiums are set annually by the states in which employees perform services and could increase periodically. There can be no assurance that the Company will be able to increase the fees charged to its customers in a timely manner and by an amount sufficient to cover increased unemployment insurance premiums. Workers' compensation costs have increased as various states in which the Company conducts operations have raised benefit levels and liberalized allowable claims. The Company maintains workers' compensation insurance for its employees under an insured program in its areas of operation. There can be no assurance that the Company's actual workers' compensation obligations will not exceed the amount of 8 its insured coverage or that the Company will be able to increase the fees charged to its customers sufficiently to offset increased employment costs. LIABILITY FOR EMPLOYEE ACTIONS Providers of contract and temporary staffing services generally place their employees in the workplace of other businesses. The risk of employee misconduct is attendant to the Company's business. These risks could include claims relating to errors and omissions, misuse of proprietary information, misappropriation of funds, discrimination and harassment, theft of customer property, other criminal activity or torts and other claims. While the Company has not historically experienced any material claims of these types, and has insurance covering certain of these risks, there can be no assurance that the Company will not experience such claims, incur costs in connection with such risks in the future, that insurance coverage will continue to be available or that it will be adequate to cover such liabilities. RISKS RELATED TO TAX STATUS OF INDEPENDENT CONTRACTORS Generally, the Company treats its technical personnel as employees for federal and state tax purposes and pays all requisite Social Security taxes (FICA), payroll taxes, unemployment taxes, workers' compensation insurance premiums and other employee taxes and similar costs. In certain cases, however, technical personnel desire to be treated as independent contractors for federal and state tax purposes with respect to their assignments. In such cases, and if appropriate, the individual is treated as an independent contractor for tax purposes. Of the technical personnel, during each of the last three fiscal years, less than 5% were treated as independent contractors for federal and state tax purposes. The Company believes that it is in material compliance with all applicable tax regulations concerning the classification of its technical personnel, and has not, to date, been the subject of any attempt by any federal or state authority to reclassify any of the personnel it has treated as independent contractors. There can be no assurance, however, that federal and state taxing authorities will not challenge the Company's classification of technical personnel as independent contractors in the future. If successful, such a challenge could result in the imposition of additional taxes, interest and penalties, the amount of which could have a material adverse effect on the Company's financial condition. RISK OF GOVERNMENT REGULATIONS AND LEGISLATIVE PROPOSALS The Company's costs of operations could increase if there are any material changes in government regulations. Recent federal and state legislative proposals have included provisions seeking to extend health insurance benefits to employees who do not currently receive such benefits. As a result of the wide variety of national and state proposals currently under consideration, the impact of such proposals cannot be predicted. There can be no assurance that the Company will be able to increase the fees charged to its customers in a timely manner and sufficient amount to cover increased costs related to any new benefits that may be extended to temporary employees as a result of such legislation or regulations. It is not possible to predict whether any other legislation or regulations affecting the Company's operations will be proposed or enacted at the federal or state level; however, no assurances can be given that if enacted, such legislation or regulations would not have a material adverse effect on the Company. COMPETITIVE MARKET The temporary staffing industry is highly competitive, with limited barriers to entry. The Company competes for customers in the geographic regions in which it operates with national, regional and local, full service and specialized staffing providers. Certain of the Company's competitors have greater marketing, financial and other resources, and more established operations, than the Company. As a result, they may be better able to respond or adapt to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, marketing and sales of their services than the Company. The Company expects that the level of competition will remain high in the future, which could limit the Company's ability to maintain its market share or maintain gross 9 margins in the geographic regions or industry sectors in which it operates, either of which could have a material adverse affect on the Company's business, financial condition and results of operations. See "Business -- Competition." GENERAL ECONOMIC RISKS Demand for professional staffing services is significantly affected by the general level of economic activity. When economic activity slows, customers may delay or cancel plans that involve the hiring of permanent or contract technical personnel. The Company is unable to predict the level of economic activity at any particular time, and fluctuations in the general economy could adversely affect the Company's business, operating results and financial condition. DISCRETION IN USE OF PROCEEDS The Company intends to use approximately $5.0 million of the net proceeds from this Offering (assuming a public offering price of $8.00 per share) to repay certain outstanding indebtedness and intends to use the approximately $11.9 million in remaining net proceeds (approximately $14.7 million if the Underwriters' over-allotment is exercised) for general corporate purposes, primarily to finance future acquisitions. The Company currently has no understandings, commitments or agreements with respect to any material acquisitions; however, as a result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. Consequently, there can be no assurance as to when or how the remaining net proceeds from the Offering will be used. If the Company is unable to promptly utilize such proceeds in connection with acquisitions, or to otherwise use such proceeds in the growth of its business, the returns realized from temporarily investing such proceeds may be substantially less than the returns which could be realized if such proceeds were successfully invested in the business. See "Use of Proceeds." CONTROL BY EXISTING MANAGEMENT Following the completion of this Offering, officers and directors of the Company will have voting rights over approximately 24.7% of the then outstanding shares of Common Stock (23.5% if the Underwriters' over-allotment option is exercised) and may be able to exercise effective control over most matters requiring approval of the Company's stockholders, including the election of the Company's directors. See "Principal and Selling Stockholders" and "Description of Securities." VOLATILITY OF STOCK PRICE The market price of the Company's Common Stock has recently experienced volatility. In the future, the market price of the Common Stock could fluctuate substantially due to a variety of factors, including quarterly operating results of the Company or other companies in the same or similar industry, changes in general conditions in the economy, the financial markets or the staffing services industry, natural disasters or other developments affecting the Company or its competitors. See "Price Range of Common Stock and Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS The market price of the Common Stock could be adversely affected by the sale of substantial amounts of Common Stock in the public market following this Offering. Of the 7,139,863 shares of Common Stock that will be outstanding following the Offering, 1,748,950 shares of Common Stock are considered "restricted securities" for the purpose of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act") and may only be sold if they are registered under the Securities Act or if an exemption from such registration is available. All of the Company's directors and executive officers and Limeport Investments, LLC have agreed not to sell, otherwise dispose of, or pledge any shares of the Common Stock for 180 days after the date of this Prospectus (the "Lock-Up Period") without the prior written consent of Legg Mason Wood Walker, Incorporated. The Lock-Up Period 10 will not apply to the Common Stock offered by Limeport Investments, LLC as a Selling Stockholder. See "Principal and Selling Stockholders" and "Shares Eligible for Future Sale." Following expiration of the Lock-Up Period, 174,111 of the restricted securities will be eligible for public resale either in accordance with Rule 144 under the Securities Act or by operation of the applicable registration rights agreements between the holders of such restricted securities and the Company. Of the remaining restricted securities, 1,262,528 may not be sold until April 30, 1998 and 312,311 shares may not be sold until August 30, 1998, each pursuant to certain registration rights arrangements with the Company. Sales of additional shares in the public market could also occur upon the exercise of existing stock options and Class C Warrants. The sales could take place prior to the expiration of the Lock-Up Period. The Company is unable to predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price for the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such influx of shares into the market could occur, could adversely affect the market price for the Common Stock and could impair the Company's future ability to obtain capital through offerings of equity securities. EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Articles of Incorporation, as amended (the "Articles of Incorporation"), Amended and Restated Bylaws (the "Bylaws"), the Nevada General Corporation Law, the Company's Stockholder Rights Plan (the "Rights Plan") and the Second Amended and Restated Termination Benefits Agreement between the Company and its Chief Executive Officer (the "Benefits Agreement") could delay or frustrate the removal of incumbent directors and could make difficult a change in control transaction including a merger, tender offer or proxy contest involving the Company, even if such events could be viewed as beneficial by the Company's stockholders. For example, the Articles of Incorporation provide for a classified Board of Directors and deny the right of stockholders to amend the Bylaws without the consent of the Board and require advance notice of stockholder nominations of directors. The Company is also subject to provisions of the Nevada General Corporation Law that prohibit a publicly held Nevada corporation from engaging in a broad range of business combinations with a person who, together with affiliates and associates, owns 10% or more of the corporation's outstanding voting shares (an "interested stockholder") for three years after the person became an interested stockholder, unless the business combination is approved in a prescribed manner. In addition, the Rights Plan provides for substantial dilution of an "acquiring person" as defined therein in the event a person or group of persons acquires beneficial ownership of 15% or more of the outstanding Common Stock of the Company or in the event of a merger or sale of assets which is not approved by the "continuing directors," of the Company as defined in the Rights Plan. Furthermore, in the event of a "change in control" (as defined in the Benefits Agreement) which results in the termination of the Chief Executive Officer, the Company would be required to make substantial payments and, in certain circumstances, reduce the exercise price of options issued to the Chief Executive Officer. See "Management - -- Change in Control Arrangements" and "Description of Securities -- Provisions Having a Possible Anti-Takeover Effect." 11 ACQUISITION PROGRAM Since the beginning of fiscal 1995, the Company has completed the acquisition of six staffing companies with combined revenues of approximately $67.7 million in their respective fiscal years prior to the acquisition. These acquisitions shifted the Company's business from general support to the specialty professional service sectors, such as information technology, professional engineering and specialty healthcare services. These acquisitions also increased the Company's geographic presence in the Northeast and Midwest regions of the United States, thereby allowing the Company to more effectively provide services to large regional and national accounts. Key elements of the Company's growth strategy are to continue to pursue strategic acquisitions in selected geographic regions and in the specialty professional service sectors. These acquisitions may serve to strengthen the Company's presence in existing markets, introduce the Company to new regions with strong growth opportunities, or add new specialty staffing services. The Company regularly reviews various strategic acquisition opportunities and periodically engages in discussions regarding such acquisitions. While the number, timing, size and terms of such acquisitions may vary, management has developed the following general guidelines to identify potential acquisitions: o Regional businesses with revenues of $25.0 million or less. o Businesses with profitable operations and experienced management personnel. o Sellers who are willing to accept a significant portion of the acquisition price in the form of multi-tiered earnouts based on meeting certain growth and profitability targets. Management believes that, in addition to its growth strategy and acquisition guidelines, the following factors distinguish the Company from competitive bidders when pursuing acquisitions: (i) the opportunity of the target management to be key contributors and participants in the growth of a medium-sized public company; (ii) the rapid integration of general and administrative functions to allow a greater focus upon sales and marketing efforts; (iii) operational autonomy which fosters a desirable entrepreneurial environment; and (iv) the use of substantial performance-based financial incentives. The following information provides a summary of the acquisitions completed by the Company since the beginning of fiscal 1995. Great Lakes Design, Inc. ("Great Lakes"). In December 1994, the Company acquired the operating assets of Great Lakes for $200,000 in the form of a $150,000 note payable over a period of two years, $50,000 in cash and certain earnout provisions. Great Lakes generated revenues of approximately $3.2 million during its fiscal year ended December 31, 1994. Through this transaction, the Company acquired two branch offices which provide engineering and technical staffing services. Cataract, Inc. ("Cataract"). In August 1995, the Company acquired all of the outstanding stock of Cataract for $2.0 million cash and 312,311 restricted shares of the Company's Common Stock. The restricted shares have been pledged to the Company for a period of three years to secure certain levels of sales revenues that have been warranted by the former Cataract shareholders. Cataract generated revenues of approximately $20.5 million during its fiscal year ended December 31, 1994. Through this transaction, the Company acquired five branch offices which provide engineering staffing services. The Consortium ("Consortium"). In March 1996, the Company acquired all of the outstanding stock of Consortium for 1.3 million restricted shares of the Company's Common Stock. Consortium generated revenues of approximately $26.0 million during its fiscal year ended December 31, 1995. Through this transaction, the Company acquired five branch offices which provide information technology, specialty healthcare and general support staffing services. In addition, the two principal shareholders of Consortium joined the Company's senior management. 12 The Consortium of Maryland, Inc. ("Consort MD"). In May 1996, the Company acquired all of the outstanding stock of Consort MD for $621,500 cash and 34,327 restricted shares of the Company's Common Stock, plus additional shares of restricted stock having a value equal to approximately $250,000, based upon a post-closing verification of financial data warranted at closing. Consort MD generated revenues of approximately $6.0 million during its fiscal year ended December 31, 1995. Through this transaction, the Company acquired one branch office which provides information technology staffing services. In addition, the sole shareholder of Consort MD joined the Company's senior management. Performance Staffing, Inc. ("PSI"). In September 1996, the Company acquired the operating assets of PSI for 2,500 restricted shares of the Company's Common Stock, and in connection therewith, assumed approximately $110,000 of PSI's debt. PSI generated revenues of approximately $2.0 million during its fiscal year ended December 31, 1995. Through this transaction, the Company acquired three branch offices which provide engineering and general support staffing services. Programming Alternatives of Minnesota, Inc. ("PAMI"). Effective as of November 4, 1996, the Company acquired all of the outstanding stock of PAMI for approximately $4.5 million cash plus $1.6 million of consideration in the form of a three year promissory note payable upon attaining certain earnings targets within the three-year period. The Company also agreed to pay additional consideration to the former PAMI shareholder in the event that during the three-year period the performance of PAMI exceeds the established earnings targets. PAMI generated revenues of approximately $10.0 million during its fiscal year ended December 31, 1996. Through this transaction, the Company acquired one branch office which provides information technology staffing services. 13 USE OF PROCEEDS The net proceeds from the sale of the 2,323,187 shares of Common Stock offered hereby by the Company are estimated to be approximately $16.9 million ($19.7 million in the event the Underwriters' over-allotment option is exercised) assuming a public offering price of $8.00 per share and after deducting estimated underwriting discounts and commissions and Offering expenses. The Company will not receive any proceeds from the sale of Common Stock by the Selling Stockholders. Approximately $5.0 million of the net proceeds will be used to repay outstanding debt under the Company's Revolving Credit Facility which was obtained for working capital purposes and acquisition financing. The revolving credit facility provides a revolving line of credit which permits borrowings of up to $20.0 million at an interest rate equal to LIBOR plus 2.25% and expires on June 30, 1999. Borrowings under the Revolving Credit Facility have been used to fund certain of the Company's acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The Company intends to use the remaining net proceeds of approximately $11.9 million (approximately $14.7 million if the Underwriters' over-allotment is exercised) for working capital and other general corporate purposes, primarily to finance future acquisitions. The Company currently has no understandings, commitments or agreements with respect to any material acquisitions; however, as a result of the Company's process of regularly reviewing acquisition prospects, negotiations may occur from time to time if appropriate opportunities arise. Pending the uses described above, the Company intends to invest its net proceeds in short-term, investment-grade securities. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Common Stock is presently included on The Nasdaq SmallCap Market under the symbol "RCMT." The Common Stock has been approved for inclusion on The Nasdaq National Market under the symbol "RCMT" subject to completion of this Offering and to official notice of issuance. The following table sets forth high and low sales prices by fiscal quarters for the periods indicated, as reported on The Nasdaq SmallCap Market.
FISCAL 1995 HIGH LOW - ----------- --------- --------- First Quarter...................................................... $ 3.75 $ 2.97 Second Quarter..................................................... 3.90 3.28 Third Quarter...................................................... 3.44 2.50 Fourth Quarter..................................................... 4.06 2.97 FISCAL 1996 First Quarter...................................................... $ 6.25 $ 2.66 Second Quarter..................................................... 13.25 4.22 Third Quarter...................................................... 15.38 5.75 Fourth Quarter..................................................... 12.88 7.00 FISCAL 1997 First Quarter...................................................... $ 10.38 $ 7.00 Second Quarter..................................................... 9.75 6.25
On May 9, 1997 the last reported sale price of the Common Stock on The Nasdaq SmallCap Market was $8.00 per share. As of May 9, 1997, the approximate number of holders of record of the Company's Common Stock was 1,882. Based upon the requests for proxy information in connection with the Company's most recent Annual Meeting of Stockholders, the Company believes the number of beneficial owners of its Common Stock exceeds 4,900. 14 The Company has never declared or paid a cash dividend on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. It is the current policy of the Company's Board of Directors to retain all earnings to finance the development and expansion of the Company's business. Any future payment of dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions and other factors that the Board of Directors deems relevant. The Revolving Credit Facility prohibits the payment of dividends or distributions on account of the capital stock without the prior consent of Mellon Bank, N.A. CAPITALIZATION The following table sets forth the note payable under the Company's Revolving Credit Facility and the consolidated capitalization of the Company at January 31, 1997 on an actual basis and as adjusted, as of such date, to give effect to the sale by the Company of 2,323,187 shares of Common Stock at an assumed offering price of $8.00 per share, the application of the net proceeds therefrom as set forth in "Use of Proceeds" and the retirement of treasury stock. This table should be reviewed in conjunction with the Company's historical and pro forma financial statements and related notes appearing elsewhere in this Prospectus.
JANUARY 31, 1997 ---------------------- ACTUAL AS ADJUSTED --------- --------- (IN THOUSANDS) Cash and cash equivalents.................................................. $ 125 $ 12,027 --------- --------- --------- --------- Notes payable -- bank (1).................................................. $ 7,000 $ 2,000 --------- --------- --------- --------- Long-term debt............................................................. -- -- Shareholders' equity: Preferred stock, $1.00 par value; 5,000,000 shares authorized; no shares issued or outstanding................................................. -- -- Common stock, $0.05 par value; 40,000,000 shares authorized; 4,878,476 shares issued, actual and 7,138,863 shares issued, as adjusted........ 244 357 Additional paid-in capital............................................... 17,161 33,887 Treasury stock, at cost 62,800 shares.................................... (63) -- Accumulated deficit...................................................... (341) (341) --------- --------- Total shareholders' equity............................................ 17,001 33,903 --------- --------- Total capitalization............................................... $ 17,001 $ 33,903 --------- --------- --------- ---------
- ------------------ (1) Classified within the Company's Consolidated Financial Statements as a current liability. 15 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data for, and as of the end of, each of the years in the four year period ended October 31, 1996 are derived from the consolidated financial statements of the Company which have been audited by Grant Thornton LLP, independent auditors. The selected consolidated financial data for, and as of the end of, the year ended October 31, 1992 are derived from the consolidated financial statements of the Company which have been audited by Morris J. Cohen & Co., independent auditors. The selected consolidated financial data for the three months ended January 31, 1996 and 1997 are derived from the unaudited consolidated financial statements of the Company, which in the opinion of management include all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the results of operations and financial position for such periods. The results of operations for the three months ended January 31, 1997 are not necessarily indicative of the results of operations to be expected for the year. The pro forma consolidated financial data presented below gives effect to all business acquired by the Company through January 31, 1997 as if these acquisitions were consummated as of November 1, 1995. The pro forma results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated as of the beginning of the period presented or that might be attained in the future. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the actual and pro forma consolidated financial statements of the Company included elsewhere in this Prospectus.
YEAR ENDED OCTOBER 31, THREE MONTHS ENDED JANUARY 31, ---------------------------------------------------------------- ------------------------------- 1996 1996 1997 -------------------- -------------------- --------- PRO PRO 1992 1993 1994 1995 ACTUAL FORMA(1) ACTUAL FORMA(1) ACTUAL --------- --------- --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of Income Data: Revenues................. $ 26,864 $ 28,633 $ 29,239 $ 26,916 $ 61,039 $ 84,665 $ 9,777 $ 19,072 $ 21,151 Cost of services......... 22,858 24,387 23,864 22,379 48,780 65,518 7,986 14,931 16,051 --------- --------- --------- --------- --------- --------- --------- --------- --------- Gross profit............. 4,006 4,246 5,375 4,537 12,259 19,147 1,791 4,141 5,100 Operating costs and expenses Selling, general and administrative........ 3,697 3,281 3,674 3,550 8,914 13,957 1,144 3,079 3,626 Depreciation and amortization.......... 125 113 93 130 330 475 55 119 119 --------- --------- --------- --------- --------- --------- --------- --------- --------- Operating income......... 184 852 1,608 857 3,015 4,715 592 943 1,355 Other income (expense)... (29) (41) 5 86 (194) (190) (31) (31) (85) --------- --------- --------- --------- --------- --------- --------- --------- --------- Income before income taxes................... 155 811 1,613 943 2,821 4,525 561 912 1,270 Income taxes............. 63 78 187 94 453 837 59 175 489 --------- --------- --------- --------- --------- --------- --------- --------- --------- Income from continuing operations.............. 92 733 1,426 849 2,368 3,688 502 737 781 Loss from discontinued operations.............. (1,029) -- -- -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss)........ ($ 937) $ 733 $ 1,426 $ 849 $ 2,368 $ 3,688 $ 502 $ 737 $ 781 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per share................... ($ 0.33) $ 0.28 $ 0.49 $ 0.28 $ 0.55 $ 0.66 $ 0.15 $ 0.14 $ 0.16 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental net income per share(2)................ $ 0.18 $ 0.38 $ 0.47 $ 0.10 $ 0.10 $ 0.15 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average shares outstanding............. 2,868 2,578 2,930 3,008 4,321 5,557 3,277 5,362 4,971 PRO FORMA(1) Statement of Income Data: Revenues................. $ 21,151 Cost of services......... 16,051 --------- Gross profit............. 5,100 Operating costs and expenses Selling, general and administrative........ 3,626 Depreciation and amortization.......... 119 --------- Operating income......... 1,355 Other income (expense)... (50) --------- Income before income taxes................... 1,305 Income taxes............. 548 --------- Income from continuing operations.............. 757 Loss from discontinued operations.............. -- --------- Net income (loss)........ $ 757 --------- --------- Net income (loss) per share................... $ 0.13 --------- --------- Supplemental pro forma net income per share(2)................ $ 0.13 --------- --------- Weighted average shares outstanding............. 5,719
OCTOBER 31, ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- (IN THOUSANDS) Balance Sheet Data: Cash and cash equivalents......................................... $ 473 $ 914 $ 2,534 $ 298 $ 6 Working capital, exclusive of notes payable -- bank............... 3,592 3,741 5,201 4,242 9,518 Total assets...................................................... 5,097 5,334 6,666 10,302 24,407 Long-term debt.................................................... 129 74 35 -- -- Shareholders' equity.............................................. 3,294 4,046 5,477 7,527 16,220 JANUARY 31, 1997 ------------------------ AS ACTUAL ADJUSTED(3) --------- --------- Balance Sheet Data: Cash and cash equivalents......................................... $ 125 $ 12,027 Working capital, exclusive of notes payable -- bank............... 9,919 21,821 Total assets...................................................... 30,191 42,093 Long-term debt.................................................... -- -- Shareholders' equity.............................................. 17,001 33,903
- ------------------ (1) Assumes that the acquisitions of Consortium, Consort MD, PSI and PAMI occurred on November 1, 1995 and gives effect to the reduction of certain redundant operating costs and expenses, excess salaries and non-recurring costs that were identified at the time of the acquisitions. Also gives effect to: (i) the elimination of interest expense associated with the acquisition related debt assumed to be repaid with offering proceeds; and (ii) the issuance of 748,195 shares of Common Stock (at an assumed offering price of $8.00 per share) which, net of estimated underwriting commissions and offering expenses payable by the Company, would be sufficient to repay the acquisition related indebtedness as set forth in "Use of Proceeds." (2) Assumes an effective tax rate of 42%. The Company's effective tax rates for the years ended October 31, 1995 and 1996 and the three months ended January 31, 1996 and 1997 were 10%, 16%, 11% and 39%, respectively, due to the utilization of net operating loss carryforwards. (3) Gives effect to the sale of 2,323,187 shares of Common Stock (at an assumed offering price of $8.00 per share) offered by the Company hereby and the application of the net proceeds therefrom as set forth in "Use of Proceeds." 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company provides contract and temporary personnel in the information technology, professional engineering and technical, specialty healthcare and general support sectors of the staffing industry to a diversified base of national, regional and local customers. The Company's business and strategy have changed dramatically since its inception in 1971. Through 1981, the Company's business focused on the development of environmental technologies and the operation of related environmental businesses. In 1981, the Company diversified its operations through the acquisition of Intertec Design, Inc., a staffing company that provided technical, clerical and light industrial personnel. In fiscal 1992 current management chose to discontinue its environmental business and from 1992 through 1994, repositioned its core staffing business to improve profitability and to take advantage of consolidating market dynamics. Significant revenue growth began in fiscal 1995 as the Company implemented a growth strategy that resulted in the acquisition of six businesses in the staffing industry. These acquisitions shifted the Company's business toward the higher margin information technology and specialty healthcare sectors. During this time, the Company also elected to discontinue providing certain lower margin general support services. General support services, which from fiscal 1992 to 1994 accounted for approximately 51.0% of the Company's revenues, decreased as a percentage of the Company's revenues to 20.5% during the three months ended January 31, 1997. Correspondingly, revenues from the Company's specialty professional services accounted for 79.5% of the Company's revenues during the three months ended January 31, 1997. Prior to implementation of its growth strategy, in fiscal 1994 the Company's revenues and operating income were $29.2 million and $1.6 million, respectively. In fiscal 1996, on a pro forma basis giving effect to the acquisitions as if they had occurred on November 1, 1995, the Company's revenues and operating income increased to $84.7 million and $4.7 million, respectively. The Company realizes revenues from the placement of contract and temporary staffing personnel. These services are provided to the customer on a time and material basis at hourly rates that are established for each of the Company's staffing personnel, based upon their skill level, experience and type of work performed. Billable hourly rates range from an average of approximately $55 - $75 within the information technology group, $30 - $60 in the professional engineering group, $35 - $65 within the specialty healthcare group and $8 - $15 in the Company's general support group. Approximately 90.0% of the Company's revenues are currently realized on the basis of agreed upon hourly billing rates. In some instances, billing rates can be adjusted based upon increases in workers' compensation, taxes and other agreed upon costs. The remaining 10.0% of the Company's business is presently derived from consulting projects. In view of the diversification of the Company's service offerings, and by drawing upon the skills developed within the Company's engineering and technical group, management intends to develop project management skills within its information technology and other groups and believes that an additional percentage of its business may be derived in the future from larger-scale consulting projects. Approximately 40.0% of the Company's services are provided under contract. The remainder are provided under purchase orders. Contracts are utilized on certain of the more complex assignments where the engagements are for longer terms or where precise documentation of the nature and scope of the assignment is necessary. Contracts, although they normally relate to longer-term and more complex engagements, generally do not obligate the customer to purchase a minimum level of services and are generally terminable by the customer on 60 - 90 days notice. The average length of engagement varies from three months to one year within the information technology and engineering sectors, three months to six months within the specialty healthcare sector and one week to three weeks within the general support sector. Approximately 70.0% of the Company's services are billed to customers on a weekly basis. The remainder are billed on a bi-weekly and monthly basis based upon the type of project and arrangement with the customer. Revenues are recognized when the services are provided. 17 Costs of services consist primarily of salaries and compensation related expenses for billable staffing personnel, including payroll taxes, employee benefits, worker's compensation and other insurance. Principally all of the billable personnel are treated by the Company as employees, although approximately 5.0% of information technology personnel are treated as independent contractors. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for operating activities 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 estimated at $14.0 million which is being amortized over a 40 year period currently resulting in amortization expense aggregating approximately $350,000 annually. The Company's net income for each of the three fiscal years in the period ended October 31, 1996, has been determined after giving effect to the utilization of a net operating loss carryforward. This effectively reduced federal tax accruals to a minimal amount during those periods and subjected the Company to composite tax rates of between 9.9% and 16.1%, principally as a result of state income taxes. Through the three months ended January 31, 1997, the Company had utilized principally all of its net operating loss carryforward and, accordingly, expects that for the foreseeable future its net income will be subject to full federal and state rates of taxation. RESULTS OF OPERATIONS The following table sets forth certain income statement data on an historical and pro forma basis as a percentage of revenue:
PERCENTAGE OF REVENUES --------------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, THREE MONTHS ENDED JANUARY 31, -------------------------------------------------- ----------------------------------------- 1996 1996 1997 ---------------------------- ---------------------------- ----------- 1994 1995 ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1) ACTUAL --------- --------- ----------- --------------- ----------- --------------- ----------- Revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of services............ 81.6 83.1 79.9 77.4 81.7 78.3 75.9 --------- --------- --------- --------- --------- --------- --------- Gross profit................ 18.4 16.9 20.1 22.6 18.3 21.7 24.1 Operating costs and expenses Selling, general and administrative.......... 12.6 13.2 14.7 16.4 11.7 16.1 17.1 Depreciation and amortization............ 0.3 0.5 0.5 0.6 0.6 0.6 0.6 --------- --------- --------- --------- --------- --------- --------- Operating income............ 5.5 3.2 4.9 5.6 6.0 5.0 6.4 Other income (expense)...... 0.0 0.3 (0.3) (0.2) (0.3) (0.2) (0.4) --------- --------- --------- --------- --------- --------- --------- Income before income taxes..................... 5.5 3.5 4.6 5.4 5.7 4.8 6.0 Income taxes................ 0.6 0.3 0.7 1.0 0.6 0.9 2.3 --------- --------- --------- --------- --------- --------- --------- Net income.................. 4.9% 3.2% 3.9% 4.4% 5.1% 3.9% 3.7% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- PRO FORMA(1) --------------- Revenues.................... 100.0% Cost of services............ 75.9 --------- Gross profit................ 24.1 Operating costs and expenses Selling, general and administrative.......... 17.1 Depreciation and amortization............ 0.6 --------- Operating income............ 6.4 Other income (expense)...... (0.2) --------- Income before income taxes..................... 6.2 Income taxes................ 2.6 --------- Net income.................. 3.6% --------- ---------
- ------------------ (1) Assumes that the acquisitions of Consortium, Consort MD, PSI and PAMI occurred on November 1, 1995 and gives effect to the reduction of certain redundant operating costs and expenses, excess salaries and non-recurring costs that were identified at the time of the acquisitions. Also gives effect to: (i) the elimination of interest expense associated with the acquisition related debt assumed to be repaid with offering proceeds; and (ii) the issuance of 748,195 shares of Common Stock (at an assumed offering price of $8.00 per share) which, net of estimated underwriting commissions and offering expenses payable by the Company, would be sufficient to repay the acquisition related indebtedness as set forth in "Use of Proceeds." 18 The following charts set forth the components of revenues of the Company for the periods presented: [In the printed version, there are pie charts which present revenues of the Company for the periods stated:] Fiscal 1994 First Quarter Fiscal 1997 51% 40.5% 33.5% 6% 49% 20% / / Information Technology / / Professional Engineering & Technical / / General Support / / Specialty Health Care Pro Forma Compared to Actual Results of Operations Since the beginning of fiscal 1995, the Company has acquired six staffing companies with combined revenues of approximately $67.7 million in their respective fiscal years prior to the acquisition. All of these acquisitions have been accounted for using the purchase method of accounting, and, accordingly, the Company's statements of income include the operating results of the acquired businesses from the dates of acquisition. The Company's historical consolidated operating results have been significantly affected by the number, timing and size of these acquisitions. Accordingly, pro forma financial data are provided within this Prospectus for a more meaningful representation of the Company's operating results. Pro forma financial data has been prepared and included herein to give effect to the acquisitions of Consortium, Consort MD, PSI and PAMI as if they occurred on November 1, 1995. Pro forma adjustments have been made to reflect the elimination of certain expenses that were identified at the time of these acquisitions, including excess salaries, and operating and administrative expenses and personnel. The pro forma financial data are not necessarily indicative of results of operations that would have occurred had these acquisitions been consummated as of the beginning of the periods presented or that might be attained in the future. Three Months Ended January 31, 1997 Compared to Three Months Ended January 31, 1996 Revenues. Revenues increased 116.0%, or $11.4 million, for the three months ended January 31, 1997 as compared to the comparable prior year period. Of this increase, approximately $9.3 million was attributable to revenue growth through acquisitions that occurred after the first quarter of fiscal 1996 and approximately $2.1 million was from internal growth. Internal growth was experienced in the information technology and healthcare sectors and was offset by discontinued business in the general support sector due to unacceptable margins and workers' compensation rates. 19 Cost of Services. Cost of services increased 101.0%, or $8.1 million, for the three months ended January 31, 1997 as compared to the equivalent prior year period. This increase was primarily due to increased salaries and compensation associated with the increased revenues experienced during this period. Cost of services as a percentage of revenues decreased to 75.9% for the three months ended January 31, 1997 from 81.7% for the comparable prior year period. This decline was primarily due to a greater percentage of the Company's revenues being derived from specialty staffing services. Selling, General and Administrative. Selling, general and administrative expenses increased 217.0%, or $2.5 million, for the three months ended January 31, 1997 as compared to the comparable prior year period. This increase resulted from the change in the mix of the business during the three months ended January 31, 1997, which required higher marketing, sales, recruiting and administrative expenses than the comparable prior year period. Selling, general and administrative expenses as a percentage of revenues increased to 17.1% for the three months ended January 31, 1997 from 11.7% in the comparable prior year period, primarily attributable to the increased sales, recruiting and administrative expenses necessary to support the Company's continued growth within the information technology sector. Corporate overhead expenses as a percentage of revenues decreased to 2.1% for the three months ended January 31, 1997 from 3.4% for the three months ended January 31, 1996 as these costs were spread over a larger revenue base. Depreciation and Amortization. Depreciation and amortization increased 116.0%, or $63,700, for the three months ended January 31, 1997 as compared to the comparable prior year period. This increase was primarily due to the amortization of intangible assets incurred in connection with the acquisitions that occurred after the first quarter of fiscal 1996. Other Income (Expense). Other income (expense) consists primarily of interest expense which increased 262.0%, or $65,300, for the three months ended January 31, 1997 as compared to the comparable prior year period. This increase was due to the increased borrowings necessary to provide the funds required for certain of the Company's acquisitions as well as to refinance the working capital debt of some of the acquired companies. Income Tax. Income tax expense increased 733.0%, or $430,000, for the three months ended January 31, 1997 as compared to the comparable prior year period. This increase was due to an increase in the effective tax rate from 10.5% to 38.5% and increased levels of net income. The increase in the effective tax rate was primarily due to the utilization of principally all of the remaining net operating loss carryforward which offset net income in prior periods. Year Ended October 31, 1996 Compared to Year Ended October 31, 1995 Revenues. Revenues increased 126.8%, or $34.1 million, in fiscal 1996 as compared to fiscal 1995. Of this increase, approximately $32.4 million was attributable to revenue growth through acquisitions and approximately $1.7 million was from internal growth. Internal growth was experienced in the information technology and healthcare sectors and was offset by discontinued business in the general support sector due to unacceptable margins and workers' compensation rates. Cost of Services. Cost of services increased 118.0%, or $26.4 million, in fiscal 1996 as compared to fiscal 1995. This increase was primarily due to increased salaries and compensation associated with the increased revenues experienced during this period. Cost of services as a percentage of revenues decreased to 79.9% for fiscal 1996 from 83.1% for fiscal 1995. This decline was primarily attributable to a greater percentage of the Company's revenues being derived from specialty staffing services. Selling, General and Administrative. Selling, general and administrative expenses increased 151.0%, or $5.4 million, in fiscal 1996 as compared to fiscal 1995. This increase resulted from the change in the mix of the business during fiscal 1996, which required higher marketing, sales, recruiting and administrative expenses than in fiscal 1995. Selling, general and administrative expenses as a percentage of revenues increased to 14.6% during fiscal 1996 as compared to 13.2% for fiscal 1995. This increase was primarily attributable to higher marketing, sales, recruiting and administrative 20 expenses necessary to support continued growth within the information technology sector. Corporate overhead expenses as a percentage of revenues decreased to 2.5% of revenues in fiscal 1996 from 4.6% of revenues in fiscal 1995, as these costs were spread over a larger revenue base. Depreciation and Amortization. Depreciation and amortization increased 153.0%, or $199,000, in fiscal 1996 as compared to fiscal 1995. This increase was primarily due to the amortization of intangible assets incurred in connection with the acquisitions that occurred or were fully realized during fiscal 1996. Other Income (Expense). Other income (expense) consists primarily of interest income (expense) which changed by $268,000, from $104,000 in fiscal 1995 to ($164,000) in fiscal 1996. This increase was attributable to increased borrowings necessary to provide the funds required for the acquisitions during fiscal 1996. Income Tax. Income tax expense increased 385.0%, or $360,000, in fiscal 1996 as compared to fiscal 1995. This increase was primarily due to the higher level of profitability for fiscal 1996. The effective tax rates experienced by the Company in fiscal 1996 and fiscal 1995 were 16.1% and 9.9%, respectively. During each of these periods, the Company utilized a net operating loss carryforward to offset current income. Year Ended October 31, 1995 Compared to Year Ended October 31, 1994 Revenue. The Company's revenues decreased 7.9%, or $2.3 million, in fiscal 1995 as compared to fiscal 1994. This resulted principally from a reduction of services provided to two major customers who reduced their overall staffing requirements during the year. This was partially offset by an increase in revenues from two acquisitions that were completed during fiscal 1995. Cost of Services. Cost of services decreased 6.2%, or $1.5 million, in fiscal 1995 as compared to fiscal 1994. This decrease was due to the decline in services provided to the two previously mentioned major customers. Cost of services as a percentage of revenues increased to 83.1% for fiscal 1995 from 81.6% for fiscal 1994. Selling, General and Administrative. Selling, general and administrative expenses decreased 3.4%, or $124,000, in fiscal 1995 as compared to fiscal 1994. This decrease was primarily attributable to a reduction in overhead expenses implemented with the decrease in business from the Company's two major customers. Selling, general and administrative expenses as a percentage of revenues increased to 13.2% for fiscal 1995 as compared to 12.6% for fiscal 1994, as reductions in overhead were less than the overall reduction in revenues. Depreciation and Amortization. Depreciation and amortization increased 40.0%, or $37,256, in fiscal 1995 as compared to fiscal 1994. This resulted principally from amortization of intangible assets attributable to the business acquisitions completed in fiscal 1995. Other Income (Expense). Other income (expense) increased during fiscal 1995 by $85,000 as compared to fiscal 1994 due to an increase in interest income from temporary cash balances. Income Tax. Income tax expense decreased 50.0%, or $94,000, in fiscal 1995 as compared to fiscal 1994. This decrease was primarily due to the lower level of profitability for fiscal 1995. Seasonality and Quarterly Results of Operations The following table presents certain unaudited quarterly statements of operations data for each of the Company's last nine fiscal quarters. In the opinion of the Company's management, this quarterly information has been prepared on the same basis as the audited financial statements appearing elsewhere in this Prospectus and includes all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the unaudited quarterly results set forth herein. The Company's quarterly results may be subject to fluctuation, thus, the operating results for any quarter are not necessarily indicative of results for any future period. 21
THREE MONTHS ENDED ------------------------------------------------------------------------------------------------ JAN. 31, APR. 30, JULY 31, OCT. 31, JAN. 31, APR. 30, JULY 31, OCT. 31, 1995 1995 1995 1995 1996 1996 1996 1996 ----------- ----------- ----------- ----------- ----------- --------- --------- --------- (IN THOUSANDS) Revenues................ $ 6,693 $ 6,280 $ 5,015 $ 8,928 $ 9,777 $ 13,785 $ 17,378 $ 20,099 Cost of services........ 5,542 5,125 4,121 7,591 7,986 11,312 13,579 15,903 --------- --------- --------- --------- --------- --------- --------- --------- Gross profit............ 1,151 1,155 894 1,337 1,791 2,473 3,799 4,196 Operating costs and expenses Selling, general and administrative...... 884 855 800 1,011 1,144 1,932 2,826 3,012 Depreciation and amortization........ 29 37 34 30 55 80 101 94 --------- --------- --------- --------- --------- --------- --------- --------- Operating income........ 238 263 60 296 592 461 872 1,090 Other income (expense).. 18 42 31 (5) (31) (26) (85) (52) --------- --------- --------- --------- --------- --------- --------- --------- Income before income taxes................. 256 305 91 291 561 435 787 1,038 Income taxes............ 27 27 21 19 59 48 102 244 --------- --------- --------- --------- --------- --------- --------- --------- Net income.............. $ 229 $ 278 $ 70 $ 272 $ 502 $ 387 $ 685 $ 794 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- (AS A PERCENTAGE OF REVENUES) ------------------------------------------------------------------------------------------------ Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of services........ 82.8 81.6 82.2 85.0 81.7 82.1 78.1 79.1 --------- --------- --------- --------- --------- --------- --------- --------- Gross profit............ 17.2 18.4 17.8 15.0 18.3 17.9 21.9 20.9 Operating costs and expenses Selling, general and administrative...... 13.3 13.7 15.9 11.4 11.7 14.0 16.3 14.9 Depreciation and amortization........ 0.4 0.6 0.7 0.3 0.6 0.6 0.6 0.5 --------- --------- --------- --------- --------- --------- --------- --------- Operating income........ 3.5 4.1 1.2 3.3 6.0 3.3 5.0 5.5 Other income (expense).. 0.3 0.7 0.6 (0.1) (0.3) (0.2) (0.5) (0.3) --------- --------- --------- --------- --------- --------- --------- --------- Income before income taxes................. 3.8 4.8 1.8 3.2 5.7 3.1 4.5 5.2 Income taxes............ 0.4 0.4 0.4 0.2 0.6 0.3 0.6 1.2 --------- --------- --------- --------- --------- --------- --------- --------- Net income.............. 3.4% 4.4% 1.4% 3.0% 5.1% 2.8% 3.9% 4.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- JAN. 31, 1997 --------- Revenues................ $ 21,151 Cost of services........ 16,051 --------- Gross profit............ 5,100 Operating costs and expenses Selling, general and administrative...... 3,626 Depreciation and amortization........ 119 --------- Operating income........ 1,355 Other income (expense).. (85) --------- Income before income taxes................. 1,270 Income taxes............ 489 --------- Net income.............. $ 781 --------- --------- Revenues................ 100.0% Cost of services........ 75.9 --------- Gross profit............ 24.1 Operating costs and expenses Selling, general and administrative...... 17.1 Depreciation and amortization........ 0.6 --------- Operating income........ 6.4 Other income (expense).. (0.4) --------- Income before income taxes................. 6.0 Income taxes............ 2.3 --------- Net income.............. 3.7% --------- ---------
The Company could experience quarterly variations in revenues and operating income as a result of many factors, including the timing of assignments from customers, the timing of future acquisitions, the timing of the hiring of personnel, the timing of additional selling, general and administrative expenses incurred to support new business and changes in the Company's revenue mix. In connection with certain engineering projects, the Company could incur costs in periods prior to recognizing revenues under those contracts. In addition, the Company must plan its operating expenditures based on revenue forecasts, and a revenue shortfall below such forecast in any quarter would likely adversely affect the Company's operating results for the quarter. While the effects of seasonality of the Company's business have been obscured by its rapid growth, the Company usually experiences lower revenues in its first fiscal quarter due to the slowdown in business associated with the holiday season. LIQUIDITY AND CAPITAL RESOURCES Operating activities provided $1.1 million of cash for the three months ended January 31, 1997 and used $1.9 million of cash during fiscal 1996. The change was primarily attributable to an increase in accounts receivable which was offset by increased levels of profitability, depreciation and amortization associated with the acquisitions. Operating activities provided $1.1 million of cash during fiscal 1995. The cash generated was largely the result of net income, adjusted for non-cash expenses and management of working capital components. 22 Investing activities utilized $5.2 million, $1.2 million and $2.4 million in the three months ended January 31, 1997 and fiscal years 1996 and 1995, respectively. In January 1997, the Company purchased PAMI for $4.5 million in cash and a three year contingent promissory note. In addition, the acquisition of PAMI required the use of $660,000 in working capital funds. During fiscal 1996, the Company purchased three staffing companies which required the use of $1.0 million of cash. During fiscal 1995, the Company purchased two staffing companies which required the use of $2.3 million in cash. These acquisitions collectively resulted in goodwill of approximately $14.0 million which is being amortized at approximately $350,000 per year. Financing activities provided $4.2 million and $2.8 million in cash for the three months ended January 31, 1997 and fiscal 1996, respectively. Cash was primarily provided under the Company's Revolving Credit Facility. In addition, during fiscal 1996, the Company secured $1.0 million through a private placement of its Common Stock. Financing activities used $916,084 in cash during fiscal 1995, primarily due to the repayment of long term debt of an acquired company. On December 19, 1996, the Company and its subsidiaries entered into an amended and restated loan agreement with Mellon Bank, N.A. for providing a credit facility of up to $20.0 million (the "Revolving Credit Facility") which expires on June 30, 1999. The Revolving Credit Facility is collateralized by accounts receivable, contract rights and furniture and fixtures together with unlimited guarantees from the Company. The Revolving Credit Facility requires the Company and its subsidiaries to meet certain financial objectives and maintain certain financial covenants with respect to net income, effective net worth, working capital, senior indebtedness to effective net worth ratios, capital expenditures, current assets to current liabilities ratios, consolidated working capital and consolidated tangible net worth. At October 31, 1996 and January 31, 1997, the Company and its subsidiaries were in compliance with all financial covenants contained within the Revolving Credit Facility. Advances under the Revolving Credit Facility are to be used to meet cash flow requirements for the subsidiaries as well as operating expenses for the Company. The interest rate charged by the bank, under the amended and restated agreement will be based on the London Interbank Offered Rate ("LIBOR") plus 2.25%. The Company intends to utilize approximately $5.0 million of the net proceeds from this Offering to pay down the Revolving Credit Facility which had a balance of approximately $7.0 million as of January 31, 1997, although the Company does intend to draw on this line as needed in the future. The Company anticipates that its primary uses of capital in future periods will be for acquisitions and the funding of increases in accounts receivables. The Company believes that the net proceeds from this Offering and borrowings under the Revolving Credit Facility and any net cash flow from operations will be sufficient to meet the Company's capital needs for at least the next twelve months. Prior to 1977, the Company operated a facility located in Fontana, California (the "Facility") at which it processed certain materials to recover aluminum. The property on which the Facility was located (the "Property") was owned by a former shareholder and officer ("Former Officer") of the Company. In 1977, the Company sold certain assets (the "1977 Transaction") utilized in its operation to a Company (the "Purchaser") that continued processing similar materials at the Facility until 1982. As part of the 1977 Transaction, the Company was permitted to store on the Property an existing stockpile of aluminum oxide materials (the "stockpile") which was available for consumption in the Purchaser's operations. From 1977 to 1980, the Purchaser utilized a significant amount of material from the stockpile in its operations. Materials generated by the Purchaser's operations were also added to the stockpile. The Purchaser acquired the Property in 1985 from the Former Officer. Purportedly, in response to an order from a state environmental agency (which, along with a subsequent order, is referred to herein as the "Order) relating to potential ground water degradation, the Purchaser performed a number of actions, including, in 1992, disposal of the existing stockpile at an approximate cost of $5.6 million. The Purchaser has sought contribution from the Company for its proportionate share of the disposal costs, as well as anticipated maintenance costs of approximately $700,000, on common law grounds and pursuant to certain federal and state environmental laws. Based upon, among other things, an analysis of environmental studies performed before and after the 1977 Transaction as well as a review of the compliance records of the state environmental agency, the 23 Company has concluded that: (i) the Facility was in material compliance with all applicable federal and state environmental laws at the time of the 1977 Transaction; (ii) the Purchaser was cited for numerous violations of applicable environmental laws after the 1977 Transaction, thus, any violations of laws after 1977, including any consequent remediation and disposal obligations, were likely the responsibility of the Purchaser; (iii) neither the costs incurred by the Purchaser, not the events leading up to the incurrence of these costs, appear to support a claim under federal environmental laws; (iv) certain actions taken and costs incurred by the Purchaser may not have been necessary or required to comply with the Order; (v) liability, if any, would only apply to the minority percentage of the stockpile attributable to the Company's operations; and (vi) the Purchaser's contribution claims for costs incurred in 1992 and earlier in response to the Order may be barred under the statute of limitations relating to the state law claims. The Company believes it has meritorious defenses to the Purchaser's claims and, in management's opinion, the Company's exposure under the claims is not likely to have a materially adverse impact on the Company's overall financial condition. There can be no assurance, however, that the Company will not incur material expenses and costs in connection with the defense and resolution of any claims brought by the Purchaser or that the Company will not ultimately be responsible for certain of the costs incurred by the Purchaser, which may include pre- and post-judgment interest, in an amount that may be material to the Company. Furthermore, since the Company has not established any reserves in connection with such claims, any such liability, if at all, would be recorded as an expense in the period incurred or estimated. This amount, even if not material to the Company's overall financial condition, could adversely affect the Company's results of operations in the period recorded. Management intends to vigorously oppose any such claims. IMPACT OF INFLATION The effects of inflation on the Company's operations were not significant during the periods presented. RECENTLY ISSUED ACCOUNTING STANDARDS In October 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation, which is effective beginning in 1996. This statement encourages the fair value based method of accounting for stock options and similar equity instruments granted to employees. This method requires that the fair value of equity instruments granted to employees be recorded as compensation expense. However, the statement allows companies to continue to use the intrinsic value based method which, in most cases, does not result in a charge to earnings. The Company will not adopt the fair value based method of accounting for stock options. However, if the fair value based method of accounting were applied to grants of stock options in 1996, the effect would not be material. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement 121"), which requires companies to review long-lived assets and certain identifiable intangibles to be held, used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has adopted Statement 121, which had no significant effect on the financial statements. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share ("Statement 128"). Statement 128 requires the presentation of basic earnings per share and, if applicable, diluted earnings per share, instead of primary and fully diluted earnings per share required under Accounting Principles Board Opinion No. 15. See Note 1 to Notes to Consolidated Financial Statements for the effect of Statement 128 on earnings per share for the year ended October 31, 1996 and the three months ended January 31, 1997. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129, Disclosure of Information About Capital Structure ("Statement 129"). Management believes that the Company is in compliance with the provisions of Statement 129. 24 BUSINESS INTRODUCTION The Company is a multi-regional provider of specialty staffing services through its 30 branch offices located in 12 states. Through its primary operating groups, the Company provides contract and temporary personnel in the information technology, professional engineering and technical, specialty healthcare and general support sectors of the staffing industry to a diversified base of national, regional and local customers. During its fiscal year ended October 31, 1996, the Company provided an average of 2,600 contract and temporary staffing employees on a daily basis to approximately 700 customers, including a number of Fortune 500 companies, governmental units and public utilities, as well as small to medium-size retail, manufacturing, professional and service organizations. From its inception, the Company focused on the development of environmental technologies and the operation of related environmental businesses. In 1981, the Company diversified through the acquisition of Intertec Design, Inc., a staffing company that provided technical, clerical and light industrial personnel. In fiscal 1992 current management chose to discontinue its environmental business and from 1992 through 1994, repositioned its core staffing business to improve profitability and to take advantage of changing market dynamics. INDUSTRY OVERVIEW Competitive pressures are causing businesses to examine all aspects of their cost structure and the use of contract and temporary staffing employees has become widely accepted as a valuable tool for managing personnel costs and for meeting specialized or fluctuating employment requirements. The growth in the use of temporary staffing services has been driven by three fundamental shifts in the U.S. economy over the last decade. In the late 1980s and early 1990s, many U.S. corporations made large reductions in their workforces and reorganized their operations to meet global competition. This action resulted in a large unemployed and skilled labor force that became willing to relocate and accept new working standards. In addition, government regulations have significantly increased the employment costs incurred by employers. The cost to screen, hire, train and provide benefits to employees combined with heightened scrutiny upon employee/employer behavior has increased the costs to employers. Also, competitive market dynamics and the significant rate of change in information technology has put a strain on businesses to improve productivity through the use of current networking and information processing technologies. In response, many companies are looking outside of their organizations to temporarily utilize individuals with the requisite specialized technical skills through temporary or project oriented assignments. According to the National Association of Temporary Staffing Services ("NATSS"), from 1991 to 1995, the U.S. market for temporary staffing services grew at a compound annual rate of approximately 16.0%. Industry revenue increased during this period from approximately $21.5 billion to approximately $45.1 billion. While the staffing industry has grown rapidly in recent years, in 1996, temporary employment represented only 2.2% of the average daily employment of the total U.S. workforce, and it is anticipated to grow to 4.0% by the year 2000. The increase in industry revenues also reflects a growing acceptance of temporary work assignments among employers and employees. Studies show that more than 90% of all U.S. businesses have used some form of temporary staffing services. In addition, employees who once viewed temporary staffing assignments as employment of last resort, are beginning to enjoy the benefits of flexible work hours, access to varied and challenging work assignments and the absence of administrative responsibilities typically associated with permanent employment positions. The range and duration of services provided on a temporary basis has expanded substantially. Companies now use skilled specialty personnel for varying lengths of time to respond to increasingly complex technological challenges without incurring the fixed overhead costs associated with permanent employees. This trend has led to the rapid growth of several specialty staffing sectors. According to Staffing Industry Reports, information technology is the fastest growing sector within the 25 temporary staffing industry. Revenues within the information technology sector are estimated to have grown from $5.7 billion in 1993 to $9.2 billion in 1995, and were projected to grow to $11.4 billion in 1996, a 26.0% compound annual growth rate. Similarly, revenues within the professional/specialty sector, which includes professional engineering, are estimated to have grown from $2.4 billion in 1993 to $4.0 billion in 1995, and were projected to grow to $4.8 billion in 1996, also a 26.0% compound annual growth rate. The temporary staffing industry is highly fragmented, with over 7,000 companies in the United States. The industry is currently experiencing a trend toward consolidation primarily due to the increasing demand by large companies to reduce the number of their vendors and the resulting demand for staffing companies to offer a wide range of services over a broad geographic area. Currently, however, the demand for employees skilled in new technologies exceeds the supply of qualified personnel. As employers find it more difficult to locate full time candidates with special skills, they increasingly turn to temporary staffing companies to fill these needs. The Company believes these industry conditions are making it more difficult for small staffing companies to compete due to limited recruiting and placement capabilities, limited working capital and limited management resources. These factors are expected to accelerate the industry's consolidation trend. BUSINESS STRATEGY The Company's objective is to be a leading provider of specialty professional staffing services in selected regions throughout the United States. The Company has developed an interrelated growth and operating strategy to achieve this objective. Key elements of its growth and operating strategy are as follows: GROWTH STRATEGY Strengthen Market Presence in Selected Regions Throughout the Country. The Company intends to develop a strong market presence in the regions it serves and in other regions with strong growth characteristics. The Company believes that it competes most often against local staffing companies which have limited services, resources and capabilities. The Company intends to utilize its diversity of service offerings, management resources, as well as acquisition, recruiting and placement capabilities to distinguish itself from its competition and to achieve significant customer penetration and retention. Focus on Specialty Professional Staffing Services. The Company intends to focus on providing specialty professional staffing services, primarily in the information technology, engineering and specialty healthcare sectors. Demand continues to expand for professional staffing services, reflecting changing attitudes toward workforce management and the proliferation of technical skills required by businesses, industry and the healthcare system. The Company believes that such services provide higher growth rates and profit margins, and tend to be less cyclical than traditional contract and temporary staffing services. Additionally, the Company intends to blend the project design and management capabilities of its professional engineering personnel with the skills of its information technology personnel to solicit larger scale consulting projects. Acquisitions. The Company has acquired six specialty professional staffing companies since the beginning of fiscal 1995 and intends to continue to pursue an aggressive acquisition program to strengthen its presence in its existing markets, expand into new geographic regions or offer new specialty professional staffing services. In targeting acquisitions, the Company focuses on regional companies with revenues of $25.0 million or less, a history of profitable operations, and a strong entrepreneurial management team. The Company generally structures payment of a significant portion of the acquisition price in the form of multi-tiered earnouts based on growth and profitability. Focus on Internal Growth. The Company believes it has substantial opportunities to increase revenues and profitability from its operations. The Company intends to continually refine its mix of service offerings to promote internal growth by increasing sales to existing customers, developing new customers and providing additional staffing services. Internal growth, which is a key element in the 26 Company's acquisition criteria, is also promoted by integrating the administrative functions of acquired companies to permit management to focus on increasing sales and profitability. The Company increased revenues in its information technology, professional engineering and specialty healthcare staffing areas by 17.4% in fiscal 1996 compared to fiscal 1995, on a pro forma basis giving effect to the Company's acquisitions as if they had occurred as of November 1, 1994. OPERATING STRATEGY Rapidly Integrate Acquisitions. The Company believes that it can increase its operational efficiencies by integrating the general and administrative functions at the corporate level and by reducing or eliminating any redundant functions and facilities at the acquired companies. Management's policy is to perform this integration within three months of an acquisition in order to quickly realize potential savings and synergies, efficiently control and monitor its operations and to allow acquired companies to focus exclusively on growing their sales and operations. Foster a Decentralized Entrepreneurial Environment. A key element of the Company's acquisition criteria is an experienced and entrepreneurial management team. The Company intends to foster this entrepreneurial atmosphere by continuing to build on the local names, reputations and client familiarity of the acquired companies and by sharing their operating policies, procedures and expertise with other branch locations to develop new ideas to best serve the prospects of the Company. The Company believes an entrepreneurial business atmosphere allows its branch offices to quickly and creatively respond to local market demands and enhances the Company's ability to motivate, attract and retain managers to maximize growth and profitability. Develop and Maintain Strong Customer Relationships. The Company seeks to develop and maintain strong interactive customer relationships by anticipating and focusing on its customers' needs. The Company believes that by partnering with its customers to design flexible staffing programs that can be expanded, contracted or redirected into other specialty areas, it can continually generate new opportunities to service their staffing requirements. Attract and Retain High Quality Contract and Temporary Personnel. The Company believes that one of the primary factors in its success has been its ability to attract and retain qualified contract and temporary personnel. The Company continually seeks to attract and retain such personnel by: (i) providing stimulating and challenging work assignments; (ii) offering competitive wages; (iii) effectively communicating with its candidates; (iv) providing training to maintain and upgrade skills; and (v) aligning the needs of its customers with the appropriately skilled personnel. OPERATIONS Through its primary operating groups, the Company provides specialty staffing services in the following industry sectors: Information Technology, Professional Engineering and Technical, Specialty Healthcare and General Support. INFORMATION TECHNOLOGY The Information Technology group provides staffing and consulting services in the areas of client server hardware and operating systems, PC applications and support, database management, network communications, mainframe and midrange hardware and software, and technical support. The scope of services offered includes networking and facilities management and communication equipment service and maintenance, which rely upon varied technical disciplines, such as: UNIX, MS Windows, Solaris, Windows 95, Novell, Netware, Sybase, Informix, Lotus Notes, Clipper, Visual Basic, Visual C+, Cobol II, CICS and Fortran. Typical engagements focus on specific areas of knowledge or are utilized to supplement the customer's staffing requirements. These engagements average in duration from three to 12 months. The following are examples of the types of services that have been provided by the Company's Information Technology group: 27 The Company provided 15 to 20 programming consultants to a multi-national bank holding company to write custom software for a variety of business analysis and programming applications. These programs are being developed to conform to a number of different platforms and environments such as IBM Mainframe, UNIX, AS400, OS2 and Novell. The Company provided 20 to 25 consultants to a national communications conglomerate to evaluate the viability and advisability of downsizing the application to the client/server platform. The engagement entailed analyzing the system against requirements, surveying system users to assess satisfaction, assessing the system's suitability for client/server implementation, and preliminary evaluation of off-the-shelf systems. The Company provided six to ten consultants to an international pharmaceutical corporation to assist it in the implementation of a process by which a standard is proposed, evaluated, tested, accepted and retired. As part of the methodology, a range of corporate applications have been identified and benchmarked for use in the test and acceptance process. PROFESSIONAL ENGINEERING AND TECHNICAL The Professional Engineering and Technical group provides personnel to perform project engineering, design, drafting or other technical services either at the site of the customer or, less frequently, at the Company's own facilities. Representative services include: electrical engineering design; system engineering design and analysis; mechanical engineering design; procurement engineering; civil structural engineering design; computer aided design; environmental engineering; and code compliance. The Professional Engineering and Technical group has also developed an expertise in providing engineering, design and technical services to many customers in the nuclear power, fossil fuel and electric utility industries. The Professional Engineering and Technical group's project managers and operations support personnel work as a team and typically provide a detailed scope of work analysis, time and material assessment and monitor and control projects on a turnkey basis. The engagements of the Professional Engineering and Technical group generally vary in duration from three to 12 months. The following are examples of the types of services that have been provided by the Company's Professional Engineering and Technical group: The Company provided approximately 115 engineering consultants to a large regional utility to implement an action plan designed to return its electrical generating units back to service. The ultimate goal of the plan is to provide reasonable assurance that the future operation of each unit will be conducted in accordance with operating license, technical specifications and updated safety analysis reports. The Company has been providing these services to this customer for more than ten years. The Company provided ten consultants to an international aircraft manufacturing company to incorporate manual and CAD corrections or revisions for drawings, as well as new design, at a fixed price for military and commercial aircraft both in-house and at client site. The Company has been providing these services to this customer for more than ten years. The Company provided 30 consultants to an international chemical company for engineering and technical, construction management, administration and lab support. The Company has been providing these services to this customer for more than ten years. SPECIALTY HEALTHCARE The Specialty Healthcare group provides skilled healthcare professionals, primarily physical therapists, occupational therapists, speech language pathologists, nursing staff relief personnel and nurses aides. The Specialty Healthcare group consists of the medical rehabilitation therapy division and the nursing division, each with typical engagements ranging three to six months and on a day to day shift basis, respectively. All therapy and nursing personnel provided by the Company are licensed professionals. Of the total revenues for the Specialty Healthcare group, approximately 85% is derived 28 from the provision of medical rehabilitation therapy services and approximately 15% from nursing services. Contract and permanent placement services are also provided for each of the divisions. The medical rehabilitation therapy division provides physical, occupational and speech therapy services to hospitals, nursing homes, pre-schools, sports medicine facilities and private practices. These services include: in-patient, out-patient, sub-acute and acute care, rehabilitation, geriatric, pediatric and adult day care. The nursing division consists of a managed care and a critical care unit. The managed care unit provides permanent placement services of registered nurses, nurse practitioners, utilization review nurses and other managed care professionals. The critical care unit provides emergency room and medical/surgical nurses for staff relief. The following are examples of the types of services provided by the Specialty Healthcare group: The Company provided 15 to 20 registered nurses to a large northern New Jersey hospital on a supplemental staffing basis for various shifts and days during the year to work in either the emergency room, intensive care units or radiology departments. The Company provided approximately ten to 12 speech language pathologists for the board of education for a major metropolitan city pursuant to a multi-year contract to conduct speech and language evaluations. GENERAL SUPPORT The General Support group provides contract and temporary services, as well as permanent placement services, for full time and part time personnel in a variety of disciplines, including office, clerical, data entry, secretarial, accounting, light industrial, shipping and receiving and general warehouse. Contract and temporary assignments range in length from less than one day to several weeks or months. The General Support group has been awarded multi-year contracts by such companies including AT&T, First National Bank of Chicago, Mellon Bank and Sears. RECRUITING AND TRAINING The Company devotes a significant amount of time and resources in locating, training and retaining its personnel. The full-time recruiters utilize the Company's proprietary UNIX network database system for the sectors in which they operate. The databases are cross-referenced by skill to match potential candidates with the specific requirements of the customer. The individuals in the databases are identified through numerous activities including: sourcing; networking; referrals; internet; job fairs; newspaper and trade journal advertising; attendance at industry shows and presentations. The Company is capable of developing a background profile on any personnel candidate and routinely performs verification of education and employment, as well as personal and professional reference checks. The assessment of a potential candidate is performed and documented by in-house personnel who have knowledge of the Company's contractual obligations and the methods of developing and handling this type of personnel information. The screening and selection process employed by the Company provides the basis for qualifying candidates for assignments. As potential candidates are identified, each individual participates in an extensive qualification process. An in-house interview of the candidate is typically conducted by both the recruiting and sales staff and candidates are evaluated and qualified by a member of the Company's technical staff. Upon placement with the appropriate customer, the employee is continually monitored and supervised to ensure competent, timely and professional performance. Regular on-site visits by the Company's representatives are made and the employees and their supervisors are contacted. Employees complete weekly status reports which are signed by their supervisor. Employees report regularly on the status of their projects in order to identify and eliminate potential problems and issues which may arise. Exit interviews are conducted upon completion of an assignment and the customer is invited to confirm that 29 all parties are satisfied with the work completed. The Company also offers educational programs to upgrade the skills of its personnel, particularly within its Information Technology group. BRANCH OFFICES The Company offers its services through 30 branch offices located in 12 states as follows:
NUMBER OF STATE OFFICES SERVICES PROVIDED - ----- ---------- ----------------- Connecticut 4 Engineering and Technical; General Support New York 2 Information Technology; Engineering and Technical; Healthcare New Jersey 4 Information Technology; Engineering and Technical; Healthcare; General Support Pennsylvania 3 Engineering and Technical; General Support Maryland 1 Information Technology Kentucky 3 Engineering and Technical; General Support Indiana 1 General Support South Carolina 1 Engineering and Technical Georgia 1 Engineering and Technical Minnesota 1 Information Technology Michigan 3 Engineering and Technical California 6 General Support
The branch offices operate within guidelines established by management of the Company as independent profit centers with responsibility for sales and marketing, recruitment and retention of temporary staffing personnel and customer relations. Branch managers operate with a significant degree of autonomy and are compensated based upon performance. The compensation system is designed to motivate the managers to maximize the Company's growth and profitability. Depending on the size of the region in which a branch office is located, a regional or general manager may have oversight responsibilities for two or more branch offices. The Company supports the operation of its branch offices by providing payroll, billing and collection, purchasing, cash management, internal audit and other administrative support services. These services may also include coordination of marketing and sales efforts to certain national and multi-regional accounts, recruitment, training and deployment of temporary personnel. CUSTOMERS AND MARKETING The Company derives its revenues from a diversified customer base, including a number of Fortune 500 companies, governmental units and public utilities, as well as small to medium-size retail, manufacturing, professional and service organizations. Northeast Utilities accounted for 12.0% of the Company's revenues for the three months ended January 31, 1997 and 12.7% of the Company's revenues during fiscal 1996. No other single customer accounted for 10.0% or more of the Company's revenues during these periods. The Company's largest five and ten customers accounted for approximately 25.0% and 31.0%, respectively, of the Company's revenues during fiscal 1996. 30 SELECTED CUSTOMERS: Air Products & Chemicals Mellon Bank Amtrak Mercedes Benz AT&T Merrill Lynch Bell Atlantic Mt. Sinai Hospital Beth Israel Medical Center Paramount Pictures Boeing PECO Energy Chase Manhattan Bank Sandoz Pharmaceuticals Consolidated Edison Sears Coopers & Lybrand Showtime Networks Deloitte & Touche Terrence Cardinal Cooke Healthcare Center Hackensack Medical Center United Technologies MCI Westinghouse
Sales and marketing efforts are conducted at the local and regional level through the Company's network of branch offices. The Company emphasizes long-term personal relationships with customers which are developed through regular assessment of customer requirements and proactive monitoring of personnel performance. Branch managers make regular sales visits to existing and prospective customers. New customers are obtained through active sales programs and referrals. The Company encourages branch managers to participate in national and regional trade associations, local chambers of commerce and other civic associations. Local employees are encouraged to be active in civic organizations and industry trade groups to facilitate the development of new customer relationships. Sales and marketing efforts directed toward multi-regional or national accounts are coordinated by the Company's corporate staff. The Company's information system contains data regarding all of its customers, including the services and personnel provided to such customers. Accordingly, support in identifying cross-selling opportunities for certain larger and national accounts can be provided at the corporate level. By acting as a coordinator of all the branch offices, the Company assists the branch offices in providing service to customers, developing a strategy to pursue national account opportunities and responding to the trend of national companies to work with a limited number of preferred vendors for their staffing requirements. INFORMATION SYSTEMS The Company's internal information system is linked to a majority of the Company's offices. This system supports Company-wide operations such as payroll, billing, accounting and sales and management reports. Additionally, each of the four service groups has separate databases to permit efficient tracking of available personnel on a local basis. These databases facilitate efficient matching of customers' requirements with available temporary staffing personnel. All of the offices and associated personnel acquired by the Company are integrated into the Company's internal information system and the personnel databases are updated accordingly. The internal information system has the capacity to service the Company's anticipated growth without significant capital expenditures for the foreseeable future. COMPETITION The staffing industry is highly competitive and fragmented, consisting of more than 7,000 businesses. There are limited barriers to entry and new competitors frequently enter the market. The Company encounters competition from large international, national and regional companies, but, its principal competitors are generally local, independent staffing companies that are located in the Company's various regional markets. 31 The Company competes for qualified temporary staffing employees and for customers who require the services of such employees. The principal competitive factors in attracting and retaining qualified temporary staffing employees are competitive salaries and benefits, quality and frequency of assignments and responsiveness to employee needs. The principal competitive factors in obtaining customers are providing comprehensive staffing solutions to customer requirements, the timely availability of qualified temporary staffing employees, the ability to match customer requirements with available temporary staffing employees, competitive pricing of services and satisfying work production requirements. The Company believes its long-term customer relationships and strong emphasis on providing service and value to its customers and temporary staffing employees are important competitive advantages. Additionally, the Company competes for suitable acquisition candidates. Management believes that, in addition to its growth strategy and acquisition guidelines, the following factors distinguish it from competitive bidders when pursuing acquisitions: (i) the opportunity of the acquiree management to be key contributors and participants in the growth of a medium-sized public company; (ii) the rapid integration of general and administrative functions to allow a greater focus upon sales and marketing efforts; (iii) operational autonomy which fosters a desirable entrepreneurial environment; and (iv) the use of substantial performance-based financial incentives. EMPLOYEES As of April 30, 1997, the Company employed on its permanent staff 191 persons, including 37 administrative and clerical support staff, 42 regional managers and recruiters, 49 sales and marketing personnel, 31 information technology personnel, 25 engineers (who participate in engineering and design projects undertaken by the Company) and seven executive level management personnel. During the twelve months ended October 31, 1996, the average number of temporary personnel employed on daily assignments was approximately 2,600, including approximately 550 engineering and technical personnel, 450 information technology personnel and 100 health care personnel. None of the Company's employees, including its temporary employees, is represented by a collective bargaining agreement. The Company considers its relationship with its employees to be good. FACILITIES Presently, the Company provides temporary staffing services through 30 offices in 12 states. These offices typically consist of 1,500 to 2,500 square feet and are leased by the Company for terms of one to three years. Offices in larger or smaller markets may vary in size from the typical office. The Company does not expect that maintaining or finding suitable lease space at reasonable rates in its markets or in areas where the Company contemplates expansion will be difficult. The Company's executive and administrative offices are located at 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613. These premises consist of approximately 8,800 square feet and are leased at a rate of $11.00 per square foot per month for a term ending on January 31, 1998. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. The Company has been named in Orders relating to the storage of certain materials at a former Company facility located in Fontana, California. For additional information with regard to this matter, see "Risk Factors -- Potential Claims Relating to Former Operation of California Facility." 32 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Certain information concerning the directors and executive officers of the Company is set forth below:
NAME AGE OFFICE - ---- --- ------ Leon Kopyt (1) 50 Chairman, Chief Executive Officer, President and Director Barry S. Meyers (1) 56 Chief Operating Officer, Executive Vice President and Director Martin Blaire (1) 55 Executive Vice President and Director Stanton Remer (1) 46 Chief Financial Officer, Treasurer, Secretary and Director Peter R. Kaminsky 57 Senior Vice President Norman S. Berson (2) 70 Director Robert B. Kerr (2)(3) 54 Director Woodrow B. Moats, Jr. (3) 64 Director
- ------------------ (1) Member of the Executive Committee (2) Member of the Audit Committee (3) Member of the Compensation Committee LEON KOPYT was appointed President and Chief Executive Officer on January 23, 1992 and from May 1, 1990 to that date served as Chief Operating Officer of the Company. Additionally, Mr. Kopyt served as Chief Financial Officer and Treasurer of the Company from 1992 to 1994. Mr. Kopyt's prior experience includes serving as President and Chief Executive Officer of Socimi International, a European transportation and defense products manufacturing company from 1981 to 1990. Mr. Kopyt holds a B.S. degree in Electrical Engineering from Drexel University. Mr. Kopyt has been a director of the Company since 1991 and Chairman of the Board since 1992. BARRY S. MEYERS was appointed the Chief Operating Officer in March 1996. Previously, he was a co-founder of The Consortium and served as its President since its inception in 1975. Mr. Meyers' prior experience includes serving as New York branch manager for Informatics Data Services, regional director of sales and systems with ITT Data Services and serving as a communications consultant with AT&T. Mr. Meyers holds a B.A. in Psychology from Hunter College. Mr. Meyers has been a director of the Company since 1996. MARTIN BLAIRE was appointed an Executive Vice President in March 1996. Previously, he was a co-founder of The Consortium and served as its Executive Vice President, Secretary and Treasurer since its inception in 1975. Mr. Blaire's prior experience includes serving as a branch manager for Stromberg Datagraphix, a General Dynamics subsidiary and serving as district sales manager for ITT Data Services. Mr. Blaire holds a B.B.A. in Accounting from the University of Miami, Florida. Mr. Blaire has been a director of the Company since 1996. STANTON REMER was appointed Chief Financial Officer and Treasurer in May 1994. Mr. Remer's prior experience includes serving as an audit manager of a local accounting firm in 1993, serving as Chief Financial Officer of Sterling Supply Corporation from 1991 to 1992 and serving as managing partner of a regional accounting firm from 1983 to 1991. Mr. Remer is a Certified Public Accountant and holds a M.B.A. in Finance from Temple University and a B.S. in Textile Science from the Philadelphia College of Textiles & Science. Mr. Remer has been a director of the Company since 1992. PETER R. KAMINSKY was appointed Senior Vice President in May 1996. Mr. Kaminsky was the founder of Consort MD. Mr. Kaminsky's prior experience includes serving as Assistant to the President of a subsidiary of the Equitable Life Assurance Society from 1965 to 1974, where his 33 responsibilities included management recruitment, acquisitions, marketing literature development and public relations. Mr. Kaminsky holds a B.S. in Science from American University. NORMAN S. BERSON has been a shareholder in the law firm of Fineman & Bach, P.C., of Philadelphia, Pennsylvania, and its predecessors since 1981. The Company has retained Fineman & Bach, P.C. to represent it on various legal matters. From 1967 to 1982, Mr. Berson was a member of the House of Representatives of the Commonwealth of Pennsylvania. Mr. Berson has been a director of the Company since 1987. ROBERT B. KERR is founder and partner of Everingham & Kerr, Inc., a merger and acquisition consulting firm located in Haddon Heights, New Jersey, which provides professional intermediary services and other consulting services to small and middle market manufacturing, distribution and service businesses. Mr. Kerr's prior experience includes serving as Vice President-Sales, for Shieldalloy Corporation, a specialty metals producer, from 1974 to 1987. Mr. Kerr holds a B.S. in Mechanical Engineering, a B.A. in Arts and Sciences from Pennsylvania State University and a M.B.A. in Management from Wayne State University. Mr. Kerr has been a director of the Company since 1994. WOODROW B. MOATS, JR. is President of W. B. Moats & Associates, Berwyn, Pennsylvania, a marketing communications organization specializing in business-to-business marketing. Mr. Moats' prior experience includes serving as Senior Vice President -- Corporate Marketing and Public Relations of National Railway Utilization Corporation from 1975 to 1980. Mr. Moats is a graduate of the University of Miami, Florida, as a marketing major specializing in advertising. Mr. Moats has been a director since 1994. BOARD OF DIRECTORS The Board of Directors is divided into three classes with respect to term of office, with each class to include one-third of the whole number of the Board of Directors or as near thereto as possible. The term of office of Class A Directors (Norman S. Berson and Barry S. Meyers), Class B Directors (Robert B. Kerr and Woodrow B. Moats, Jr.) and Class C Directors (Martin Blaire, Leon Kopyt and Stanton Remer) expires as of the date of the 2000, 1998 and 1999 annual meetings of the stockholders, respectively. At each annual meeting of the stockholders, that number of directors whose terms shall then expire shall be elected to serve for a term of three years and until their successors shall be duly elected and qualified. The Board of Directors has established an Executive Committee, an Audit Committee and a Compensation Committee. The Executive Committee has been delegated all of the powers of the Board of Directors and is responsible for the operation of the Company between formal meetings of the Board of Directors. The Audit Committee is responsible for reviewing the Company's financial and accounting practices and controls and making recommendations concerning the engagement of independent auditors. The Compensation Committee is responsible for determining the compensation of the officers and employees of the Company and administering the Company's plans. See "Stock Option Plans." DIRECTOR COMPENSATION Members of the Board of Directors who are nonsalaried receive $750 for each Directors Meeting they attend and $300 for each special committee meeting, except for Mr. Berson who does not receive fees for meetings of the directors or committee meetings. 34 EXECUTIVE COMPENSATION The following table sets forth certain information with respect to compensation awarded to, earned by or paid to the Chief Executive Officer of the Company and the four other most highly compensated executive officers of the Company who were serving at the end of the fiscal year ended October 31, 1996 (collectively, the "Named Executive Officers") for all services rendered in all capacities to the Company and its subsidiaries. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ---------------------------- AWARDS PAYOUTS ------------- ------------- ANNUAL COMPENSATION SECURITIES ALL OTHER --------------------------------- UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS (1) --------------------------- --------- ----------- --------- ------------- ------------- Leon Kopyt.................................. 1996 $291,923 $50,900 11,720(2) $12,068 President and Chief 1995 $249,161 $26,300 40,300 $11,062 Executive Officer 1994 $209,955 $40,500 30,000 $ 9,262 Barry S. Meyers............................. 1996 $159,351(3) -- -- $ 9,047 Executive Vice President Stanton Remer............................... 1996 $120,000 -- -- $ 2,544 Chief Financial Officer 1995 $100,000 -- 10,000 $ 2,345 1994 $ 80,000 -- 10,000 $ 2,334 Martin Blaire............................... 1996 $159,351(2) -- -- $ 8,468 Executive Vice President Peter R. Kaminsky........................... 1996 $100,000(2) -- -- $ 5,000 Senior Vice President
- ------------------ (1) Represents premiums paid by the Company for life and disability insurance. (2) Does not include options to purchase 500,000 shares under the Company's 1996 Executive Stock Plan granted on November 21, 1996, subsequent to fiscal 1996. See "Option/SAR Grants in Last Fiscal Year." (3) Reflects compensation for partial year employment. OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED --------------------------- ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS/SARS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION -------------------- NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5% 10% - ------------------------------------- ------------ ------------- ----------- ----------- --------- --------- Leon Kopyt........................... 11,720(2) 37.7% $5.00 3/1/06 $36,853 $93,393
35 OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS SHARES AT FY-END AT FY-END ACQUIRED SHARES ($) ON VALUE EXERCISABLE/ EXERCISABLE/ NAME EXERCISE REALIZED($) UNEXERCISABLE UNEXERCISABLE - -------------------------------------------------------- --------------- ----------------- ------------- ------------ Leon Kopyt.............................................. 0 0 92,300/ $658,128/ 11,720(2) $ 53,443 Stanton Remer........................................... 0 0 30,000/ $ 99,225 0
- ------------------ (1) Options are exercisable beginning one year after the date of the grant. Shares received upon exercise of the options may not be sold for at least one year after the date of exercise. (2) Does not include options to purchase 500,000 shares under the Company's 1996 Executive Stock Plan granted on November 21, 1996. These options are subject to exercise for a period of ten years upon payment of an exercise price of $7.125 per share, which reflects the market value of the Common Stock on the date of grant. Options to purchase 250,000 shares are vested while the remaining options are subject to vesting: (i) 50.0% on the earlier of February 28, 1998 or once the market capitalization of the Company equals or exceeds $60 million for a period of thirty consecutive trading days; and (ii) the remaining 50.0% on the earlier of February 28, 1999 or once the market capitalization of the Company equals or exceeds $75 million for a period of 30 consecutive trading days. Immediate vesting of all of the options occurs, however, if a change in control of the Company occurs (as defined under the Benefits Agreement), or if during the term, Mr. Kopyt's employment is terminated for other than good and sufficient cause. The potential realizable value at assumed annual rates of stock price appreciation of 5.0% and 10.0% during the term of these options, is $2,240,437 and $5,677,708, respectively. The value of the in-the-money unexercised options (assuming 100% vesting) as of May 9, 1997, is $985,500. If Mr. Kopyt's total compensation (including compensation from the exercise of these options) exceeds $1.0 million in any fiscal year, the income from exercise of these options, to the extent it exceeds $1.0 million, would not be deductible to the Company for tax purposes under Section 162(m) of the Code. EXECUTIVE EMPLOYMENT AGREEMENTS The Company has employment agreements with each of Messrs. Kopyt, Meyers, Blaire and Kaminsky which provide each executive officer with an annual base salary of $300,000, $240,000, $240,000 and $200,000, respectively, vacation time and other standard benefits. The employment agreements of Messrs. Meyers and Blaire have terms of two years which commenced in March 1996, and Mr. Kaminsky's employment agreement has a term of two years which commenced in May 1996. Mr. Kopyt's agreement provides for a term of three years which commenced in March 1996, with an automatic extension for additional periods of one year. Each of the employment agreements is terminable upon the death of the executive officer or if the executive officer is discharged for cause. The employment agreements also include non-disclosure/non-competition provisions governing the conduct of the executive officer during and after employment. In addition to base salary, certain of the employment agreements provide for additional payments. Messrs. Blaire and Meyers' employment agreements provide that each is to receive severance payments upon the earlier of the expiration of their employment term or the date they are otherwise terminated without good and sufficient cause. In such an event, the individual shall be entitled to continue to receive a salary at the level of his existing salary for a period of one year. Additionally, under Mr. Kopyt's employment agreement, he is to receive a bonus based on the consolidated 36 operating profits before taxes of the Company for each fiscal year as follows: (i) up to $750,000 -- 3% bonus; (ii) over $750,000 and up to $1,500,000 -- 2% bonus; (iii) in excess of $1,500,000 -- 1% bonus. Mr. Kopyt earned a bonus of $50,900 during fiscal 1996. CHANGE IN CONTROL ARRANGEMENTS In December 1993, the Company entered into a Termination Benefits Agreement with Mr. Kopyt that was subsequently amended and restated as of March 18, 1997 (the "Benefits Agreement"). Pursuant to the Benefits Agreement, following a Change in Control (as defined therein) the remaining term of Mr. Kopyt's employment is extended for five years (the "Extended Term"). If Mr. Kopyt's employment is terminated thereafter by the Company other than for cause, or by Mr. Kopyt for good reason (including, among other things, a material change in Mr. Kopyt's salary, title, reporting responsibilities or a change in office location which requires Mr. Kopyt to relocate): the Company is obligated to pay Mr. Kopyt a lump sum equal to his salary and bonus for the remainder of the Extended Term; the exercise price of the options to purchase 500,000 shares granted to Mr. Kopyt under the 1996 Executive Stock Plan will be reduced to 50% of the average market price of the Common Stock for the 60 days prior to the date of termination if the resulting exercise price is less than the original exercise price of $7.125 per share; and the Company shall be obligated to pay to Mr. Kopyt the amount of any excise tax associated with the benefits provided to Mr. Kopyt under the Benefits Agreement. If such a termination had taken place as of May 9, 1997, Mr. Kopyt would have been entitled to cash payments of approximately $2.0 million (representing salary and excise tax payments), and the equity in Mr. Kopyt's options would have increased by approximately $1.3 million. PROFIT SHARING PLAN The Company maintains 401(k) plans as of October 31, 1996 for the benefit of eligible employees. The plan is a profit-sharing plan, including a cash or deferred arrangement pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"), sponsored by the Company to provide eligible employees an opportunity to defer compensation and have such deferred amounts contributed to the 401(k) plan on a pre-tax basis, subject to certain limitations. The Company may, at the discretion of the Board of Directors, make contributions of cash to match deferrals of compensation by participants. The Company made no contributions of cash to the 401(k) plans to match deferrals of compensation by participants in the fiscal years ending October 31, 1996, 1995, or 1994. Amounts contributed to the 401(k) plans by executive officers during the fiscal years ended October 31, 1996, 1995 and 1994 were $13,380, $11,035, and $0, respectively. The amounts contributed by all employee participants, excluding officers, during the period November 1, 1993 to October 31, 1996 totaled $798,436. STOCK OPTION PLANS The Company currently has options outstanding under four stock option plans: (i) the 1986 Incentive Stock Option Plan (the "1986 Plan"); (ii) the 1992 Incentive Stock Option Plan (the "1992 Plan"); (iii) the 1994 Non-Employee Directors Stock Option Plan (the "1994 Plan"); and (iv) the 1996 Executive Stock Plan (the "Executive Stock Plan") (collectively, the "Plans"). The Plans are administered by the Compensation Committee of the Board of Directors. Under the 1986 Plan, an aggregate of 60,000 shares was reserved for issuance upon the exercise of options granted to officers, directors and key employees of the Company and its subsidiaries. All of the options have been granted at exercise prices ranging from $1.25 to $2.66. No shares remain available for issuance. 37 Under the 1992 Plan, an aggregate of 100,000 shares of Common Stock were reserved for issuance upon the exercise of options granted to officers, directors and key employees of the Company and its subsidiaries. Options to purchase 99,700 shares of Common Stock have been granted at exercise prices ranging from $1.09 to $8.13. Under the 1992 Plan, 300 shares remain available for issuance. The 1992 Plan will terminate in 2002, unless terminated at an earlier date by the Board of Directors. Under the 1994 Plan, an aggregate of 80,000 shares of common stock were reserved for issuance upon the exercise of options granted to non-employee directors of the Company. Options to purchase 70,000 shares of Common Stock have been granted at exercise prices ranging from $3.44 to $5.00. Under the 1994 Plan, 10,000 shares remain available for issuance. The exercise of such options is contingent upon service as a director for one year, and the options are terminated upon the date the optionee ceases to be a director. The 1994 Plan terminates in 2004, unless terminated at an earlier date by the Board of Directors. Each of the 1986 and 1992 Plans provides for the issuance of incentive stock options, intended to qualify as such under Section 422A of the Code. All options granted under the Plans have terms which do not exceed ten years and are subject to exercise prices which are not less than 100% of the fair market value of the shares at the time of grant. Under the Executive Stock Plan, an aggregate of 1,250,000 shares of Common Stock was reserved for issuance upon the exercise of options granted to key management employees and directors of the Company and its subsidiaries, of which 750,000 shares remain available for issuance. This plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights and awards of restricted common stock. 38 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of May 9, 1997 and is adjusted to reflect the sale of the shares of Common Stock offered hereby by: (i) each person known by the Company to beneficially own 5% or more of the Company's outstanding Common Stock; (ii) each of the Company's directors; (iii) each of the Named Executive Officers; (iv) the Selling Stockholders; and (v) all directors and executive officers of the Company as a group. Except as otherwise indicated, each person set forth below has sole voting and investment power on the shares reported.
SHARES BENEFICIALLY SHARES TO BE OWNED PRIOR TO BENEFICIALLY OWNED OFFERING AFTER OFFERING ------------------------ SHARES ------------------------ NUMBER OF BEING NUMBER OF NAME AND ADDRESS(2) SHARES(1) PERCENT OFFERED SHARES PERCENT - ------------------------------------------------- ----------- ----------- --------- ----------- ----------- Leon Kopyt (3)................................... 880,745 16.3% 0 742,432 9.5% Barry S. Meyers.................................. 607,468 12.6% 0 607,468 8.5% Martin Blaire.................................... 607,468 12.6% 36,000 571,468 8.0% Stanton Remer (4)................................ 34,000 * 0 34,000 * Peter R. Kaminsky................................ 54,327 1.1% 0 54,327 * Norman S. Berson (5)............................. 20,000 * 0 20,000 * Robert B. Kerr (6)............................... 14,000 * 0 14,000 * Woodrow B. Moats, Jr. (6)........................ 14,000 * 0 14,000 * Limeport Investments, LLC (7).................... 276,625 5.7% 138,313 138,312 1.9% c/o Acquest International 1760 Market Street, 12th Floor Philadelphia, PA 19103 Mr. and Mrs. Philip J. Hempleman................. 472,500 9.8% 0 472,500 6.6% & Sanford B. Prater c/o Ardsley Advisory Partners 646 Steamboat Road Greenwich, CT 06830 J. Dennis Bodemann............................... 1,500 * 1,500 0 0 5619 Oldham Ct. Louisville, KY 40291 Harry R. Nelson.................................. 1,000 * 1,000 0 0 2100 Gardner Lane Suite 216 Louisville, KY 40205 All Directors and Officers as a group (8 persons).................................... 2,232,008 40.6% 36,000 2,057,695 26.3%
- ------------------ * Represents less than one percent of the Company's outstanding Common Stock. (1) The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations promulgated under the Exchange Act, and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of an individual and any other relative who has the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or which each person has the right to acquire within 60 days after the date of this Prospectus through the exercise of options, or otherwise. Beneficial ownership may be disclaimed as to certain of the securities. This table has been prepared based on 4,816,676 shares of Common Stock outstanding as of May 9, 1997. 39 (2) The address of all directors and officers is c/o RCM Technologies, Inc., 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109. (3) Includes vested options to purchase 250,000 shares under the Company's 1996 Executive Stock Plan and vested options to purchase 104,010 shares under the Company's other option plans. Also includes options to purchase 250,000 shares under the Company's 1996 Executive Stock Plan which vest when the Company's market capitalization achieves certain levels; and 276,625 shares held by Limeport Investments, LLC ("Limeport") over which Mr. Kopyt has voting power with regard to the election of directors of the Company. Limeport is a Selling Stockholder in this Prospectus. (4) Includes vested options to purchase 30,000 shares under the Company's outstanding stock option plans and includes 4,000 shares of Common Stock issuable upon exercise of the Class C Common Stock Warrants. (5) Includes vested options to purchase 20,000 shares under the Company's outstanding stock option plans. (6) Includes vested options to purchase 14,000 shares under the Company's outstanding stock option plans. Does not include options to purchase 6,000 shares which are not presently exercisable. (7) Limeport has granted voting rights over these shares to Leon Kopyt with respect to the election of directors. On all other matters, voting rights have been retained by Limeport Investments, LLC. CERTAIN VOTING ARRANGEMENTS On February 5, 1996, the Company issued and sold 276,625 shares of Common Stock to Limeport in a private placement transaction. In conjunction with this transaction, Limeport granted Mr. Kopyt an irrevocable proxy entitling him to vote such shares solely in connection with the election of directors of the Company, at any regular or special meeting of the stockholders. Effective August 31, 1995, the Company completed the acquisition of Cataract, pursuant to a Merger Agreement dated July 31, 1995 (the "Cataract Merger Agreement"). Pursuant to the terms of the Cataract Merger Agreement, the former Cataract shareholders pledged until November 30, 1998, approximately 312,311 shares of the Company's common stock ("Cataract Shares") they received as part of the merger consideration, in order to guarantee certain performance criteria of Cataract established in the Cataract Merger Agreement. Following the expiration of the pledge period, the Cataract Shares are to be placed in a voting trust until the earlier of: (i) the public or private sale of such shares in open market transactions to unaffiliated third parties; or (ii) the resignation or removal from office of Leon Kopyt, currently Chief Executive Officer and President of the Company. Notwithstanding the above, one-third of the Cataract Shares shall be released from trust commencing August 31, 2000, and thereafter an additional one-third of the Cataract Shares shall be released from trust upon each of August 31, 2001 and August 31, 2002. During the period in which the Cataract Shares are subject to pledge and the voting trust, the Cataract Shares are to be voted by the Company's Board of Directors on behalf of the former shareholders of Cataract. Effective March 11, 1996 the Company completed the acquisition of Consortium pursuant to a Stock Purchase Agreement dated March 1, 1996 (the "Consortium Purchase Agreement"). Pursuant to the terms of the Consortium Purchase Agreement, the former Consortium shareholders, which include Messrs. Blaire and Meyers, directors and officers of the Company, agreed, among other things, to vote the approximately 1,300,000 shares received by them in the aggregate, under the Consortium Purchase Agreement ("Consortium Shares") in connection with the election of directors of the Company for all of the individuals nominated by a majority of the Board of Directors of the Company and, unless the Company otherwise consents in writing, on all other matters to be voted on by the stockholders of the Company, in accordance with the recommendation of the majority of the Board of Directors; provided that the Consortium Shares may be voted as such holders determine in their sole discretion on any "Significant Event." The term "Significant Event" means any: (i) sale of substantially all of the assets of the Company; (ii) acquisition of the Company by a third party through a merger transaction in which the Company is the target company; or (iii) transaction or series of related transactions which results in the issuance and/or sale by the Company of more than 20% of the outstanding capitalization 40 on a fully diluted basis, if on a pro forma basis, the proportionate net stockholders' equity of the former Consortium shareholders after such proposed transaction would be diluted. These provisions shall remain in effect until the earlier of: (i) the date upon which Mr. Leon Kopyt no longer serves as an officer of the Company; or (ii) six months following the date upon which both Messrs. Blaire and Meyers cease to be employees of the Company (the "Termination Date"), provided, however, that the Termination Date shall be deemed to occur on any such earlier date that the employment of both of Messrs. Blaire and Meyers is terminated without cause. Additionally, the Company has agreed to: (i) continue to nominate Messrs. Blaire and Meyers to the Board of Directors; and (ii) cause Messrs. Blaire and Meyers to be appointed to the Executive Committee of the Board of Directors, for so long as: (A) the former Consortium shareholders, in the aggregate, continue to own, directly or beneficially, 50% or more of the Consortium Shares (as adjusted by any stock splits, recapitalization or other adjustments to the capital stock of the Company), and (B) either of Messrs. Blaire or Meyers remain as a management level employee of the Company; provided, however, that: (x) in the event only one of Messrs. Blaire or Meyers is a management level employee, then only that individual shall be entitled to the rights set forth in clauses (i) and (ii) hereof; and (y) the provisions of clause (B) above shall not be effective to abrogate the Company's obligations in clauses (i) and (ii) above if the employment of either or both of Messrs. Blaire and Meyers is terminated by the Company without cause; in which case the Company shall remain obligated to undertake those actions identified in clauses (i) and (ii) hereof for the remaining period of any employment agreements pursuant to which Messrs. Blaire or Meyers were employed upon such termination. Effective May 2, 1996, the Company completed the acquisition of Consort MD pursuant to a Merger Agreement dated April 23, 1996 (the "Consort MD Merger Agreement"). Pursuant to the terms of the Consort MD Merger Agreement, Peter Kaminsky, the former sole shareholder of Consort MD and an executive officer of the Company, agreed, among other things, to vote the 34,327 shares received by him in connection with all matters to be voted on by the stockholders of the Company, in accordance with the recommendation of the majority of the Board of Directors. These provisions shall remain in effect until the earlier of: (i) May 2, 1998; or (ii) the termination of Mr. Kaminsky's employment agreement with the Company. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Berson, a director of the Company, is a shareholder in the law firm of Fineman & Bach, P.C., which serves as counsel to the Company. The Company paid legal fees of $65,887 during the fiscal year 1996 to Fineman & Bach, P.C. The Company has adopted a policy which requires that all transactions with affiliates of the Company be approved by a majority of the non-management directors of the Company and be on terms no less favorable to the Company that can be obtained from unaffiliated persons. There have been no transactions in excess of $60,000 with affiliates during the fiscal year ended October 31, 1996, 1995 or 1994, except as set forth above. 41 DESCRIPTION OF SECURITIES COMMON STOCK The Company is authorized to issue 40,000,000 shares of Common Stock, $0.05 par value per share, of which 4,816,676 are outstanding as of May 9, 1997. The holders of Common Stock are entitled to one vote per share on all matters to be voted upon by stockholders. Subject to preferences that may be applicable to any then outstanding Preferred Stock, the holders of Common Stock are entitled, among other things: (i) to share ratably in dividends if, when and as declared by the Board of Directors out of funds legally available therefor; and (ii) in the event of liquidation, dissolution or winding-up of the Company, to share ratably in the distribution of assets legally available therefor, after payment of debts and expenses. The holders of Common Stock do not have cumulative voting rights in the election of directors and have no preemptive rights to subscribe for additional shares of capital stock of the Company. All current outstanding shares of the Common Stock are, and the shares offered hereby, when sold in the manner contemplated by this Prospectus will be fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to the terms of any series of Preferred Stock which the Company may issue in the future. PREFERRED STOCK The Company may issue up to 5,000,000 shares of Preferred Stock from time to time as authorized by its Board of Directors in any one or more classes or series. Subject to the provisions of the Company's Articles of Incorporation and limitations prescribed by law, the Board of Directors is expressly authorized to adopt resolutions to issue the shares, to fix the number of shares, to change the number of shares constituting any series, and to provide for or change the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, including dividend rights (including whether dividends are cumulative), dividend rates, terms of redemption (including sinking fund provisions), redemption prices, conversion rights and liquidation preferences of the shares constituting any class or series of the Preferred Stock, in each case without any further action or vote by the stockholders. The Company has no current plans to issue any shares of Preferred Stock. CLASS C WARRANTS There are presently 786,709 Class C Warrants outstanding. The Class C Warrants were issued pursuant to the terms of a Warrant Agreement between the Company and American Stock Transfer & Trust Company (the "Warrant Agent"). As adjusted by subsequent recapitalizations of the Company, each five Class C Warrants entitle the registered holder thereof to purchase one share of Common Stock at an exercise price of $15.00 per share. The Class C Warrants were initially scheduled to expire on January 31, 1990, however, the expiration date has been extended by the Company's Board of Directors to December 31, 1997. The exercise price and number of shares issuable upon exercise of the Class C Warrants is subject to adjustment in the event of a recapitalization, stock dividend, stock split or merger. The Class C Warrants can be exercised by surrendering to the Warrant Agent a Class C Warrant Certificate signed by the holder thereof or his duly authorized agent with the form of election to purchase on the reverse side of the certificate completed and signed. Surrendered Warrant Certificates must be accompanied by payment in full of the aggregate exercise price for the Class C Warrants to be exercised, which payment may be in the form of cash or certified check. The Company has reserved out of its authorized but unissued shares a sufficient number of shares for issuance upon exercise, if at all, of the Class C Warrants. Upon issuance, the shares of Common Stock issuable upon exercise of the Class C Warrants will be fully paid, legally issued and non-assessable. Exercise of the Class C Warrants is not presently possible, since the exercise thereof is not covered by a current prospectus. Management is uncertain, in view of the exercise price of such Warrants in relation to the current trading value of the Company's Common Stock, that the exercise of Class C Warrants will be facilitated prior to the expiration of such Warrants on December 31, 1997. 42 PROVISIONS HAVING A POSSIBLE ANTI-TAKEOVER EFFECT Nevada General Corporation Law Nevada's "Combinations with Interested Stockholders" statute, which applies to a Nevada corporation having at least 200 stockholders, and which, unless the Articles of Incorporation provide otherwise has a class of voting shares registered under the Exchange Act, prohibits an "interested stockholder" from entering into a "combination" with the corporation, unless certain conditions are met. A "combination" includes (a) any merger with an interested stockholder, (b) any consolidation, sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets, in one transaction or a series of transactions, to an interested stockholder, having: (i) an aggregate market value equal to 5% or more of the aggregate market value of the corporation's assets; (ii) an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation; or (iii) representing 10% or more of the earning power or net income of the corporation, or (c) any issuance or transfer of shares of the corporation or its subsidiaries to an interested stockholder having an aggregate market value equal to 5% or more of the aggregate market value of all the outstanding shares of the corporation. An "interested stockholder" is a person who, together with affiliates and associates, beneficially owns (or within the prior three years, did beneficially own) 10% or more of the corporation's voting stock. A stockholder who owned 10% or more of the corporation's stock on January 1, 1991 is not an interested stockholder. A corporation to which the statute applies may not engage in a "combination" with the interested stockholder within three years after it acquired its shares, unless the combination or the interested stockholder's acquisition of the shares making the stockholder an interested stockholder was approved by the board of directors before the interested stockholder acquired such shares. If this prior approval is not obtained, then after the three-year period expires, the combination may be consummated either by the approval of the board of directors and a majority of the voting power held by disinterested stockholders at a meeting called after expiration of the three-year period, or if the consideration to be paid by the interested stockholder is at least equal to the higher of: (i) the highest price per share paid by the interested stockholder within the three years immediately preceding the date of the announcement of the combination or in the transaction in which it became an interested stockholder, whichever is higher, plus interest as provided in the statute; and (ii) the market value per common share on the date of announcement of the combination or the date the interested stockholder acquired the shares, whichever is higher; or (iii) if higher for the holders of preferred stock, the highest liquidation preference of the preferred stock, plus interest as provided in the statute. Nevada's "Acquisition of Controlling Interest" statute prohibits a person or group owning or offering to acquire voting shares of a corporation, under certain circumstances, from voting shares of a target corporation's stock after crossing certain threshold ownership percentages, unless such corporation's Articles or Bylaws are amended to make the statute inapplicable to the acquisition or unless the acquiror obtains the approval of the target corporation's disinterested stockholders. The statute specifies three thresholds: at least one-fifth but less than one-third, at least one-third but less than a majority, and a majority or more, of the outstanding voting power. Once an acquiror crosses one of the above thresholds, shares which it acquired in the transaction taking it over the threshold or within ninety days become "Control Shares" which are deprived of the right to vote until a majority of the disinterested stockholders restore that right. If an acquiror does not make certain timely demands on the target corporation or if the stockholders fail to restore voting rights to the acquiror, then the corporation may, if so provided in its Articles of Incorporation or Bylaws, call certain of the acquiror's shares for redemption. The Company's Articles of Incorporation and Bylaws do not currently permit it to call an acquiror's shares for redemption under these circumstances. The Acquisition of Controlling Interest statute also provides that in the event the stockholders restore full voting rights to a holder of Control Shares which owns a majority of the voting stock, then all other stockholders who do not vote in favor of restoring voting rights to the Control Shares may demand payment for the "fair value" of their shares (which is generally equal to the highest price paid in the transaction subjecting the stockholder to the statute). The Acquisition of Controlling Interest statute only applies to a Nevada corporation with at least 200 stockholders, including at least 100 record stockholders who are Nevada 43 residents, and which does business directly or indirectly in Nevada. As of the date of this Prospectus, the Company does not have 100 record stockholders in Nevada and does not conduct business in Nevada, although there can be no assurance that in the future the Acquisition of Controlling Interest statute will not be applicable to the Company. The provisions described above, together with classified Board of Directors, other provisions of the Articles of Incorporation described below, the ability of the Board of Directors to issue Preferred Stock as described under "Preferred Stock," and the Rights Plan may have the effect of delaying or deterring a change in the control or management of the Company. Under the Nevada General Corporation Law, a director may be removed only by a vote of the holders of two-thirds of the voting power of the issued and outstanding shares entitled to vote. Articles of Incorporation Undesignated Preferred Stock. One of the effects of undesignated Preferred Stock may be to enable the Board of Directors to render more difficult or to discourage an attempt to obtain control of the Company by means of a tender offer, proxy contest, merger or otherwise, and thereby to protect the continuity of the Company's management. The issuance of shares of the Preferred Stock pursuant to the Board of Directors' authority described above may adversely affect the rights of the holders of Common Stock. For example, Preferred Stock issued by the Company may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock may discourage bids for the Common Stock or may otherwise adversely affect the market price of the Common Stock. Restrictions on Amendments to the Bylaws. The Articles of Incorporation provide that any amendment to the Bylaws proposed by shareholders must comply with the requirements for amendments to the Articles of Incorporation, including the requirement that such amendment be approved by the Board of Directors. This provision would make it difficult for a stockholder to avoid certain anti-takeover provisions of the Bylaws by amending the Bylaws. By-Laws The Amended and Restated Bylaws provide for a classified Board of Directors. The Board of Directors is elected in staggered terms, allowing each member to serve for three years, generally with one-third of the directors to be elected each year. The classification system of electing directors may discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the incumbency of the Board of Directors, as it generally makes it more difficult for stockholders to replace a majority of the Board of Directors. The Bylaws restrict the ability of a stockholder to nominate a candidate for director at a meeting of stockholders unless notice of the nomination, along with specified information, is received by the Company at least 150 days prior to date of the meeting. The Bylaws also provide that in the event of a "change in control" of the Company, vacancies in the Board of Directors may only be filled by the directors who were the directors prior to the change of control. A "change in control" is defined as a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act. Such a change in control shall be deemed to have occurred if (a) any "person" as such term is used in Sections 13(d) and 14(d) of the Exchange Act, other than the Company or any "person" who is a director or officer of the Company, is or becomes the "beneficial owner" as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding securities, or (b) during any twelve month period individuals who at the beginning of such period constitute the Board of Directors of the Company cease, for any reason, to constitute at least a majority, unless the election of each director who was not a director at the beginning of the period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. 44 Rights Plan On March 14, 1996, the Board of Directors of the Company declared a dividend of one common stock purchase right (the "Right") for each outstanding share of Common Stock of the Company to stockholders of record as of the close of business on April 1, 1996 (the "Record Date") and authorized the issuance of one Right with respect to each share of Common Stock that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date or the Expiration Date (as such terms are defined below); provided, however, that Rights may be issued with respect to shares of Common Stock that become outstanding after the Distribution Date and prior to the earlier of the Redemption Date or the Expiration Date under certain circumstances. Except as described below, each Right, when exercisable, entitles the registered holder to purchase from the Company one additional share of Common Stock, at a price of $3.00 per share (the "Purchase Price") subject to adjustment. The Rights were issued pursuant to a Rights Agreement dated as of March 14, 1996 between the Company and American Stock Transfer & Trust Company, as Rights Agent (the "Rights Agreement"). Initially, the Rights will be evidenced by the certificates for Common Stock of the Company registered in the names of the holders thereof and not by separate rights certificates. Subject to certain exceptions, until the earlier of (i) such time as the Company learns that a person, alone or together with all affiliates and associates ("Acquiring Person") has acquired the beneficial ownership of 15% or more of the Common Stock then outstanding; or (ii) the close of business on such date, if any, as may be designated by the Board of Directors of the Company following the commencement of, or first public disclosure of an intent to commence, a tender or exchange offer by any person for outstanding Common Stock if, upon consummation of such tender or exchange offer, such person would be the beneficial owner of 15% or more of the outstanding Common Stock (the close of business on the earlier of such dates being the "Distribution Date"), no separate rights certificates will be distributed and the Rights, including the right to receive rights certificates, will be transferable only in connection with the transfer of Common Stock. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Rights Certificate") will be mailed to the holders of record of the Common Stock as of the Distribution Date and, thereafter, the Rights will be evidenced solely by such Rights Certificates. The Rights Agreement provides that, until the earliest of the Distribution Date, the close of business on October 31, 2005 (the "Expiration Date") or any day set by the Board of Directors of the Company for the redemption of all then outstanding Rights (the "Redemption Date"), the Rights shall be evidenced by the certificates representing the Common Stock and will be transferred with the Common Stock. At any time prior to the earlier of (i) such time as a person becomes an Acquiring Person and (ii) the Expiration Date, the Board of Directors of the Company may order the redemption of all, but not fewer than all, the then outstanding Rights at a price of $.01 per Right or at a price adjusted by the Board of Directors of the Company in accordance with the Rights Agreement (the "Redemption Price") which may, at the option of the Company, be paid in cash or common stock or other securities of the Company deemed by the Board of Directors of the Company, in its sole discretion, to be at least equivalent in value to the Redemption Price. Immediately upon the Board of Directors of the Company ordering redemption of the Rights, the Rights will terminate and the only right thereafter of the holder of the Right shall be to receive the Redemption Price. Until a Right is exercised, the holder thereof shall not be deemed for any purpose the holder of the Common Stock, or of any other securities of the Company which may at any time be issuable upon the exercise of the Rights, and will have no rights as a stockholder of the Company, including, without limitation, the right to vote or receive dividends. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on the Rights being redeemed or a substantial number of Rights being acquired, and under certain circumstances the Rights beneficially owned by such a person or group may become void. The Rights should not interfere with any merger or other business 45 combination approved by the Board of Directors of the Company because, if the Rights would become exercisable as a result of such merger or other business combination, the Board of Directors may, at its option, prior to the time that any person becoming an Acquiring Person, redeem all, but not less than all, of the then outstanding Rights at the Redemption Price. The foregoing provisions of the Rights Plan could delay or frustrate the removal of incumbent directors or the assumption of control by the holder of a large block of Common Stock even if such removal or assumption would be beneficial, in the short-term, to stockholders of the Company. The provisions could discourage or make more difficult a merger, tender offer or proxy contest even if such event would be favorable to the interests of stockholders. INDEMNIFICATION AND DIRECTORS' AND OFFICERS' INSURANCE The Company's Articles of Incorporation and Bylaws, taken in conjunction, provide that the Company shall, to the full extent permitted by the Nevada General Corporation Law, indemnify all persons whom it has the power to indemnify pursuant thereto, including officers and directors of the Company. In addition, the Articles of Incorporation authorize the Company to maintain insurance to cover such liabilities. The Company recently purchased Directors' and Officers' Liability Insurance to protect directors and officers of the Company from any liability asserted against them for acts taken or omissions occurring in their capacities as such. The Company policy has an aggregate liability limit of $5.0 million. The Company is not required to maintain such insurance and there can be no assurance that the Company will continue to maintain such insurance or coverage in such amounts. TRANSFER AGENT The Transfer Agent for the Common Stock is American Stock Transfer & Trust Company. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 7,139,863 shares of Common Stock outstanding. Of these shares, a total of approximately 5,390,913 shares will be tradable without restriction or further registration under the Securities Act. The remaining 1,748,950 shares of Common Stock are considered "restricted securities" for the purpose of Rule 144 under the Securities Act and may only be sold if they are registered under the Securities Act or if an exemption from such registration is available. All of the Company's directors and executive officers, and Limeport, have agreed not to sell, otherwise dispose of, or pledge any shares of the Common Stock for 180 days after the date of this Prospectus (the "Lock-Up Period") without the prior written consent of Legg Mason Wood Walker, Incorporated. The Lock-Up Period will not apply to the Common Stock offered by Limeport as a Selling Stockholder. In general, under Rule 144, any affiliate of the Company or any person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year, but less than two years, would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1.0% of the outstanding shares of Common Stock and the reported average weekly trading volume in the Common Stock for the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain requirements relating to manner of sale, notice and availability of current public information concerning the Company. Persons who have not been affiliates of the Company for at least three months and who have held their shares for more than two years are entitled to sell restricted securities under Rule 144(k) without regard to the volume, manner of sale, notice and public information requirements of Rule 144. Following expiration of the Lock-Up Period, 174,111 of the restricted securities will be eligible for public resale either in accordance with Rule 144 or by operation of the applicable registration rights agreements between the holder of such restricted securities and the Company. Of the remaining restricted securities, 1,262,528 may not be sold until April 30, 1998, and 312,311 shares may not be 46 sold until August 30, 1998, each pursuant to certain registration rights arrangements with the Company. Sales of additional shares in the public market could also occur upon the exercise of existing stock options and Class C Warrants. The sales could take place prior to the expiration of the Lock-Up Period. The Company is unable to predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price for the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such influx of shares into the market could occur, could adversely affect the market price for the Common Stock and could impair the Company's future ability to obtain capital through offerings of equity securities. REGISTRATION RIGHTS The Company has granted certain registration rights to the holders of 1,925,763 shares of Common Stock. 276,625 of these shares were issued in a private placement transaction in February 1996 to Limeport (the "Limeport Shares"), 1,300,000 Shares were issued in connection with the acquisition of Consortium in March 1996 (the "Consortium Shares"), and 2,500 shares were issued in connection with the acquisition of PSI in September 1996 (the "PSI Shares"). 138,313 of the Limeport Shares, 36,000 of the Consortium Shares and all of the PSI Shares have been included for sale within this Prospectus. Pursuant to these rights, the Company has agreed to use its best efforts to, on or before 120 days after the date of this Prospectus file with the Commission a registration statement permitting the resale of the remainder of the Limeport Shares and the Consortium Shares no sooner than 180 days after the date of this Prospectus. The holders of the remaining Consortium Shares, however, have agreed to certain limitations upon the resale of these shares as follows: (i) through March 11, 1998, resale shall be limited to only those shares with an aggregate value of $300,000; (ii) from March 11, 1998 to March 11, 1999, resales shall be limited to that number of shares that could have been sold during this period under Rule 144 (as that Rule was in effect as of the closing of such transaction in March 1996); however, no greater than 50,000 shares per week per holder; and (iii) after March 11, 1999, resales are unlimited. The Company has also granted registration rights effective March 2, 1998 covering the resale of the 34,327 shares issued in connection with the acquisition of Consort MD and commencing August 30, 1998, covering the resale of up to 312,311 shares of Common Stock issued in connection with the acquisition of Cataract in August 1995. LOCK-UP AGREEMENT The Company and all of the executive officers, directors and Limeport, upon consummation of this Offering, have agreed with the Underwriters not to sell, otherwise dispose of or pledge any shares of Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of Legg Mason Wood Walker, Incorporated. 47 UNDERWRITING The Underwriters named below, acting through their representatives, Legg Mason Wood Walker, Incorporated and Janney Montgomery Scott Inc. (the "Representatives") have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase a total of 2,323,187 shares of Common Stock from the Company and 176,813 shares of Common Stock from the Selling Stockholders. The number of shares of Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below. The Underwriters are committed to purchase all of such shares if any are purchased. Under certain circumstances the commitments of non-defaulting Underwriters may be increased. The names of the several Underwriters and the respective number of shares to be purchased by each of them are as follows:
NUMBER UNDERWRITER OF SHARES - ----------- ----------- Legg Mason Wood Walker, Incorporated............................................ Janney Montgomery Scott Inc..................................................... TOTAL...................................................................... 2,500,000 ----------- -----------
The Underwriters propose to offer the shares of Common Stock to the public initially at the offering price per share set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share, and the Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share on sales to other dealers. After the commencement of the public offering of the shares of Common Stock, the offering price and concession may be changed. The Company and the Selling Stockholders have agreed to indemnify the several Underwriters against certain liabilities which may be incurred in connection with the Offering, including liabilities under the Securities Act. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an aggregate of 375,000 shares of Common Stock from the Company at the same price per share as the public offering price. The Underwriters may exercise such option only to cover over-allotments in the sale of the shares of Common Stock that the Underwriters have agreed to purchase. To the extent the Underwriters exercise this option, each of the Underwriters has a firm commitment, subject to certain conditions, to purchase the same percentage of the option shares as the number of shares to be purchased and offered by that Underwriter as shown in the above table bears to the 2,500,000 shares of Common Stock initially offered hereby. All of the directors and executive officers of the Company, and Limeport have agreed with the Representatives not to sell or dispose of any shares owned by them without the consent of the Representatives for a period of 180 days after the date of this Prospectus. See "Shares Eligible for Future Sale." In connection with this Offering, certain Underwriters may engage in passive market making transactions in the Common Stock in accordance with Regulation M under the Securities Exchange Act of 1934, as amended, during the two business day period before the commencement of offers of sales of the Common Stock. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. 48 Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain Selling Stockholders, if any, to bid for and purchase the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions may consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If Underwriters create a short position in the Common Stock in connection with the offering thereof (i.e., if they sell more shares of Common Stock than are set forth on the cover page of the Prospectus), the Representatives may reduce that short position by purchasing Common Stock in the open market. The Representatives also may elect to reduce any short position by exercising all or part of the over-allotment option described in the Prospectus. The Representatives also may impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of this Offering. In general, purchases of Common Stock for the purpose of stabilization or to reduce a syndicate short position could cause the price of the Common Stock to be higher than it might otherwise be in the absence of such purchases. The imposition of a penalty bid might have an effect on the price of the Common Stock to the extent that it were to discourage resales of the Common Stock by purchasers in this Offering. Neither the Company nor the Underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor the Underwriters make any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. 49 LEGAL MATTERS The validity of the Common Stock offered hereby has been passed upon for the Company by Buchanan Ingersoll Professional Corporation, Philadelphia, Pennsylvania. As to matters of Nevada law, Buchanan Ingersoll Professional Corporation has relied upon the opinion of Schreck Morris, Las Vegas, Nevada. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Wolf, Block, Schorr and Solis-Cohen, Philadelphia, Pennsylvania. EXPERTS The financial statements as of October 31, 1995 and 1996 and for each of the three years in the period ended October 31, 1996 included in this Prospectus have been audited by Grant Thornton LLP, independent certified public accountants, whose report thereon is included herein, in reliance of said firm as experts in auditing and accounting. AVAILABLE INFORMATION The Company is subject to the informational and reporting requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information concerning the Company may be inspected without charge, and copies of all or any part thereof may be obtained from the Commission's principal office in Washington, D.C. at Room 1024, 450 Fifth Street N.W., Washington, D.C. 20549, and at the Commission's regional offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained upon written request addressed to the Commission, Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a Web site at http://www.sec.gov containing reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company. The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock being offered by this Prospectus. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the shares of Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete and, where such contract or other document is an exhibit to the Registration Statement, each such statement is qualified in all respects by the provisions of such exhibit, to which reference is hereby made. 50 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE REFERENCE --------------- Pro Forma Condensed Consolidated Financial Statements (Unaudited): Pro Forma Condensed Consolidated Statements of Operations: Year Ended October 31, 1996.................................................................. F-2 Three Months Ended January 31, 1996.......................................................... F-3 Three Months Ended January 31, 1997.......................................................... F-4 Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements..................... F-5 Consolidated Financial Statements: Independent Auditors' Report.................................................................... F-6 Consolidated Balance Sheets October 31, 1995, 1996 and January 31, 1997 (Unaudited)...................................... F-7 Consolidated Statements of Income Years ended October 31, 1994, 1995 and 1996 and the three months ended January 31, 1996 and 1997 (Unaudited)............................. F-8 Consolidated Statements of Changes in Shareholders' Equity Years ended October 31, 1994, 1995 and 1996 and the three months ended January 31, 1997 (Unaudited)...................................... F-10 Consolidated Statements of Cash Flows Years ended October 31, 1994, 1995 and 1996 and the three months ended January 31, 1996 and 1997 (Unaudited)............................. F-11 Notes to Consolidated Financial Statements...................................................... F-12 Schedules....................................................................................... F-24
F-1 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) YEAR ENDED OCTOBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACQUIRED HISTORICAL COMPANIES ADJUSTMENTS PRO FORMA ------------- ----------- ------------- ------------- Revenues................................................ $ 61,039 $ 23,626 $ 84,665 ---------- --------- --------- Operating Expenses Cost of services...................................... 48,780 16,738 65,518 Selling, General and Administrative................................. 8,914 5,363 ($220)(a) 13,957 (100)(b) Depreciation and amortization......................... 330 15 130 (c) 475 ---------- --------- ---------- Total operating expenses.............................. 58,024 22,116 79,950 ---------- --------- ---------- Operating income........................................ 3,015 1,510 4,715 Other expense........................................... (194) 4(d) (190) ---------- --------- ---------- Income before taxes..................................... 2,821 1,510 4,525 Income taxes............................................ 453 384(e) 837 ---------- --------- ------ ---------- Net Income.............................................. $ 2,368 $ 1,510 ($ 190) $ 3,688 ---------- --------- ------ ---------- ---------- --------- ------ --------- Earnings per common share............................... $ 0.55 $ 0.66 ---------- ---------- ---------- ---------- Weighted average number of shares outstanding........................................... 4,320,571 5,557,047 ---------- ---------- ---------- ----------
See notes to pro forma condensed consolidated financial statement. F-2 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED JANUARY 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACQUIRED HISTORICAL COMPANIES ADJUSTMENTS PRO FORMA ------------- ----------- ------------- ------------- Revenues................................................ $ 9,777 $ 9,295 $ 19,072 ---------- ------- ---------- Operating Expenses Cost of services...................................... 7,989 6,945 14,931 Selling, General and Administrative................................. 1,144 2,230 ($220)(a) 3,079 (75)(b) Depreciation and amortization......................... 55 31 33(c) 119 ---------- ------- ---------- Total operating expenses.............................. 9,185 9,206 18,129 ---------- ------- ---------- Operating income........................................ 592 89 943 Other expense........................................... (31) (31) ---------- ------- ---------- Income before taxes..................................... 561 89 912 Income taxes............................................ 59 116(e) 175 ---------- ------- ------- ---------- Net Income.............................................. $ 502 $ 89 $ 146 737 ---------- ------- ------- ---------- ---------- ------- ------- ---------- Earnings per common share............................... $ 0.15 $ 0.14 ---------- ---------- ---------- ---------- Weighted average number of shares outstanding........................................... 3,276,627 5,361,649 ---------- ---------- ---------- ----------
See notes to pro forma condensed consolidated financial statement. F-3 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED JANUARY 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACQUIRED HISTORICAL COMPANIES ADJUSTMENTS PRO FORMA ------------- ----------- ------------- ------------- Revenues................................................ $ 21,151 $ 21,151 ---------- ---------- Operating Expenses Cost of services...................................... 16,051 16,051 Selling, General and Administrative................................. 3,626 3,626 Depreciation and amortization......................... 119 119 ---------- ---------- Total operating expenses.............................. 19,796 19,796 ---------- ---------- Operating income........................................ 1,355 1,355 Other expense........................................... (85) $35(d) (50) ---------- ---------- Income before taxes..................................... 1,270 1,305 Income taxes............................................ 489 59(e) 548 ---------- ----- ---------- Net Income.............................................. $ 781 ($24) $ 757 ---------- ----- ---------- ---------- ----- ---------- Earnings per common share............................... $ 0.16 $ 0.13 ---------- ---------- ---------- ---------- Weighted average number of shares outstanding........................................... 4,970,620 5,718,815 ---------- ---------- ---------- ----------
See notes to pro forma condensed consolidated financial statement. F-4 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION The accompanying unaudited pro forma condensed consolidated financial statements (the "Pro Forma Financial Statements") are based on adjustments to the historical consolidated financial statements of RCM Technologies, Inc. ("RCM" or the "Company") to give effect to the acquisitions described in Note 3 (the "Acquired Companies"). The pro forma condensed consolidated statements of operations assume all acquisitions described in Note 3 were consummated as of the November 1, 1995 (beginning of the fiscal year ended October 31, 1996). The pro forma consolidated statements of income also reflect the assumed issuance of 748,195 shares of Common Stock (at an estimated public offering price of $8.00 per share) which, net of estimated underwriting discounts and offering expenses payable by the Company, would result in sufficient net proceeds to repay acquisition related debt. These shares are assumed to have been issued and debt repaid, at the beginning of the periods presented, and thus interest expense attributable to such debt has been eliminated. The pro forma condensed consolidated statements of operations are not necessarily indicative of results that would have occurred had the acquisitions been consummated as of the beginning of the periods presented or that might be attained in the future. Certain information normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Pro Forma Financial Statements should be read in conjunction with the historical consolidated financial statements of RCM, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus. (2) EARNINGS PER SHARE Pro forma earnings per share were computed by dividing net income applicable to common stock by the average number of shares of common stock and common stock equivalents outstanding during the period and the dilutive effect of common stock issued in connection with the acquisition of the Acquired Companies. (3) ACQUISITIONS The Consortium ("Consortium"). In March 1996, the Company acquired all of the outstanding stock of Consortium for 1.3 million restricted shares of the Company's Common Stock. Consortium generated revenues of approximately $26.0 million during its fiscal year ended December 31, 1995. Through this transaction, the Company acquired five branch offices which provide information technology, healthcare and general support staffing services. The Consortium of Maryland, Inc. ("Consort MD"). In May 1996, the Company acquired all of the outstanding stock of Consort MD for $621,500 cash and 34,327 restricted shares of the Company's Common Stock, plus additional acquisition consideration consisting of additional shares of restricted stock having a value equal to approximately $250,000, based upon a post-closing verification of financial data warranted at closing. Consort MD generated revenues of approximately $6.0 million during its fiscal year ended December 31, 1995. Through this transaction, the Company acquired one branch office, which provides information technology staffing services. Performance Staffing, Inc. ("PSI"). In September 1996, the Company acquired the operating assets of PSI for 2,500 restricted shares of the Company's Common Stock, and in connection therewith, assumed approximately $110,000 of PSI's debt. PSI generated revenues of approximately $2.0 million during its fiscal year ended December 31, 1995. Through this transaction, the Company acquired three branch offices which provide engineering and general support staffing services. F-5 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) ACQUISITIONS -- (CONTINUED) Programming Alternatives of Minnesota, Inc. ("PAMI"). Effective as of November 4, 1996, the Company acquired all of the outstanding stock of PAMI for approximately $4.5 million cash plus $1.6 million of contingent consideration in the form of a three year promissory note payable upon attaining certain earnings targets within the three-year period. The Company also agreed to pay certain bonus consideration to the former PAMI shareholder in the event that during the three-year earn-out period, the performance of PAMI exceeds the established earnings targets. PAMI generated revenues of approximately $10.0 million during its fiscal year ended December 31, 1996. Through this transaction, the Company acquired one branch office which provides information technology staffing services. (4) ADJUSTMENTS TO HISTORICAL FINANCIAL STATEMENTS The following pro forma adjustments have been made to the historical statements of operations as if all acquisitions described in Note 3 were consummated as of the beginning of the periods presented: (a) To reduce salaries for the difference between compensation of certain sellers prior to consummation of the acquisitions and their compensation following the acquisitions as stipulated in their respective employment agreements with RCM. (b) To reflect the elimination of redundant operating costs and non recurring expenses that were immediately identifiable at the time of the acquisitions. (c) To reflect amortization of goodwill related to the purchase of the Acquired Companies, which is being amortized on a straight-line basis over 40 years. (d) To reflect elimination of interest expense on the note payable assumed to be repaid with the offering proceeds. (e) To reflect the change in income taxes related to pro forma adjustments, and (ii) income taxes on Acquired Companies that were S corporations as if they were C corporations for federal and state income tax purposes. F-6 INDEPENDENT AUDITORS' REPORT Board of Directors RCM Technologies, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of RCM Technologies, Inc. (a Nevada corporation) and Subsidiaries as of October 31, 1996 and 1995 and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended October 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of RCM Technologies, Inc. and Subsidiaries as of October 31, 1996 and 1995 and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1996 in conformity with generally accepted accounting principles. We have also audited Schedules I and II of RCM Technologies, Inc. and Subsidiaries as of and for each of the three years in the period ended October 31, 1996. In our opinion, these schedules present fairly, in all material respects, the information required to be set forth therein. [SIGNATURE] Grant Thornton LLP Philadelphia, Pennsylvania December 16, 1996 (Except for Note 6 as to which the date is December 19, 1996, Note 4, regarding the acquisition of Programming Alternatives of Minnesota, Inc., as to which the date is January 7, 1997 and the last paragraph of Note 16, as to which the date is May 2, 1997). F-7 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
OCTOBER 31, JANUARY 31, -------------------------- ------------ 1995 1996 1997 ---- ---- ---- (UNAUDITED) Current assets Cash and cash equivalents............................................. $ 297,550 $ 5,989 $ 124,856 Accounts receivable, net of allowance for doubtful accounts of $15,000 -- 1995; $76,000 -- 1996; $157,000 -- 1997.......................... 5,133,662 13,985,445 14,749,871 Prepaid expenses and other current assets............................. 671,662 404,198 672,064 ------------ ------------ ------------ Total current assets.............................................. 6,102,874 14,395,632 15,546,791 ------------ ------------ ------------ Property and equipment, at cost Equipment and leasehold improvements.................................. 1,208,317 1,644,831 1,975,849 Less: accumulated depreciation and amortization....................... 763,966 1,142,740 1,199,043 ------------ ------------ ------------ 444,351 502,091 776,806 ------------ ------------ ------------ Other assets Deposits.............................................................. 43,074 88,039 83,706 Intangible assets (net of accumulated amortization of $73,492, $366,337 and $453,444 in 1995, 1996 and 1997, respectively)......... 3,711,256 9,420,858 13,783,573 ------------ ------------ ------------ 3,754,330 9,508,897 13,867,279 ------------ ------------ ------------ Total assets...................................................... $ 10,301,555 $ 24,406,620 $ 30,190,876 ------------ ------------ ------------ ------------ ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Note payable -- bank.................................................. $ 914,435 $ 2,746,636 $ 7,000,000 Accounts payable and accrued expenses................................. 472,107 734,791 882,157 Accrued payroll....................................................... 1,182,934 2,789,725 2,949,932 Taxes other than income taxes......................................... 205,494 432,607 712,023 Income taxes payable.................................................. 920,439 1,083,355 ------------ ------------ ------------ Total current liabilities......................................... 2,774,970 7,624,198 12,627,467 ------------ ------------ ------------ Income taxes payable.................................................... 562,312 562,312 Shareholders' equity Preferred stock, $1.00 par value; 5,000,000 shares authorized; no shares issued or outstanding Common stock, $0.05 par value; 40,000,000 shares authorized; 3,255,024 shares issued in 1995 and 4,878,476 shares issued in 1996 and 1997, respectively........................................................ 162,751 243,924 243,924 Additional paid-in capital............................................ 10,916,692 17,161,105 17,161,105 Treasury stock, at cost 62,800 shares................................. (62,821) (62,821) (62,821) Accumulated deficit................................................... (3,490,037) (1,122,098) (341,111) ------------ ------------ ------------ 7,526,585 16,220,110 17,001,097 ------------ ------------ ------------ Total liabilities and shareholders' equity........................ $ 10,301,555 $ 24,406,620 $ 30,190,876 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-8 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED YEARS ENDED OCTOBER 31, JANUARY 31, ---------------------------------------- -------------------------- 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) Revenues................................... $ 29,238,995 $ 26,915,737 $ 61,039,173 $ 9,776,507 $ 21,150,721 ------------ ------------ ------------ ------------ ------------ Operating costs and expenses Cost of services......................... 23,863,889 22,378,817 48,779,886 7,985,878 16,051,317 Selling, general and administrative...... 3,674,102 3,549,810 8,914,102 1,144,116 3,625,653 Depreciation and amortization............ 93,141 130,397 329,680 54,970 118,629 ------------ ------------ ------------ ------------ ------------ 27,631,132 26,059,024 58,023,668 9,184,964 19,795,599 ------------ ------------ ------------ ------------ ------------ Operating income........................... 1,607,863 856,713 3,015,505 591,543 1,355,122 Other income (expense) Interest expense......................... (34,196) (38,158) (163,811) (24,901) (90,189) Other, net............................... 39,381 124,050 (30,216) (6,030) 5,388 ------------ ------------ ------------ ------------ ------------ 5,185 85,892 (194,027) (30,931) (84,801) ------------ ------------ ------------ ------------ ------------ Income before income taxes................. 1,613,048 942,605 2,821,478 560,612 1,270,321 Income taxes............................... 187,043 93,500 453,539 58,749 489,334 ------------ ------------ ------------ ------------ ------------ Net income................................. $ 1,426,005 $ 849,105 $ 2,367,939 $ 501,863 $ 780,987 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income per share....................... $.49 $.28 $.55 $.15 $.16 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Weighted average number of shares outstanding.............................. 2,930,276 3,007,969 4,320,571 3,276,627 4,970,620 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-9 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1994, 1995, 1996 AND THREE MONTHS ENDED JANUARY 31, 1997 (UNAUDITED)
COMMON STOCK ADDITIONAL -------------------- PAID-IN ACCUMULATED TREASURY SHARES AMOUNT CAPITAL DEFICIT STOCK --------- --------- ------------ ------------ --------- Balance, October 31, 1993.......................... 2,937,713 $ 146,885 $ 9,727,090 ($5,765,147) ($ 62,821) Exercise of stock options.......................... 5,000 250 5,218 Net income......................................... 1,426,005 --------- --------- ------------ ----------- --------- Balance, October 31, 1994.......................... 2,942,713 147,135 9,732,308 (4,339,142) (62,821) Issuance of common stock in connection with acquisitions..................................... 312,311 15,616 1,184,384 Net Income......................................... 849,105 --------- --------- ------------ ----------- --------- Balance, October 31, 1995.......................... 3,255,024 162,751 10,916,692 (3,490,037) (62,821) Exercise of stock options.......................... 10,000 500 15,438 Issuance of common stock in connection with acquisitions..................................... 1,336,827 66,841 5,242,807 Sale of common stock............................... 276,625 13,832 986,168 Net Income......................................... 2,367,939 --------- --------- ------------ ----------- --------- Balance, October 31, 1996.......................... 4,878,476 243,924 17,161,105 (1,122,098) (62,821) Net Income (Unaudited)............................. 780,987 --------- --------- ------------ ----------- --------- Balance, January 31, 1997 (Unaudited).............. 4,878,476 $ 243,924 $ 17,161,105 ($ 341,111) ($ 62,821) --------- --------- ------------ ----------- --------- --------- --------- ------------ ----------- ---------
The accompanying notes are an integral part of these financial statements. F-10 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEARS ENDED OCTOBER 31, JANUARY 31, ------------------------------------- ------------------------ 1994 1995 1996 1996 1997 ---- ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income..................................... $ 1,426,005 $ 849,105 $ 2,367,939 $ 501,863 $ 780,987 ----------- ----------- ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization................ 93,141 130,397 329,680 54,970 118,629 Provision for losses on accounts receivable................................. 5,000 61,000 81,000 Changes in assets and liabilities: Accounts receivable........................ 286,638 854,552 (8,522,460) 6,031 278,442 Prepaid expenses and other current assets.................................. (11,443) (405,116) 267,464 (81,856) (246,776) Accounts payable and accrued expenses...... (3,807) (10,064) 262,684 (190,834) (76,269) Accrued payroll............................ 36,325 (151,348) 1,606,791 (245,606) (215,376) Billings in excess of costs and estimated earnings................................ (157,509) (148,229) Taxes other than income taxes.............. 1,827 (18,938) 227,113 283,621 227,921 Income taxes payable....................... 1,482,751 58,749 162,914 ----------- ----------- ----------- ----------- ----------- Total Adjustments................................ 250,172 251,254 (4,284,977) (114,925) 330,485 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities..................................... 1,676,177 1,100,359 (1,917,038) 386,938 1,111,472 ----------- ----------- ----------- ----------- ----------- Cash flows from investing activities: Property and equipment acquired................ (20,619) (68,189) (128,264) (29,049) (80,546) (Increase) decrease in deposits................ (557) (6,643) (44,965) (4,422) 4,333 Cash paid for acquisitions, net of cash acquired..................................... (2,345,966) (1,049,433) (5,012,394) Increase in intangible assets.................. (5,065) (137,272) ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities...... (21,176) (2,420,798) (1,222,662) (38,536) (5,225,879) ----------- ----------- ----------- ----------- ----------- Cash flows from financing activities: Net borrowing (repayments) under short term debt arrangements....................... (4,703) 176,278 1,832,201 (489,796) 4,253,364 Repayments of long term debt............... (35,228) (1,092,362) (28,890) (20,090) Sale of common stock....................... 1,000,000 Exercise of stock options.................. 5,468 15,938 438 ----------- ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities..................................... (34,463) (916,084) 2,848,139 (518,248) 4,233,274 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.................................... 1,620,538 (2,236,523) (291,561) (169,846) 118,867 Cash and cash equivalents at beginning of year... 913,535 2,534,073 297,550 297,550 5,989 ----------- ----------- ----------- ----------- ----------- Cash and cash equivalents at end of year......... $ 2,534,073 $ 297,550 $ 5,989 $ 127,704 $ 124,856 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Supplemental cash flow information: Cash paid for: Interest expense............................. $ 34,196 $ 36,738 $ 163,811 $ 24,901 $ 90,189 Income taxes................................. $ 123,049 $ 220,498 $ 726,332 $ 197,438 Acquisitions: Fair value of assets acquired.............. $ 5,218,694 $ 7,302,476 $ 5,641,380 Liabilities assumed........................ 2,872,728 6,253,043 628,986 ----------- ----------- ----------- Cash paid, net of cash acquired............ $ 2,345,966 $ 1,049,433 $ 5,012,394 ----------- ----------- ----------- ----------- ----------- -----------
F-11 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business RCM Technologies, Inc. (the "Company"), through its wholly-owned subsidiaries, is a nationwide provider of temporary and contract personnel to businesses, professional and service organizations, manufacturers and public utilities. The Company principally focuses its staffing services in the Professional Engineering and Technical, Information Technology, Health Care and General Staff Support sectors. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Interim Unaudited Financial Information The accompanying interim unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). 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, although management believes that the disclosures are adequate to make the information presented not misleading. 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 three months ended January 31, 1997 are not necessarily indicative of the results to be expected for the full year. Property and Equipment Depreciation of equipment is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated useful lives on the straight-line basis. Estimated useful lives range from three to ten years. Leasehold improvements are amortized over the lives of the respective leases or the service lives of the improvements, whichever is shorter. Income Taxes The Company follows the liability method of accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Revenue Recognition Revenue is recognized concurrently with the performance of services. When the Company enters into long-term contracts for the supply of temporary personnel, billings are rendered for employee hours worked according to contractual billing rates. Billings in excess of costs and estimated earnings on cost plus fixed fee contracts represents billings in excess of revenue recognized. Labor and overhead costs, and earnings on contracts with government contractors are subject to audit by the primary contractor or a division of the United States government. F-12 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Profit Sharing Plan The Company sponsors a defined contribution plan (401-K Plan). Participation in the plan is available to all eligible employees as defined in the plan. Company contributions to the plan are based on a percentage of the employee's contributions to the plan subject to management's election to make a contribution. There were no contributions charged to operations by the Company for fiscal years ended October 31, 1994, 1995 and 1996 and for the three months ended January 31, 1996 and 1997. Cash Equivalents For purposes of presenting the consolidated statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Earnings per Share Earnings per share of common stock are based on the weighted average number of shares of common stock and dilutive common share equivalents (which arise from stock options) outstanding during the periods. No further dilution resulted from a computation of fully diluted earnings per share. Use of Estimates 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Intangible Assets Intangible assets primarily consist of goodwill associated with the acquired businesses. Goodwill is amortized on a straight-line basis over 40 years. The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill is reduced by the estimated shortfall of cash flows. Other intangible assets consist primarily of non-compete agreements, which are amortized over the term of the respective agreements. Amortization expense for fiscal years 1994, 1995 and 1996 was $4,136; $48,928 and $211,337, respectively. Amortization expense for the three months ended January 31, 1996 and 1997 was $29,100 and $87,107, respectively. Fair Value of Financial Instruments The carrying value of financial instruments approximates fair value. The Company's financial instruments are accounts receivable, accounts payable and long-term debt. The Company does not have any off-balance sheet financial instruments or derivatives. New Standards In October 1995, the Financial Accounting Standards Board issued Statement No. 123, Accounting for Stock-Based Compensation, which is effective beginning in 1996. This statement encourages the fair value based method of accounting for stock options and similar equity instruments F-13 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) granted to employees. This method requires that the fair value of equity instruments granted to employees be recorded as compensation expense. However, the statement allows companies to continue to use the intrinsic value based method which, in most cases, does not result in a charge to earnings. The Company will not adopt the fair value based method of accounting for stock options and the Company does not anticipate that this statement will have a material impact on the financial statements. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement 121"), which requires companies to review long-lived assets and certain identifiable intangibles to be held, used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has adopted Statement 121, which had no significant effect on the financial statements. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("Statement 128"), Earnings per Share. This statement requires the presentation of basic earnings per share and, if applicable, diluted earnings per share, instead of primary and fully diluted earnings per share required under Accounting Principles Board Opinion No. 15. ("Opinion No. 15"). Had the principles of Statement 128 been applied for the year ended October 31, 1996, and the three months ended January 31, 1997, basic earnings per share would have been $.56 and $.16, respectively, and diluted earnings per share would have been $.55 and $.16, respectively. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129 ("Statement 129"), Disclosure of Information About Capital Structure. The Company does not anticipate that Statement 129 will have a material impact on the financial statements. Pro Forma Net Income and Net Income Per Share (Unaudited) The Company's pro forma net income and net income per share for the year ended October 31, 1996, and the three months ended January 31, 1997, are $2,506,000 and $836,000 and $.54 and $.15, respectively. The supplemental pro forma net income and net income per share reflect the issuance of shares necessary to retire the average balance of notes payable outstanding of approximately $2,048,000 and $4,510,000 for the year ended October 31, 1996, and January 31, 1997, respectively, and the resulting increase in net income in the amount of $185,000 and $55,000 for the year ended October 31, 1996, and the three months ended January 31, 1997, respectively. The calculation is based on the weighted average shares outstanding used in the calculation of net income per share, adjusted for the estimated shares that would be issued by the Company, i.e. 337,251 and 666,370 shares for year ended October 31, 1996, and three months ended January 31, 1997, respectively, at an estimated offering price of $8.00 per share, to retire these obligations, at actual income tax rates of 16% and 39% for the year ended October 31, 1996 and the three months ended January 31, 1997, respectively. This calculation does not reflect the impact of the Company's acquisitions. 2. STOCK SPLIT In April 1996, the Board of Directors, with stockholder approval, amended the Company's Articles of Incorporation to effect a one-for-five reverse split of common stock whereby each five shares of issued and outstanding common stock were exchanged for one share of common stock. The amendment had no effect on the number of authorized shares and the par value of the common stock. All references in the financial statements to weighted average number of shares outstanding, earnings per share amounts and stock option data have been restated to reflect the reverse split. F-14 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 3. SALE OF COMMON STOCK On February 5, 1996, the Company issued and sold 276,625 shares of common stock to Limeport Investments, LLC in a Private Placement transaction for $1,000,000 ($3.615 per share). The purchase price was based on a twenty percent discount to the twenty day average closing price prior to the purchase of the shares. The shares are restricted securities; however, the Company has agreed to register such shares by filing a shelf registration statement by February 15, 1997. The President of the Company, Leon Kopyt, has been granted certain voting rights over these shares as long as they remain owned by Limeport Investments, LLC. 4. ACQUISITIONS Three Years Ended October 31, 1996 During the three year period ended October 31, 1996, the Company acquired five businesses in the staffing services industry. These acquisitions, which are described 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. On December 15, 1994, the Company purchased certain operating assets of Great Lakes Design, Inc. for $200,000 in the form of a $150,000 note payable and $50,000 in cash. In addition, the Company will share with the seller a portion of the operating income of the Great Lakes Design operating unit for a period of five years after acquisition. Costs in excess of assets acquired of $52,800 are being amortized over a period of forty years. A non-compete covenant of $107,100 is being amortized over a five year period. The note payable is uncollateralized, bears interest at 8% per annum and is payable in quarterly installments of $20,490, including interest, with a final maturity date of December 1, 1996. On August 30, 1995, the Company acquired Cataract, Inc., a supplier of management, engineering, design and technical services to the nuclear power, fossil fuel, electric utilities and process industries. The acquisition was completed through a merger transaction pursuant to which Cataract, Inc. was merged with and into a newly-created subsidiary of the Company, which then concurrently changed its name to "Cataract, Inc." The consideration payable to the former shareholders of Cataract, Inc. consisted of $2,000,000 cash and 312,311 restricted shares of the Registrant's common stock (the "Shares"), valued at $1,200,000. The cost in excess of net assets acquired was $3,385,966. The cost in excess of net assets acquired is being amortized over a 40 year period. The shares issued to the former Cataract, Inc. shareholders have been pledged to the Company for a period of three years to secure the performance of certain conditions subsequent to the merger relating to the achievement of certain levels of sales revenues that have been warranted by the former Cataract, Inc. shareholders. Following the expiration of the pledge period, the Shares are to be placed in a voting trust until the earlier of: (i) the public or private sale of such Shares in open market transactions to unaffiliated third parties; or (ii) the resignation or removal from office of Leon Kopyt, currently Chief Executive Officer and President of the Company. Notwithstanding the above, one-third of the Shares shall be released from trust commencing upon the fifth anniversary of the closing, and thereafter an additional one-third of the Shares shall be released from trust upon each of the sixth and seventh annual anniversaries of the closing date. F-15 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 4. ACQUISITIONS -- (CONTINUED) During the period in which the Shares are subject to pledge and the voting trust, the Shares are to be voted by the Company's Board of Directors on behalf of the former shareholders of Cataract, Inc. On March 11, 1996, the Company acquired all of the outstanding shares of The Consortium, a specialty provider of information technology and health care personnel servicing private sector and government clients in the greater metropolitan New York region. The consideration paid to the former shareholders of The Consortium consisted of 1.3 million restricted shares of the Company's common stock, valued at $5,000,000, in exchange for all of the outstanding capital stock of The Consortium. The Company has agreed to file a shelf registration statement by February 15, 1997, permitting the sale of $600,000 in value of securities during the period April 1997 through March 1998. Thereafter, the remainder of these shares are subject to significant restrictions on resale through March 11, 1999. The cost in excess of net assets acquired of $4,940,700 is included in the Company's Consolidated Balance Sheet as "Intangible Assets" and is being amortized over a 40 year period. On May 1, 1996, the Company acquired The Consortium of Maryland, Inc. ("Consort MD"), a specialty provider of information technology personnel services to major U.S. Corporations in the greater metropolitan Washington, D.C. region. Consort MD was not related or affiliated with The Consortium. The acquisition was completed through a merger transaction (the "Merger") pursuant to which Consort MD was merged with and into a newly-created subsidiary of the Company, which then concurrently changed its name to "The Consortium of Maryland, Inc." The Merger consideration paid to the former shareholder of Consort MD at the closing consisted of $621,500 cash and 34,327 restricted shares of the Company's common stock valued at $377,597. Additional merger consideration, consisting of additional shares of stock having value equal to tangible net worth of Consort MD as of the Merger date, will be paid in the amount of approximately $250,000 to the former shareholder of Consort MD. The Company has agreed to file a registration statement by May 1, 1998 permitting the sale of the restricted shares. On September 13, 1996, the Company acquired all the assets and assumed all of the liabilities of Performance Staffing, Inc. ("PSI"). The consideration paid to the former shareholders of PSI consisted of 2,500 shares of restricted shares of the Company's common stock valued at $21,000. There is contingent consideration of $10,000, which is payable upon the collection of not less than 93% of all of the outstanding accounts receivables billed by PSI prior to acquisition by the Company. The following unaudited results of operations have been prepared assuming the acquisitions had occurred as of 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.
YEAR ENDED OCTOBER 31, ---------------------------- 1995 1996 ----------- ----------- Revenues.............................................................. $77,883,000 $75,075,000 Net income............................................................ $ 2,059,000 $ 2,764,000 Income per common share............................................... $ .45 $ .57
Three Months Ended January 31, 1997 On January 7, 1997, the Company acquired Programming Alternatives of Minnesota, Inc. ("PAMI"), a Minneapolis, Minnesota-based specialty provider of information technology personnel, particularly those with high demand client-server skills. The acquisition was completed effective as of F-16 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 4. ACQUISITIONS -- (CONTINUED) November 4, 1996 through a stock purchase transaction (the "Purchase") pursuant to which PAMI became a wholly-owned subsidiary of the Company. The Purchase consideration paid to the former shareholders of PAMI consisted of $4,490,000 cash and a $1,625,000 three year promissory note payable contingent upon PAMI achieving certain base levels of operating income for each twelve month period following the Purchase, for a period of three years. An additional earn-out payment, to be recorded as additional purchase price, may be made to the former shareholders at the end of the third anniversary of the Purchase to the extent that operating income exceeds these base levels. The acquisition has been accounted for under the purchase method of accounting. The cost in excess of net assets acquired of $4,483,331 is included in the Company's Consolidated Balance Sheet as "Intangible Assets" and is being amortized over a 40 year period. The following unaudited results of operations have been prepared assuming the acquisition had occurred at November 1, 1995. Those results are not necessarily indicative of results of future operations nor of results that would have occurred had the acquisition been consummated at November 1, 1995. THREE MONTHS ENDED ------------------- JANUARY 31, --------------- 1996 --------------- Revenues.................................................... $19,072,000 Income before income taxes.................................. $ 1,244,000 Net income.................................................. $ 746,000 Income per common share..................................... $ .16 5. PROPERTY AND EQUIPMENT Property and equipment is comprised of the following:
OCTOBER 31, JANUARY 31, ---------------------- ----------- 1995 1996 1997 ---------- ---------- ----------- Office equipment......................................... $1,017,197 $1,453,711 $1,784,729 Capitalized lease........................................ 174,873 174,873 174,873 Leasehold improvements................................... 16,247 16,247 16,247 ---------- ---------- ---------- 1,208,317 1,644,831 1,975,849 Less: accumulated depreciation and amortization.......... 763,966 1,142,740 1,199,043 ---------- ---------- ---------- $ 444,351 $ 502,091 $ 776,806 ---------- ---------- ---------- ---------- ---------- ----------
6. NOTE PAYABLE -- BANK The note payable is the outstanding amount pursuant to a bank revolving line of credit agreement expiring in 1998. Borrowing under the credit facility is based on 85% of accounts receivable on which not more than ninety days have elapsed since the date of invoicing. The credit facility is collateralized by accounts receivable, contract rights and furniture and fixtures with unlimited guarantees from the Company. The credit facility requires the subsidiaries and the Company to meet certain objectives with respect to financial ratios and earnings. The interest rate charged by the bank at October 31, 1995 and 1996 was at the prime rate (effective rate of 8.75% and 8.25%, respectively). At October 31, 1996, there was $6,991,000 available under the credit facility. F-17 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 6. NOTE PAYABLE -- BANK -- (CONTINUED) On December 19, 1996, the Company and its subsidiaries entered into an amended and restated agreement with Mellon Bank, N.A. for providing a credit facility in the maximum amount of $20,000,000, increased from $10,000,000 at October 31, 1996. The agreement expires on June 30, 1999. The weighted average interest rate charged by the bank, under the amended and restated agreement, based on the London Interbank Offered Rate ("LIBOR") plus 2.25%, was 7.82% at January 31, 1997. 7. SHAREHOLDER RIGHTS PLAN On March 14, 1996, the Board of Directors of the Company declared a dividend of one Common Share Purchase Right ("Right") for each outstanding share of common stock of the Company. Each Right entitles stockholders to buy one share of common stock at an exercise price of $3.00. The Rights will be exercisable only if a person or group acquires 15% or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the common stock. The Company will be entitled to redeem the Rights at one cent per Right at any time before a 15% or greater position has been acquired. The dividend distribution was made on April 1, 1996, to shareholders of record at the close of the business on that date. The Rights expire April 1, 2006. 8. SHAREHOLDERS' EQUITY Common shares reserved Shares of unissued common stock were reserved for the following purposes:
OCTOBER 31, JANUARY 31, ---------------------- ----------- 1995 1996 1997 --------- ----------- ----------- Exercise of warrants............................................ 157,342 157,342 157,342 Exercise of options outstanding................................. 163,300 214,400 714,400 Future grants of options........................................ 74,100 760,300 762,700 --------- ----------- ----------- Total......................................................... 394,742 1,132,042 1,634,442 --------- ----------- ----------- --------- ----------- -----------
Warrants At October 31, 1995 and 1996, and January 31, 1997, the Company had 786,709 warrants outstanding to purchase 157,342 shares of the Company's common stock. As a result of the reverse stock split (see note 2) each warrant continues to have an exercise price of $3.00 per share, but five warrants are needed to convert to one share of common stock. The warrants expire on April 1, 1997 unless otherwise extended by the Board of Directors. Incentive Stock Option Plans On February 27, 1986, the shareholders approved the RCM Technologies, Inc. 1986 Incentive Stock Option Plan ("1986 Plan") which authorizes the issuance not later than October 30, 1995 of up to 60,000 shares of Common Stock to officers, directors and key employees of the Company and its subsidiaries. On April 23, 1992, the shareholders approved the RCM Technologies, Inc. 1992 Incentive Stock Option Plan ("1992 Plan") which authorizes the issuance not later than February 13, 2002 of up to 100,000 shares of Common Stock to officers, directors and key employees of the Company and its F-18 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 8. SHAREHOLDERS' EQUITY -- (CONTINUED) subsidiaries. The 1986 and 1992 Plans contain substantially the same terms. Options under all plans are intended to be incentive stock options pursuant to Section 422A of the Internal Revenue Code. The option terms for all plans cannot exceed ten years and the exercise price cannot be less than 100% of the fair market value of the shares at the time of grant. On May 19, 1994, the shareholders approved the RCM Technologies, Inc. 1994 Nonemployee Directors Stock Option Plan ("1994 Plan") as a means of recruiting and retaining nonemployee directors of the Company. There are 80,000 shares of Common Stock reserved under the plan for issuance no later than July 19, 2004. All director stock options are granted at fair market value at the date of grant. The exercise of options granted is contingent upon service as a director for a period of one year. If the optionee ceases to be a director of the Company, any option granted shall terminate. On August 15, 1996, the Board of Directors approved the RCM Technologies, Inc. 1996 Executive Stock Plan ("1996 Plan") which authorizes the issuance not later than August 15, 2006 of up to 1,250,000 (effective January 15, 1997) shares of Common Stock to officers and key employees of the Company and its subsidiaries. Effective November 21, 1996, the Chief Executive Officer, Mr. Kopyt, was granted 500,000 options pursuant to the 1996 Plan, of which 375,000 options were not exercisable as of January 31, 1997. Transactions related to all stock options are as follows:
THREE MONTHS ENDED ------------------- YEAR ENDED OCTOBER 31, JANUARY 31, ------------------------------------ ------------------- 1994 1995 1996 1997 ----------- ----------- ---------- ------------------- Outstanding options, beginning....................... 106,000 173,300 163,300 214,400 Granted.............................................. 80,000 50,300 61,100 500,000 Forfeited............................................ (7,700) (60,300) Exercised............................................ (5,000) (10,000) ----------- ----------- ---------- ----------- Outstanding options, end of period................... 173,300 163,300 214,400 714,400 ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Exercisable options.................................. 93,300 87,000 141,300 266,300 ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Option grant price per share......................... $1.09 $1.09 $1.09 $1.09 to $ 19.84 to $ 19.84 to $ 8.13 to $ 8.13
9. COMMITMENTS Employment Contract and Termination Benefits Agreement The Company has employment agreements with its President and certain senior executives with a latest expiration date of February 28, 1999. The agreement with the President provides for a bonus based on pre-tax earnings. No maximum compensation limit exists. The aggregate commitment for future salaries at October 31, 1996, excluding bonuses, was $1,660,000. In addition, an option plan is available for all employees to receive stock options resulting from recommendations by the Compensation Committee of the Board of Directors. The Company has a termination benefits agreement with the President which grants him the right to receive up to 2.99 times the average aggregate annual compensation as reported for federal income tax purposes for the past five years plus continuation of certain benefits, and provides for the surrender of stock options in exchange for the payment by the Company of the difference between the option price and the share price on the date of change of control (as defined) within a period of five years thereafter or termination (as defined), which ever is higher. The maximum contingent liability for F-19 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 9. COMMITMENTS -- (CONTINUED) salary and incentive compensation is approximately $1,452,000 and $2,950,000 as of October 31, 1996 and January 31, 1997, respectively. On March 18, 1997, the Company amended the Agreement whereby, following a change in control, the remaining term of the President's employment is extended for five years (the "Extended Term"). If the President's employment is terminated thereafter by the Company for other than cause, or by the President for good reason: the Company is obligated to pay the President an amount equal to his salary and bonus for the remainder of the Extended Term; the exercise price of 500,000 options granted to the President will be reduced to 50% of the fair market value of the Common Stock on the date of termination if the resulting exercise price is less than the original exercise price of $7.125 per share; and the Company shall be obligated to pay the President the amount of any excise taxes associated with the benefits provided under this Agreement. If such termination had taken place on March 18, 1997, the President would have been entitled to a payment of approximately $2,150,000 and the equity in the options would have increased by approximately $1,500,000. Operating leases The Company leases office facilities and various equipment under noncancellable leases expiring at various dates through October 29, 2006. Certain leases are subject to escalation clauses based upon changes in various factors. The minimum future annual operating lease commitments for leases with noncancellable terms in excess of one year, exclusive of escalation, are as follows: YEAR ENDING OCTOBER 31, AMOUNT - ------------ ---------- 1997........................................................... $ 583,800 1998........................................................... 420,100 1999........................................................... 264,300 2000........................................................... 213,900 2001........................................................... 188,400 Thereafter..................................................... 1,023,000 ---------- Total.......................................................... $2,693,500 ---------- ---------- Rent expense for the years ended October 31, 1994, 1995 and 1996 was $336,662, $354,267, and $498,042, respectively. Rent expense for the three months ended January 31, 1996 and 1997 was $101,417 and $174,455, respectively. 10. MAJOR CUSTOMERS Sales to major clients for the years ended October 31, 1994, 1995 and 1996 were as follows: For the year ended October 31, 1994, three clients contributed $7,811,000, $2,950,000 and $2,095,000, respectively (an aggregate of $12,856,000 or 44.0% of total sales). For the year ended October 31, 1995, three clients contributed $3,300,000, $2,061,000 and $1,347,000, respectively (an aggregate of $6,708,000 or 24.9% of total sales). Accounts receivable from these three clients represented 8.1% of the total trade accounts receivable at October 31, 1995. For the year ended October 31, 1996, one client contributed $7,776,000 or 12.7% of total sales. Accounts receivable from the client represented 13.3% of the total trade accounts receivable at October 31, 1996. F-20 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 10. MAJOR CUSTOMERS -- (CONTINUED) Sales to major clients for the three months ended January 31, 1996 and 1997 were as follows: For the three months ended January 31, 1996, one client contributed $1,114,000 or 11.4% of the total sales. Accounts receivable from the client represented 2.1% of the total trade accounts receivable at January 31, 1996. For the three months ended January 31, 1997, one client contributed $2,482,000 or 11.7% of the total sales. Accounts receivable from the client represented 4.0% of the total trade accounts receivable at January 31, 1997. 11. RELATED PARTY TRANSACTIONS A director of the Company is a shareholder in a law firm that rendered various legal services to the Company. Fees paid to the law firm have not been significant. 12. INCOME TAXES The components of income tax expense are as follows:
THREE MONTHS ENDED ------------------------ YEARS ENDED OCTOBER 31, JANUARY 31, -------------------------------------------- ------------------------ 1994 1995 1996 1996 1997 -------------- ------------- ------------- ----------- ----------- Current Federal............................... $ 27,000 $ 10,000 $ 48,000 $ 46,749 $ 357,911 State and local....................... 160,043 83,500 405,539 12,000 131,423 -------------- ------------- ------------- ----------- ----------- Total income tax expense -- current..... $ 187,043 $ 93,500 $ 453,539 $ 58,749 $ 489,334 -------------- ------------- ------------- ----------- ----------- -------------- ------------- ------------- ----------- -----------
The income tax provisions reconciled to the tax computed at the statutory Federal rate was:
THREE MONTHS ENDED -------------------- YEARS ENDED OCTOBER 31, JANUARY 31, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- Tax at statutory rate............................................ 34.0% 34.0% 34.0% 34.0% 34.0% State income taxes, net of Federal income tax benefit............ 6.5 5.8 9.4 1.4 6.8 Provision for doubtful accounts.................................. .1 .3 Net operating loss carry-overs................................... (31.3) (32.3) (32.4) (24.9) (2.3) Other, net....................................................... 2.3 2.4 4.8 --------- --------- --------- --------- --------- 11.6% 9.9% 16.1% 10.5% 38.5% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
At October 31, 1996, the net operating loss carry-overs available to offset regular taxable income and tax credit carry-overs available to offset regular or alternative minimum federal taxes are as follows: F-21 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 12. INCOME TAXES -- (CONTINUED) NET EXPIRATION OPERATING TAX DATE LOSS CREDITS - ---------- ----------- --------- 1997-2004.............................................. $ $53,100 2005................................................... 20,000 2007................................................... 300,000 --------- ------- Total.................................................. $300,000 $73,100 -------- ------- Should there be a change in control as defined in the Internal Revenue Code, utilization of such losses could be limited. Net operating losses for alternative minimum tax purposes at October 31, 1996 are approximately $270,000. Significant components of the Company's deferred tax assets at October 31, 1995 and 1996, and January 31, 1997, are as follows:
OCTOBER 31, JANUARY 31, ------------------------ ----------- 1995 1996 1997 ---------- -------- -------- Deferred tax assets due to: Net operating loss carry-over.......................................... $1,019,800 $102,000 $ 72,900 Tax credit carry-over.................................................. 73,100 73,100 73,100 Depreciation of property and equipment................................. 23,200 20,000 20,000 Other.................................................................. 46,887 ---------- -------- -------- 1,162,987 195,100 166,000 Less: 100% valuation allowance........................................... 1,162,987 195,100 166,000 ---------- -------- -------- Total net deferred tax assets............................................ $ $ $ ---------- -------- -------- ---------- -------- --------
The valuation allowance was decreased during 1995 and 1996 and 1997 by $316,286, $967,887 and $29,100, respectively, due to the utilization of net operating loss carry-overs and the reversal of temporary differences. 13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Year Ended October 31, 1995
GROSS NET INCOME SALES PROFIT NET INCOME PER SHARE* -------------- ------------- ------------- ------------- 1st Quarter........................................... $ 6,692,756 $ 1,150,362 $ 229,015 $ .08 2nd Quarter........................................... 6,280,172 1,155,413 277,724 .05 3rd Quarter........................................... 5,015,376 894,096 69,716 .02 4th Quarter........................................... 8,927,433 1,337,049 272,650 .08 -------------- ------------- ------------- --------- Total................................................. $ 26,915,737 $ 4,536,920 $ 849,105 $ .28 -------------- ------------- ------------- --------- -------------- ------------- ------------- ---------
F-22 RCM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS AND DISCLOSURES AT AND FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1997 ARE UNAUDITED) -- (CONTINUED) 13. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -- (CONTINUED) Year Ended October 31, 1996
GROSS NET INCOME SALES PROFIT NET INCOME PER SHARE* -------------- ------------- ------------- ------------- 1st Quarter........................................... $ 9,776,507 $ 1,790,629 $ 501,863 $ .15 2nd Quarter........................................... 13,785,626 2,473,426 386,736 .09 3rd Quarter........................................... 17,378,155 3,798,231 684,937 .14 4th Quarter........................................... 20,098,885 4,197,002 794,403 .16 -------------- ------------- ------------- --------- Total................................................. $ 61,039,173 $ 12,259,288 $ 2,367,939 $ .55 -------------- ------------- ------------- --------- -------------- ------------- ------------- ---------
- ------------------ * Per share data is adjusted to reflect the one for five reverse stock split (note 2). Total of quarterly amounts do not agree to the annual amount due to separate quarterly calculations of weighted average shares outstanding. 14. OTHER INCOME (EXPENSE) Included in Other Income (Expense) is Interest Income in the amount of $57,810; $142,810 and $116, respectively for years ended October 31, 1994, 1995 and 1996. 15. SELF-FUNDED GROUP MEDICAL INSURANCE Cataract, Inc. provides group medical insurance to its employees on a self-funded basis up to $30,000 per insured individual to an annual aggregate limitation of $242,000. Amounts in excess of these thresholds are covered by insurance. Management believes that adequate reserves have been recorded to cover claims incurred but not reported as of October 31, 1996 and January 31, 1997. 16. CONTINGENCY During the third quarter of 1996, the Company received a request for contribution in an unspecified amount from the purchaser of a property in 1977 on which the Company had previously conducted the storage and handling of certain aluminum recovery materials. The purchaser has suggested that, based upon an order by the California Regional Water Quality Control Board, the Company's handling and storage of certain materials on the site prior to and after the sale may have contributed to environmental contamination of the ground water on and around the site. Any such contamination was discovered years after the sale. Based upon the results of a preliminary examination of the matter, which includes an environmental survey of the property conducted prior to the time of the sale, the Company believes that the site in question complied with all environmental rules and regulations at the time of the sale and that any contamination was likely caused by the operation of the purchaser thereafter. The Company believes it has meritorious defenses to the purchaser's claims and, in management's opinion, the Company's exposure under the claims is not likely to have a materially adverse impact on the Company's overall financial condition. There can be no assurance, however, that the Company will not incur material expenses and costs in connection with the defense and resolution of any claims brought by the purchaser or that the Company will not ultimately be responsible for certain of the costs incurred by the purchaser, which may include pre- and post-judgment interest, in an amount that may be material to the Company. Management intends to vigorously oppose any such claims. F-23 SCHEDULE I RCM TECHNOLOGIES, INC. (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEET OCTOBER 31, 1995 AND 1996
1995 1996 -------------- -------------- ASSETS Current assets Cash........................................................................... $ 1,733 $ 8,586 Prepaid expenses and other assets.............................................. 134,937 132,663 -------------- -------------- Total current assets........................................................ 136,670 141,249 -------------- -------------- Other assets Deposits....................................................................... 5,495 5,695 Long-term receivables from affiliates.......................................... 8,188,366 16,073,166 -------------- -------------- 8,193,861 16,078,861 -------------- -------------- Total assets................................................................ $ 8,330,531 $ 16,220,110 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY Share in deficiency in assets of subsidiaries.................................... 803,946 -------------- -------------- Shareholders' equity Common stock................................................................... 813,756 243,924 Additional paid in capital..................................................... 10,265,687 17,161,105 Accumulated deficit............................................................ (3,490,037) (1,122,098) -------------- -------------- 7,589,406 16,282,931 Less: treasury stock........................................................... 62,821 62,821 -------------- -------------- Total shareholders' equity..................................................... 7,526,585 16,220,110 -------------- -------------- Total liabilities and shareholders' equity..................................... $ 8,330,531 $ 16,220,110 -------------- -------------- -------------- --------------
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc. and subsidiaries are an integral part of these statements. F-24 SCHEDULE I RCM TECHNOLOGIES, INC. (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF OPERATIONS YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
1994 1995 1996 ------------- ----------- ------------- Operating expenses Administrative...................................................... $ 116,418 $ 31,780 $ 139,280 ------------- ----------- ------------- Operating loss........................................................ (116,418) (31,780) (139,280) ------------- ----------- ------------- Miscellaneous expense................................................. (7,299) (3,678) (10,261) ------------- ----------- ------------- (7,299) (3,678) (10,261) ------------- ----------- ------------- Loss before management fee income..................................... (123,717) (35,458) (149,541) Management fee income................................................. 123,820 35,458 149,541 ------------- ----------- ------------- Income before income taxes............................................ 103 Income taxes.......................................................... 103 ------------- ----------- ------------- Income before income in subsidiaries Equity in earnings in subsidiaries.................................... 1,426,005 849,105 2,367,939 ------------- ----------- ------------- Net income............................................................ $ 1,426,005 $ 849,105 $ 2,367,939 ------------- ----------- ------------- ------------- ----------- -------------
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc. and subsidiaries are an integral part of these statements. F-25 SCHEDULE I RCM TECHNOLOGIES, INC. (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
1994 1995 1996 ------------- ----------- ------------- Cash flows from operating activities: Net income............................................................ $ 1,426,005 $ 849,105 $ 2,367,939 ------------- ----------- ------------- Adjustments to reconcile net income to net cash provided by operating activities: Changes in operating assets and liabilities: Prepaid expenses and other assets................................ 530 (2,625) 2,274 Accounts payable and accrued expenses............................ (4,681) (11,108) Income taxes payable............................................. (1,800) ------------- ----------- ------------- (5,951) (13,733) 2,274 ------------- ----------- ------------- Net cash provided by operating activities........................... 1,420,054 835,372 2,370,213 ------------- ----------- ------------- Cash flows from investing activities: Increase in deposits................................................ (95) Share in deficiency in assets of subsidiaries....................... (1,426,005) (849,105) (2,367,939) Decrease (increase) in long-term receivables from subsidiaries........ 399 8,042 (1,011,359) ------------- ----------- ------------- Net cash used in investing activities............................... (1,425,701) (841,063) (3,379,298) ------------- ----------- ------------- Cash flows from financing activities: Sale of common stock................................................ 1,000,000 Exercise of stock options........................................... 5,468 15,938 ------------- ----------- ------------- Net cash provided by financing activities........................... 5,468 1,015,938 ------------- ----------- ------------- Net increase (decrease) in cash and equivalents....................... (179) (5,691) 6,853 Cash and equivalents at beginning of year............................. 7,603 7,424 1,733 ------------- ----------- ------------- Cash and equivalents at end of year................................... $ 7,424 $ 1,733 $ 8,586 ------------- ----------- ------------- ------------- ----------- -------------
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc. and subsidiaries are an integral part of these statements. F-26 SCHEDULE II RCM TECHNOLOGIES, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - -------- ----------- ------------------------ ----------- ----------- ADDITIONS ------------------------ BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTION PERIOD - ----------- ----------- ----------- ----------- ----------- ----------- Year Ended October 31, 1996 Allowance for doubtful accounts on trade receivables........................................ $ 15,000 $ 15,320 $ 76,320 $ 76,000 Year Ended October 31, 1995 Allowance for doubtful accounts on trade receivables........................................ $ 15,000 $ 40,310 $ 40,310 $ 15,000 Year Ended October 31, 1994 Allowance for doubtful accounts on trade receivables........................................ $ 10,000 $ 92,707 $ 97,707 $ 15,000
F-27 RCM TECHNOLOGIES, INC. COMPUTATION OF EARNINGS PER COMMON SHARE YEARS ENDED OCTOBER 31, 1994, 1995 AND 1996
1994 1995 1996 ------------- ------------- ------------- Income Income applicable to common stock................................... $ 1,426,005 $ 849,105 $ 2,367,939 ------------- ------------- ------------- ------------- ------------- ------------- Shares Weighted average number of common shares outstanding.................................................... 2,875,077 2,933,819 4,247,907 Common stock equivalents.......................................... 55,199 74,150 72,664 ------------- ------------- ------------- Total............................................................. 2,930,276 3,007,969 4,320,571 ------------- ------------- ------------- ------------- ------------- ------------- Primary income per share............................................ $ .49 $ .28 $ .55 Fully diluted earnings per share.................................... $ .49 $ .28 $ .55 ------------- ------------- ------------- ------------- ------------- -------------
F-28 [RCM LOGO] [In the printed prospectus there is a pie chart which presents the Company's percent of revenues by product line.*] Information Technology - 40.5% Professional Engineering & Technical - 33.5% Specialty Healthcare - 6% General Support - 20% *for the three months ended January 31, 1997. ================================================================================ NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS PAGE --------- Prospectus Summary............................. 3 Risk Factors................................... 6 Acquisition Program............................ 12 Use of Proceeds................................ 14 Price Range of Common Stock and Dividend Policy....................................... 14 Capitalization................................. 15 Selected Consolidated Financial Data........... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 17 Business....................................... 25 Management..................................... 33 Principal and Selling Stockholders............. 39 Certain Relationships and Related Transactions................................. 41 Description of Securities...................... 42 Shares Eligible for Future Sale................ 46 Underwriting................................... 48 Legal Matters.................................. 50 Experts........................................ 50 Available Information.......................... 50 Index to Financial Statements.................. F-1 2,500,000 SHARES [LOGO] COMMON STOCK ------------------- PROSPECTUS ------------------- LEGG MASON WOOD WALKER INCORPORATED JANNEY MONTGOMERY SCOTT INC. , 1997 ================================================================================ PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following is a list of the estimated expenses to be incurred by the Registrant in connection with the preparation and filing of this Registration Statement. SEC Registration Fee........................................ $ 7,300 Printing and Engraving...................................... 100,000 Accountants' Fees and Expenses.............................. 25,000 Blue Sky Filing Fees and Expenses........................... 20,000 NASD Filing Fee............................................. 2,909 Listing Fees................................................ 17,500 Legal Fees and Expenses..................................... 225,000 Other Offering Expenses..................................... 77,291 ------- TOTAL................................................ $475,000 ======== Item 14. Indemnification of Directors and Officers The Company's Articles of Incorporation and Bylaws, taken in conjunction, provide that the Company shall, to the full extent permitted by the Nevada General Corporation Law, indemnify all persons whom it has the power to indemnify pursuant thereto, including officers and directors of the Company. In addition, the Articles of Incorporation authorize the Company to maintain insurance to cover such liabilities. The Company recently purchased Directors' and Officers' Liability Insurance to protect directors and officers of the Company from any liability asserted against them for acts taken or omissions occurring in their capacities as such. The Company policy has an aggregate liability limit of $2,000,000, at an annual cost of $45,250. The Company is not required to maintain such insurance and there can be no assurance that the Company will continue to maintain such insurance or coverage in such amounts. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issuer. II-1 Reference is made to Item 17 for the undertakings of the Registrant with respect to indemnification of liabilities arising under the Securities Act. Item 15. Recent Sales of Unregistered Securities 1. On August 30, 1995, the Company issued a total of 312,311 shares of Common Stock, to the stockholders set forth in the table below as partial consideration for the exchange of 100% of the stock of Cataract, Inc., a Pennsylvania corporation. Shares of Name Common Stock ---- ------------ Joseph Marubbio.................................. 70,270 Paula Marubbio................................... 70,270 Robert L. and Marie A. Starer, as tenants by the entireties..................................... 140,540 James R. and Sarah B. Affleck, Jr., as tenants by the entireties................................. 31,231 The issuance of such shares was made in reliance on the exemptions from registration requirements provided by Section 4(2) of the Securities Act. 2. On February 5, 1996, the Company issued and sold 276,625 shares of Common Stock to Limeport Investments, LLC for $1,000,000 in a private placement transaction exempt from registration requirements under Section 4(2) of the Securities Act. 3. On March 11, 1996, the Company issued a total of 1,300,000 shares of Common Stock to the stockholders set forth in the table below in consideration for the exchange of 100% of the stock of The Consortium, a New Jersey corporation. Shares of Name Common Stock ---- ------------ Martin Blaire.................................. 607,468 Barry S. Meyers................................ 607,468 Marie Wolfson.................................. 23,556 Howard Ross.................................... 55,084 Alexander C. Valcic............................ 6,424 The issuance of such shares was made in reliance on the exemptions from registration requirements provided by Section 4(2) of the Securities Act. 4. On May 2, 1996, the Company issued a total of 34,327 shares of Common Stock to the stockholder set forth in the table below as partial consideration for the exchange of 100% of the stock of The Consortium of Maryland, Inc., a Maryland corporation. II-2 Shares of Name Common Stock ---- ------------ Peter Kaminsky................................ 34,327 The issuance of such shares was made in reliance on the exemptions from registration requirements provided by Section 4(2) of the Securities Act. 5. On September 4, 1996, the Company issued a total of 2,500 shares of Common Stock to stockholders set forth in the table below as partial consideration for the exchange of the operating assets of Performance Staffing, Inc., a Kentucky corporation. Shares of Name Common Stock ---- ------------ J. Dennis Bodemann............................ 1,500 Harry R. Nelson............................... 1,000 The issuance of such shares was made in reliance on the exemption from registration requirements provided by Section 4(2) of the Securities Act. II-3 Item 16. Exhibits and Financial Statement Schedules Financial Statement Schedules Page Reference --------- I. Condensed Financial Information of the Company..................... F-26 II. Valuation and Qualifying Accounts and Reserves..................... F-29 Exhibits (1) Form of Underwriting Agreement. Filed herewith (3)(a) Articles of Incorporation, as amended, incorporated by reference to Exhibit 3(a) of the Registrant's Form 10-K dated October 31, 1994, filed with the Commission on January 4, 1995 (Commission File No. 1-10245). (3)(b) Bylaws, as amended on February 22, 1996; incorporated by reference to Exhibit 3 of the Quarterly Report on Form 10-Q dated January 31, 1996. (4)(a) Warrant Agreement dated September 1, 1989, with respect to Class C Warrants between the Registrant and American Stock Transfer and Trust Company; incorporated by reference to Exhibit 4 (b) of the Registrant's Form S-1 Registration Statement dated July 25, 1989, as amended August 16, 1989 and May 14, 1990 (Commission File No. 33-30109). (4)(b) Rights Agreement dated as of March 14, 1996, between RCM Technologies, Inc. and American Stock Transfer & Trust Company, as Rights Agent; incorporated by reference to Exhibit 4 of the Registrant's Current Report on Form 8-K dated March 19, 1996. (5)(a) Opinion of Buchanan Ingersoll Professional Corporation. To be provided by amendment. (5)(b) Opinion of Schreck Morris. To be provided by amendment. (10)(a) Amended and Restated Loan and Security Agreement dated August 30, 1995 as amended on December 19, 1996 between, the Registrant, Intertec Design, Inc., Cataract, Inc., The Consortium and The Consortium of Maryland, Inc. and Mellon Bank, N.A.; incorporated by reference to Exhibit (10)(a) of the Annual Report on Form 10-K dated October 31, 1996 ("1996 10-K"). (10)(b) RCM Technologies, Inc. 1986 Incentive Stock Option Plan; incorporated by reference to Exhibit 10(d) of the Registrant's Annual Report on Form 10-K dated October 31, 1986, filed with the Commission on February 13, 1987 (Commission File No. 1-10245). II-4 (10)(c) RCM Technologies, Inc. 1992 Incentive Stock Option Plan; incorporated by reference to Exhibit A of the Registrant's Proxy Statement dated April 23, 1992, filed with the Commission on March 9, 1992 (Commission File No. 1-10245). (10)(d) RCM Technologies, Inc. 1994 Non-employee Director Stock Option Plan; incorporated by reference to Exhibit A of the Registrant's Proxy Statement dated May 19, 1994, filed with the Commission on June 22, 1994 (Commission File No. 33-80590). (10)(e) RCM Technologies, Inc. 1996 Executive Stock Option Plan dated August 15, 1996; incorporated by reference to Exhibit (10)(l) of the 1996 10-K. (10)(f) Stock Option Agreement dated November 30, 1996 between the Registrant and Leon Kopyt; incorporated by reference to Exhibit (10)(m) of the 1996 10-K. (10)(g) Second Amended and restated Termination Benefits Agreement dated March 18, 1997 between the Registrant and Leon Kopyt. (10)(h) Amended and restated Employment Agreement dated November 30, 1996 between the Registrant, Intertec Design, Inc. and Leon Kopyt; incorporated by reference to Exhibit (10)(g) of the 1996 10-K. (10)(i) Merger Agreement among RCM Technologies, Inc., CI Acquisition Corp. and Cataract, Inc. dated July 31, 1995; incorporated by reference to Exhibit (c)(1) of the Registrant's Current Report on Form 8-K dated August 30, 1995 ("Cataract 8-K"). (10)(j) Registration Rights Agreement dated August 30, 1995; incorporated by reference to Exhibit (c)(2) of the Cataract 8-K. (10)(k) Voting Trust Agreement dated August 30, 1995; incorporated by reference to Exhibit (c)(3) of the Cataract 8-K. (10)(l) Stock Pledge Agreement dated August 30, 1995; incorporated by reference to Exhibit (c)(5) of the Cataract 8-K. (10)(m) Stock Purchase Agreement among RCM Technologies, Inc., The Consortium and The Shareholders of The Consortium dated as of March 1, 1996; incorporated by reference to Exhibit (c)(1) of the Registrant's Current Report on Form 8-K dated March 19, 1996 ("Consortium 8-K"). (10)(n) Registration Rights Agreement dated March 11, 1996; incorporated by reference to Exhibit (c)(2) of the Consortium 8-K. (10)(o) Escrow Agreement dated March 11, 1996; incorporated by reference to Exhibit (c)(3) of the Consortium 8-K. II-5 (10)(p) Standstill and Shareholders Agreement dated March 11, 1996; incorporated by reference to Exhibit (c)(5) of the Consortium 8-K. (10)(q) Blaire Employment Agreement dated March 11, 1996; incorporated by reference to Exhibit (c)(6) of the Consortium 8-K. (10)(r) Meyers Employment Agreement dated March 11, 1996; incorporated by reference to Exhibit (c)(7) of the Consortium 8-K. (10)(s) Subscription Agreement dated January 12, 1996; incorporated by reference to Exhibit (a)(10) of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1996 ("January 10-Q"). (10)(t) Registration Rights Agreement dated February 5, 1996; incorporated by reference to Exhibit (a)(10.1) of the January 10-Q. (10)(u) Merger Agreement among RCM Technologies, Inc., Sort Acquisition Corp., the Consortium of Maryland, Inc. and Peter Kaminsky dated April 23, 1996; incorporated by reference to Exhibit (2) of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended April 30, 1996 ("April 10-Q"). (10)(v) Registration Rights Agreement dated May 2, 1996; incorporated by reference to Exhibit (10.1) of the April 10-Q. (10)(w) Escrow Agreement dated May 2, 1996; incorporated by reference to Exhibit (10.2) of the April 10-Q. (10)(x) Standstill and Shareholders Agreement dated May 2, 1996; incorporated by reference to Exhibit (10.3) of the April 10-Q. (10)(y) Kaminsky Employment Agreement dated May 2, 1996; incorporated by reference to Exhibit (10.4) of the April 10-Q. (11) Computation of Earnings Per Share. Included within the Financial Statements. (21) Subsidiaries of the Registrant; incorporated by reference to Exhibit 11 of the 1996 10-K. (23)(a) Consent of Independent Certified Public Accountants. Filed herewith. (23)(b) Consent of Buchanan Ingersoll Professional Corporation. Included within Exhibit 5(a) hereto. (23)(c) Consent of Schreck Morris. Included within Exhibit 5(b) hereto. II-6 Item 17. Undertakings 1. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in a successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 2. The undersigned Registrant hereby undertakes that: (a) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (b) For purposes determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be as the initial bona fide offering thereof. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused Amendment No. 2 to this Registration Statement to be signed on its behalf by the undersigned, hereunto duly authorized in the City of Pennsauken, New Jersey on May 12, 1997. RCM TECHNOLOGIES, INC. By: /s/ Leon Kopyt ----------------------------------- Leon Kopyt President and Chief Executive Officer By: /s/ Stanton Remer ----------------------------------- Stanton Remer Treasurer, Secretary and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- /s/ Leon Kopyt Chairman, Chief Executive May 12, 1997 - ------------------------------------- Officer, President and Leon Kopyt Director (principal executive officer) * Chief Operating Officer, May 12, 1997 - ------------------------------------- Executive Vice President and Barry S. Meyers Director * Executive Vice President and May 12, 1997 - ------------------------------------- Director Martin Blaire * Chief Financial Officer, May 12, 1997 - ------------------------------------- Treasurer, Secretary and Stanton Remer Director (principal financial and accounting officer) * Director May 12, 1997 - ------------------------------------- Norman S. Berson * Director May 12, 1997 - ------------------------------------- Robert B. Kerr * Director May 12, 1997 - ------------------------------------- Woodrow B. Moats, Jr.
* Power of Attorney previously filed under the Registration Statement on Form S-1 filed March 21, 1997. /s/ Leon Kopyt - ------------------------- Leon Kopyt Attorney-in-fact EX-1 2 UNDERWRITING AGREEMENT 2,500,000 Shares RCM TECHNOLOGIES, INC. Common Stock UNDERWRITING AGREEMENT Philadelphia, Pennsylvania , 1997 ------------- LEGG MASON WOOD WALKER, INCORPORATED JANNEY MONTGOMERY SCOTT INC. As Representatives of the Several Underwriters Named in Schedule I Hereto c/o Legg Mason Wood Walker, Incorporated 1735 Market Street Philadelphia, Pennsylvania 19103 Dear Ladies and Gentlemen: RCM Technologies, Inc., a Nevada corporation (the "Company"), proposes to sell to Legg Mason Wood Walker, Incorporated and Janney Montgomery Scott, Inc. (the "Representatives") and the several other underwriters named in Schedule I hereto (collectively with the Representatives, the "Underwriters") 2,323,187 shares of the Company's common stock, par value $.05 per share ("Common Shares") and the selling shareholders of the Company named in Schedule II hereto (collectively, the "Selling Shareholders") propose to sell severally to the Underwriters an aggregate of 176,813 Common Shares. Such Common Shares to be sold to the Underwriters by the Company and the Selling Shareholders are hereinafter referred to as the "Firm Shares." The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Firm Shares shall be offered to the public initially at a public offering price of $________ per Firm Share (the "Offering Price"). In addition, solely to cover over-allotments in the sale of the Firm Shares, the Underwriters may purchase for the Underwriters' own accounts, ratably in proportion to the amounts set forth opposite their respective names in Schedule I hereto, up to 375,000 additional Common Shares from the Company. Such additional Common Shares are referred to herein as the "Optional Shares." If any Optional Shares are purchased, the Optional Shares shall be purchased for offering to the public at the Offering Price and in accordance with the terms and conditions set forth herein. The Firm Shares and the Optional Shares are referred to collectively herein as the "Shares." The Company and the Selling Shareholders, intending to be legally bound, hereby confirm their respective agreements with the Underwriters, and representations and warranties set forth below, as follows: 1. Representations and Warranties (a) Representations and Warranties of the Company. The Company, and each of the subsidiaries of the Company listed in Exhibit A hereto (each a "Subsidiary" and collectively, the "Subsidiaries"), jointly and severally represent and warrant to, and agree with, the several Underwriters that: (i) the Company has prepared, in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (the "Regulations") of the Securities and Exchange Commission (the "SEC") under the Act in effect at all applicable times, and has filed with the SEC a registration statement on Form S-1 (File No. 333- ) for the purpose of registering the Shares under the Act. Copies of such registration statement and any amendments thereto, and all forms of the related prospectus contained therein, have been delivered to the Representatives. Any preliminary prospectus included in such registration statement or filed with the SEC pursuant to Rule 424(a) of the Regulations is hereinafter called a "Preliminary Prospectus." The various parts of such registration statement, including all exhibits thereto and the information (if any) contained in the form of final prospectus filed with the SEC pursuant to Rule 424(b) of the Regulations and deemed by virtue of Rule 430A(b) of the Regulations to be part of the registration statement at the time it was declared effective, each as amended at the time the registration statement became effective, are hereinafter collectively called the "Registration Statement." The final prospectus in the form included in the Registration Statement or first filed with the SEC pursuant to Rule 424(b) of the Regulations and any amendments or supplements thereto is hereinafter called the "Prospectus"; (ii) the Registration Statement has become effective under the Act and the SEC has not issued any stop order suspending the effectiveness of the Registration Statement or preventing or suspending the use of the Preliminary Prospectus, nor has the SEC instituted or threatened to institute proceedings with respect to such an order. No stop order suspending the sale of the Shares in any jurisdiction designated by the Representatives as provided for in Section 5(f) hereof has been issued, and no proceedings for that purpose have been instituted or threatened. The Company has complied in all material respects with all requests of the SEC, or requests of which the Company has been advised of any state securities commission in a state designated by the Representatives as provided for in Section 5(f) hereof, for additional information to be included in the Registration Statement, any Preliminary Prospectus or the Prospectus. Each Preliminary Prospectus conformed to all the requirements of the Act and the Regulations as of its date in all material respects and did not as of its date contain any untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein except the foregoing shall not apply to statements in or omissions from any Preliminary Prospectus in reliance upon and in conformity with information supplied to -2- the Company in writing by or on behalf of any Underwriter through the Representatives expressly for use therein. The Registration Statement, on the date on which it is declared effective by the SEC (the "Effective Date") and when any post-effective amendment thereof shall become effective, and the Prospectus, at the time it is filed with the SEC pursuant to Rule 424(b) and on the Closing Date (as defined in Section 3 hereof) and any Option Closing Date (as defined in Section 4(b) hereof), will conform in all material respects to all the requirements of the Act and the Regulations, and will not, on any of such dates, include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the Registration Statement or the Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of any Underwriter through the Representatives expressly for use therein. The Company hereby acknowledges that the two paragraphs appearing on the inside front cover of the Prospectus and the allocation of Shares among the Underwriters, the dollar amounts of the concessions in the paragraph that follows the tabular list of Underwriters and the last five paragraphs appearing under the caption "Underwriting" constitute the only statements in any Preliminary Prospectus, the Registration Statement or the Prospectus made in reliance upon and in conformity with information furnished by or on behalf of any Underwriter and that no statement was omitted from any Preliminary Prospectus, the Registration Statement or the Prospectus in reliance upon and in conformity with information furnished by or on behalf of any Underwriter; (iii) the Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada, with all necessary corporate power and authority, and all required licenses, permits, clearances, certifications, registrations, approvals, consents and franchises, to own or lease and operate its properties and to conduct its business as described in the Prospectus, and to execute, deliver and perform this Agreement; each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with all necessary corporate power and authority, and all required licenses, permits, clearances, certifications, registrations, approvals, consents and franchises, to own or lease and operate its properties and to conduct its business as described in the Prospectus; (iv) all of the outstanding shares of capital stock or other evidence of ownership of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company free and clear of all liens, encumbrances and security interests; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding; (v) this Agreement has been duly authorized, executed and delivered by the Company and each of the Subsidiaries and constitutes, with respect to each, its legal, valid and binding obligation, enforceable against the Company and each of the Subsidiaries in accordance with its terms, except as such enforceability may be limited by equitable principles or by the application of bankruptcy, insolvency or other similar laws relating to or affecting creditor's rights generally, and except as rights to indemnity and contribution hereunder may be limited by applicable securities laws; -3- (vi) the execution, delivery and performance of this Agreement by the Company and the Subsidiaries does not and will not, with or without the giving of notice or the lapse of time, or both, (a) conflict with any term or provision of the Company's or the Subsidiaries' Articles of Incorporation or Bylaws (or any similar governing instruments); (b) result in a breach of, constitute a default under, result in the termination or modification of, result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the assets of the Company or any Subsidiary, or require any payment by the Company or any Subsidiary or impose any liability on the Company or any Subsidiary pursuant to any contract, indenture, mortgage, deed of trust, commitment or other agreement or instrument to which the Company or any Subsidiary is a party or by which any of the Company's or the Subsidiaries' assets are bound or affected; (c) violate any law, rule, regulation, judgment, order or decree of any government or governmental agency, instrumentality or court, domestic or foreign, having jurisdiction over the Company or any Subsidiary or any of the Company's or the Subsidiaries' properties or business; or (d) result in a breach, termination or lapse of the Company's or the Subsidiaries' corporate power and authority to own or lease and operate its assets and properties and conduct its business as described in the Prospectus; (vii) at the date or dates indicated in the Prospectus, the Company had the duly authorized and outstanding capital stock set forth in the Prospectus. On the Effective Date, the Closing Date and any Option Closing Date, there will be no options or warrants for the purchase of, other outstanding rights to purchase, agreements or obligations to issue or agreements or other rights to convert or exchange any obligation or security into, capital stock of the Company or securities convertible into or exchangeable for capital stock of the Company, except as described in the Prospectus; (viii) the authorized capital stock of the Company conforms in all respects with the description thereof in the Prospectus; (ix) the currently outstanding shares of the Company's capital stock, including the shares to be purchased by the Underwriters from the Selling Shareholders, have been duly authorized and are validly issued, fully paid and non-assessable; and none of such outstanding shares of the Company's capital stock has been issued in violation of any preemptive rights of any security holder of the Company. The holders of the outstanding shares of the Company's capital stock are not subject to personal liability solely by reason of being such holders. The offers and sales of the outstanding shares of the Company's capital stock, whether described in the Registration Statement or otherwise, were made in conformity with applicable federal and state securities laws; (x) when the Shares have been duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and non-assessable. The certificates representing the Shares are in proper legal form under, and conform in all respects to the requirements of, the General Corporation Law of Nevada. Neither the filing of the Registration Statement nor the offering or sale of Shares as contemplated by this Agreement gives any security holder of the Company any rights for or relating to the registration of any -4- Common Shares or any other capital stock of the Company, except such as have been satisfied or waived; (xi) no consent, approval, authorization, order, registration, license or permit of, or filing or registration with, any court, government, governmental agency, instrumentality or other regulatory body or official is required for the valid and legal execution, delivery and performance by the Company and the Subsidiaries of this Agreement and the consummation of the transactions contemplated hereby and described in the Prospectus, except such as may be required for the registration of the Shares under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and for compliance with the applicable state securities or Blue Sky laws; (xii) the Common Shares (including the Shares) have been approved for inclusion on the Nasdaq Stock Market's National Market upon notice of issuance; (xiii) to the knowledge of the Company and the Subsidiaries, the statements in the Registration Statement and Prospectus, insofar as they are descriptions of or references to contracts, agreements or other documents, are accurate in all material respects and present or summarize fairly, in all material respects, the information required to be disclosed under the Act and/or the Regulations, and there are no contracts, agreements or other documents required to be described or referred to in the Registration Statement or Prospectus or to be filed as exhibits to the Registration Statement under the Act or the Regulations that have not been so described, referred to or filed, as required; (xiv) the consolidated financial statements of the Company (including the notes thereto) filed as part of any Preliminary Prospectus, the Prospectus and the Registration Statement present fairly, in all material respects, the consolidated financial position of the Company as of the respective dates thereof, the consolidated results of operations, consolidated cash flows and consolidated shareholders' equity of the Company for the periods indicated therein, all in conformity with generally accepted accounting principles. The supporting notes and schedules included in the Registration Statement fairly state in all material respects the information required to be stated therein in relation to the financial statements taken as a whole. The financial information included in the Prospectus under the caption "Prospectus Summary" and "Selected Consolidated Financial Data" (including pro forma and pro forma as adjusted financial information) presents fairly the information shown therein and has been compiled on a basis consistent with that of the consolidated financial statements of the Company included in the Registration Statement; and the unaudited pro forma financial information included in the Registration Statement complies as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X under the Act and the pro forma adjustments have been properly applied to the historical amounts in the compilation of this information; (xv) since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise expressly stated therein, there has not been (a) any material adverse change (including, whether or not insured against, any material loss or damage to any material assets), or development involving a prospective material adverse change, in the general affairs, properties, assets, management, condition (financial or otherwise), -5- results of operations, shareholders' equity, business or prospects of the Company or the Subsidiaries taken as a whole, (b) any material adverse change, loss, reduction, termination or nonrenewal of any contract to which the Company or any Subsidiary is a party, (c) any transaction entered into by the Company or any Subsidiary not in the ordinary course of its business that is material to the Company and the Subsidiaries taken as a whole, (d) any dividend or distribution of any kind declared, paid or made on its capital stock by the Company or any Subsidiary, (e) any liabilities or other obligations, direct or indirect, incurred by the Company or any Subsidiary that are material to the Company and the Subsidiaries taken as a whole, (f) any change in the capitalization or stock ownership of the Company or any Subsidiary or (g) any change in the indebtedness of the Company or any Subsidiary that is material to the Company and the Subsidiaries taken as a whole. Neither the Company nor any Subsidiary has any contingent liabilities or obligations that are material to the Company and the Subsidiaries taken as a whole and that are not disclosed in the Prospectus; (xvi) the Company has not distributed and will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, a Preliminary Prospectus, the Prospectus and other material, if any, to the extent permitted by the Act and the Regulations. Neither the Company nor any of its officers, directors or affiliates has taken nor shall the Company take any action designed to, or that might be reasonably expected to cause or result in, stabilization or manipulation of the price of the Common Shares to facilitate the sale of the Shares; (xvii) the Company and each Subsidiary has filed with the appropriate federal, state and local governmental agencies, and all foreign countries and political subdivisions thereof, all tax returns that are required to be filed, or has duly obtained extensions of time for the filing thereof and has paid all taxes shown on such returns or otherwise due and all assessments received by it to the extent that the same have become due. Neither the Company nor any Subsidiary has executed or filed with any taxing authority, foreign or domestic, any agreement extending the period for assessment or collection of any income or other tax and is not a party to any pending action or proceeding by any foreign or domestic governmental agencies for the assessment or collection of taxes, and no claims for assessment or collection of taxes have been asserted against the Company or any Subsidiary that might materially adversely affect the general affairs, assets, properties, condition (financial or otherwise), results of operations, shareholders' equity, business or prospects of the Company or such Subsidiary; (xviii) Grant Thornton LLP, which has given its reports on certain financial statements included as part of the Registration Statement, is a firm of independent certified public accountants as required by the Act and the Regulations; (xix) neither the Company nor any Subsidiary is in violation of or in default under any of the terms or provisions of (a) its Articles or Certificate of Incorporation or Bylaws or similar governing instruments, (b) any indenture, mortgage, deed of trust, contract, commitment or other agreement or instrument to which it is a party or by which it or any of its properties is bound or affected, (c) any law, rule, regulation, judgment, order or decree of any government or governmental agency, instrumentality or court, domestic or foreign, having jurisdiction over it or any of its properties or business, or (d) any license, permit, certification, registration, approval, consent or franchise referred to in Section l(a)(iii) hereof the violation of which would have a material adverse effect on the Company and the Subsidiaries taken as a whole; -6- (xx) except as disclosed in the Prospectus, to the knowledge of the Company and the Subsidiaries, there are no claims, actions, suits, protests, proceedings, arbitrations, investigations or inquiries pending before, or threatened or contemplated by, any governmental agency, instrumentality, court or tribunal domestic or foreign, or before any private arbitration tribunal, to which the Company or any Subsidiary is a party, that could affect the validity of any of the outstanding Common Shares, or that, except as disclosed in the Prospectus, if determined adversely to the Company or any Subsidiary, would, in any case or in the aggregate, result in any material adverse change in the general affairs, properties, condition (financial or otherwise), results of operations, shareholders' equity, business or prospects of the Company or the Subsidiaries taken as a whole; nor, to the Company's knowledge, is there any reasonable basis for any such claim, action, suit, protest, proceeding, arbitration, investigation or inquiry. Other than as disclosed in the Prospectus, there are no outstanding orders, judgments or decrees of any court, governmental agency, instrumentality or other tribunal, enjoining the Company or any Subsidiary from, or requiring the Company or any Subsidiary to take or refrain from taking, any action, or to which the Company or any Subsidiary, their properties, assets or business are bound or subject; (xxi) the Company and each of the Subsidiaries owns, or possesses adequate rights to use, all patents, patent applications, trademarks, trade names, service marks, licenses, inventions, copyrights, know-how, trade secrets, confidential information, processes, procedures and formulations and other proprietary information necessary for, used in or proposed to be used in the conduct of its business as described in the Prospectus (collectively, the "Intellectual Property"). To their knowledge, the Company and the Subsidiaries have not infringed upon, are not infringing upon and have not received any notice of conflict with, the asserted rights of others with respect to the Intellectual Property, and the Company knows of no reasonable basis for any such infringement or conflict; (xxii) the Company and each Subsidiary has good and marketable title to all property described in the Prospectus as being owned by it, free and clear of all liens, security interests, charges or encumbrances, except such as are described or referred to in the Prospectus or such as do not materially affect the value of such property and do not interfere in any material respect with the use made, or proposed to be made, of such property by the Company or Subsidiary. The Company and each Subsidiary has adequately insured its property against loss or damage by fire or other casualty and maintains, in amounts reasonably believed by it to be adequate, insurance against such other risks as it deems appropriate. To the knowledge of the Company and the Subsidiaries, all real and personal property leased by the Company or any Subsidiary, as described or referred to in the Prospectus, is held by the Company or such Subsidiary under valid leases. The executive offices and all other facilities of the Company, owned or operated by the Company since the inception of its business (the "Premises"), and all operations conducted thereon, are now and, since the Company or any Subsidiary began to use such Premises, always have been and prior to when the Company or the Subsidiaries began to use such Premises, always had been, in compliance with all U.S. laws concerning or related to industrial hygiene and the protection of health and the environment, including all federal, state and local statutes, ordinances, regulations and rules (collectively, the "Governmental Laws"), other than as disclosed in the Prospectus. Other than as disclosed in the Prospectus, there are no conditions on, about, beneath or arising from the Premises that might give rise to liability, the imposition of a statutory lien or require a "Response," "Removal" or "Remedial Action," as defined herein, under any of the Governmental Laws. Other than as -7- disclosed in the Prospectus, neither the Company nor any Subsidiary has received notice, and there is no claim, demand, investigation, regulatory action, suit or other action instituted or threatened against the Company or any Subsidiary or any portion of the Premises relating to any of the Governmental Laws. Other than as disclosed in the Prospectus, neither the Company nor any Subsidiary has received any notice of violation, citation, complaint, order, directive, request for information or response thereto, notice letter, demand letter or compliance schedule to or from any governmental or regulatory agency arising out of or in connection with "hazardous substances" (as defined by applicable environmental laws) on, about, beneath, arising from or generated at the Premises. As used in this subsection, the terms "Response," "Removal" and "Remedial Action" shall have the respective meanings assigned to such terms under Sections 101(23)-101(25) of the Comprehensive Environmental Response, Compensation and Liability Act, as amended by the Superfund Amendments and Reauthorization Act, 42 U.S.C. 9601(23)-9601(25); (xxiii) the Company and each Subsidiary maintains a system of internal accounting controls sufficient to provide reasonable assurances that: (a) transactions are executed in accordance with management's general or specific authorization; (b) transactions are recorded as necessary in order to permit preparation of financial statements in accordance with generally accepted accounting principles and statutory accounting practices and to maintain accountability for assets; (c) access to assets is permitted only in accordance with management's general or specific authorization; and (d) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences; (xxiv) each contract or other instrument (however characterized or described) to which the Company or any Subsidiary is a party or by which any of its properties or business is bound or affected and which is material to the conduct of the Company's or any Subsidiary's business as described in the Prospectus has been duly and validly executed by the Company or such Subsidiary, and, to the knowledge of the Company, by the other parties thereto. Each such contract or other instrument is in full force and effect and, to the Company's knowledge, is enforceable against the parties thereto in accordance with its terms, and the Company or the Subsidiaries are not, and no other party is, in default thereunder, and no event has occurred that, with the lapse of time or the giving of notice, or both, would constitute a default under any such contract or other instrument. All necessary consents under such contracts or other instruments to disclosure in the Prospectus with respect thereto have been obtained; (xxv) except for such plans as are disclosed in the Prospectus, the Company and the Subsidiaries do not have any employee benefit plan, profit sharing plan, employee pension benefit plan or employee welfare benefit plan or deferred compensation arrangements ("Plans") that are subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder ("ERISA"). All Plans that are subject to ERISA are in compliance with ERISA, in all material respects, and, to the extent required by the Internal Revenue Code of 1986, as amended (the "Code"), in compliance with the Code in all material respects. Neither the Company nor any Subsidiary has had any employee pension benefit plan that is subject to Part 3 of Subtitle B of Title I of ERISA or any defined benefit plan or multi-employer plan. The Company has not maintained retired life and retired health insurance plans that are employee welfare benefit plans providing for continuing benefit or -8- coverage for any employee or any beneficiary of any employee after such employee's termination of employment, except as required by Section 4980B of the Code. No fiduciary or other party in interest with respect to any of the Plans has caused any of such Plans to engage in a prohibited transaction as defined in Section 406 of ERISA. As used in this subsection, the terms "defined benefit plan," "employee benefit plan," "employee pension benefit plan," "employee welfare benefit plan," "fiduciary" and "multi-employer plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA; (xxvi) no labor dispute exists with the employees of the Company or any Subsidiary, and, to the best of the Company's knowledge, no such labor dispute is threatened. The Company has no knowledge of any existing or threatened labor disturbance by the employees of any of the principal customers of the Company or the Subsidiaries that would materially adversely affect the general affairs, properties, condition (financial or otherwise), results of operations, shareholders' equity, business or prospects of the Company or the Subsidiaries taken as a whole; (xxvii) neither the Company nor any Subsidiary has incurred any liability for any finder's fees or similar payments in connection with the transactions contemplated herein; (xxviii) the Company and each Subsidiary currently conducts its affairs in such a manner as to ensure that it will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder; (xxix) no statement, representation, warranty or covenant made by the Company or any Subsidiary in this Agreement or in any certificate or document required by this Agreement to be delivered to the Representatives is, was when made, or as of the Closing Date or any Option Closing Date will be, inaccurate, untrue or incorrect in any material respect. No transaction has occurred or is proposed between or among the Company and any of its officers, directors or shareholders or any affiliate of any such officer, director or shareholder that is required to be described in and is not described in the Registration Statement and the Prospectus; (xxx) none of the Company, any Subsidiary or any officer, director, employee, agent or other person acting on behalf of the Company or such Subsidiary, has, directly or indirectly, given or agreed to give any money, property or similar benefit or consideration to any customer (including any employee or agent of any customer) or official or employee of any agency or instrumentality of any government (foreign or domestic) or political party or candidate for office (foreign or domestic) or any other person who was, is or in the future may be in a position to affect the general affairs, properties, condition (financial or otherwise), results of operations, shareholders' equity, business or prospects of the Company and the Subsidiaries or any actual or proposed business transaction of the Company or the Subsidiaries that (a) could subject the Company or such Subsidiary to any liability (including, but not limited to the payment of monetary damages) or penalty in any civil, criminal or governmental action or proceeding, or (b) violates any law, rule or regulation to which the Company or the Subsidiaries are subject; -9- (xxxi) neither the Company nor any Subsidiary has declared, paid or accrued any dividends or distributions to shareholders, and will not hereafter declare, pay or accrue any such dividends or distributions prior to the Closing Date or the Option Closing Date; and (xxxii) none of the shareholders of the Company is affiliated with any member of the National Association of Securities Dealers, Inc. (the "NASD"). Any certificate signed by any officer of the Company or any Subsidiary in such capacity and delivered to the Representatives or to counsel for the Underwriters pursuant to this Agreement shall be deemed a representation and warranty by the Company or such Subsidiary to the several Underwriters as to the matters covered thereby. (b) Representations and Warranties of the Selling Shareholders. Each of the Selling Shareholders (except as expressly limited below) represents and warrants to, and agrees with, the several Underwriters that: (i) such Selling Shareholder has duly executed and delivered a power of attorney in the form contained in the Custody Agreement (as defined below) appointing Leon Kopyt as such Selling Shareholder's attorney-in-fact (the "Attorney-in-Fact"); the Attorney-in-Fact is authorized to execute, deliver and perform this Agreement on behalf of such Selling Shareholder, including, without limitation, the authority to determine the purchase price to be paid to each such Selling Shareholder by the Underwriters as set forth in Section 2 of this Agreement, and in connection therewith such Selling Shareholder has duly executed and delivered a Power of Attorney and Custody Agreement (the "Custody Agreement"), in the form heretofore delivered to the Representatives, with American Stock Transfer & Trust Company as custodian (the "Custodian"). Certificates in negotiable form representing the Shares to be sold by such Selling Shareholder hereunder have been or will be deposited with the Custodian pursuant to the Custody Agreement for the purpose of delivery pursuant to this Agreement. Such Selling Shareholder agrees that the Shares represented by the certificates which are either on deposit or which will be on deposit with the Custodian are subject to the interests of the Underwriters hereunder, that the arrangements made for such custody and the appointment of the Attorney-in-Fact are to that extent irrevocable, and that the obligations of such Selling Shareholder hereunder shall not be terminated except as provided in this Agreement or the Custody Agreement, by any act of such Selling Shareholder, by operation of law or otherwise, whether, in the case of an individual Selling Shareholder, by the death or incapacity of such Selling Shareholder, or by the occurrence of any other event. If any individual Selling Shareholder should die or become incapacitated, or if any other event should occur, before the delivery of the Shares to be sold by such Selling Shareholder hereunder, the certificates for such Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement and the Custody Agreement as if such death, incapacity, or other event had not occurred, regardless of whether or not the Custodian or Attorney-in-Fact shall have received notice thereof; (ii) such Selling Shareholder has the full right, power and authority to enter into this Agreement and the Custody Agreement and to sell, transfer and deliver the Shares to be sold by such Selling Shareholder hereunder, and this Agreement and the Custody -10- Agreement have been duly authorized, executed and delivered by such Selling Shareholder and constitute the legal, valid and binding obligations of such Selling Shareholder enforceable in accordance with their respective terms, subject to equitable principles. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and by the Custody Agreement will not result in a violation or breach by such Selling Shareholder of, or constitute a default by such Selling Shareholder under, any indenture, mortgage, deed of trust, note, bank loan or credit agreement or any other agreement or instrument to which such Selling Shareholder is a party or by which such Selling Shareholder is bound, any organizational document relating to such Selling Shareholder (including, without limitation, any partnership agreement, articles of incorporation, or bylaws), or any statute, judgment, decree, order, rule or regulation of any court or governmental agency or body applicable to such Selling Shareholder; (iii) all authorizations, approvals and consents necessary for the execution and delivery by such Selling Shareholder of the Custody Agreement, the execution and delivery by or on behalf of such Selling Shareholder of this Agreement, and the sale and delivery of the Shares to be sold by such Selling Shareholder hereunder (other than such authorizations, approvals or consents as may be necessary under the state securities or Blue Sky laws), have been obtained and are in full force and effect; (iv) such Selling Shareholder now is, and on the Closing Date will be, the lawful owner of the Shares to be sold by such Selling Shareholder pursuant to this Agreement. On the Closing Date, such Selling Shareholder will have valid and marketable title to such Shares, free and clear of all liens, encumbrances, security, interests or other restrictions (other than those created under the Custody Agreement); and upon proper delivery of and payment for such Shares as provided herein, the Underwriters will acquire valid and marketable title thereto, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, including any liability for estate or inheritance taxes, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Shareholder; (v) to the knowledge of such Selling Shareholder, the representations and warranties of the Company contained in Section l(a) hereof are true and correct; such Selling Shareholder has examined the Registration Statement and the Prospectus and has no knowledge of any fact, condition or information not disclosed therein which has adversely affected or could adversely affect the general affairs, assets, properties, condition (financial or otherwise), results of operations, shareholders' equity, business or prospects of the Company or the Subsidiaries, taken as a whole; to the knowledge of such Selling Shareholder after review of the Registration Statement and Prospectus, neither the Registration Statement nor the Prospectus contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading; and such Selling Shareholder is not prompted to sell the Shares to be sold by such Selling Shareholder hereunder by any information concerning the Company or any Subsidiary which is not set forth in the Prospectus; (vi) such Selling Shareholder has examined the Registration Statement and the Prospectus and the information relating to such Selling Shareholder set forth therein and, as to such information, neither the Registration Statement nor the Prospectus -11- contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading and such Selling Shareholder hereby acknowledges that the two paragraphs appearing on the inside front cover of the Prospectus and the allocation of Shares among the Underwriters, the dollar amounts of the concessions in the paragraph that follows the tabular list of Underwriters and the last five paragrphs appearing under the caption "Underwriting" constitute the only statements in any Preliminary Prospectus, the Registration Statement or the Propsectus made in reliance upon and in conformity with information furnished by or on behalf of any Underwriter and that no statement was omitted from any Preliminary Prospectus, the Registration Statement or the Propsectus in reliance upon and in conformity with information furnished by or on behalf of any Underwriter; (vii) such Selling Shareholder will comply in all respects with the lock-up agreement executed by such Selling Shareholder in favor of Legg Mason Wood Walker, Incorporated, as more fully described in Paragraph 5(k) below; (viii) such Selling Shareholder has not incurred any liability for any finder's fee or similar payments in connection with the sale of such Selling Shareholder's Shares hereunder; and (ix) such Selling Shareholder (A) has not distributed and will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, a Preliminary Prospectus, the Prospectus and other material, if any, permitted by the Act and the Regulations, and (B) has not taken and will not take any action designed to, or that might be reasonably expected to cause or result in, stabilization or manipulation of the price of the Shares. 2. Purchase and Sale of Firm Shares. On the basis of the representations, warranties, covenants and agreements contained herein, but subject to the terms and conditions set forth herein, (a) the Company shall sell to the several Underwriters at the Offering Price, less the Underwriting Discounts and Commissions in the amount of $_____ per Share, the respective amounts of the Firm Shares set forth opposite their names on Schedule I hereto, and the Underwriters, severally and not jointly, shall purchase from the Company on a firm commitment basis, at the Offering Price, less the Underwriting Discounts and Commissions in the amount of $_____ per Share, the respective amounts of the Firm Shares set forth opposite their names on Schedule I hereto; and (b) the Selling Shareholders shall sell to the several Underwriters at the Offering Price, less the Underwriting Discounts and Commissions in the amount of $______ per Share, the respective amounts of the Firm Shares set forth opposite their names on Schedule II hereto, and the Underwriters, severally and not jointly, shall purchase from the Selling Shareholders on a firm commitment basis, at the Offering Price, less the Underwriting Discounts and Commissions in the amount of $_____ per Share, the portion of the total Firm Shares listed on Schedule II hereto that bears the same ratio as the amounts that the Firm Shares set forth opposite their names on Schedule I hereto bears to the total Firm Shares listed on such schedule. In making this Agreement, each Underwriter is contracting severally, and not jointly, and except as provided in Sections 4 and 11 hereof, the agreement of each Underwriter is to purchase only -12- that number of shares specified with respect to that Underwriter in Schedule I hereto. The Underwriters shall offer the Shares to the public as set forth in the Prospectus. 3. Payment and Delivery. Payment for the Firm Shares shall be made by certified or official bank check payable to the order of (i) the Company with respect to the Firm Shares sold by it and (ii) the Custodian with respect to the Firm Shares sold by the Selling Shareholders, in New York Clearing House or similar next day funds, at the offices of Legg Mason Wood Walker, Incorporated, 1735 Market Street, Philadelphia, Pennsylvania, or such other place as shall be agreed upon by the Company and the Representatives, or in immediately available funds wired to such accounts as the Company or the Custodian may specify (with all costs and expenses incurred by the Underwriters in connection with such settlement in immediately available funds, including, but not limited to, interest or cost of funds and expenses, to be borne pro rata by the Company and the Selling Shareholders), against delivery of the Firm Shares to the Representatives at the offices of Legg Mason Wood Walker, Incorporated, 1735 Market Street, Philadelphia, Pennsylvania for the respective accounts of the Underwriters. Such payment and delivery will be made at _____A.M., Philadelphia, Pennsylvania time, on the third business day after the date of this Agreement or at such other time and date no later than three business days thereafter as the Representatives and the Company shall agree upon. Such time and date are referred to herein as the "Closing Date." The certificates representing the Firm Shares to be sold and delivered will be in such denominations and registered in such names as the Representatives request not less than two full business days prior to the Closing Date, and will be made available to the Representatives for inspection, checking and packaging at the office of the Company's transfer agent not less than one full business day prior to the Closing Date. 4. Option to Purchase Optional Shares. (a) For the purposes of covering any over-allotments in connection with the distribution and sale of the Firm Shares as contemplated by the Prospectus, subject to the terms and conditions herein set forth, the several Underwriters are hereby granted an option by the Company to purchase all or any part of the Optional Shares (the "Over-allotment Option"). The purchase price to be paid for the Optional Shares shall be the Offering Price less the Underwriting Discounts and Commissions shown on the cover page of the Prospectus. The Over-allotment Option granted hereby may be exercised by the Representatives on behalf of the several Underwriters as to all or any part of the Optional Shares at any time and from time to time within 30 days after the date of the Prospectus. No Underwriter shall be under any obligation to purchase any Optional Shares prior to an exercise of the Over-allotment Option. (b) The Over-allotment Option granted hereby may be exercised by the Representatives on behalf of the several Underwriters by giving notice to the Company by a letter sent by registered or certified mail, postage prepaid, telex, telegraph, telegram or facsimile (such notice to be effective when received), addressed as provided in Section 13 hereof, setting forth the number of Optional Shares to be purchased, the date and time for delivery of and payment for the Optional Shares and stating that the Optional Shares referred to therein are to be used for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares. If such notice is given prior to the Closing Date, the date set forth therein for such delivery and payment shall be the Closing Date. If such notice is given on or after the Closing -13- Date, the date set forth therein for such delivery and payment shall be a date selected by the Representatives that is within three full business days after the exercise of the Over-allotment Option. The date and time set forth in such a notice is referred to herein as an "Option Closing Date," and a closing held pursuant to such a notice is referred to herein as an "Option Closing." Upon each exercise of the Over-allotment Option, and on the basis of the representations, warranties, covenants and agreements herein contained, and subject to the terms and conditions herein set forth, the several Underwriters shall become severally, but not jointly, obligated to purchase from the Company the number of Optional Shares specified in each notice of exercise of the Over-allotment Option. (c) The number of Optional Shares to be sold to each Underwriter pursuant to each exercise of the Over-allotment Option shall be the number set forth opposite their names on Schedule I hereto. Notwithstanding the foregoing, the number of Optional Shares purchased and sold pursuant to each exercise of the Over-allotment Option shall be subject to such adjustment as the Representatives may approve to eliminate fractional shares and subject to the provisions for the allocation of Optional Shares purchased for the purpose of covering over-allotments set forth in the agreement entered into by and among the Underwriters in connection herewith (the "Agreement Among Underwriters"). (d) Payment for the Optional Shares shall be made to the Company by certified or official bank check payable to the order of the Company in New York Clearing House or similar next day funds at the offices of Legg Mason Wood Walker, Incorporated, 1735 Market Street, Philadelphia, Pennsylvania, or such other place as shall be agreed upon by the Company and the Representatives, or in immediately available funds wired to such account as the Company may specify (with all costs and expenses incurred by the Underwriters in connection with such settlement in immediately available funds, including, but not limited to, interest or cost of funds and expenses, to be borne by the Company), against delivery of the Optional Shares to the Representatives at the offices of Legg Mason Wood Walker, Incorporated, 1735 Market Street, Philadelphia, Pennsylvania, for the respective accounts of the Underwriters. The certificates representing the Optional Shares to be issued and delivered will be in such denominations and registered in such names as the Representatives request not less than two full business days prior to the Option Closing Date, and will be made available to the Representatives for inspection, checking and packaging at the office of the Company's transfer agent not less than one full business day prior to the Option Closing Date. 5. Certain Covenants and Agreements of the Company. The Company covenants and agrees with the several Underwriters as follows: (a) if Rule 430A of the Regulations is employed, the Company will timely file the Prospectus pursuant to and in compliance with Rule 424(b) of the Regulations and will advise the Representatives of the time and manner of such filing; (b) the Company will not file or publish any amendment or supplement to the Registration Statement, any Preliminary Prospectus or the Prospectus at any time before the completion of the distribution of the Shares by the Underwriters that is not (i) in compliance -14- with the Regulations and (ii) approved by the Representatives (such approval not to be unreasonably withheld or delayed); (c) the Company will advise the Representatives immediately, and confirm such advice in writing, (i) when any post-effective amendment to the Registration Statement is filed with the SEC, (ii) of the receipt of any comments from the SEC concerning the Registration Statement, (iii) when any post-effective amendment to the Registration Statement becomes effective, or when any supplement to the Prospectus or any amended Prospectus has been filed, (iv) of any request of the SEC for amendment or supplementation of the Registration Statement or Prospectus or for additional information, (v) during the period when the Prospectus is required to be delivered under the Act and Regulations, of the happening of any event as a result of which the Registration Statement or the Prospectus would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, (vi) during the period noted in (v) above, of the need to amend the Registration Statement or supplement the Prospectus to comply with the Act, (vii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, and (viii) of the suspension of the qualification of any of the Shares for offering or sale in any jurisdiction in which the Underwriters intend to make such offers or sales, or of the initiation or threatening of any proceedings for any of such purposes known to the Company. The Company will use its best efforts to prevent the issuance of any such stop order or of any order preventing or suspending such use and, if any such order is issued, to obtain as soon as possible the lifting thereof; (d) the Company has delivered to the Representatives, without charge, copies of each Preliminary Prospectus. The Company will deliver to the Representatives, without charge, from time to time during the period when delivery of the Prospectus is required under the Act, such number of copies of the Prospectus (as supplemented or amended) as the Representatives may reasonably request. The Company hereby consents to the use of such copies of the Preliminary Prospectus and the Prospectus for purposes permitted by the Act, the Regulations and the securities or Blue Sky laws of the states in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. The Company has furnished or will furnish to the Representatives six original signed copies of the Registration Statement as originally filed and of all amendments and supplements thereto, whether filed before or after the Effective Date, six copies of all exhibits filed therewith and six signed copies of all consents and certificates of experts, and will deliver to the Representatives such number of conformed copies of the Registration Statement, including financial statements and exhibits, and all amendments thereto, as the Representatives may reasonably request; (e) the Company will comply with the Act, the Regulations, the Exchange Act and the rules and regulations thereunder so as to permit the continuance of sales of and dealings in the Shares for as long as may be necessary to complete the distribution of the Shares as contemplated hereby; -15- (f) the Company will furnish such information as may be required and otherwise cooperate in the registration or qualification of the Shares, or exemption therefrom, for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions in which the Representatives determine to offer the Shares, after consultation with the Company, and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided, however, that no such qualification shall be required in any jurisdiction where, solely as a result thereof, the Company would be subject to taxation or qualification as a foreign corporation doing business in such jurisdiction where it is not now so qualified or to take any action which would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. The Company will, from time to time, prepare and file such statements and reports as are or may be required to continue such qualification in effect for so long a period as is required under the laws of such jurisdictions for such offering and sale; (g) subject to subsection 5(b) hereof, in case of any event, at any time within the period during which, in the opinion of counsel for the Underwriters, a prospectus is required to be delivered under the Act and Regulations, as a result of which any Preliminary Prospectus or the Prospectus, as then amended or supplemented, would contain an untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or, if it is necessary at any time to amend any Preliminary Prospectus or the Prospectus to comply with the Act and Regulations or any applicable securities or Blue Sky laws, the Company promptly will prepare and file with the SEC, and any applicable state securities commission, an amendment, supplement or document that will correct such statement or omission or effect such compliance and will furnish to the several Underwriters such number of copies of such amendment(s), supplement(s) or document(s) (in form and substance satisfactory to the Representatives and counsel for the Underwriters) as the Representatives may reasonably request. For purposes of this subsection (g), the Company will provide such information to the Representatives, the Underwriters' counsel and counsel to the Company as shall be necessary to enable such persons to consult with the Company with respect to the need to amend or supplement the Registration Statement, Preliminary Prospectus or Prospectus or file any document, and shall furnish to the Representatives and the Underwriters' counsel such further information as each may from time to time reasonably request; (h) the Company will make generally available to its security holders not later than 18 months after the Effective Date, an earnings statement of the Company (which need not be audited unless required by the Act or the Regulations) that shall comply with Section 11(a) of the Act and cover a period of at least 12 consecutive months beginning not later than the first day of the Company's fiscal quarter next following the Effective Date; (i) for a period of five years following the Effective Date, the Company will upon request furnish to the Representatives copies of all materials furnished by the Company to its shareholders and all public reports and all reports and financial statements furnished by the -16- Company to the SEC pursuant to the Exchange Act or any rule or regulation of the SEC thereunder; (j) during the course of the distribution of the Shares, the Company will not take, directly or indirectly, any action designed to or that could reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Shares; (k) the Company has caused each person listed on Schedule IV hereto to execute an agreement (a "Lock-up Agreement"), which Lock-up Agreement shall be in form and substance satisfactory to the Representatives and the Underwriters' counsel providing that (i) for a period of 180 days after the Effective Date, they will not, without the prior written consent of the Representatives, directly or indirectly offer to sell, sell, contract to sell or otherwise transfer or dispose of any Common Shares, any options or warrants to purchase Common Shares, or any securities convertible into or exercisable for any Common Shares owned by them or with respect to which they have the power of disposition and (ii) from the date of such Lock-up Agreement for a period of 180 days after the Effective Date, they will not exercise any demand, mandatory, piggyback, optional or any other registration rights with respect to Common Shares. The Company has delivered such agreements to the Representatives prior to the date of this Agreement. Appropriate stop transfer instructions will be issued by the Company to the transfer agent for the Common Shares; (l) for a period of three years following the Effective Date, the Company will not engage in any transaction with affiliates (as defined in the Regulations) without the prior approval of a majority of the members of its Board of Directors who do not have an interest in such transaction other than in their capacity as directors of the Company; (m) for a period of 180 days after the Effective Date, the Company will not, without the prior written consent of the Representatives, offer, sell, contract to sell or otherwise dispose of any Common Shares or any securities convertible into or exercisable for any Common Shares or grant options to purchase any Common Shares other than with respect to issuances in connection with mergers, acquisitions or other similar business combinations, or the grant of options under the 1986 Incentive Stock Option Plan, the 1992 Incentive Stock Option Plan, the 1994 Non-Employee Directors Stock Option Plan and the 1996 Executive Stock Plan which are not exercisable within such 180-day period; (n) the Company will cause the Common Shares (including, without limitation, the Shares) to be included in the Nasdaq Stock Market's National Market prior to the Closing Date; and (o) the Company may extend the term of its Class C Warrants to a date no later than December 31, 1997; provided, that the terms of such Class C Warrants shall not, at any time, be amended further in any respect. 6. Payment of Fees and Expenses. (a) Whether or not the transactions contemplated by this Agreement are consummated and regardless of the reason this Agreement is terminated, the Company will pay -17- or cause to be paid, and bear or cause to be borne, all costs and expenses incident to the performance of the obligations of the Company and the Selling Shareholders under this Agreement, including: (i) the fees and expenses of the accountants and counsel for the Company incurred in the preparation of the Registration Statement and any post-effective amendments thereto (including financial statements and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; (ii) printing and mailing expenses associated with the Registration Statement and any post-effective amendments thereto, any Preliminary Prospectus, the Prospectus, this Agreement, the Agreement Among Underwriters, the Underwriters' Questionnaire submitted to each of the Underwriters by Legg Mason Wood Walker, Incorporated, in connection herewith, the power of attorney executed by each of the Underwriters in favor of Legg Mason Wood Walker, Incorporated, in connection herewith, the Selected Dealer Agreement and related documents and the preliminary Blue Sky memorandum relating to the offering prepared by Wolf, Block, Schorr and Solis-Cohen, counsel to the Underwriters (collectively with any supplement thereto, the "Preliminary Blue Sky Memorandum"); (iii) the costs (other than fees and expenses of the Underwriters' counsel except in connection with Blue Sky and NASD filings or exemptions as provided herein) incident to the authentication, issuance, sale and delivery of the Shares to the Underwriters; (iv) the fees, expenses and all other costs of qualifying the Shares for sale under the securities or Blue Sky laws of those states in which the Shares are to be offered or sold, including, without limitation, the fees and expenses of Underwriters' counsel and such local counsel as may have been reasonably required and retained for such purpose; (v) the fees, expenses and other costs of, or incident to, securing any review or approvals by or from the NASD, including the reasonable fees and expenses of the Underwriters' counsel; (vi) the filing fees of the SEC; (vii) the cost of furnishing to the Underwriters copies of the Registration Statement, each Preliminary Prospectus and the Prospectus as herein provided; (viii) the Company's travel expenses in connection with meetings with the brokerage community and institutional investors; (ix) the costs and expenses associated with settlement in same day funds (including, but not limited to, interest or cost of funds expenses), if desired by the Company; (x) any fees or costs payable to the Nasdaq Stock Market as a result of the offering; (xi) the cost of printing certificates for the Shares; (xii) the cost and charges of any transfer agent; (xiii) the costs, up to $25,000, of advertising the offering, including, without limitation, with respect to the placement of "tombstone" advertisements in publications selected by the Representatives; and (xiv) all other costs and expenses reasonably incident to the performance of the Company's and the Selling Shareholders' obligations hereunder that are not otherwise specifically provided for in this Section 6(a); provided, however, that, except as specifically set forth in Section 6(c) hereof, (A) the Underwriters shall be responsible for their out-of-pocket expenses, including those associated with meetings with the brokerage community and institutional investors, other than the Company's travel expenses, and the fees and expenses of their counsel for other than Blue Sky and NASD filings or exemptions, and (B) the Selling Shareholders shall be responsible for any transfer or income taxes assessed with respect to the Shares sold by the Selling Shareholders and any fees and expenses of the Selling Shareholders' counsel and such other expenses as are agreed to by the Company and the Selling Shareholders or as may be required by law or regulation. (b) The Company shall pay as due any state registration, qualification, notice and filing fees and any accountable out-of-pocket disbursements in connection with such registration, qualification or filing in the states in which the Representatives determine to offer or sell the Shares. -18- 7. Conditions of Underwriters' Obligations. The obligation of each Underwriter to purchase and pay for the Firm Shares that it has agreed to purchase hereunder on the Closing Date, and to purchase and pay for any Optional Shares as to which it exercises its right to purchase under Section 4 on an Option Closing Date, is subject at the date hereof, the Closing Date and any Option Closing Date to the continuing accuracy and fulfillment of the representations and warranties of the Company and the Selling Shareholders to the performance by the Company of its covenants and obligations hereunder, and to the following additional conditions: (a) if required by the Regulations, the Prospectus shall have been filed with the SEC pursuant to Rule 424(b) of the Regulations within the applicable time period prescribed for such filing by the Regulations; on or prior to the Closing Date or any Option Closing Date, as the case may be, no stop order or other order preventing or suspending the effectiveness of the Registration Statement or the sale of any of the Shares shall have been issued under the Act or any state securities law and no proceedings for that purpose shall have been initiated or shall be pending or, to the Representatives' knowledge or the knowledge of the Company, shall be contemplated by the SEC or by any authority in any jurisdiction designated by the Representatives pursuant to Section 5(f) hereof; and any request on the part of the SEC for additional information shall have been complied with to the reasonable satisfaction of counsel for the Underwriters; (b) all corporate proceedings and other matters incident to the authorization, form and validity of this Agreement, the Shares and the form of the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby, shall be satisfactory in all respects to counsel to the Underwriters; the Company and the Selling Shareholders shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters; and the Representatives shall have received from the Underwriters' counsel, Wolf, Block, Schorr and Solis-Cohen, an opinion, dated as of the Closing Date and any Option Closing Date, as the case may be, and addressed to the Representatives individually and as the -19- Representatives of the several Underwriters, which opinion shall be satisfactory in all respects to the Representatives; (c) the NASD shall have indicated that it has no objection to the underwriting arrangements pertaining to the sale of any of the Shares; (d) the Representatives shall have received a copy of an executed Lock-up Agreement from each person listed on Schedule IV hereto; (e) the Representatives shall have received at or prior to the Closing Date from the Underwriters' counsel a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the securities or Blue Sky laws of such jurisdictions designated by the Representatives pursuant to Section 5(f) hereof; (f) on the Closing Date and any Option Closing Date, there shall have been delivered to the Representatives signed opinions of Buchanan Ingersoll Professional Corporation, and _______________ counsel for the Company and the Selling Shareholders, respectively, dated as of each such date and addressed to the Representatives individually and as the Representatives of the several Underwriters to the effect set forth in Exhibit B and Exhibit B-1 hereto, respectively, or as is otherwise reasonably satisfactory to the Representatives; (g) at the Closing Date and any Option Closing Date: (i) the Registration Statement and any post-effective amendment thereto and the Prospectus and any amendments or supplements thereto shall contain all statements that are required to be stated therein in accordance with the Act and the Regulations and in all material respects shall conform to the requirements of the Act and the Regulations, and neither the Registration Statement nor any post-effective amendment thereto nor the Prospectus and any amendments or supplements thereto shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) since the respective dates as of which information is given in the Registration Statement and any post-effective amendment thereto and the Prospectus and any amendments or supplements thereto, there shall have been no material adverse change in the properties, condition (financial or otherwise), results of operations, shareholders' equity, business or management of the Company and the Subsidiaries, taken as a whole, from that set forth therein, whether or not arising in the ordinary course of business, other than as expressly referred to in the Registration Statement or Prospectus; (iii) since the respective dates as of which information is given in the Registration Statement and the Prospectus or any amendment or supplement thereto, there shall have been no event or transaction, contract or agreement entered into by the Company, other than in the ordinary course of business and as set forth in the Registration Statement or Prospectus, that has not been, but would be required to be, set forth in the Registration Statement or Prospectus; (iv) since the respective dates as of which information is given in the Registration Statement and any post-effective amendment thereto and the Prospectus and any amendments or supplements thereto, there shall have been no material adverse change, loss, reduction, termination or non-renewal of any contract to which the Company or any Subsidiary is a party; and (v) no action, suit or proceeding at law or in equity shall be pending or threatened against the Company that -20- would be required to be set forth in the Prospectus, other than as set forth therein, and no proceedings shall be pending or threatened against or directly affecting the Company or any Subsidiary before or by any federal, state or other commission, board or administrative agency wherein an unfavorable decision, ruling or finding would materially adversely affect the properties, condition (financial or otherwise), results of operations, shareholders' equity, or business of the Company or the Subsidiaries other than as expressly set forth in the Prospectus; (h) the Representatives shall have received at the Closing Date and any Option Closing Date certificates of the Chief Executive Officer and the Chief Financial Officer of the Company dated as of the date of the Closing Date or Option Closing Date, as the case may be, and addressed to the Representatives, individually and as the Representatives of the several Underwriters, to the effect that (i) the signers of the certificate have read this Agreement and the representations and warranties of the Company in this Agreement are true and correct in all material respects, as if made at and as of the Closing Date or the Option Closing Date, as the case may be, and the Company has complied in all material respects with all the agreements, fulfilled in all material respects all the covenants and satisfied all the conditions on its part to be performed, fulfilled or satisfied at or prior to the Closing Date or the Option Closing Date, as the case may be, and (ii) the signers of the certificate have examined the Registration Statement and the Prospectus and any amendments or supplements thereto and that the conditions set forth in Section 7(g) of this Agreement have been satisfied; (i) the Representatives shall have received at the Closing Date certificates of or on behalf of the Selling Shareholders dated as of the date of the Closing Date and addressed to the Representatives, individually and as the Representatives of the several Underwriters, to the effect that (i) the Selling Shareholders have read this Agreement and the representations and warranties of the Selling Shareholders in this Agreement are true and correct in all material respects, as if made at and as of the Closing Date and (ii) the Selling Shareholders have examined the Registration Statement and the Prospectus and any amendments or supplements thereto and that the conditions set forth in Section 7(g) of this Agreement have been satisfied; (j) at the time this Agreement is executed and at the Closing Date and any Option Closing Date the Representatives shall have received a letter addressed to the Representatives individually and as the Representatives of the several Underwriters, and in form and substance satisfactory to the Representatives and to Grant Thornton LLP in all respects (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) from Grant Thornton LLP dated as of the date of this Agreement, the Closing Date or the Option Closing Date, as the case may be: (i) confirming that they are independent certified public accountants within the meaning of the Act and the Regulations and stating that the section of the Registration Statement under the caption "Experts" is correct insofar as it relates to them; (ii) stating that, in their opinion, the consolidated financial statements, schedules and notes of the Company and the Subsidiaries audited by them and included in the -21- Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the Regulations; (iii) stating that, on the basis of specified procedures, which included the procedures specified by the American Institute of Certified Public Accountants for a review of interim financial information, as described in SAS No. 71, Interim Financial Information (with respect to the latest unaudited consolidated financial statements of the Company included in the Registration Statement), a reading of the latest available unaudited interim consolidated financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the minutes of the meetings of the shareholders and the Boards of Directors of the Company and the Subsidiaries, and audit and compensation committees of such Boards, if any, and inquiries to certain officers and other employees of the Company and the Subsidiaries responsible for financial and accounting matters, nothing has come to their attention that caused them to believe that (A) the unaudited consolidated financial statements of the Company included in the Registration Statement, (1) do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations, or (2) any material modifications should be made to such unaudited financial statements for them to be in conformity with generally accepted accounting principles; (B) at the date of the latest available unaudited interim consolidated financial statements of the Company and a specified date not more than five business days prior to the date of such letter, there was any change in the capital stock or debt of the Company or any decrease in net current assets, total assets or shareholders' equity of the Company as compared with the amounts shown in the _____________________________ consolidated balance sheet of the Company included in the Registration Statement, or that for the periods from ________________ to the date of the latest available unaudited consolidated financial statements of the Company and to a specified date not more than five days prior to the date of the letter, there were any decreases, as compared to the corresponding periods in the prior year, in net sales, or in total or per share amounts of income before minority interest and change in accounting principle or of net income, except in all instances for changes, decreases or increases which the Registration Statement discloses have occurred or may occur and except for such other changes, decreases or increases which the Representatives shall in their sole discretion accept; or (C) the unaudited pro forma financial statements included in the Registration Statement does not comply as to form in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X under the Act and that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of those statements; and (iv) stating that they have compared specific dollar amounts, numbers of shares and other numerical data and financial information set forth in the Registration Statement that have been specified by the Representatives and that Grant Thornton LLP is willing to perform and report upon prior to the date of this Agreement, to the extent that such information is derived from the accounting records subject to the internal control structure, policies and procedures of the Company's or the Subsidiaries' accounting systems, or has been derived directly from such accounting records by analysis or comparison or has been derived from other records and analysis maintained or prepared by the Company or the Subsidiaries with the results obtained from the application of readings, inquiries and other appropriate procedures (which -22- procedures do not constitute an audit in accordance with generally accepted auditing standards) set forth in the letter, and found them to be in agreement; (k) there shall have been duly tendered to the Representatives for the respective accounts of the Underwriters certificates representing all of the Shares to be purchased by the Underwriters on the Closing Date or any Option Closing Date, as the case may be; (l) at the Closing Date and any Option Closing Date, the Representatives shall have been furnished such additional documents, information and certificates as they shall have reasonably requested; (m) the Common Shares (including, without limitation, the Shares) shall be included in the Nasdaq Stock Market's National Market; (n) the issuance and sale of the Shares shall be legally permitted under applicable Blue Sky or state securities laws so long as such sales are made in accordance with the Preliminary Blue Sky Memorandum; and (o) all corporate and other proceedings and other matters incident to the authorization, form and validity of this Agreement and the form of the Registration Statement and Prospectus and all other legal matters related to this Agreement and the transactions contemplated hereby, shall be satisfactory in all respects to counsel to the Underwriters. The Company and the Selling Shareholders shall have furnished to such counsel all documents and information that they shall have reasonably requested to enable them to pass upon such matters. All such opinions, certificates, letters and documents shall be in compliance with the provisions hereof only if they are satisfactory in form and substance to the Representatives and Underwriters' counsel. The Company and the Selling Shareholders shall furnish the Representatives with such conformed copies of such opinions, certificates, letters and other documents as they shall reasonably request. If any condition to the Underwriters' obligations hereunder to be fulfilled prior to or at the Closing Date or any Option Closing Date, as the case may be, is not fulfilled, the Representatives may on behalf of the several Underwriters, terminate this Agreement with respect to the Closing Date or such Option Closing Date, as applicable, or, if it so elects, waive any such conditions which have not been fulfilled or extend the time for their fulfillment. Any such termination shall be without liability of the Underwriters to the Company or the Selling Shareholders. 8. Indemnification and Contribution. (a) The Company and each Selling Shareholder, severally and jointly, shall indemnify and hold harmless each Underwriter and each person, if any, who controls each Underwriter within the meaning of the Act, against any and all loss, liability, claim, damage and expense whatsoever, including, but not limited to, any and all reasonable expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever or in connection with any investigation or inquiry of, or action or proceeding that may be brought against, the respective indemnified parties, arising out -23- of or based upon any breach of representations and warranties made by the Company or any such Selling Shareholder in this Agreement and any untrue statements or alleged untrue statements of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, any application or other document (in this Section 8 collectively called "application") executed by the Company and based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify all or any part of the Shares under the securities laws thereof or filed with the SEC or the NASD, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the foregoing indemnity: (i) shall not, subject to the acknowledgment of the Company in Section 1(a)(ii) hereof and the acknowledgment of the Selling Shareholders in Section 1(b)(vi) hereof, apply in respect of any statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter or through the Representatives expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment or supplement thereto, or in any application or in any communication to the SEC, as the case may be; and (ii) with respect to any Preliminary Prospectus, shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares if, at or prior to the written confirmation of the sale of such Shares, a copy of an amended Preliminary Prospectus or the Prospectus (or the Prospectus as amended or supplemented) was delivered to such Underwriter but was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the amended Preliminary Prospectus or Prospectus (or the Prospectus as amended or supplemented). This indemnity agreement will be in addition to any liability the Company and the Selling Shareholders may otherwise have. (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, each Selling Shareholder, and each other person, if any, who controls the Company or a Selling Shareholder within the meaning of the Act to the same extent as the foregoing indemnities from the Company and the Selling Shareholders to the several Underwriters, but only with respect to any loss, liability, claim, damage or expense resulting from statements or omissions, or alleged statements or omissions, if any, made in any Preliminary Prospectus, Registration Statement or Prospectus or any amendment or supplement thereof or any application in reliance upon and in conformity with written information furnished to the Company by any Underwriter or through the Representatives with respect to any Underwriter by or on behalf of such Underwriter expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereof or any application, as the case may be. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. -24- (c) If any action, inquiry, investigation or proceeding is brought against any person in respect of which indemnity may be sought pursuant to any of the two preceding paragraphs, such person (hereinafter called the "indemnified party") shall, promptly after notification of, or receipt of service of process for, such action, inquiry, investigation or proceeding, notify in writing the party or parties against whom indemnification is to be sought (hereinafter called the "indemnifying party") of the institution of such action, inquiry, investigation or proceeding and the indemnifying party, upon the request of the indemnified party, shall assume the defense of such action, inquiry, investigation or proceeding, including the employment of counsel (reasonably satisfactory to such indemnified party) and payment of expenses. No indemnification provided for in this Section 8 shall be available to any indemnified party who shall fail to give such notice if the indemnifying party does not have knowledge of such action, inquiry, investigation or proceeding, to the extent that such indemnifying party has been materially prejudiced by the failure to give such notice, but the omission to so notify the indemnifying party shall not relieve the indemnifying party otherwise than under this Section 8. Such indemnified party or controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless the employment of such counsel shall have been authorized in writing by the indemnifying party in connection with the defense of such action. If such indemnified party or parties shall have been advised by counsel that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, the indemnified party or parties shall be entitled to select counsel (such counsel, "Separate Counsel") to conduct the defense to the extent determined by such counsel to be necessary to protect the interests of the indemnified party or parties and the reasonable fees and expenses of such Separate Counsel shall be borne by the indemnifying party; provided, however, that if the indemnified parties engage more than one Separate Counsel, then the indemnifying party's liability with respect to such Separate Counsel shall be limited, in the aggregate, to an amount equal to the highest amount of reasonable fees and expenses charged or incurred by a single Separate Counsel, which amount shall be divided among the indemnified parties on a pro rata basis in accordance with the relative amounts of reasonable fees and expenses of their respective Separate Counsel. Expenses covered by the indemnification in this Section 8 shall be paid by the indemnifying party as they are incurred by the indemnified party. Anything in this Section 8 to the contrary notwithstanding, the indemnifying party shall not be liable for any settlement of any such claim effected without its written consent. (d) Each Selling Shareholder's aggregate liability under this Section 8 shall be limited to an amount equal to the net proceeds (before deducting expenses) received by such Selling Shareholder from the sale of such Selling Shareholder's Shares pursuant to this Agreement. (e) If the indemnification provided for in this Section 8 is unavailable to, or insufficient to hold harmless an indemnified party under Sections 8(a) or (b) hereof in respect of any losses, liabilities, claims, damages or expenses (or actions, inquiries, investigations or proceedings in respect thereof) referred to therein, except by reason of the provisos set forth in Section 8(a) hereof or the failure to give notice as required in Section 8(c) hereof (provided that -25- the indemnifying party does not have knowledge of the action, inquiry, investigation or proceeding and to the extent such party has been materially prejudiced by the failure to give such notice), then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, liabilities, claims, damages or expenses (or actions, inquiries, investigations or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company or the Selling Shareholders on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company or each Selling Shareholder on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, liabilities, claims or reasonable expenses (or actions, inquiries, investigations or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company or each Selling Shareholder on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company or each Selling Shareholder bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or a Selling Shareholder on the one hand or the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(e) were determined by pro rata allocation (even if the Selling Shareholders or the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to above in this Section 8(e). The amount paid or payable by an indemnified party as a result of the losses, liabilities, claims, damages or reasonable expenses (or actions, inquiries, investigations or proceedings in respect thereof) referred to above in this Section 8(e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(e), (i) the provisions of the Agreement Among Underwriters shall govern contribution among Underwriters, (ii) no Underwriter (except as provided in the Agreement Among Underwriters) shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, and (iii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their individual underwriting obligations and not joint. 9. Representations and Agreements to Survive Delivery. Except as the context otherwise requires, all representations, warranties and agreements contained in this Agreement shall be deemed to be representations, warranties and agreements at the Closing Date -26- and any Option Closing Date; and such representations, warranties and agreements of the Underwriters, the Company and the Selling Shareholders, including, without limitation, the indemnity and contribution agreements contained in Section 8 hereof and the agreements contained in Sections 6, 9, 10 and 13 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person, and shall survive delivery of the Shares and termination of this Agreement, whether before or after the Closing Date or any Option Closing Date. 10. Effective Date of This Agreement and Termination Hereof. (a) This Agreement shall become effective at _______ A.M., Philadelphia, Pennsylvania time, on the first business day following the Effective Date or at the time of the public offering by the Underwriters of the Shares, whichever is earlier, except that the provisions of Sections 6, 8, 9, 10 and 13 hereof shall be effective upon execution hereof. The time of the public offering, for the purpose of this Section 10, shall mean the time when any of the Shares are first released by the Underwriters for offering by dealers. The Representatives may prevent the provisions of this Agreement (other than those contained in Sections 6, 8, 9, 10 and 13 hereof) from becoming effective without liability of any party to any other party, except as noted below, by giving the notice indicated in Section 10(c) hereof before the time the other provisions of this Agreement become effective. (b) The Representatives shall have the right to terminate this Agreement at any time prior to the Closing Date as provided in Sections 7 and 11 hereof or if any of the following have occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company or its Subsidiaries, or the earnings, business affairs, management or business prospects of the Company or its Subsidiaries, whether or not arising in the ordinary course of business, that would, in the Representatives' reasonable judgment, make the offering or delivery of the Shares impracticable; (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic, political or financial market conditions if the effect on the financial markets of the United States of such outbreak, calamity, crisis or change is material and adverse and would, in the Representatives' reasonable judgment, make the offering or delivery of the Shares impracticable; (iii) suspension of trading generally in securities on the New York Stock Exchange, the American Stock Exchange, the Nasdaq Stock Market or the over-the-counter market or limitation on prices (other than limitations on hours or numbers of days of trading) for securities or the promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority that in the Representatives' reasonable opinion materially and adversely affects trading on such exchange or the over-the-counter market; -27- (iv) declaration of a banking moratorium by either federal or Nevada state authorities; (v) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs that in the Representatives' reasonable opinion has a material adverse effect on the securities markets in the United States; or (vi) trading in any securities of the Company shall have been suspended or halted by the Nasdaq Stock Market or the SEC. (c) If the Representatives elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 10, the Representatives shall notify the Company and the Selling Shareholders thereof promptly by telephone, telex, telegraph, telegram or facsimile, confirmed by letter. 11. Default by an Underwriter. (a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares or Optional Shares hereunder, and if the Firm Shares or Optional Shares with respect to which such default relates do not exceed the aggregate of 10% of the number of Firm Shares or Optional Shares, as the case may be, that all Underwriters have agreed to purchase hereunder, then such Firm Shares or Optional Shares to which the default relates shall be purchased severally by the non-defaulting Underwriters in proportion to their respective commitments hereunder. (b) If such default relates to more than 10% of the Firm Shares or Optional Shares, as the case may be, the Representatives may, in their discretion, arrange for another party or parties (including a non-defaulting Underwriter) to purchase such Firm Shares or Optional Shares to which such default relates, on the terms contained herein. In the event that the Representatives do not arrange for the purchase of the Firm Shares or Optional Shares to which a default relates as provided in this Section 11, this Agreement may be terminated by the Representatives or by the Company without liability on the part of the several Underwriters (except as provided in Section 8 hereof) or the Company (except as provided in Sections 6 and 8 hereof), but nothing herein shall relieve a defaulting Underwriter of its liability, if any, to the other several Underwriters and to the Company for damages occasioned by its default hereunder. (c) If the Firm Shares or Optional Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representatives or the Company shall have the right to postpone the Closing Date or any Option Closing Date, as the case may be, for a reasonable period but not in any event exceeding seven days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment to the Registration Statement or supplement to the Prospectus that in the opinion of counsel for the Underwriters may thereby be made necessary. The terms "Underwriters" and "Underwriter" as used in this Agreement shall include any party substituted under this Section 11 with like effect as if it had -28- originally been a party to this Agreement with respect to such Firm Shares and/or Optional Shares. 12. Notice. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and, if sent to any Underwriter, shall be mailed, delivered, telexed, telegrammed, telegraphed or telecopied and confirmed to such Underwriter, c/o Legg Mason Wood Walker, Incorporated, 1735 Market Street, Philadelphia, Pennsylvania 19103, Attention: Mr. Mitchell Posner, with a copy to Wolf, Block, Schorr and Solis-Cohen, Twelfth Floor Packard Building, S.E. Corner 15th and Chestnut Streets, Philadelphia, Pennsylvania 19102-2678, Attention: Mark K. Kessler, Esquire; if sent to the Company shall be mailed, delivered, telexed, telegrammed, telegraphed or telecopied and confirmed to RCM Technologies, Inc., 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey, 08109-4613, Attention: Leon Kopyt, with a copy to Buchanan Ingersoll Professional Corporation, Eleven Penn Center, 14th Floor, 1835 Market Street, Philadelphia, Pennsylvania, 19103, Attention: Stephen M. Cohen, Esquire; if sent to the Selling Shareholders shall be mailed, delivered, telegrammed, telegraphed or telecopied and confirmed to (a) Limeport Investments, LLC c/o Acquest International, 1760 Market Street, 12th Floor, Philadelphia, Pennsylvania 19103, (b) J. Dennis Bodemann, 5619 Oldham Court, Lousiville, Kentucky 40291, or (c) Harry R. Nelson, 2100 Gardner Lane, Suite 216, Lousiville, Kentucky 40205, as applicable, with a copy to _______________ ________________________________________. 13. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the several Underwriters, the Company, the Selling Shareholders and the controlling persons, directors and officers thereof, and their respective successors, assigns, heirs and legal representatives, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. The terms "successors" and "assigns" shall not include any purchaser of the Shares merely because of such purchase. In all dealings with the Company and the Selling Shareholders under this Agreement, the Representatives shall act on behalf of each of the several Underwriters, and the Company and the Selling Shareholders shall be entitled to act and rely upon any statement, request, notice or agreement made or given by the Representatives jointly or by Janney Montgomery Scott Inc. on behalf of the Representatives. 14. Definition of Business Day. For purposes of this Agreement, "business day" means any day on which the Nasdaq National Market, or to the extent that the Common Shares are included in the Nasdaq SmallCap Market, the Nasdaq SmallCap Market, is opened for trading. 15. Counterparts. This Agreement may be executed in one or more counterparts and all such counterparts will constitute one and the same instrument. 16. Construction. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania applicable to agreements made and performed entirely within such Commonwealth. All references herein to the knowledge of the Company shall be deemed to include the knowledge of each of the Subsidiaries. -29- If the foregoing correctly sets forth your understanding of our agreement, please sign and return to the Company the enclosed duplicate hereof, whereupon it will become a binding agreement in accordance with its terms. Very truly yours, RCM TECHNOLOGIES, INC. By: ------------------------------------ Leon Kopyt Chairman of the Board, Chief Executive Officer and President THE SELLING SHAREHOLDERS By: ------------------------------------ Leon Kopyt Attorney-in-fact acting on behalf of each of the Selling Shareholders named in Schedule II hereto. The foregoing Agreement is hereby confirmed and accepted as of the date first above written. LEGG MASON WOOD WALKER, INCORPORATED JANNEY MONTGOMERY SCOTT INC. As Representatives of the Several Underwriters named in Schedule I hereto By: LEGG MASON WOOD WALKER, INCORPORATED By: -------------------------------------------- Authorized Representative By: JANNEY MONTGOMERY SCOTT INC. By: -------------------------------------------- Authorized Representative -30- JOINDER Each of the subsidiaries, intending to be legally bound, hereby joins this Agreement for purposes of Sections 1 and 9 hereof. INTERTEC DESIGN, INC. ------------------------------------ By: Title: CATARACT, INC. ------------------------------------ By: Title: THE CONSORTIUM ------------------------------------ By: Title: THE CONSORTIUM OF MARYLAND, INC. ------------------------------------ By: Title: PROGRAMMING ALTERNATIVES OF MINNESOTA, INC. ------------------------------------ By: Title: -31- SCHEDULE I Schedule of Underwriters
Number of Firm Number of Shares to be Optional Shares Underwriter Purchased to be Purchased ----------- ---------------- --------------- Legg Mason Wood Walker, Incorporated Baltimore, MD Janney Montgomery Scott, Inc., Philadelphia, PA --------- ------- TOTAL 2,500,000 375,000
I-1 SCHEDULE II Schedule of Selling Shareholders Number of Firm Selling Shareholder Shares to be Sold ------------------- ----------------- Limeport Investments, LLC 138,313 J. Dennis Bodemann 1,500 Harry R. Nelson 2,500 Martin Blaire 36,000 II-1 SCHEDULE III Shareholder NASD Affiliations III-1 SCHEDULE IV List of Persons Who Are to Deliver Lock-Up Agreements Called for Under Sections 5(k) and 7(d) RCM Technologies, Inc. Limeport Investments, LLC Leon Kopyt Barry S. Meyers Martin Blaire Stanton Remer Peter R. Kaminsky Norman S. Berson Robert B. Kerr Woodrow B. Moats, Jr. IV-1 EXHIBIT A Subsidiaries of the Company, Jurisdiction of Incorporation and Percentage Ownership Subsidiary Jurisdiction % Ownership - ---------- ------------ ----------- Intertec Design, Inc. New York 100% Cataract, Inc. Pennsylvania 100% The Consortium New Jersey 100% The Consortium of New Jersey 100% Maryland, Inc. Programming Alternatives Minnesota 100% of Minnesota, Inc. A-1 EXHIBIT B Matters to be Covered in the Opinion of Buchanan Ingersoll Professional Corporation Counsel for the Company (1) The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation with full power and authority to conduct all of the activities conducted by it, own or lease all of the assets owned or leased by it, and conduct its business all as described in the Registration Statement and the Prospectus; and is duly licensed or qualified to do business and in good standing as a United States foreign corporation in all jurisdictions in which the nature of the activities conducted by it and/or the character of the assets owned and leased by it makes such qualification or license necessary except where the failure to be so qualified or licensed would not have a material adverse effect on the Company and the Subsidiaries taken as a whole; and the Subsidiaries are all wholly owned subsidiaries of the Company. (2) No authorization, approval, consent or license of any governmental or regulatory body, except as may be required under the Act or the blue sky laws of the various jurisdictions, is required in connection with the (A) authorization, issuance, transfer, sale or delivery of the Shares to be sold by the Company; (B) execution, delivery and performance of this Agreement by the Company or (C) taking of any action contemplated in the Underwriting Agreement or in the Registration Statement or the Prospectus, or if so required, all such authorizations, approvals, consents and licenses, specifying the same, have been obtained and are in full force and effect and have been disclosed to the Representatives. (3) The Company has authorized and outstanding capital stock, stock options and other derivative securities as set forth in the Registration Statement and the Prospectus. The outstanding shares of the Common Stock have been, and all of the Shares will be, upon sale or issuance and payment therefor, duly authorized, validly issued, fully paid and nonassessable, are not subject to preemptive rights and have not been issued in violation of any statutory preemptive rights or similar contractual rights. The holders of shares of the Common Stock are not and will not be subject to personal liability solely by reason of being such holders. The issue and sale of the Shares by the Company have been duly and validly authorized. The Common Stock has been duly authorized for quotation in the Nasdaq National Market. All issuances and repurchases of securities by the Company were exempt from, or complied in all material respects with, the provisions of all applicable federal and state securities laws relating to the registration of securities and all state corporate laws. (4) No holder of any securities of the Company has the right to require registration of shares of the Common Stock or other securities of the Company other than such rights as have been duly waived. The description of the Common Stock and the Shares contained in the Registration Statement and the Prospectus conforms to the rights set forth in the instruments defining the same and is in conformity with the requirements of the Act and the Regulations. (5) The Company is not an "investment company" as defined in Section 3(a) of the Investment Company Act and, if the Company conducts its business as set forth in the B-1 Registration Statement and the Prospectus, will not become an "investment company" and will not be required to register under the Investment Company Act. (6) The Company has full power and authority to enter into this Agreement, and this Agreement has been duly authorized, executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable in accordance with its terms, except insofar as rights to indemnity or contribution may be limited by applicable law or equitable principles, and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, arrangement or similar laws affecting creditors' rights generally or by general equitable principles. (7) Nothing has come to such counsel's attention to give such counsel reason to believe that any of the representations and warranties of the Company or the Selling Shareholders contained in this Agreement or in any certificate or document contemplated under this Agreement to be delivered is not true or correct or that any of the covenants and agreements contained in this Agreement or in any such certificate or document to be performed on the part of the Company or the Selling Shareholders or any of the respective conditions contained in this Agreement or in any such certificate or document, or set forth in the Registration Statement or the Prospectus, to be fulfilled or complied with by the Company or the Selling Shareholders has not been or will not be duly and timely performed, fulfilled or complied with in any material respect. (8) The Registration Statement and the Prospectus, and each amendment thereof or supplement thereto, comply as to form and substance with, and are responsive in all material respects to, the requirements of the Act and the Rules and Regulations (except that no opinion need be expressed as to matters concerning financial statements and other financial data and related notes, schedules and financial or statistical data contained in the Registration Statement or the Prospectus). (9) Such counsel has participated in the preparation of the Registration Statement and the Prospectus and nothing has come to the attention of such counsel to lead them to believe that, as of each of the Effective Date, the Closing Date and any Option Closing Date, either the Registration Statement or the Prospectus, or any amendment or supplement thereto, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except that no opinion need be expressed as to matters concerning financial statements and other financial data and related notes, schedules and financial or statistical data contained in the Registration Statement or the Prospectus). (10) Such counsel has read all contracts specifically enumerated in the Registration Statement and the Prospectus, and such contracts are fairly summarized or described therein, conform in all material respects to the descriptions thereof contained therein, and are filed as exhibits thereto, if required, and there are no contracts or documents required to be so summarized or disclosed or so filed which have not been so summarized or disclosed or so filed. B-2 (11) The Registration Statement has become effective under the Act, and (A) no stop order suspending the effectiveness of the Registration Statement has been issued and (B) to the best of such counsel's knowledge, no proceedings for that purpose have been instituted or are threatened, pending or contemplated. The opinion delivered at the Closing Date shall state that all filings required by Rule 424 and Rule 430A of the Rules and Regulations have been made, to the extent that such rules are utilized. (12) The execution and delivery of this Agreement by the Company, the consummation by the Company of the transactions herein contemplated and the compliance with the terms of this Agreement do not and will not conflict with or result in a breach of any of the terms or provisions of or violate or constitute a default under, the Articles of Incorporation or Bylaws of the Company, or any indenture, mortgage or other agreement or instrument to which the Company is a party or by which the Company or any of its properties is bound, or any existing statute, rule or regulation, or any judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its properties. (13) There are no legal proceedings pending or, to the knowledge of such counsel, threatened against the Company which are required to be disclosed in the Registration Statement, except as described therein. There are no pending or, to the knowledge of such counsel, threatened actions, suits or proceedings before any court or any governmental or regulatory authority relating to any federal, state or local environmental laws, the ultimate resolution of which actions, suits or proceedings would have a materially adverse effect on the overall financial condition of the Company. The analyses, conclusions and other disclosures in the Registration Statement under "Risk Factors - Potential Claims Relating to Former Operation of California Facility," and in other portions of the Registration Statement which address such matter, fully and fairly present, in the opinion of such counsel, the analyses, conclusions and other disclosures described therein with respect to the matters described therein. In rendering such opinions, counsel for the Company may set forth that as to certain matters of fact, such counsel is relying on one or more certificates of public officials, governmental agencies or officers of the Company. In addition, as to matters of law, counsel for the Company may rely as to matters involving the application of laws other than the laws of the United States, the laws of Pennsylvania, and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance satisfactory to the Underwriters' counsel) of other counsel reasonably acceptable to the Underwriters' counsel, familiar with the applicable laws, provided that such counsel for the Company also shall state in its opinion that it believes that both the Underwriters and it are justified in relying upon such opinions of such local counsel. Unless the context clearly indicates otherwise, the term "Company" as used in this Exhibit, shall include the Subsidiaries. The opinion of counsel for the Company shall include a statement to the effect that it may be relied upon by counsel for the Underwriters in their opinion delivered to the Underwriters. B-3 EXHIBIT B-1 Matters to be Covered in the Opinion of Counsel to the Selling Shareholders (1) Each Selling Shareholder has full power and authority to enter into this Agreement and the Power of Attorney and Custody Agreement (the "Custody Agreement"). All authorizations and consents necessary for the execution and delivery of this Agreement and the Custody Agreement on behalf of each Selling Shareholder have been given. The delivery of the Shares on behalf of each Selling Shareholder pursuant to the terms of the Agreement and payment therefor by the Underwriters will pass marketable title to the Shares to the Underwriters and, to the best of such counsel's knowledge, will pass title to the Shares free and clear of all liens, encumbrances and claims. (2) Each of the Agreement and the Custody Agreement has been duly authorized, executed and delivered by each Selling Shareholder, is a valid and binding agreement of each Selling Shareholder and is enforceable against each Selling Shareholder in accordance with the terms thereof except insofar as rights to indemnity or contribution may be limited by applicable law or equitable principles, and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, arrangement or similar laws affecting creditors' rights generally or by general equitable principles. (3) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or regulatory body, except as may be required under the Act or the blue sky laws of the various jurisdictions, is required in connection with the authorization, issuance, transfer, sale or delivery of the Shares by or on behalf of each Selling Shareholder, in connection with the execution, delivery and performance of the Agreement and the Custody Agreement by each Selling Shareholder or in connection with the taking by or on behalf of each Selling Shareholder of any action contemplated thereby or, if so required, all such B-1-1 consents, approvals, authorizations and orders specifying the same have been obtained and are in full force and effect, except such as have been obtained under the Act or the Regulations. (4) The execution and delivery of the Agreement and the Custody Agreement by each Selling Shareholder, the consummation by each Selling Shareholder of the transactions herein contemplated and the compliance by each Selling Shareholder with the terms thereof do not and will not result in the creation or imposition of any lien, charge or encumbrance upon any of the assets of any Selling Shareholder pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under or result in the acceleration of any obligation under, any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, lease, contract or other agreement or instrument to which any Selling Shareholder is a party or by which it or any of its properties is bound or affected, or any statute, judgment, ruling, decree, order, rule or regulation of any court or other governmental agency or body applicable to each Selling Shareholder. (5) There are no transfer or similar taxes payable in connection with the sale and delivery of the Shares by each Selling Shareholder to the Underwriters, except as specified in such opinion. B-1-2 EX-23.(A) 3 CONSENT OF ACCOUNTANTS CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated December 16, 1996 (except for Note 6 as to which the date is December 19, 1996, Note 4, regarding the acquisition of Programming Alternatives of Minnesota, Inc., as to which the date is January 7, 1997 and the last paragraph of Note 16, as to which the date is May 2, 1997), accompanying the consolidated financial statements and schedules of RCM Technologies, Inc. (a Nevada corporation) and Subsidiaries contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." GRANT THORNTON LLP Philadelphia Pennsylvania May 13, 1997 -----END PRIVACY-ENHANCED MESSAGE-----