Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 27, 2008

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to         

 

Commission file number 1-10245

 

RCM TECHNOLOGIES, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Nevada

 

95-1480559

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

 

 

2500 McClellan Avenue, Suite 350,
Pennsauken, New Jersey

 

08109-4613

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

 

Registrant’s telephone number, including area code:  (856) 356-4500

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

 

 

 

Common Stock, par value $0.05 per share

 

The NASDAQ Stock Market LLC

 

 

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

 

Large Accelerated Filer o

 

Accelerated Filer o

 

Non-Accelerated Filer o
(Do not check if a smaller reporting company)

 

Smaller Reporting Company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

 

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $52,668,000 based upon the closing price of $4.31 per share of the registrant’s common stock on June 27, 2008 on The NASDAQ Global Market. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from the figure is an affiliate or that any person whose holdings are included is not an affiliate and any such admission is hereby disclaimed. The information provided is included solely for record keeping purposes of the Securities and Exchange Commission.

 

The number of shares of registrant’s common stock (par value $0.05 per share) outstanding as of March 23, 2009: 12,813,522.

 

Documents Incorporated by Reference

 

Portions of the definitive proxy statement for the registrant’s 2009 Annual Meeting of Stockholders (the “2009 Proxy Statement”) are incorporated by reference into Items 10, 11, 12, 13 and 14 in Part III of this Annual Report on Form 10-K. If the 2009 Proxy Statement is not filed by April 26, 2009, an amendment to this annual report on Form 10-K setting forth this information will be duly filed with the Securities and Exchange Commission.

 

 

 



Table of Contents

 

RCM TECHNOLOGIES, INC.

FORM 10-K

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

 

 

 

 

Item

1.

Business

2

 

Item

1A.

Risk Factors

14

 

Item

1B.

Unresolved Staff Comments

17

 

Item

2.

Properties

17

 

Item

3.

Legal Proceedings

17

 

Item

4.

Submission of Matters to a Vote of Security Holders

17

 

 

 

 

 

PART II

 

 

 

 

 

 

 

 

 

Item

5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18

 

Item

6.

Selected Financial Data

20

 

Item

7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

Item

7A.

Quantitative and Qualitative Disclosures about Market Risk

35

 

Item

8.

Financial Statements and Supplementary Data

36

 

Item

9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

36

 

Item

9A(T).

Controls and Procedures

36

 

Item

9B.

Other Information

36

 

 

 

 

 

PART III

 

 

 

 

 

 

 

 

 

Item

10.

Directors, Executive Officers and Corporate Governance

37

 

Item

11.

Executive Compensation

37

 

Item

12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

37

 

Item

13.

Certain Relationships and Related Transactions, and Director Independence

37

 

Item

14.

Principal Accountant Fees and Services

37

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

 

 

Item

15.

Exhibits and Financial Statement Schedules

38

 

Signatures

 

 

 



Table of Contents

 

PART I

 

Private Securities Litigation Reform Act Safe Harbor Statement

 

Certain statements included herein and in other reports and public filings made by RCM Technologies, Inc. (“RCM” or the “Company”) are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements regarding the adoption by businesses of new technology solutions; the use by businesses of outsourced solutions, such as those offered by the Company in connection with such adoption; and the outcome of litigation (at both the trial and appellate levels) involving the Company. Readers are cautioned that such forward-looking statements, as well as others made by the Company, which may be identified by words such as “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “believe,” and similar expressions, are only predictions and are subject to risks and uncertainties that could cause the Company’s actual results and financial position to differ materially from such statements. Such risks and uncertainties include, without limitation: (i) unemployment and general economic conditions affecting the provision of information technology and engineering services and solutions and the placement of temporary staffing personnel; (ii) the Company’s ability to continue to attract, train and retain personnel qualified to meet the requirements of its clients; (iii) the Company’s ability to identify appropriate acquisition candidates, complete such acquisitions and successfully integrate acquired businesses; (iv) uncertainties regarding pro forma financial information and the underlying assumptions relating to acquisitions and acquired businesses; (v) uncertainties regarding amounts of deferred consideration and earnout payments to become payable to former shareholders of acquired businesses; (vi) adverse effects on the market price of the Company’s common stock due to the potential resale into the market of significant amounts of common stock; (vii) the adverse effect a potential decrease in the trading price of the Company’s common stock would have upon the Company’s ability to acquire businesses through the issuance of its securities; (viii) the Company’s ability to obtain financing on satisfactory terms; (ix) the reliance of the Company upon the continued service of its executive officers; (x) the Company’s ability to remain competitive in the markets that it serves; (xi) the Company’s ability to maintain its unemployment insurance premiums and workers compensation premiums; (xii) the risk of claims being made against the Company associated with providing temporary staffing services; (xiii) the Company’s ability to manage significant amounts of information and periodically expand and upgrade its information processing capabilities; (xiv) the Company’s ability to remain in compliance with federal and state wage and hour laws and regulations; (xv) uncertainties in predictions as to the future need for the Company’s services; (xvi) uncertainties relating to the allocation of costs and expenses to each of the Company’s operating segments; (xvii) the costs of conducting and the outcome of litigation involving the Company, (xviii) obligations relating to indemnities and similar agreements entered into in connection with the Company’s business activities, and (xix) other economic, competitive and governmental factors affecting the Company’s operations, markets, products and services. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. The Company undertakes no obligation to publicly release the results of any revision of these forward-looking statements to reflect these trends or circumstances after the date they are made or to reflect the occurrence of unanticipated events.

 

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ITEM 1. BUSINESS

 

General

 

RCM Technologies is a premier provider of business and technology solutions designed to enhance and maximize the operational performance of its customers through the adaptation and deployment of advanced information technology and engineering services. RCM has been an innovative leader in the design, development, and delivery of these services to commercial and government sectors for more than 35 years. Over the years, the Company has developed and assembled an attractive, diverse and extensive portfolio of capabilities, service offerings and delivery options, established a proven record of performance and credibility, and built an efficient pricing structure. This combination offers clients a compelling value proposition with the potential to substantially accelerate the successful attainment of their business objectives.

 

RCM consists of three operating segments: Information Technology, Engineering and Commercial Services. The Company’s Information Technology, or IT, segment provides enterprise business solutions, application services, infrastructure solutions, competitive advantage & productivity solutions, life sciences solutions and other selected vertical market specific offerings. RCM’s Engineering segment provides engineering and design, engineering analysis, technical writing and technical support services. The Company’s Commercial Services segment provides health care professionals as well as clerical and light industrial temporary personnel.

 

The Company services some of the largest national and international companies in North America as well as a lengthy roster of Fortune 1000 and mid-sized businesses in such industries as Aerospace/Defense, Energy, Financial Services, Life Sciences, Manufacturing & Distribution, the Public Sector and Technology. RCM believes it offers a range of solutions that fosters long-term client relationships, affords cross-selling opportunities, and minimizes the Company’s dependence on any single technology or industry sector. RCM sells and delivers its services through a network of 35 offices in selected regions throughout North America.

 

The Company is a Nevada corporation organized in 1971. The address of its principal executive office is 2500 McClellan Avenue, Suite 350, Pennsauken, NJ 08109-4613.

 

During the year ended December 27, 2008, approximately 49.4% of RCM’s total revenues were derived from IT services, 28.3% from Engineering services, and the remaining 22.3% from Commercial services.

 

Demand for the Company’s services can be significantly impacted by changes in the general level of economic activity and particularly technology spending. During periods of reduced economic activity, such as the environment in the United States and the world in general since approximately mid-2007 and continuing into 2009, the Company may also be subject to increased competition and pricing pressure in its markets. Extended periods of weakness in the economy can have a material adverse impact on the Company’s business and results of operations.

 

Industry Overview

 

Businesses today face intense competition, the challenge of constant technological change and the ongoing need for business process optimization. To address these issues and to compete more effectively, companies are continually evaluating the need for implementing innovative solutions to upgrade their systems, applications, and processes. As a result, the ability of an organization to integrate and align advanced technologies with new business objectives is critical.

 

Although most companies recognize the importance of optimizing their systems, applications and processes to compete in today’s challenging environment, the process of designing, developing and implementing business and technology solutions is becoming increasingly complex. The Company believes that many businesses are focused on return on investment analysis in prioritizing their initiatives. Consequently, over the past few years, companies have elected to defer, redefine or cancel investments in new systems, software, and solutions and have focused on making more effective use of previous technological investments.

 

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The current economic environment challenges many companies to integrate and manage computing environments consisting of multiple computing platforms, operating systems, databases and networking protocols and off-the-shelf software applications to support business objectives. Companies also need to keep pace with new technology developments, which often rapidly render existing equipment and internal skills obsolete. At the same time, external economic factors have caused many organizations to focus on core competencies and trim workforces in the IT management area. Accordingly, these organizations often lack the quantity, quality and variety of IT skills necessary to design and support IT solutions. IT managers are charged with supporting increasingly complex systems and applications of significant strategic value, while working under budgetary, personnel and expertise constraints within their own organizations.

 

The Company believes its target market for IT services is among middle-market companies, which typically lack the time and technical resources to satisfy all of their IT needs internally. These companies commonly require sophisticated, experienced IT assistance to achieve their business objectives and often rely on IT service providers to help implement and manage their systems. However, many middle-market companies rely on multiple providers for their IT needs. Generally, the Company believes that this reliance on multiple providers results from the fact that larger IT service providers do not target these companies, while smaller IT service providers, which do target these companies, lack sufficient breadth of services or industry knowledge to satisfy all of these companies’ needs. The Company believes this reliance on multiple service providers creates multiple relationships that are more difficult and less cost-effective to manage than a single relationship and can adversely influence the quality and compatibility of IT solutions. RCM is structured to provide middle-market companies a single source for their IT needs.

 

The Company’s Engineering group continues to focus on areas of growth within the energy and aerospace industries.  In recent years, many businesses have been adversely impacted by higher oil prices, and for that and various other reasons, there has been growing sentiment around the world for the development of alternative sources of energy, including a renewed interest in nuclear power. Over the same period, there has been a significant increase in spending in the United States in the aerospace and defense industries due largely to a strengthening of the military and homeland security in response to geo-political unrest and the threat of terrorism. The combination of higher energy prices and increased military spending has created numerous business opportunities for service providers, especially those engaged in engineering operations in North America and abroad.

 

In the healthcare services industry, a shortage of nurses and other medical personnel in the United States has led to increases in business activity for health care service companies, including the Company’s Specialty Healthcare Group. Due in part to an aging population and improved medical technology, the demand for selected health care professionals is expected to continue over the next several years.

 

Meanwhile, the general economy of the United States over the past several years has negatively affected temporary staffing businesses which are providers of light industrial and clerical help. Generally, demand for lower-skilled workers is weakened in a general economy that is in a downward cycle.

 

Business Strategy

 

RCM is dedicated to providing solutions to meet its clients’ business needs by delivering information technology and engineering services. The Company’s objective is to be a recognized leader of specialized professional consulting services and solutions in major markets throughout North America. The Company has developed operating strategies to achieve this objective. Key elements of its growth and operating strategies are as follows:

 

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Growth Strategy

 

Promote Full Life Cycle Solution Capability

 

The Company promotes a full life cycle solution capability to its customers. The goal of the full life cycle solution strategy is to fully address a client’s project implementation cycle at each stage of its development and deployment. This entails the Company working with its clients from the initial conceptualization of a project through its design and project execution, and extending into ongoing management and support of the delivered product. RCM’s strategy is to build projects and solutions offerings selectively, utilizing its extensive resource base.

 

The Company believes that the effective execution of this strategy will generate improved margins on the existing resources. The completion of this service-offering continuum is intended to afford the Company the opportunity to strengthen long-term client relationships that will further contribute to a more predictable revenue stream.

 

In addition to a full life cycle solution offering, the Company continues to focus on transitioning into higher value oriented services in an effort to increase its margins on its various service lines (relative to lower value services) and generate revenue that is more sustainable. The Company believes this transition is accomplished by pursuing additional vertical market specific solutions in conjunction or combination with longer-term based solutions, through expansion of its client relationships and by pursuing strategic alliances and partnerships.

 

Achieve Internal Growth

 

The Company continues to promote its internal growth strategies. Its growth strategy is designed to better serve the Company’s customers, generate higher revenues, and achieve greater operating efficiencies. National and regional sales management programs were designed and implemented to segregate clients by vertical market and national accounts to advance our value added services focus. This process is improving account coordination so clients can benefit from deeper industry knowledge as well as maximizing our major account opportunities.

 

RCM provides a company orientation program in which sales managers and professionals receive relevant information about company operations.

 

RCM has adopted an industry-centric approach to sales and marketing. This initiative contemplates that clients within the same industry sectors tend to have common business challenges. It therefore allows the Company to present and deliver enhanced value to those clients in the vertical markets in which RCM has assembled the greatest work experience. RCM’s consultants continue to acquire project experience that offers differentiated awareness of the business challenges that clients in that industry are facing. This alignment also facilitates and creates additional cross-selling opportunities. The Company believes this strategy will lead to greater account penetration and enhanced client relationships.

 

Operational strategies contributing to RCM’s internal productivity include the delineation of certain new solutions practice areas in markets where its clients had historically known the Company as a contract service provider. The formation of these practice areas will facilitate the flow of project opportunities and the delivery of project-based solutions.

 

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Table of Contents

 

Continue Selective Strategic Acquisitions

 

The industry in which the Company operates continues to be highly fragmented, and the Company plans to continue to selectively assess opportunities to make strategic acquisitions as such opportunities are presented to the Company. The Company’s past acquisition strategy was designed to broaden the scope of services and technical competencies and grow its full life cycle solution capabilities, and the Company would continue to consider such goals in any future acquisitions. In considering acquisitions, the Company focuses principally on companies with (i) technologies or market segments RCM has targeted for strategic value enhancement, (ii) margins that will not dilute the margins now being delivered, (iii) experienced management personnel, (iv) substantial growth prospects and (v) sellers who desire to join the Company’s management team. To retain and provide incentives for management of its acquired companies, the Company has generally structured a significant portion of the acquisition price in the form of multi-tiered consideration based on growth of operating profitability of the acquired company over a two to three-year period.

 

Operating Strategy

 

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 emphasizes a relationship-oriented approach to business, rather than the transaction or assignment-oriented approach that the Company believes is used by many of its competitors. This industry-centric strategy is designed to allow RCM to expand further its relationships with clients in RCM’s targeted sectors.

 

To develop close customer relationships, the Company’s practice managers regularly meet with both existing and prospective clients to help design solutions and identify the resources needed to execute their strategies. The Company’s managers also maintain close communications with their customers during each project and on an ongoing basis after its completion. The Company believes that this relationship-oriented approach can result in greater customer satisfaction. Additionally, the Company believes that by collaborating with its customers in designing business solutions, it can generate new opportunities to cross-sell additional services that the Company has to offer. The Company focuses on providing customers with qualified individuals or teams of experts compatible with the business needs of our customers and makes a concerted effort to follow the progress of such relationships to ensure their continued success.

 

Attract and Retain Highly Qualified Consultants and Technical Resources

 

The Company believes it has been successful in attracting and retaining qualified consultants and contractors by (i) providing stimulating and challenging work assignments, (ii) offering competitive wages, (iii) effectively communicating with its candidates, (iv) providing selective training to maintain and upgrade skills and (v) aligning the needs of its customers with appropriately skilled personnel. The Company believes it has been successful in retaining these personnel due in part to its use of practice managers who are dedicated to maintaining contact with, and monitoring the satisfaction levels of, the Company’s consultants while they are on assignment.

 

Centralize Administrative Functions

 

The Company continues to improve its operational efficiencies by integrating general and administrative functions at the corporate or regional level, and reducing or eliminating redundant functions formerly performed at smaller branch offices. This enables the Company to realize savings and synergies and to control and monitor its operations efficiently, as well as to quickly integrate new acquisitions. It also allows local branches to focus more on growing their local operations.

 

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To accomplish this, the Company’s financial reporting and accounting systems are centralized in the Company’s operational headquarters in Parsippany, NJ. During 2004, the Company upgraded the back office operations to include increased functionality as well as business continuity planning. The systems have been configured to allow the performance of all back office functions, including payroll, project management, project cost accounting, billing, human resource administration and financial reporting and consolidation. The Company believes that this configuration provides a robust and highly scalable platform from which to manage daily operations, and has the capacity to accommodate increased usage.

 

Information Technology

 

The Company’s IT segment is comprised of two business groups — the IT Consulting Business Group and the IT Solutions Business Group. The IT Consulting Business Group consists of three business units in North America — the Eastern Region, the Central Region and the Western Region. The Solutions Business Group consists of three business units — IT Enterprise Management, Enterprise Business Solutions and Life Sciences.

 

The RCM Enterprise Business Solutions Group’s core business mission is to continue its strategic transformation designed to focus the Company on developing proprietary customized solutions and intellectual property by bundling software, systems, tools and services into integrated business and technology solutions.

 

RCM’s sector knowledge coupled with technical and business process experience enable the Company to provide strategic planning and direction, rigorous project execution, and management and support services for an entire project life cycle. RCM has successfully completed multimillion-dollar projects in a variety of industry verticals using time-tested methodologies that manage strict budgets, timelines and quality metrics.

 

Among those IT services provided by RCM to its clients are:

 

·                  Enterprise Business Solutions

·                  Application Services

·                  Infrastructure Solutions

·                  Competitive Advantage & Productivity Solutions

·                  Life Sciences Solutions

 

The Company believes that its ability to deliver information technology solutions across a wide range of technical platforms provides an important competitive advantage. RCM ensures that its consultants have the expertise and skills needed to keep pace with rapidly evolving information technologies. The Company’s strategy is to maintain expertise and acquire knowledge in multiple technologies so it can offer its clients non-biased technology solutions best suited to their business needs.

 

The Company provides its IT services through a number of flexible delivery methods. These include management consulting engagements, project management of client efforts, project implementation of client initiatives, outsourcing, both on and off site, and a full complement of resourcing alternatives.

 

As of December 27, 2008, the Company had assigned approximately 780 information technology employees and consultants to its customers.

 

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Engineering

 

The Company’s Engineering segment consists of three business units — Engineering Services and Projects, Power Systems Services USA and Power Systems Services Canada. The Engineering Services and Projects unit includes Aerospace, Manufacturing and Industrial Engineering divisions. The Power Systems units focus primarily on the nuclear power, fossil fuel and electric utility industries.

 

RCM provides a full range of Engineering services including Engineering & Design, Engineering Analysis, Engineer-Procure-Construct, Configuration Management, Hardware/Software Validation & Verification, Quality Assurance, Technical Writing & Publications, Manufacturing Process Planning & Improvement, Reliability Centered Maintenance (RCM), Component & Equipment Testing and Risk Management Engineering. Engineering services are provided at the site of the client or, less frequently, at the Company’s own facilities.

 

The Company believes that the deregulation of the utilities industry and the aging of nuclear power plants offer the Company an opportunity to capture a greater share of professional services and project management requirements of the utilities industry both in engineering services and through cross-selling of its information technology services. Heightened competition, deregulation, and rapid technological advances are forcing the utilities industry to make fundamental changes in its business process. These pressures have compelled the utilities industry to focus on internal operations and maintenance activities and to increasingly outsource their personnel requirements. Additionally, the Company believes that competitive performance demands from deregulation should increase the importance of information technology to this industry. The Company believes that its expertise and strong relationships with certain customers within the utilities industry position the Company to be a leading provider of professional services to the utilities industry.

 

The Company provides its engineering services through a number of delivery methods. These include managed tasks and resources, complete project services, outsourcing, both on and off-site, and a full complement of resourcing alternatives.

 

As of December 27, 2008, the Company had assigned approximately 450 engineering and technical employees and consultants to its customers.

 

Commercial

 

The Company’s Commercial Services segment consists of the Specialty Health Care and General Support Services groups.

 

The Company’s Specialty Health Care Group specializes in long-term and short-term staffing as well as executive search and placement for the following fields: rehabilitation (physical therapists, occupational therapists and speech language pathologists), nursing, managed care, allied health care, health care management and medical office support. The specialty health care group provides services to hospitals, long-term care facilities, schools, sports medicine facilities and private practices. Services include in-patient, outpatient, sub-acute and acute care, multilingual speech pathology, rehabilitation, and geriatric, pediatric, and adult day care. Typical engagements either range from three to six months or are on a day-to-day shift basis.

 

The Company’s General Support Services Group provides contract and temporary services, as well as permanent placement services, for full-time and part-time personnel in a variety of functional areas, including office, clerical, data entry, secretarial, light industrial, shipping, receiving, and general warehouse. Contract and temporary assignments range in length from less than one day to several weeks or months.

 

As of December 27, 2008, the Company had assigned approximately 410 specialty health care and 490 general support services personnel to its customers.

 

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Branch Offices

 

The Company’s organization consists of 35 branch offices located in the United States, Puerto Rico and Canada. The locations and services of each of the branch offices are set forth in the table below.

 

LOCATION

 

NUMBER OF
OFFICES

 

SERVICES
PROVIDED(1)

USA

 

 

 

 

 

California

 

9

 

IT, C

 

Connecticut

 

2

 

E

 

Florida

 

1

 

C

 

Maryland

 

1

 

IT

 

Michigan

 

4

 

IT, E

 

Minnesota

 

1

 

IT

 

Missouri

 

1

 

IT

 

New Jersey

 

3

 

IT, E

 

New York

 

2

 

IT, E, C

 

Ohio

 

1

 

IT

 

Pennsylvania

 

1

 

C

 

Rhode Island

 

1

 

E

 

Texas

 

2

 

IT

 

Wisconsin

 

2

 

IT, E

 

 

31

 

 

 

 

 

 

 

PUERTO RICO

 

1

 

IT

 

 

 

 

 

CANADA

 

3

 

IT, E

 


(1) Services provided are abbreviated as follows:

IT    - Information Technology

E     - Engineering

C     - Commercial

 

Branch offices are primarily located in markets that the Company believes have strong growth prospects for IT and Engineering services. The Company’s branches are operated in a decentralized, entrepreneurial manner with most branch offices operating as independent profit centers. The Company’s branch managers are given significant autonomy in the daily operations of their respective offices and, with respect to such offices, are responsible for overall guidance and supervision, budgeting and forecasting, sales and marketing strategies, pricing, hiring and training. Branch managers are paid on a performance-based compensation system designed to motivate the managers to maximize growth and profitability.

 

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The Company is domiciled in the United States and its segments operate in the United States and Canada. Revenues for the year ended December 27, 2008 and Goodwill and Intangible Assets by geographic area as of December 27, 2008 are as follows (in thousands):

 

 

 

Revenues

 

Goodwill

 

Intangible
Assets

 

United States

 

$

188,672

 

$

6,538

 

$

276

 

Canada

 

20,605

 

 

 

 

 

$

209,277

 

$

6,538

 

$

276

 

 

The Company believes that substantial portions of the buying decisions made by users of the Company’s services are made on a local or regional basis and that the Company’s branch offices most often compete with local and regional providers. Since the Company’s branch managers are in the best position to understand their local markets and customers often prefer local providers, the Company believes that a decentralized operating environment enhances operating performance and contributes to employee and customer satisfaction.

 

From its headquarters locations in New Jersey, the Company provides its branch offices with centralized administrative, marketing, finance, MIS, human resources and legal support. Centralized administrative functions minimize the administrative burdens on branch office managers and allow them to spend more time focusing on sales and marketing and practice development activities.

 

Our principal sales offices typically have one general manager, one sales manager, three to six sales people, several technical delivery or practice managers and several recruiters. The general managers report to regional vice presidents who are responsible for ensuring that performance goals are achieved. The Company’s regional vice presidents meet frequently to discuss “best practices” and ways to increase the Company’s cross selling of its professional services. The Company’s practice managers meet periodically to strategize, maintain continuity, and identify developmental needs and cross-selling opportunities.

 

Sales and Marketing

 

Sales and marketing efforts are conducted at the local and or regional level through the Company’s network of branch offices. The Company emphasizes long-term personal relationships with customers that are developed through regular assessment of customer requirements and proactive monitoring of personnel performance. The Company’s sales personnel make regular visits to existing and prospective customers. New customers are obtained through active sales programs and referrals. The Company encourages its employees to participate in national and regional trade associations, local chambers of commerce and other civic associations. The Company seeks to develop strategic partnering relationships with its customers by providing comprehensive solutions for all aspects of a customer’s information technology, engineering and other professional services needs. The Company concentrates on providing carefully screened professionals with the appropriate skills in a timely manner and at competitive prices. The Company regularly monitors the quality of the services provided by its personnel and obtains feedback from its customers as to their satisfaction with the services provided.

 

The Company has elevated the importance of working with and developing its partner alliances with technology firms. Partner programs are in place with firms RCM has identified as strategically important to the completeness of the service offering of the Company. Relations have been established with firms such as Microsoft, QAD, Mercury, IBM, Harland Financial and Oracle, among others. The partner programs may be managed either at a national level from RCM’s corporate offices or at a regional level from its branch offices.

 

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The Company’s larger representative customers include 3M, ADP, BancTec, Bristol Myers Squibb, Bruce Power, Entergy, FlightSafety International, Lilly del Caribe, Microsoft, MSC Industrial Supply, New York City Department of Education, Ontario Power Group, Schering Plough, United Technologies, U.S. Department of the Treasury, Wyeth and Wells Fargo. The Company serves Fortune 1000 companies and many middle market clients. The Company’s relationships with these customers are typically formed at the customers’ local or regional level and from time to time, when appropriate, at the corporate level for national accounts.

 

During 2008, United Technologies accounted for 11.1% of the Company’s revenues. No other customer accounted for 10% or more of the Company’s revenues. The Company’s five, ten and twenty largest customers accounted for approximately 27.1%, 33.5% and 44.0%, respectively, of the Company’s revenues for 2008.

 

Recruiting and Training

 

The Company devotes a significant amount of time and resources, primarily at the branch level, to locating, training and retaining its professional personnel. Full-time recruiters utilize the Company’s proprietary databases of available personnel, which are cross-indexed by competency and skill to match potential candidates with the specific project requirements of the customer. The qualified personnel in the databases are identified through numerous activities, including networking, referrals, trade shows, job fairs, schools, newspaper and trade journal advertising, Internet recruiting services and the Company’s website.

 

The Company believes that a significant element of the Company’s success in retaining qualified consultants and contract personnel is the Company’s use of consultant relationship managers and technical practice managers. Consultant relationship managers are qualified Company personnel dedicated to maintaining on-site contact with, and monitoring the satisfaction levels of, the Company’s consultants and contract personnel while they are on assignment. Practice managers are consulting managers responsible for the technical development and career development of the Company’s technical personnel within the defined practice areas. The Company provides technical training and skills development through vendor-sponsored courses, computer-based training tools and on the job mentoring programs.

 

Information Systems

 

The Company is continuing to invest in its current ERP installation.  During 2004, the Company upgraded the hardware, operating system, and ERP software to accommodate its growing needs. The ERP system is hosted on Windows 2003 enterprise server operating system and on multi redundant Dell PowerEdge servers. The branch offices of the Company are networked to the corporate offices via private circuits, which enable the ERP application to be accessed securely at all operational locations.  The ERP system supports Company-wide operations such as payroll, billing, human resources, project systems, accounts receivable, accounts payable, all general ledger accounting and consolidation reporting functionality.

 

The Company also has Autotime, an automated time and attendance system, which augments the ERP application by catering to the needs of its diverse business offerings and distributed workforce. The system is housed on a three-tiered architecture on DELL PowerEdge 1800 servers and is currently deployed in the Canadian division.

 

The Company has migrated its Recruiting (e.g. Candidate) and Sales (e.g. Requirement) Tracking to JobDiva, an application service provider (ASP) solution. The integrated solution allows RCM to track all client requirements on an enterprise level. The solution further permits RCM to search multiple sources (e.g. job boards) to identify and match suitable candidates for an opportunity or need. This solution allows RCM to build and maintain a proprietary database of prequalified candidates, thereby enhancing our ability to respond to client demands. Furthermore, the solution increases visibility internally to sales personnel and the management team to manage client priorities no longer on a localized but a national basis. Customized reporting and query capabilities allow RCM management to monitor personnel performance and client responsiveness. All data and information is accessible via the web.

 

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RCM has engaged in three major strategic initiatives to improve upon its ability to secure data, deliver services and improve on its communication infrastructure.

 

RCM deployed a new mail architecture based on the Microsoft Exchange 2007 platform. The system is comprised of redundant mail routing servers and clustered mailbox servers attached to a Storage Area Network (SAN) This new messaging platform has the current capacity of six Terabytes (TB), with the capability of scaling to 18 Terabytes (TB). In addition to mail storage being sized for VOIP integration, web access to the mail server is only allowed via secure HTTPs protocol.

 

RCM has upgraded its perimeter network and WAN architecture to a secure centralized model on Private Network Transport (PNT) AT&T circuits, utilizing Multiple Packet Label Switching (MPLS) transport protocol. The hub datacenter at its operational headquarters has been outfitted with redundant fiber circuits from AT&T and Optimum Lightpath utilizing Border gateway Protocol (BGP) for automatic failover. In addition, redundant firewalls, routers and switching architecture should protect against hardware failure.

 

The move to service oriented architecture facilitated the implementation of the Cisco Voice over IP (VOIP) solution which is currently deployed throughout RCM’s offices. This enterprise solution, based on Cisco Call Manager, Unity voicemail, Mobility Manager, Meeting Place, Fax Server and Video Presence will, when completed, unify all RCM offices in the US and Canada. Summary of benefits include four digit extension calls between RCM offices, email and voicemail unification, soft and mobile phone integration, video and web conferencing, central and email enabled faxing.

 

The above initiatives have contributed to improved communication within RCM and also to its clients.

 

Other Information

 

Safeguards - Business, Disaster and Contingency Planning

 

RCM has implemented a number of safeguards to protect the Company from various system-related risks including a warm data center disaster recovery site, redundant telecommunications and server systems architecture, multi-tiered server and desktop backup infrastructure, and data center physical and environmental controls. In addition, RCM has developed disaster recovery / business continuity procedures for all offices.

 

Given the significant amount of data generated in the Company’s key processes including recruiting, sales, payroll and customer invoicing, RCM has established redundant procedures, functioning on a daily basis, within the Company’s primary data center. This redundancy should mitigate the risks related to hardware, application and data loss by utilizing the concept of live differential backups of servers and desktops to Storage Area (SAN) devices on its backup LAN, culminating in offsite tape storage at an independent facility. Besides the local tape backup rotation of branch office systems, data is also replicated to SAN devices in Parsippany to achieve business continuity. Controls within the data center environment ensure that all systems are proactively monitored and data is properly archived.

 

Additionally, RCM has contracted and brokered strategic relationships with third-party vendors to meet its recovery objectives in the event of a system disruption. For example, comprehensive service level agreements provided by AT&T and Cisco for RCM’s data circuits and network devices, guarantee minimal outages as well as network redundancy and scalability. The Disaster Recovery site, located at the corporate office in Pennsauken, NJ, provides WAN, ERP and messaging services should the primary data center facility at Parsippany, NJ, become inoperable.

 

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Safeguards - Business, Disaster and Contingency Planning (Continued)

 

The Company’s ability to protect its data assets against damage from fire, power loss, telecommunications failures, and facility violations is critical. The Company uses Postini mail management service to filter all emails destined for the RCMT domain before being delivered to the corporate mail servers. Websense, web filtering has also been deployed to safeguard the enterprise from malicious internet content. The deployment of virus, spam, and patch management controls extends from the perimeter network to all desktops and is centrally monitored and managed. In addition to the virus and malware controls, an Intrusion Protection System (IPS) monitors and alerts on changes in network traffic patterns as well as known hostile signatures.

 

The Company maintains a disaster recovery plan that outlines the recovery organization structure, roles and procedures, including site addendum disaster plans for all of its key operating offices. Corporate IT personnel regulate the maintenance and integrity of backed-up data throughout the Company.

 

Competition

 

The market for IT and engineering services is highly competitive and is subject to rapid change. As the market demand has shifted, many software companies have adopted tactics to pursue services and consulting offerings making them direct competitors when in the past they may have been alliance partners. Primary competitors include participants from a variety of market segments, including publicly and privately held firms, systems consulting and implementation firms, application software firms, service groups of computer equipment companies, facilities management companies, general management consulting firms and staffing companies. In addition, the Company competes with its clients’ internal resources, particularly where these resources represent a fixed cost to the client. Such competition may impose additional pricing pressures on the Company.

 

The Company believes its principal competitive advantages in the IT and engineering services market include: strong relationships with existing clients, a long-term track record with over 1,000 clients, a broad range of services, technical expertise, knowledge and experience in multiple industry sectors, quality and flexibility of service, responsiveness to client needs and speed in delivering IT solutions.

 

Additionally, the Company competes for suitable acquisition candidates based on its differentiated acquisition model, its entrepreneurial and decentralized operating philosophy, and its strong corporate-level support and resources.

 

Seasonality

 

The Company’s operating results can be affected by the seasonal fluctuations in corporate IT and engineering expenditures. Generally, expenditures are lowest during the first quarter of the year when clients are finalizing their IT and engineering budgets. In addition, quarterly results may fluctuate depending on, among other things, the number of billing days in a quarter and the seasonality of clients’ businesses. The business is also affected by the timing of holidays and seasonal vacation patterns, generally resulting in lower revenues and gross profit in the fourth quarter of each year. Extreme weather conditions may also affect demand in the first and fourth quarters of the year as certain clients’ facilities are located in geographic areas subject to closure or reduced hours due to inclement weather. In addition, the Company generally experiences an increase in its cost of sales and a corresponding decrease in gross profit and gross margin percentage in the first and second fiscal quarters of each year as a result of resetting certain state and federal employment tax rates and related salary limitations.

 

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Employees

 

As of December 27, 2008, the Company employed an administrative staff of approximately 250 people, including certified IT specialists and licensed engineers who, from time to time, participate in IT and engineering design projects undertaken by the Company. As of December 27, 2008, there were approximately 780 information technology and 450 engineering and technical employees and consultants assigned by the Company to work on client projects for various periods. As of December 27, 2008, there were approximately 410 specialty health care and 490 general support services employees and consultants. None of the Company’s employees is represented by a collective bargaining agreement. The Company considers its relationship with its employees to be good.

 

Access to Company Information

 

RCM electronically files its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports with the Securities and Exchange Commission (“SEC”). The public may read and copy any of the reports that are filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxies, information statements, and other information regarding issuers that file electronically.

 

RCM makes available on its website or by responding free of charge to requests addressed to the Company’s Corporate Secretary, its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed by the Company with the SEC pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended. These reports are available as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The Company’s website is http://www.rcmt.com. The information contained on the Company’s website, or on other websites linked to the Company’s website, is not part of this document. Reference herein to the Company’s website is an inactive text reference only.

 

RCM has adopted a Code of Conduct applicable to all of its directors, officers and employees. In addition, the Company has adopted a Code of Ethics, within the meaning of applicable SEC rules, applicable to its Chief Executive Officer, Chief Financial Officer and Controller. Both the Code of Conduct and Code of Ethics are available, free of charge, by sending a written request to the Company’s Corporate Secretary. If the Company makes any amendments to either of these Codes (other than technical, administrative, or other non-substantive amendments), or waive (explicitly or implicitly) any provision of the Code of Ethics to the benefit of our Chief Executive Officer, Chief Financial Officer or Controller, it intends to disclose the nature of the amendment or waiver, its effective date and to whom it applies in the investor relations portion of the website, or in a report on Form 8-K filed with the SEC.

 

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ITEM 1A. RISK FACTORS

 

The Company’s business involves a number of risks, some of which are beyond its control. The risk and uncertainties described below are not the only ones the Company faces. Management believes that the most significant of these risks and uncertainties are as follows:

 

Economic Trends

 

The recent global economic crisis has caused, among other things, a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, and extreme volatility in credit, equity and fixed income markets. Any or all of these developments could negatively affect our business, operating results or financial condition in a number of ways. For example, current or potential customers may be unable to fund capital spending programs, new product launches or other similar activities on which they might otherwise use us, and therefore delay, decrease or cancel purchases or our services or not pay us or to delay paying us for previously purchased services. In addition, financial institution failures may cause us to incur increased expenses or make it more difficult either to utilize our existing debt capacity or otherwise obtain financing for our operations, investing activities (including the financing of any future acquisitions), or financing activities.

 

Government Regulations

 

Staffing firms and employment service providers are generally subject to one or more of the following types of government regulation: (1) regulation of the employer/employee relationship between a firm and its employees, including tax withholding or reporting, social security or retirement, benefits, workplace compliance, wage and hour, anti-discrimination, immigration and workers’ compensation; (2) registration, licensing, record keeping and reporting requirements; and (3) federal contractor compliance. Failure to comply with these regulations could result in the Company incurring penalties and other liabilities, monetary and otherwise.

 

Highly Competitive Business

 

The staffing services and outsourcing markets are highly competitive and have limited barriers to entry. RCM competes in global, national, regional, and local markets with numerous temporary staffing and permanent placement companies. Price competition in the staffing industry is significant and pricing pressures from competitors and customers are increasing. In addition, there is increasing pressure on companies to outsource certain areas of their business to low cost offshore outsourcing firms. RCM expects that the level of competition will remain high in the future, which could limit RCM’s ability to maintain or increase its market share or profitability.

 

Events Affecting our Significant Customers

 

As disclosed in Item 1, “Business,” our five, ten and twenty largest customers accounted for approximately 27.1%, 33.5% and 44.0%, respectively, of our revenues for 2008. Some of these customers may be affected by the current state of the economy or developments in the credit markets. For example, United Technologies, which accounted for 11.1% of the Company’s revenues in 2008, announced on March 10, 2009 that it had reduced its 2009 profit forecast 13 % and will eliminate 11,600 jobs, or 5% of its global work force. In addition, our customers may engage in mergers or similar transactions; for example, Wyeth recently announced that it expects to be acquired by Pfizer, and Schering Plough, recently announced that it expects to be acquired by Merck. Should any of our significant customers experience a downturn in its business that weakens its financial condition or merge with another company or otherwise cease independent operation, it is possible that the business that the customer does with us would be reduced or eliminated, which could adversely affect our financial results.

 

Additionally, the Company estimates to its best ability that the automobile and financial services industries each represented approximately 3.7% or 7.5% combined of the Company’s total revenues in 2008. The automobile and financial services industries are two industries that have been severely impacted by recent national and global economic malaise.

 

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Dependence Upon Personnel

 

The Company’s operations depend on the continued efforts of its officers and other executive management. The loss of key officers and members of executive management may cause a significant disruption to the Company’s business. RCM also depends on the performance and productivity of its local managers and field personnel. The Company’s ability to attract and retain new business is significantly affected by local relationships and the quality of service rendered. The loss of key managers and field personnel may also jeopardize existing client relationships with businesses that continue to use our services based upon past relationships with local managers and field personnel.

 

Revolving Credit Facility and Liquidity

 

If we are unable to borrow under our Revolving Credit Facility, it may adversely affect our liquidity, results of operations and financial condition. Our liquidity depends on our ability to generate sufficient cash flows from our operations and, from time to time, borrowings under our Revolving Credit Facility with our agent lender Citizens Bank of Pennsylvania. The Company believes that Citizens Bank is liquid and is not aware of any current risk that they will become illiquid.  At December 27, 2008, we had outstanding borrowings under the Revolving Credit Facility of $4.9 million, and letters of credit outstanding for $1.6 million. 

 

The Revolving Credit Facility contains various financial and non-financial covenants.  At December 27, 2008, we were in compliance with the covenants and other provisions of the Credit Facility. Any failure to be in compliance could have a material adverse effect on our liquidity, results of operations and financial condition.

 

Goodwill and Intangible Impairments May Have an Adverse Effect on our Financial Statements

 

As of December 27, 2008, we had $6.5 million of goodwill and $0.3 million intangible assets on our balance sheet, which represents 8.6% of our total assets. Goodwill represents the premium paid over the fair value of the net tangible and intangible assets we have acquired in business combinations. SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) requires the Company to perform a goodwill and intangible asset impairment test on at least an annual basis. Application of the goodwill and intangible asset impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill and intangible asset impairment for each reporting unit. The Company conducts its annual goodwill and intangible asset impairment test as of the last day of the Company’s fiscal November each year, or more frequently if indicators of impairment exist. We periodically analyze whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower than expected growth rates, among others. The Company compares the fair value of each of its reporting units to their respective carrying values, including related goodwill and intangible assets. Future changes in our industries could impact the results of future annual impairment tests. There can be no assurance that future tests of goodwill and intangible asset impairment will not result in impairment charges. If we are required to write down goodwill or intangible assets, the related charge could materially reduce reported net income or result in a net loss for the period in which the write down occurs.

 

Workers’ Compensation and Employee Medical Insurance

 

The Company self-insures a portion of the exposure for losses related to workers’ compensation and employees’ medical insurance. The Company has established reserves for workers’ compensation and employee medical insurance claims based on historical loss statistics and periodic independent actuarial valuations. Significant differences in actual experience or significant changes in assumptions may materially affect the Company’s future financial results.

 

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Table of Contents

 

Improper Activities of Our Temporary Professionals Could Result in Damage to Our Business Reputation, Discontinuation of Our Client Relationships and Exposure to Liability

 

The Company may be subject to claims by our clients related to errors and omissions, misuse of proprietary information, discrimination and harassment, theft and other criminal activity, malpractice, and other claims stemming from the improper activities or alleged activities of our temporary professionals. There can be no assurance that our current liability insurance coverage will be adequate or will continue to be available in sufficient amounts to cover damages or other costs associated with such claims.

 

Claims raised by clients stemming from the improper actions of our temporary professionals, even if without merit, could cause us to incur significant expense associated with the costs or damages related to such claims. Furthermore, such claims by clients could damage our business reputation and result in the discontinuation of client relationships.

 

Our Acquisitions May Not Succeed

 

The Company reviews prospective acquisitions as an element of its growth strategy. The failure of any acquisition to meet the Company’s expectations, whether due to a failure to successfully integrate any future acquisition or otherwise, may result in damage to the Company’s financial performance and/or divert management’s attention from its core operations or could negatively affect the Company’s ability to meet the needs of its customers promptly.

 

Foreign Currency Fluctuations and Changes in Exchange Rates

 

The Company is exposed to risks associated with foreign currency fluctuations and changes in exchange rates. RCM’s exposure to foreign currency fluctuations relates to operations in Canada, principally conducted through its Canadian subsidiary. Exchange rate fluctuations affect the U.S. dollar value of reported earnings derived from the Canadian operations as well as the carrying value of our investment in the net assets related to these operations. The Company does not engage in hedging activities with respect to foreign operations.

 

Trademarks

 

Management believes the RCM Technologies, Inc. name is extremely valuable and important to its business. The Company endeavors to protect its intellectual property rights and maintain certain trademarks, trade names, service marks and other intellectual property rights, including The Source of Smart Solutions®. The Company is not currently aware of any infringing uses or other conditions that would be reasonably likely to materially and adversely affect our use of our proprietary rights.

 

Data Center Capacity and Telecommunication Links

 

Uninterruptible Power Supply (UPS), card key access, fire suppression, and environmental control systems protect RCM’s datacenter.  All systems are monitored on a 24/7 basis with alerting capabilities via voice or email.  The telecommunications architecture at RCM utilizes managed private circuits from AT&T, which encompasses provisioning redundancy and diversity.

 

RCM’s ability to protect its data center against damage from fire, power loss, telecommunications failure and other disasters is critical to business operations.  In order to provide many of its services, RCM must be able to store, retrieve, process and manage large databases and periodically expand and upgrade its capabilities.  Any damage to the Company’s data centers or any failure of the Company’s telecommunication links that interrupts its operations or results in an inadvertent loss of data could adversely affect RCM’s ability to meet its customers’ needs and their confidence in utilizing RCM for future services.

 

RCM’s ability to protect its data, provide services and safeguard its installations, as it relates to the IT infrastructure, is in part dependent on several outside vendors with whom the Company maintains service level agreements.

 

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Table of Contents

 

Accrued Bonuses

 

The Company pays bonuses to certain executive management, field management and corporate employees based on, or after giving consideration to, a variety of financial performance measures. Executive management, field management, and certain corporate employees’ bonuses are accrued throughout the year for payment during the first quarter of the following year, based in part upon actual annual results as compared to annual budgets. Variances in actual results versus budgeted amounts can have a significant impact on the calculations and therefore the estimates of the required accruals. Accordingly, the actual earned bonuses may be materially different from the estimates used to determine the quarterly accruals.

 

Litigation

 

The Company is currently, and may in the future become, involved in legal proceedings and claims arising from time to time in the course of its business, including the litigation described in Note 15 (Contingencies) to the consolidated financial statements. An adverse outcome to the referenced litigation or other cases arising in the future could have an adverse impact on the consolidated financial position and consolidated results of operations of the Company.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 2. PROPERTIES

 

The Company provides specialty professional consulting services, principally performed at various client locations, through 35 administrative and sales offices located in the United States, Puerto Rico, and Canada. The majority of the Company’s offices typically consist of 1,000 to 6,000 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 it will be difficult to maintain or find suitable lease space at reasonable rates in its markets or in areas where the Company contemplates expansion.

 

The Company’s executive office is located at 2500 McClellan Avenue, Suite 350, Pennsauken, New Jersey 08109-4613. These premises consist of approximately 10,200 square feet and are leased at a rate of $13.89 per square foot per annum for a term ending on January 31, 2011.

 

The Company’s operational office is located at 20 Waterview Boulevard, 4th Floor, Parsippany, NJ 07054-1271. These premises consist of approximately 28,000 square feet and are leased at a rate of $29.00 per square foot per annum for a term ending on June 30, 2012.

 

ITEM 3. LEGAL PROCEEDINGS

 

See discussion of Legal Proceedings in Note 15 (Contingencies) to the consolidated financial statements included in Item 8 of this Report.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

There were no matters submitted to a vote of security holders during the quarter ended December 27, 2008.

 

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PART II

 

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Shares of the Company’s common stock are traded on The NASDAQ Global Market under the Symbol “RCMT.” The following table sets forth approximate high and low sales prices for the two years in the period ended December 27, 2008 as reported by The NASDAQ Global Market:

 

 

 

Common Stock

 

 

 

High

 

Low

 

Fiscal 2007

 

 

 

 

 

 

 

First Quarter

 

$

7.90

 

$

5.75

 

Second Quarter

 

8.80

 

5.86

 

Third Quarter

 

10.30

 

6.47

 

Fourth Quarter

 

$

8.36

 

$

4.93

 

 

 

 

 

 

 

Fiscal 2008

 

 

 

 

 

First Quarter

 

$

6.51

 

$

3.82

 

Second Quarter

 

4.81

 

3.75

 

Third Quarter

 

4.57

 

2.00

 

Fourth Quarter

 

$

2.24

 

$

0.77

 

 

Holders

 

As of February 12, 2009, the approximate number of holders of record of the Company’s Common Stock was 513. Based upon the requests for proxy information in connection with the Company’s 2008 Annual Meeting of Stockholders, the Company believes the number of beneficial owners of its Common Stock is approximately 2,512.

 

Dividends

 

The Company has never declared or paid a cash dividend on the 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 (as defined in Item 7 hereof) prohibits the payment of dividends or distributions on account of the Company’s capital stock without the prior consent of the majority of the Company’s lenders.

 

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Table of Contents

 

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS

 

The graph below is presented in accordance with SEC requirements. You should not draw any conclusions from the data in the graph, because past results do not necessarily predict future stock price performance. The graph does not represent our forecast of future stock price performance.

 

The following graph compares the cumulative 5-year total return provided shareholders on RCM Technologies, Inc.’s common stock relative to the cumulative total returns of the NASDAQ Composite index, and a customized peer group of four companies that includes: Butler International, Kelly Services Inc, MPS Group Inc and Spherion Corp. Management believes this peer group conducts its business operations in the same industry group as RCM Technologies, Inc. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, in the peer group, and the index on December 31, 2003 and its relative performance is tracked through December 31, 2008.

 

 

 

Total Return Analysis

 

12/03

 

12/04

 

12/05

 

12/06

 

12/07

 

12/08

 

RCM Technologies, Inc.

 

$

100.00

 

$

68.25

 

$

69.19

 

$

81.26

 

$

79.77

 

$

15.06

 

NASDAQ Composite

 

$

100.00

 

$

110.08

 

$

112.88

 

$

126.51

 

$

138.13

 

$

80.47

 

Peer Group

 

$

100.00

 

$

113.31

 

$

117.74

 

$

117.17

 

$

89.17

 

$

55.39

 

 

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ITEM 6. SELECTED FINANCIAL DATA

 

The selected historical consolidated financial data was derived from the Company’s Consolidated Financial Statements. The selected historical consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements of the Company, and notes thereto, included elsewhere herein. (In thousands, except earnings per share data).

 

 

 

Years Ended

 

 

 

December 27,

 

December 29,

 

December 30,

 

December 31,

 

January 1,

 

 

 

2008

 

2007

 

2006

 

2005

 

2005(2)

 

Income Statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

209,277

 

$

214,209

 

$

201,920

 

$

180,618

 

$

169,277

 

Gross profit

 

53,975

 

52,976

 

50,508

 

42,683

 

40,974

 

(Loss) income before charges listed below

 

(1,671

)

7,500

 

7,622

 

3,593

 

4,412

 

Amortization, net of tax

 

(460

)

(320

)

(310

)

(57

)

(41

)

Goodwill and intangible asset impairment, net of tax

 

(37,574

)

 

 

 

(2,164

)

Stock based compensation, net of tax

 

(100

)

(411

)

(956

)

 

 

Net (loss) income

 

$

(39,805

)

$

6,769

 

$

6,356

 

$

3,536

 

$

2,207

 

Earnings Per Share (1)

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(3.15

)

$

.57

 

$

.54

 

$

.31

 

$

.19

 

Diluted

 

$

(3.15

)

$

.54

 

$

.53

 

$

.30

 

$

.19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 27,

 

December 29,

 

December 30,

 

December 31,

 

January 1,

 

 

 

2008

 

2007

 

2006

 

2005

 

2005(2)

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

42,687

 

$

43,541

 

$

38,844

 

$

33,032

 

$

29,545

 

Total assets

 

78,841

 

109,714

 

100,040

 

106,773

 

99,388

 

Long term liabilities

 

 

 

 

 

 

Total liabilities

 

23,490

 

17,666

 

16,647

 

31,084

 

29,443

 

Stockholders’ equity

 

$

55,351

 

$

92,048

 

$

83,393

 

$

75,689

 

$

69,945

 

 

 

 

 

 

 

 

 

 

 

 

 


 

(1) Shares used in computing earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

12,647,127

 

11,970,042

 

11,773,601

 

11,456,757

 

11,325,626

 

Diluted

 

12,647,127

 

12,484,639

 

12,034,665

 

11,731,591

 

11,679,812

 

 

(2) Year ended January 1, 2005 had fifty-three weeks and all other years had fifty-two weeks.

 

20



Table of Contents

 

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

RCM participates in a market that is cyclical in nature and extremely sensitive to economic changes. As a result, the impact of economic changes on revenues and operations can be substantial, resulting in significant volatility in the Company’s financial performance.

 

After pro forma adjustments to remove the impact of two acquisitions in its Information Technology segment completed in 2008, RCM experienced a significant decline in its 2008 revenues and gross profit as compared to 2007, particularly in its Information Technology and Engineering segments.  RCM believes the decline in its Information Technology pro forma revenues was principally due to a deterioration of overall economic conditions in its geographic markets and industry verticals served in 2008.  The principal reason for the decline in 2008 Engineering revenues as compared to 2007 was due to the loss of a major customer.

 

Over the years, RCM has developed and assembled an attractive portfolio of capabilities, established a proven record of performance and credibility and built an efficient pricing structure. The Company is committed to optimizing its business model as a single-source premier provider of business and technology solutions with a strong vertical focus offering an integrated suite of services through a global delivery platform.

 

The Company believes that most companies recognize the importance of advanced technologies and business processes to compete in today’s business climate. However, the process of designing, developing and implementing business and technology solutions is becoming increasingly complex. The Company believes that many businesses today are focused on return on investment analysis in prioritizing their initiatives. This has an impact on spending by current and prospective clients for many emerging new solutions.

 

Nonetheless, the Company continues to believe that businesses must implement more advanced IT and engineering solutions to upgrade their systems, applications and processes so that they can maximize their productivity and optimize their performance in order to maintain a competitive advantage. Although working under budgetary, personnel and expertise constraints, companies are driven to support increasingly complex systems, applications, and processes of significant strategic value. This has given rise to a demand for outsourcing. The Company believes that its current and prospective clients are continuing to evaluate the potential for outsourcing business critical systems, applications, and processes.

 

The Company provides project management and consulting services, which are billed based on either agreed-upon fixed fees or hourly rates, or a combination of both. The billing rates and profit margins for project management and solutions services are higher than those for professional consulting services. The Company generally endeavors to expand its sales of higher margin solutions and project management services. The Company also realizes revenues from client engagements that range from the placement of contract and temporary technical consultants to project assignments that entail the delivery of end-to-end solutions. These services are primarily provided to the client at hourly rates that are established for each of the Company’s consultants based upon their skill level, experience and the type of work performed.

 

The majority of the Company’s services are provided under purchase orders. Contracts are utilized on certain of the more complex assignments where the engagements are for longer terms or where precise documentation on the nature and scope of the assignment is necessary. Although contracts normally relate to longer-term and more complex engagements, they do not obligate the customer to purchase a minimum level of services and are generally terminable by the customer on 60 to 90 days’ notice. The Company, from time to time, enters into contracts requiring the completion of specific deliverables. Typically these contracts are for less than one year.  The Company recognizes revenue on these deliverables at the time the client accepts and approves the deliverables.

 

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Table of Contents

 

Costs of services consist primarily of salaries and compensation-related expenses for billable consultants, including payroll taxes, employee benefits, and insurance. Selling, general and administrative expenses consist primarily of salaries and benefits of personnel responsible for business development, recruiting, operating activities, and training, and include corporate overhead expenses. Corporate overhead expenses relate to salaries and benefits of personnel responsible for corporate activities, including the Company’s corporate marketing, administrative and reporting responsibilities and acquisition program. The Company records these expenses when incurred. Depreciation relates primarily to the fixed assets of the Company. Amortization relates to the allocation of the purchase price of an acquisition, which has been assigned to covenants not to compete, and customer lists. Acquisitions have been accounted for under Financial Accounting Standards Board (“FASB”) Statement of Financial Account Standards (“SFAS”) No. 141, “Business Combinations,” and have created goodwill.

 

Critical Accounting Policies

 

The Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgment increases, such judgments become even more subjective. While management believes its assumptions are reasonable and appropriate, actual results may be materially different from estimated. Management has identified certain critical accounting policies, described below, that require significant judgment to be exercised by management.

 

Revenue Recognition

 

The Company derives its revenues from several sources. All of the Company’s segments perform consulting and staffing services. The Company’s Engineering Services and Information Technology Services segments also perform project services. All of the Company’s segments derive revenue from permanent placement fees.

 

Project Services - The Company recognizes revenues in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (“SAB 104”) which clarifies application of U.S. generally accepted accounting principles to revenue transactions. Project services are generally provided on a cost-plus-fixed-fee or time-and-material basis. Typically, a customer will outsource a discrete project or activity and the Company assumes responsibility for the performance of such project or activity. The Company recognizes revenues and associated costs on a gross basis as services are provided to the customer and costs are incurred using its employees. The Company, from time to time, enters into contracts requiring the completion of specific deliverables.  The Company recognizes revenue on these deliverables at the time the client accepts and approves the deliverables. In instances where project services are provided on a fixed-price basis and the contract will extend beyond a 12-month period, revenue is recorded in accordance with the terms of each contract. In some instances, revenue is billed and recorded at the time certain milestones are reached, as defined in the contract. In other instances, revenue is billed and recorded based upon contractual rates per hour. In addition, some contracts contain “Performance Fees” (bonuses) for completing a contract under budget. Performance Fees, if any, are recorded when the contract is completed and the revenue is reasonably certain of collection. Some contracts also limit revenues and billings to maximum amounts. Provision for contract losses, if any, is made in the period such losses are determined. For contracts where there are multiple deliverables and the work has not been 100% complete on a specific deliverable, the costs have been deferred. The associated costs are expensed when the related revenue is recognized.

 

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Table of Contents

 

Consulting and Staffing Services - Revenues derived from consulting and staffing services are recorded on a gross basis as services are performed and associated costs have been incurred using employees of the Company. In these circumstances, the Company assumes the risk of acceptability of its employees to its customers. In certain cases, the Company may utilize other companies and their employees to fulfill customer requirements. In these cases, the Company receives an administrative fee for arranging for, billing for, and collecting the billings related to these companies. The customer is typically responsible for assessing the work of these companies who have responsibility for acceptability of their personnel to the customer. Under these circumstances, the Company’s reported revenues are net of associated costs (effectively the administrative fee).

 

Permanent Placement Services - The Company earns permanent placement fees from providing permanent placement services. Fees for placements are recognized at the time the candidate commences employment. The Company guarantees its permanent placements on a prorated basis for 90 days. In the event a candidate is not retained for the 90-day period, the Company will provide a suitable replacement candidate. In the event a replacement candidate cannot be located, the Company will provide a prorated refund to the client. An allowance for refunds, based upon the Company’s historical experience, is recorded in the financial statements. Revenues are recorded on a gross basis as a component of revenue.

 

Accounts Receivable

 

The Company’s accounts receivable are primarily due from trade customers. Credit is extended based on evaluation of customers’ financial condition and, generally, collateral is not required. Accounts receivable payment terms vary and are stated in the financial statements at amounts due from customers net of an allowance for doubtful accounts. Accounts outstanding longer than the payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts.

 

The Company’s accounts receivable allowance for doubtful accounts decreased by approximately $0.6 million to $0.9 million as of December 27, 2008 from $1.6 million as of December 29, 2007.  The primary reason for this decrease was that the Company believes its accounts receivable balance before allowance for doubtful accounts as of December 27, 2008 was more certain than the accounts receivable balance before allowance for doubtful accounts as of December 29, 2007. The Company experienced write-offs of accounts receivable in 2008, excluding the write-off of the note receivable of $6.1 million described below, of $2.2 million as compared to $0.7 million in 2007. Due to the increased write-offs of accounts receivable in 2008, a lower allowance for doubtful accounts was required so consequently $0.6 million of those write-offs were charged to accounts receivable allowance for doubtful accounts. Bad debt expense, excluding the write-off of the note receivable of $6.1 million described below, was $1.6 million in 2008 as compared to $0.6 million in 2007.

 

On February 26, 2008, the Company accepted a promissory note from a customer for $7.5 million in payment of a like amount of accounts receivable from that customer. The customer paid $1.4 million through April 30, 2008 at which point management of the Company concluded that the customer was going to default on its May 1, 2008 installment payment. The Company has since determined that the note receivable is not collectible. Therefore, the Company wrote off this note receivable in the amount of $6.1 million.

 

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Table of Contents

 

Goodwill

 

Goodwill represents the premium paid over the fair value of the net tangible and intangible assets we have acquired in business combinations. SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) requires the Company to perform a goodwill and intangible asset impairment test on at least an annual basis. Application of the goodwill and intangible asset impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill and intangible asset impairment for each reporting unit. The Company conducts its annual goodwill and intangible asset impairment test as of the last day of the Company’s fiscal November each year, or more frequently if indicators of impairment exist. We periodically analyze whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, among others. The Company compares the fair value of each of its reporting units to their respective carrying values, including related goodwill and intangible assets.

 

During 2008, the Company incurred goodwill and intangible asset impairment expense of $43.3 million. The reduction in the value of goodwill and intangible assets is primarily attributed to reduced expectations for future cash flows in the impacted reporting units. The reduced expected cash flows resulted in a lower discounted cash flow calculation as compared to prior year’s goodwill and intangible asset impairment tests. The Company reduced expectations for future cash flows due primarily to a weakened general economy and uncertainty as to the demand for our reporting unit services. Goodwill at December 27, 2008 and December 29, 2007 was $6.5 million and $39.6 million, respectively. Intangible assets at December 27, 2008 and December 29, 2007 was $0.3 million. See Footnote 5 to the Financial Statements for a further explanation. Future changes in our industries could impact the results of future annual impairment tests. There can be no assurance that future tests of goodwill and intangible asset impairment will not result in impairment charges.

 

Long-Lived and Intangible Assets

 

The Company evaluates long-lived assets and intangible assets with definite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. Assets to be disposed of by sale, if any, are reported at the lower of the carrying amount or fair value less cost to sell.

 

Accounting for Stock Options

 

The Company uses stock options to attract, retain, and reward employees for long-term service.

 

Effective as of January 1, 2006, the Company adopted SFAS 123R “Share Based Payment” (“SFAS 123R”). SFAS 123R requires that the compensation cost relating to stock-based payment transactions be recognized in financial statements. That cost is measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of stock-based compensation arrangements including stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee stock purchase plans.

 

In addition to the accounting standard that sets forth the financial reporting objectives and related accounting principles, SFAS 123R includes an appendix of implementation guidance that provides expanded guidance on measuring the fair value of stock-based payment awards. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

 

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Table of Contents

 

Since the Company adopted SFAS 123R, effective January 1, 2006, using the modified-prospective transition method, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding as of the beginning of the period of adoption. The Company measures stock-based compensation cost using the Black-Scholes option pricing model.

 

Accounting for Income Taxes

 

In establishing the provision for income taxes and deferred income tax assets and liabilities, and valuation allowances against deferred tax assets, the Company makes judgments and interpretations based on enacted tax laws, published tax guidance, and estimates of future earnings. As of December 27, 2008, the Company had total net deferred tax assets of $6.6 million, primarily representing deferred benefits from the impairment of goodwill and intangible assets, operating loss carryforwards and alternative minimum tax carryforwards and the tax effect of an allowance for doubtful accounts. Realization of deferred tax assets is dependent upon the likelihood that future taxable income will be sufficient to realize these benefits over time, and the effectiveness of tax planning strategies in the relevant tax jurisdictions. In the event that actual results differ from these estimates and assessments, valuation allowances may be required.

 

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. The Company recognized no material adjustments in the liability for unrecognized income tax benefits due to the adoption of FIN 48. The Company conducts its operations in multiple tax jurisdictions in the United States and Canada. With limited exceptions, the Company is no longer subject to audits by tax authorities for tax years prior to 2005. At December 27, 2008, the Company did not have any uncertain tax positions.

 

The Company’s future effective tax rates could be adversely affected by changes in the valuation of its deferred tax assets or liabilities or changes in tax laws or interpretations thereof. In addition, the Company is subject to the examination of its income tax returns by the Internal Revenue Service and other tax authorities. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes.

 

Accrued Bonuses

 

The Company pays bonuses to certain executive management, field management and corporate employees based on, or after giving consideration to, a variety of financial performance measures. Executive management, field management, and certain corporate employees’ bonuses are accrued throughout the year for payment during the first quarter of the following year, based in part upon actual annual results as compared to annual budgets. In addition, the Company pays discretionary bonuses, which are not related to budget performance, to certain employees. Variances in actual results versus budgeted amounts can have a significant impact on the calculations and therefore the estimates of the required accruals. Accordingly, the actual earned bonuses may be materially different from the estimates used to determine the quarterly accruals. The Company from time to time may also withhold any potential bonuses due to uncollected year-end accounts receivable balances.

 

Forward-looking Information

 

The Company’s growth prospects are influenced by broad economic trends. The pace of customer capital spending programs, new product launches and similar activities have a direct impact on the need for consulting and engineering services as well as temporary and permanent employees. When the U.S. and Canadian economies decline, the Company’s operating performance could be adversely impacted. The Company believes that its fiscal discipline, strategic focus on targeted vertical markets and diversification of service offerings provides some insulation from adverse trends. However, declines in the economy could result in the need for future cost reductions or changes in strategy.

 

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Table of Contents

 

Additionally, changes in government regulations could result in prohibition or restriction of certain types of employment services or the imposition of new or additional employee benefits, licensing or tax requirements with respect to the provision of employment services that may reduce RCM’s future earnings. There can be no assurance that RCM will be able to increase the fees charged to its clients in a timely manner and in a sufficient amount to cover increased costs as a result of any of the foregoing.

 

The employment services market is highly competitive with limited barriers to entry. RCM competes in global, national, regional, and local markets with numerous consulting, engineering and employment companies. Price competition in the industries the Company serves is significant, and pricing pressures from competitors and customers are increasing. RCM expects that the level of competition will remain high in the future, which could limit RCM’s ability to maintain or increase its market share or profitability.

 

Results of Operations (In thousands, except for earnings per share data)

 

 

 

Year Ended
December 27, 2008

 

Year Ended
December 29, 2007

 

Year Ended
December 30, 2006

 

 

 

Amount

 

% of
Revenue

 

Amount

 

% of
Revenue

 

Amount

 

% of
Revenue

 

Revenues

 

$

209,277

 

100.0

 

$

214,209

 

100.0

 

$

201,920

 

100.0

 

Cost of services

 

155,302

 

74.2

 

161,233

 

75.3

 

151,412

 

75.0

 

Gross profit

 

53,975

 

25.8

 

52,976

 

24.7

 

50,508

 

25.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

46,568

 

22.3

 

41,418

 

19.3

 

41,244

 

20.4

 

Bad debt - note receivable

 

6,090

 

2.9

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

2,067

 

1.0

 

1,442

 

0.7

 

1,507

 

0.7

 

Impairment of goodwill and intangible assets

 

43,315

 

20.7

 

 

 

 

 

Total operating expense

 

98,040

 

46.8

 

42,860

 

20.0

 

42,751

 

21.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(44,065

)

(21.1

)

10,116

 

4.7

 

7,757

 

3.8

 

Other (expense) income

 

(298

)

(0.1

)

937

 

0.5

 

(287

)

(0.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

(44,363

)

(21.2

)

11,053

 

5.2

 

7,470

 

3.7

 

Income taxes (benefit) expense

 

(4,558

)

2.2

 

4,284

 

2.0

 

1,114

 

0.6

 

Net (loss) income

 

$

(39,805

)

(19.0

)

$

6,769

 

3.2

 

$

6,356

 

3.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

$

(3.15

)

 

 

$

.57

 

 

 

$

.54

 

 

 

Diluted:

 

$

(3.15

)

 

 

$

.54

 

 

 

$

.53

 

 

 

 

The above summary is not a presentation of results of operations under generally accepted accounting principles in the United States of America and should not be considered in isolation or as an alternative to results of operations as an indication of the Company’s performance.

 

The Company follows a 52/53 week fiscal reporting calendar ending on the Saturday closest to December 31. All years presented represent 52 weeks. A 53-week year occurs periodically.

 

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Table of Contents

 

Year Ended December 27, 2008 Compared to Year Ended December 29, 2007

 

Revenues. Revenues decreased 2.3%, or $4.9 million, for the year ended December 27, 2008 as compared to the prior year (the “comparable prior year period”). Revenues increased $4.5 million in the Information Technology (“IT”) segment, decreased $11.9 million in the Engineering segment, and increased $2.5 million in the Commercial segment. Management attributes the overall decrease to a weakening of the general economy and the loss of an engineering client, which generated revenue of $18.0 million in the 2007 period as compared to $0 in the 2008 period. Revenues that were attributable to all acquisitions which occurred in the IT segment since December 29, 2007 and were not included in the comparable prior year period were approximately $21.1 million.

 

Cost of Services. Cost of services decreased 3.7%, or $5.9 million, for the year ended December 27, 2008 as compared to the comparable prior year period. This decrease was primarily due to the decrease in revenues. Cost of services as a percentage of revenues decreased to 74.2% for the year ended December 27, 2008 from 75.3% for the comparable prior year period. This decrease was primarily attributable to decreased revenues in the Engineering segment, which had lower gross margins.

 

Selling, General and Administrative.  Selling, general and administrative (“SGA”) expenses increased 12.4%, or $5.2 million, for the year ended December 27, 2008 as compared to the comparable prior year period.  The increase in SGA expenses was principally due to the following a) two acquisitions in the Company’s Information Technology  segment increased SGA expenses by $4.3 million; and b) the Company’s bad debt expense, excluding the write-off of the note receivable of $6.1 million described below, increased by  $1.0 million.  As a percentage of revenues, SGA expenses were 22.3% for the year ended December 27, 2008 as compared to 19.3% for the comparable prior year period.  This percentage increase was primarily attributable to additional SGA expenses incurred in connection with two acquisitions subsequent to February 28, 2008 and the increase in bad debt expense combined with decreased revenues overall.

 

Bad Debt - Accounts Receivable.  The Company experienced bad debt charges on accounts receivable, excluding the write-off of the note receivable of $6.1 million described below, of $1.6 million, as compared to $0.6 million in 2007. The large increase in bad debt charges on accounts receivable was principally due to several unusually large write-offs from certain clients offset by a reduction of the Company’s accounts receivable – allowance for doubtful accounts.  The Company’s accounts receivable – allowance for doubtful accounts was $0.9 million as of December 27, 2008 as compared to $1.6 million as of December 29, 2007.

 

Bad Debt - Note Receivable. On February 26, 2008, the Company accepted a promissory note from a customer for $7.5 million in payment of a like amount of accounts receivable from that customer. The customer paid $1.4 million through April 30, 2008 at which point management of the Company concluded that the customer was going to default on its May 1, 2008 installment payment. The Company has since determined that the note receivable is not collectible. Therefore, the Company wrote off this note receivable in the amount of $6.1 million.

 

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Table of Contents

 

Goodwill and Intangible Asset Impairment Expense. During 2008, the Company experienced goodwill and intangible asset impairment expense of $43.3 million. Goodwill represents the premium paid over the fair value of the net tangible and intangible assets we have acquired in business combinations. SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) requires the Company to perform a goodwill and intangible asset impairment test on at least an annual basis. Application of the goodwill and intangible asset impairment test requires significant judgments including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the businesses, the useful life over which cash flows will occur and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and/or conclusions on goodwill and intangible asset impairment for each reporting unit. The Company conducts its annual goodwill and intangible asset impairment test as of the last day of the Company’s fiscal November each year, or more frequently if indicators of impairment exist. We periodically analyze whether any such indicators of impairment exist. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include a sustained, significant decline in our share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition and/or slower expected growth rates, among others. The Company compares the fair value of each of its reporting units to their respective carrying values, including related goodwill. Future changes in our industries could impact the results of future annual impairment tests. Goodwill at December 27, 2008 and December 29, 2007 was $6.5 million and $39.6 million, respectively. Intangible assets at December 27, 2008 and December 29, 2007, was $0.3 million. There can be no assurance that future tests of goodwill and intangible asset impairment will not result in impairment charges.

 

Depreciation and Amortization. Depreciation and amortization increased 43.3%, or $0.7 million, for the year ended December 27, 2008 as compared to the comparable prior year period. This increase was principally attributable to amortization of intangibles incurred from two acquisitions in the 2008 period.

 

Other Income (Expense). Other income (expense) consists of interest expense, net of interest income and gains and losses on foreign currency transactions and, in 2007, the proceeds from a legal settlement. For the year ended December 27, 2008, actual interest expense and unused credit line fees of $0.3 million were offset by $0.1 million of interest income, which was earned from short-term money market deposits. Interest expense, net increased $0.2 million for the year ended December 27, 2008 as compared to the comparable prior year period. This increase was primarily due to increased borrowing levels associated with the funding of two acquisitions in the 2008 period. The Company realized losses on foreign currency transactions of approximately $0.1 million for the year ended December 27, 2008 as compared to gains on foreign currency transactions of approximately $0.1 million for the comparable prior year period. This change was attributable to unfavorable exchange rates realized during the 2008 period. The proceeds from the legal settlement in 2007 were realized when the Company reached a settlement with one of the law firm defendants resulting in the recovery of $0.8 million (see footnote 15 to the consolidated financial statements).

 

Income Tax. The Company experienced an income tax benefit of $4.6 million in 2008 as compared to an income tax expense of $4.3 million in 2007. This change was principally attributable to a decrease in income before taxes, which included a $6.1 million bad debt expense on a note receivable and a non tax-deductible impairment of goodwill and intangible assets of $43.3 million for the year ended December 27, 2008. The effective tax rate was a credit of 10.3% for the year ended December 27, 2008 as compared to 38.7% in the comparable prior year period.

 

Net Loss. During 2008, the Company experienced a net loss of $39.8 million as compared to net income of $6.8 million in 2007. The difference was primarily attributable to the following factors: decreased revenues of $4.9 million, increased selling, general and administrative expenses of $5.2 million, bad debt-note receivable of $6.1 million, goodwill and impairment expense of $43.3 million, offset by an income tax benefit of $5.7 million.

 

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Table of Contents

 

Segment Discussion (See Footnote 13)

 

Information Technology

 

IT revenues of $103.5 million in 2008 increased $4.5 million, or 4.5%, compared to 2007 IT revenues of $99.0 million. The increase in revenue was attributable to two acquisitions in 2008 offset by the weakness in the economy and reduced demand for the Company’s IT services. The IT segment EBITDA was $0.9 million for 2008, as compared to $5.9 million for 2007.

 

Engineering

 

Engineering revenues of $59.3 million in 2008 decreased $11.9 million, or 16.7%, compared to 2007 Engineering revenues of $71.2 million. The decrease in revenue was primarily attributable to the loss of an Engineering client that generated revenue of $18.0 million in the 2007 period. The Engineering segment EBITDA was a negative of $2.2 million EBITDA for 2008, as compared to $3.9 million positive EBITDA for 2007.

 

Commercial

 

Commercial revenues of $46.6 million in 2008 increased $2.5 million, or 5.6%, compared to 2007 Commercial Services revenues of $44.1 million. The increase in revenues was principally attributable to increased demand for the Company’s Healthcare staffing services. The Commercial segment EBITDA was $2.7 million of EBITDA for 2008, as compared to $1.7 million of EBITDA for 2007.

 

Year Ended December 29, 2007 Compared to Year Ended December 30, 2006

 

Revenues. Revenues increased 6.1%, or $12.3 million, for the year ended December 29, 2007 as compared to the prior year (the “comparable prior year period”). Revenues decreased $2.5 million in the IT segment, increased $13.5 million in the Engineering segment, and increased $1.3 million in the Commercial segment. The decrease in IT revenues was attributable to a diminished demand for the Company’s IT services. Management attributes the overall increase to an improvement of the general economy in the first half of the year combined with successful marketing and sales efforts.

 

Cost of Services. Cost of services increased 6.5%, or $9.8 million, for the year ended December 29, 2007 as compared to the comparable prior year period. This increase was primarily due to the increase in revenues. Cost of services as a percentage of revenues increased to 75.3% for the year ended December 29, 2007 from 75.0% for the comparable prior year period.

 

Selling, General and Administrative. Selling, general and administrative (“SGA”) expenses increased 0.4%, or $174,000, for the year ended December 29, 2007 as compared to the comparable prior year period. As a percentage of revenues, SGA expenses were 19.3% for the year ended December 29, 2007 as compared to 20.4% for the comparable prior year period. This decrease in percentage was primarily attributable to the spreading of fixed operating costs over a higher revenue base.

 

Depreciation and Amortization. Depreciation and amortization were essentially unchanged for the year ended December 29, 2007 as compared to the comparable prior year period.

 

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Other Income. Other income consisted of interest income, net of interest expense and gains and losses on foreign currency transactions. For the year ended December 29, 2007, actual interest income of $0.1 million was offset by $0.1 million of interest expense. The interest income was principally earned from short-term money market deposits. Interest income, net, increased $0.3 million for the year ended December 29, 2007 as compared to the comparable prior year period. This increase was primarily due to an increase in interest income, and an overall decrease in interest on the line of credit due to fewer borrowings in the current year, as compared to the comparable prior year period. Gains on foreign currency transactions increased $0.1 million because of the strengthening of the Canadian Dollar as compared to the U. S. Dollar during the year ended December 29, 2007. Included in other income was an $0.8 million gain from a legal settlement (see footnote 15 to the financial statements).

 

Income Tax. Income tax expense increased 284.6%, or $3.2 million, for the year ended December 29, 2007 as compared to the comparable prior year period. The increase was primarily attributable to a reversal of $1.3 million of previously accrued income taxes in the year ended December 30, 2006, which related to the potential repayment of tax benefits associated with previously claimed tax deductions claimed from goodwill impairments. This matter was settled during the year ended December 30, 2006. As a result, the effective tax rate was 38.8% for the year ended December 29, 2007 as compared to 14.9% in the year ended December 30, 2006. The effective income tax rate for 2006 without the $1.3 million reversal would have been 32.3%.

 

Net Income. Net income totaled $6.8 million, or 3.2% of revenue, in 2007 as compared to $6.4 million, or 3.1% of revenue, in 2006. Included in 2006 was a reversal of $1.3 million of previously accrued income taxes. If the reversal of the accrued income taxes of $1.3 million had not occurred in 2006, net income as a percentage of revenues would have been 2.5%.

 

Segment Discussion (See Footnote 13)

 

Information Technology

 

IT revenues of $99.0 million in 2007 represented a decrease of $2.5 million, or 2.5%, compared to 2006. The decrease in revenue was attributable to a decrease in demand for IT services. EBITDA for the IT segment was $5.9 million, or 51.3% of the overall EBITDA, for 2007 as compared to $6.7 million, or 71.8% of the overall EBITDA, for 2006.

 

Engineering

 

Engineering revenues of $71.2 million in 2007 represented an increase of $13.5 million, or 23.5%, compared to 2006. The increase in revenue was attributable to an increase in demand for the Company’s engineering services. The Engineering segment EBITDA was $3.9 million, or 33.8% of the overall EBITDA, for 2007 as compared to $1.0 million, or 11.2% of the overall EBITDA, for 2006.

 

Commercial

 

Commercial revenues of $44.1 million in 2007 represented an increase of $1.2 million, or 2.9%, compared to 2006. The increase in revenue for the Commercial segment was attributable to improvement in economic activity within this segment. The Commercial segment EBITDA was $1.7 million, or 14.9% of the overall EBITDA, for 2007 as compared to $1.6 million, or 17.0% of the overall EBITDA, for 2006.

 

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Liquidity and Capital Resources

 

The following table summarizes the major captions from the Company’s Consolidated Statements of Cash Flows:

 

 

 

Year Ended

 

(In thousands)

 

December 27, 2008

 

December 29, 2007

 

 

 

 

 

 

 

Operating Activities

 

$

(4,807

)

$

8,605

 

Investing Activities

 

$

(10,364

)

$

(851

)

Financing Activities

 

$

4,344

 

$

993

 

 

Operating Activities

 

Operating activities used $4.8 million of cash for the year ended December 27, 2008 as compared to $8.6 million provided by operating activities for the comparable 2007 period.  The decrease in cash provided by operating activities was primarily attributable to a net loss of $39.8 million, an increase in accounts receivable, an increase in deferred tax assets, an increase in prepaid expenses and other current assets, and a decrease in income taxes payable. These changes were offset by an increase in payroll and withheld taxes, accrued compensation, accounts payable and accrued expenses.  The increase in accounts receivable was due primarily to the increase in revenues in the fourth quarter of 2008 of $53.5 million as compared to revenues in the fourth quarter of 2007 of $48.8 million.

 

Investing Activities

 

Investing activities used $10.4 million for the year ended December 27, 2008 as compared to $0.9 million for the comparable prior year period. The increase in the use of cash for investing activities for 2008 as compared to the comparable 2007 period was primarily attributable to increases in expenditures for property and equipment and in cash used for acquisitions.

 

Financing Activities

 

In 2008, financing activities principally consisted of the proceeds from borrowing from the line of credit to finance the acquisition of NuSoft Solutions, Inc and MBH Solutions, Inc. (See footnote 5 to the financial statements). In 2007, financing activities principally consisted of the exercise of stock options and issuance of stock for the employee stock purchase plan with an aggregate exercise price of $993,000.

 

The Company and its subsidiaries are party to a loan agreement with Citizens Bank of Pennsylvania, which was amended and restated effective February 20, 2009, which now provides for a $15 million revolving credit facility and includes a sub-limit of $5.0 million for letters of credit (the “Revolving Credit Facility”). At December 27, 2008 the loan agreement provided for a $25 million Revolving Credit Facility. Borrowings under the Revolving Credit Facility bear interest at one of two alternative rates, as selected by the Company at each incremental borrowing. These alternatives are: (i) LIBOR (London Interbank Offered Rate), plus applicable margin, or (ii) the agent bank’s prime rate. The Company also pays unused line fees based on the amount of the Revolving Credit Facility that is not drawn.

 

All borrowings under the Revolving Credit Facility are collateralized by all of the assets of the Company and its subsidiaries and a pledge of the stock of its subsidiaries. The Revolving Credit Facility also contains various financial and non-financial covenants, such as restrictions on the Company’s ability to pay dividends. The Revolving Credit Facility expires in August 2011.

 

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The weighted average interest rates under the Revolving Credit Facility for the year ended December 27, 2008 and December 29, 2007 were 3.82% and 8.25%, respectively. The majority of borrowings in 2008 were subject to alternative (i) LIBOR (London Interbank Offered Rate), plus applicable margin on contracts of 30 days or more. All borrowings in 2007 were short term and borrowed under alternative (ii) the agent bank’s prime rate. During the year ended December 27, 2008 and December 29, 2007, the Company’s outstanding borrowings ranged from $-0- to $10.5 million and $-0- million to $1.5 million, respectively. At December 27, 2008 and December 29, 2007, there were $4.9 million and $0.0 outstanding borrowings under this facility, respectively. At December 27, 2008, there were letters of credit outstanding for $1.6 million. At December 27, 2008, the Company had availability for additional borrowings under the Revolving Credit Facility of $18.5 million. Upon execution of the amendment to the Company’s loan agreement on February 20, 2009, availability on a proforma basis as of December 27, 2008 was reduced to $8.5 million.

 

The Company anticipates that its primary uses of capital in future periods will be for working capital purposes. Funding for any long-term and short-term capital requirements as well as future acquisitions will be derived from one or more of the Revolving Credit Facility, funds generated through operations or future financing transactions. The Company is subject to legal proceedings and claims that arise from time to time in the ordinary course of its business, which may or may not be covered by insurance. Were an unfavorable final outcome to occur, there exists the possibility of a material adverse impact on our financial position, liquidity, and the results of operations for the period in which the effect becomes reasonably estimable.

 

The Company’s business strategy is to achieve growth both internally through operations and externally through strategic acquisitions. The Company from time to time engages in discussions with potential acquisition candidates. As the size of the Company and its financial resources increase however, acquisition opportunities requiring significant commitments of capital may arise. In order to pursue such opportunities, the Company may be required to incur debt or issue potentially dilutive securities in the future. No assurance can be given as to the Company’s future acquisition and expansion opportunities or how such opportunities will be financed.

 

The Company does not currently have material commitments for capital expenditures and does not currently anticipate entering into any such commitments during the next 12 months. The Company’s current commitments consist primarily of lease obligations for office space. The Company believes that its capital resources are sufficient to meet its present obligations and those to be incurred in the normal course of business for the next 12 months.

 

At December 27, 2008, the Company had a deferred tax asset totaling $6.6 million, primarily representing deferred benefits from the impairment of goodwill and intangible assets, operating loss carryforwards and alternative minimum tax carryforwards and the tax effect of an allowance for doubtful accounts. The Company expects to utilize deferred tax assets associated with net operating loss carryforwards of $2.4 million during the 12 months ending December 26, 2009 by offsetting the related tax benefits of such assets against tax liabilities incurred from forecasted taxable income.

 

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Summarized below are the Company’s obligations and commitments to make future payments under lease agreements and debt obligations as of December 27, 2008 (in thousands):

 

 

 

Payments Due by Period

 

 

 

Total

 

Less Than
1 Year

 

1-3 Years

 

3-5 Years

 

More Than
5 Years

 

Long-Term Debt Obligations (1)

 

$

4,900

 

$

4,900

 

$

 

$

 

$

 

Operating Lease Obligations

 

12,686

 

4,271

 

7,398

 

1,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

17,586

 

$

9,171

 

$

7,398

 

$

1,017

 

$

 

 


(1)The Revolving Credit Facility is for $15.0 million and includes a sub-limit of $5.0 million for letters of credit. The agreement expires in August 2011. At December 27, 2008, there were outstanding letters of credit for $1.6 million. As of March 24, 2009, the Company does not anticipate that interest expense in 2009 will be material.

 

Material Subsequent Event

 

As of December 27, 2008, the Company was a plaintiff in a material lawsuit as more fully described in Footnote 15 in the Financial Statements. On March 16, 2009 the Company entered into a settlement agreement with the defendants in this lawsuit. The Company expects to receive $9.8 million, $5.9 million net of tax effect, on or before March 31, 2009.

 

Significant employment agreements are as follows:

 

Employment Agreement

 

The Company has an employment agreement with its Chief Executive Officer and President, Leon Kopyt, which currently provides for an annual base salary of $550,000 and other customary benefits. In addition, the agreement provides that Mr. Kopyt’s annual bonus be based on EBITDA, defined as earnings before interest, taxes, depreciation and amortization. The agreement expires on February 28, 2010. The agreement is for a rolling term of three years, which automatically extends each year for an additional one-year period on February 28 of each year. The employment agreement is terminable by the Company upon Mr. Kopyt’s death or disability, or for “good and sufficient cause,” as defined in the agreement.

 

Termination Benefits Agreement

 

The Company is party to a Termination Benefits Agreement with its Chief Executive Officer Leon Kopyt, amended on December 12, 2007 to comply with the requirements of section 409A of the Internal Revenue Code of 1986 (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), then the following provisions take effect: the Company is obligated to pay Mr. Kopyt a lump sum equal to his salary and bonus for the remainder of the Extended Term; 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 December 27, 2008, Mr. Kopyt would have been entitled to cash payments of approximately $4.9 million (representing salary and excise tax payments).

 

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Table of Contents

 

Severance Agreement

 

The Company is party to a Severance Agreement with Mr. Kopyt, amended on December 12, 2007 to comply with the requirements of section 409A of the Internal Revenue Code of 1986 (the “Severance Agreement”). The agreement provides for certain payments to be made to Mr. Kopyt and for the continuation of Mr. Kopyt’s employee benefits for a specified time after his service with the Company is terminated other than “for cause,” as defined in the Severance Agreement. Amounts payable to Mr. Kopyt under the Severance Agreement would be offset and reduced by any amounts received by Mr. Kopyt after his termination of employment under his employment agreement and the Benefits Agreement, which are supplemented and not superseded by the Severance Agreement. If Mr. Kopyt had been terminated as of December 27, 2008, then under the terms of the Severance Agreement, and after offsetting any amounts that would have been received under his current employment and termination benefits agreements, he would have been entitled to cash payments of approximately $3.2 million, inclusive of employee benefits.

 

Impact of Inflation

 

Consulting, staffing, and project services are generally priced based on mark-ups on prevailing rates of pay, and as a result are able to generally maintain their relationship to direct labor costs. Permanent placement services are priced as a function of salary levels of the job candidates.

 

The Company’s business is labor intensive; therefore, the Company has a high exposure to increasing healthcare benefit costs. The Company attempts to compensate for these escalating costs in its business cost models and customer pricing by passing along some of these increased healthcare benefit costs to its customers and employees, however, the Company has not been able to pass on all increases. The Company is continuing to review its options to further control these costs, which the Company does not believe are representative of general inflationary trends. Otherwise, inflation has not been a meaningful factor in the Company’s operations.

 

New Accounting Standards

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” to partially defer SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. SFAS No. 157 was effective for the Company on December 30, 2007, except for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value on a recurring basis for which our effective date is December 28, 2008. The adoption of this statement did not have a material effect on our consolidated financial position or results of operations.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115” (“SFAS No. 159”). SFAS No. 159 expands the use of fair value accounting but does not affect existing standards, which require assets and liabilities to be carried at fair value. Under SFAS No. 159, a company may elect to use fair value to measure accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and other eligible financial instruments. SFAS No. 159 is effective for the Company as of December 30, 2007.

 

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The Company has elected not to apply the fair value option to measure any of the financial assets and liabilities on its balance sheet not already valued at fair value under other accounting pronouncements. These other financial assets and liabilities are primarily accounts receivable, accounts payable and debt which are reported at historical value. The fair value of these financial assets and liabilities approximate their fair value because of their short duration and in the case of the debt because it carries variable interest rates which are reset frequently.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). This statement replaces SFAS No. 141, “Business Combinations,” and requires an acquirer to recognize the assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. SFAS No. 141R requires costs incurred to effect the acquisition to be recognized separately from the acquisition as period costs. SFAS No. 141R also requires the acquirer to recognize restructuring costs that the acquirer expects to incur, but is not obligated to incur, separately from the business combination. In addition, SFAS No. 141R requires an acquirer to recognize assets and liabilities assumed arising from contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. Other key provisions of this statement include the requirement to recognize the acquisition-date fair values of research and development assets separately from goodwill and the requirement to recognize changes in the amount of deferred tax benefits that are recognizable due to the business combination in either income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. With the exception of certain tax-related aspects described above, SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after December 28, 2008.

 

In May 2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the U.S. The Company does not believe the adoption of SFAS 162 will have a material impact on its results of operations or financial position.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment portfolio and debt instruments, which primarily consist of its Revolving Credit Facility. The Company does not have any derivative financial instruments in its portfolio. The Company places its investments in instruments that meet high credit quality standards. The Company is adverse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk. As of December 27, 2008, the Company’s investments consisted of cash and money market funds. The Company does not use interest rate derivative instruments to manage its exposure to interest rate changes. Presently the impact of a 10% (approximately 90 basis points) increase in interest rates on its variable debt (using an incremental borrowing rate) would have a relatively nominal impact on the Company’s results of operations. The Company does not expect any material loss with respect to its investment portfolio.

 

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Table of Contents

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The financial statements, together with the report of the Company’s Registered Public Accounting Firm, begins on page F-1.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A(T). CONTROLS AND PROCEDURES

 

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures as of the end of the period covered by this report were functioning effectively to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

 

A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

Management’s Report on Internal Control over Financial Reporting

 

The report of management on our internal control over financial reporting is set forth in Item 8 of this report and is incorporated herein by reference.

 

There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter and that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

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Table of Contents

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by Item 10 shall be included in the 2009 Proxy Statement.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The information required by Item 11 shall be included in the 2009 Proxy Statement.

 

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Except as set forth below, the information required by Item 12 shall be included in the 2009 Proxy Statement.

 

The table below presents certain information concerning securities issuable in connection with equity compensation plans that have been approved by the Company’s shareholders and that have not been approved by the Company’s shareholders.

 

Plan category

 

Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights

 

Weighted-average exercise
price of outstanding

options, warrants and
rights

 

Number of securities
remaining available for
issuance under equity
compensation plans,
excluding securities
reflected in column (a)

 

 

 

(a)

 

(b)

 

(c)

 

Equity compensation plans approved by security holders

 

1,293,900

 

$

4.48

 

699,294

 

Equity compensation plans not approved by security holders

 

 

 

 

Total

 

1,293,900

 

$

4.48

 

699,294

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE

 

The information required by Item 13 shall be included in the 2009 Proxy Statement.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The information required by Item 14 shall be included in the 2009 Proxy Statement.

 

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PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)     1. and 2. Financial Statement Schedules — See “Index to Financial Statements and Schedules” on F-1.

 

          3. See Item (b) below.

 

(b)      Exhibits

 

(3)(a)

 

Articles of Incorporation, as amended; incorporated by reference to Exhibit 3(a) to the Registrant’s Annual Report on Form 10-K for the year ended October 31, 1994.

 

 

 

(3)(b)

 

Certificate of Amendment of Articles of Incorporation; incorporated by reference to Exhibit A to the Registrant’s Proxy Statement, dated February 6, 1996, filed with the Securities and Exchange Commission on January 29, 1996.

 

 

 

(3)(c)

 

Certificate of Amendment of Articles of Incorporation; incorporated by reference to Exhibit B to the Registrant’s Proxy Statement, dated February 6, 1996, filed with the Securities and Exchange Commission on January 29, 1996.

 

 

 

+ (3)(d)

 

Amended and Restated Bylaws.

 

 

 

(4)(a)

 

Registration Rights Agreement, dated March 11, 1996, by and between RCM Technologies, Inc. and the former shareholders of The Consortium; incorporated by reference to Exhibit (c)(2) to the Registrant’s Current Report on Form 8-K dated March 19, 1996, filed with the Securities and Exchange Commission on March 20, 1996.

 

 

 

*(10)(a)

 

RCM Technologies, Inc. 1992 Incentive Stock Option Plan; incorporated by reference to Exhibit A to the Registrant’s Proxy Statement, dated March 9, 1992, filed with the Securities and Exchange Commission on March 9, 1992.

 

 

 

(10)(b)

 

RCM Technologies, Inc. 1994 Non-employee Director Stock Option Plan; incorporated by reference to the appendix to the Registrant’s Proxy Statement, dated March 31, 1994, filed with the Securities and Exchange Commission on March 28, 1994.

 

 

 

*(10)(c)

 

RCM Technologies, Inc. 1996 Executive Stock Option Plan, dated August 15, 1996; incorporated by reference to Exhibit 10(l) to the Registrant’s Annual Report on Form 10-K for the year ended October 31, 1996, filed with the Securities and Exchange Commission on January 21, 1997 (the “1996 10-K”).

 

 

 

* (10)(d)

 

RCM Technologies, Inc. 2000 Employee Stock Incentive Plan, dated January 6, 2000; incorporated by reference to Exhibit A to the Registrant’s Proxy Statement, dated March 3, 2000, filed with the Securities and Exchange Commission on February 28, 2000.

 

 

 

*(10)(e)

 

Second Amended and Restated Termination Benefits Agreement, dated March 18, 1997, between the Registrant and Leon Kopyt; incorporated by reference to Exhibit 10(g) to the Registrant’s Registration Statement on Form S-1 (SEC File No. 333-23753), filed with the Securities and Exchange Commission on March 21, 1997.

 

 

 

*(10)(f)

 

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) to the 1996 10-K.

 

 

 

(10)(g)

 

Amended and Restated Loan and Security Agreement, dated May 31, 2002, between RCM Technologies, Inc. and all of its Subsidiaries with Citizens Bank of Pennsylvania, as Administrative Agent and Arranger; incorporated by reference to Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, filed with the Securities and Exchange Commission on August 5, 2002 (the “Second Quarter 2002 10-Q”).

 

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*(10)(h)

 

Severance Agreement, dated June 10, 2002, between RCM Technologies, Inc. and Leon Kopyt; incorporated by reference to Exhibit 10a to the Second Quarter 2002 10-Q.

 

 

 

* (10)(i)

 

Exhibit A to Severance Agreement General Release; incorporated by reference to Exhibit 10b to the Second Quarter 2002 10-Q.

 

 

 

(10)(j)

 

Amendment and Modification to Amended And Restated Loan and Security Agreement, dated December 30, 2002, between RCM Technologies, Inc. and all of its Subsidiaries and Citizens Bank of Pennsylvania as Administrative Agent and Arranger; incorporated by reference to Exhibit 10(k) to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the Securities and Exchange Commission on February 28, 2003, as amended on March 3, 2003 (the “2002 10-K”).

 

 

 

(10)(k)

 

Second Amendment and Modification to Amended And Restated Loan and Security Agreement, dated February 26, 2003, between RCM Technologies, Inc. and all of its Subsidiaries and Citizens Bank of Pennsylvania as Administrative Agent and Arranger; incorporated by reference to Exhibit 10(l) to 2002 10-K).

 

 

 

(10)(l)

 

Third Amendment and Modification to Amended And Restated Loan and Security Agreement, dated October 1, 2003, between RCM Technologies, Inc. and all of its Subsidiaries and Citizens Bank of Pennsylvania as Administrative Agent and Arranger; incorporated by reference to Exhibit 99.H to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, filed with the Securities and Exchange Commission on November 6, 2003.

 

 

 

(10)(m)

 

Fourth Amendment and Modification to Amended And Restated Loan and Security Agreement, dated July 23, 2004, between RCM Technologies, Inc. and all of its Subsidiaries and Citizens Bank of Pennsylvania as Administrative Agent and Arranger; incorporated by reference to Exhibit 10(a) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 3, 2004, filed with the Securities and Exchange Commission on August 5, 2004.

 

 

 

(10)(n)

 

Fifth Amendment and Modification to Amended and Restated Loan and Security Agreement dated August 7, 2006, between RCM Technologies, Inc. and all of its Subsidiaries and Citizens Bank of Pennsylvania as Administrative Agent and Arranger; incorporated by reference to Exhibit 10(a) to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2006 , filed with the Securities and Exchange Commission on August 10, 2006.

 

 

 

*(10)(o)

 

Amendment No. 1, dated December 12, 2007, to the Amended and Restated Employment Agreement, entered into on November 30, 1996, between Leon Kopyt and RCM Technologies, Inc.; incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated December 12, 2007, filed with the Securities and Exchange Commission on December 12, 2007 (the “December 2007 8-K”).

 

 

 

* (10)(p)

 

Amendment No. 1, dated December 12, 2007, to the Second Amended and Restated Termination Benefits Agreement, made March 18, 1997, between Leon Kopyt and RCM Technologies, Inc.; incorporated by reference to Exhibit 10.2 to the December 2007 8-K.

 

 

 

* (10)(q)

 

Amendment No. 1, dated December 12, 2007, to the Severance Agreement, entered into on June 12, 2002, between Leon Kopyt and RCM Technologies, Inc.; incorporated by reference to Exhibit 10.3 to the December 2007 8-K.

 

 

 

*(10)(r)

 

Compensation Arrangements for Named Executive Officers.

 

 

(Filed herewith)

 

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Table of Contents

 

* (10)(s)

 

Compensation Arrangements for Directors.

 

 

(Filed herewith)

 

 

 

* (10)(t)

 

The RCM Technologies, Inc. 2007 Omnibus Equity Compensation Plan; incorporated by reference to Annex A to the Registrant’s Proxy Statement, dated April 20, 2007, filed with the Securities and Exchange Commission on April 19, 2007.

 

 

 

* (10)(u)

 

Separation and Release Agreement, dated August 27, 2008; incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated August 21, 2008, filed with the Securities and Exchange Commission on August 27, 2008.

 

 

 

(10)(v)

 

Second Amended and Restated Loan and Security Agreement dated as of February 19, 2009, between RCM Technologies, Inc. and all of its Subsidiaries, Citizens Bank of Pennsylvania as Administrative Agent and Arranger and the Financial Institutions Named therein as Lenders; incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K dated February 19, 2009, filed with the Securities and Exchange Commission on February 25, 2009.

 

 

 

(11)

 

Computation of Earnings (loss) Share.

 

 

(Filed herewith)

 

 

 

(21)

 

Subsidiaries of the Registrant.

 

 

(Filed herewith)

 

 

 

(23)

 

Consent of Grant Thornton LLP.

 

 

(Filed herewith)

 

 

 

31.1

 

Certifications of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

(Filed herewith)

 

 

 

31.2

 

Certifications of Chief Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

(Filed herewith)

 

 

 

32.1

 

Certifications of Chief Executive Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

 

 

(Filed herewith)

 

 

 

32.2

 

Certifications of Chief Financial Officer Required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended. (This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section. Further, this exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.)

 

 

(Filed herewith)

 


 

* Constitutes a management contract or compensatory plan or arrangement.

 

+ Filed herewith.

 

40



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

RCM Technologies, Inc.

 

Date: March 3, 2009

By:

/s/ Leon Kopyt

 

Leon Kopyt

 

Chairman, President, Chief Executive Officer and Director

 

 

Date: March 3, 2009

By:

/s/ Kevin D. Miller

 

  Kevin D. Miller

 

Chief Financial Officer, Treasurer and Secretary

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Date: March 3, 2009

 

/s/ Leon Kopyt

 

  Leon Kopyt

 

Chairman, President, Chief Executive Officer (Principal Executive Officer) and Director

 

 

Date: March 3, 2009

 

/s/ Kevin D. Miller

 

  Kevin D. Miller

 

Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer)

 

 

Date: March 3, 2009

 

/s/ Norman S. Berson

 

  Norman S. Berson

 

  Director

 

 

Date: March 3, 2009

 

/s/ Robert B. Kerr

 

 Robert B. Kerr

 

 Director

 

 

Date: March 3, 2009

 

/s/ Lawrence Needleman

 

Lawrence Needleman

 

Director

 

41



Table of Contents

 

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

FORM 10-K

 

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

 

 

 

Page

 

 

 

Consolidated Balance Sheets, December 27, 2008 and December 29, 2007

 

F-2

 

 

 

Consolidated Statements of Operations, Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

 

F-4

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity and Consolidated Statements of Comprehensive (Loss) Income, Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

 

F-6

 

 

 

Consolidated Statements of Cash Flows, Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

 

F-7

 

 

 

Notes to Consolidated Financial Statements

 

F-9

 

 

 

Management’s Report on Internal Control Over Financial Reporting

 

F-34

 

 

 

Report of Independent Registered Public Accounting Firm

 

F-35

 

 

 

Schedules I and II

 

F-36

 

F-1



Table of Contents

 

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

December 27, 2008 and December 29, 2007

(Dollars in thousands, except share and per share amounts, unless otherwise indicated)

 

ASSETS

 

 

 

December 27,

 

December 29,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

815

 

$

11,642

 

Accounts receivable, net of allowance for doubtful accounts of $942 and $1,583 in fiscal 2008 and 2007, respectively

 

55,770

 

45,468

 

Long term receivable-current portion

 

 

1,893

 

Prepaid expenses and other current assets

 

3,012

 

1,493

 

Deferred tax assets

 

6,580

 

711

 

 

 

 

 

 

 

Total current assets

 

66,177

 

61,207

 

 

 

 

 

 

 

Property and equipment, at cost

 

 

 

 

 

Equipment and leasehold improvements

 

11,278

 

9,407

 

Less: accumulated depreciation and amortization

 

5,692

 

5,178

 

 

 

 

 

 

 

Net property and equipment

 

5,586

 

4,229

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Long term receivable

 

 

4,216

 

Deposits

 

264

 

125

 

Goodwill

 

6,538

 

39,588

 

Intangible assets, net of accumulated amortization of $834 and $726 in fiscal 2008 and 2007, respectively

 

276

 

349

 

 

 

 

 

 

 

Total other assets

 

7,078

 

44,278

 

 

 

 

 

 

 

Total assets

 

$

78,841

 

$

109,714

 

 

The accompanying notes are an integral part of these financial statements.

 

F-2



Table of Contents

 

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS — (CONTINUED)

 

December 27, 2008 and December 29, 2007

(Dollars in thousands, except share and per share amounts, unless otherwise indicated)

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

December 27,
2008

 

December 29,
2007

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Line of credit

 

$

4,900

 

$

 

Accounts payable and accrued expenses

 

8,375

 

8,005

 

Accrued compensation

 

8,610

 

7,418

 

Payroll and withheld taxes

 

1,067

 

1,087

 

Income taxes payable

 

538

 

1,156

 

 

 

 

 

 

 

Total current liabilities

 

23,490

 

17,666

 

 

 

 

 

 

 

Stockholders’ 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; 12,774,026 and 12,058,689 shares issued and outstanding at December 27, 2008 and December 29, 2007, respectively

 

639

 

603

 

Additional paid-in capital

 

106,788

 

102,951

 

Accumulated other comprehensive income

 

720

 

1,484

 

Accumulated deficit

 

(52,796

)

(12,990

)

 

 

 

 

 

 

 

 

55,351

 

92,048

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

78,841

 

$

109,714

 

 

The accompanying notes are an integral part of these financial statements.

 

F-3



Table of Contents

 

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

(Dollars in thousands, except share and per share amounts, unless otherwise indicated)

 

 

 

December 27,

 

December 29,

 

December 30,

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Revenues

 

$

209,277

 

$

214,209

 

$

201,920

 

 

 

 

 

 

 

 

 

Cost of services(1)

 

155,302

 

161,233

 

151,412

 

 

 

 

 

 

 

 

 

Gross profit

 

53,975

 

52,976

 

50,508

 

 

 

 

 

 

 

 

 

Operating costs and expenses

 

 

 

 

 

 

 

Selling, general and administrative(2)

 

46,568

 

41,418

 

41,244

 

Bad debt - note receivable

 

6,090

 

 

 

Depreciation

 

1,300

 

1,122

 

1,197

 

Amortization

 

767

 

320

 

310

 

Impairment of goodwill and intangible assets

 

43,315

 

 

 

 

 

98,040

 

42,860

 

42,751

 

 

 

 

 

 

 

 

 

Operating (loss) income

 

(44,065

)

10,116

 

7,757

 

 

 

 

 

 

 

 

 

Other (expense) income

 

 

 

 

 

 

 

Interest (expense) income, net

 

(230

)

59

 

(256

)

(Loss) gain on foreign currency transactions

 

(75

)

78

 

(31

)

Legal settlement

 

 

800

 

 

Other

 

7

 

 

 

 

 

(298

)

937

 

(287

)

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

(44,363

)

11,053

 

7,470

 

 

 

 

 

 

 

 

 

Income tax (benefit) expense

 

(4,558

)

4,284

 

1,114

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(39,805

)

$

6,769

 

$

6,356

 

 


(1)

Includes stock based compensation expense of $45, $22 and $46 for the years ended December 27, 2008, December 29, 2007 and December 30, 2006, respectively.

 

 

(2)

Includes stock based compensation expense of $55, $389 and $910 for the years ended December 27, 2008, December 29, 2007 and December 30, 2006, respectively.

 

The accompanying notes are an integral part of these financial statements.

 

F-4



Table of Contents

 

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)

Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

(Dollars in thousands, except share and per share amounts, unless otherwise indicated)

 

 

 

December 27,

 

December 29,

 

December 30,

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

Net income

 

$

(3.15

)

$

.57

 

$

.54

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

12,647,127

 

11,970,042

 

11,773,301

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

Net income

 

$

(3.15

)

$

.54

 

$

.53

 

 

 

 

 

 

 

 

 

Weighted average number of common and common equivalent shares outstanding

 

12,647,127

 

12,484,639

 

12,034,665

 

 

The accompanying notes are an integral part of these financial statements.

 

F-5



Table of Contents

 

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

(Dollars in thousands, except share and per share amounts, unless otherwise indicated)

 

 

 

Common Stock

 

Additional
Paid-in

 

Accumulated
Other
Comprehensive

 

Accumulated

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Income

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2005

 

11,728,261

 

$

586

 

$

100,235

 

$

982

 

$

(26,115

)

$

75,688

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock under employee stock purchase plan

 

33,770

 

2

 

142

 

 

 

144

 

Exercise of stock options

 

60,095

 

3

 

226

 

 

 

229

 

Translation adjustment

 

 

 

 

20

 

 

20

 

Stock based compensation expense

 

 

 

956

 

 

 

956

 

Net income

 

 

 

 

 

6,356

 

6,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 30, 2006

 

11,822,126

 

591

 

101,559

 

1,002

 

(19,759

)

83,393

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock under employee stock purchase plan

 

28,563

 

1

 

143

 

 

 

144

 

Exercise of stock options

 

208,000

 

11

 

838

 

 

 

849

 

Translation adjustment

 

 

 

 

482

 

 

482

 

Stock based compensation expense

 

 

 

411

 

 

 

411

 

Net income

 

 

 

 

 

6,769

 

6,769

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 29, 2007

 

12,058,689

 

603

 

102,951

 

1,484

 

(12,990

)

92,048

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock under employee stock purchase plan

 

15,337

 

1

 

55

 

 

 

56

 

Translation adjustment

 

 

 

 

(764

)

 

(764

)

Stock based compensation expense

 

 

 

100

 

 

 

100

 

Acquired companies

 

700,000

 

35

 

3,682

 

 

 

3,717

 

Net loss

 

 

 

 

 

(39,805

)

(39,805

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 27, 2008

 

12,774,026

 

$

639

 

$

106,788

 

$

720

 

$

(52,796

)

$

55,351

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

 

 

 

December 27,

 

December 29,

 

December 30,

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(39,805

)

$

6,769

 

$

6,356

 

Foreign currency translation adjustment

 

(764

)

482

 

20

 

Comprehensive (loss) income

 

$

(40,569

)

$

7,251

 

$

6,376

 

 

The accompanying notes are an integral part of these financial statements.

 

F-6



Table of Contents

 

RCM TECHNOLOGIES, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 27, 2008, December 29, 2007 and December 30, 2006

(Dollars in thousands, except share and per share amounts, unless otherwise indicated)

 

 

 

December 27,

 

December 29,

 

December 30,

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(39,805

)

$

6,769

 

$

6,356

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

2,056

 

1,449

 

1,508

 

Impairment of goodwill and intangible assets

 

43,315

 

 

 

Gain on disposal of assets

 

(7

)

 

 

Provision for allowance on accounts receivable

 

(641

)

(89

)

(120

)

Stock based compensation expense

 

100

 

411

 

956

 

Provision for losses on notes receivable

 

6,090

 

 

 

Deferred taxes

 

(5,869

)

2,474

 

827

 

Changes in assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

Accounts and note receivable

 

(10,275

)

(3,030

)

(3,144

)

Restricted cash

 

 

 

8,572

 

Prepaid expenses and other current assets

 

(1,582

)

244

 

1,132

 

Accounts payable and accrued expenses

 

906

 

118

 

(7,665

)

Accrued compensation

 

1,330

 

(780

)

1,086

 

Payroll and withheld taxes

 

38

 

(87

)

277

 

Income taxes payable

 

(463

)

1,126

 

(4,181

)

 

 

 

 

 

 

 

 

Total adjustments

 

34,998

 

1,836

 

(752

)

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(4,807

)

$

8,605

 

$

5,604

 

 

The accompanying notes are an integral part of these financial statements.