FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ........... to ...........
Commission file number 1-10245
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RCM TECHNOLOGIES, INC. Exact name of registrant as specified in its charter
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Nevada Securities registered pursuant to Section 12(b) of the Act:
State of Incorporation
Title of each class
2500 McClellan Avenue, Suite 350, None
Pennsauken, New Jersey 08109-4613
Address of principal Name of each exchange on which registered
executive offices
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None
95-1480559
IRS Employer Identification No. Securities registered pursuant
to Section 12(g) of the Act:
(856) 486-1777 Title of each class
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Registrant's telephone number, including area code: Common Stock, par value $.05
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Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. YES NO X
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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 NO X
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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__
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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 ___ Accelerated Filer ___
Non-Accelerated Filer ___ Smaller Reporting Company X
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(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
YES NO X
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The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $89,628,000 based upon the closing price of
$7.79 per share of the registrant's common stock on June 29, 2007 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 18, 2008: 12,058,689.
Documents Incorporated by Reference
Portions of the definitive proxy statement for the registrant's 2008
Annual Meeting of Stockholders (the "2008 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 2008 Proxy Statement is not filed by April 27, 2008, an
amendment to this annual report on Form 10-K setting forth this information will
be duly filed with the Securities and Exchange Commission.
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RCM TECHNOLOGIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I 1
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Item 1. Business.................................................................................. 2
Item 1A. Risk Factors ............................................................................. 14
Item 1B. Unresolved Staff Comments................................................................. 16
Item 2. Properties................................................................................ 16
Item 3. Legal Proceedings......................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders....................................... 16
PART II 17
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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities......................................................................... 17
Item 6. Selected Financial Data................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................ 33
Item 8. Financial Statements and Supplementary Data............................................... 33
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 33
Item 9A(T). Controls and Procedures................................................................... 33
Item 9B. Other Information......................................................................... 33
PART III 34
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Item 10. Directors, Executive Officers and Corporate Governance.................................... 34
Item 11. Executive Compensation.................................................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters................................................................................... 34
Item 13. Certain Relationships and Related Transactions, and Director Independence................. 34
Item 14. Principal Accountant Fees and Services.................................................... 34
PART IV 35
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Item 15. Exhibits and Financial Statement Schedules................................................ 35
Signatures.................................................................................................. 38
PART I
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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, and (xviii)
other economic, competitive and governmental factors affecting the Company's
operations, markets, products and services. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date made. The Company undertakes no obligation to publicly release the results
of any revision of these forward-looking statements to reflect these trends or
circumstances after the date they are made or to reflect the occurrence of
unanticipated events.
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ITEM 1. BUSINESS
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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 contract 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 34 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 29, 2007, approximately 46.2% of RCM's total
revenues were derived from IT services, 33.2% from Engineering services, and the
remaining 20.6% 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, 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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ITEM 1. BUSINESS (CONTINUED)
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Industry Overview (Continued)
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 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 typically 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
nuclear and aerospace industries.
In recent years, many businesses have been adversely impacted by higher oil
prices, and 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 couple of
years has positively affected temporary staffing businesses which are providers
of light industrial and clerical help. Generally, demand for lower-skilled
workers is stronger in the earlier stages of an economic cycle. As the economic
recovery reaches a certain level of maturity, demand for lower-skilled temporary
help tends to diminish.
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:
3
ITEM 1. BUSINESS (CONTINUED)
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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 to do so.
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 the
quality of earnings.
In addition to a full life cycle solution offering, the Company continues to
focus on transitioning into higher value oriented services to increase its
margins on its various service lines and generate revenue that is more
predictable. 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 Respectable Internal Growth
The Company continues to evolve its internal growth strategies. Its growth
strategy is designed to serve better 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 recognizes 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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ITEM 1. BUSINESS (CONTINUED)
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Growth Strategy (Continued)
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
Foster a Decentralized Entrepreneurial Environment
A key element of the Company's operating strategy is to foster a decentralized,
entrepreneurial environment for its employees. The Company fosters this
environment by continuing to build on local market knowledge of each branch's
reputation, customer relationships and expertise. The Company believes an
entrepreneurial business atmosphere allows its branch offices to respond quickly
and creatively to local market demands and enhances the Company's ability to
motivate, attract and retain managers and to maximize growth and profitability.
Develop and Maintain Strong Customer Relationships
The Company seeks to develop and maintain strong interactive customer
relationships by anticipating and focusing on its customers' needs. The Company
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 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.
5
ITEM 1. BUSINESS (CONTINUED)
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Operating Strategy (Continued)
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 efficiently its operations, as well as to quickly integrate
and enhance the return from new acquisitions. It also allows local branches to
focus more on growing their local operations.
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 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:
o Enterprise Business Solutions
o Application Services
o Infrastructure Solutions
o 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.
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ITEM 1. BUSINESS (CONTINUED)
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Information Technology (Continued)
As of December 29, 2007, the Company had assigned approximately 685 information
technology employees and consultants to its customers.
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 staffing 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 29, 2007, the Company had assigned approximately 437 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 29, 2007, the Company had assigned approximately 1,200 commercial
services personnel to its customers.
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ITEM 1. BUSINESS (CONTINUED)
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Branch Offices
The Company's organization consists of 34 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.
NUMBER OF SERVICES
LOCATION OFFICES PROVIDED(1)
----------------------------- ------------------ -------------------
USA
California 9 IT, C
Connecticut 2 E
Florida 1 C
Maryland 1 IT
Massachusetts 1 IT
Michigan 2 IT, E
Minnesota 1 IT
Missouri 1 IT
New Jersey 2 IT, E
New York 3 IT, E, C
Pennsylvania 1 C
Rhode Island 1 E
Texas 2 IT
Wisconsin 3 IT, E
-
30
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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ITEM 1. BUSINESS (CONTINUED)
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Branch Offices (Continued)
The Company is domiciled in the United States and its segments operate in the
United States and Canada. Revenues, Goodwill and Definite-Long Lived Assets by
geographic area for the year ended and as of December 29, 2007 are as follows
(in thousands):
Definite-Long
Revenues Goodwill Lived Assets
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United States $198,032 $34,791 $349
Canada 16,177 4,797 -
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$214,209 $39,588 $349
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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.
9
ITEM 1. BUSINESS (CONTINUED)
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Sales and Marketing (Continued)
The Company's larger representative customers include 3M, BancTec, Bristol Myers
Squibb, Bruce Power, Entergy, FlightSafety International, MSC Industrial Supply,
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 2007, United Technologies accounted for 10.8% of the Company's revenues.
No other customer accounted for 10% or more of the Company's revenues. The
Company's five and ten largest customers accounted for approximately 29.9% and
38.3%, respectively, of the Company's revenues for 2007.
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 has invested, and 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 resides on a
Windows 2003 enterprise server operating system and is housed on multi redundant
Dell PowerEdge servers. The branch offices of the Company are networked to the
corporate offices via AT&T-managed VPN, which enables 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 maintains a unified front end system. This system consists of
two elements: the PCR system and the Microsoft CRM system. The PCR system
manages candidate information in a skills based database, work order flows, and
recruiting reporting on a national basis. The PCR application is housed on a
Dell PowerEdge 1750 with a RAID 5 disk configuration. The database in which the
PCR information is stored is Microsoft SQL 2000 (SP 3A). The web based system,
provided by Main Sequence, Inc., is customized to RCM's business requirements
and is hosted and maintained at the Company's data center. Each of the service
groups maintains databases to permit efficient tracking of available personnel
on a local basis. This system facilitates efficient matching of customers'
requirements with available technical personnel.
The Microsoft CRM system manages the business sales funnel, which includes
customer contacts, single sales objectives, contact management functionality for
the sales force, and sales reporting on a national basis. The system is housed
on a Dell PowerEdge 1750 with a multi hardware redundant configuration. The OS
is Windows 2003 and the database engine is Microsoft SQL 2000 (SP 3A). The web
based system, provided by Microsoft, has minor customization and is hosted and
maintained at the Company's headquarters.
10
ITEM 1. BUSINESS (CONTINUED)
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Information Systems (Continued)
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.
Over the past year, RCM has engaged in three major strategic initiatives to
improve upon its ability to secure data, deliver services and improve on its
communication infrastructure.
In September 2007, RCM initiated deployment of 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 four Terabytes
(TB), with the capability of scaling to 18 Terabytes (TB). In addition to the
system being sized for VOIP integration, web access to the mail server is only
allowed via secure HTTPs protocol.
RCM is currently converting its WAN architecture from the current IPSec public
VPN to a private Multiple Packet Label Switching (MPLS) network hosted by AT&T.
The move to a service oriented architecture provides numerous benefits,
including, voice, video and data convergence, Class and Quality of Service (CoS
/ QoS), improved security and manageability. Throughout RCM offices, perimeter
devices, such as firewalls, routers and core switches are in the process of also
being replaced, in order to accommodate voice, video and data streams.
Upon completion of the new MPLS network, RCM expects to begin rollout of its
VOIP initiative. This enterprise solution will be based on Cisco Call Manager,
Unity voicemail, Mobility Manager, Meeting Place, Fax Server and Video Presence
and will 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 one and mobile phone integration, video and web conferencing, central and
email enabled faxing.
The above initiatives are expected to improve communication within RCM and to
deliver exceptional services 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 mitigates 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 storage at an independent facility. 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
for RCM's managed firewall, VPN and data circuits guarantees 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
redundancy services should the primary data center facility at Parsippany, NJ,
become inoperable.
11
ITEM 1. BUSINESS (CONTINUED)
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Other Information (Continued)
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 server. The
deployment of virus, spam, and patch management controls extends from the email
gateway to all desktops and is centrally monitored and managed. In addition to
the standard 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 comprehensive 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 experiences an increase in
its cost of sales and a corresponding decrease in gross profit and gross margin
percentage in the first fiscal quarter of each year as a result of resetting
certain state and federal employment tax rates and related salary limitations.
12
ITEM 1. BUSINESS (CONTINUED)
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Employees
As of December 29, 2007, the Company employed an administrative staff of
approximately 243 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 29, 2007, there were
approximately 685 information technology and 437 engineering and technical
employees and consultants assigned by the Company to work on client projects for
various periods. As of December 29, 2007, there were approximately 1,200
commercial 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 on the Company's website and are further 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.
13
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 Company's growth and earnings 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 temporary and permanent
employees. Further declines in the economy would adversely affect the Company's
operating performance and could result in the need for future cost reductions or
changes in strategy.
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.
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, which
could cause future revenues to decline in that event.
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.
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.
14
ITEM 1A. RISK FACTORS (CONTINUED)
------------------------------------------------------------------------------
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.
Goodwill and Intangible Impairments May Have an Adverse Effect on our Results
of Operations
As of December 29, 2007, we had $39.9 million of goodwill and intangible assets
on our balance sheet, which represents 36.6% of our total assets. This amount
primarily represents the remaining excess of the total purchase price of our
acquisitions over the fair value of the net assets acquired. If we are required
to write down goodwill, the related charge could materially reduce reported net
income or result in a net loss for the period in which the write down occurs.
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 SolutionsSM.
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 a managed solution from AT&T,
which encompasses redundancy, with the incorporation of shadow circuits and
backup devices, and diversity, with circuits provisioned from different
geographical locations and high availability failover VPN tunnels across
locations.
RCM's ability to protect its data centers against damage from fire, power loss,
telecommunications failure and other disasters is critical. 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.
15
ITEM 1A. RISK FACTORS (CONTINUED)
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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 anticipated
annual results 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 financial
statements. An adverse outcome to the referenced litigation or other cases
arising in the future could have an adverse impact on the financial position and
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 34 administrative and sales
offices located in the United States, Puerto Rico, and Canada. The Company's
offices typically consist of 1,000 to 5,000 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 $13.39 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 29, 2007.
16
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 29, 2007 as reported
by The NASDAQ Global Market:
Common Stock
----- ---------------------- ----------------------
Fiscal 2006 High Low
---------------------------- --------- -- ---------
First Quarter $6.50 $4.91
Second Quarter 6.73 4.59
Third Quarter 5.90 4.48
Fourth Quarter $6.75 $4.90
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
Holders
As of March 5, 2008, 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 2007 Annual Meeting of Stockholders, the Company
believes the number of beneficial owners of its Common Stock is approximately
2,920.
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.
17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (CONTINUED)
------------------------------------------------------------------------------
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 12/31/2002 and its relative
performance is tracked through 12/29/2007.
[GRAPHIC OMITTED][GRAPHIC OMITTED]
Total Return Analysis 2002 2003 2004 2005 2006 2007
---------------------------------------------------------------------------------------------------------------
RCM Technologies, Inc. $100.0 $188.52 $128.67 $130.43 $153.20 $150.38
NASDAQ Composite $100.0 $149.75 $164.64 $168.60 $187.83 $205.22
Peer Group $100.0 $141.06 $159.83 $166.08 $165.27 $125.78
18
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 29, December 30, December 31, January 1, December 27,
----------------------------------------------------------------------------------------------------------------------------------
2007 2006 2005 2005(2) 2003
----------------------------------------------------------------------------------------------------------------------------------
Income Statement
Revenues $214,209 $201,920 $180,618 $169,277 $206,605
Gross profit 52,976 50,508 42,683 40,974 44,595
Income before charges listed
below 7,500 7,622 3,593 4,412 6,812
Amortization, net of tax (320) (310) (57) (41) (18)
Goodwill impairment, net of tax (2,164)
Stock based compensation, net of tax (411) (956) (4,015)
Net income $6,769 $6,356 $3,536 $2,207 $2,779
Earnings Per Share (1)
Net income:
Basic $.57 $.54 $.31 $.19 $.26
Diluted $.54 $.53 $.30 $.19 $.26
-----------------------------------------------------------------------------------------------------------------------------------
December 29, December 30, December 31, January 1, December 27,
-----------------------------------------------------------------------------------------------------------------------------------
2007 2006 2005 2005(2) 2003
-----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet
Working capital $43,541 $38,844 $33,032 $29,545 $23,882
Total assets 109,714 100,040 106,773 99,388 99,704
Long term liabilities - - - - -
Total liabilities 17,666 16,647 31,084 29,443 32,533
Stockholders' equity $92,048 $83,393 $75,689 $69,945 $67,170
--------------------------------------
(1) Shares used in computing earnings per share:
Basic 11,970,042 11,773,601 11,456,757 11,325,626 10,716,179
Diluted 12,484,639 12,034,665 11,731,591 11,679,812 10,896,305
((2)) Year ended January 1, 2005 had fifty-three weeks and all other years had
fifty-two weeks.
19
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.
RCM's operational performance gained momentum in 2006 with a moderate increase
in revenues and earnings as compared to the preceding years. This increase was
attributed to an improvement in the general economy, strength in the Company's
sector and increased capital spending by clients in selected markets. All three
major business segments of the Company benefited from stronger economic
conditions in 2006. During the first half of 2007, RCM's financial performance
continued to show modest year over year improvement. During the second half of
2007, however, business activity began to decelerate moderately as compared to
the second half of the prior year due to a severe slowdown in several of RCM's
markets, which impacted the overall economy. RCM continues to be vigilant in
monitoring its operating cost structure with a strong focus on working capital
management and cash flows.
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. Revenues are recognized when services are
provided.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------------------------------------
Overview (Continued)
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.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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Revenue Recognition (Continued)
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.
Goodwill
Goodwill represents the excess of the cost of businesses acquired over the fair
market value of identifiable assets. In accordance with SFAS 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), the Company performs its annual goodwill
impairment testing, by reportable unit, as of November 30th of each year, or
more frequently if events or changes in circumstances indicate that goodwill may
be impaired. Application of the goodwill 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 the Company's weighted average cost of capital. Changes in these estimates
and assumptions could materially affect the determination of fair value and/or
conclusions on goodwill impairment for each reporting unit. The Company
conducted its annual goodwill impairment test for 2007 as of December 1, 2007
and identified no impairments. Goodwill was $39.6 million and $39.3 million at
December 29, 2007 and December 30, 2006, respectively.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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Long-Lived 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 used stock options to attract, retain, and reward employees for
long-term service.
Effective as of January 1, 2006, the Company adopted "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. The impact of SFAS 123R,
if it had been in effect, on the net earnings and related per share amounts of
the Company's fiscal year ended December 31, 2005 was disclosed in Note 1
Summary of Significant Accounting Policies - Stock-Based Compensation of the
Company's Financial Statements included in the Company's Form 10-K for the
fiscal year ended December 31, 2005.
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.
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 29, 2007, the
Company had total net deferred tax assets of $0.7 million, primarily
representing the tax effect of an allowance for doubtful accounts and
alternative minimum tax carryfowards. 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 2002. At December 29, 2007, 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.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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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 anticipated
annual results compared to annual budgets. In addition, the Company pays
discretionary bonuses to certain employees, which are not related to budget
performance. 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.
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.
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.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
------------------------------------------------------------------------------
Results of Operations (In thousands, except for earnings per share data)
Year Ended Year Ended Year Ended
December 29, 2007 December 30, 2006 December 31, 2005
-------------------------------------------------------------------------------------------------------------------------
% of % of % of Revenue
Amount Revenue Amount Revenue Amount
-------------------------------------------------------------------------------------------------------------------------
Revenues $214,209 100.0 $201,920 100.0 $180,618 100.0
Cost of services 161,233 75.3 151,412 75.0 137,935 76.4
-------------------------------------------------------------------------------------------------------------------------
Gross profit 52,976 24.7 50,508 25.0 42,683 23.6
-------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 41,418 19.3 41,244 20.4 35,461 19.6
Depreciation and amortization 1,442 .7 1,507 .7 1,206 .7
-------------------------------------------------------------------------------------------------------------------------
42,860 20.0 42,751 21.1 36,667 20.3
-------------------------------------------------------------------------------------------------------------------------
Operating income 10,116 4.7 7,757 3.8 6,016 3.3
Other income (expense) 937 .5 (287) (.1) (209) (.1)
-------------------------------------------------------------------------------------------------------------------------
Income before income taxes 11,053 5.2 7,470 3.7 5,807 3.2
Income taxes 4,284 2.0 1,114 .6 2,271 1.2
-------------------------------------------------------------------------------------------------------------------------
Net income $6,769 3.2 $6,356 3.1 $3,536 2.0
=========================================================================================================================
Earnings per share
Basic: $.57 $.54 $.31
Diluted: $.54 $.53 $.30
=========================================================================================================================
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.
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 a slower demand for the Company's
IT services. Management attributes the overall increase to an improvement of
the general economy for most of the year and 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.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------------------------------------
Year Ended December 29, 2007 Compared to Year Ended December 30, 2006(Continued)
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.
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 $126,000 was offset by $67,000 of
interest expense. The interest income was principally earned from short-term
money market deposits. Interest income, net, increased $315,000 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 $109,000 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 $800,000 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%.
Goodwill Impairment. SFAS 142 requires the Company to perform a goodwill
impairment test on at least an annual basis. The results of the 2007, 2006 and
2005 impairment testing indicated no impairment to goodwill. There can be no
assurance that future goodwill impairment tests will not result in further
impairment charges.
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.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
------------------------------------------------------------------------------
Year Ended December 29, 2007 Compared to Year Ended December 30, 2006(Continued)
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.
Year Ended December 30, 2006 Compared to Year Ended December 31, 2005
Revenues. Revenues increased 11.8%, or $21.3 million, for the year ended
December 30, 2006 as compared to the prior year (the "comparable prior year
period"). Revenues increased $3.4 million in the IT segment, $9.9 million in the
Engineering segment and $7.9 million in the Commercial segment. Management
attributes the overall increase to an improvement of the general economy and
successful marketing and sales efforts.
Cost of Services. Cost of services increased 9.8%, or $13.5 million, for the
year ended December 30, 2006 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 decreased to 75.0% for the year ended December 30, 2006
from 76.4% for the comparable prior year period. This decrease was primarily
attributable to increased revenues in the Engineering segment, which has higher
gross margins.
Selling, General and Administrative. SGA expenses increased 16.3%, or $5.8
million, for the year ended December 30, 2006 as compared to the comparable
prior year period. As a percentage of revenues, SGA expenses were 20.4% for the
year ended December 30, 2006 as compared to 19.6% for the comparable prior year
period. This increase was primarily attributable to SFAS 123R stock based
compensation expense of $910,000 in 2006 compared to $-0- in the comparable
prior year period, as well as increased sales costs on higher revenues.
Depreciation and Amortization. Depreciation and amortization increased 25.0%, or
$301,000, for 2006 as compared to 2005. This increase was attributable to the
amortization of intangibles in the amount of $215,000 incurred subsequent to
December 31, 2005, due to acquisitions in late 2005 and early 2006.
Other Expense. Other expense consisted of interest expense, net of interest
income and gains and losses on foreign currency transactions. For the year ended
December 30, 2006, actual interest expense of $539,000 was offset by $283,000 of
interest income, which was principally earned from short-term money market
deposits. Interest expense, net, increased $35,200 for the year ended December
30, 2006 as compared to the comparable prior year period. This increase was
primarily due to an increase in the effective interest rate on the line of
credit for the year ended December 30, 2006, which was partially offset by a
reduction of debt, as compared to the comparable prior year period. Losses on
foreign currency transactions increased $43,100 because of the strengthening of
the Canadian Dollar as compared to the U. S. Dollar during the year ended
December 30, 2006.
Income Tax. Income tax expense decreased 50.9%, or $1.2 million, for the year
ended December 30, 2006 as compared to the comparable prior year period. The
decrease was primarily attributable to a reversal of $1.3 million of previously
accrued income taxes, 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.
This decrease was partially offset by higher taxable income for the year ended
December 30, 2006, compared to the comparable prior year period. As a result,
the effective tax rate was 14.9% for the year ended December 30, 2006 as
compared to 39.1% in the year ended December 31, 2005.
Goodwill Impairment. SFAS 142 requires the Company to perform a goodwill
impairment test on at least an annual basis. The results of the 2006 and 2005
impairment testing indicated no impairment to goodwill. There can be no
assurance that future goodwill impairment tests will not result in further
impairment charges.
27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
------------------------------------------------------------------------------
Year Ended December 30, 2006 Compared to Year Ended December 31, 2005(Continued)
Net Income. Net income totaled $6.4 million, or 3.1% of revenue in 2006 as
compared to $3.5 million, or 2.0% of revenue in 2005. 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 $101.4 million in 2006 represented an increase of $3.4 million,
or 3.5%, compared to 2005. The increase in revenue was attributable to an
increase in demand for IT services. EBITDA for the IT segment was $6.7 million,
or 71.8% of the overall EBITDA, for 2006 as compared to $5.8 million, or 80.8%
of the overall EBITDA, for 2005.
Engineering
Engineering revenues of $57.6 million in 2006 represented an increase of $9.9
million, or 20.8%, compared to 2005. The increase in revenue was attributable to
an increase in demand for the Company's engineering services. The Engineering
segment EBITDA was $1.0 million, or 11.2% of the overall EBITDA, for 2006 as
compared to $258,000, or 3.6% of the overall EBITDA, for 2005.
Commercial
Commercial revenues of $42.9 million in 2006 represented an increase of $7.9
million, or 22.7%, compared to 2005. The increase in revenue for the Commercial
segment was attributable to improvement in economic activity within this
segment. The Commercial segment EBITDA was $1.6 million, or 17.0% of the overall
EBITDA, for 2006 as compared to $1.1 million, or 15.6% of the overall EBITDA,
for 2005.
28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
----------------------------------------------------------------------------
Liquidity and Capital Resources
The following table summarizes the major captions from the Company's
Consolidated Statements of Cash Flows:
Year Ended
(In thousands) December 29, 2007 December 30, 2006
---------------------------- -- --------------------- -- --------------------
Operating Activities $8,605 $5,604
Investing Activities ($851) ($3,401)
Financing Activities $993 ($3,527)
Operating Activities
Operating activities provided $8.6 million of cash for the year ended December
29, 2007 as compared to $5.6 million for the comparable 2006 period. The
increase in cash provided by operating activities was primarily attributable to
increased earnings, a decrease in prepaid expenses and other current assets, a
decrease in deferred tax assets, an increase in income taxes payable, an
increase in accounts payable and accrued expenses, and a decrease in non-cash
charge for stock based compensation expense. These changes were offset by an
increase in accounts receivable, and a decrease in payroll and withheld taxes.
The Company continues to institute enhanced controls and standardization over
its receivables collection and disbursement processes.
Investing Activities
Investing activities used $0.9 million for the year ended December 29, 2007 as
compared to $3.4 million for the comparable prior year period. The decrease in
the use of cash for investing activities for 2007 as compared to the comparable
2006 period was primarily attributable to decreases in expenditures for property
and equipment and in cash used for acquisitions.
Financing Activities
In 2007, financing activities principally consisted of the sale of stock for the
employee stock purchase plan of $144,000 and the exercise of stock options with
an aggregate exercise price of $849,000. In 2006, financing activities
principally consisted of the sale of stock for the employee stock purchase plan
of $144,000 and the exercise of stock options with an aggregate exercise price
of $229,000 and debt reduction of $3.9 million.
The Company and its subsidiaries are party to a loan agreement with Citizens
Bank of Pennsylvania, administrative agent for a syndicate of banks, which
provides for a $25 million revolving credit facility and includes a sub-limit of
$5.0 million for letters of credit (the "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.
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. For the year ended
December 29, 2007, the Company had minimal borrowing requirements; as a result,
the Company incurred $31,000 of unused line fees. The weighted average interest
rate under the Revolving Credit Facility for the year ended December 30, 2006
was 9.05%. During 2007 and 2006, the Company's outstanding borrowings ranged
from $-0- to $1.5 million and $-0- to $7.1 million, respectively. At December
29, 2007 and December 30, 2006, there were no outstanding borrowings under this
facility. At December 29, 2007, there were letters of credit outstanding for
$1.6 million. At December 29, 2007, the Company had availability for additional
borrowing under the Revolving Credit Facility of $23.4 million.
29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
Financing Activities (Continued)
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.
On February 29, 2008, the Company accepted a note receivable from a customer for
$6.1 million of which $1.9 million is payable within 12 months and the remaining
$4.2 million is payable in 36 monthly installments of $152,000, including
principal and interest at 6% per annum through July 2011. The note receivable is
collateralized by a second position on all of the customer's accounts receivable
as well as the personal guarantees of all its officers. If the note receivable
should become impaired because of a default by the debtor, the result could be a
material adverse impact on our financial position, liquidity, and results of
operations for the period in which a default may occur.
At December 29, 2007, the Company had a deferred tax asset totaling $.7 million,
primarily representing the tax effect of an allowance for doubtful accounts and
an alternative minimum tax credit carryfoward. The Company expects to utilize
the deferred tax asset during the 12 months ending December 27, 2008 by
offsetting the related tax benefits of such assets against tax liabilities
incurred from forecasted taxable income.
Summarized below are the Company's obligations and commitments to make future
payments under lease agreements and debt obligations as of December 29, 2007 (in
thousands):
Payments Due by Period
---------------------------------------------------------------------------------------------------------------
Less Than More Than
Total 1 Year 1-3 Years 3-5 Years 5 Years
---------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations (1) $ $ $ $ $
Operating Lease Obligations 10,289 3,358 4,653 2,226 52
---------------------------------------------------------------------------------------------------------------
Total $10,289 $3,358 $4,653 $2,226 $52
===============================================================================================================
(1) The Revolving Credit Facility is for $25.0 million and includes a
sub-limit of $5.0 million for letters of credit. The agreement expires
in August 2011. At December 29, 2007, there were outstanding letters of
credit for $1.6 million.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
------------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
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. As of December 29, 2007, 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 29, 2007, Mr. Kopyt would have been entitled to cash payments of
approximately $4.9 million (representing salary and excise tax payments).
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 29, 2007, 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 $3.1 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.
31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
-----------------------------------------------------------------------------
Liquidity and Capital Resources (Continued)
New Accounting Standards
Effective January 1, 2007, the Company adopted the provisions of Financial
Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in
Income Taxes ("FIN 48"), an interpretation of FASB Statement No. 109 ("SFAS
109"). FIN 48 prescribes a model for the recognition and measurement of a tax
position taken or expected to be taken in a tax return, and provides guidance on
derecognition, classification, interest and penalties, disclosure and
transition. Implementation of FIN 48 did not result in a cumulative effect
adjustment to retained earnings. With few exceptions, the Company is no longer
subject to audits by tax authorities for tax years prior to 2001. At December
29, 2007, the Company did not have any significant unrecognized tax benefits.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 clarifies the principle that fair value should be based
on assumptions market participants would use when pricing an asset or liability
and establishes a fair value hierarchy that prioritizes information used to
develop those assumptions. Under the standard, fair value measurements would be
separately disclosed by level within the fair value hierarchy. SFAS 157 is
effective for the Company beginning beginning on December 28, 2007.
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 159"). SFAS 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 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 159 is
effective for the Company beginning beginning on December 28, 2007.
The Company is currently evaluating the impact, if any, that the adoption of
SFAS 157 will have on the Company's consolidated financial statements, and has
not yet determined if SFAS 159 will be adopted.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations." This statement replaces SFAS No. 141, "Business Combinations,"
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, this statement 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, this statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period after December 15, 2008.
32
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 29, 2007, 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.
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.
33
PART III
-----------------------------------------------------------------------------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
-----------------------------------------------------------------------------
The information required by Item 10 shall be included in the 2008 Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
-----------------------------------------------------------------------------
The information required by Item 11 shall be included in the 2008 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 2008 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.
------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of securities
------------------------------ remaining available for
Number of securities to be Weighted-average exercise issuance under equity
issued upon exercise of price of outstanding compensation plans,
outstanding options, options, warrants and excluding securities
warrants and rights rights reflected in column (a)
Plan category
------------------------------- ---------------------------- ---------------------------- ----------------------------
(a) (b) (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans 1,462,000 $4.10 728,694
approved by security
holders...............
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans not
approved by security ____________________ ____________________ ____________________
holders...............
------------------------------- ---------------------------- ---------------------------- ----------------------------
1,462,000 $4.10 728,694
Total.................
------------------------------- ---------------------------- ---------------------------- ----------------------------
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
------------------------------------------------------------------------------
The information required by Item 13 shall be included in the 2008 Proxy
Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------------------------------------
The information required by Item 14 shall be included in the 2008 Proxy
Statement.
34
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; incorporated by reference to Exhibit
3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1997, filed with the Securities and
Exchange Commission on June 13, 1997.
(3)(e) Amendment No. 3 to Amended and Restated Bylaws (filed herewith).
(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.
35
PART IV (CONTINUED)
----------------------------------------------------------------------------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
----------------------------------------------------------------------------
(b) Exhibits (Continued)
(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").
* (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.
36
PART IV (CONTINUED)
-----------------------------------------------------------------------------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT (CONTINUED)
-----------------------------------------------------------------------------
(b) Exhibits (Continued)
* (10)(r) Compensation Arrangements for Named Executive Officers.
(Filed herewith)
* (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.
(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.
37
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 13, 2008 By: /s/ Leon Kopyt
-----------------
Leon Kopyt
Chairman, President, Chief Executive
Officer and Director
Date: March 13, 2008 By: /s/ Stanton Remer
-------------------
Stanton Remer
Executive Vice President,
Chief Financial Officer, Treasurer,
Secretary and Director
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 13, 2008 /s/ Leon Kopyt
--------------------------------
Leon Kopyt
Chairman, President, Chief Executive
Officer (Principal Executive Officer)
and Director
Date: March 13, 2008 /s/ Stanton Remer
-------------------------------
Stanton Remer
Executive Vice President, Chief Financial
Officer, Treasurer, Secretary
(Principal Financial and Accounting Officer)
and Director
Date: March 13, 2008 /s/ Norman S. Berson
---------------------
Norman S. Berson
Director
Date: March 13, 2008 /s/ Robert B. Kerr
-------------------
Robert B. Kerr
Director
Date: March 13, 2008 /s/ Lawrence Needleman
-----------------------
Lawrence Needleman
Director
38
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
Page
-------------------------------------------------------------------------------------- --- ---------
Consolidated Balance Sheets, December 29, 2007 and December 30, 2006 F-2
Consolidated Statements of Income, Years Ended December 29, 2007,
December 30, 2006 and December 31, 2005 F-4
Consolidated Statements of Changes in Stockholders' Equity and Consolidated
Statements of Comprehensive Income, Years Ended December 29, 2007,
December 30, 2006 and December 31, 2005 F-6
Consolidated Statements of Cash Flows, Years Ended December 29, 2007,
December 30, 2006 and December 31, 2005 F-7
Notes to Consolidated Financial Statements F-9
Management's Report on Internal Control Over Financial Reporting F-30
Report of Independent Registered Public Accounting Firm F-32
Schedules I and II F-33
F-1
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 29, 2007 and December 30, 2006
-----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-----------------------------------------------------------------------------
ASSETS
December 29, December 30,
2007 2006
-----------------------------------------------------------------------------------------------------------------
Current assets
Cash and cash equivalents $11,642 $2,449
Accounts receivable, net of allowance for doubtful accounts
of $1,583 and $1,672 in fiscal 2007
and 2006, respectively 45,468 48,141
Long term receivable - current portion 1,893
Prepaid expenses and other current assets 1,493 1,716
Deferred tax assets 711 3,185
-----------------------------------------------------------------------------------------------------------------
Total current assets 61,207 55,491
-----------------------------------------------------------------------------------------------------------------
Property and equipment, at cost
Equipment and leasehold improvements 9,407 10,087
Less: accumulated depreciation and amortization 5,178 5,695
-----------------------------------------------------------------------------------------------------------------
4,229 4,392
-----------------------------------------------------------------------------------------------------------------
Other assets
Long term receivable 4,216
Deposits 125 159
Goodwill 39,588 39,329
Intangible assets, net of accumulated amortization
of $726 and $406 in fiscal 2007 and 2006, respectively 349 669
-----------------------------------------------------------------------------------------------------------------
44,278 40,157
-----------------------------------------------------------------------------------------------------------------
Total assets $109,714 $100,040
=================================================================================================================
F-2
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
December 29, 2007 and December 30, 2006
-----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
December 29, December 30,
2007 2006
----------------------------------------------------------------------------------------------------------------
Current liabilities
Accounts payable and accrued expenses $8,005 $7,317
Accrued compensation 7,418 8,122
Payroll and withheld taxes 1,087 1,146
Income taxes payable 1,156 62
----------------------------------------------------------------------------------------------------------------
Total current liabilities 17,666 16,647
----------------------------------------------------------------------------------------------------------------
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; 12,058,689 and
11,822,126 shares issued and outstanding
at December 29, 2007 and December 30, 2006, respectively 603 591
Additional paid-in capital 102,951 101,559
Accumulated other comprehensive income 1,484 1,002
Accumulated deficit (12,990) (19,759)
----------------------------------------------------------------------------------------------------------------
92,048 83,393
----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $109,714 $100,040
================================================================================================================
F-3
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
----------------------------------------------------------------------------
December 29, December 30, December 31,
2007 2006 2005
------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Revenues $214,209 $201,920 $180,618
Cost of services(1) 161,233 151,412 137,935
------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Gross profit 52,976 50,508 42,683
------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Operating costs and expenses
Selling, general and administrative(2) 41,418 41,244 35,461
Depreciation 1,122 1,197 1,111
Amortization 320 310 95
------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
42,860 42,751 36,667
------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Operating income 10,116 7,757 6,016
------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Other income (expense)
Interest income (expense), net 59 (256 ) (221)
Gain (loss) on foreign currency transactions 78 (31 ) 12
Legal settlement 800
------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
937 (287 ) (209)
------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Income before income taxes 11,053 7,470 5,807
Income tax expense 4,284 1,114 2,271
------------------------------------------------------- -- --------------- -- -- -------------- --- -- ---------------
Net income $6,769 $6,356 $3,536
======================================================= == =============== == == ============== === == ===============
(1) Includes stock based compensation expense of $22 and $46 for the years
ended December 29, 2007 and December 30, 2006, respectively.
(2) Includes stock based compensation expense of $389 and $910 for the years
ended December 29, 2007 and December 30, 2006, respectively.
F-4
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
-----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-----------------------------------------------------------------------------
December 29, December 30, December 31,
2007 2006 2005
--------------------------------------------------- --- ------------- --- -- -------------- --- -- --------------
Basic earnings per share
--------------------------------------------------- --- ------------- --- -- -------------- --- -- --------------
Net income $.57 $.54 $.31
=================================================== === ============= === == ============== === == ==============
Weighted average number of common shares
outstanding 11,970,042 11,773,301 11,456,757
Diluted earnings per share
--------------------------------------------------- --- ------------- --- -- -------------- --- -- --------------
Net income $.54 $.53 $.30
=================================================== === ============= === == ============== === == ==============
Weighted average number of common and common equivalent
shares outstanding (includes dilutive securities
relating to options of 514,597 in 2007, 261,364 in 2006
and 274,834 in 2005) 12,484,639 12,034,665 11,731,591
F-5
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
-----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-----------------------------------------------------------------------------
Accumulated
Additional Other
Common Stock Paid-in Comprehensive Accumulated
Shares Amount Capital Income Deficit Total
----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2005 11,383,470 $569 $98,291 $736 ($29,651 ) $69,945
-----------------------------------------------------------------------------------------------------------------------------------
Issuance of stock under employee
stock purchase plan 38,941 2 144 146
Exercise of stock options 205,850 10 843 853
Issuance of common stock and
stock options in connection with
acquisition 100,000 5 957 962
Translation adjustment 246 246
Net income 3,536 3,536
-----------------------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
December 29, December 30, December 31,
2007 2006 2005
----------------------------------------------------------------------------------------------
Net income $6,769 $6,356 $3,536
Foreign currency translation
adjustment 482 20 246
----------------------------------------------------------------------------------------------
Comprehensive income $7,251 $6,376 $3,782
==============================================================================================
F-6
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
------------------------------------------------------------------------------
December 29, December 30, December 31,
2007 2006 2005
-------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $6,769 $6,356 $3,536
-------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,449 1,508 1,206
Provision for allowance on accounts
receivable (89) (120) (70)
Stock based compensation expense 411 956
Deferred taxes 2,474 827 952
Changes in assets and liabilities:
Accounts and note receivable (3,030) (3,144) (4,342)
Restricted cash 8,572 (276)
Prepaid expenses and other current
assets 244 1,132 (50)
Accounts payable and accrued expenses 118 (7,665) 1,449
Accrued compensation (780) 1,086 321
Payroll and withheld taxes (87) 277 (233)
Income taxes payable 1,126 (4,181) 1,104
-------------------------------------------------------------------------------------------------------------
Total adjustments 1,836 (752) 61
-------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $8,605 $5,604 $3,597
-------------------------------------------------------------------------------------------------------------
F-7
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
-----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-----------------------------------------------------------------------------
December 29, December 30, December 31,
2007 2006 2005
------------------------------------------------------ -- --------------- -- -- -------------- -- -- --------------
Cash flows from investing activities:
Property and equipment acquired ($625 ) ($1,569 ) ($558 )
Decrease (increase) in deposits 33 9 (29 )
Cash paid for acquisitions, net of cash acquired (259 ) (1,840 ) (1,896 )
------------------------------------------------------ -- --------------- -- -- -------------- -- -- --------------
Net cash used in investing activities (851 ) (3,400 ) (2,483 )
------------------------------------------------------ -- --------------- -- -- -------------- -- -- --------------
Cash flows from financing activities:
Net repayments of line of credit (3,900 ) (1,000 )
Issuance of stock for employee stock purchase plan 144 144 146
Exercise of stock options 849 229 853
------------------------------------------------------ -- --------------- -- -- -------------- -- -- --------------
Net cash provided by (used in) financing activities 993 (3,527 ) (1 )
------------------------------------------------------ -- --------------- -- -- -------------- -- -- --------------
Effect of exchange rate changes on cash
and cash equivalents 446 11 246
------------------------------------------------------ -- --------------- -- -- -------------- -- -- --------------
Net increase (decrease) in cash
and cash equivalents 9,193 (1,312 ) 1,359
Cash and cash equivalents at beginning of year 2,449 3,761 2,402
------------------------------------------------------ -- --------------- -- -- -------------- -- -- --------------
Cash and cash equivalents at end of year $11,642 $2,449 $3,761
====================================================== == =============== == == ============== == == ==============
Supplemental cash flow information:
Cash paid for:
Interest $162 $723 $333
Income taxes $737 $4,060 $423
F-8
The accompanying notes are an integral part of these financial statements.
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation
RCM Technologies, Inc. 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's offices are located in major
metropolitan centers throughout North America.
The consolidated financial statements are comprised of the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The preparation of the
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from these
estimates.
Fiscal Periods
The reporting period for the Company is the Saturday closest to the last
day in December. Fiscal years 2007, 2006 and 2005 represent the 52 weeks
ended December 29, 2007, December 30, 2006 and December 31, 2005,
respectively.
Cash and Cash Equivalents
The Company considers its holdings of highly liquid money-market
instruments to be cash equivalents if the securities mature within 90 days
from the date of acquisition. These investments are carried at cost, which
approximates fair value.
The Company's cash balances and short-term investments are maintained in
accounts held by major banks and financial institutions. At December 29,
2007 and December 30, 2006, $3.9 million and $1.3 million, respectively of
cash and cash equivalents were held in Canadian banks.
Fair Value of Financial Instruments
The Company's carrying value of financial instruments, consisting primarily
of accounts receivable, which approximates fair value. The Company
does not have any off-balance sheet financial instruments. The Company does
not have derivative products in place to manage risks related to foreign
currency fluctuations for its foreign operations or for interest rate
changes.
Allowance for Doubtful Accounts
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.
F-9
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
-----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line method at rates calculated to provide for retirement of
assets at the end of their estimated useful lives. The annual rates are 20%
for computer hardware and software as well as furniture and office
equipment. Leasehold improvements are amortized over the shorter of the
estimated life of the asset or the lease term.
Goodwill
Goodwill represents the excess of the cost of businesses acquired over the
fair market value of identifiable assets. In accordance with SFAS 142,
Goodwill and Other Intangible Assets, the Company performs its annual
goodwill impairment testing, by reporting unit, as of November 30, 2007, or
more frequently if events or changes in circumstances indicate that
goodwill may be impaired. Application of the goodwill impairment test
requires significant judgment 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 impairment for
each reporting unit. The Company conducted its annual goodwill impairment
test as of November 30, 2007 and identified no impairments. Goodwill at
December 29, 2007 and December 30, 2006 was $39.6 and $39, respectively.
Long-Lived Assets
The Company accounts for long-lived assets in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. Management
periodically reviews the carrying amounts of long-lived assets to determine
whether current events or circumstances warrant adjustment to such carrying
amounts. Any impairment is measured by the amount that the carrying value
of such assets exceeds their fair value, primarily based on estimated
discounted cash flows. Considerable management judgment is necessary to
estimate the fair value of assets. Assets to be disposed of are carried at
the lower of their financial statement carrying amount or fair value, less
cost to sell.
Software
In accordance with the American Institute of Certified Public Accountants'
Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), certain
costs related to the development or purchase of internal-use software are
capitalized and amortized over the estimated useful life of the software.
During the years ended December 29, 2007, December 30, 2006 and December
31, 2005, the Company capitalized approximately $135, $563 and $269,
respectively, of software costs in accordance with SOP 98-1.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109
"Accounting for Income Taxes" ("SFAS 109"), which requires an asset and
liability approach of accounting for income taxes. SFAS 109 requires
assessment of the likelihood of realizing benefits associated with deferred
tax assets for purposes of determining whether a valuation allowance is
needed for such deferred tax assets. The Company and its wholly owned U.S.
subsidiaries file a consolidated federal income tax return.
F-10
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
-----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-----------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company derives its revenues from several sources. All of the Company's
segments perform staffing services. The Company's Engineering services and
IT 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"). SAB 104 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. Expenses related to contracts that
extend beyond a 12-month period are charged to cost of services as
incurred.
Consulting/Staffing Services - Revenues derived from staffing services are
recorded on a gross basis as services are performed and associated costs
have been incurred using employees of the Company. In these circumstances,
the Company assumes the risk of acceptability of its employees to its
customers. In certain cases, the Company may utilize other companies and
their employees to fulfill customer requirements. In these cases, the
Company receives an administrative fee for arranging for, billing for, and
collecting the billings related to these companies. The customer is
typically responsible for assessing the work of these companies who have
responsibility for acceptability of their personnel to the customer. Under
these circumstances, the Company's reported revenues are net of associated
costs (effectively the administrative fee).
Permanent Placement 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 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.
At December 29, 2007 and December 30, 2006 there were $8.4 million and $8.5
million of unbilled receivables included in accounts receivable.
Concentration
During 2007, one customer accounted for 10.8% of the Company's revenues and
16.4% of the Company's accounts and notes receivable. No other customer
accounted for 10% or more of the Company's revenues. The Company's five and
ten largest customers accounted for approximately 29.9% and 38.3%,
respectively, of the Company's revenues for 2007.
F-11
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration (Continued)
During 2006, one customer accounted for 11.4% of the Company's revenues and
17.5% of the Company's accounts receivable. No other customer accounted for
10% or more of the Company's revenues. The Company's 5 and 10 largest
customers accounted for approximately 25.2% and 34.6%, respectively, of the
Company's revenues for 2006.
During 2005, the Company's largest customer accounted for 8.8% of the
Company's revenues. At December 31, 2005, the accounts receivable due from
the largest customer was $7.7 million. The Company's 5 and 10 largest
customers accounted for approximately 26.3% and 35.6%, respectively, of the
Company's revenues for 2005.
Foreign Currency Translation
The functional currency of the Company's Canadian subsidiary is the
subsidiary's local currency. Assets and liabilities are translated at
period-end exchange rates. Income and expense items are translated at
weighted average rates of exchange prevailing during the year. Any
translation adjustments are included in the accumulated other comprehensive
income account in stockholders' equity. Transactions executed in different
currencies resulting in exchange adjustments are translated at spot rates
and resulting foreign exchange transaction gains and losses are included in
the results of operations.
Comprehensive Income
Comprehensive income consists of net income and foreign currency
translation adjustments.
Per Share Data
Basic net income per share is calculated using the weighted-average number
of common shares outstanding during the period. Diluted net income per
share is calculated using the weighted-average number of common shares plus
dilutive potential common shares outstanding during the period. Potential
common shares consist of stock options that are computed using the treasury
stock method. Because of the Company's capital structure, all reported
earnings pertain to common shareholders and no other assumed adjustments
are necessary.
The number of common shares used to calculate basic and diluted earnings
per share for 2007, 2006 and 2005 was determined as follows:
Year Ended Year Ended Year Ended
December 29, December 30, December 31,
2007 2006 2005
------------------------------------ -- --------------- -- ---------------- -- --------------
Basic average shares outstanding 11,970,042 11,773,301 11,456,757
Dilutive effect of stock options 514,597 261,364 274,834
------------------------------------ -- --------------- -- ---------------- -- --------------
Dilutive shares 12,484,639 12,034,665 11,731,591
==================================== == =============== == ================ == ==============
F-12
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Per Share Data (Continued)
Options to purchase 1,462,000 shares of common stock at prices ranging from
$3.00 to $9.81 per share were outstanding as of December 29, 2007. There
were 35,000 options not included in the calculation of common stock
equivalents because the exercise price of the options exceeded the average
market price for the year ended December 29, 2007.
Options to purchase 1,768,000 shares of common stock at prices ranging from
$3.00 to $7.04 per share were outstanding as of December 30, 2006. There
were 109,000 options not included in the calculation of common stock
equivalents because the exercise price of the options exceeded the average
market price for the year ended December 30, 2006.
Options to purchase 1,935,483 shares of common stock at prices ranging from
$3.00 to $7.04 per share were outstanding as of December 31, 2005. There
were 163,000 options not included in the calculation of common stock
equivalents because the exercise price of the options exceeded the average
market price for the year ended December 31, 2005.
Stock - Based Compensation
At December 29, 2007, the Company had five stock-based employee
compensation plans. Prior to January 1, 2006, the Company accounted for
stock based compensation awards pursuant to these plans under the
recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("Opinion 25") and
related Interpretations, as permitted by SFAS No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). No stock-based compensation expense
related to stock options was recorded in periods prior to January 1, 2006,
as all options granted had an exercise price equal to the market value of
the underlying common stock on the date of grant. The Company disclosed the
pro forma effects on net earnings, assuming compensation cost had been
recognized, in all prior periods. The Company measures the fair value of
stock options, if and when granted, based upon the closing market price of
the Company's common stock on the date of grant. All grants typically vest
over a three-year period and expire within 10 years of issuance. Stock
options that vest in accordance with service conditions amortize over their
applicable vesting period using the straight-line method.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS
123(R)") using the modified-prospective transition method. Under that
transition method, compensation cost recognized in 2006 and 2007 included:
(a) compensation cost for all stock-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS 123, adjusted
for estimated forfeitures, and (b) compensation cost for all stock-based
payments granted subsequent to January 1, 2006, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123(R),
adjusted for estimated forfeitures. The straight-line recognition method is
used to recognize compensation expense associated with stock-based payments
that are subject to graded vesting based on service conditions.
F-13
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
------------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock - Based Compensation (Continued)
Stock-based compensation expense of $0.4 million, or $0.03 per diluted
share, and of $1 million, or $0.08 per diluted share, was recognized for
the year ended December 29, 2007 and December 30, 2006, respectively.
The following table illustrates the effect on net earnings and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock based employee compensation
(in thousands, except per share amounts) for fiscal year ended
December 31, 2005.
Net income, as reported $3,536
Less: stock-based compensation costs
determined under fair value based
method for all awards 692
Net income, pro forma $2,844
Earnings per share of common
stock-basic:
As reported $.31
Pro forma $.25
Earnings per share of common
stock-diluted:
As reported $.30
Pro forma $.24
The pro-forma compensation cost using the fair value-based method under
SFAS No. 123R includes valuations related to stock options granted since
January 1, 1995 using the Black-Scholes Option Pricing Model. The weighted
average fair value of options granted using the Black-Scholes Option
Pricing Model during 2007, 2006 and 2005 has been estimated using the
following assumptions:
Year Ended Year Ended Year Ended
December 29, December 30, December 31,
2007 2006 2005
---------------------------------------------------------------------------------------
Weighted average risk-free
interest rate 4.91% 4.90% 3.91%
Expected term of option 5 years 5 years 5 years
Expected stock price volatility 58% 56% 58%
Expected dividend yield - - -
Annual forfeiture rate 29.8% 22.30% 5.88%
Weighted-average per share
value granted $4.96 $2.44 $2.51
F-14
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock - Based Compensation (Continued
Expected volatility is based on the historical volatility of the price of
the Company's common stock since December 29, 2002. The Company uses
historical information to estimate expected life and forfeitures within the
valuation model. The expected term of awards represents the period of time
that options granted are expected to be outstanding. The risk-free rate for
periods within the expected life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant. Compensation cost is
recognized using a straight-line method over the vesting or service period
and is net of estimated forfeitures. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes options-pricing
model.
There were options to purchase 40,000 and 12,000 shares of common stock
granted during the years 2007 and 2006, respectively. The stock-based
compensation expense attributable to the 40,000 and 12,000 options was $15
and $5 for fiscal years 2007 and 2006, respectively.
As of December 29, 2007, the Company had approximately $0.2 million of
total unrecognized compensation cost related to non-vested awards granted
under our various stock-based plans, which is expected to be recognized
over a weighted-average period of one year. These amounts do not include
the cost of any additional options that may be granted in future periods
nor any changes in the Company's forfeiture rate.
The Company received cash from options exercised during the fiscal years
2007 and 2006 of $849 and $229, respectively. The impact of these cash
receipts is included in financing activities in the accompanying
consolidated statements of cash flows.
Advertising Costs
Advertising costs are expensed as incurred. Total advertising expense was
$1,039, $1,080 and $884 for the fiscal years 2007, 2006 and 2005,
respectively.
Use of Estimates and Uncertainties
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, revenues and expenses and disclosure of contingent assets
and liabilities. Actual results could differ from those estimates.
The Company uses estimates to calculate an allowance for doubtful
accounts on its accounts receivables. These estimates can be significant
to the operating results and financial position of the Company.
The Company has risk participation arrangements with respect to workers
compensation and health care insurance. The amounts included in the
Company's costs related to this risk participation are estimated and can
vary based on changes in assumptions, the Company's claims experience or
the providers included in the associated insurance programs.
The Company can be affected by a variety of factors including uncertainty
relating to the performance of the U.S. economy, competition, demand for
the Company's services, adverse litigation and claims and the hiring,
training and retention of key employees.
F-15
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ears Ended December 29, 2007, December 30, 2006 and December 30, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards
Effective January 1, 2007, the Company adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN
48"), an interpretation of FASB Statement No. 109 ("SFAS 109"). FIN 48
prescribes a model for the recognition and measurement of a tax position
taken or expected to be taken in a tax return, and provides guidance on
derecognition, classification, interest and penalties, disclosure and
transition. Implementation of FIN 48 did not result in a cumulative effect
adjustment to retained earnings. With few exceptions, the Company is no
longer subject to audits by tax authorities for tax years prior to 2001. At
December 29, 2007, the Company did not have any significant unrecognized
tax benefits.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 clarifies the principle that fair value should be
based on assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes
information used to develop those assumptions. Under the standard, fair
value measurements would be separately disclosed by level within the fair
value hierarchy. SFAS 157 is effective for the Company beginning after
November 15, 2007.
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 159"). SFAS 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 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 159 is effective for the Company beginning
after November 15, 2007.
The Company is currently evaluating the impact, if any that the adoption of
SFAS 157 and 159 will have on the Company's consolidated financial
statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations." This statement replaces SFAS No. 141, "Business Combinations,"
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, this statement 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, this statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period after December 15, 2008.
2. NOTE RECEIVABLE
On February 29, 2008, the Company accepted a note receivable from a customer for
$6.1 million of which $1.9 million is payable within 12 months and the remaining
$4.2 million is payable in 36 monthly installments of $152,000, including
principal and interest at 6% per annum through July 2011. The note receivable is
collateralized by a second position on all of the customer's accounts receivable
as well as the personal guarantees of all its officers.
F-16
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 30, 2005
-----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-----------------------------------------------------------------------------
3. ACQUISITION
On April 17, 2006, the Company purchased the operating assets of Techpubs,
LLC ("Techpubs"), a Rhode Island limited liability company. Techpubs is a
specialty provider of engineering services. The acquisition has been
accounted for in accordance with Statement of SFAS No. 141 "Business
Combinations." Accordingly, the results of operations of the acquired
company have been included in the consolidated results of operations of the
Company from the date of acquisition and are included in the Engineering
segment.
The purchase consideration at closing consisted of $0.6 million in cash and
$0.3 million of deferred consideration contingent upon achieving certain
base levels of operating income for each of the three 12 month periods
following the purchase.
The acquisition was accounted for in accordance with SFAS No. 141,
"Business Combinations."
In connection with certain acquisitions, the Company is obligated to pay
contingent consideration to the selling shareholders upon the acquired
business achieving certain earnings targets over periods ranging from two
to three years following the acquisition. In general, the contingent
consideration amounts fall into two categories: (a) Deferred Consideration
- fixed amounts are due if the acquisition achieves a base level of
earnings which has been determined at the time of acquisition and (b)
Earnouts - amounts payable are not fixed and are based on the growth in
excess of the base level earnings. The Company's outstanding Deferred
Consideration obligations, which relate to various acquisitions, are
anticipated to result in approximately the following payments:
Year Ending Amount
-------------------------------------- -- ----------------
December 27, 2008 $800
January 2, 2010 100
-------------------------------------- -- ----------------
$900
====================================== == ================
The Deferred Consideration and Earnouts, when paid, will be recorded as
additional purchase consideration and added to goodwill on the consolidated
balance sheet. Earnouts cannot be estimated with any certainty.
The following (unaudited) results of operations have been prepared assuming
the Techpubs acquisition had occurred as of the beginning of the periods
presented. These results are not necessarily indicative of results of
future operations nor of results that would have occurred had the
acquisition of Techpubs occurred as of the beginning of the periods
presented.
Fifty-Two
Weeks Ended Fifty-Two Fifty-Two
December 29, Weeks Ended Weeks Ended
2007 December 30, December 31,
Amounts Actual 2006 2005
(Unaudited) (Unaudited)
--------------------------- ---------------- ----------------- ----------------
Revenues $214,209 $202,220 $187,275
Operating income 10,116 7,814 6,993
Net income $6,679 $6,376 $4,043
Earnings per share $0.54 $0.53 $0.34
F-17
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 30, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
-----------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following:
December 29, December 30,
2007 2006
------------------------------------------------------------------------------
Equipment and furniture $1,102 $1,595
Computers and systems 7,315 7,590
Leasehold improvements 990 902
------------------------------------------------------------------------------
9,407 10,087
Less: accumulated depreciation and
amortization 5,178 5,695
------------------------------------------------------------------------------
$4,229 $4,392
==============================================================================
The Company writes off fully depreciated assets each year. In fiscal 2007,
2006 and 2005, the write offs were $1,407, $1,243 and $881, respectively.
5. GOODWILL AND INTANGIBLES
SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") requires
the Company to perform a goodwill impairment test on at least an annual
basis. Application of the goodwill 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 impairment for each reporting unit.
The Company conducts its annual goodwill impairment test as of November 30.
The Company compares the fair value of each of its reporting units to their
respective carrying values, including related goodwill. Future changes in
the industry could impact the results of future annual impairment tests.
Goodwill at December 29, 2007 and December 30, 2006 was $39.6 million and
$39.3 million, respectively. There can be no assurance that future tests of
goodwill impairment will not result in impairment charges.
The results of the 2007, 2006 and 2005 impairment testing indicated no
impairment of goodwill.
The changes in the carrying amount of goodwill for the years ended December
29, 2007 and December 30, 2006 are as follows:
Information
Technology Engineering Commercial Total
---- ----------------------------------- --- -------------- -- ------------- -- ------------- -- ------------
Balance as of December 31, 2005 $30,132 $7,528 $37,660
Goodwill acquired during the year 1,218 451 1,669
---- ----------------------------------- --- -------------- -- ------------- -- ------------- -- -------------
Balance as of December 30, 2006 31,350 7,979 39,329
Goodwill acquired during the year 259 259
---- ----------------------------------- --- -------------- -- ------------- -- ------------- -- -------------
Balance as of December 29, 2007 $31,350 $8,238 $39,588
======================================== === ============== == ============= == ============= == =============
F-18
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 30, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
5. GOODWILL AND INTANGIBLES (CONTINUED)
The following table reflects the components of intangible assets, excluding
goodwill:
December 29, 2007 December 30, 2006
---------------------------------- -------------------------------- -- ---------------------------------
Gross Accumulated Gross Accumulated
Carrying Carrying
Amount Amortization Amount Amortization
---------------------------------- ------------- -- --------------- -- ------------- --- ---------------
Definite-lived intangible assets
Non-compete agreements $145 $64 $145 $35
Customer relationships 930 662 930 371
---------------------------------- ------------- -- --------------- -- ------------- --- ---------------
Total $1,075 $726 $1,075 $406
================================== ============= == =============== == ============= === ===============
The estimated useful lives of the intangibles ranges from 3 to 5 years.
Amortization of the definite-lived intangible assets is as follows:
Year Amount
-------------- - --------------
2008 $233
2009 57
2010 49
2011 10
-------------- - --------------
$349
============== = ==============
6. LINE OF CREDIT
The Company and its subsidiaries are party to a loan agreement with
Citizens Bank of Pennsylvania, administrative agent for a syndicate of
banks, which provides for a $25 million revolving credit facility and
includes a sub-limit of $5.0 million for letters of credit (the "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.
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. For the year ended
December 29, 2007, the Company had essentially minimal borrowing
requirements; as a result, the Company incurred $31,000 of unused line
fees. The weighted average interest rate under the Revolving Credit
Facility for the year ended December 30, 2006 was 9.05%. During 2007 and
2006, the Company's outstanding borrowings ranged from $-0- to $1.5 million
and $-0- to $7.1 million, respectively. At December 29, 2007 and December
30, 2006, there were no outstanding borrowings under this facility. At
December 29, 2007, there were letters of credit outstanding for $1.6
million. At December 29, 2007, the Company had availability for additional
borrowing under the Revolving Credit Facility of $23.4 million.
F-19
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
7. STOCK BASED COMPENSATION
Common Stock Reserved
Unissued shares of common stock were reserved for the following purposes:
December 29, December 30,
2007 2006
-------------------------------------------------------------------------
Exercise of options outstanding 1,462,000 1,768,000
Future grants of options 728,694 29,194
-------------------------------------------------------------------------
Total 2,190,694 1,797,194
=========================================================================
Incentive Stock Option Plans
1992 Incentive Stock Option Plan (the 1992 Plan)
The 1992 Plan, approved by the Company's stockholders in April 1992 and
amended in April 1998, provided for the issuance of up to 500,000 shares of
common stock per individual to officers, directors, and key employees of
the Company and its subsidiaries through February 13, 2002, at which time
the 1992 Plan expired. The options issued were intended to be incentive
stock options pursuant to Section 422A of the Internal Revenue Code. The
option terms were not permitted to exceed ten years and the exercise price
was not permitted to be less than 100% of the fair market value of the
shares at the time of grant. The Compensation Committee of the Board of
Directors determined the vesting period at the time of grant for each of
these options. As of December 29, 2007, options to purchase 68,455 shares
of common stock were outstanding.
1994 Non-employee Directors Stock Option Plan (the 1994 Plan)
The 1994 Plan, approved by the Company's stockholders in May 1994 and
amended in April 1998, provided for issuance of up to 110,000 shares of
common stock to non-employee directors of the Company through February 19,
2004, at which time the 1994 Plan expired. Options granted under the 1994
Plan were granted at fair market value at the date of grant, and the
exercise of options is contingent upon service as a director for a period
of one year. Options granted under the 1994 Plan terminate when an optionee
ceases to be a Director of the Company. As of December 29, 2007, options to
purchase 50,000 shares of common stock were outstanding.
1996 Executive Stock Option Plan (the 1996 Plan)
The 1996 Plan, approved by the Company's stockholders in August 1996 and
amended in April 1999, provides for issuance of up to 1,250,000 shares of
common stock to officers and key employees of the Company and its
subsidiaries through January 1, 2006, at which time the 1996 Plan expired.
Options are generally granted at fair market value at the date of grant.
The Compensation Committee of the Board of Directors determines the vesting
period at the time of grant. As of December 29, 2007, options to purchase
869,045 shares of common stock were outstanding.
2000 Employee Stock Incentive Plan (the 2000 Plan)
The 2000 Plan, approved by the Company's stockholders in April 2001,
provides for issuance of up to 1,500,000 shares of the Company's common
stock to officers and key employees of the Company and its subsidiaries or
to consultants and advisors utilized by the Company. The Compensation
Committee of the Board of Directors may award incentive stock options or
non-qualified stock options, as well as stock appreciation rights, and
determines the vesting period at the time of grant. As of December 29,
2007, options to purchase 28,694 shares of common stock were available for
future grants, and options to purchase 474,500 shares of common stock were
outstanding.
F-20
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
7. STOCK BASED COMPENSATION (CONTINUED)
Incentive Stock Option Plans (Continued)
2007 Omnibus Equity Compensation Plan (the 2007 Plan)
The 2007 Plan, approved by the Company's stockholders in June 2007,
provides for the issuance of up to 700,000 shares of the Company's common
stock to officers, non-employee directors, employees of the Company and its
subsidiaries or to consultants and advisors utilized by the Company. No
more than 350,000 shares of common stock in the aggregate may be issued
pursuant to grants of stock awards, stock units, performance shares and
other stock-based awards. No more than 300,000 shares of common stock with
respect to awards may be granted to any individual during any fiscal year.
The Compensation Committee of the Board of Directors determines the vesting
period at the time of grant. As of December 29, 2007, options to purchase
700,000 shares of common stock were available for future grants, and there
were no options to purchase shares of common stock outstanding.
Transactions related to all stock options are as follows:
Year Weighted- Year Weighted- Year Weighted-
Ended Average Ended Average Ended Average
December 29, Exercise December 30, Exercise December 31, Exercise
2007 Price 2006 Price 2005 Price
-------------------------------------------------------------------------------------------------------------------------
Outstanding options 1,768,000 $4.34 1,935,483 $4.34 1,183,583 $4.03
at beginning of year
Granted 40,000 9.29 12,000 6.12 1,003,000 4.67
Cancelled (138,000 ) 4.70 (119,388 ) 4.68 (45,250 ) 4.62
Exercised (208,000 ) 4.08 (60,095 ) 3.82 (205,850 ) 4.15
-------------------------------------------------------------------------------------------------------------------------
Outstanding options 1,462,000 $4.48 1,768,000 $4.34 1,935,483 $4.34
at end of year
=========================================================================================================================
Exercisable options
at end of year 904,000 $4.10 1,005,000 $4.00 770,150 $3.91
=========================================================================================================================
Option grant price $3.00 $3.00 $3.00
per share to $9.81 to $7.04 to $7.04
The following table summarizes information about stock options outstanding
at December 29, 2007:
--------------- --------------------------------------------------------------
Weighted-Average
Range of Number of Remaining Weighted-Average
Exercise Outstanding Contractual Life Exercise Price
Prices Options
--------------- -----------------------------------------------------------------------
$3.00 - $4.40 954,500 6.06 years $4.00
$4.70 - $6.91 472,500 5.77 years $5.06
$9.18 35,000 9.55 years $9.62
F-21
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
7. STOCK BASED COMPENSATION (CONTINUED)
Employee Stock Purchase Plan
The Company implemented an Employee Stock Purchase Plan (the "Purchase
Plan") with shareholder approval, effective January 1, 2001. Under the
Purchase Plan, employees meeting certain specific employment qualifications
are eligible to participate and can purchase shares of Common Stock
semi-annually through payroll deductions at the lower of 85% of the fair
market value of the stock at the commencement or end of the offering
period. The purchase plan permits eligible employees to purchase common
stock through payroll deductions for up to 10% of qualified compensation.
During the year ended December 29, 2007, there were 28,563 shares issued
under the Purchase Plan for net proceeds of $144. As of December 29, 2007,
there were 196,625 shares available for issuance under the Purchase Plan.
8. RETIREMENT PLANS
Profit Sharing Plan
The Company maintains a 401(k) profit sharing plan for the benefit of
eligible employees. The 401(k) plan includes a cash or deferred arrangement
pursuant to Section 401(k) of the Internal Revenue Code sponsored by the
Company to provide eligible employees an opportunity to defer compensation
and have such deferred amounts contributed to the 401(k) plan on a pre-tax
basis, subject to certain limitations. The Company at the discretion of the
Board of Directors may make contributions of cash to match deferrals of
compensation by participants. Contributions charged to operations by the
Company for years ended December 29, 2007, December 30, 2006 and December
31, 2005 were $287, $251 and $100, respectively.
9. COMMITMENTS
Employment Agreement
The Company has an employment agreement with its Chief Executive Officer
and President, Leon Kopyt ("Mr. Kopyt"), which currently provides for an
annual base salary of $550 and other customary benefits. In addition, the
agreement provides that Mr. Kopyt's annual bonus is based on EBITDA,
defined as earnings before interest, taxes, depreciation, and amortization.
As of December 29, 2007, the agreement expires on February 28, 2009. 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 Mr. 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
29, 2007, Mr. Kopyt would have been entitled to cash payments of
approximately $4.9 million (representing salary and excise tax payments).
F-22
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
9. COMMITMENTS (CONTINUED)
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 current employment
and termination benefits agreements, which are supplemented and not
superseded by the Severance Agreement. If Mr. Kopyt had been terminated as
of December 29, 2007, 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 $3.1 million, inclusive of
employee benefits.
Operating Leases
The Company leases office facilities and various equipment under
non-cancelable leases expiring at various dates through April 2013. Certain
leases are subject to escalation clauses based upon changes in various
factors. The minimum future annual operating lease commitments for leases
with non-cancelable terms in excess of one year, exclusive of operating
escalation charges, are as follows (in thousands):
Year ending December 31, Amount
(In thousands)
--------------------------------------------------
2008 $3,358
2009 2,782
2010 1,871
2011 1,498
2012 728
Thereafter 52
--------------------------------------------------
Total $10,289
==================================================
Rent expense for the fiscal years ended December 29, 2007, December 30,
2006 and December 31, 2005 was $3,801, $3,941, and $3,514, respectively.
The Company subleases space to other tenants at various office locations
under cancelable lease agreements. During fiscal 2007, 2006 and 2005
revenues of approximately $417, $114, and $22, respectively, were
recognized under these leasing arrangements.
10. RELATED PARTY TRANSACTIONS
A director of the Company is a shareholder in a law firm that has rendered
various legal services to the Company. Fees paid to the law firm have not
been significant.
F-23
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
----------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
----------------------------------------------------------------------------
11. INCOME TAXES
The components of income tax expense (benefit) are as follows:
Year Ended Year Ended Year Ended
December 29, December 30, December 31,
2007 2006 2005
----------------------------------------------------------------------------------------------------
Current
Federal $162 $930
State and local 756 $259 511
Foreign 864 27 (123)
----------------------------------------------------------------------------------------------------
1,782 286 1,319
----------------------------------------------------------------------------------------------------
Deferred
Federal 2,518 704 809
State and local (16) 124 143
----------------------------------------------------------------------------------------------------
2,502 828 952
----------------------------------------------------------------------------------------------------
Total $4,284 $1,114 $2,271
====================================================================================================
The income tax provisions reconciled to the tax computed at the statutory
Federal rate was:
December 29, December 30, December 31,
2007 2006 2005
----------------------------------------------------------------------------------------------------
Tax at statutory rate (credit) 34.0% 34.0% 34.0%
State income taxes, net of Federal
income tax benefit 4.4 6.2 5.7
Stock compensation expense 1.3 4.3
Foreign income tax effect .5 1.3 2.9
Deductible amortization (2.3) (3.3) (4.1)
Federal tax audit adjustment
(see penultimate paragraph footnote 11) (27.4)
Non-deductible charges .9 1.3 (2.4)
Other, net (1.5) 3.0
----------------------------------------------------------------------------------------------------
Total income tax expense 38.8% 14.9% 39.1%
====================================================================================================
F-24
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
11. INCOME TAXES (CONTINUED)
At December 29, 2007 and December 30, 2006, deferred tax assets and
liabilities consist of the following:
December 29, December 30,
------------------------------------ 2007 2006
Deferred tax assets:
------------------------------------------------------------------------
Loss carryforwards $135 $2,880
Allowance for doubtful accounts 633 669
Alternative minimum tax credits 162
Reserves and accruals 146 196
Litigation reserve 106 59
------------------------------------------------------------------------
1,182 3,804
------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid expense deferral (471) (592)
Miscellaneous (27)
------------------------------------------------------------------------
(471) (619)
------------------------------------------------------------------------
Net deferred tax assets $711 $3,185
========================================================================
As of December 31, 2002, the Company had accrued approximately $2.5 million
for income tax liabilities, which related to the potential repayment of tax
benefits associated with previously claimed tax deductions claimed from
goodwill impairments. On June 8, 2006, the goodwill impairment deductions
of approximately $13.5 million were disallowed by the Internal Revenue
Service as a deduction in the December 31, 2002 income tax return. Based
upon the methodology applied by the Internal Revenue Service, these
deductions are best substantiated by facts and circumstances arising during
2005 and therefore the deductions are included in the December 31, 2005
federal income tax return. This reclassification of the deduction from the
year ended December 31, 2002 to the year ended December 31, 2005 results in
the reversal of the income tax reserve of approximately $1.3 million, of
which approximately $1.0 million was recorded in the three months ended
July 1, 2006. Additionally, the remaining reserve primarily covered
interest of approximately $0.7 million and a net operating loss
disallowance of approximately $0.4 million, which were paid during 2006.
The full impact is included in the statement of income for the year ended
December 30, 2006.
The deferred tax asset relating to the net operating loss carryforward
represents the tax effect of a federal net operating loss carryforward of
approximately $0.4 million expiring in the year 2026.
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 total amount of interest and penalties recognized in the statements of
income for each of the years in the three-year period ended December 29,
2007 was insignificant and when incurred is reported as interest expense.
The Company has provided what it believes to be an appropriate amount of
tax for items that involve interpretation of the tax law. However, events
may occur in the future that will cause the Company to reevaluate the
current provision and may result in an adjustment to the liability for
taxes.
F-25
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
12. INTEREST INCOME, NET OF INTEREST EXPENSE
Interest expense, net of interest income consisted of the following:
December 29, December 30, December 31,
2007 2006 2005
-----------------------------------------------------------------------
Interest expense ($67) ($539) ($568)
Interest income 126 283 347
-----------------------------------------------------------------------
$59 ($256) ($221)
=======================================================================
13. SEGMENT INFORMATION
The Company follows SFAS 131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS 131"), which provides guidance for
companies to report information about operating segments, geographic areas,
and major customers. The accounting policies of each segment are the same
as those described in the summary of significant accounting policies (see
Note 1).
The Company uses earnings before interest and taxes (operating income) to
measure segment profit. Segment operating income includes selling, general
and administrative expenses directly attributable to that segment as well
as charges for allocating corporate costs to each of the operating
segments. The following tables reflect the results of the segments
consistent with the Company's management system (in thousands):
Information
Fiscal 2007 Technology Engineering Commercial Corporate Total
------------------------------ - --------------- - -------------- -- -------------- -- ------------ - ------------
Revenue $98,951 $71,156 $44,102 $214,209
Operating expenses (1) (2) 93,019 67,245 42,387 202,651
------------------------------ - --------------- - -------------- -- -------------- -- ------------ - ------------
EBITDA ((3)) 5,932 3,911 1,715 11,558
Depreciation 503 462 157 1,122
Amortization of intangibles 286 34 320
------------------------------ - --------------- - -------------- -- -------------- -- ------------ - ------------
Operating income 5,143 3,415 1,558 10,116
Interest income, net of
interest expense (30 ) (20 ) (9 ) (59)
Gain on foreign currency
transactions (78 ) (78)
Legal settlement (800 ) (800)
Income taxes 2,005 1,362 607 310 4,284
------------------------------ - --------------- - -------------- -- -------------- -- ------------ - ------------
Net income $3,168 $2,151 $960 $490 $6,769
============================== = =============== = ============== == ============== == ============ = ============
Total assets $50,832 $28,431 $14,060 $16,391 $109,714
Capital expenditures $372 $124 $32 $97 $625
F-26
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
13. SEGMENT INFORMATION (CONTINUED)
Information
Fiscal 2006 Technology Engineering Commercial Corporate Total
-------------------------------------------------------------------------------------------------------------------
Revenue $101,449 $57,607 $42,864 $201,920
Operating expenses (1), 94,799 56,569 41,288 192,656
(2),(3)
-------------------------------------------------------------------------------------------------------------------
EBITDA (3) 6,650 1,038 1,576 9,264
Depreciation 533 495 169 1,197
Amortization of intangibles 286 24 310
-------------------------------------------------------------------------------------------------------------------
Operating income 5,831 519 1,407 7,757
Interest expense, net of
interest income 129 73 54 256
Loss on foreign currency
transactions 31 31
Income taxes 850 62 202 1,114
-------------------------------------------------------------------------------------------------------------------
Net income $4,852 $353 $1,151 $6,356
===================================================================================================================
Total assets $53,431 $24,272 $12,137 $10,200 $100,040
Capital expenditures $282 $1,009 $63 $215 $1,569
F-27
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
13. SEGMENT INFORMATION (CONTINUED)
Information
Fiscal 2005 Technology Engineering Commercial Corporate Total
-------------------------------------------------------------------------------------------------------------------
Revenue $98,010 $47,683 $34,925 $180,618
Operating expenses (1) 92,173 47,425 33.798 173,396
-------------------------------------------------------------------------------------------------------------------
EBITDA (3) 5,837 258 1,127 7,222
Depreciation 578 373 160 1,111
Amortization of intangibles 95 95
-------------------------------------------------------------------------------------------------------------------
Operating income (loss) 5,164 (115) 967 6,016
Interest expense, net of
interest income 120 58 43 221
Gain on foreign currency
transactions (12) (12)
Income taxes (benefit) 1,973 (63) 361 2,271
-------------------------------------------------------------------------------------------------------------------
Net income (loss) $3,071 ($98) $563 $3,536
===================================================================================================================
Total assets $54,729 $19,316 $11,953 $20,775 $106,773
Capital expenditures $275 $125 $158 $558
(1) Operating expenses exclude depreciation and amortization.
(2) Operating expenses include $411 and $956 of stock based compensation
expense for the years ended December 29, 2007 and December 30, 2006,
respectively.
(3) EBITDA means earnings before interest, taxes, depreciation and
amortization. We believe that EBITDA, as presented, represents a useful
measure of assessing the performance of our operating activities, as it
reflects our earnings trends without the impact of certain non-cash and
unusual charges or income. EBITDA is also used by our creditors in
assessing debt covenant compliance. We understand that, although
security analysts frequently use EBITDA in the evaluation of companies,
it is not necessarily comparable to EBITDA of other companies due to
potential inconsistencies in the method of calculation. EBITDA is not
intended as an alternative to cash flow provided by operating
activities as a measure of liquidity, nor as an alternative to net
income as an indicator of our operating performance, nor as an
alternative to any other measure of performance in conformity with
generally accepted accounting principles in the United States of
America.
F-28
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
13. SEGMENT INFORMATION (CONTINUED)
The following reconciles consolidated operating income to the Company's
pretax income:
December 29, December 30, December 31,
2007 2006 2005
----------------------------------------------------------------------------------------------------
Consolidated operating income $10,116 $7,757 $6,016
Interest income (expense), net 59 (256) (221)
Gain (loss) on foreign currency transactions 78 (31) 12
Legal settlement 800
----------------------------------------------------------------------------------------------------
Consolidated pretax income $11,053 $7,470 $5,807
====================================================================================================
The Company derives a majority of its revenue from companies headquartered
in the United States. Revenues reported for each operating segment are all
from external customers.
The Company is domiciled in the United States and its segments operate in
the United States and Canada. Revenues and fixed assets by geographic area
for the years ended December 29, 2007, December 30, 2006, and December 31,
2005 are as follows:
December 29, December 30, December 31,
2007 2006 2005
------------------------------------------------------------------------------------------------
Revenues
United States $198,032 $190,644 $165,808
Canada 16,177 11,276 14,810
------------------------------------------------------------------------------------------------
$214,209 $201,920 $180,618
================================================================================================
Fixed Assets
United States $4,127 $4,338 $3,873
Canada 102 54 147
------------------------------------------------------------------------------------------------
$4,229 $4,392 $4,020
================================================================================================
14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Year Ended December 29, 2007
Diluted
Gross Net Net Income
Sales Profit Income Per Share (a)
-----------------------------------------------------------------------------------------------------------
1st Quarter $54,493 $12,377 $1,571 $.13
2nd Quarter 56,846 13,959 1,853 .15
3rd Quarter 54,079 13,433 1,724 .14
4th Quarter 48,791 13,207 1,621 .13
-----------------------------------------------------------------------------------------------------------
Total $214,209 $52,976 $6,769 $.54
===========================================================================================================
F-29
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 29, 2007, December 30, 2006 and December 31, 2005
---------------------------------------------------------------------------
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
---------------------------------------------------------------------------
14. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
Year Ended December 30, 2006
Diluted
Gross Net Net Income
Profit Income Per Share (a)
Sales
-----------------------------------------------------------------------------------------------------------
1st Quarter $47,054 $12,043 $811 $.07
2nd Quarter 49,025 12,198 1,859 .16
3rd Quarter 51,650 12,952 1,349 .11
4th Quarter 54,191 13,315 2,337 .19
-----------------------------------------------------------------------------------------------------------
Total $201,920 $50,508 $6,356 $.53
===========================================================================================================
(a) Each quarterly amount is based on separate calculations of weighted
average shares outstanding.
15. CONTINGENCIES
In late 1998, two shareholders who were formerly officers and directors of
the Company filed suit against the Company. The former officers and
directors alleged that the Company wrongfully limited the number of shares
of the Company's common stock that could have been sold by the plaintiffs
under a registration rights agreement entered into in connection with an
acquisition transaction pursuant to which the plaintiffs became
shareholders of the Company.
A trial in 2002 resulted in a judgment in favor of the plaintiffs for $7.6
million that was affirmed on appeal. In June 2006, the Company paid $8.6
million, which included post-judgment interest and other items totaling
$1.0 million to the plaintiffs to satisfy the judgment.
In November 2002, the Company filed suit on professional liability claims
against the attorneys and law firms who had served as its counsel in the
acquisition transaction and in connection with its subsequent dealings with
the plaintiffs concerning their various relationships with the Company
resulting from that transaction. In its lawsuit against its former counsel,
the Company is seeking complete indemnification with respect to (1) its
costs and counsel fees incurred in the defense against the claims of the
plaintiffs; (2) the amount it paid to satisfy the judgment; and (3) its
costs and counsel fees incurred in the prosecution of the legal malpractice
action itself. In February 2007, the Company reached a settlement with one
of the law firm defendants resulting in the recovery of $0.8 million.
Discovery proceedings are continuing with the other defendants and a trial
will likely be scheduled in the first half of 2009.
The Company is party to two agreements of indemnity related to the
performance of two construction projects by a customer of the Company. In
the event of non-performance by the customer, the Company may be obligated
to indemnify the project owners for certain cost overruns on such projects.
The Company is also subject to other pending legal proceedings and claims
that arise from time to time in the ordinary course of its business, which
may or may not be covered by insurance.
F-30
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting for the company. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our system of internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the
company's assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of our internal control
over financial reporting as of December 29, 2007 based upon criteria in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission ("COSO"). Based on this assessment, management
determined that the company's internal control over financial reporting was
effective as of December 29, 2007, based on the criteria in Internal
Control-Integrated Framework issued by COSO.
This annual report does not include a report of management's assessment
regarding internal control over financial reporting or an attestation report of
the company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for newly public
companies.
This report 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 report 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.
/S/ Leon Kopyt /S/ Stanton Remer
------------------------------------ -----------------------------------------
Leon Kopyt Stanton Remer
Chairman and Chief Executive Officer Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
Dated: March 20, 2008
F-31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
----------------------------------------------------------------------------
Board of Directors
RCM Technologies, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of RCM
Technologies, Inc. (a Nevada corporation) and Subsidiaries (the Company) as of
December 29, 2007 and December 30, 2006 and the related consolidated statements
of income, changes in stockholders' equity, comprehensive income and cash flows
for each of the years in the three-year period ended December 29, 2007. Our
audits of the basic financial statements included the financial statement
schedules listed in the index appearing under Item 15 (a)(2). These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
RCM Technologies, Inc. and Subsidiaries as of December 29, 2007 and December 30,
2006, and the consolidated results of its operations and its cash flows for each
of the years in the three-year period ended December 29, 2007, in conformity
with accounting principles generally accepted in the United States of America.
Also in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
As discussed in note 1 to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, on January 1, 2006.
/s/ Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
March 12, 2008
F-32
SCHEDULE I
----------------------------------------------------------------------------
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEET
December 29, 2007 and December 30, 2006
(Dollars in thousands, except share and per share amounts,
unless otherwise indicated)
ASSETS
December 29, December 30,
2007 2006
-----------------------------------------------------------------------------------------------------------
Current assets
Prepaid expenses and other assets $4 $3
-----------------------------------------------------------------------------------------------------------
Other assets
Long-term receivables from affiliates 92,201 84,625
-----------------------------------------------------------------------------------------------------------
Total assets $92,205 $84,628
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
December 29, December 30,
2007 2006
-----------------------------------------------------------------------------------------------------------
Current liabilities
Accounts payable and accrued expenses $157 $234
-----------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock 603 591
Foreign currency translation adjustment 1,484 1,002
Additional paid in capital 102,951 101,559
Accumulated deficit (12,990) (19,759)
-----------------------------------------------------------------------------------------------------------
Total stockholders' equity 92,048 83,393
-----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $92,205 $83,627
===========================================================================================================
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-33
SCHEDULE I
-----------------------------------------------------------------------------
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
Years Ended December 29, 2007, December 30, 2006
and December 31, 2005 (Dollars in thousands, except
share and per share amounts, unless otherwise indicated)
December 29, December 30, December 31,
2007 2006 2005
---------------------------------------------------------------------------------------------------
Operating expenses
Administrative $1,414 $1,445 $1,138
---------------------------------------------------------------------------------------------------
Operating loss (1,414) (1,445) (1,138)
Management fee income 1,414 1,445 1,138
---------------------------------------------------------------------------------------------------
Income before income in subsidiaries
Equity in earnings of subsidiaries 6,769 6,356 3,536
---------------------------------------------------------------------------------------------------
Net income $6,769 $6,356 $3,536
===================================================================================================
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-34
SCHEDULE I
-----------------------------------------------------------------------------
RCM TECHNOLOGIES, INC. (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
Years Ended December 29, 2007, December 30, 2006
and December 31, 2005 (Dollars in thousands, except
share and per share amounts, unless otherwise indicated)
December 29, December 30, December 31,
2007 2006 2005
---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $6,769 $6,356 $3,536
---------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Recognition of share based compensation 411 956
Equity in deficiency in assets
of subsidiaries (6,769) (6,356) (3,536)
Changes in operating assets and liabilities:
Prepaid expenses and other assets (1) 5 22
Accounts payable and accrued expenses (77) 112 16
---------------------------------------------------------------------------------------------------------------
(6,436) (5,283) (3,498)
---------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 333 1,073 38
---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in long-term
receivables from subsidiaries (807) (1,458) (1,284)
---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (807) (1,458) (1,284)
---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Sale of stock for employee stock purchase plan 144 144 146
Exercise of stock options 849 229 853
---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 993 373 1,000
---------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents (519) 12 246
---------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents
Cash and equivalents at beginning of year
---------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year
$ $ $
===============================================================================================================
The "Notes to Consolidated Financial Statements" of RCM Technologies, Inc.
and subsidiaries are an integral part of these statements.
F-35
SCHEDULE II
-----------------------------------------------------------------------------
RCM TECHNOLOGIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended December 29, 2007, December 30, 2006
and December 31, 2005 (Dollars in thousands, except
share and per share amounts, unless otherwise indicated)
Column A Column B Column C Column D Column E
-------------------------------------- - -------------- -- ------------------------------- -- ------------- -- -------------
Additions
-------------------------------------- - -------------- -- ------------------------------- -- ------------- -- -------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deduction Period
-------------------------------------- - -------------- -- -------------- -- ------------- -- ------------- -- -------------
Year Ended December 29, 2007
Allowance for doubtful
accounts on trade
receivables $1,672 $598 $687 $1,583
Year Ended December 30, 2006
Allowance for doubtful
accounts on trade
receivables $1,792 $294 $414 $1,672
Year Ended December 31, 2005
Allowance for doubtful
accounts on trade
receivables $1,862 $276 $346 $1,792
F-36
EXHIBIT INDEX
-----------------------------------------------------------------------------
(3)(e) Amendment No. 3 to Amended and Restated Bylaws.
(10)(o) Compensation Arrangements for Named Executive Officers.
(10)(p) Compensation Arrangements for Directors.
(11) Computation of Earnings Per Share.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Chief Executive Officer Required by Rule 13a-14(b
of the Securities Exchange Act of 1934, as amended.
31.2 Certification of Chief Financial Officer Required by Rule 13a-14(b)
of the Securities Exchange Act of 1934, as amended.
32.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 of The Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 of The Sarbanes-Oxley Act of 2002.
EXHIBIT 3 (e)
-----------------------------------------------------------------------------
AMENDMENT NO. 3
TO THE
AMENDED AND RESTATED
BYLAWS OF
RCM TECHNOLOGIES, INC.
ADOPTED: JUNE 14, 2007
1. Section 6.01(a) of Article VI of the Company's Amended and Restated
Bylaws is deleted in its entirety and in lieu thereof the following is
substituted:
(a) Form of Certificates. Shares of the Company may
be certified or uncertificated, as provided under Nevada law,
and this Section 6.01(a) of this Article VI shall not be
interpreted to limit the authority of the Directors to issue
some or all of any of the classes or series of shares of the
Company without certificates.
To the extent certificates for shares are issued,
such certificates shall be in the form as approved by the
board of directors and state the Company is incorporated under
the laws of the State of Nevada, the name of the person to
whom issued and the number and class of shares and the
designation of the series (if any) the certificate represents.
If the Company is authorized to issue shares of more than one
class or series, certificate for shares of the Company shall
set forth upon the face or back of the certificate(or shall
state on the face or back of the certificate that the Company
will furnish to any shareholder upon request and without
charge), a full or summary statement of the designations,
voting rights, preferences, limitations and special rights of
the shares of each class or series authorized to be issued so
far as they have been fixed and determined and the authority
of the board of directors to fix and determine the
designations, voting rights, preferences, limitations and
special rights of the classes and series of shares of the
Company.
In the case of shares issued without certificates,
the Company will, within a reasonable time after such
issuance, send the holders of such shares a written statement
containing the information specified in the preceding
paragraph. At least annually thereafter, the Company shall
provide to its stockholders of record a written statement
confirming the information contained in the informational
statement sent pursuant to the preceding sentence.
2. Section 6.03 of Article VI of the Company's Amended and Restated
Bylaws is deleted in its entirety and in lieu thereof the following is
substituted:
Transfers of shares shall be made on the share
register or transfer books of the Company upon surrender of
the certificate therefore, endorsed by the person named in the
certificate or by an attorney lawfully constituted in writing;
provided, that in the case of shares that are not represented
by a certificate, no delivery of a certificate shall be
required and transfers shall be made on the share register or
transfer books of the Company only by the record holder of
such shares or by an attorney lawfully constituted in writing.
No transfers shall be made inconsistent with the provisions of
the Uniform Commercial Code, its amendments and supplements.
EXHIBIT 10 (o)
------------------------------------------------------------------------------
RCM TECHNOLOGIES, INC.
Compensation Arrangements for Named Executive Officers
Stanton Remer. Executive Vice President, Chief Financial Officer and Treasurer.
The Company on an at-will basis pursuant to an oral agreement employs Mr. Remer.
In addition to standard medical, disability, life insurance, 401(k) and employee
stock incentive benefits available to all eligible employees, he is eligible for
the Executive Medical Supplementary Plan available to the named executive
officers, the Executive Stock Option Plan available to officers and key
employees and an auto allowance available to certain middle managers and above.
Mr. Remer received a base salary of $250,000 in 2007. His bonus is compensated
according to a Schedule of Compensation approved by the Compensation Committee
on December 17, 1997, pursuant to which the Company pays a bonus of .002 of the
Company's EBITDA, defined as earnings before income taxes, depreciation and
amortization, on a consolidated basis within 60 days following the close of the
fiscal year. A further bonus of .002 of EBITDA is payable to Mr. Remer on a
discretionary basis.
Rocco Campanelli. Executive Vice President. The Company on an at-will basis
pursuant to an oral agreement employs Mr. Campanelli. In addition to standard
medical, disability, life insurance, 401(k) and employee stock incentive
benefits available to all eligible employees, he is eligible for the Executive
Medical Supplementary Plan available to the named executive officers, the
Executive Stock Option Plan available to officers and key employees and an auto
allowance available to certain middle managers and above. Mr. Campanelli
received a base salary of $225,000 in 2007. His bonus is based on a percentage
of divisional Engineering net operating income above certain threshold targets.
Kevin D. Miller. Senior Vice President. The Company on an at-will basis pursuant
to an oral agreement employs Mr. Miller. In addition to the standard medical,
disability, life insurance, 401(k) and employee stock incentive benefits
available to all eligible employees, he is eligible for the Executive Medical
Supplementary Plan available to the named executive officers, the Executive
Stock Option Plan available to officers and key employees and an auto allowance
available to certain middle managers and above. Mr. Miller received a base
salary of $250,000 in 2007. He is eligible for a discretionary bonus.
EXHIBIT 10 (p)
----------------------------------------------------------------------------
RCM TECHNOLOGIES, INC.
Compensation Arrangements for Directors
Directors who are RCM Technologies, Inc employees are not compensated for their
services as directors.
Non-employee directors, except as set forth below, each receive $24,000 in
annual compensation for service on the Board, payable in equal monthly
installments in cash.
In addition, each non-employee director receives $750 payable in cash for each
in-person meeting of the full Board attended by that director, and $300 for each
meeting of a committee (in excess of four meetings per year of that committee),
whether in-person or telephonic, attended by that director.
Norman S. Berson, one of the non-employee directors, is of counsel to a law firm
that from time to time performs services for the Company. Fees paid by the
Company to this law firm are not significant or material. Nevertheless, Mr.
Berson has voluntarily declined to accept compensation for his service on the
Board.
EXHIBIT 11
------------------------------------------------------------------------------
COMPUTATION OF EARNINGS PER COMMON SHARE
Years Ended December 29, 2007, December 30, 2006
and December 31, 2005 (Dollars in thousands, except
share and per share amounts, unless otherwise indicated)
December 29, December 30, December 31,
2007 2006 2005
--------------------------------------------------------------------------------------------------------------
Diluted earnings
Net income applicable to common
stock $6,769 $6,356 $3,536
==============================================================================================================
Shares
Weighted average number of common
shares outstanding 11,970,042 11,773,301 11,456,757
Common stock equivalents 514,597 261,364 274,834
--------------------------------------------------------------------------------------------------------------
Total 12,484,639 12,034,665 11,731,591
==============================================================================================================
Diluted earnings per common share $.54 $.53 $.30
==============================================================================================================
Basic
Net income applicable to common
stock $6,769 $6,356 $3,536
==============================================================================================================
Shares
Weighted average number of common
shares outstanding 11,970,042 11,773,301 11,456,757
==============================================================================================================
Basic earnings per common share $.57 $.54 $.31
==============================================================================================================
EXHIBIT 21
-----------------------------------------------------------------------------
SUBSIDIARIES OF THE REGISTRANT
Business Support Group of Michigan, Inc.
Cataract, Inc.
Programming Alternatives of Minnesota, Inc.
RCMT Delaware, Inc.
RCM Technologies Services Company, Inc.
RCM Technologies (USA), Inc.
RCM Technologies Canada Corp
Soltre Technology, Inc.
EXHIBIT 23
-----------------------------------------------------------------------------
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
RCM Technologies, Inc.
We have issued our report dated March 12, 2008, which report expresses an
unqualified opinion and includes an explanatory paragraph relating to the
application of Statement of Financial Accounting Standard No. 123(R) as of
December 31, 2006) accompanying the consolidated financial statements and
related schedules included in the 2007 Annual Report of RCM Technologies, Inc.
and Subsidiaries on Form 10-K for the year ended December 29, 2007. We hereby
consent to the incorporation by reference of said report in the Registration
Statements of RCM Technologies, Inc. on Forms S-8 (File No. 333-145904,
effective September 6, 2007, File No. 333-61306, effective April 21, 1993, File
No. 333-80590, effective June 22, 1994, File No. 333-48089, effective March 17,
1998, File No. 333-52206, effective December 19, 2000 and File No. 333-52480,
effective December 21, 2000).
/s/Grant Thornton LLP
Grant Thornton LLP
Philadelphia, Pennsylvania
March 12, 2008
EXHIBIT 31.1
------------------------------------------------------------------------------
CERTIFICATION
I, Leon Kopyt, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles; and
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 20, 2008
/s/ Leon Kopyt
-------------------------------
Leon Kopyt
Chairman and Chief Executive Officer
EXHIBIT 31.2
-----------------------------------------------------------------------------
CERTIFICATION
I, Stanton Remer, certify that:
1. I have reviewed this annual report on Form 10-K of RCM Technologies, Inc.
(the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles; and
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 20, 2008
/s/ Stanton Remer
-----------------
Stanton Remer
Executive Vice President
Chief Financial Officer,
Treasurer, and Secretary
EXHIBIT 32.1
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the
"Company") for the year ended December 29, 2007 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Leon Kopyt, President
& Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to
my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended (15 U.S.C. section 78m (a)); and (2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Leon Kopyt
----------------------
Leon Kopyt
Chief Executive Officer
March 20, 2008
A signed original of this written statement required by Section 906 has been
provided to RCM Technologies, Inc. and will be retained by RCM Technologies,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.
EXHIBIT 32.2
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of RCM Technologies, Inc. (the
"Company") for the year ended December 29, 2007 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Stanton Remer, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350,
as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to my
knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended (15 U.S.C. section 78m (a)); and (2)
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Stanton Remer
----------------------
Stanton Remer
Executive Vice President
Chief Financial Officer
March 20, 2008
A signed original of this written statement required by Section 906 has been
provided to RCM Technologies, Inc. and will be retained by RCM Technologies,
Inc. and furnished to the Securities and Exchange Commission or its staff upon
request.