SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended January 1, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-12636
THERMORETEC CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 59-3203761
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
Damonmill Square
9 Pond Lane, Suite 5A
Concord, Massachusetts 01742-2851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at January 28, 2000
---------------------------- -------------------------------
Common Stock, $.01 par value 13,604,625
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMORETEC CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
January 1, April 3,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents (includes $20,607 under repurchase $ 3 $ 20,669
agreement with affiliated company in fiscal 1999)
Advance to affiliate (Note 6) 29,306 -
Accounts receivable, less allowances of $1,743 and $1,706 24,529 32,035
Unbilled contract costs and fees 16,754 7,442
Deferred tax asset and refundable income taxes 3,830 3,923
Prepaid expenses 1,749 1,454
-------- --------
76,171 65,523
-------- --------
Property, Plant, and Equipment, at Cost (Note 5) 48,774 55,280
Less: Accumulated depreciation and amortization 26,773 23,538
-------- --------
22,001 31,742
-------- --------
Other Assets 7,466 7,589
-------- --------
Cost in Excess of Net Assets of Acquired Companies 33,916 35,087
-------- --------
$139,554 $139,941
======== ========
2
THERMORETEC CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
January 1, April 3,
(In thousands except share amounts) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Subordinated convertible debentures (includes $6,950 $ 40,600 $ -
of related-party debt)
Accounts payable 14,648 10,048
Accrued payroll and employee benefits 5,999 6,326
Deferred revenue 3,677 2,675
Billings in excess of revenues earned 828 3,323
Other accrued expenses (Note 5) 5,744 4,068
Due to parent company and affiliated companies 1,896 2,109
-------- --------
73,392 28,549
-------- --------
Deferred Income Taxes - 511
-------- --------
Subordinated Convertible Obligations (includes $6,830 - 40,600
of related-party debt)
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000 shares authorized; 143 142
14,298,686 and 14,247,572 shares issued
Capital in excess of par value 87,729 88,045
Accumulated deficit (15,989) (12,063)
Treasury stock at cost, 697,908 and 693,074 shares (5,721) (5,843)
-------- --------
66,162 70,281
-------- --------
$139,554 $139,941
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMORETEC CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
January 1, January 2,
(In thousands except per share amounts) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $42,577 $36,907
------- -------
Costs and Operating Expenses:
Cost of revenues 35,381 31,364
Selling, general, and administrative expenses 5,090 4,188
Restructuring costs (Note 5) (7) -
Gain on sale of fixed assets (38) -
------- -------
40,426 35,552
------- -------
Operating Income 2,151 1,355
Interest Income 418 197
Interest Expense (includes $78 and $67 to related parties) (577) (542)
------- -------
Income Before Income Taxes 1,992 1,010
Income Tax Provision (897) (504)
------- -------
Net Income $ 1,095 $ 506
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .08 $ .04
======= =======
Weighted Average Shares (Note 3):
Basic 13,566 13,168
======= =======
Diluted 14,093 13,178
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMORETEC CORPORATION
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
January 1, January 2,
(In thousands except per share amounts) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $ 116,986 $106,463
--------- --------
Costs and Operating Expenses:
Cost of revenues 97,276 89,743
Selling, general, and administrative expenses 12,812 12,310
Restructuring costs (Note 5) 9,625 9,176
Gain on sale of fixed assets (38) -
--------- --------
119,675 111,229
--------- --------
Operating Loss (2,689) (4,766)
Interest Income 1,138 548
Interest Expense (includes $234 and $195 to related parties) (1,661) (1,625)
--------- --------
Loss Before Income Taxes (3,212) (5,843)
Income Tax Benefit 642 1,514
--------- --------
Net Loss $ (2,570) $ (4,329)
========= ========
Basic and Diluted Loss per Share (Note 3) $ (.19) $ (.33)
========= ========
Basic and Diluted Weighted Average Shares (Note 3) 13,568 13,043
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMORETEC CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
January 1, January 2,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net loss $ (2,570) $(4,329)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Noncash restructuring costs (Note 5) 9,039 8,105
Change in deferred income taxes (2,841) -
Depreciation and amortization 4,727 5,562
Provision for losses on accounts receivable 183 285
Gain on sale of fixed assets (38) -
Other noncash items 378 405
Changes in current accounts, excluding the effects of acquisition:
Accounts receivable 7,073 (2,497)
Unbilled contract costs and fees (10,545) (941)
Other current assets (272) (2,690)
Accounts payable 4,600 714
Billings in excess of revenues earned (2,495) 470
Other current liabilities (Note 5) 3,645 1,683
Due to parent company and affiliated companies (213) 1,575
-------- -------
Net cash provided by operating activities 10,671 8,342
-------- -------
Investing Activities:
Advances to affiliate, net (Note 6) (29,306) -
Acquisition, net of cash acquired - (576)
Proceeds from maturities of available-for-sale investments - 2,006
Purchases of property, plant, and equipment (2,979) (3,116)
Proceeds from sale of property, plant, and equipment 288 186
Increase in other assets (274) (1,368)
Other - 122
-------- -------
Net cash used in investing activities (32,271) (2,746)
-------- -------
Financing Activities:
Dividends paid (1,356) (402)
Collection of long-term notes receivable 1,936 -
Net proceeds from issuance of Company common stock 354 28
Other - (84)
-------- -------
Net cash provided by (used in) financing activities 934 (458)
-------- -------
Increase (Decrease) in Cash and Cash Equivalents (20,666) 5,138
Cash and Cash Equivalents at Beginning of Period 20,669 8,912
-------- -------
Cash and Cash Equivalents at End of Period $ 3 $14,050
======== =======
6
THERMORETEC CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
January 1, January 2,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ---------------------
Noncash Activities:
Fair value of assets of acquired company $ - $ 576
Cash paid for acquired company - (576)
-------- -------
$ - $ -
======== =======
Dividend reinvested in Company common stock $ - $ 892
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
THERMORETEC CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoRetec Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at January 1, 2000, the results of
operations for the three- and nine-month periods ended January 1, 2000, and
January 2, 1999, and the cash flows for the nine-month periods ended January 1,
2000, and January 2, 1999. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of April 3, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. Certain amounts in fiscal 1999 have
been reclassified to conform to the presentation in the fiscal 2000 financial
statements. The consolidated financial statements and notes are presented as
permitted by Form 10-Q and do not contain certain information included in the
annual financial statements and notes of the Company. The consolidated financial
statements and notes included herein should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K for the fiscal year ended April 3, 1999, filed with the Securities and
Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income (loss) and "other comprehensive
items," which in the fiscal 1999 periods represents unrealized net of tax gains
and losses from available-for-sale investments. There were no unrealized gains
or losses during the first nine months of fiscal 2000, therefore, comprehensive
income equals net income (loss) reported for the three- and nine-month periods
ended January 1, 2000. During the three- and nine-month periods ended January 2,
1999, the Company had comprehensive income of $507,000 and had a comprehensive
loss of $4,326,000, respectively.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Nine Months Ended
January 1, January 2, January 1, January 2,
(In thousands except per share amounts) 2000 1999 2000 1999
- ------------------------------------------------------------- --------- ----------- ----------- ----------
Basic
Net Income (Loss) $1,095 $ 506 $(2,570) $(4,329)
------ ------- ------- -------
Weighted Average Shares 13,566 13,168 13,568 13,043
------ ------- ------- -------
Basic Earnings (Loss) per Share $ .08 $ .04 $ (.19) $ (.33)
====== ======= ======= =======
Diluted
Net Income (Loss) $1,095 $ 506 $(2,570) $(4,329)
Effect of Convertible Debentures 15 - - -
------ ------- ------- -------
Income Available to Common Shareholders, as Adjusted 1,110 506 (2,570) (4,329)
------ ------- ------- -------
Weighted Average Shares 13,566 13,168 13,568 13,043
Effect of :
Stock options 257 10 - -
Convertible debentures 270 - - -
------ ------- ------- -------
Weighted Average Shares, as Adjusted 14,093 13,178 13,568 13,043
------ ------- ------- -------
Diluted Earnings (Loss) per Share $ .08 $ .04 $ (.19) $ (.33)
====== ======= ======= =======
8
3. Earnings (Loss) per Share (continued)
The computation of diluted earnings (loss) per share for each period
excludes the effect of assuming the exercise of certain outstanding stock
options and warrants because the effect would be antidilutive. As of January 1,
2000, there were 540,000 of such options and warrants outstanding, with exercise
prices ranging from $6.51 to $14.93 per share. In addition, the computation of
diluted earnings (loss) per share for the nine-month period ended January 1,
2000, and the three- and nine-month periods ended January 2, 1999, excludes the
effect of assuming the conversion of $2,650,000 principal amount of a 3 7/8%
subordinated convertible note, convertible at $9.83 per share, and the
computation of diluted earnings (loss) per share for all periods excludes the
effect of assuming the conversion of $37,950,000 principal amount of 4 7/8%
subordinated convertible debentures, convertible at $17.92 per share, because
the effects would be antidilutive.
4. Business Segment Information
Three Months Ended Nine Months Ended
January 1, January 2, January 1, January 2,
(In thousands) 2000 1999 2000 1999
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues:
Consulting and Engineering $ 25,071 $ 19,784 $ 64,907 $ 55,637
Nuclear Remediation 8,243 9,228 25,664 26,249
Soil Remediation 7,014 5,707 18,640 17,406
Fluids Recycling 2,249 2,188 7,775 7,171
-------- --------- -------- ---------
$ 42,577 $ 36,907 $116,986 $ 106,463
======== ========= ======== =========
Income (Loss) Before Income Taxes:
Consulting and Engineering $ 1,209 $ 816 $ 3,559 $ 2,302
Nuclear Remediation 437 441 1,379 1,557
Soil Remediation (a) 818 466 (7,010) (8,112)
Fluids Recycling 282 111 962 729
Corporate (b) (595) (479) (1,579) (1,242)
-------- --------- -------- ---------
Total operating income (loss) 2,151 1,355 (2,689) (4,766)
Interest expense, net (159) (345) (523) (1,077)
-------- --------- -------- ---------
$ 1,992 $ 1,010 $ (3,212) $ (5,843)
======== ========= ======== =========
(a) Includes restructuring costs of $9.6 million and $9.2 million in the first
nine months of fiscal 2000 and 1999, respectively.
(b) Primarily general and administrative expenses.
5. Restructuring Costs
During fiscal 1999, the Company recorded restructuring costs for the
closure of two soil-recycling facilities, resulting in a write-down of fixed
assets to their estimated disposal value and a write-off of intangible assets,
as well as ongoing lease costs and severance for 13 employees. The Company
closed one soil-recycling facility in March 1999 and is actively seeking a buyer
for the second soil-recycling facility. Negotiations are ongoing with a
potential buyer, however, there can be no assurance that the Company will
complete the sale. If negotiations are not successful and the Company can not
identify another buyer, the Company expects to close the facility in the first
half of calendar 2000. As of April 3, 1999, the Company had terminated 6
employees. No additional employees were terminated during the first nine months
of fiscal 2000. The Company took this action after a period of operating losses
at these facilities, which the Company believes arose from relaxed enforcement
of state rules concerning disposal of contaminated soils and the availability of
alternative disposal options to customers.
9
5. Restructuring Costs (continued)
During fiscal 2000, the Company announced the planned sale of three
additional soil-recycling facilities. In connection with these actions, the
Company recorded $9,625,000 of restructuring charges in the first nine months of
fiscal 2000. These costs include an $8,920,000 write-down of fixed assets to
their estimated disposal value; a $119,000 write-off of prepaid expenses
associated with the facilities; $475,000 of severance costs for 33 employees, 3
of whom were terminated in the first nine months of fiscal 2000; $50,000 of
ongoing lease costs; and $61,000 of retention bonuses paid.
Unaudited revenues and operating income before restructuring charges from
the soil-recycling facilities that have been or will be closed or sold
aggregated $8,655,000 and $1,927,000, respectively, in the first nine months of
fiscal 2000, and $12,389,000 and $708,000, respectively, in fiscal 1999. These
facilities are available for sale immediately. As a result of the restructuring
actions, the Company discontinued recording depreciation on the soil-recycling
facilities to be sold or closed. During the three-month period ended January 1,
2000, discontinuing depreciation at these facilities increased the Company's
operating income by $291,000. During the nine-month period ended January 1,
2000, discontinuing depreciation at these facilities reduced the Company's
operating loss by $1,220,000.
Substantially all of the restructuring costs to date have been noncash
charges except for amounts recorded as accrued restructuring costs. A summary of
the changes in accrued restructuring costs, which are included in other accrued
expenses in the accompanying balance sheet, is as follows:
Severance Facility- Other Total
(In thousands) closing
- ------------------------------------------------- -------------- ------------- ------------- -------------
Fiscal 1999 Plan
Balance at April 3, 1999 $ 112 $ 690 $ - $ 802
Usage (71) (16) - (87)
------ ----- ----- ------
Balance at January 1, 2000 $ 41 $ 674 $ - $ 715
====== ===== ===== ======
Fiscal 2000 Plan
Balance at April 3, 1999 $ - $ - $ - $ -
Provision charged to expense 475 50 61 586
Usage (65) (10) (61) (136)
------ ----- ----- ------
Balance at January 1, 2000 $ 410 $ 40 $ - $ 450
====== ===== ===== ======
The Company expects to pay the balance of restructuring costs accrued for
severance primarily during the remainder of calendar 2000 and the balance of
costs accrued for facilities through the expiration of a lease in 2006. The
Company expects to incur additional costs of approximately $100,000, primarily
for future incremental costs related to the restructuring, during the remainder
of fiscal 2000.
6. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron Corporation
commenced use of a new domestic cash management arrangement. Under the new
arrangement, amounts advanced to Thermo Electron by the Company for domestic
cash management purposes bear interest at the 30-day Dealer Commercial Paper
Rate plus 50 basis points, set at the beginning of each month. Thermo Electron
is contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash
10
6. Cash Management Arrangement (continued)
management arrangement by all Thermo Electron subsidiaries other than wholly
owned subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. Amounts
invested in this arrangement are included in "advance to affiliate" in the
accompanying balance sheet.
In addition, under the new domestic cash management arrangement, amounts
borrowed from Thermo Electron for domestic cash management purposes bear
interest at the 30-day Dealer Commercial Paper Rate plus 150 basis points, set
at the beginning of each month. The Company has no borrowings under this
arrangement at January 1, 2000.
7. Proposed Merger
On October 19, 1999, the Company entered into a definitive agreement and
plan of merger with Thermo Electron, pursuant to which Thermo Electron would
acquire all of the outstanding shares of Company common stock held by
shareholders other than Thermo TerraTech and Thermo Electron in exchange for
$7.00 per share in cash, without interest. The merger had been originally
announced as a stock-for-stock transaction, pursuant to which shareholders of
the Company would have received stock of Thermo Electron in exchange for their
shares of the Company. Following the merger, the Company's common stock would
cease to be publicly traded. The Board of Directors of the Company approved the
merger agreement based on a recommendation by a special committee of the Board
of Directors, consisting of an independent director of the Company. The
completion of this merger is subject to certain conditions, including
shareholder approval of the merger agreement and the completion of review by the
Securities and Exchange Commission of certain required filings. Thermo Electron
and Thermo TerraTech intend to vote all of their shares of common stock of the
Company in favor of approval of the merger agreement. Therefore, approval of the
merger agreement is assured. This merger is expected to be completed in the
fourth quarter of fiscal 2000.
8. Subsequent Event
Proposed Sale of the Company
On January 31, 2000, Thermo Electron announced that it plans to sell all
of the Thermo TerraTech businesses, including the Company. This action is part
of a major reorganization plan under which Thermo Electron will spin in, spin
off, and sell various businesses to focus solely on its core measurement and
detection instruments business.
Proposed Sale of Soil-remediation Facilities
In February 2000, the Company signed a letter of intent to sell five of
the Company's six remaining soil-remediation facilities, including three
facilities announced for sale earlier in fiscal 2000 (Note 5). The transaction
is expected to be completed before the end of the second quarter of calendar
2000, although there can be no assurance that the Company will complete this
sale. Unaudited revenues and operating income before restructuring charges of
the five soil-remediation facilities that will be sold aggregated $16,425,000
and $4,351,000, respectively, in the first nine months of fiscal 2000, and
$19,439,000 and $3,445,000, respectively, in fiscal 1999.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
11
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 3, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company is a national provider of environmental-liability and
resource-management services. Through a nationwide network of offices, the
Company offers these and related consulting services in four segments:
Consulting and Engineering, Nuclear Remediation, Soil Remediation, and Fluids
Recycling.
The Company's Consulting and Engineering segment provides consultation,
engineering, and on-site services to help clients manage problems associated
with environmental compliance, resource management, and the remediation of
industrial sites contaminated with organic and inorganic wastes and residues.
The Company's eastern U.S. construction operation performs the cleanup of
hazardous waste sites for government and industry as a prime construction
contractor and completes predesigned remedial action contracts at sites
containing hazardous, toxic, and radioactive wastes.
The Company's Nuclear Remediation segment provides services to remove
radioactive contaminants from sand, gravel, and soil, as well as health physics
services, radiochemistry-laboratory services, radiation-dosimetry services,
radiation-instrument calibration and repair services, and radiation-source
production. The Company also provides nuclear-remediation and waste-management
services to government and private sector clients.
Through its Soil Remediation segment, the Company designs and operates
fixed and mobile facilities for the remediation of contaminated soil. The
Company's soil-remediation centers are environmentally secure facilities for
receiving, storing, and processing petroleum-contaminated soils. In February
2000, the Company signed a letter of intent to sell five of the Company's six
remaining soil-remediation facilities. The transaction is expected to be
completed before the end of the second quarter of calendar 2000, although there
can be no assurance that the Company will complete this sale (Note 10).
The Company's Fluids Recycling segment collects, tests, processes, and
recycles used motor oil and other industrial fluids in certain western states
(Oregon, Idaho, Nevada, Utah, Colorado, New Mexico, Texas, and Arizona).
The Company's businesses are affected by several factors, particularly
regulation and enforcement of remediation activities, extreme weather
variations, economic cycles, the availability of federal and state funding for
environmental cleanup, and local competition.
The Company has acquired a number of businesses in the last three years.
The Company does not presently intend to actively seek to make additional
acquisitions in the near future, and expects instead to concentrate its
resources on strengthening its core businesses.
Results of Operations
Third Quarter Fiscal 2000 Compared With Third Quarter Fiscal 1999
Revenues increased to $42.6 million in the third quarter of fiscal 2000
from $36.9 million in the third quarter of fiscal 1999. Revenues increased $5.3
million to $25.1 million in the Consulting and Engineering segment, primarily
due to higher revenues from a large remedial-construction contract that is
expected to continue through fiscal 2001. Soil Remediation segment revenues
increased $1.3 million to $7.0 million, primarily as a result of an increase in
the volume of soil processed, offset in part by the March 1999 closure of a
soil-recycling facility that had revenues of $0.2
12
Third Quarter Fiscal 2000 Compared With Third Quarter Fiscal 1999 (continued)
million in the third quarter of fiscal 1999 (Note 5). These increases in
revenues were offset in part by a $1.0 million decrease in revenues at the
Nuclear Remediation segment as a result of the completion of a government
contract in August 1999.
The gross profit margin increased to 17% in the third quarter of fiscal
2000 from 15% in the third quarter of fiscal 1999. The gross profit margin
increased primarily due to the discontinuation of depreciation at the
soil-recycling facilities to be sold or closed, as discussed below. To a lesser
extent, the gross profit margin increased due to higher margins in the
Consulting and Engineering segment, primarily as a result of a reduction of
losses in its eastern U.S. construction operation on certain
remedial-construction contracts.
Selling, general, and administrative expenses as a percentage of revenues
increased to 12% in the third quarter of fiscal 2000 from 11% in the third
quarter of fiscal 1999. Selling, general, and administrative expenses increased
$0.9 million, primarily due to additional costs resulting from the higher volume
of business in the Consulting and Engineering segment, $0.2 million of
litigation settlement costs, and $0.1 million of increased insurance costs.
In the first quarter of fiscal 2000, the Company announced plans to sell
three soil-recycling facilities, in addition to the two announced for closure in
fiscal 1999, discussed below (Note 5). The Company took these actions after a
period of operating losses at these facilities, which it believes arose from
relaxed enforcement of state rules concerning disposal of contaminated soils and
alternative disposal options to customers. The discontinuation of depreciation
at the soil-recycling facilities to be sold or closed increased operating income
by $0.3 million during the third quarter of fiscal 2000. All of the facilities
that will be sold or closed reported aggregate revenues and operating income,
prior to restructuring costs, of $8.7 million and $1.9 million, respectively, in
the first nine months of fiscal 2000, and $12.4 million and $0.7 million,
respectively, in fiscal 1999.
Interest income increased to $0.4 million in the third quarter of fiscal
2000 from $0.2 million in the third quarter of fiscal 1999 as a result of higher
average invested balances.
The effective tax rates were 45% and 50% in the third quarter of fiscal
2000 and 1999, respectively. The effective tax rates exceeded the statutory
federal income tax rate in both periods primarily due to the impact of state
income taxes and nondeductible amortization of cost in excess of net assets of
acquired companies. The effective tax rate decreased in fiscal 2000 due to the
lower relative effect of nondeductible amortization of cost in excess of net
assets of acquired companies.
In July 1998, the Company filed suit against a customer, seeking payment
of $2.6 million that has been billed under a contract to provide remediation
services. The customer has disputed its obligation to pay the Company. While the
Company generally maintains reserves for these types of matters, failure to
collect this receivable would have a material adverse impact on the Company's
future results of operations.
First Nine Months Fiscal 2000 Compared With First Nine Months Fiscal 1999
Revenues increased to $117.0 million in the first nine months of fiscal
2000 from $106.5 million in the first nine months of fiscal 1999. Revenues
increased $9.3 million to $64.9 million in the Consulting and Engineering
segment, primarily due to higher revenues from a large remedial-construction
contract that is expected to continue through fiscal 2001. Soil Remediation
segment revenues increased $1.2 million to $18.6 million primarily as a result
of the reasons discussed in the results of operations for the third quarter. The
soil recycling facility that closed in fiscal 1999 had revenues of $0.9 million
in that period. Fluids Recycling segment revenues increased $0.6 million to $7.8
million, primarily due to increased capacity as a result of geographic
expansion. These increases in revenues were offset in part by a $0.6 million
decrease in revenues in the Nuclear Remediation segment primarily as a result of
the reason discussed in the results of operations for the third quarter.
13
First Nine Months Fiscal 2000 Compared With First Nine Months Fiscal 1999
(continued)
The gross profit margin increased to 17% in the first nine months of
fiscal 2000 from 16% in the first nine months of fiscal 1999. The gross profit
margin increased primarily due to the discontinuation of depreciation at the
soil-recycling facilities to be sold or closed as discussed below.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 11% in the first nine months of fiscal 2000 from 12% in the first
nine months of fiscal 1999, primarily due to the effect of increased revenues as
a percentage of selling, general, and administrative expenses in the
Construction and Engineering segment and the Soil Remediation segment, offset in
part by the reasons discussed in the results of operations for the third
quarter.
In connection with the proposed sale of businesses discussed in the
results of operations for the third quarter, the Company recorded $9.6 million
of restructuring costs in the first nine months of fiscal 2000. These charges
primarily represent the excess of book value of the businesses proposed to be
sold over the estimated proceeds from their sale (Note 5). The discontinuation
of depreciation at the soil-recycling facilities to be sold or closed reduced
the operating loss by $1.2 million during the first nine months of fiscal 2000.
During the second quarter of fiscal 1999, the Company recorded $9.2
million of restructuring costs in connection with the decision to close two
soil-recycling facilities (Note 5). The costs included a write-down of fixed
assets to their estimated disposal value and a write-off of intangible assets,
including cost in excess of net assets of acquired companies, as well as other
closure costs. The decision was due to the reasons discussed in the results of
operations for the third quarter.
Interest income increased to $1.1 million in the first nine months of
fiscal 2000 from $0.5 million in the first nine months of fiscal 1999 as a
result of higher average invested balances.
The Company recorded tax benefits in the first nine months of fiscal 2000
and 1999 at an effective rate below the statutory federal income tax rate. The
effective tax rate was below the federal statutory rate in fiscal 2000 primarily
due to the impact of state income taxes and nondeductible amortization of cost
in excess of net assets of acquired companies. The effective tax rate in 1999
was below the statutory federal income tax rate primarily due to the impact of
the write-off of nondeductible cost in excess of net assets of acquired
companies.
Liquidity and Capital Resources
Consolidated working capital was $2.8 million at January 1, 2000, compared
with $37.0 million at April 3, 1999. The decline in working capital is primarily
due to the reclassification of $38.0 million of subordinated convertible
debentures due May 2000 to current liabilities. Cash and cash equivalents
totaled $3,000 at January 1, 2000, compared with $20.7 million at April 3, 1999.
In addition, as of January 1, 2000, the Company had $29.3 million invested in an
advance to affiliate. Prior to the use of a new domestic cash management
arrangement between the Company and Thermo Electron Corporation (Note 6), which
became effective June 1, 1999, amounts invested with Thermo Electron were
included in cash and cash equivalents. During the first nine months of fiscal
2000, $10.7 million of cash was provided by operating activities. Accounts
receivable and unbilled contract costs and fees used $3.5 million of cash,
primarily due to increased revenues in the third quarter of fiscal 2000,
compared with the fourth quarter of fiscal 1999, and, to a lesser extent, the
timing of billings. The Company expects to pay the balance of restructuring
costs accrued for severance of $0.5 million primarily during the remainder of
calendar 2000 and the balance of costs accrued for facilities of $0.7 million
through the expiration of a lease in 2006.
Excluding advance to affiliate activity, the Company's primary investing
activity in the first nine months of fiscal 2000 consisted of capital
expenditures. During the first nine months of fiscal 2000, the Company expended
$3.0 million for purchases of property, plant, and equipment and plans to make
capital expenditures of approximately $1.5 million during the remainder of
fiscal 2000.
14
Liquidity and Capital Resources (continued)
The Company's financing activities provided $0.9 million of cash. Cash of
$1.9 million was provided by the collection of a long-term note receivable. This
source of cash was offset in part by $1.4 million of cash used to pay a
semiannual cash dividend of $0.10 per share of common stock on September 30,
1999, to shareholders of record as of September 20, 1999.
The Company generally expects to have positive cash flow from its existing
operations. The Company's $38.0 million principal amount 4 7/8% convertible
debentures mature on May 1, 2000. The maturity of these debentures will have a
material adverse effect on the Company's liquidity. These debentures may be
repaid prior to the maturity date if the merger of the Company with Thermo
Electron (Note 7) is completed prior to that time. The merger of the Company
with Thermo Electron is considered a redemption event causing the acceleration
of the repayment of the debentures.
Year 2000
As of the date of this report, the Company has completed its year 2000
initiatives which included: (i) testing and upgrading significant information
technology systems and facilities; (ii) assessing the year 2000 readiness of its
key suppliers, vendors, and customers; and (iii) developing contingency plans.
As a result of completing these initiatives, the Company believes that all
of its material information technology systems and critical non-information
technology systems are year 2000 compliant. In addition, the Company is not
aware of any significant supplier or vendor that has experienced material
disruption due to year 2000 issues. The Company has also developed a contingency
plan to allow its primary business operations to continue despite disruptions
due to year 2000 problems, if any, that might yet arise in the future. The costs
incurred to date by the Company in connection with the year 2000 issue have not
been material.
While the Company to date has been successful in minimizing negative
consequences arising from year 2000 issues, there can be no assurance that in
the future the Company's business operations or financial condition may not be
impacted by year 2000 problems, such as increased warranty claims, vendor and
supplier disruptions, or litigation relating to year 2000 issues.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk from changes in interest rates and
equity prices has not changed materially from its exposure at year-end fiscal
1999.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On November 22, 1999, a complaint was filed in the Court of Chancery of
the State of Delaware in and for New Castle County by a stockholder of the
Company. The complaint names the Company, Thermo Electron, and certain directors
of the Company as defendants and alleges, among other things, that the proposed
merger, if consummated, would force the minority shareholders of the Company to
sell their shares for an inadequate price, due to the defendants' alleged
failure to deal fairly with the interests of the Company's minority
shareholders. The plaintiff seeks damages and other relief. The defendants have
not yet filed an answer to the complaint.
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Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On October 21, 1999, the Company filed a Current Report on Form 8-K, dated
October 19, 1999, with respect to the execution of an Agreement and Plan of
Merger by and among the Company, Retec Acquisition Corporation, and Thermo
Electron Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 10th day of February 2000.
THERMORETEC CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
17
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.