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 2, 1999.
[ ] 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 (I.R.S. Employer
incorporation or organization) 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 29, 1999
---------------------------- --------------------------------
Common Stock, $.01 par value 13,167,907
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMORETEC CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
January 2, April 4,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $14,050 and
$8,000 under repurchase agreement with
affiliated company) $ 14,050 $ 8,912
Available-for-sale investments, at quoted market
value (amortized cost of $2,008) - 2,003
Accounts receivable, less allowances of $1,066
and $1,690 33,626 30,529
Unbilled contract costs and fees 9,095 8,154
Prepaid and refundable income taxes 5,384 2,256
Prepaid expenses 1,829 2,257
Due from parent company and Thermo Electron - 667
-------- --------
63,984 54,778
-------- --------
Property, Plant, and Equipment, at Cost (Note 4) 52,342 57,040
Less: Accumulated depreciation and amortization 22,419 20,029
-------- --------
29,923 37,011
-------- --------
Other Assets (Note 4) 9,612 10,954
-------- --------
Cost in Excess of Net Assets of Acquired Companies
(Note 4) 35,930 37,568
-------- --------
$139,449 $140,311
======== ========
2
THERMORETEC CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
January 2, April 4,
(In thousands except share amounts) 1999 1998
- --------------------------------------------------------------------------
Current Liabilities:
Accounts payable $ 11,250 $ 10,936
Accrued payroll and employee benefits 5,853 4,875
Deferred revenue 2,642 3,374
Billings in excess of revenues earned 1,747 1,277
Other accrued expenses (Note 4) 6,275 4,375
Due to parent company and Thermo Electron 908 -
-------- --------
28,675 24,837
-------- --------
Deferred Income Taxes 407 407
-------- --------
Long-term Obligations:
4 7/8% Subordinated convertible debentures
(includes $3,425 and $3,000 of related-party
debt) 37,950 37,950
3 7/8% Subordinated convertible note, due to
parent company 2,650 2,650
-------- --------
40,600 40,600
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000 shares
authorized; 14,247,572 and 14,019,918 shares
issued 142 140
Capital in excess of par value 89,942 89,103
Accumulated deficit (11,215) (5,592)
Treasury stock at cost, 1,079,665 and 1,089,085
shares (9,102) (9,181)
Net unrealized loss on available-for-sale
investments (Note 3) - (3)
-------- --------
69,767 74,467
-------- --------
$139,449 $140,311
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMORETEC CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
-------------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Revenues $36,907 $34,620
------- -------
Costs and Operating Expenses:
Cost of revenues 31,364 30,673
Selling, general, and administrative
expenses 4,188 3,633
------- -------
35,552 34,306
------- -------
Operating Income 1,355 314
Interest Income 197 231
Interest Expense (includes $67 and $62 to
related parties) (542) (558)
Gain on Sale of Unconsolidated Subsidiary - 3,012
------- -------
Income Before Income Taxes 1,010 2,999
Income Tax Provision (504) (1,298)
------- -------
Net Income $ 506 $ 1,701
======= =======
Basic and Diluted Earnings per Share (Note 2) $ .04 $ .13
======= =======
Weighted Average Shares (Note 2):
Basic 13,168 12,718
======= =======
Diluted 13,178 15,207
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMORETEC CORPORATION
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
------------------------
January 2, January 3,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------
Revenues $106,463 $ 96,463
-------- --------
Costs and Operating Expenses:
Cost of revenues 89,743 82,871
Selling, general, and administrative
expenses 12,310 10,727
Restructuring costs (Note 4) 9,176 -
-------- --------
111,229 93,598
------- -------
Operating Income (Loss) (4,766) 2,865
Interest Income 548 773
Interest Expense (includes $195 and $186 to
related parties) (1,625) (1,665)
Equity in Earnings of Unconsolidated
Subsidiary - 174
Gain on Sale of Unconsolidated Subsidiary - 3,012
Other Income - 204
-------- --------
Income (Loss) Before Income Taxes (5,843) 5,363
Income Tax (Provision) Benefit 1,514 (2,390)
-------- --------
Net Income (Loss) $ (4,329) $ 2,973
======== ========
Basic and Diluted Earnings (Loss) per
Share (Note 2):
Basic $ (.33) $ .24
======== ========
Diluted $ (.33) $ .23
======== ========
Weighted Average Shares (Note 2):
Basic 13,043 12,552
======== ========
Diluted 13,043 12,994
======== ========
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 2, January 3,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ (4,329) $ 2,973
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Noncash restructuring costs (Note 4) 8,105 -
Depreciation and amortization 5,797 5,615
Equity in earnings of unconsolidated
subsidiary - (174)
Gain on sale of unconsolidated subsidiary - (3,012)
Provision for losses on accounts
receivable 285 71
Other noncash items 170 (228)
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable (2,497) (9,012)
Unbilled contract costs and fees (941) (1,386)
Other current assets (2,690) (843)
Accounts payable 714 3,720
Billings in excess of revenues earned 470 588
Other current liabilities (Note 4) 1,683 (2,644)
Due to (from) parent company and
Thermo Electron 1,575 (477)
-------- --------
Net cash provided by (used in) operating
activities 8,342 (4,809)
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (576) (5,064)
Purchases of property, plant, and equipment (3,116) (4,653)
Proceeds from sale of unconsolidated
subsidiary - 8,825
Proceeds from sale of property, plant, and
equipment 186 -
Proceeds from sales and maturities of
available-for-sale investments 2,006 48
Purchase of other assets (1,368) (1,285)
Other 122 472
-------- --------
Net cash used in investing activities $ (2,746) $ (1,657)
-------- --------
6
THERMORETEC CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
------------------------
January 2, January 3,
(In thousands) 1999 1998
- --------------------------------------------------------------------------
Financing Activities:
Repurchases of Company common stock $ - $ (3,055)
Dividends paid (402) (354)
Net proceeds from issuance of Company common
stock 28 77
Other (84) (454)
-------- --------
Net cash used in financing activities (458) (3,786)
-------- --------
Increase (Decrease) in Cash and Cash Equivalents 5,138 (10,252)
Cash and Cash Equivalents at Beginning of
Period 8,912 18,600
-------- --------
Cash and Cash Equivalents at End of Period $ 14,050 $ 8,348
======== ========
Noncash Activities:
Fair value of assets of acquired companies $ 576 $ 13,629
Cash paid for acquired companies (576) (5,665)
Issuance of Company common stock for acquired
companies - (2,850)
-------- --------
Liabilities assumed of acquired companies $ - $ 5,114
======== ========
Dividends reinvested in Company common stock $ 892 $ 870
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoRetec Corporation (the Company), formerly Thermo Remediation Inc.,
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 2, 1999, the results of operations for the three- and nine-month
periods ended January 2, 1999, and January 3, 1998, and the cash flows for the
nine-month periods ended January 2, 1999, and January 3, 1998. The Company's
results of operations for the three-month periods ended January 2, 1999, and
January 3, 1998, include 13 weeks and 14 weeks, respectively, and its results of
operations for the nine-month periods ended January 2, 1999, and January 3,
1998, include 39 weeks and 40 weeks, respectively. Interim results are not
necessarily indicative of results for a full year.
The consolidated balance sheet presented as of April 4, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. Certain amounts in fiscal 1998 have
been reclassified to conform to the presentation in the fiscal 1999 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 4, 1998, filed with the Securities and
Exchange Commission.
2. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------ -------------------
(In thousands except Jan. 2, Jan. 3, Jan. 2, Jan. 3,
per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------
Basic
Net Income (Loss) $ 506 $ 1,701 $(4,329) $ 2,973
------- ------- ------- -------
Weighted Average Shares 13,168 12,718 13,043 12,552
------- ------- ------- -------
Basic Earnings (Loss) per
Share $ .04 $ .13 $ (.33) $ .24
======= ======= ======= =======
8
2. Earnings (Loss) per Share (continued)
Three Months Ended Nine Months Ended
------------------- -------------------
(In thousands except Jan. 2, Jan. 3, Jan. 2, Jan. 3,
per share amounts) 1999 1998 1999 1998
- --------------------------------------------------------------------------
Diluted
Net Income (Loss) $ 506 $ 1,701 $(4,329) $ 2,973
Effect of Convertible
Obligations - 293 - 46
------- ------- ------- -------
Income Available to Common
Shareholders, as Adjusted $ 506 $ 1,994 $(4,329) $ 3,019
------- ------- ------- -------
Weighted Average Shares 13,168 12,718 13,043 12,552
Effect of:
Convertible obligations - 2,387 - 270
Stock options 10 102 - 172
------- ------- ------- -------
Weighted Average Shares,
as Adjusted 13,178 15,207 13,043 12,994
------- ------- ------- -------
Diluted Earnings (Loss)
per Share $ .04 $ .13 $ (.33) $ .23
======= ======= ======= =======
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options and warrants because
the effect would be antidilutive. As of January 2, 1999, there were 1,544,660 of
such options and warrants outstanding, with exercise prices ranging from $1.98
to $15.40 per share. In addition, the computation of diluted earnings per share
for all periods, other than the third quarter of fiscal 1998, 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, and for
the fiscal 1999 periods 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, because the effects would be antidilutive.
3. Comprehensive Income
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represents unrealized, net of tax, losses from available-for-sale investments,
reported as a component of shareholders' investment in the accompanying fiscal
1998 balance sheet. During the third quarter of fiscal 1999 and 1998, the
Company had comprehensive income of $507,000 and $1,693,000, respectively.
During the first nine months of fiscal 1999 and 1998, the Company had a
comprehensive loss of $4,326,000 and comprehensive income of $2,960,000,
respectively.
9
4. Restructuring Costs
During the second quarter of fiscal 1999, the Company recorded $9.2 million
of restructuring costs in connection with the closure of two soil-recycling
facilities. The costs include a $6.2 million write-down of fixed assets to their
estimated disposal value of $0.9 million and a $1.9 million write-off of
intangible assets, including cost in excess of net assets of acquired companies,
as well as $1.1 million for other closure costs, including $0.5 million for
lease costs and $0.3 million for severance for nine employees. The Company
expects to complete the closure of the two soil-recycling facilities before the
end of fiscal 1999. During the first nine months of fiscal 1999, the Company
expended $0.1 million on closure costs. As of January 2, 1999, other accrued
expenses in the accompanying balance sheet include $1.0 million for closure
costs related to the facilities, including ongoing lease costs and, to a lesser
extent, severance.
5. Proposed Reorganization
On August 12, 1998, Thermo Electron Corporation announced a proposed
reorganization involving certain of Thermo Electron's subsidiaries, including
the Company. As part of this reorganization, Thermo Electron announced that the
Company may be taken private and become a wholly owned subsidiary of Thermo
TerraTech Inc. It is currently contemplated that the Company's shareholders
would receive shares of common stock of Thermo TerraTech in exchange for their
shares of the Company's common stock. The completion of this transaction is
subject to numerous conditions, including the establishment of prices or
exchange ratios; confirmation of anticipated tax consequences; the approval of
the Board of Directors of Thermo TerraTech; the negotiation and execution of a
definitive merger agreement; the receipt of a fairness opinion from an
investment banking firm that the transaction is fair to the Company's
shareholders (other than Thermo TerraTech and Thermo Electron) from a financial
point of view; the approval of the Company's Board of Directors, including its
independent directors; and clearance by the Securities and Exchange Commission
of any necessary documents regarding the proposed transaction.
6. Option Exchange
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 1,119,000 shares at a weighted average exercise price of $7.46 elected
to participate in this exchange and, as a result, received options to purchase
560,000 shares of Company common stock at $2.66 per share. The other terms of
the new options are the same as the exchanged options, except that the holders
may not sell shares purchased pursuant to such new options for a period of six
months from the exchange date.
10
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,"
"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 4, 1998, filed with the Securities and Exchange
Commission.
Overview
The Company is a national provider of environmental-liability management
services. Through a nationwide network of offices, the Company offers these and
related consulting services in five areas: industrial remediation, nuclear
remediation, waste-fluids collection and recycling, soil remediation, and
environmental-management and information-technology systems.
The Company's industrial remediation businesses provide consultation,
engineering, and on-site services to help clients manage problems associated
with environmental compliance, waste management, and the remediation of
industrial sites contaminated with organic and inorganic wastes and residues. In
May 1997, the Company's Remediation Technologies, Inc. (RETEC) subsidiary
acquired TriTechnics Corporation, an environmental engineering and consulting
firm. The Company's IEM Sealand subsidiary 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.
Through its RPM Systems, Inc. subsidiary, acquired in August 1997, the
Company develops and implements management and computer-based systems that aid
in the collection and application of environmental data, helping to establish or
improve a customer's environmental-compliance program while controlling the
related costs.
The Company provides nuclear-remediation 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. In November 1997, the Company acquired Benchmark Environmental
Corporation, a provider of nuclear-remediation and waste-management services to
government and private sector clients.
11
Overview (continued)
The Company also collects, tests, processes, and recycles used motor oil and
other industrial fluids in certain western states (Oregon, Idaho, Nevada, Utah,
Colorado, New Mexico, and Arizona).
Through its TPS Technologies division, the Company designs and operates
facilities for the remediation of nonhazardous soil and mobile equipment for the
onsite remediation of such wastes. The Company's soil-remediation centers are
environmentally secure facilities for receiving, storing, and processing
petroleum-contaminated soils.
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. The Company may, however,
acquire one or more complementary businesses if they are presented to the
Company on terms the Company believes to be attractive.
Results of Operations
Third Quarter Fiscal 1999 Compared With Third Quarter Fiscal 1998
Revenues increased 7% to $36.9 million in the third quarter of fiscal 1999
from $34.6 million in the third quarter of fiscal 1998. Industrial remediation
revenues increased $1.2 million due to higher revenues from consulting and
engineering services at RETEC. This increase was more than offset by a decrease
in revenues at IEM Sealand resulting from a decline in the number of contracts
in process. Revenues from nuclear services increased due to the inclusion of
$1.0 million in revenues from an acquired business and, to a lesser extent,
internal growth. Revenues from fluids-recycling services increased $0.4 million,
primarily due to increased capacity as a result of geographical expansion.
Revenues from soil-remediation services increased $0.9 million in the third
quarter of fiscal 1999, resulting from higher volumes of soil processed. The
Company believes that the recent strength in the soil-remediation market is due
in part to compliance with a December 1998 Environmental Protection Agency
deadline for modifying underground storage tanks. Although the Company expects
this market to remain viable for some time after December 1998, this source of
business is expected to decline in future years, and the Company believes it
will be required to refocus its soil-remediation services business over time.
The gross profit margin increased to 15% in the third quarter of fiscal 1999
from 11% in the third quarter of fiscal 1998. The gross profit margin increased
due to the effect in fiscal 1998 of losses on certain contracts for remedial
construction services at IEM Sealand and, to a lesser extent, due to higher
utilization of billable personnel at RETEC in fiscal 1999. Following the
decision to close two soil-recycling
12
Third Quarter Fiscal 1999 Compared With Third Quarter Fiscal 1998
(continued)
facilities and to write down the associated assets (Note 4), the Company
discontinued depreciating the fixed assets at the sites. This action reduced
cost of revenues in the third quarter of fiscal 1999 by $0.2 million.
Selling, general, and administrative expenses as a percentage of revenues
increased to 11% in the third quarter of fiscal 1999 from 10% in the third
quarter of fiscal 1998, primarily due to higher provisions for uncollectible
accounts, increased administrative costs associated with the Company's name
change, and higher insurance costs.
Gain on sale of unconsolidated subsidiary in fiscal 1998 resulted from the
Company's sale of its interest in a joint venture.
The effective tax rates in the third quarter of fiscal 1999 and 1998 were
50% and 43%, respectively. The effective tax rates exceeded the statutory
federal income tax rate 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 increased in fiscal 1999 due to the higher
relative effect of nondeductible expenses.
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 1999 Compared With First Nine Months Fiscal 1998
Revenues increased 10% to $106.5 million in the first nine months of fiscal
1999 from $96.5 million in the first nine months of fiscal 1998. Industrial
remediation revenues increased $7.2 million due to higher revenues from
consulting and engineering services at RETEC and due to the inclusion of $1.0
million in revenues from acquired companies. These increases were more than
offset by a decrease in revenues at IEM Sealand resulting from a decline in the
number of contracts in process. Revenues from nuclear services increased
primarily due to the inclusion of $5.2 million in revenues from an acquired
business. Revenues from fluids-recycling services increased $2.2 million,
primarily due to increased capacity as a result of geographical expansion.
Revenues from soil-remediation services increased $3.8 million in fiscal 1999,
resulting from higher volumes of soil processed.
The gross profit margin increased to 16% in the first nine months of fiscal
1999 from 14% in the first nine months of fiscal 1998. The gross profit margin
increased in fiscal 1999 primarily due to higher volumes of soil processed and
higher utilization of billable personnel at RETEC.
Selling, general, and administrative expenses as a percentage of revenues
increased to 12% in the first nine months of fiscal 1999 from 11% in the first
nine months of fiscal 1998, primarily due to the reasons discussed in the
results for the third quarter.
13
First Nine Months Fiscal 1999 Compared With First Nine Months Fiscal 1998
(continued)
During the second quarter of fiscal 1999, the Company recorded $9.2 million
of restructuring costs in connection with the closure of two soil-recycling
facilities. The costs include 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 (Note 4). The
closure was in response to changes in market conditions, which resulted in
lower-priced disposal alternatives. These facilities reported aggregated
revenues and operating losses of $2.2 million and $0.8 million, respectively, in
fiscal 1998 and aggregated revenues and operating losses prior to the decision
to close the facilities of $1.8 million and $0.1 million, respectively, in
fiscal 1999.
Interest income decreased to $0.5 million in the first nine months of fiscal
1999 from $0.8 million in the first nine months of fiscal 1998 as a result of
lower average invested balances.
Equity in earnings of unconsolidated subsidiary in fiscal 1998 represents
the Company's proportionate share of income from a joint venture that was sold
in fiscal 1998. Gain on sale of unconsolidated subsidiary resulted from the
Company's sale of its interest in this joint venture.
The Company recorded a tax benefit in the first nine months of fiscal 1999
at an effective rate 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. The effective tax rate was 45% in the first nine months of
fiscal 1998. This rate exceeded the statutory federal income tax rate primarily
due to the impact of state income taxes and nondeductible amortization of cost
in excess of net assets of acquired companies.
Liquidity and Capital Resources
Consolidated working capital, including cash, cash equivalents, and
available-for-sale investments, was $35.3 million at January 2, 1999, compared
with $29.9 million at April 4, 1998. Cash, cash equivalents, and
available-for-sale investments were $14.1 million at January 2, 1999, compared
with $10.9 million at April 4, 1998. During the first nine months of fiscal
1999, $8.3 million of cash was provided by operating activities. The Company
used cash to fund an increase in accounts receivable of $2.5 million, primarily
as a result of the $2.6 million receivable under dispute, discussed in the
results of operations for the third quarter of fiscal 1999. Cash of $2.7 million
was used to fund an increase in other current assets, primarily prepaid and
refundable income taxes.
The Company's investing activities used $2.7 million of cash during the
first nine months of fiscal 1999. The Company expended $3.1 million for
purchases of property, plant, and equipment and plans to make capital
expenditures of approximately $2 million during the remainder of fiscal 1999. In
August 1998, the Company, through its Thermo Fluids subsidiary,
14
Liquidity and Capital Resources (continued)
acquired substantially all of the assets of Genesis Petroleum Corporation for
$0.6 million in cash. Genesis provides oil collection and oil re-refinery
services.
During the first nine months of fiscal 1999, the Company's financing
activities used $0.5 million of cash. On September 1, 1998, the Company paid a
semiannual cash dividend of $0.10 per share of common stock to shareholders of
record as of August 18, 1998. The Company paid $0.5 million in connection with
this dividend. The amount of cash dividends ultimately paid by the Company is
dependent on the number of shareholders participating in the Company's Dividend
Reinvestment Plan.
Although the Company does not presently intend to actively seek to acquire
additional businesses in the near future, it may acquire one or more
complementary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. In addition, $38.0 million principal amount of the Company's 4
7/8% convertible debentures mature on May 1, 2000. The Company expects that it
will finance any such acquisitions and the redemption of such debentures through
a combination of internal funds and/or short-term borrowings from Thermo
TerraTech Inc. or Thermo Electron Corporation, although it has no agreement with
these companies to ensure that funds will be available on acceptable terms, or
at all.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, services and operations. The Company's year
2000 initiatives include (i) testing and upgrading significant information
technology systems and facilities; (ii) contacting key suppliers and vendors to
determine their year 2000 compliance status; and (iii) developing a contingency
plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its critical
information technology systems and facilities will be ready for the year 2000.
The first phase of the program, testing and evaluating the Company's critical
information technology systems and facilities for year 2000 compliance, has
largely been completed. During phase one, the Company tested and evaluated its
significant computer systems, software applications and related equipment for
year 2000 compliance. The Company also evaluated the potential year 2000 impact
on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information technology
systems, and this process was approximately 50% complete as of January 2, 1999.
In many cases, such upgrades or replacements are being made in the ordinary
course of business, without accelerating previously scheduled upgrades or
replacements. The Company expects that all of its material information
15
Year 2000 (continued)
technology systems and critical facilities will be year 2000 compliant by
September 1999. For phase three of the program, the Company will continue
periodic testing of its critical internal business systems and facilities in an
effort to minimize operating disruptions due to year 2000 issues.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company has started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has not completed the majority of its
assessment of third party risk, but expects to be substantially completed by
September 1999.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. This plan may include identifying and securing other suppliers. As the
Company continues to evaluate the year 2000 readiness of its business systems
and facilities, and significant suppliers and vendors, it will modify and adjust
its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred third-party expenses (External Costs) related to
year 2000 issues of approximately $50,000 as of January 2, 1999, and the total
External Costs of year 2000 remediation are expected to be approximately
$200,000. All of the External Costs incurred as of January 2, 1999, were spent
on testing and upgrading information technology systems. All internal costs and
related external costs, other than capital additions, related to year 2000
remediation have been and will continue to be expensed as incurred.
The Company does not track the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Some services provided by the Company involve the delivery to clients of
third-party software and
16
Year 2000 (continued)
hardware. In addition, certain older third-party products, which the Company no
longer uses in providing its services to clients, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations and financial condition in amounts that cannot be
reasonably estimated at this time.
PART II - OTHER INFORMATION
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
17
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 5th day of February 1999.
THERMORETEC CORPORATION
/s/ Paul F. Kelleher
-------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
-------------------------
Theo Melas-Kyriazi
Chief Financial Officer
18
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.