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 October 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 Identification No.)
incorporation or organization)
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 October 29, 1999
Common Stock, $.01 par value 13,607,715
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMORETEC CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 2, April 3,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents (includes $20,607 under repurchase $ 63 $20,669
agreement with affiliated company in fiscal 1999)
Advance to affiliate (Note 6) 29,131 -
Accounts receivable, less allowances of $1,775 and $1,706 23,986 32,035
Unbilled contract costs and fees 12,901 7,442
Prepaid and refundable income taxes 3,830 3,923
Prepaid expenses 1,566 1,454
-------- --------
71,477 65,523
-------- --------
Property, Plant, and Equipment, at Cost (Note 5) 48,253 55,280
Less: Accumulated depreciation and amortization 25,638 23,538
-------- --------
22,615 31,742
-------- --------
Other Assets 7,474 7,589
-------- --------
Cost in Excess of Net Assets of Acquired Companies 34,731 35,087
-------- --------
$136,297 $139,941
======== ========
2
THERMORETEC CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 2, April 3,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Subordinated convertible debentures (includes $4,300 of related-party $ 37,950 $ -
debt)
Accounts payable 10,055 10,048
Accrued payroll and employee benefits 6,587 6,326
Deferred revenue 3,392 2,675
Billings in excess of revenues earned 1,766 3,323
Other accrued expenses (Note 5) 5,771 4,068
Due to parent company and affiliated companies 2,844 2,109
-------- --------
68,365 28,549
-------- --------
Deferred Income Taxes - 511
-------- --------
Subordinated Convertible Obligations (includes $2,650 and $6,830 2,650 40,600
of related-party debt)
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000 shares authorized; 142 142
14,247,572 shares issued
Capital in excess of par value 87,741 88,045
Accumulated deficit (17,145) (12,063)
Treasury stock at cost, 648,212 and 693,074 shares (5,456) (5,843)
-------- --------
65,282 70,281
-------- --------
$136,297 $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
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Revenues $38,560 $35,140
------- -------
Costs and Operating Expenses:
Cost of revenues 31,991 29,507
Selling, general, and administrative expenses 3,899 3,930
Restructuring costs (Note 5) 63 9,176
------- -------
35,953 42,613
------- -------
Operating Income (Loss) 2,607 (7,473)
Interest Income 406 185
Interest Expense (includes $78 and $66 to related parties) (542) (542)
------- -------
Income (Loss) Before Income Taxes 2,471 (7,830)
Income Tax (Provision) Benefit (1,143) 2,507
------- -------
Net Income (Loss) $ 1,328 $(5,323)
======= =======
Basic and Diluted Earnings (Loss) per Share (Note 3) $ .10 $ (.41)
======= =======
Weighted Average Shares (Note 3):
Basic 13,578 13,027
======= =======
Diluted 14,059 13,027
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMORETEC CORPORATION
Consolidated Statement of Operations
(Unaudited)
Six Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Revenues $74,409 $69,556
------- -------
Costs and Operating Expenses:
Cost of revenues 61,895 58,379
Selling, general, and administrative expenses 7,722 8,122
Restructuring costs (Note 5) 9,632 9,176
------- -------
79,249 75,677
------- -------
Operating Loss (4,840) (6,121)
Interest Income 720 351
Interest Expense (includes $156 and $128 to related parties) (1,084) (1,083)
------- -------
Loss Before Income Taxes (5,204) (6,853)
Income Tax Benefit 1,539 2,018
------- -------
Net Loss $(3,665) $(4,835)
======= =======
Basic and Diluted Loss per Share (Note 3) $ (.27) $ (.37)
======= =======
Basic and Diluted Weighted Average Shares (Note 3) 13,569 12,981
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMORETEC CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Operating Activities:
Net loss $ (3,665) $(4,835)
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
Noncash restructuring costs (Note 5) 9,071 8,105
Change in deferred income taxes (2,841) -
Depreciation and amortization 3,223 4,027
Provision for losses on accounts receivable 118 135
Other noncash items 198 116
Changes in current accounts, excluding the effects of acquisition:
Accounts receivable 7,750 (5,663)
Unbilled contract costs and fees (5,459) (877)
Other current assets (135) (2,861)
Accounts payable 7 (1,587)
Billings in excess of revenues earned (1,557) (217)
Other current liabilities (Note 5) 2,710 2,169
Due to parent company and affiliated companies 735 900
-------- -------
Net cash provided by (used in) operating activities 10,155 (588)
-------- -------
Investing Activities:
Advances to affiliate, net (Note 6) (29,131) -
Acquisition, net of cash acquired - (576)
Purchases of property, plant, and equipment (2,210) (2,330)
Proceeds from sale of property, plant, and equipment 22 185
Other (46) (76)
-------- -------
Net cash used in investing activities (31,365) (2,797)
-------- -------
Financing Activities:
Dividends paid (1,417) (463)
Repayment of long-term notes receivable 1,892 65
Net proceeds from issuance of Company common stock 129 28
-------- -------
Net cash provided by (used in) financing activities 604 (370)
-------- -------
Decrease in Cash and Cash Equivalents (20,606) (3,755)
Cash and Cash Equivalents at Beginning of Period 20,669 8,912
-------- -------
Cash and Cash Equivalents at End of Period $ 63 $ 5,157
======== =======
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.
6
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 October 2, 1999, the results of
operations for the three- and six-month periods ended October 2, 1999, and
October 3, 1998, and the cash flows for the six-month periods ended October 2,
1999, and October 3, 1998. 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 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 six months of fiscal 2000, therefore, comprehensive
income equals net income (loss) reported for the three- and six-month periods
ended October 2, 1999. During the three- and six-month periods ended October 3,
1998, the Company had comprehensive losses of $5,318,000 and $4,833,000,
respectively.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Six Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------ ---------- ---------- ----------- ----------
Basic
Net Income (Loss) $1,328 $(5,323) $(3,665) $(4,835)
------ ------- ------- -------
Weighted Average Shares 13,578 13,027 13,569 12,981
------ ------- ------- -------
Basic Earnings (Loss) per Share $ .10 $ (.41) $ (.27) $ (.37)
====== ======= ======= =======
Diluted
Net Income (Loss) $1,328 $(5,323) $(3,665) $(4,835)
Effect of Convertible Debentures 15 - - -
------ ------- ------- -------
Income Available to Common Shareholders, as Adjusted 1,343 (5,323) (3,665) (4,835)
------ ------- ------- -------
Weighted Average Shares 13,578 13,027 13,569 12,981
Effect of :
Stock options 211 - - -
Convertible debentures 270 - - -
------ ------- ------- -------
Weighted Average Shares, as Adjusted 14,059 13,027 13,569 12,981
------ ------- ------- -------
Diluted Earnings (Loss) per Share $ .10 $ (.41) $ (.27) $ (.37)
====== ======= ======= =======
7
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 because the effect would be antidilutive. As of October 2, 1999, there
were 490,000 of such options outstanding, with exercise prices ranging from
$5.84 to $14.93 per share. In addition, the computation of diluted earnings per
share for the six-month period ended October 2, 1999, and the three- and
six-month periods ended October 3, 1998, 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
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 Six Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues:
Consulting and Engineering $20,589 $ 18,185 $39,836 $ 35,853
Nuclear Remediation 8,871 8,608 17,421 17,021
Soil Remediation 6,216 5,774 11,626 11,699
Fluids Recycling 2,884 2,573 5,526 4,983
------- -------- ------- --------
$38,560 $ 35,140 $74,409 $ 69,556
======= ======== ======= ========
Income (Loss) Before Income Taxes:
Consulting and Engineering $ 1,158 $ 754 $ 2,350 $ 1,486
Nuclear Remediation 408 551 942 1,116
Soil Remediation (a) 1,161 (8,719) (7,828) (8,578)
Fluids Recycling 390 349 680 618
Corporate (b) (510) (408) (984) (763)
------- -------- ------- --------
Total operating income (loss) 2,607 (7,473) (4,840) (6,121)
Interest expense, net (136) (357) (364) (732)
------- -------- ------- --------
$ 2,471 $ (7,830) $(5,204) $ (6,853)
======= ======== ======= ========
(a) Includes restructuring costs of $9.6 million in the first six months of
fiscal 2000 and $9.2 million in the fiscal 1999 periods.
(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, 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. If no buyer is found, the Company will close
the facility. As of April 3, 1999, the Company had terminated 6 employees. No
additional employees were terminated during the first six months of fiscal 2000.
8
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 $9,632,000 of restructuring charges in the first six months of
fiscal 2000. These costs include an $8,952,000 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,
none of whom were terminated in the first six months of fiscal 2000; $50,000 of
ongoing lease costs; and $36,000 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 $5,813,000 and $1,338,000, respectively, in the first six 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- and six-month periods ended
October 2, 1999, discontinuing depreciation at these facilities increased the
Company's operating income by $440,000 and reduced the Company's pretax
operating loss by $928,000, respectively.
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
Costs
- ------------------------------------------------- -------------- ------------- ------------- -------------
Fiscal 1999 Plan
Balance at April 3, 1999 $ 112 $690 $ - $ 802
Usage (71) (16) - (87)
----- ---- ---- -----
Balance at October 2, 1999 $ 41 $674 $ - $ 715
===== ==== ==== =====
Fiscal 2000 Plan
Balance at April 3, 1999 $ - $ - $ - $ -
Provision charged to expense 475 50 36 561
Usage (50) (10) (36) (96)
----- ---- ---- -----
Balance at October 2, 1999 $ 425 $ 40 $ - $ 465
===== ==== ==== =====
The Company expects to pay the balance of accrued restructuring costs
primarily during the remainder of fiscal 2000. The Company expects to incur
additional costs of approximately $100,000, primarily for expected 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 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.
9
6. Cash Management Arrangement (continued)
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 October 2, 1999.
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 in cash per share, 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 and, therefore, approval of
the merger agreement is assured. This merger is expected to be completed in the
fourth quarter of fiscal 2000.
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 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 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.
10
Overview (continued)
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. Although the
Company expects this market to remain viable for some time after October 2,
1999, there can be no assurance that this business will not decline in future
years. In the first quarter of fiscal 2000, the Company announced plans to sell
three additional soil-recycling facilities (Note 5).
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
Second Quarter Fiscal 2000 Compared With Second Quarter Fiscal 1999
Revenues increased to $38.6 million in the second quarter of fiscal 2000
from $35.1 million in the second quarter of fiscal 1999. Revenues increased $2.4
million to $20.6 million at 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 $0.4 million to $6.2 million, primarily as a result of an increase in
the volume of soil processed, offset in part by the closing of a soil-recycling
facility in fiscal 1999 (Note 5). Fluids Recycling segment revenues increased
$0.3 million to $2.9 million, primarily due to increased capacity as a result of
geographic expansion.
The gross profit margin increased to 17% in the second quarter of fiscal
2000 from 16% in the second 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.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 10% in the second quarter of fiscal 2000 from 11% in the second
quarter of fiscal 1999. This decrease was primarily due to the effect of
increased revenues as a percentage of selling, general, and administrative
expenses at the Construction and Engineering segment and, to a lesser extent, a
reduction in staffing levels at the Soil Remediation segment as a result of the
restructuring actions taken in fiscal 1999.
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). In connection with these actions, the
Company recorded pretax charges totaling $0.1 million in the second quarter of
fiscal 2000 for retention bonuses paid and cash costs incurred in connection
with the proposed sale of a facility. The discontinuation of depreciation at the
soil-recycling facilities to be sold or closed increased operating income by
$0.4 million during the second quarter of fiscal 2000.
11
Second Quarter Fiscal 2000 Compared With Second Quarter Fiscal 1999 (continued)
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 in response to changes in market conditions,
which have resulted in lower-priced soil-recycling alternatives.
All of the facilities that will be sold or closed reported aggregate
revenues and operating income, prior to restructuring costs, of $5.8 million and
$1.3 million, respectively, in the first six 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 second quarter of fiscal
2000 from $0.2 million in the second quarter of fiscal 1999 as a result of
higher average invested balances.
The Company's effective tax rate in the second quarter of fiscal 2000 was
46%. 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. The Company recorded a tax benefit
in the second quarter 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.
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 Six Months Fiscal 2000 Compared With First Six Months Fiscal 1999
Revenues increased to $74.4 million in the first six months of fiscal 2000
from $69.6 million in the first six months of fiscal 1999. Revenues increased
$4.0 million to $39.8 million at the Consulting and Engineering segment,
primarily due to higher revenues from a large remedial-construction contract
that is expected to continue through fiscal 2001. Fluids Recycling segment
revenues increased $0.5 million to $5.5 million, primarily due to increased
capacity as a result of geographic expansion.
The gross profit margin increased to 17% in the first six months of fiscal
2000 from 16% in the first six 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 10% in the first six months of fiscal 2000 from 12% in the first
six months of fiscal 1999. This decrease was primarily due to the reasons
discussed in the results of operations for the second quarter.
In connection with the proposed sale of businesses discussed in the
results of operations for the second quarter, the Company recorded $9.6 million
of restructuring costs in the first six 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 $0.9 million in fiscal 2000.
Interest income increased to $0.7 million in the first six months of
fiscal 2000 from $0.4 million in the first six months of fiscal 1999 as a result
of higher average invested balances.
The Company recorded a tax benefit in the first six months of fiscal 2000
and 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.
12
Liquidity and Capital Resources
Consolidated working capital was $3.1 million at October 2, 1999, 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 a current liability. Cash and cash equivalents were
$0.1 million at October 2, 1999, compared with $20.7 million at April 3, 1999.
In addition, as of October 2, 1999, the Company had $29.1 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 six months of fiscal
2000, $10.2 million of cash was provided by operating activities. Cash of $7.8
million was provided by a decrease in accounts receivable, primarily due to the
timing of billings and increased collection efforts. This source of cash was
offset in part by $5.5 million of cash used to fund an increase in unbilled
contract costs and fees, primarily due to the timing of billings. The Company
expects to pay the balance of the accrued restructuring costs of $1.2 million
primarily during the remainder of fiscal 2000.
Excluding advances to affiliate activity, the Company's primary investing
activity in the first six months of fiscal 2000 consisted of capital
expenditures. The Company expended $2.2 million for purchases of property,
plant, and equipment during the period and plans to make capital expenditures of
approximately $2.3 million during the remainder of fiscal 2000.
The Company's financing activities provided $0.6 million of cash. Cash of
$1.9 million was provided by the repayment 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. 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. The Company expects that it will finance any such acquisitions
through a combination of internal funds and/or short-term borrowings from Thermo
Electron, although it has no agreement to ensure that funds will be available on
acceptable terms, or at all. In addition, 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
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Informational and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
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) assessing the year 2000
readiness of its key suppliers and vendors; 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 non-information technology systems
will be ready for the year 2000. In the first phase of the program, the Company
tested and evaluated its critical information technology systems and
non-information technology systems for year 2000 compliance, which efforts
included testing and evaluating its significant computer systems, software
applications, and related equipment for year 2000 compliance. The Company also
evaluated the potential year 2000
13
Year 2000 (continued)
impact on its critical non-information technology systems, which efforts
included testing the year 2000 readiness of its utility and telecommunications
systems at its critical facilities. In phase two of its program, any material
noncompliant information technology systems or non-information technology
systems that were identified during phase one were prioritized and remediated.
Based on its evaluations, the Company concluded that no material upgrades or
modifications to its critical non-information technology systems are required.
The Company is currently upgrading or replacing its material noncompliant
information technology systems, and this process was approximately 90% complete
as of October 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 technology systems and critical non-information technology systems
will be year 2000 compliant by the end of November 1999.
The Company has also identified and assessed 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 developed and
distributed questionnaires relating to year 2000 compliance to its significant
suppliers and vendors. The Company also followed up with significant suppliers
and vendors that did not respond to the Company's questionnaires. To date, no
significant supplier or vendor has indicated that it believes its business
operations will be materially disrupted by the year 2000 issue. As of October 2,
1999, the Company has completed the majority of its assessment of third-party
risk.
Contingency Plan
The Company has developed a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan includes identifying manual or backup systems in the event of a
failure of the Company's material information technology systems. The Company
may in the future modify or adjust its contingency plan as may be required in
the event that there are changes in the year 2000 readiness of its business
systems and facilities, and significant suppliers and vendors.
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 $0.2 million as of October 2, 1999. All of the
external costs incurred as of October 2, 1999, were spent on testing and
upgrading information technology systems. In fiscal 1999 and in the first six
months of fiscal 2000, approximately 5% of the Company's total information
technology budget was spent on year 2000 issues. 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. 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.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that the Company experiences year 2000
problems in its material information technology systems that cause the Company
to be unable to access data, to process transactions, and to maintain accurate
books and records. In such an event, the Company's operations could be delayed
or temporarily shut down, and it could be unable to meet its obligations to
customers in a timely fashion. The Company's business, operations, and financial
condition could be adversely affected in amounts that cannot be reasonably
estimated at this time.
14
Year 2000 (continued)
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 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. As
discussed above, if any of the Company's key 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
material adverse impact on the Company's business, operations, and financial
condition in amounts that cannot be reasonably estimated at this time.
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 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
None.
15
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 November 1999.
THERMORETEC CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
16
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
2.1 Agreement and Plan of Merger dated as of October 19, 1999, by and
among Thermo Electron Corporation, Retec Acquisition Corporation,
and ThermoRetec Corporation (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K relating to events
occurring on October 19, 1999 [File No. 1-12636] and incorporated
herein by reference).
27 Financial Data Schedule.