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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________________ to ________________
COMMISSION FILE NUMBER 1-9947
TRC COMPANIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-0853807
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5 Waterside Crossing
Windsor, Connecticut 06095
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 289-8631
___________________________________
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, and (2) has been subject to such filing requirements
for the past 90 days. YES [x] NO [_]
On March 31, 1997 there were 6,688,102 shares of the registrant's common stock,
$.10 par value, outstanding.
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TRC COMPANIES, INC.
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 1997
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Statements of Operations for the three and nine months ended
March 31, 1997 and 1996..................................................... 3
Balance Sheets at March 31, 1997 and June 30, 1996............................ 4
Statements of Cash Flows for the nine months ended
March 31, 1997 and 1996..................................................... 5
Notes to Financial Statements................................................. 6
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................................... 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................................. 11
Item 6. Exhibits and Reports on Form 8-K.............................................. 11
SIGNATURE.................................................................................... 12
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PART I: FINANCIAL INFORMATION
TRC COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
----------------- ----------------- ----------------- -----------------
GROSS REVENUE $ 15,873,491 $ 19,422,036 $ 51,113,029 $ 59,401,329
Less subcontractor costs and
direct charges 4,005,687 4,613,083 13,134,295 12,964,969
----------------- ----------------- ----------------- -----------------
NET SERVICE REVENUE 11,867,804 14,808,953 37,978,734 46,436,360
----------------- ----------------- ----------------- -----------------
OPERATING COSTS AND EXPENSES:
Salaries and other direct costs
of services 10,999,743 13,592,606 32,973,863 42,278,947
General and administrative expenses 951,778 1,020,665 2,785,572 2,884,800
Depreciation and amortization 701,999 724,678 2,074,737 2,153,151
----------------- ----------------- ----------------- -----------------
12,653,520 15,337,949 37,834,172 47,316,898
----------------- ----------------- ----------------- -----------------
INCOME (LOSS) FROM OPERATIONS (785,716) (528,996) 144,562 (880,538)
Interest expense 203,377 212,072 602,404 699,109
----------------- ----------------- ----------------- -----------------
INCOME (LOSS) BEFORE TAXES (989,093) (741,068) (457,842) (1,579,647)
Federal and state income tax
provision (benefit) (376,000) (286,000) (174,000) (605,000)
----------------- ----------------- ----------------- -----------------
NET INCOME (LOSS) $ (613,093) $ (455,068) $ (283,842) $ (974,647)
================= ================= ================= =================
EARNINGS (LOSS) PER SHARE $ (.09) $ (.06) $ (.04) $ (.14)
================= ================= ================= =================
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 6,694,005 7,063,952 6,758,745 7,096,759
================= ================= ================= =================
The accompanying notes are an integral part of the financial statements.
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TRC COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, June 30,
1997 1996
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 727,877 $ 1,321,524
Accounts receivable, less allowance for doubtful accounts 27,599,367 27,977,190
Inventories 1,175,855 915,336
Income taxes refundable 296,581 -
Deferred income tax benefits 1,317,000 1,219,000
Prepaid expenses and other current assets 815,241 444,583
-------------- --------------
31,931,921 31,877,633
-------------- --------------
PROPERTY AND EQUIPMENT, AT COST 20,028,560 19,667,334
Less accumulated depreciation and amortization 15,131,075 13,802,300
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4,897,485 5,865,034
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COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES, NET OF
ACCUMULATED AMORTIZATION 25,540,371 25,903,615
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OTHER ASSETS 846,671 588,407
-------------- --------------
$ 63,216,448 $ 64,234,689
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 5,600,000 $ 7,000,000
Accounts payable 2,847,589 2,209,401
Accrued compenation and benefits 1,999,364 2,542,809
Income taxes payable - 53,431
Other accrued liabilities 1,089,777 1,068,781
-------------- --------------
11,536,730 12,874,422
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NONCURRENT LIABILITIES:
Long-term debt 7,000,000 5,200,000
Accrued lease obligations - 96,480
Deferred income taxes 1,615,000 1,316,000
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8,615,000 6,612,480
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SHAREHOLDERS' EQUITY:
Capital stock:
Preferred, $.10 par value; 500,000 shares authorized, none issued - -
Common, $.10 par value; 30,000,000 shares authorized, 7,316,755
shares issued at March 31, 1997 and 7,265,755 shares issued
at June 30, 1996 731,675 726,575
Additional paid-in capital 38,093,644 37,894,744
Retained earnings 7,136,402 7,420,244
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45,961,721 46,041,563
Less treasury stock, at cost 2,897,003 1,293,776
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43,064,718 44,747,787
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$ 63,216,448 $ 64,234,689
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The accompanying notes are an integral part of the financial statements.
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TRC COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
1997 1996
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (283,842) $ (974,647)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,074,737 2,153,151
Change in deferred taxes and other non-cash items (139,480) (533,563)
Changes in assets and liabilities:
Accounts receivable 819,863 3,113,714
Inventories (260,519) 873,522
Prepaid expenses and other current assets (283,290) (308,587)
Accounts payable 504,859 (587,241)
Accrued compensation and benefits (627,464) (685,494)
Income taxes (350,012) (528,870)
Other accrued liabilities (366,866) 535,719
----------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,087,986 3,057,704
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment, net (342,424) (308,417)
Decrease (increase) in other assets, net (145,094) 71,096
Cash from acquisition 9,112 -
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (478,406) (237,321)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrrowings (repayments) on long-term debt 400,000 (3,700,000)
Purchase of treasury stock (1,603,227) (499,002)
Principal repayments under capitalized lease obligations - (79,487)
Proceeds from exercise of stock options - 38,481
----------------- -----------------
NET CASH USED IN FINANCING ACTIVITIES (1,203,227) (4,240,008)
----------------- -----------------
DECREASE IN CASH AND CASH EQUIVALENTS (593,647) (1,419,625)
Cash and cash equivalents, beginning of period 1,321,524 2,180,764
----------------- -----------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 727,877 $ 761,139
================= =================
The accompanying notes are an integral part of the financial statements.
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TRC COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
1. The consolidated balance sheet at March 31, 1997 and the consolidated
statements of operations for the three and nine months ended March 31, 1997
and 1996 and the consolidated statements of cash flows for the nine months
ended March 31, 1997 and 1996 are unaudited, but in the opinion of the
Company, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for the interim
periods. The results of operations for the three and nine months ended
March 31, 1997 are not necessarily indicative of the results to be expected
for the full fiscal year. Certain footnote disclosures usually included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report to Shareholders
for the fiscal year ended June 30, 1996.
2. Earnings (loss) per common share are based upon the weighted average number
of common shares outstanding and, when dilutive, common stock equivalents
using the treasury stock method.
3. The components of inventories were as follows:
March 31, June 30,
1997 1996
----------------- -----------------
Materials and supplies $ 522,698 $ 539,054
Work-in-progress 257,143 60,787
Finished goods 396,014 315,495
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$ 1,175,855 $ 915,336
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4. In February 1997, the Company completed the acquisition of the capital
stock of Garrow & Associates, Inc., a cultural resources management company
with headquarters in Atlanta, Georgia. Purchase consideration consisted of
51,000 shares of the Company's common stock valued at $204,000. The
acquisition has been recorded using the purchase method of accounting. The
excess of purchase price over the fair value of the net assets acquired was
$318,569.
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TRC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Nine Months Ended March 31, 1997 and 1996
OVERVIEW
The Company provides a broad range of environmental engineering and remediation
services, specializing in all areas of air pollution control, solid and
hazardous waste management, risk assessment, process engineering, and natural
and cultural resources management. The Company's services are provided to
commercial organizations and government agencies primarily in the U.S. market.
RESULTS OF OPERATIONS
The Company, in the course of providing its services, routinely subcontracts
drilling, laboratory analyses and other specialized services. These costs are
passed directly through to clients and, in accordance with industry practice,
are included in gross revenue. Because subcontractor costs and direct charges
can change significantly from project to project, the change in gross revenue is
not necessarily a true indication of business trends. Accordingly, the Company
considers net service revenue, which is gross revenue less subcontractor costs
and direct charges, as its primary measure of revenue growth.
The following table presents the percentage relationships of certain items in
the consolidated statements of operations to net service revenue:
Three Months Ended Nine Months Ended
March 31, March 31,
1997 1996 1997 1996
---------- ---------- ---------- ----------
NET SERVICE REVENUE 100.0 % 100.0 % 100.0 % 100.0 %
---------- ---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Salaries and other direct costs of services 92.7 91.8 /1/ 86.8 91.0 /2/
General and administrative expenses 8.0 6.9 7.3 6.2
Depreciation and amortization 5.9 4.9 5.5 4.7
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (6.6) (3.6)/1/ (1.9) /2/
.4
Interest expense 1.7 1.4 1.6 1.5
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INCOME (LOSS) BEFORE TAXES (8.3) (5.0) (1.2) (3.4)
Federal and state income tax provision (benefit) (3.2) (1.9) (.5) (1.3)
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NET INCOME (LOSS) (5.1) % (3.1) % (.7) % (2.1) %
========== ========== ========== ==========
/1/ 84.4% and 3.9%, respectively, before operating charge
/2/ 81.6% and 7.6%, respectively, before operating charge
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Net service revenue for the three and nine months ended March 31, 1997 decreased
by 19.9% and 18.2%, respectively, as compared to the same periods last year.
These decreases were primarily due to the continued weak environmental services
market resulting from regulatory uncertainty and budget reductions in federal
enforcement spending, which has led to overall lower levels of expenditures by
industry for environmental engineering and remedial services, coupled with
greater competition and capacity for available work.
Salaries and other direct costs of services decreased by 19.1% during the three
months ended March 31, 1997, as compared to the same period last year. This
decrease resulted from the $1.1 million operating charge reflected in the same
period last year and the results of continued cost reduction efforts. For the
nine months ended March 31, 1997, salaries and other direct costs of services
decreased by 22.0%, as compared to the same period last year. This decrease was
primarily related to the $4.4 million operating charge reflected in the same
period last year and the results of the cost reduction efforts taken throughout
last year. The operating charges recorded in the prior year related to staff
reductions, excess lease capacity costs and increased allowances for receivables
and inventories.
In connection with the operating charges recorded in fiscal 1996, approximately
$100,000 and $300,000, respectively, were charged against the accrual during the
three and nine months ended March 31, 1997. Approximately $200,000 and $100,000,
respectively, were charged against the accrual during the three and nine months
ended March 31, 1996. At March 31, 1997, remaining liabilities of approximately
$400,000 were included in other accrued liabilities.
General and administrative expenses decreased by 6.7% and 3.4%, respectively,
during the three and nine months ended March 31, 1997, as compared to the same
periods last year, primarily due to continued cost reduction efforts.
Depreciation and amortization expense decreased by 3.1% and 3.6%, respectively,
during the three and nine months ended March 31, 1997, as compared to the same
periods last year. These decreases were due to the comparative reduction in
capital expenditures during fiscal 1996 and the first nine months of the current
fiscal year, combined with the effect of other equipment that became fully
depreciated.
For the three months ended March 31, 1997, the Company reported a loss from
operations of $785,716, compared to a loss from operations of $528,996 in the
same period last year, which included an operating charge of $1.1 million. The
loss in the current year was primarily due to the reduction in net service
revenue, partially offset by the decrease in operating expenses. For the nine
months ended March 31, 1997, the Company reported income from operations of
$144,562, compared to a loss from operations of $880,538 in the same period last
year. The loss in the prior year was the direct result of the operating charges,
while the results for current period continue to be adversely affected by the
reduction in net service revenue.
Interest expense decreased by 4.1% and 13.8%, respectively, during the three and
nine months ended March 31, 1997 as compared to the same periods last year.
These decreases resulted from lower levels of long-term debt outstanding.
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The provision (benefit) for federal and state income taxes was 38% of income
(loss) before taxes for the three and nine months ended March 31, 1997 and 1996.
The tax benefit of current year federal losses will be realized through the
carryback of such losses to prior years.
As a result of the aforementioned, the Company reported a net loss of $613,093
or $.09 per share for the three months ended March 31, 1997, compared to a net
loss of $455,068 or $.06 per share in the same period last year. For the nine
months ended March 31, 1997, the Company reported a net loss of $283,842 or $.04
per share, compared to a net loss of $974,647 or $.14 per share in the same
period last year.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128),
requiring the presentation of basic and diluted earnings per share. This
Statement shall be effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. If earnings (loss) per share had been computed in accordance with FAS
128 for the quarter ended March 31, 1997, basic and diluted earnings (loss) per
share would have been the same as amounts reported.
IMPACT OF INFLATION
The Company's operations have not been materially affected by inflation or
changing prices due to both the short-term nature of many of its contracts, and
because most contracts of a longer term are subject to adjustment or have been
priced to cover anticipated increases in labor and other costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash provided by operations and the strength of its
balance sheet to fund operations. The Company's liquidity is assessed in terms
of its overall ability to generate cash to fund its operating and investing
activities, and to reduce debt. Of particular importance in the management of
liquidity are cash flows generated from operating activities, capital
expenditure levels and its bank line of credit.
The Company relies on its bank financing arrangement to assist in funding
various operating and financing activities. As of March 31, 1997, the Company
was in default of its interest coverage covenant under its Amended and Restated
Revolving Credit and Term Loan Agreement with a commercial bank. Pending
negotiation of an amendment to the credit facility, the bank has agreed to take
no action with regard to the default. In addition, the Company and the bank have
agreed to limit the use of the credit facility from $25 million to $8 million.
At March 31, 1997, outstanding borrowings, pursuant to the agreement were $5.6
million, at an average interest rate of 6.5%. The amount outstanding has been
classified as current in accordance with the Company's intention not to
refinance the obligation on a long-term basis and to repay substantially all of
the outstanding balance over the next year from available cash flow. The Company
expects to increase its available cash flow over the next year primarily from
cost reduction activities, which include the elimination of certain senior
management and their associated salaries and expenses, and from reductions in
working capital derived mainly from the
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collection of accounts receivable. Furthermore, the Company did not make the $7
million final principal payment due March 21, 1997 on the 5 3/4% subordinated
note issued in March 1994 in connection with the acquisition of Environmental
Solutions, Inc. The Company and the noteholders have agreed to renegotiate the
provisions of the note including extending the payment terms. Accordingly, the
balance outstanding at March 31, 1997 has been classified as long-term.
During the nine months ended March 31, 1997, the Company acquired 381,900 shares
of its common stock for approximately $1.6 million, pursuant to a 500,000 share
stock repurchase program announced in February 1996. A total of 459,000 shares
were repurchased under this program which has been suspended.
The Company expects to make capital expenditures of approximately $150,000
during the remainder of fiscal 1997. The Company believes that cash generated
from operations, the cash on hand at March 31, 1997 and available borrowings
under the revolving credit agreement will be sufficient to meet the Company's
cash requirements for the remainder of fiscal 1997.
OTHER MATTERS
On April 1, 1997, a special committee of the Company's outside Board members
(the "Special Committee") appointed Richard D. Ellison, Ph.D., P.E., as Chairman
of the Board, President and Chief Executive Officer. Vincent A. Rocco, former
Chairman and Chief Executive Officer, and Bruce D. Cowen, former President and
Director, had resigned. Mr. Ellison will also continue as President of TRC
Environmental Solutions, Inc. In a related action, Richard D. McGuire, former
President of TRC Environmental Corporation, also joined the Board. Also, on
April 1, 1997, the Company reached an agreement with Messrs. Rocco and Cowen
under which they have agreed to make restitution to the Company for the amount
by which the Company was damaged by virtue of the exercise of stock options in
excess of the amount authorized to be issued to them as well as for certain
travel and entertainment expenses that exceeded Company policies. The amounts to
be paid are being determined. As previously reported, the Special Committee has
been investigating that subject and other matters and expects that its inquiry
will be concluded during the current quarter.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that describe the Company's
business prospects. These statements involve risks and uncertainties including,
but not limited to, regulatory uncertainty, funding for government projects,
level of demand for the Company's services, product acceptance, industry-wide
competitive factors, and political, economic or other conditions. Furthermore,
market trends are subject to changes which could adversely affect future
results.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3, Legal Proceedings, in the Company's
Annual Report on Form 10-K for the year ended June 30, 1996, for a
description of existing litigation against the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 - Financial Data Schedule (for SEC purposes only)
(b) Reports on Form 8-K - There were no reports on Form 8-K filed
during the quarter ended March 31, 1997, however, a Form 8-K was
filed on April 3, 1997 related to events originating in that
quarter.
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SIGNATURE
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.
TRC COMPANIES, INC.
May 15, 1997 by: /s/ Harold C. Elston, Jr.
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Harold C. Elston, Jr.
Vice President and Treasurer
(Chief Accounting Officer)
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