EXHIBIT 13
PORTIONS OF TRC COMPANIES, INC. 1999 ANNUAL REPORT TO SHAREHOLDERS
EXPRESSLY INCORPORATED BY REFERENCE INTO
THIS FORM 10-K
FINANCIAL HIGHLIGHTS
TRC COMPANIES, INC. AND SUBSIDIARIES
In thousands, except per share data
YEARS ENDED JUNE 30, 1999 1998 (1) 1997 (1)
- -----------------------------------------------------------------------------------------------------------------------
Gross revenue $78,223 $69,568 $65,447
Net service revenue 57,333 49,708 47,729
Income from operations 4,330 2,217 37
Net income (loss) 2,447 925 (602)
Earnings (loss) per share - basic and diluted $.36 $.14 $.09
Working capital $17,431 $20,475 $20,679
Current ratio 2.0 to 1 2.8 to 1 2.9 to 1
Percentage of debt to total capitalization 14.4% 14.4% 20.4%
Shareholders' equity at year-end $46,988 $44,455 $42,844
Book value per share $6.91 $6.55 $6.41
Common shares outstanding 6,799 6,782 6,688
(1) Operating results presented above for fiscal 1998 and 1997 do not include
the results of the Company's instrumentation business that was sold in
July 1998. The sale resulted in a gain that was not material. See Selected
Financial Data on page 2 for results as reported for fiscal 1998 and 1997.
24
SELECTED FINANCIAL DATA
TRC COMPANIES, INC. AND SUBSIDIARIES
In thousands, except per share data
YEARS ENDED JUNE 30, 1999 1998(1) 1997(1) 1996(1) 1995(1)
---------------------------------------------------------------------------------------------------------
Gross revenue $78,223 $72,570 $68,506 $76,999 $93,013
Less subcontractor costs and direct charges 20,890 19,861 17,718 16,981 21,200
-----------------------------------------------------
Net service revenue 57,333 52,709 50,788 60,018 71,813
-----------------------------------------------------
Operating costs and expenses:
Direct labor and fringe benefit costs 26,075 23,324 22,680 26,470 29,903
Indirect costs and expenses 21,998 21,796 21,590 27,918(2) 26,450
General and administrative expenses 2,462 2,451 3,565 3,950 3,965
Depreciation and amortization 2,468 2,702 2,789 2,896 3,037
-----------------------------------------------------
53,003 50,273 50,624 61,234 63,355
-----------------------------------------------------
Income (loss) from operations 4,330 2,436 164 (1,216) 8,458
Interest expense 507 725 829 906 1,399
Other income, net - - - - (15)
-----------------------------------------------------
Income (loss) before taxes 3,823 1,711 (665) (2,122) 7,074
Federal and state income tax provision (benefit) 1,376 650 (160) (807) 2,653
-----------------------------------------------------
Net income (loss) $ 2,447 $ 1,061 $ (505) $(1,315) $ 4,421
-----------------------------------------------------
Earnings (loss) per share:
Basic $.36 $.16 $(.07) $(.19) $.62
Diluted .36 .16 (.07) (.19) .61
-----------------------------------------------------
Average shares outstanding:
Basic 6,782 6,715 6,741 7,067 7,081
Diluted 6,839 6,726 6,747 7,078 7,208
-----------------------------------------------------
Cash dividends declared None None None None None
-----------------------------------------------------
Balance Sheet at June 30,
Total assets $66,072 $61,604 $62,290 $64,235 $73,815
-----------------------------------------------------
Debt 7,900 7,500 11,000 12,200 17,200
-----------------------------------------------------
Shareholders' equity 46,988 44,455 42,844 44,748 46,538
-----------------------------------------------------
(1) Include results of Company's instrumentation business that was sold
in July 1998.
(2) Results for fiscal 1996 include operating charges of $4.4 million
(approximately $2.8 million after taxes) related to staff reductions,
excess lease capacity and increased allowances for receivables and
inventories.
25
SUMMARIZED UNAUDITED QUARTERLY FINANCIAL DATA
TRC COMPANIES, INC. AND SUBSIDIARIES
In thousands, except per share data
- ------------------------------------------------------------------------------------------------------------
FISCAL 1999 (1) 1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------------
Gross revenue $18,406 $18,987 $17,930 $22,900
Net service revenue 12,880 13,151 14,071 17,231
Income from operations 879 998 1,080 1,373
Income before taxes 760 877 980 1,206
Net income 471 544 608 824
Earnings per share - basic and diluted $.07 $.08 $.09 $.12
Market price per share:
High $5.13 $5.63 $5.94 $6.25
Low 3.75 3.75 4.63 4.50
- ------------------------------------------------------------------------------------------------------------
FISCAL 1998 (2) 1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------------
Gross revenue $17,560 $19,054 $16,398 $19,558
Net service revenue 12,990 12,944 12,919 13,856
Income from operations 417 636 562 821
Income before taxes 197 413 423 678
Net income 122 256 262 421
Earnings per share - basic and diluted $.02 $.04 $.04 $.06
Market price per share:
High $4.50 $4.69 $5.13 $5.69
Low 3.13 3.56 3.81 4.38
(1) Results of operations for the third and fourth quarters of fiscal 1999
include acquisitions completed during those quarters.
(2) Include results of the Company's instrumentation business that was sold
in July 1998.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the Selected
Financial Data, the Consolidated Financial Statements and related Notes to
Consolidated Financial Statements.
OVERVIEW
The Company provides technical, financial risk management and construction
services to industry and government primarily in the United States market. The
Company's main focus is in the areas of infrastructure improvements and
expansions, environmental management and information technology.
RESULTS OF OPERATIONS
The Company, in the course of providing its services, routinely subcontracts
drilling, laboratory analyses, construction equipment and other 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 vary significantly from project to project, 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:
YEARS ENDED JUNE 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------
Net service revenue 100.0% 100.0% 100.0%
---------------------------------
Operating costs and expenses:
Direct labor and fringe benefit costs 45.5 44.2 44.7
Indirect costs and expenses 38.4 41.4 42.5
General and administrative expenses 4.3 4.7 7.0
Depreciation and amortization 4.3 5.1 5.5
---------------------------------
Income from operations 7.5 4.6 .3
Interest expense .8 1.4 1.6
---------------------------------
Income (loss) before taxes 6.7 3.2 (1.3)
Federal and state income tax provision (benefit) 2.4 1.2 (.3)
---------------------------------
Net income (loss) 4.3% 2.0% (1.0)%
---------------------------------
27
1999 COMPARED TO 1998
The revenue growth trend established in fiscal 1998 continued in fiscal 1999.
Gross revenue increased from $72.6 million in fiscal 1998 to $78.2 million. Net
service revenue increased from $52.7 million in fiscal 1998 to $57.3 million.
The increase in revenue was primarily due to continued growth in the core
businesses and from acquisitions completed during the year. Gross and net
service revenue in fiscal 1998 were $69.6 and $49.7, respectively, without
consideration of the Company's instrumentation business that was sold in July
1998, indicating growth in the core businesses of approximately 12% and 15%,
respectively.
Direct labor and fringe benefit costs increased by approximately 12% during
fiscal 1999, as compared to fiscal 1998, primarily due to the increase in
revenue. Indirect costs and expenses increased by only about 1% in fiscal 1999,
as compared to fiscal 1998. As a percentage of net service revenue, indirect
costs and expenses decreased to approximately 38%, from 41% in fiscal 1998. This
improvement resulted from management's continuing program to increase staff
utilization and reduce non-productive overhead, and to a lesser extent from cost
savings resulting from the sale of the Company's instrumentation business in
July 1998.
General and administrative expenses remained relatively even in fiscal 1999, as
compared to fiscal 1998. This continuing improvement with respect to revenue
growth also reflects management's philosophy of maintaining a flat
organizational structure with no non-productive overhead.
Depreciation and amortization expense decreased by approximately 9% in fiscal
1999, as compared to fiscal 1998. This decrease was primarily due to the sale of
the Company's instrumentation business in July 1998 and to the comparative
reduction in capital expenditures over the past several years, combined with the
effect of equipment that became fully depreciated.
Income from operations was $4.3 million in fiscal 1999, compared to $2.4 million
in fiscal 1998. The continuing improvement in operating performance was
primarily due to the growth in revenue (without comparable increases in
operating overhead) and acquisitions.
Interest expense decreased by approximately 30% in fiscal 1999, as compared to
fiscal 1998, resulting primarily from lower levels of debt outstanding.
The provision for federal and state income taxes reflects an effective rate of
36% in fiscal 1999, compared to an effective rate of 38% in fiscal 1998. This
decrease was due to lower state income taxes. The Company believes that there
will be sufficient taxable income in future periods to enable utilization of
deferred income tax benefits.
28
1998 COMPARED TO 1997
Fiscal 1998 reflected the first year of operating performance under the
Company's new management team that was installed in April 1997. During fiscal
1998, the revenue declines of the prior two years were halted and a growth trend
was established. Gross revenue increased by 6% from $68.5 million in fiscal 1997
to $72.6 million. Net service revenue increased by 4% from $50.8 million in
fiscal 1997 to $52.7 million. The increase in revenue resulted primarily from
growth in the core businesses.
Direct labor and fringe benefit costs increased by 3% during fiscal 1998 as a
result of the increase in revenue. Indirect costs and expenses increased by 1%
in fiscal 1998, however, as a percentage of net service revenue, indirect costs
and expenses decreased to 41% from 43% in fiscal 1997. This improvement was
primarily due to new management's initiation of programs to increase staff
utilization and reduce non-productive overhead.
General and administrative expenses decreased by 31% in fiscal 1998, as compared
to fiscal 1997, also reflecting the new management's philosophy of maximizing
revenue without increasing overhead.
Depreciation and amortization expense decreased by 3% in fiscal 1998, as
compared to fiscal 1997. This decrease was due to the comparative reduction in
expenditures for equipment in fiscal 1997 and 1996, combined with the effect of
other equipment that became fully depreciated.
The Company reported income from operations of $2.4 million in fiscal 1998,
compared to $.2 million in fiscal 1997. This improvement was primarily due to a
combination of the increase in revenue and overhead reductions. In fiscal 1998,
the Company recorded charges aggregating approximately $.9 million to exit
certain non-core businesses. The recording of these charges is consistent with
the Company's objective to focus on its strategic market sectors. These charges
were essentially offset by the inclusion of approximately $.9 million of
non-recurring income related to the settlement agreements with the former
Chairman and the former President.
Interest expense decreased by 13% in fiscal 1998, as compared to fiscal 1997.
The decrease resulted primarily from lower levels of debt outstanding, partially
offset by higher interest rates.
The provision for federal and state income taxes reflected an effective rate of
approximately 38% in fiscal 1998, compared to the benefit in fiscal 1997
recorded at an effective rate of 24%. The benefit in fiscal 1997 was recorded at
a lower effective rate because of foreign taxes paid for which a foreign tax
credit was not available.
IMPACT OF INFLATION
The Company's operations have not been materially affected by inflation or
changing prices because of the short-term nature of many of its contracts, and
the fact that most contracts of a longer term are subject to adjustment or have
been priced to cover anticipated increases in labor and other costs.
29
LIQUIDITY AND CAPITAL RESOURCES
The Company relies on cash provided by operations and borrowings based upon
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 an adequate bank line of
credit.
Operating activities are the principal source of cash flow for the Company.
Operating activities provided $3.8 million of cash flow during fiscal 1999,
down from $5.7 million last year. Although operating performance improved
significantly in fiscal 1999, the cash generated by net income and the
non-cash charges against income for depreciation and amortization was reduced
by several factors, principally higher income tax payments and payments to
subcontractors in early fiscal 1999 for work completed in the fourth quarter
of fiscal 1998 on an Exit Strategies-TM- project. Also, fiscal 1998 operating
cash flow contained a non-recurring settlement recovery of approximately $.9
million from the former Chairman and the former President, as further
described in Note 9 to the Consolidated Financial Statements.
Investing activities used cash of approximately $3.3 million in fiscal 1999.
The acquisition of businesses completed in fiscal 1999 required the use of
approximately $4.8 million (net of cash acquired). Capital expenditures
during fiscal 1999 for additional equipment and information systems to
support business growth increased $1.3 million, up from $1 million last year.
In July 1998, the Company completed the sale of its instrumentation business
that provided approximately $2.8 million in cash. In fiscal 2000, the Company
expects to make capital expenditures of approximately $2 million and also
expects expenditures for acquisitions to continue at a pace similar to fiscal
1999.
The Company relies on its bank financing arrangement to assist in funding
various operating activities. The Company has available a $15 million
revolving credit facility, secured by accounts receivable, which expires July
2001. Borrowings under the agreement bear interest at the bank's base rate or
the Eurodollar rate plus 1-3/4%. At June 30, 1999, borrowings outstanding
pursuant to the agreement were $4 million at an average interest rate of
6-3/4%.
At June 30, 1999, the Company had outstanding a $3.5 million subordinated
note issued in March 1994 in connection with the acquisition of Environmental
Solutions, Inc. and subsequently amended in July 1997. Interest on the note
accrued at the greater of the interest rate paid on the Company's bank debt
or 7-3/4%. The outstanding balance at June 30, 1999 was repaid on July 1,
1999 with cash provided by the revolving credit facility. The Company also
had outstanding at June 30, 1999 a $.4 million 7-3/4% subordinated note
issued in connection with the March 1998 purchase of Hydro-Geo Consultants,
Inc. The note is repayable in four remaining equal annual installments.
The Company expects to increase its available cash flow over the next fiscal
year, primarily from operations and reductions in working capital derived
mainly from the collection of accounts receivable. The Company believes that
cash generated from operations, the cash on hand at June 30, 1999 and
available borrowings under the bank credit facility will be sufficient to
meet the Company's cash requirements for fiscal 2000.
30
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its critical management,
financial and operating systems will recognize and process transactions for the
year 2000 and beyond. As a result, all computer systems and applications have
been reviewed and, where appropriate, detailed plans have been developed,
implemented and tested. The costs specific to the Year 2000 issue are not
expected to have a material impact on the Company's future operating results,
financial condition or cash flows.
Although the Company expects to be fully Year 2000 compliant on a timely
basis, if system modifications and conversions are not effective, or if the
Company's critical suppliers and customers do not address this issue
successfully, the Year 2000 issue could possibly have a material impact on
the Company's operations and financial condition.
The Company is developing contingency plans to be implemented as part of its
efforts to identify and mitigate any Year 2000 issues. The contingency plans
will deal with the most likely worst-case scenarios and will be substantially
complete by September 30, 1999, with follow-up to occur through December 31,
1999.
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, government funding,
level of demand for the Company's services, industry-wide competitive factors
and political, economic or other conditions. Furthermore, market trends are
subject to changes that could adversely affect future results.
31
CONSOLIDATED STATEMENTS OF OPERATIONS
TRC COMPANIES, INC. AND SUBSIDIARIES
IN THOUSANDS, EXCEPT PER SHARE DATA
YEARS ENDED JUNE 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------
GROSS REVENUE $78,223 $72,570 $68,506
Less subcontractor costs and direct charges 20,890 19,861 17,718
-----------------------------------------
NET SERVICE REVENUE 57,333 52,709 50,788
-----------------------------------------
OPERATING COSTS AND EXPENSES:
Direct labor and fringe benefit costs 26,075 23,324 22,680
Indirect costs and expenses 21,998 21,796 21,590
General and administrative expenses 2,462 2,451 3,565
Depreciation and amortization 2,468 2,702 2,789
-----------------------------------------
53,003 50,273 50,624
-----------------------------------------
Income from operations 4,330 2,436 164
Interest expense 507 725 829
-----------------------------------------
Income (loss) before taxes 3,823 1,711 (665)
Federal and state income tax provision (benefit) 1,376 650 (160)
-----------------------------------------
Net income (loss) $ 2,447 $ 1,061 $ (505)
-----------------------------------------
Earnings (loss) per share - basic and diluted $.36 $.16 $ (.07)
-----------------------------------------
AVERAGE SHARES OUTSTANDING:
Basic 6,782 6,715 6,741
Diluted 6,839 6,726 6,747
-----------------------------------------
See accompanying notes to consolidated financial statements.
32
CONSOLIDATED BALANCE SHEETS
TRC COMPANIES, INC. AND SUBSIDIARIES
IN THOUSANDS, EXCEPT SHARE DATA
AS OF JUNE 30, 1999 1998
----------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 1,368 $ 1,379
Accounts receivable, less allowance for doubtful accounts 31,479 27,775
Inventories - 1,103
Deferred income tax benefits 1,231 950
Prepaid expenses and other current assets 1,096 846
------- -------
35,174 32,053
------- --------
PROPERTY AND EQUIPMENT:
Furniture and equipment 18,743 19,613
Leasehold improvements 1,634 1,660
------- --------
20,377 21,273
Less accumulated depreciation and amortization 16,603 17,267
------- --------
3,774 4,006
------- --------
COSTS IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES, net of accumulated
amortization of $5,355 and $4,397, respectively 26,519 24,874
------- --------
OTHER ASSETS 605 671
------- --------
$66,072 $61,604
------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt $ 7,600 $ 3,600
Accounts payable 4,152 4,133
Accrued compensation and benefits 3,433 2,685
Income taxes payable 1,399 578
Other accrued liabilities 1,159 582
------- --------
17,743 11,578
------- --------
NON-CURRENT LIABILITIES:
Long-term debt 300 3,900
Deferred income taxes 1,041 1,671
------- --------
1,341 5,571
------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 7 AND 9)
SHAREHOLDERS' EQUITY:
Capital stock:
Preferred, $.10 par value; 500,000 shares authorized, none issued - -
Common, $.10 par value; 30,000,000 shares authorized,
7,427,846 and 7,410,855 shares issued at June 30, 1999
and 1998, respectively 743 741
Additional paid-in capital 38,719 38,635
Retained earnings 10,423 7,976
------- --------
49,885 47,352
Less treasury stock, at cost 2,897 2,897
------- --------
46,988 44,455
-------- --------
$66,072 $61,604
-------- --------
See accompanying notes to consolidated financial statements.
33
CONSOLIDATED STATEMENTS OF CASH FLOWS
TRC COMPANIES, iNC. AND SUBSIDIARIES
IN THOUSANDS
YEARS ENDED JUNE 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,447 $ 1,061 $ (505)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,468 2,702 2,789
Change in deferred taxes and other non-cash items (444) 609 368
Changes in assets and liabilities, net of effects from acquisitions
and disposition:
Accounts receivable 452 (661) 1,880
Inventories (292) (331) (136)
Prepaid expenses and other current assets (135) 820 (833)
Accounts payable (845) 1,384 398
Accrued compensation and benefits 30 (40) (119)
Income taxes 549 1,177 (652)
Other accrued liabilities (472) (999) 73
-----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,758 5,722 3,263
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of instrumentation business 2,750 -- --
Additions to property and equipment (1,270) (1,039) (643)
Acquisition of businesses, net of cash acquired (4,784) (431) --
Decrease (increase) in other assets 33 98 (138)
Disposal of equipment 7 9 20
-----------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,264) (1,363) (761)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subordinated debt (3,600) -- --
Net borrowings (repayments) under credit facility 3,085 (4,000) (1,200)
Proceeds from exercise of stock options 10 -- --
Purchase of treasury stock -- -- (1,603)
-----------------------------
NET CASH USED IN FINANCING ACTIVITIES (505) (4,000) (2,803)
-----------------------------
INCREASE (DECREASE) IN CASH (11) 359 (301)
Cash, beginning of year 1,379 1,020 1,321
-----------------------------
CASH, END OF YEAR $ 1,368 $ 1,379 $ 1,020
-----------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 435 $ 611 $ 757
Income taxes paid (refunded), net 1,018 (315) (119)
-----------------------------
See accompanying notes to consolidated financial statements.
- -------------------------------------------------------------------------------
34
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
TRC COMPANIES, INC. AND SUBSIDIARIES
Common stock issued Treasury stock
--------------------- ----------------------
Additional
IN THOUSANDS, EXCEPT SHARE DATA Number paid-in Retained Number
YEARS ENDED JUNE 30, 1999, 1998 AND 1997 of shares Amount capital earnings of shares Amount
- ----------------------------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1996 7,265,755 $ 727 $ 37,895 $ 7,420 246,753 $ (1,294)
Issuance of common stock in connection with
business acquired 51,000 5 199 -- -- --
Purchase of treasury stock -- -- -- -- 381,900 (1,603)
Net loss -- -- -- (505) -- --
------------------------------------------------------------------------
BALANCES, JUNE 30, 1997 7,316,755 732 38,094 6,915 628,653 (2,897)
Issuance of common stock and warrant in
connection with business acquired 94,100 9 541 -- --
Net income -- -- -- 1,061 -- --
------------------------------------------------------------------------
BALANCES, JUNE 30, 1998 7,410,855 741 38,635 7,976 628,653 (2,897)
Issuance of common stock in
connection with business acquired 14,741 2 74 -- -- --
Exercise of stock options (including tax 2,250 -- 10 -- -- --
Net income -- -- -- 2,447 -- --
------------------------------------------------------------------------
BALANCES, JUNE 30, 1999 7,427,846 $ 743 $ 38,719 $ 10,423 628,653 $ (2,897)
------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TRC COMPANIES, INC. AND SUBSIDIARIES
IN THOUSANDS, EXCEPT SHARE DATA
Note 1. ACCOUNTING POLICIES
A. The consolidated financial statements include the Company
and its wholly-owned subsidiaries, after elimination of intercompany accounts
and transactions. Certain financial statement items have been reclassified to
conform to the current year's format.
B. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
C. At June 30, 1998, inventories totaling $1,103 related to the
instrumentation business that was sold in July 1998 were stated at the lower of
cost or market, cost being determined using the first-in, first-out (FIFO)
method.
D. Property and equipment are stated on the basis of cost,
including costs to bring the equipment into operation. Major improvements and
betterments to existing equipment are capitalized. Maintenance and repairs are
charged to expense as incurred.
The Company provides for depreciation of property and
equipment on the straight-line method using estimated useful lives of 3 to 10
years. Accelerated methods are used for income tax purposes.
E. Leasehold improvements are amortized over the lives of the
various leases or the useful lives of the improvements, whichever is shorter.
F. Costs in excess of the fair value of net assets of acquired
businesses are primarily amortized over 30 years on a straight-line basis. On a
periodic basis, the Company reassesses the appropriateness of both the carrying
value and remaining life of these costs. Such reassessments are computed using
forecasted cash flows on an undiscounted basis and other factors.
G. Revenue on engineering and remediation contracts is
recognized as the services are performed and the related costs are incurred.
Revenue from the sale of instruments in fiscal 1998 and 1997 was recognized when
the products were shipped.
The Company makes revisions in its cost estimates as
required during the course of performing contracts; the impact of such revisions
is reflected in the accounting periods in which the relevant facts become known.
36
H. Research and development costs related to the Company's
instrumentation business that was sold in July 1998 were charged to operations
as incurred and amounted to approximately $187 and $190 in fiscal 1998 and 1997,
respectively.
I. The Company applies the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and
related interpretations in accounting for stock options
J. The Company provides for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the carrying amounts and tax bases of
assets and liabilities.
K. In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (FAS) No. 130, Reporting
Comprehensive Income. FAS 130 established standards for reporting and displaying
comprehensive income in a set of financial statements. The Company has no items
of other comprehensive income.
L. Earnings (loss) per share is computed in accordance with
the provisions of Statement of Financial Accounting Standards No. 128, Earnings
per Share. Basic earnings (loss) per share is based upon the weighted average
common shares outstanding during the year. Diluted earnings (loss) per share
reflect the potential dilutive effect of outstanding stock options and warrants.
M. The Company has 401(k) savings plans covering
substantially all employees. The Company's contributions to the plans were
approximately $578, $562 and $543 in fiscal 1999, 1998 and 1997,
respectively. The Company does not provide post-employment benefits.
N. Cash, accounts receivable, accounts payable, accrued
liabilities and the Company's subordinated notes as reflected in the financial
statements are reasonable estimates of their fair value because of the
short-term maturity of those instruments. The carrying amount of the Company's
note payable pursuant to its revolving credit agreement at June 30, 1999,
approximates fair value because the interest rate on this instrument changes
with market interest rates.
Note 2. BUSINESS ACTIVITIES
The Company conducts its activities under one business segment which
involves providing engineering and consulting services primarily in the areas of
infrastructure improvements and expansions, environmental management and
information technology. The Company's services and products are provided to
commercial organizations and government agencies primarily in the U.S. market.
In July 1998, the Company sold its instrumentation subsidiary that
developed and manufactured air monitoring instrumentation. During fiscal 1998,
the Company recorded charges aggregating approximately $890 to exit certain
non-core businesses. The decision to exit these non-core businesses was
consistent with the Company's objective to focus on its strategic market
sectors.
37
Note 3. ACCOUNTS RECEIVABLE
Accounts receivable at June 30, 1999 and 1998 are comprised of the following:
1999 1998
- -------------------------------------------------------------------------------------
Amounts billed $ 25,121 $ 22,803
Unbilled costs 7,976 6,767
Retainage 928 580
-------- ---------
34,025 30,150
Less allowance for doubtful accounts 2,546 2,375
-------- ---------
$ 31,479 $ 27,775
-------- ---------
Management expects that substantially all unbilled costs will be billed
and collected in the subsequent year. Retainage represents amounts billed but
not paid by the client which, pursuant to the contract, are due upon completion
and acceptance by the client.
Net service revenue from contracts with U.S. Government agencies
amounted to approximately $9,407, $10,721 and $10,998 in fiscal 1999, 1998 and
1997, respectively.
Note 4. ACQUISITIONS AND DIVESTITURE
In March 1999, the Company acquired all of the outstanding shares of Alton
Geoscience, Inc. (Alton), headquartered in Irvine, California. Alton's primary
business activities include site investigations, remediation and monitoring
services for major oil and pipeline companies. The purchase price included cash
of $1,562 (net of cash acquired) and a $500 holdback payable in one year. The
Company will make an additional payment equal to 75% of Alton's pre-tax profit
for the twelve-month period ending September 30, 1999. The acquisition has been
accounted for using the purchase method of accounting.
In April 1999, the Company acquired all of the outstanding shares of Vectre
Corporation (Vectre), an environmental engineering and consulting firm located
in Lafayette, New Jersey. The purchase price consisted of cash of $1,489 (net of
cash acquired). The Company may also be required to make additional payments if
certain profit objectives are achieved in each of the years in the four-year
period ending June 30, 2003. The acquisition has been accounted for using the
purchase method of accounting.
In May 1999, A & H Engineers, P.C. (A & H), a transportation consulting and
engineering firm located in New York City, merged into a subsidiary of the
Company. The purchase price consisted of $1,733 (net of cash acquired). The
Company will make additional payments based upon revenue objectives in each of
the years in the four-year period ending April 30, 2003. The acquisition has
been accounted for using the purchase method of accounting.
The aggregate excess of purchase price over the fair values of the net assets
acquired for these acquisitions was $2,528 (before contingent consideration),
which is being amortized over 30 years on a straight-line basis.
38
In March 1998, a wholly-owned subsidiary of the Company acquired substantially
all of the business assets, liabilities and obligations of Hydro-Geo
Consultants, Inc., a Denver-based firm servicing principally the domestic and
international mining and water resource sectors. The purchase price of
approximately $1,500 consisted of a combination of cash, a $500 five-year 7 3/4%
subordinated note, 94,100 shares of the Company's common stock and a warrant to
purchase 75,000 shares of the Company's common stock exercisable at $4.25 per
share and expiring in March 2003. The acquisition has been accounted for using
the purchase method of accounting. The purchase price and expenses associated
with the acquisition resulted in costs in excess of the fair value of the net
assets acquired of approximately $1,075, which is being amortized over 30 years
on a straight-line basis.
The following unaudited pro forma summary presents the consolidated results of
operations as if the current year acquisitions had occurred at the beginning of
the years presented, after giving effect to certain adjustments, including
amortization of costs in excess of the net assets acquired, increased interest
expense on acquisition borrowings and related income tax effects.
Years ended June 30, 1999 1998
- -------------------------------------------------------------------------------
Net service revenue $67,203 $64,616
------- -------
Net income 2,956 1,386
------- -------
Earnings per share - diluted $.43 $.21
------- -------
The pro forma financial information does not purport to be indicative of the
results that would have occurred had the acquisitions taken place at the
beginning of the periods presented, nor do they purport to be indicative of the
results that will be obtained in the future.
In July 1998, the Company sold its instrumentation business which had sales of
approximately $3,000 in fiscal 1998, for $2,750 in cash resulting in a gain that
was not significant.
Note 5. DEBT
Debt at June 30, 1999 and 1998 is comprised of the following:
1999 1998
- ----------------------------------------------------------------------------------------
Note payable - revolving credit agreement $ 4,000 $ -
Subordinated note, due July 1999 3,500 7,000
7 3/4% subordinated note, due March 2003 400 500
--------- --------
7,900 7,500
Less current portion 7,600 3,600
--------- --------
Long-term debt $ 300 $ 3,900
--------- --------
39
The Company has available a $15,000 credit facility, as amended July 1,
1999, secured by accounts receivable which extends through July 2001. Borrowings
under the agreement bear interest at the bank's base rate or the Euro dollar
rate plus 1 3/4%. The weighted average interest rate on outstanding borrowings
at June 30, 1999 was 6 3/4%. The Company also pays a commitment fee of 1/4% on
the unused portion of the facility. The Company was in compliance with all
covenants contained in the agreement at all times during the year ended June 30,
1999.
The subordinated note due July 1999 was issued in March 1994 in
connection with the acquisition of Environmental Solutions, Inc. In exchange for
an extension of the payment term, the note was amended in July 1997 to increase
the interest rate to the greater of the interest paid on the bank debt or 7
3/4%. In addition, warrants to purchase 50,000 shares of the Company's common
stock were issued to the noteholder, exercisable at $4.50 per share and expiring
in July 2000. The outstanding balance at June 30, 1999 was repaid on July 1,
1999.
The 7 3/4% subordinated note due March 2003 was issued in March 1998 in
connection with the acquisition of Hydro-Geo Consultants, Inc. The balance
outstanding at June 30, 1999 is payable in four equal annual installments.
Note 6. FEDERAL AND STATE INCOME TAXES
The federal and state income tax provision (benefit) for fiscal 1999,
1998 and 1997 consists of the following:
YEARS ENDED JUNE 30, 1999 1998 1997
- -------------------------------------------------------------------------------
Current:
Federal $1,427 $679 $(798)
State 103 34 10
Deferred:
Federal (45) (116) 623
State (109) 53 5
------- ----- ------
$1,376 $650 $(160)
------- ----- ------
40
Deferred income taxes represent the tax effect of transactions that are
reported in different periods for financial and tax reporting purposes.
Temporary differences and carryforwards that give rise to a significant portion
of deferred income tax benefits (liabilities) are as follows:
AS OF JUNE 30, 1999 1998
- ------------------------------------------------------------------------------------------
Deferred income tax benefits:
Doubtful accounts and other accruals $ 767 $ 796
Vacation pay accrual 283 6
Adjustment of inventories and contracts to tax basis - 70
Other, net 181 78
-------- --------
$ 1,231 $ 950
-------- --------
Deferred income tax liabilities:
Depreciation and amortization $(1,613) $(1,645)
Loss carryforwards from acquisition 528 -
Accrued lease obligations 68 74
Other, net (24) (100)
-------- --------
$(1,041) $(1,671)
-------- --------
A reconciliation of the federal statutory and the Company's effective income tax
rates follows:
YEARS ENDED JUNE 30, 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
Statutory rate 34.0% 34.0% (34.0%)
State taxes, net of federal tax benefit 1.8 4.4 1.7
Adjustment of deferred income taxes due to state
tax rate changes (2.8) - -
Foreign taxes for which a foreign tax credit was
not available - - 10.1
Other, net 3.0 (.4) (1.8)
----- ----- -------
Effective income tax rate 36.0% 38.0% (24.0)%
----- ----- --------
At June 30, 1999, the Company had approximately $1,500 of operating loss
carryforwards available to reduce future federal taxable income. These loss
carryforwards relate to the March 1999 acquisition of Alton Geoscience, Inc. and
expire in years 2008 through 2018. Although utilization of these carryforwards
is subject to certain limitations, the Company believes that all of the
carryforwards will be utilized prior to their expiration.
41
Note 7. LEASE COMMITMENTS
The Company has commitments at June 30, 1999 under noncancelable
operating leases primarily for office and warehouse space and for computer and
office equipment. Rental payments, net of sublease receipts, charged to
operations in fiscal 1999, 1998 and 1997 were approximately $4,189, $3,674 and
$4,179, respectively. Certain leases for office and warehouse space require
payments for expenses under escalation clauses.
Minimum future lease obligations payable in future fiscal years are as
follows:
Years ending June 30,
- ---------------------------------------------------------------------
2000 $ 4,014
2001 3,108
2002 3,013
2003 2,750
2004 2,349
2005 and thereafter 6,316
--------
$ 21,550
--------
Note 8. STOCK OPTIONS
The Company's non-qualified stock option plan for employees and
directors, as amended, authorizes the granting of options, including
performance-based options, with exercise prices at no less than the fair market
value of the common stock on the date such options are granted. The exercisable
option period is fixed by the Board of Directors at the time of grant, but
cannot exceed ten years and generally begins within a specified period after the
date of grant. No accounting recognition is given to stock options until they
are exercised, at which time the proceeds are credited to the capital accounts.
The Company receives a tax benefit upon exercise of these options in an amount
equal to the difference between the option price and the fair market value of
the common stock. Tax benefits related to stock options are credited to
additional paid-in capital when realized for financial reporting purposes.
The Company had a separate stock option plan for directors who were not
employees. In fiscal 1997, the stock option plan for directors was terminated
and the stock option plan for employees was amended to include directors.
42
A summary of stock option activity for the three years ended June 30,
1999 follows:
1999 1998 1997
--------------------------------------------------------------------
Average Average Average
Options Price Options Price Options Price
- --------------------------------------------------------------------------------------------------------------
Outstanding options, beginning of year 688,677 $5.04 738,352 $4.38 577,959 $6.86
Granted 254,000 4.29 497,000 4.50 736,600 3.66
Exercised (2,250) 4.33 - - - -
Canceled (54,197) 6.99 (547,175) 3.67 (588,207) 6.00
Transfer from directors' plan - - - - 12,000 8.88
-------------------------------------------------------------
Outstanding options, end of year 886,230 $4.71 688,677 $5.04 738,352 $4.38
-------------------------------------------------------------
Options exercisable at end of year 457,333 $4.99 120,519 $6.91 80,536 $7.52
-------------------------------------------------------------
Options available for future grants 649,689 849,492 799,817
------- ------- -------
The following table summarizes information about outstanding stock
options at June 30, 1999:
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Average Average Average
Exercise Price Shares Price Term (Years) Shares Price
------------------- ------------- -------------- ----------------- -------------- ---------------
$3.50 - $ 4.50 727,125 $4.36 8.6 342,062 $4.38
4.63 - 6.00 59,500 4.95 8.5 15,666 5.04
6.63 - 10.00 99,605 7.09 1.4 99,605 7.09
Grants in fiscal 1998 include 485,000 options granted to certain senior
managers in exchange for a reduction in cash compensation to the grantees over
the next two years, with individuals receiving one option for every two dollars
in aggregate salary reduction over such two-year period. Cancellations in fiscal
1998 include 516,600 options granted in fiscal 1997 that were contingent upon
the attainment of certain performance goals. In fiscal 1997, 497,770 options
held by the former Chairman and the former President were cancelled in
connection with their resignations.
In connection with the acquisition of Environmental Solutions, Inc.
(ESI) in fiscal 1994, the Company issued warrants to employees of ESI to
purchase shares of common stock, under the same terms and conditions as the
employee stock option plan. At June 30, 1999, warrants to purchase 19,400 shares
of common stock at $6.63 per share were outstanding and expire in February 2001.
Since the Company applies the provisions of APB 25 and related
interpretations in accounting for stock options and warrants, no compensation
cost has been recognized in the Company's consolidated statements of operations
for the stock option and warrant plans. Had compensation cost for the stock
option and warrant plans been determined based on the fair value at the grant
date for awards under those plans, consistent with the requirements of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, the Company's pro forma net income (loss) and earnings
43
(loss) per share for the years ended June 30, 1999, 1998 and 1997 would have
been as follows:
Years ended June 30, 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 2,447 $ 1,061 $ (505)
Net income (loss), pro forma 1,647 903 (601)
Earnings (loss) per share - basic and diluted, as reported $.36 $.16 $(.07)
Earnings (loss) per share - basic and diluted, pro forma .24 .13 (.09)
In arriving at the pro forma amounts, the fair value of each option and
warrant grant was estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions:
Years ended June 30, 1999 1998 1997
- ------------------------------------------------------------------------
Risk-free interest rate 4.7% 5.4% 6.5%
Expected life 7.5 years 7.4 years 3.8 years
Expected volatility 49% 63% 52%
Expected dividend yield None None None
The weighted average fair value of options and warrants granted during
fiscal 1999, 1998 and 1997 was $2.50, $3.42 and $2.19, respectively.
Note 9. CONTINGENCIES
The Company's contracts with the U.S. Government are subject to
examination and renegotiation. Contracts and other records of the Company have
been examined through June 30, 1992. The Company believes that adjustments
resulting from such examinations or renegotiation proceedings, if any, will not
have a significant impact on the Company's operating results, financial
condition or cash flows.
In 1997, the Board of Directors created a Special Committee of outside
board members of the Company to investigate the exercise of stock options by the
former Chairman and the former President, as well as other matters. The Special
Committee conducted its investigation with the assistance of outside counsel and
accountants who had no prior affiliation with the Company, and also consulted
with the Company's independent accountants. The investigation revealed no
circumstances that had any material effect on the Company's historical audited
financial statements. In December 1997, the Company entered into settlement
agreements with those former executive officers. The Company was fully
reimbursed for costs of the investigation and damages incurred. As a result, the
Company recorded income in fiscal 1998 of approximately $900 related to the
settlement.
44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of TRC Companies, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
TRC Companies, Inc. and its subsidiaries at June 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
August 4, 1999
45
TRC COMPANIES, INC.
DIRECTORS
Richard D. Ellison
Chairman, President and Chief Executive Officer
TRC Companies, Inc.
Edward W. Large *
Counsel to the law firms of Crowell & Moring
and Day, Berry & Howard; formerly Executive
Vice President and Director of United
Technologies Corporation
Richard J. McGuire, Jr. *
Formerly President of TRC Environmental Corporation and
TRC Mariah Associates, Inc.
J. Jeffrey McNealey *
Partner in the law firm of
Porter, Wright, Morris & Arthur
Edward G. Jepsen *
Executive Vice President and
Chief Financial Officer of
Amphenol Corporation
* Audit Committee Member
OFFICERS
Richard D. Ellison
Chairman, President and Chief Executive Officer
Harold C. Elston, Jr.
Senior Vice President and Chief Financial Officer
John H. Claussen
Senior Vice President
Miro Knezevic
Senior Vice President
Martin H. Dodd
Vice President and General Counsel
46
SHAREHOLDER INFORMATION
EXECUTIVE OFFICES
TRC Companies, Inc.
5 Waterside Crossing
Windsor, CT 06095
(860) 289-8631
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
One Financial Plaza
Hartford, CT 06103
ANNUAL MEETING
The 1999 annual meeting of shareholders will be held on Friday, October
22, 1999, at 10:00 a.m., at the Company's executive offices.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission, Washington, D.C., is available without
charge by writing to:
TRC Companies, Inc.
5 Waterside Crossing
Windsor, CT 06095
Attn: Investor Relations
STOCK EXCHANGE, DIVIDEND AND MARKET INFORMATION
The Company's common stock is traded on the New York Stock Exchange
under the symbol "TRR".
To date the Company has not paid any cash dividends. The payment of
dividends in the future will be subject to the financial condition, capital
requirements and earnings of the Company. However, future earnings are expected
to be used for expansion of the Company's operations, and cash dividends are not
likely for the foreseeable future.
REGISTRAR AND TRANSFER AGENT FOR COMMON STOCK
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, NY 10005
Shareholders may call the agent's Shareholder Services Department directly
concerning stock certificates and address changes at (800) 937-5449.
47