<PAGE>
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, 1998
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
----------------------------- ---------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5 Waterside Crossing
Windsor, Connecticut 06095
---------------------------------------- ---------------
(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, 1998 there were 6,782,202 shares of the registrant's common stock,
$.10 par value, outstanding.
<PAGE>
TRC COMPANIES, INC.
CONTENTS OF QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 1998
<TABLE>
<S> <C>
PART I - Financial Information
Item 1. Consolidated Financial Statements
Statements of Operations for the three and nine months ended
March 31, 1998 and 1997.................................................... 3
Balance Sheets at March 31, 1998 and June 30, 1997.............................. 4
Statements of Cash Flows for the nine months ended
March 31, 1998 and 1997.................................................... 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...................................................................................... 11
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
TRC COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue ......................... $ 16,398,434 $ 15,873,491 $ 53,012,559 $ 51,113,029
Less subcontractor costs
and direct charges ................ 3,479,036 4,005,687 14,158,995 13,134,295
------------ ------------ ------------ ------------
Net service revenue ................... 12,919,398 11,867,804 38,853,564 37,978,734
------------ ------------ ------------ ------------
Operating costs and expenses:
Direct labor and fringe benefit costs 5,774,192 5,541,542 17,192,495 17,018,783
Indirect costs and expenses ......... 5,310,645 5,458,201 16,151,958 15,955,080
General and administrative expenses . 591,459 951,778 1,875,492 2,785,527
Depreciation and amortization ....... 681,201 701,999 2,018,218 2,074,737
------------ ------------ ------------ ------------
12,357,497 12,653,520 37,238,163 37,834,127
------------ ------------ ------------ ------------
Income (loss) from operations ......... 561,901 (785,716) 1,615,401 144,562
Interest expense ...................... 138,576 203,377 581,988 602,404
------------ ------------ ------------ ------------
Income (loss) before taxes ............ 423,325 (989,093) 1,033,413 (457,842)
Federal and state income tax
provision (benefit) ................. 161,000 (376,000) 393,000 (174,000)
------------ ------------ ------------ ------------
Net income (loss) .................... $ 262,325 $ (613,093) $ 640,413 $ (283,842)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Earnings (loss) per share:
Basic and diluted ................... $ .04 $ (.09) $ .10 $ (.04)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Average shares outstanding:
Basic ............................... 6,703,279 6,694,005 6,693,161 6,758,291
Diluted ............................. 6,719,741 6,694,005 6,699,081 6,766,056
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
TRC COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................... $ 459,422 $ 1,020,065
Accounts receivable, less allowance for doubtful accounts ......... 24,753,929 26,539,226
Inventories ....................................................... 1,387,689 1,092,391
Income taxes refundable ........................................... 194,465 598,677
Deferred income tax benefits ...................................... 982,000 884,000
Prepaid expenses and other current assets ......................... 726,378 1,324,114
----------- -----------
28,503,883 31,458,473
----------- -----------
Property and equipment, at cost ..................................... 21,140,742 20,295,696
Less accumulated depreciation and amortization .................... 16,879,352 15,596,670
----------- -----------
4,261,390 4,699,026
Costs in excess of net assets of acquired businesses, net of
accumulated amortization .......................................... 25,693,669 25,310,445
----------- -----------
Other assets ........................................................ 707,679 822,315
----------- -----------
$59,166,621 $62,290,259
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt ........................................... $ 3,600,000 $ 4,000,000
Accounts payable .................................................. 2,251,465 2,740,240
Accrued compensation and benefits ................................. 1,803,220 2,508,369
Unearned revenue .................................................. 824,738 --
Other accrued liabilities ......................................... 858,127 1,529,992
----------- -----------
9,337,550 10,778,601
----------- -----------
Noncurrent liabilities:
Long-term debt .................................................... 3,900,000 7,000,000
Deferred income taxes ............................................. 1,895,000 1,668,000
----------- -----------
5,795,000 8,668,000
----------- -----------
Shareholders' equity:
Capital stock:
Preferred, $.10 par value; 500,000 shares authorized, none issued -- --
Common, $.10 par value; 30,000,000 shares authorized, 7,410,855
shares issued at March 31, 1998 and 7,316,755 shares issued
at June 30, 1997 .............................................. 741,085 731,675
Additional paid-in capital ........................................ 38,634,234 38,093,644
Retained earnings ................................................. 7,555,755 6,915,342
----------- -----------
46,931,074 45,740,661
Less treasury stock, at cost ...................................... 2,897,003 2,897,003
----------- -----------
44,034,071 42,843,658
----------- -----------
$59,166,621 $62,290,259
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
TRC COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $ 640,413 $ (283,842)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 2,018,218 2,074,737
Change in deferred taxes and other non-cash items 129,000 (139,480)
Changes in assets and liabilities:
Accounts receivable ........................... 2,360,097 819,863
Inventories ................................... (295,298) (260,519)
Prepaid expenses and other current assets ..... 618,511 (283,290)
Accounts payable .............................. (498,026) 504,859
Accrued compensation and benefits ............. (921,624) 627,464
Unearned revenue .............................. 824,738 --
Income taxes .................................. 404,212 (350,012)
Other accrued liabilities ..................... (721,866) (366,866)
----------- -----------
Net cash provided by operating activities ........... 4,558,375 1,087,986
----------- -----------
Cash flows from investing activities:
Additions to property and equipment, net .......... (763,005) (342,424)
Acquisition of business, net of cash received ..... (430,839) --
Decrease (increase) in other assets, net .......... 74,826 (135,982)
----------- -----------
Net cash used in investing activities ............... (1,119,018) (478,406)
----------- -----------
Cash flows from financing activities:
Repayment of debt ................................. (4,000,000) 400,000
Purchase of treasury stock ........................ -- (1,603,227)
----------- -----------
Net cash used in financing activities ............... (4,000,000) (1,203,227)
----------- -----------
Decrease in cash and cash equivalents ............... (560,643) (593,647)
Cash and cash equivalents, beginning of period ...... 1,020,065 1,321,524
----------- -----------
Cash and cash equivalents, end of period ............ $ 459,422 $ 727,877
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
TRC COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1. The consolidated balance sheet at March 31, 1998 and the consolidated
statements of operations for the three and nine months ended March 31, 1998
and 1997 and the consolidated statements of cash flows for the nine months
ended March 31, 1998 and 1997 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, 1998 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, 1997.
2. The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 (FAS 128), Earnings per Share, in December 1997. As
required by FAS 128, all periods presented have been restated to reflect
adoption of the new accounting standard.
3. The components of inventories were as follows:
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
---------- ----------
<S> <C> <C>
Materials and supplies ........... $ 738,040 $ 637,147
Work-in-progress ................. 176,007 33,552
Finished goods ................... 473,642 421,692
---------- ----------
$1,387,689 $1,092,391
---------- ----------
---------- ----------
</TABLE>
4. In December 1997, the Company entered into settlement agreements with its
former Chairman and Chief Executive Officer and former President. Pursuant
to the agreements, the Company received reimbursement for damages related
to the improper exercise of stock options and other matters, and for the
costs of the investigation conducted by the Special Committee formed by the
Board in March 1997. This matter has not had any material adverse effect on
the Company's financial condition or results of operations.
6
<PAGE>
TRC COMPANIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Three and Nine Months Ended March 31, 1998 and 1997
Overview
TRC Companies, Inc. provides a broad range of environmental management,
engineering and remediation services and specialized pollution control
measurement instrumentation to industry and government.
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net service revenue .................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Operating costs and expenses:
Direct labor and fringe benefit costs 44.7 46.7 44.2 44.8
Indirect costs and expenses .......... 41.1 46.0 41.6 42.0
General and administrative expenses 4.6 8.0 4.8 7.3
Depreciation and amortization ........ 5.3 5.9 5.2 5.5
----- ----- ----- -----
Income (loss) from operations .......... 4.3 (6.6) 4.2 0.4
Interest expense ....................... 1.0 1.7 1.5 1.6
----- ----- ----- -----
Income (loss) before taxes 3.3 (8.3) 2.7 (1.2)
Federal and state income tax
provision (benefit) .................. 1.3 (3.2) 1.1 (0.5)
----- ----- ----- -----
Net income (loss)....................... 2.0% (5.1)% 1.6% (0.7)%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
7
<PAGE>
Net service revenue increased by 8.9% during the three months ended March 31,
1998 to $12.9 million, from $11.9 million in the same period last year. The
Company had its fourth straight quarter of stabilized revenue after two years of
continuous net service revenue declines. The Company believes that the larger
revenue declines experienced during the past two years are not expected to recur
in the near future as the market for the Company's services improves. For the
nine months ended March 31, 1998, net service revenue increased by 2.3% to $38.9
million, from $38 million in the same period last year.
Direct labor and fringe benefit costs increased by 4.2% during the three months
ended March 31, 1998, as compared to the same period last year, primarily due to
the increase in net service revenue. For the nine months ended March 31, 1998,
direct labor and fringe benefit costs increased by 1.0% compared to the same
period last year, primarily due to the slight increase in net service revenue.
Indirect costs and expenses decreased by 2.7% during the three months ended
March 31, 1998, as compared to the same period last year, primarily due to
reductions in overhead costs and to a slight increase in staff utilization. For
the nine months ended March 31, 1998, these costs were up by 1.2%, as compared
to the same period last year. However, as a percentage of net service revenue,
these costs decreased to 41.6% for the nine months ended March 31, 1998, from
42.0% in the same period last year.
General and administrative expenses decreased by 37.9% and 32.7%, respectively,
during the three and nine months ended March 31, 1998, as compared to the same
periods last year. These decreases are the direct result of the cost reductions
undertaken in the fourth quarter of the last fiscal year.
Depreciation and amortization expense decreased by 3.0% and 2.7%, respectively,
during the three and nine months ended March 31, 1998, as compared to the same
periods last year. These decreases were primarily due to the comparative
reductions in capital expenditures in fiscal 1997 and 1996, combined with the
effect of other equipment which became fully depreciated.
For the three months ended March 31, 1998, the Company reported income from
operations of $561,901, as compared to a loss from operations of $785,716 in the
same period last year. For the nine months ended March 31, 1998, the Company
reported income from operations of $1,615,401, as compared to $144,562 for the
same period last year. The improvements in the three and nine months ended
March 31, 1998, as compared to the same period last year, were primarily due
to the increase in net service revenue and lower operating costs.
Interest expense decreased by 31.9% and 3.4%, respectively, during the three and
nine months ended March 31, 1998, as compared to the same periods last year.
These decreases resulted primarily from lower levels of debt outstanding,
partially offset by higher interest rates.
The provision (benefit) for federal and state income taxes was recorded at an
effective rate of 38% of income (loss) before taxes for the three and nine
months ended March 31, 1998 and 1997. The Company believes that there will be
sufficient taxable income in the carryforward periods to enable utilization of
the deferred tax benefits.
8
<PAGE>
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.
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 over $4.6 million of cash flow during the nine
months ended March 31, 1998, up from $1.1 million in the same period last year.
Such cash flow for the nine months ended March 31, 1998 was primarily comprised
of cash generated by net income and the non-cash charges against income for
depreciation and amortization, from the reduction in receivables, the increase
in unearned revenue and approximately net $1.1 million relating to the
settlement agreements with former officers, and was partially offset by the
timing of vendor payments and payroll costs.
Cash used for investing purposes was approximately $1.1 million during the nine
months ended March 31, 1998, up from $.5 million in the same period last year.
Capital expenditures for equipment to support business growth increased to $.8
million, up from $.3 million in the same period last year. The Company expects
to make capital expenditures of approximately $.2 million during the remainder
of fiscal 1998. In March 1998, the Company completed the acquisition of
Hydro-Geo Consultants, Inc. a Denver based firm associated principally with the
domestic and international mining and water resource sectors. The firm had
annual revenue of approximately $2.0 million in 1997. The purchase consideration
consisted of a combination of cash, common stock and a 5-year subordinated note.
The Company relies on its bank financing arrangement to assist in funding
various operating and financing activities. The Company has available a $4
million revolving credit facility secured by accounts receivable which expires
June 30, 1998. Borrowings under the agreement bear interest at the bank's base
rate or the Eurodollar rate plus 2%. The agreement requires the Company to meet
certain financial ratios. At March 31, 1998, there were no borrowings
outstanding pursuant to the agreement.
At March 31, 1998, the Company had outstanding a $7 million subordinated note
issued in March 1994 in connection with the acquisition of Environmental
Solutions, Inc. and subsequently amended as of July 11, 1997. Interest on the
note accrues at the greater of the interest rate paid on the Company's bank debt
or 7 3/4%. The outstanding balance will be repaid in two equal installments of
$3.5 million on July 1, 1998 and 1999. The Company also had outstanding at
March 31, 1998 a $.5 million 7 3/4% subordinated note issued in connection
with
9
<PAGE>
the purchase of Hydro-Geo Consultants, Inc. The note is repayable in five equal
annual installments beginning in March 1999.
The Company expects to increase its available cash flow over the remainder of
fiscal 1998, primarily from operations and from 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 March 31, 1998 and
available borrowings under the bank line of credit will be sufficient to meet
the Company's cash requirements for the remainder of fiscal 1998. Upon
termination of the revolving credit agreement with the bank on June 30, 1998,
the Company expects to renew or replace the facility.
Other Matters
In December 1997, the Company entered into settlement agreements with its former
Chairman and Chief Executive Officer and former President. Pursuant to the
agreements, the Company received reimbursement for damages related to the
improper exercise of stock options and other matters, and for the costs of the
investigation conducted by the Special Committee formed by the Board in March
1997. This matter has not had any material adverse effect on the Company's
financial condition or results of operations.
New Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (FAS 130), was issued and establishes standards for
reporting and displaying comprehensive income and its components. FAS 130
requires comprehensive income and its components, as recognized under the
accounting standards, to be displayed in a financial statement with the same
prominence as other financial statements. The Company plans to adopt the
standard beginning in fiscal 1999, as required. Adoption is not expected to have
a material impact on the financial position or results of operations of the
Company.
Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information, also issued in June 1997, establishes
new standards for reporting information about operating segments in annual and
interim financial statements. The standard also requires descriptive information
about the way the operating segments are determined, the products and services
provided by the segments and the nature of differences between reportable
segment measurements and those used for the consolidated enterprise. This
standard will be effective for the Company in fiscal 1999. Adoption in interim
financial statements is not required until the year after initial adoption;
however, comparative prior period information is required. Adoption is not
expected to have a material impact on the financial position or results of
operations of the Company.
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, 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.
10
<PAGE>
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, 1997, for a
description of existing litigation against the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 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, 1998.
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, 1998 by: /s/ Harold C. Elston, Jr.
----------------------------------
Harold C. Elston, Jr.
Vice President and Treasurer
(Chief Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 459,422
<SECURITIES> 0
<RECEIVABLES> 24,753,929
<ALLOWANCES> 0
<INVENTORY> 1,387,689
<CURRENT-ASSETS> 28,503,883
<PP&E> 21,140,742
<DEPRECIATION> 16,879,352
<TOTAL-ASSETS> 59,166,621
<CURRENT-LIABILITIES> 9,337,550
<BONDS> 0
0
0
<COMMON> 741,085
<OTHER-SE> 43,292,986
<TOTAL-LIABILITY-AND-EQUITY> 59,166,621
<SALES> 53,012,559
<TOTAL-REVENUES> 53,012,559
<CGS> 0
<TOTAL-COSTS> 51,397,158
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 581,988
<INCOME-PRETAX> 1,033,413
<INCOME-TAX> 393,000
<INCOME-CONTINUING> 640,413
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 640,413
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
