<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 December 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
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
5 Waterside Crossing
Windsor, Connecticut 06095
- --------------------------------- ------------------------------------
(Address of principal (Zip Code)
executive offices)
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. /x/ YES / / NO
On December 31, 1997 there were 6,688,102 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 December 31, 1997
PART I--FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Consolidated Financial Statements
Statements of Operations for the three and
six months ended December 31, 1997 and 1996..............3
Balance Sheets at December 31, 1997 and
June 30, 1997............................................4
Statements of Cash Flows for the six months
ended December 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........................................12
Item 6. Exhibits and Reports on Form 8-K.........................12
Signature..........................................................12
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
TRC Companies, Inc.
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------- ------------- ------------- -------------
Gross revenue....................................... $ 19,053,815 $ 17,210,373 $ 36,614,125 $ 35,239,538
Less subcontractor costs and direct charges....... 6,109,816 4,485,406 10,679,959 9,128,608
------------- ------------- ------------- -------------
Net service revenue................................. 12,943,999 12,724,967 25,934,166 26,110,930
------------- ------------- ------------- -------------
Operating costs and expenses:
Direct labor and fringe benefit costs............. 5,737,332 5,700,327 11,418,303 11,477,241
Indirect costs and expenses....................... 5,297,530 5,025,437 10,841,313 10,496,879
General and administrative expenses............... 604,655 916,417 1,284,033 1,833,794
Depreciation and amortization..................... 668,496 687,806 1,337,017 1,372,738
------------- ------------- ------------- -------------
12,308,013 12,329,987 24,880,666 25,180,652
------------- ------------- ------------- -------------
Income from operations.............................. 635,986 394,980 1,053,500 930,278
Interest expense.................................... 223,161 202,272 443,412 399,027
------------- ------------- ------------- -------------
Income before taxes................................. 412,825 192,708 610,088 531,251
Federal and state income tax provisions............. 157,000 73,000 232,000 202,000
------------- ------------- ------------- -------------
Net income.......................................... $ 255,825 $ 119,708 $ 378,088 $ 329,251
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Earnings per share:
Basic and diluted................................. $ .04 $ .02 $ .06 $ .05
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Average shares outstanding:
Basic............................................. 6,688,102 6,685,897 6,688,102 6,790,434
Diluted........................................... 6,688,902 6,701,985 6,688,752 6,802,081
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
TRC Companies, Inc.
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 876,973 $ 1,020,065
Accounts receivable, less allowance for doubtful accounts........................ 25,775,652 26,539,226
Inventories...................................................................... 1,233,819 1,092,391
Income taxes refundable.......................................................... 306,713 598,677
Deferred income tax benefits..................................................... 954,000 884,000
Prepaid expenses and other current assets........................................ 951,899 1,324,114
------------- -------------
30,099,056 31,458,473
------------- -------------
Property and equipment, at cost.................................................... 20,618,155 20,295,696
Less accumulated depreciation and amortization................................... 16,446,659 15,596,670
------------- -------------
4,171,496 4,699,026
------------- -------------
Costs in excess of net assets of acquired businesses, net of accumulated
amortization..................................................................... 24,850,593 25,310,445
------------- -------------
Other assets....................................................................... 734,822 822,315
------------- -------------
$ 59,855,967 $ 62,290,259
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt.......................................................... $ 5,400,000 $ 4,000,000
Accounts payable................................................................. 2,420,269 2,740,240
Accrued compensation and benefits................................................ 1,559,486 2,508,369
Unearned revenue................................................................. 997,038 --
Other accrued liabilities........................................................ 938,428 1,529,992
------------- -------------
11,315,221 10,778,601
------------- -------------
Noncurrent liabilities:
Long-term debt................................................................... 3,500,000 7,000,000
Deferred income taxes............................................................ 1,819,000 1,668,000
------------- -------------
5,319,000 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, 7,316,755 shares issued
at December 31, 1997 and June 30, 1997........................................ 731,675 731,675
Additional paid-in capital........................................................ 38,093,644 38,093,644
Retained earnings................................................................. 7,293,430 6,915,342
------------- -------------
46,118,749 45,740,661
Less treasury stock, at cost...................................................... 2,897,003 2,897,003
------------- -------------
43,221,746 42,843,658
------------- -------------
$ 59,855,967 $ 62,290,259
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
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TRC Companies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHES ENDED
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 378,088 $ 329,251
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................................................... 1,337,017 1,372,738
Change in deferred taxes and other non-cash items.................................. 81,000 42,105
Changes in assets and liabilities:
Accounts receivable.............................................................. 763,574 1,318,394
Inventories...................................................................... (141,428) (134,673)
Prepaid expenses and other current assets........................................ 372,215 (332,555)
Accounts payable................................................................. (319,971) (183,451)
Accrued compensation and benefits................................................ (948,883) (294,259)
Unearned revenue................................................................. 997,038 --
Income taxes..................................................................... 291,964 50,779
Other accrued liabilities........................................................ (591,564) (274,490)
----------- -----------
Net cash provided by (used in) operating activities.................................... 2,219,050 1,893,839
----------- -----------
Cash flows from investing activities:
Additions to property and equipment, net............................................. (322,459) (190,470)
Decrease (increase) in other assets, net............................................. 60,317 (166,337)
----------- -----------
Net cash used in investing activities.................................................. (262,142) (356,807)
----------- -----------
Cash flows from financing activities:
Repayment of debt.................................................................... (2,100,000) (200,000)
Purchase of treasury stock........................................................... -- (1,496,102)
----------- -----------
Net cash used in financing activities.................................................. (2,100,000) (1,696,102)
----------- -----------
Decrease in cash and cash equivalents.................................................. (143,092) (159,070)
Cash and cash equivalents, beginning of period......................................... 1,020,065 1,321,524
----------- -----------
Cash and cash equivalents, end of period............................................... $ 876,973 $ 1,162,454
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
TRC Companies, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. The consolidated balance sheet at December 31, 1997 and the consolidated
statements of operations for the three and six months ended December 31, 1997
and 1996 and the consolidated statements of cash flows for the six months ended
December 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 six months ended December 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, 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>
DECEMBER 31, JUNE 30,
1997 1997
------------ ------------
<S> <C> <C>
Materials and supplies............................................................... $ 697,330 $ 637,147
Work-in-progress..................................................................... 132,728 33,552
Finished goods....................................................................... 403,761 421,692
------------ ------------
$1,233,819 $ 1,092,391
------------ ------------
------------ ------------
</TABLE>
4. In December 1997, the Company entered into settlement agreements with its
former Chairman and Chief Executive Officer, Vincent A. Rocco, and former
President, Bruce D. Cowen. 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 Six Months Ended December 31, 1997 and 1996
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 SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<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................................ 44.3 44.8 44.0 44.0
Indirect costs and expenses.......................................... 40.9 39.5 41.8 40.2
General and administrative expenses.................................. 4.6 7.2 4.9 7.0
Depreciation and amortization........................................ 5.1 5.4 5.2 5.2
--------- --------- --------- ---------
Income from operations................................................. 4.9 3.1 4.1 3.6
Interest expense....................................................... 1.7 1.6 1.7 1.5
--------- --------- --------- ---------
Income before taxes.................................................... 3.2 1.5 2.4 2.1
Federal and state income tax provision................................. 1.2 0.6 0.9 0.8
--------- --------- --------- ---------
Net income............................................................. 2.0% 0.9% 1.5% 1.3%
--------- --------- --------- ---------
</TABLE>
7
<PAGE>
Net service revenue increased by 1.7% during the three months ended December
31, 1997 to $12.9 million, from $12.7 million in the same period last year. The
Company had its third 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
six months ended December 31, 1997, net service revenue decreased by .7% to
$25.9 million, from $26.1 million in the same period last year.
Direct labor and fringe benefit costs increased by .6% during the three
months ended December 31, 1997, as compared to the same period last year,
primarily due to the slight increase in net service revenue. For the six months
ended December 31, 1997, direct labor and fringe benefit costs decreased by .5%
compared to the same period last year, primarily due to the slight decrease in
net service revenue. Indirect costs and expenses increased by 5.4% and 3.3%,
respectively, during the three and six months ended December 31, 1997, as
compared to the same periods last year. However, compared to the previous two
quarterly periods, these costs decreased primarily due to recent reductions in
overhead costs and to a slight increase in staff utilization.
General and administrative expenses decreased by 34.0% and 30.0%,
respectively, during the three and six months ended December 31, 1997, 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 2.8% and 2.6%
respectively, during the three and six months ended December 31, 1997, as
compared to the same periods last year. These decreases are 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.
Income from operations increased to $635,986 and $1,053,500, respectively,
for the three and six months ended December 31, 1997, compared to $394,980 and
$930,278, respectively, reported in the same periods last year. The increase for
the three month period was due to the increase in net service revenue and lower
operating costs. For the six month period, the increase was due to lower
operating costs.
Interest expense increased by 10.3% and 11.1%, respectively, during the
three and six months ended December 31, 1997, as compared to the same periods
last year. Although average outstanding borrowings were less in the current
quarterly periods, interest expense increased because of higher interest rates
on the bank debt and subordinated note.
The provision for federal and state income taxes was recorded at an
effective rate of 38% of income before taxes for the three and six months ended
December 31, 1997 and 1996. 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 $2.2 million of cash flow during the six
months ended December 31, 1997, up from $1.9 million in the same period last
year. Such cash flow for the six months ended December 31, 1997 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 activities was approximately $.3 million during the
six months ended December 31, 1997, primarily related to additions to property
and equipment, partially offset by the decrease in other assets. The Company
expects to make capital expenditures of approximately $.2 million during the
remainder of fiscal 1998.
The Company relies on its bank financing arrangement to assist in funding
various operating and financing activities. The Company has available a
revolving credit facility which expires June 30, 1998. Under the agreement,
the Company has a $5 million credit facility secured by accounts receivable
that will reduce to $4 million at 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
December 31, 1997, outstanding borrowings pursuant to the agreement were $1.9
million, at an average interest rate of 8.2%. The Company intends to repay a
substantial portion of the outstanding balance over the next six months from
available cash flow.
At December 31, 1997, the Company's long-term debt consisted of 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
9
<PAGE>
interest rate paid on the Company's bank debt or 7.75%. The outstanding
balance will be repaid in two equal installments of $3.5 million on July 1,
1998 and 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
December 31, 1997 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, Vincent A. Rocco, and former
President, Bruce D. Cowen. 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
10
<PAGE>
acceptance, industry-wide competitive factors and political, economic or
other conditions. Furthermore, market trends are subject to changes which
could adversely affect future results.
11
<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 December 31, 1997.
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.
February 13, 1998 by: /s/ Harold C. Elston, Jr.
-----------------------------
Harold C. Elston, Jr.
Vice President and Treasurer
(Chief Accounting Officer)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 876,973
<SECURITIES> 0
<RECEIVABLES> 25,775,652
<ALLOWANCES> 0
<INVENTORY> 1,233,819
<CURRENT-ASSETS> 30,099,056
<PP&E> 20,618,155
<DEPRECIATION> 16,446,659
<TOTAL-ASSETS> 59,855,967
<CURRENT-LIABILITIES> 11,315,221
<BONDS> 0
0
0
<COMMON> 731,675
<OTHER-SE> 42,490,071
<TOTAL-LIABILITY-AND-EQUITY> 59,855,967
<SALES> 36,614,125
<TOTAL-REVENUES> 36,614,125
<CGS> 0
<TOTAL-COSTS> 35,560,625
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 443,412
<INCOME-PRETAX> 610,088
<INCOME-TAX> 232,000
<INCOME-CONTINUING> 378,088
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 378,088
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
