SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended July 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-12636
THERMORETEC CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 59-3203761
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Damonmill Square
9 Pond Lane, Suite 5A
Concord, Massachusetts 01742-2851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 30, 1999
Common Stock, $.01 par value 13,573,083
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMORETEC CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
July 3, April 3,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents (includes $20,607 under repurchase agreement $ 62 $20,669
with affiliated company in fiscal 1999)
Advance to affiliate (Note 7) 23,380 -
Accounts receivable, less allowances of $1,681 and $1,706 29,199 32,035
Unbilled contract costs and fees 6,005 7,442
Prepaid and refundable income taxes 3,830 3,923
Prepaid expenses 1,338 1,454
-------- --------
63,814 65,523
-------- --------
Property, Plant, and Equipment, at Cost (Note 5) 47,427 55,280
Less: Accumulated depreciation and amortization 24,468 23,538
-------- --------
22,959 31,742
-------- --------
Other Assets 9,655 7,589
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 5) 35,002 35,087
-------- --------
$131,430 $139,941
======== ========
2
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THERMORETEC CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 3, April 3,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Subordinated convertible debentures (includes $4,300 of related-party $ 37,950 $ -
debt)
Accounts payable 8,472 10,048
Accrued payroll and employee benefits 5,131 6,326
Deferred revenue 2,854 2,675
Billings in excess of revenues earned 1,964 3,323
Other accrued expenses (Note 5) 4,721 4,068
Due to parent company and affiliated companies 2,353 2,109
-------- --------
63,445 28,549
-------- --------
Deferred Income Taxes - 511
Subordinated Convertible Obligations (includes $2,650 and $6,830 of 2,650 40,600
related-party debt)
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 50,000,000 shares authorized; 14,247,572 142 142
shares issued
Capital in excess of par value 87,935 88,045
Accumulated deficit (17,056) (12,063)
Treasury stock at cost, 674,489 and 693,074 shares (5,686) (5,843)
-------- --------
65,335 70,281
-------- --------
$131,430 $139,941
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMORETEC CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $35,849 $34,416
------- -------
Costs and Operating Expenses:
Cost of revenues 29,904 28,872
Selling, general, and administrative expenses 3,823 4,192
Restructuring costs (Note 5) 9,569 -
------- ------
43,296 33,064
------- ------
Operating Income (Loss) (7,447) 1,352
Interest Income 314 166
Interest Expense (includes $78 and $62 to related parties) (542) (541)
------- ------
Income (Loss) Before Income Taxes (7,675) 977
Income Tax (Provision) Benefit 2,682 (489)
------- ------
Net Income (Loss) $(4,993) $ 488
======= ======
Basic and Diluted Earnings (Loss) per Share (Note 3) $ (.37) $ .04
======= ======
Weighted Average Shares (Note 3):
Basic 13,559 12,935
======= ======
Diluted 13,559 12,996
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMORETEC CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income (loss) $ (4,993) $ 488
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Noncash restructuring costs (Note 5) 9,044 -
Change in deferred income taxes (2,841) -
Depreciation and amortization 1,609 2,043
Provision for losses on accounts receivable 7 70
Other noncash items 62 (1)
Changes in current accounts:
Accounts receivable 2,648 (1,405)
Unbilled contract costs and fees 1,437 (1,819)
Other current assets 210 194
Accounts payable (1,576) (293)
Billings in excess of revenues earned (1,359) (148)
Other current liabilities (Note 5) (456) (1,011)
Due to parent company and affiliated companies 244 35
-------- -------
Net cash provided by (used in) operating activities 4,036 (1,847)
-------- -------
Investing Activities:
Advances to affiliate, net (Note 7) (23,380) -
Purchases of property, plant, and equipment (1,307) (1,232)
Proceeds from sale of property, plant, and equipment 9 188
Other (24) -
-------- -------
Net cash used in investing activities (24,702) (1,044)
-------- -------
Financing Activities:
Net proceeds from issuance of Company common stock 48 28
Other 11 43
-------- -------
Net cash provided by financing activities 59 71
-------- -------
Decrease in Cash and Cash Equivalents (20,607) (2,820)
Cash and Cash Equivalents at Beginning of Period 20,669 8,912
-------- -------
Cash and Cash Equivalents at End of Period $ 62 $ 6,092
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
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Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoRetec Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at July 3, 1999, and the results of
operations and cash flows for the three-month periods ended July 3, 1999, and
July 4, 1998. Interim results are not necessarily indicative of results for a
full year.
The consolidated balance sheet presented as of April 3, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. Certain amounts in fiscal 1999 have
been reclassified to conform to the presentation in the fiscal 2000 financial
statements. The consolidated financial statements and notes are presented as
permitted by Form 10-Q and do not contain certain information included in the
annual financial statements and notes of the Company. The consolidated financial
statements and notes included herein should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on Form
10-K for the fiscal year ended April 3, 1999, filed with the Securities and
Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents unrealized, net of tax gains and losses from available-for-sale
investments. During the first quarter of fiscal 2000 and 1999, the Company had a
comprehensive loss of $4,993,000 and comprehensive income of $485,000,
respectively.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Basic
Net Income (Loss) $(4,993) $ 488
------- ------
Weighted Average Shares 13,559 12,935
------- ------
Basic Earnings (Loss) per Share $ (.37) $ .04
======= ======
Diluted
Net Income (Loss) $(4,993) $ 488
------- ------
Weighted Average Shares 13,559 12,935
Effect of Stock Options - 61
------- ------
Weighted Average Shares, as Adjusted 13,559 12,996
------- ------
Diluted Earnings (Loss) per Share $ (.37) $ .04
======= ======
6
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3. Earnings (Loss) per Share (continued)
The computation of diluted earnings (loss) per share excludes the effect
of assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of July 3, 1999, there were 1,381,214 of such options
outstanding, with exercise prices ranging from $1.98 to $14.93 per share. In
addition, the computation of diluted earnings per share for all periods excludes
the effect of assuming the conversion of $37,950,000 principal amount of 4 7/8%
subordinated convertible debentures, convertible at $17.92 per share, and the
effect of assuming the conversion of $2,650,000 principal amount of a 3 7/8%
subordinated convertible note, convertible at $9.83 per share, because the
effects would be antidilutive.
4. Business Segment Information
Three Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- --------
Revenues:
Consulting and Engineering $19,247 $17,668
Nuclear Remediation 8,550 8,413
Soil Remediation 5,410 5,925
Fluids Recycling 2,642 2,410
------- -------
$35,849 $34,416
======= =======
Income (Loss) Before Income Taxes:
Consulting and Engineering $ 1,244 $ 732
Nuclear Remediation 534 565
Soil Remediation (a) (8,989) 141
Fluids Recycling 290 269
Corporate (b) (526) (355)
------- -------
Total operating income (loss) (7,447) 1,352
Interest expense, net (228) (375)
------- -------
$(7,675) $ 977
======= =======
(a) Includes restructuring costs of $9,569,000 in fiscal 2000.
(b) Primarily general and administrative expenses.
5. Restructuring Costs
During fiscal 1999, the Company recorded restructuring costs for the
closure of two soil-recycling facilities, resulting in a write-down of fixed
assets to their estimated disposal value, a write-off of intangible assets, as
well as ongoing lease costs and severance for 13 employees. The Company closed
one soil-recycling facility in March 1999 and is actively seeking a buyer for
the second soil-recycling facility. If no buyer is found, the Company will close
the facility. As of April 3, 1999, the Company had terminated 6 employees. No
additional employees were terminated during the first quarter of fiscal 2000.
In May 1999, the Company announced the planned sale of three additional
soil-recycling facilities. In connection with these actions, the Company
recorded $9,569,000 of restructuring charges in the first quarter of fiscal
2000. These costs include an $8,925,000 write-down of fixed assets to their
estimated disposal value of $3,160,000; the write-off of $119,000 of prepaid
expenses associated with the facilities; $475,000 of severance costs for 33
employees, none of whom were terminated in the first quarter of fiscal 2000; as
well as $50,000 of ongoing lease costs.
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5. Restructuring Costs (continued)
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Unaudited revenues and operating income before restructuring charges from
the soil-recycling facilities that have been or will be closed or sold
aggregated $2,610,000 and $465,000, respectively, in the first quarter of fiscal
2000, and $12,389,000 and $708,000, respectively, in fiscal 1999. As a result of
the restructuring actions, depreciation has been discontinued on the
soil-recycling facilities to be sold or closed. During the first quarter of
fiscal 2000, discontinuing depreciation at these facilities reduced the pretax
operating loss by $488,000. A summary of the changes in accrued restructuring
costs, which are included in other accrued expenses in the accompanying balance
sheet, is as follows:
<S> <C> <C> <C>
Facility
-closing
(In thousands) Severance Costs Total
- ------------------------------------------------------------------------- ----------- ---------- ---------
Balance at April 3, 1999 $ 112 $ 690 $ 802
Provision charged to expense 475 50 525
Usage (49) (13) (62)
------ ------ ------
Balance at July 3, 1999 $ 538 $ 727 $1,265
====== ====== ======
The Company expects to incur additional costs of $107,000, primarily for
expected future incremental costs related to the restructuring, during the
remainder of fiscal 2000.
6. Proposed Reorganization
Thermo Electron Corporation has announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company.
Under this plan, the Company and its sister subsidiary, The Randers Killam Group
Inc., as well as their parent company, Thermo TerraTech Inc., would be merged
into Thermo Electron. As a result, all three companies would become wholly owned
subsidiaries of Thermo Electron. The public shareholders of the Company, The
Randers Killam Group, and Thermo TerraTech would receive common stock in Thermo
Electron in exchange for their shares. The completion of these transactions is
subject to numerous conditions, including the establishment of prices and
exchange ratios; confirmation of anticipated tax consequences; the approval of
the Board of Directors of Thermo TerraTech and The Randers Killam Group; the
negotiation and execution of a definitive merger agreement; the receipt of a
fairness opinion from an investment banking firm that the transaction is fair to
the Company's shareholders (other than Thermo TerraTech and Thermo Electron)
from a financial point of view; the approval of the Company's Board of
Directors, including its independent directors; and completion of review by the
Securities and Exchange Commission of any necessary documents regarding the
proposed transactions.
7. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points,
set at the beginning of each month. Thermo Electron is contractually required to
maintain cash, cash equivalents, and/or immediately available bank lines of
credit equal to at least 50% of all funds invested under this cash management
arrangement by all Thermo Electron subsidiaries other than wholly owned
subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. Amounts
invested in this arrangement are included in "advance to affiliate" in the
accompanying balance sheet.
8
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended April 3, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company is a national provider of environmental-liability and
resource-management services. Through a nationwide network of offices, the
Company offers these and related consulting services in four segments:
Consulting and Engineering, Nuclear Remediation, Soil Remediation, and Fluids
Recycling.
The Company's Consulting and Engineering segment provides consultation,
engineering, and on-site services to help clients manage problems associated
with environmental compliance, resource management, and the remediation of
industrial sites contaminated with organic and inorganic wastes and residues.
The Company's eastern construction operation performs the cleanup of hazardous
waste sites for government and industry as a prime construction contractor and
completes predesigned remedial action contracts at sites containing hazardous,
toxic, and radioactive wastes.
The Company's Nuclear Remediation segment provides services to remove
radioactive contaminants from sand, gravel, and soil, as well as health physics
services, radiochemistry-laboratory services, radiation-dosimetry services,
radiation-instrument calibration and repair services, and radiation-source
production. The Company also provides nuclear-remediation and waste-management
services to government and private sector clients.
Through its Soil Remediation segment, the Company designs and operates
fixed and mobile facilities for the remediation of contaminated soil. The
Company's soil-remediation centers are environmentally secure facilities for
receiving, storing, and processing petroleum-contaminated soils. Although the
Company expects this market to remain viable for some time after July 3, 1999,
there can be no assurance that this business will not decline in future years.
In May 1999, the Company announced plans to sell three additional soil-recycling
facilities (Note 5).
The Company's Fluids Recycling segment collects, tests, processes, and
recycles used motor oil and other industrial fluids in certain western states
(Oregon, Idaho, Nevada, Utah, Colorado, New Mexico, Texas, and Arizona).
The Company's businesses are affected by several factors, particularly
regulation and enforcement of remediation activities, extreme weather
variations, economic cycles, the availability of federal and state funding for
environmental cleanup, and local competition.
The Company has acquired a number of businesses in the last three years.
The Company does not presently intend to actively seek to make additional
acquisitions in the near future, and expects instead to concentrate its
resources on strengthening its core businesses.
9
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Results of Operations
First Quarter Fiscal 2000 Compared With First Quarter Fiscal 1999
Revenues increased to $35.8 million in the first quarter of fiscal 2000
from $34.4 million in the first quarter of fiscal 1999. Revenues increased $1.6
million to $19.2 million at the Consulting and Engineering segment, primarily
due to higher revenues from a large remedial-construction contract. Fluids
Recycling segment revenues increased $0.3 million to $2.7 million, primarily due
to increased capacity as a result of geographic expansion. These increases were
offset in part by a decrease in Soil Remediation segment revenues of $0.5
million to $5.4 million, primarily as a result of the closing of a
soil-recycling facility in fiscal 1999 (Note 5) and lower average prices per ton
of soil processed.
The gross profit margin increased to 17% in the first quarter of fiscal
2000 from 16% in the first quarter of fiscal 1999. The gross profit margin
increased primarily due to discontinuing depreciation at the soil-recycling
facilities to be sold or closed as discussed below, as well as a reduction of
losses at the Consulting and Engineering segment's eastern construction
operation on certain remedial-construction contracts and higher utilization of
billable personnel. These increases were offset in part by lower average prices
per ton of soil processed at the Soil Remediation segment.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 11% in the first quarter of fiscal 2000 from 12% in the first
quarter of fiscal 1999. This decrease was primarily due to the effect of
increased revenues as a percentage of selling, general, and administrative
expenses at the Construction and Engineering segment and, to a lesser extent, a
reduction in staffing levels at the Soil Remediation segment as a result of the
restructuring actions taken in fiscal 1999.
In May 1999, the Company announced plans to sell three additional
soil-recycling facilities. In connection with this action, the Company recorded
pretax charges totaling $9.6 million in the first quarter of fiscal 2000 (Note
5). These charges primarily represent the excess of the book value of the three
facilities proposed to be sold over the estimated proceeds from the sale.
Aggregate revenues and operating income before restructuring charges from the
soil-recycling facilities that have been or will be sold or closed were $2.6
million and $0.5 million, respectively, in the first quarter of fiscal 2000, and
$12.4 million and $0.7 million, respectively, in fiscal 1999. As a result of the
restructuring actions, depreciation has been discontinued at the soil-recycling
facilities to be sold or closed. During the first quarter of fiscal 2000,
discontinuing depreciation at these facilities reduced the pretax operating loss
by $0.5 million.
Interest income increased to $0.3 million in the first quarter of fiscal
2000 from $0.2 million in the first quarter of fiscal 1999 as a result of higher
average invested balances.
The Company recorded a tax benefit at a rate of 35% in the first quarter
of fiscal 2000. The Company's effective tax rate in the first quarter of fiscal
1999 was 50%. This rate exceeded the statutory federal income tax rate primarily
due to the impact of state income taxes and nondeductible amortization of cost
in excess of net assets of acquired companies.
In July 1998, the Company filed suit against a customer, seeking payment
of $2.6 million that has been billed under a contract to provide remediation
services. The customer has disputed its obligation to pay the Company. While the
Company generally maintains reserves for these types of matters, failure to
collect this receivable would have a material adverse impact on the Company's
future results of operations.
10
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Liquidity and Capital Resources
Consolidated working capital, including cash and cash equivalents was $0.4
million at July 3, 1999, compared with $37.0 million at April 3, 1999. The
decline in working capital is primarily due to the reclassification of $38.0
million of subordinated convertible debentures due May 2000 to a current
liability. Cash and cash equivalents were $0.1 million at July 3, 1999, compared
with $20.7 million at April 3, 1999. In addition, as of July 3, 1999, the
Company had $23.4 million invested in an advance to affiliate. Prior to the use
of a new domestic cash management arrangement between the Company and Thermo
Electron Corporation (Note 7), which became effective June 1, 1999, amounts
invested with Thermo Electron were included in cash and cash equivalents. During
the first quarter of fiscal 2000, $4.0 million of cash was provided by operating
activities. Cash of $2.6 million was provided by a decrease in accounts
receivable, primarily due to improved collection efforts. This source of cash
was offset in part by $2.0 million of cash used to fund a decrease in accounts
payable and other current liabilities, which was primarily due to the timing of
payments.
Excluding advances to affiliate activity, the Company's primary investing
activity in the first quarter of fiscal 2000 consisted of capital expenditures.
The Company expended $1.3 million for purchases of property, plant, and
equipment during the first quarter of fiscal 2000. The Company plans to make
capital expenditures of approximately $3.2 million during the remainder of
fiscal 2000.
The Company generally expects to have positive cash flow from its existing
operations. Although the Company does not presently intend to actively seek to
acquire additional businesses in the near future, it may acquire one or more
complementary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. In addition, the Company's $38.0 million principal amount 4
7/8% convertible debentures mature on May 1, 2000. The maturity of this debt
could adversely affect the Company's liquidity in the first quarter of fiscal
2001. The Company expects that it will finance any such acquisitions and the
redemption of such debentures through a combination of internal funds and/or
short-term borrowings from Thermo TerraTech Inc. or Thermo Electron, although it
has no agreement with these companies to ensure that funds will be available on
acceptable terms, or at all.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Informational and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems, services, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading significant
information technology systems and facilities; (ii) assessing the year 2000
readiness of its key suppliers and vendors; and (iii) developing a contingency
plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and noninformation technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
noninformation technology systems for year 2000 compliance, has been largely
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical noninformation technology systems. The Company's efforts included
testing the year 2000 readiness of its utility and telecommunications systems at
its critical facilities. The Company is currently in phase two of its program,
during which any material noncompliant information technology systems or
noninformation technology systems that were identified during phase one are
prioritized and remediated. Based on its evaluations, the Company does not
believe that any material upgrades or modifications to its critical
noninformation technology systems are required. The Company is currently
upgrading or replacing its material
11
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Year 2000 (continued)
noncompliant information technology systems, and this process was approximately
85% complete as of July 3, 1999. In many cases, such upgrades or replacements
are being made in the ordinary course of business, without accelerating
previously scheduled upgrades or replacements. The Company expects that all of
its material information technology systems and critical noninformation
technology systems will be year 2000 compliant by the end of October 1999.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and distributed questionnaires relating to year 2000 compliance to its
significant suppliers and vendors. To date, no significant supplier or vendor
has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. The Company has started to follow-up with
significant suppliers and vendors that have not responded to the Company's
questionnaires. The Company has not completed the majority of its assessment of
third-party risk, but expects to be substantially completed by the end of
October 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying manual or backup systems in the event of a
failure of the Company's material information technology systems. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, and significant suppliers and vendors, it will modify and adjust its
contingency plan as may be required. The Company expects to complete its
contingency plan by the end of October 1999.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred third-party expenses (external costs) related to
year 2000 issues of approximately $0.2 million as of July 3, 1999, and the total
external costs of year 2000 remediation are expected to be approximately $0.3
million. All of the external costs incurred as of July 3, 1999, were spent on
testing and upgrading information technology systems. In fiscal 1999 and in the
first quarter of fiscal 2000, approximately 5% of the Company's total
information technology budget was spent on year 2000 issues. The Company does
not track the internal costs incurred for its year 2000 compliance project. Such
costs are principally the related payroll costs for its information systems
group. All internal costs and related external costs, other than capital
additions, related to year 2000 remediation have been and will continue to be
expensed as incurred.
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that the Company experiences year 2000
problems in its material information technology systems that cause the Company
to be unable to access data, to process transactions, and to maintain accurate
books and records. In such an event, the Company's operations could be delayed
or temporarily shut down, and it could be unable to meet its obligations to
customers in a timely fashion. The Company's business, operations, and financial
condition could be adversely affected in amounts that cannot be reasonably
estimated at this time.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or
12
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Year 2000 (continued)
delays. Some services provided by the Company involve the delivery to clients of
third-party software and hardware. In addition, certain older third-party
products, which the Company no longer uses in providing its services to clients,
may not be year 2000 compliant, which may expose the Company to claims. As
discussed above, if any of the Company's key suppliers or vendors experience
business disruptions due to year 2000 issues, the Company might also be
materially adversely affected. There is expected to be a significant amount of
litigation relating to the year 2000 issue and there can be no assurance that
the Company will not incur material costs in defending or bringing lawsuits. In
addition, if any year 2000 issues are identified, there can be no assurance that
the Company will be able to retain qualified personnel to remedy such issues.
Any unexpected costs or delays arising from the year 2000 issue could have a
material adverse impact on the Company's business, operations, and financial
condition in amounts that cannot be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk from changes in interest rates and
equity prices has not changed materially from its exposure at year-end fiscal
1999.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On May 12, 1999, the Company filed a Current Report on Form 8-K, dated as
of May 5, 1999, with respect to modifications to the previously announced
reorganization plan of the Company's ultimate parent, Thermo Electron
Corporation, involving certain of Thermo Electron's subsidiaries, including the
Company.
On May 25, 1999, the Company filed a Current Report on Form 8-K, dated as
of May 24, 1999, with respect to certain pretax restructuring and other charges
that will be taken by the Company.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 6th day of August 1999.
THERMORETEC CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27.1 Financial Data Schedule.
27.2 Amended Financial Data Schedule for the year ended April 3, 1999.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMORETEC
CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 3, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-01-2000
<PERIOD-END> JUL-03-1999
<CASH> 62
<SECURITIES> 0
<RECEIVABLES> 30,880
<ALLOWANCES> 1,681
<INVENTORY> 0
<CURRENT-ASSETS> 63,814
<PP&E> 47,427
<DEPRECIATION> 24,468
<TOTAL-ASSETS> 131,430
<CURRENT-LIABILITIES> 63,445
<BONDS> 0
0
0
<COMMON> 142
<OTHER-SE> 65,193
<TOTAL-LIABILITY-AND-EQUITY> 131,430
<SALES> 0
<TOTAL-REVENUES> 35,849
<CGS> 0
<TOTAL-COSTS> 29,904
<OTHER-EXPENSES> 9,569
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 542
<INCOME-PRETAX> (7,675)
<INCOME-TAX> (2,682)
<INCOME-CONTINUING> (4,993)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,993)
<EPS-BASIC> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THERMORETEC CORPORATION'S
ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED JULY 3, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-03-1999
<PERIOD-END> APR-03-1999
<CASH> 20,669
<SECURITIES> 0
<RECEIVABLES> 33,741
<ALLOWANCES> 1,706
<INVENTORY> 0
<CURRENT-ASSETS> 65,523
<PP&E> 55,280
<DEPRECIATION> 23,538
<TOTAL-ASSETS> 139,941
<CURRENT-LIABILITIES> 28,549
<BONDS> 33,770
0
0
<COMMON> 142
<OTHER-SE> 70,139
<TOTAL-LIABILITY-AND-EQUITY> 139,941
<SALES> 0
<TOTAL-REVENUES> 141,946
<CGS> 0
<TOTAL-COSTS> 119,483
<OTHER-EXPENSES> 9,176
<LOSS-PROVISION> 1,026
<INTEREST-EXPENSE> 2,168
<INCOME-PRETAX> (4,906)
<INCOME-TAX> (1,045)
<INCOME-CONTINUING> (3,861)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,861)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
