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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended October 4, 1998.
/ / 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 0-19655
TETRA TECH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-4148514
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
670 N. Rosemead Blvd.
Pasadena, California 91107
(Address of registrant's principal executive offices) (Zip Code)
(Registrant's telephone number, including area code:) (626) 351-4664
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
None None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Common Stock, $.01 par value
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 / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant on December 18, 1998 was $577,495,874.
The number of shares of Common Stock, $.01 par value, outstanding (the only
class of common stock of the registrant outstanding) was 28,666,131 on December
18, 1998.
Portions of registrant's Annual Report to Stockholders for the fiscal year ended
October 4, 1998 are incorporated by reference in Part II of this report.
Portions of registrant's Proxy Statement for our 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III of this report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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PART I
ITEM 1. BUSINESS.
Tetra Tech, Inc. is a leading provider of specialized management
consulting and technical services in three principal business areas: resource
management, infrastructure and communications. As a specialized management
consultant, we assist our clients in defining problems and developing innovative
and cost-effective solutions. Our management consulting services are
complemented by our technical services. These technical services, which
implement solutions, include research and development, applied science,
engineering and architectural design, construction management, and operations
and maintenance. Our clients include a diverse base of public and private
organizations located in the United States and internationally.
Since our initial public offering in December 1991, we have increased the
size and scope of our business and have expanded our service offerings through a
series of strategic acquisitions and internal growth. We have more than 3,600
employees worldwide, 3,500 of whom are located in North America in more than 100
locations. In addition, we have established a presence in Asia, South America
and Europe. From fiscal 1991 through fiscal 1998, we generated a net revenue
compounded annual growth rate of approximately 34.2%, and achieved a net income
compounded annual growth rate of approximately 36.4%.
INDUSTRY OVERVIEW
Due to increased competition, changing regulatory environments and rapid
technological advancement, many organizations face new and complex challenges.
Increasingly, these organizations are turning to professional services firms to
assist them with addressing these challenges. Since each industry presents its
own unique set of challenges, organizations often seek professional service
firms with industry-specific expertise to analyze their problems and develop
appropriate solutions. These solutions are then implemented by firms possessing
the required engineering and technical service capabilities. Each of the
following three business areas faces its own unique set of problems:
RESOURCE MANAGEMENT. The world's natural resources, including water, air
and soil, are interdependent, creating a delicate balance. Factors such as
agricultural and residential development, commercial construction and
industrialization often upset this balance. Public concern over environmental
issues, especially water quality and availability, has been a driving force
behind numerous laws and regulations that are designed to prevent environmental
degradation and mandate restorative measures. To comply with environmental laws
and regulations, respond to public pressure and attain operating efficiencies,
public and private organizations are increasing their focus on resource
management. Two areas particularly affected by these trends are water management
and waste management.
- Water Management. Insufficient water supplies, concern over the
cost, quality and availability of water and the need in many parts of the
world to replace aging infrastructure used to capture, safeguard and
distribute water are critical social and economic concerns. According to
the U.S. Environmental Protection Agency (EPA), contamination of
groundwater and surface water resulting from agricultural, residential,
commercial and industrial development is one of the most serious
environmental problems facing the United States. To alleviate these social
and economic concerns, public and private organizations seek water
management advice. According to the ENVIRONMENTAL BUSINESS JOURNAL, the
size of the consulting, engineering services and wastewater treatment
segments of the water management industry totaled more than $30 billion in
1997.
- Waste Management. In the past, many waste disposal practices
caused significant environmental damage. Since the 1970s, more stringent
controls on municipal and industrial waste have been established by
governments around the world to protect the environment. Recently, the
Federal government has committed approximately $15 billion to various
environmental initiatives in an attempt to curb pollution, accelerate
toxic waste cleanups and
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combat other forms of pollution. Organizations seek waste management
advice to comply with complex and evolving environmental regulations, to
minimize the economic impact of waste generation and disposal, and to
realize significant costs savings through increased operating
efficiencies.
INFRASTRUCTURE. Continued population and economic growth places
significant strain on an overburdened infrastructure, thereby requiring
additional development. This development includes water and wastewater treatment
plants, roads, pipelines, communication and power networks, and educational,
recreational and correctional facilities. Additionally, as existing facilities
age, they require upgrading or replacement. Further, the trend toward
privatization of infrastructure is causing public and private organizations that
develop and maintain these facilities to evaluate their cost structures and
establish more efficient systems. These factors drive the need for development
and planning services that are often provided by consulting firms. According to
the ENGINEERING NEWS-RECORD, the market opportunity in the United States for
technical services in infrastructure development including water and wastewater,
transportation, hazardous waste, and educational, recreational and correctional
facilities, ranges from $15 to $20 billion.
COMMUNICATIONS. Technological change and government deregulation have
spurred sweeping changes in the communications industry. Local and long-distance
telephone companies, cable operators and wireless service providers are
penetrating each other's markets and trying to establish a foothold in new
markets created by new technologies. For example, traditional cable operators
are installing advanced capabilities such as digital cable, cable modem, cable
telephony and other high-speed data transmission services. At the same time,
various service providers are consolidating in order to offer their subscribers
a comprehensive set of services and to maintain dominance in their markets. As
these trends continue, network service providers will increasingly turn to
professional service firms for advice and assistance in planning, deploying and
maintaining their communications networks.
Organizations within each of the above business areas face unique
problems but often lack the internal resources and experience necessary to
identify issues and evaluate possible solutions. As a result, many of these
organizations rely on advice from outside management consultants. Most
consulting companies provide limited front-end problem assessment and solution
design and require clients to engage other engineering and technical services
companies to implement recommended solutions. A significant opportunity exists
for consulting companies that not only develop, but also implement, solutions.
These professional service firms are often in the best position to help clients
respond to the challenges they face.
THE TETRA TECH SOLUTION
Tetra Tech provides the specialized management consulting services that
assist clients in identifying industry-specific problems and defining
appropriate solutions. We also provide the technical services required to
implement these solutions. We believe that we are a leader in this market and
that the following factors distinguish us from our competitors:
UNDERSTANDING CLIENT NEEDS. The ability to identify client needs is
essential to strategic planning and execution. Even before the proposal process
begins, we assist our clients by helping them define their business objectives
and strategies and identify issues that are critical to their success. We strive
to develop numerous contacts at various levels within our clients' organizations
to help us identify the key issues from a variety of perspectives. We believe
that our long history and exposure to a broad client base increase our awareness
of the issues being confronted by organizations and thereby help us identify and
solve our clients' problems.
CAPITALIZING ON OUR EXTENSIVE TECHNICAL EXPERIENCE. Since our inception
in 1966, we have provided innovative consulting and engineering services,
historically focusing on cost-effective solutions to water resource management
and environmental problems. We have been successful in leveraging this
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foundation of scientific and engineering capabilities into other areas,
including infrastructure and communications. Our services are provided by a wide
range of professionals including: archaeologists, biologists, chemical
engineers, chemists, civil engineers, computer scientists, economists,
electrical engineers, environmental engineers, environmental scientists,
geologists, hydrogeologists, mechanical engineers, oceanographers and
toxicologists. Because of the experience that we have gained from thousands of
completed projects, we often are able to apply proven solutions to client
problems without the time-consuming process of developing new approaches.
OFFERING A FULL RANGE OF SERVICES. Our depth of consulting and technical
skills allows us to respond to client needs at every phase of a project,
including initial planning, research and development, applied science,
engineering and architectural design, and construction management. Once a
particular project is completed, we are able to offer our clients additional
value-added services such as operations and maintenance. Our expertise across
industries and our broad service offerings enable us to be a single source
provider to our clients.
PROVIDING BROAD GEOGRAPHIC COVERAGE AND LOCAL EXPERTISE. We believe that
proximity to our clients is instrumental to understanding their needs and
delivering comprehensive services. We have significantly broadened our
geographic presence in recent years through strategic acquisitions and internal
growth. Our historical geographic base was primarily in the western portion of
the United States. However, we currently have operations in more than 40 states.
We have also increased our international presence, and we now have operations in
Canada, Taiwan, the Philippines, Argentina, Chile, Brazil and the Czech
Republic.
COMPANY STRATEGY
Our objective is to become the leading provider of specialized management
consulting and technical services in our chosen business areas. To achieve this
objective, we plan to continue the following primary strategies that we believe
have been integral to our success:
IDENTIFY AND EXPAND INTO NEW BUSINESS AREAS. We use our management
consulting services and certain of our technical services as an entry point to
evaluate and to enter new business areas. After our consulting practice is
established in a new business area, we can expand our operations by offering
additional technical services. For example, based on our provision of site
acquisition services to communications industry participants, we identified
infrastructure services within the communications industry as an appropriate
area into which we could expand our operations.
EXPAND SERVICE OFFERINGS AND GEOGRAPHIC PRESENCE THROUGH
ACQUISITIONS. We believe that acquisition opportunities exist that will allow
us to continue our growth in selected business areas, broaden our service
offerings and extend our geographic presence. We intend to make acquisitions
that will enable us to consolidate our position in certain key business areas,
such as communications, or further strengthen our position in our more
established service offerings. We believe that our reputation and public company
status make us an attractive partner and provide us with an advantage in
pursuing acquisitions.
FOCUS ON GOVERNMENT PROJECTS. We intend to continue marketing to
government organizations and bidding for government projects to stay on the
leading edge of policy development. This experience helps us identify market
opportunities and enhances our ability to serve other public and private
clients. Additionally, government contracts provide more predictable revenues
than private sector contracts.
MANAGE INTERNAL FINANCIAL CONTROLS. We take a disciplined approach to
monitoring, managing and improving our return on investment in each of our
business areas through the prompt billing and collection of accounts
receivables, the negotiation of favorable contract terms and the management of
our contract performance to prevent cost overruns. We believe that this approach
to managing our
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financial affairs enables us to improve our cash position and thereby fund
acquisitions and internal growth.
LEVERAGE EXISTING CLIENT BASE. Some of our clients engage us to provide
limited services. We believe that we can increase our revenue by selling
additional services to our existing client base. For example, we may be able to
secure an operations and maintenance contract after working with a client on the
design and construction phases of a facility. In addition, we believe that our
ability to offer a full spectrum of services will allow us to grow our business
and compete more effectively for larger projects.
SERVICES
We provide our clients with comprehensive management consulting and
technical services that focus on our clients' industry-specific needs. We offer
these services individually or as part of our full service approach to problem
solving. We are currently performing services under 1,000 active contracts,
ranging from small site investigations to large, complex infrastructure
projects. Our service offerings include:
- MANAGEMENT CONSULTING to assist clients in identifying and addressing
operational and competitive problems they face within their industries;
- RESEARCH AND DEVELOPMENT to formulate solutions to complex problems and
develop advanced computer simulation techniques for modeling problems,
ranging from microscopic to global;
- APPLIED SCIENCE to assess all aspects of problems and develop practical
and cost-effective solutions through the application of new technology
and data interpretation;
- ENGINEERING AND ARCHITECTURAL DESIGN to provide services from concept
development and initial planning and design through project completion;
- CONSTRUCTION MANAGEMENT to provide experienced and specialized
construction managers to assist clients in minimizing the risk of cost
overruns, delays and contractual conflicts; and
- OPERATIONS AND MAINTENANCE to allow clients to outsource routine
functions, permitting them to streamline contractor relationships and
reduce operating costs.
BUSINESS AREAS
We provide our services in the following three principal business areas:
resource management, infrastructure and communications.
RESOURCE MANAGEMENT
One of our major concentrations is water resource management, where we
have a leadership position in understanding the interrelationships of water
quality and human activities. We support high priority government programs for
water quality improvement, environmental restoration, productive reuse of
defense facilities and strategic environmental resource planning. We provide
comprehensive services, including management consulting, research and
development, applied science, engineering and architectural design, construction
management, and operations and maintenance. Our service offerings in the
resource management business area are focused on the following project areas:
SURFACE WATER PROJECTS: Public concern with the quality of rivers, lakes
and streams as well as coastal and marine waters and the ensuing
legislative and regulatory response is driving demand for our services.
Over the past 32 years, we have developed a specialized set of technical
skills that positions us to compete effectively for surface water and
watershed management projects. We provide water resource services to
government clients such as the
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EPA, the Department of Defense (DOD) and the Department of Energy (DOE),
and to a broad base of private sector clients including those in the
chemical, pharmaceutical, utility, aerospace and petroleum industries. We
also provide surface water services to state and local agencies,
particularly in the area of watershed management.
GROUNDWATER PROJECTS: Groundwater is the source of drinking water for
approximately 50% of the U.S. population and accounts for approximately
25% of all water consumed for residential, industrial and agricultural
purposes. Our activities in the groundwater field are diverse and
typically include projects such as investigating and identifying sources
of chemical contamination, examining the extent of contamination,
analyzing the speed and direction of contamination migration, and
designing and evaluating remedial alternatives. In addition, we conduct
monitoring studies to assess the effectiveness of groundwater treatment
and extraction wells.
WASTE MANAGEMENT PROJECTS: We currently provide a wide range of
engineering and consulting services for hazardous waste contamination and
remediation projects, from initial site assessment through design and
implementation phases of remedial solutions. In addition, we perform risk
assessments to determine the probability of adverse health effects that
may result from exposure to toxic substances. We also provide waste
minimization and pollution prevention services, and evaluate the
effectiveness of innovative technologies and novel solutions to
environmental problems.
NUCLEAR ENVIRONMENTAL PROJECTS: The DOE's nuclear weapons plants and
research laboratories face a wide variety of environmental challenges
including groundwater and surface water contamination, hazardous waste
management and environmental compliance. Our services include
environmental impact analyses and documentation, environmental audits and
risk assessments, regulatory compliance support, groundwater
characterization, remedial investigation/feasibility studies, and project
management and oversight. Our environmental analyses provide the DOE with
information it requires in order to make decisions regarding the storage
or disposition of surplus materials from dismantled nuclear weapon
components.
REGULATORY COMPLIANCE PROJECTS: Our regulatory compliance services include
advising our clients on the full spectrum of regulatory requirements under
the Resource Conservation and Recovery Act, the Clean Water Act, the Clean
Air Act, the National Environmental Policy Act and other environmental
laws. Although we provide services to both public and private clients, our
current emphasis is on providing regulatory compliance services to the
Army, Navy and Air Force.
INFRASTRUCTURE
In the infrastructure area, we focus on the development of water resource
projects, institutional facilities, commercial, recreational and leisure
facilities and transportation projects. These facilities are an essential part
of everyday life and also sustain economic activity and the quality of life. Our
engineers, architects and planners work in partnership with our clients to
provide adequate infrastructure development within their financial constraints.
We assist clients with infrastructure projects by providing management
consulting, engineering and architectural design, construction management, and
operations and maintenance. Our service offerings in the infrastructure business
area are focused on the following project areas:
WATER RESOURCE PROJECTS: Our technical services are applied to all aspects
of water quantity and quality management ranging from stormwater
management through drainage and flood control projects to major water and
wastewater treatment plants. Our experience includes planning, design and
construction services for drinking water projects, the design of water
treatment facilities and reservoirs, and the design of distribution
systems including pipelines and pump
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stations. Our capabilities are also applied to specialized technical
challenges associated with the design and construction of fisheries and
hatcheries worldwide.
INSTITUTIONAL FACILITIES PROJECTS: We provide architectural engineering
and construction services for projects including site planning for land
development, complete architectural design, interior design,
civil/structural engineering and mechanical/electrical engineering of
multi-story facilities. We have completed engineering and construction
projects for a wide range of clients with specialized needs such as
security systems, clean rooms, laboratories and emergency preparedness
facilities.
COMMERCIAL, RECREATIONAL AND LEISURE FACILITIES PROJECTS: We specialize in
the planning and design of water-related entertainment and leisure
facilities from theme park attractions to large marine aquariums. Our
projects also include hotels, parks, visitor centers and marinas. We have
designed complex aquatic life support systems and provided structural,
civil and mechanical engineering and design of interpretive exhibits for a
series of large aquarium projects worldwide.
TRANSPORTATION PROJECTS: We provide architectural, engineering and
construction services for transportation projects to improve public safety
and mobility. Our projects include roadway improvements, commuter railway
stations and expansion of airports. We have also completed numerous
transportation projects including bridges, major highways, and repair,
replacement and upgrading of older transportation facilities.
COMMUNICATIONS
In the communications area, we focus on the delivery of technical
solutions necessary to build and manage communications infrastructure projects.
Our capabilities support a wide range of technologies including broadband and
wireless communications. Our communications clients seek management consulting,
applied science, engineering and architectural design, and construction
management services. Our service offerings in the communications business area
are focused on the following project areas:
NETWORK FEASIBILITY PROJECTS: We apply our technical services to all
aspects of assessing the feasibility of network systems development,
expansion and upgrades for our clients. Our experience includes
feasibility and remote site selection studies, cost-benefit modeling and
market assessments. We also assist network service providers with
technical requirements definition, sensitivity/risk analysis and key
economic projections.
NETWORK PLANNING PROJECTS: We specialize in network planning, including
short- and long-term network configuration and development planning. We
develop outside plant designs, civil engineering and regulatory compliance
assessment and support efforts. In addition, our projects have included
employment analysis, staffing, logistics, planning, and materials
provisioning and management.
NETWORK ENGINEERING PROJECTS: We provide a full range of onsite and
offsite premises engineering and support services for projects ranging
from developing computer aided design workprints to field surveys. Our
experience includes digital evaluation and terrain modeling, right-of-way
permitting and site acquisition for wireless and broadband networks. In
addition, we have performed outside and inside plant design projects for
twisted pair, coaxial fiber optic and copper cable networks, and wireless
networks.
NETWORK DEVELOPMENT PROJECTS: We have performed both inside and outside
plant projects for major network service providers in both the broadband
and wireless sectors. Our construction projects include urban and long
haul underground cable installation. We have also applied our capabilities
to wireless cell site construction and aerial cable placement.
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The following table presents brief examples of specific projects in our
three primary business areas:
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BUSINESS AREA REPRESENTATIVE PROJECTS
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Resource Management - Currently conducting a remedial design/remedial action
for contaminated groundwater at a Superfund site in
Hendersonville, North Carolina for a private
corporation.
- Currently providing program management and technical
support for the Comprehensive Long-term Environmental
Action Navy (CLEAN) program under several ten-year
contracts. Activities include installation,
restoration, base realignment and closure, and
underground storage tank programs.
- Currently serving as prime contractor for
environmental operations and maintenance services at
Vandenberg Air Force Base in California. Also
providing operations and maintenance services for a
wastewater treatment plant and a hazardous waste
collection plant, and air monitoring and other
services.
Infrastructure - Completed the development and analysis of alternative
flood control measures for the Los Angeles River.
- Currently providing design and program management for
Taiwan's National Museum of Marine Biology/Aquarium.
Responsible for civil, structural and mechanical
engineering and for aquatic life support systems.
Designed water, wastewater and parking facilities.
- Selected by Texas Parks and Wildlife Department as the
prime contractor to plan and develop a new,
state-of-the-art, marine fish hatchery and visitor
center at Lake Jackson, Texas. Provided design and
construction administration, and engineering and
bioengineering for all life support systems.
Communications - Provided site acquisition, obtained entitlements,
supervised construction and installation of equipment,
and provided program management services for a
Canadian corporation.
- Supported the initiative to enhance Emergency 911
services and to improve the dispatch of emergency
services to Henrico County near Richmond, Virginia.
Assisted in the buildout of the Emergency 911
communications network through installation of
antennas, coaxial cables, microwave dishes and
elliptical waveguides.
- Currently redesigning and reconstructing 25% of Tele-
Communications Inc.'s U.S. cable TV networks under a
turnkey contract.
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CLIENTS
We have developed a diverse client base of over 700 clients both in the
public and private sectors. During fiscal 1998, the DOD, EPA and DOE accounted
for 26.2%, 17.1% and 3.5%, respectively, of our net revenue. Although agencies
of the Federal government are among our most significant clients, we often
support multiple programs within a single Federal agency. Our private sector
clients include companies in the chemical, mining, pharmaceutical, aerospace,
automotive, petroleum, communications and utility industries. No private sector
client accounted for more than 10% of our net revenue in fiscal 1998.
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The following table presents a list of representative clients in our
three primary business areas:
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REPRESENTATIVE CLIENTS
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BUSINESS AREA FEDERAL GOVERNMENT STATE, COUNTY AND LOCAL PRIVATE
- --------------------- ----------------------------- ----------------------------- -----------------------------
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RESOURCE MANAGEMENT U.S. Environmental Protection California Department of Lockheed Martin Corporation;
Agency; U.S. Air Force; U.S. Health Services; Washington Merck & Co.; General Electric
Navy; U.S. Army; U.S. Coast Department of Ecology; Prince Company; Westwood Squibb
Guard; U.S. Forest Service Georges County, Maryland; Pharmaceuticals, Inc.
Clarmont County, Ohio; City
of San Jose, California
INFRASTRUCTURE U.S. Army Corps of Engineers; City of Tucson, Arizona; City Universal Studios, Inc.;
U.S. Bureau of Reclamation; of Breckenridge, Colorado; Boeing Corporation; E.I.
U.S. Air Force; Federal Washington Department of DuPont de Nemours and
Emergency Management Agency Transportation; City of Company; Ford Motor Company
Detroit, Michigan; City of
Portland, Oregon; Texas Parks
and Wildlife Department; King
County, Washington; Delaware
Department of Transportation;
Delaware Department of
Corrections
COMMUNICATIONS Henrico County, Virginia AT&T Wireless Services;
Nextel Communications, Inc.;
AirTouch Communications,
Inc.; Motorola, Inc.; Sprint
Communications Company; TCI
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CONTRACTS
We enter into various types of contracts with our clients, including
fixed-price, fixed-rate time and materials, cost-reimbursement plus fixed fee
and cost-reimbursement plus fixed and award fee contracts. In fiscal 1998,
26.1%, 33.5% and 40.4% of our net revenue was derived from fixed-price,
fixed-rate time and materials, and cost-reimbursement plus fixed fee and award
fee contracts, respectively. Under a fixed-price contract, the client agrees to
pay a specified price for our performance of the entire contract. Fixed-price
contracts carry certain inherent risks, including risks of losses from
underestimating costs, delays in project completion, problems with new
technologies and economic and other changes that may occur over the contract
period. Consequently, the profitability of fixed-price contracts may vary
substantially. The amount of the fee received for a cost-reimbursement and award
fee contract partially depends upon the government's discretionary periodic
assessment of our performance on that contract. Our various clients determine
which type of contract we enter into for a particular engagement.
Some contracts made with the Federal government are subject to annual
approval of funding. Federal government agencies may impose spending
restrictions that limit the continued funding of our existing contracts with the
Federal government and may limit our ability to obtain additional contracts.
These limitations, if significant, could have a material adverse effect on us.
To date, spending limitations have not had a significant effect on us. All
contracts made with the Federal government may be terminated by the government
at any time, with or without cause.
Federal government agencies have formal policies against continuing or
awarding contracts that would create actual or potential conflicts of interest
with other activities of a contractor. These policies may prevent us in certain
cases from bidding for or performing contracts resulting from or relating to
certain work we have performed for the government. In addition, services
performed for a private client may create conflicts of interest that preclude or
limit our ability to obtain work for another private organization. We attempt to
identify actual or potential conflicts of interest and to minimize the
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possibility that such conflicts would affect our work under current contracts or
our ability to compete for future contracts. We have, on occasion, declined to
bid on a project because of an existing potential conflict of interest. However,
we have not experienced disqualification during a bidding or award negotiation
process by any government or private client as a result of a conflict of
interest.
Our contracts with the Federal government are subject to audit by the
government, primarily by the Defense Contract Audit Agency (DCAA). The DCAA
generally seeks to (1) identify and evaluate all activities which either
contribute to, or have an impact on, proposed or incurred costs of government
contracts; (2) evaluate the contractor's policies, procedures, controls and
performance; and (3) prevent or avoid wasteful, careless and inefficient
production or service. To accomplish this, the DCAA examines our internal
control systems, management policies and financial capability, evaluates the
accuracy, reliability and reasonableness of our cost representations and
records, and assesses compliance by us with Cost Accounting Standards and
defective-pricing clauses found within the Federal Acquisition Regulations. The
DCAA also performs the annual review of our overhead rates and assists in the
establishment of our final rates. This review focuses on the allowability of
cost items and the allowability and applicability of Cost Accounting Standards.
The DCAA also audits cost-based contracts, including the close-out of those
contracts.
The DCAA also reviews all types of proposals, including those of award,
administration, modification and repricing. Factors considered are our cost
accounting system, estimating methods and procedures, and specific proposal
requirements. Operational audits are also performed by the DCAA. A review of our
operations at every major organizational level that has a significant effect on
the performance of future government contracts is also conducted during the
proposal review period.
During the course of its audit, the DCAA may disallow costs if it
determines that we improperly accounted for such costs in a manner inconsistent
with Cost Accounting Standards. Under a government contract, only those costs
that are reasonable, allocable and allowable are recoverable. A disallowance of
costs by the DCAA could have a material adverse effect on us.
In September 1995, we acquired PRC Environmental Management, Inc. (EMI).
The Defense Contract Audit Agency (DCAA) recently completed an audit of EMI for
the fiscal years 1987 through 1995. As a result of the completed audit and our
negotiations with the DCAA, the DCAA disallowed approximately $2.9 million in
costs. Because we were aware of these issues prior to completing the
acquisition, we established a sufficient reserve and, consequently, the
disallowance did not have a material adverse effect on our business.
Due to the severity of the legal remedies available to the government,
including the required payment of damages and/or penalties, criminal and civil
sanctions, and debarment, we maintain controls to avoid the occurrence of fraud
and other unlawful activity. In addition, we maintain preventative audit
programs to ensure appropriate control systems and mitigate control weaknesses.
We provide our services under contracts, purchase orders or retainer
letters. Our policy provides that, where possible, all contracts will be in
writing. We bill all of our clients periodically based on costs incurred, on
either an hourly-fee basis or on a percentage of completion basis, as the
project progresses. Generally, our contracts do not require that we provide
performance bonds. A performance bond, issued by a surety company, guarantees
the contractor's performance under the contract. If the contractor defaults
under the contract, the surety will, in its discretion, step in to finish the
job or pay the client the amount of the bond. If the contractor does not have a
performance bond and defaults in the performance of a contract, the contractor
is responsible for all damages resulting from the breach of contract. These
damages include the cost of completion, together with possible consequential
damages such as lost profits. To date, we have not incurred material damages
beyond the coverage of any performance bond.
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Most of our agreements permit termination by the clients upon payment of
fees and expenses through the date of the termination.
MARKETING
We utilize both a centralized corporate marketing department and local
marketing groups within each of our operating units. Our corporate marketing
department assists management in establishing our business plan, our target
markets and an overall marketing strategy. The corporate marketing department
also identifies and tracks the development of large Federal programs, positions
us for new business areas, selects appropriate partners, if any, for new
projects and assists in the bid process for new projects. We market throughout
the organizations we target, focusing primarily on senior representatives in
government organizations and senior management in private companies. In
addition, the corporate marketing department supports marketing activities
firm-wide by coordinating corporate promotional and professional activities,
including appearances at trade shows, direct mailings, telemarketing and public
and media relations.
We also perform marketing activities through our local offices. We
believe that these offices have a greater understanding of local environmental
issues, laws and regulations and, therefore, can better target their marketing
activities. These marketing activities are coordinated by full time marketing
staff located in certain of our offices. These activities include meetings with
potential clients and state, county and municipal regulators, presentations to
civic and professional organizations and seminars on current regulatory topics.
COMPETITION
The market for our services is highly competitive. We compete with many
other firms, ranging from small local firms to large national firms that may
have greater financial and marketing resources. We perform a broad spectrum of
engineering and consulting services across the resource management,
infrastructure and communications business areas. Services within these business
areas are provided to a client base which includes Federal agencies, such as the
DOD, the DOE, the Department of the Interior, the EPA and the U.S. Postal
Service, state and local agencies, and the private sector. Our competition
varies and is a function of the business areas in which, and client sectors for
which, we perform our services. The range of competitors for any one procurement
can vary from 10 to 100 firms, depending upon the relative value of the project,
the financial terms and risks associated with the work, and any restrictions
placed upon competition by the client. Historically, clients have chosen among
competing firms based primarily on the quality and timeliness of the firm's
service. However, we believe that price has become an increasingly important
competitive factor. We believe that if this trend continues it could have a
material adverse effect on our operating margins and profitability.
We believe that our principal competitors include, in alphabetical order,
Black & Veatch LLP; Brown & Caldwell; Castle Tower Corporation; Camp, Dresser &
McKee; CH2M Hill Companies Ltd., Dames & Moore Group; EA Engineering, Science &
Technology, Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT Group
Inc.; Mastec, Inc.; Montgomery Watson; OSP Consultants, Inc.; Roy F. Weston,
Inc.; and URS Greiner Corporation.
BACKLOG
At October 4, 1998, our gross revenue backlog was approximately $405.0
million, compared to $217.5 million at September 28, 1997. We include in gross
revenue backlog only those contracts for which funding has been provided and
work authorizations have been received. We estimate that approximately $329.6
million of the gross revenue backlog at October 4, 1998 will be recognized
during fiscal 1999. No assurance can be given that all amounts included in
backlog will ultimately be realized, even if evidenced by written contracts. For
example, certain of our contracts with the Federal
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government and other clients are terminable at will. If any of these clients
terminate their contracts prior to completion, we would not recognize revenue.
ENVIRONMENTAL LEGISLATION
Our clients have become subject to an increasing number of frequently
overlapping Federal, state and local laws concerned with the protection of the
environment, as well as regulations promulgated by administrative agencies
pursuant to these laws. We provide services with respect to Federal
environmental laws, and regulations including: the Clean Water Act; the Resource
Conservation and Recovery Act; CERCLA; the National Environmental Policy Act;
the Safe Drinking Water Act; and other laws.
POTENTIAL LIABILITY AND INSURANCE
Our business activities could expose us to potential liability under
various environmental laws such as CERCLA. In addition, we occasionally
contractually assume liability under indemnification agreements. We cannot
predict the magnitude of such potential liabilities.
We currently maintain comprehensive general liability, umbrella and
professional liability insurance policies. These policies are "claims made"
policies. This means that only claims made during the term of the policy are
covered. If we terminate our policies and do not obtain retroactive coverage, we
would be uninsured for claims made after termination even if based on events or
acts that occurred during the term of the policy.
We obtain insurance coverage through a broker who is experienced in the
engineering field. The broker, together with our Risk Manager, periodically
review the adequacy of our insurance programs. However, because there are
various exclusions and retentions under our insurance policies, there can be no
assurance that all potential liabilities will be covered by our insurance.
Further, in the event we expand our services into new markets, we may not be
able to obtain insurance coverage for such activities or, if insurance is
obtained, the dollar amount of any liabilities incurred could exceed our
insurance coverage.
We evaluate the risk associated with uninsured claims. If we determine
that an uninsured claim has potential liability, we establish an appropriate
reserve. A reserve is not established if we determine that the claim has no
merit. Our historic levels of insurance coverage and reserves have been
adequate. However, a partially or completely uninsured claim, if successful and
of significant magnitude, could have a material adverse effect on our business.
EMPLOYEES
At October 4, 1998, we had 3,662 total employees or 3,077 full-time
equivalent employees. Of the 3,662 total employees, 2,144 are professionals. Our
professional staff includes archaeologists, biologists, chemical engineers,
chemists, civil engineers, computer scientists, economists, electrical
engineers, environmental engineers, environmental scientists, geologists,
hydrogeologists, mechanical engineers, oceanographers, toxicologists and project
managers. Our ability to retain and expand our staff of qualified professionals
will be an important factor in determining our future growth and success. Three
employees of one of our subsidiaries will be represented by a labor
organization. Management considers its relations with our employees to be good.
In addition, we supplement our consultants on certain engagements with
independent contractors. We believe that the practice of retaining independent
contractors on a per engagement basis provides us with significant flexibility
in adjusting professional personnel levels in response to changes in demand for
our services.
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RISK FACTORS
SOME OF THE INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY,"
"WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "CONTINUE" OR
SIMILAR WORDS. YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY
BECAUSE THEY: (1) DISCUSS OUR FUTURE EXPECTATIONS; (2) CONTAIN PROJECTIONS OF
OUR FUTURE OPERATING RESULTS OR OF OUR FUTURE FINANCIAL CONDITION; OR (3)
STATE OTHER "FORWARD-LOOKING" INFORMATION. WE BELIEVE IT IS IMPORTANT TO
COMMUNICATE OUR EXPECTATIONS TO OUR INVESTORS. THERE MAY BE EVENTS IN THE
FUTURE, HOWEVER, THAT WE ARE NOT ACCURATELY ABLE TO PREDICT OR OVER WHICH WE
HAVE NO CONTROL. THE RISK FACTORS LISTED IN THIS SECTION, AS WELL AS ANY
CAUTIONARY LANGUAGE IN THIS ANNUAL REPORT ON FORM 10-K, PROVIDE EXAMPLES OF
RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE EXPECTATIONS WE DESCRIBE IN OUR FORWARD-LOOKING
STATEMENTS. YOU SHOULD BE AWARE THAT THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS AND THAT UPON THE OCCURRENCE OF ANY OF THESE
EVENTS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.
RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
A significant part of our growth strategy is to acquire other companies
that complement our lines of business or that broaden our geographic presence.
During fiscal 1998, we purchased ten companies in five separate transactions. We
expect to continue to acquire companies as an element of our growth strategy.
Acquisitions involve certain risks that could cause our actual growth or
operating results to differ from our expectations or the expectations of
security analysts. For example:
- We may not be able to identify suitable acquisition candidates or to
acquire additional companies on favorable terms;
- We compete with others to acquire companies. We believe that this
competition will increase and may result in decreased availability or
increased price for suitable acquisition candidates;
- We may not be able to obtain the necessary financing, on favorable terms
or at all, to finance any of our potential acquisitions;
- We may ultimately fail to consummate an acquisition even if we announce
that we plan to acquire a company;
- We may fail to successfully integrate or manage these acquired companies
due to differences in business backgrounds or corporate cultures;
- These acquired companies may not perform as we expect;
- We may find it difficult to provide a consistent quality of service
across our geographically diverse operations; and
- If we fail to successfully integrate any acquired company, our
reputation could be damaged. This could make it more difficult to market
our services or to acquire additional companies in the future.
In addition, our acquisition strategy may divert management's attention away
from our primary service offerings, result in the loss of key clients or
personnel and expose us to unanticipated liabilities.
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Finally, acquired companies that derive a significant portion of their
revenues from the Federal government and that do not follow the same cost
accounting policies and billing procedures as we do may be subject to larger
cost disallowances for greater periods than we are. If we fail to determine the
existence of unallowable costs and establish appropriate reserves in advance of
an acquisition we may be exposed to material unanticipated liabilities, which
could have a material adverse effect on our business.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our quarterly revenues, expenses and operating results may fluctuate
significantly because of a number of factors, including:
- The seasonality of the spending cycle of our public sector clients,
notably the Federal government;
- Employee hiring and utilization rates;
- The number and significance of client engagements commenced and
completed during a quarter;
- Delays incurred in connection with an engagement;
- The ability of our clients to terminate engagements without penalties;
- The size and scope of engagements;
- The timing and size of the return on investment capital; and
- General economic and political conditions.
Variations in any of these factors could cause significant fluctuations in our
operating results from quarter to quarter and could result in net losses.
POTENTIAL VOLATILITY OF OUR STOCK PRICE
The trading price of our common stock has fluctuated widely. In addition,
in recent years the stock market has experienced extreme price and volume
fluctuations. The overall market and the price of our common stock may continue
to fluctuate greatly. The trading price of our common stock may be significantly
affected by various factors, including:
- Quarter to quarter variations in our operating results;
- Changes in environmental legislation;
- Changes in investors' and analysts' perception of the business risks and
conditions of our business;
- Broader market fluctuations; and
- General economic or political conditions.
MANAGEMENT OF GROWTH
We are growing rapidly. Our growth presents numerous managerial,
administrative, operational and other challenges. Our ability to manage the
growth of our operations will require us to continue to improve our operational,
financial and human resource management information systems and our other
internal systems and controls. In addition, our growth will increase our need to
attract, develop, motivate and retain both our management and professional
employees. The inability of our
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management to manage our growth effectively or the inability of our employees to
achieve anticipated performance or utilization levels, could have a material
adverse effect on our business.
RELIANCE ON KEY PERSONNEL AND QUALIFIED PROFESSIONALS
We depend upon the efforts and skills of our executive officers, senior
managers and consultants. With limited exceptions, we do not have employment
agreements with any of these individuals. The loss of the services of any of
these key personnel could adversely affect our business. Although we have
obtained non-compete agreements from the principal stockholders of each of the
companies we have acquired, we generally do not have non-compete or employment
agreements with key employees who were not equity holders of these companies. We
do not maintain key-man life insurance policies on any of our executive officers
or senior managers.
Our future growth and success depends on our ability to attract and
retain qualified scientists and engineers. The market for these professionals is
competitive and we may not be able to attract and retain such professionals.
DEPENDENCE UPON EXISTING LAWS AND REGULATIONS
A significant amount of our resource management business is generated
either directly or indirectly as a result of existing Federal and state
governmental laws, regulations and programs. Any changes in these laws or
regulations that reduce funding or affect the sponsorship of these programs
could reduce the demand for our services and could have a material adverse
effect on our business.
CONCENTRATION OF REVENUES
Agencies of the Federal government are among our most significant
clients. During fiscal 1998, approximately 46.8% of our net revenue was derived
from three federal agencies as follows: 26.2% of our net revenue was derived
from the Department of Defense (DOD), 17.1% from the Environmental Protection
Agency (EPA), and 3.5% from the Department of Energy (DOE). Some of our
contracts with Federal government agencies require annual funding approval and
may be terminated at their discretion. A reduction in spending by Federal
government agencies could limit the continued funding of our existing contracts
with them and could limit our ability to obtain additional contracts. These
limitations, if significant, could have a material adverse effect on our
business.
Additionally the failure of clients to pay significant amounts due us for
our services could adversely affect our business. For example, we recently
received notification from a federal government agency that we are entitled to
payments in excess of our billings. However, the agency involved must obtain
specific funding approval for amounts owed to us and there can be no assurance
this funding approval will be obtained.
RISKS ASSOCIATED WITH GOVERNMENTAL AUDITS
Our contracts with the Federal government and other governmental agencies
are subject to audit. Most of these audits are conducted by the Defense Contract
Audit Agency (DCAA), which reviews our overhead rates, operating systems and
cost proposals. The DCAA may disallow costs if it determines that we accounted
for these costs incorrectly or in a manner inconsistent with Cost Accounting
Standards. A disallowance of costs by the DCAA, or other governmental auditors,
could have a material adverse effect on our business.
In September 1995, we acquired PRC Environmental Management, Inc. (EMI).
EMI also contracts with Federal government agencies and such contracts are also
subject to the same governmental audits. The DCAA has completed audits of EMI's
contracts for the fiscal years 1987
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through 1995. As a result of these audits and our negotiations with the DCAA,
the DCAA disallowed approximately $2.9 million in costs.
FIXED PRICE CONTRACTS
We enter into various contracts with our clients, including fixed-price
contracts. In fiscal 1998, approximately 26.1% of our net revenue was derived
from fixed-price contracts. Fixed-price contracts protect clients and expose us
to a number of risks. These risks include underestimation of costs, problems
with new technologies, unforeseen costs or difficulties, delays beyond our
control and economic and other changes that may occur during the contract
period. If we incur losses under fixed-price contracts it could have a material
adverse effect on our business.
DEPENDENCE ON SUBCONTRACTORS
Under some of our contracts, we depend on the efforts and skills of
subcontractors for the performance of certain tasks. Our reliance on
subcontractors varies from project to project. In fiscal 1998, subcontractor
costs comprised 22.3% of our gross revenue. The absence of qualified
subcontractors with whom we have a satisfactory relationship could adversely
affect the quality of our service and our ability to perform under some of our
contracts.
SIGNIFICANT COMPETITION
We provide specialized management consulting and technical services to a
broad range of public and private sector clients. The market for our services is
highly competitive and we compete with many other firms. These firms range from
small regional firms to large national firms which have greater financial and
marketing resources than we do.
We focus primarily on the resource management, infrastructure and
communications business areas. We provide services to our clients which include
Federal, state and local agencies, and organizations in the private sector.
We compete for projects and engagements with a number of competitors
which can vary from 10 to 100 firms. Historically, clients have chosen among
competing firms based on the quality and timeliness of the firm's service. We
believe, however, that price has become an increasingly important factor.
We believe that our principal competitors include, in alphabetical order,
Black & Veatch LLP; Brown & Caldwell; Castle Tower Corporation; Camp, Dresser &
McKee; CH2M Hill Companies Ltd.; Dames & Moore Group; EA Engineering, Science &
Technology, Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT Group
Inc.; Mastec, Inc.; Montgomery Watson; OSP Consultants, Inc.; Roy F. Weston,
Inc.; and URS Greiner Corporation.
POTENTIAL LIABILITY AND INSURANCE
Our services involve significant risks of professional and other
liabilities which may substantially exceed the fees we derive from our services.
Our business activities could expose us to potential liability under various
environmental laws such as the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA). In addition, we sometimes
contractually assume liability under indemnification agreements. We cannot
predict the magnitude of such potential liabilities.
We currently maintain comprehensive general liability, umbrella and
professional liability insurance policies. We believe that our insurance
policies are adequate for our business operations. These policies are "claims
made" policies. Thus, only claims made during the term of the policy are
covered. If we terminate our policies and do not obtain retroactive coverage, we
would be uninsured for claims made after termination even if these claims are
based on events or acts that occurred during
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the term of the policy. Our insurance may not protect us against liability
because our policies typically have various exclusions and retentions. In
addition, if we expand into new markets, we may not be able to obtain insurance
coverage for such activities or, if insurance is obtained, the dollar amount of
any liabilities incurred could exceed our insurance coverage. A partially or
completely uninsured claim, if successful and of significant magnitude, could
have a material adverse affect on our business.
CONFLICTS OF INTEREST
Many of our clients are concerned about potential or actual conflicts of
interest in retaining management consultants. Federal government agencies have
formal policies against continuing or awarding contracts that would create
actual or potential conflicts of interest with other activities of a contractor.
These policies, among other things, may prevent us from bidding for or
performing contracts resulting from or relating to certain work we have
performed for the government. In addition, services performed for a private
client may create a conflict of interest that precludes or limits our ability to
obtain work from other public or private organizations. We have, on occasion,
declined to bid on projects because of these conflicts of interest issues.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
In fiscal 1998, approximately 3.2% of our net revenue was derived from
the international marketplace. Some contracts with our international clients are
denominated in foreign currencies. As such, these contracts contain inherent
risks including foreign currency exchange risk and the risk associated with
expatriating funds from foreign countries. If our international revenue
increases, our exposure to foreign currency fluctuations will also increase. We
have entered into forward exchange contracts to address foreign currency
fluctuations.
YEAR 2000
We are working to resolve the potential impact of the year 2000 on our
business operations and the ability of our computerized information systems to
accurately process information that may be date-sensitive. Any of our programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures.
We utilize a number of computer programs across our entire operation. The
primary information technology systems we utilize are the accounting and
financial and human resource information management systems. We began our risk
assessment in 1995. Since that time we have procured and implemented certain
accounting and financial reporting systems as well as contract administration
and billing systems that have been certified as year 2000 compliant by our
vendors. Currently, approximately 72% of our gross revenue is recognized on
these year 2000 compliant systems. We believe that our financial and accounting
and human resource management information systems will be year 2000 compliant in
a timely manner and will not be materially impacted by the year 2000. We may
fail, however, in updating our various systems to be year 2000 compliant in a
timely manner.
We have extensive business with the Federal government. Should the
Federal government, especially the Department of Defense (DOD), experience
significant business interruptions relating to non-year 2000 compliance, our
business could be materially impacted. To the extent that other third parties
which we rely upon, such as banking institutions, clients and vendors, are
unable to address their year 2000 issues in a timely manner, our business could
be materially impacted. We believe that the worst case scenario relating to the
year 2000 would be an extensive period of time in which the Federal government
and other third parties could not process payments promptly, in addition to our
financial institutions not being able to supply us with our working capital
needs.
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Additional risks associated with non-year 2000 compliance include:
- Our inability to invoice and process payments;
- Our inability to produce accurate and timely financials;
- The impact on our profitability; and
- Our potential liability to third parties for not meeting contracted
deliverables.
IMPACT OF ANTI-TAKEOVER PROVISIONS ON OUR STOCK PRICE
Our certificate of incorporation and by-laws and the Delaware General
Corporation Law include provisions that may be deemed to have anti-takeover
effects. These anti-takeover effects could delay or prevent a takeover attempt
that you or our other stockholders might consider in your or their best
interests.
In addition, our board of directors is authorized to issue, without
obtaining stockholder approval, up to 2,000,000 shares of preferred stock and to
determine the price, rights, preferences and privileges of such shares without
any further stockholder action. The existence of this "blank-check" preferred
stock could make more difficult or discourage an attempt to obtain control of us
by means of a tender offer, merger, proxy contest or otherwise.
In the future, we may adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a change
in control were at a premium price or favored by a majority of unaffiliated
stockholders. Certain of these measures may be adopted without any further vote
or action by the stockholders.
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ITEM 2. PROPERTIES.
Our corporate headquarters facilities are located in Pasadena, California.
These facilities contain approximately 25,000 square feet of office space, and
are subject to leases which expire beyond the year 2001. We lease office space
in approximately 110 locations in the United States. We also rent some
additional office space on a month-to-month basis.
We believe that our existing facilities are adequate to meet current
requirements and that suitable additional or substitute space will be available
as needed to accommodate any expansion of operations.
ITEM 3. LEGAL PROCEEDINGS.
We are subject to certain claims and lawsuits typically filed against the
engineering and consulting professions, primarily alleging professional errors
or omissions. We carry professional liability insurance, subject to certain
deductibles and policy limits against such claims. We believe that the
resolution of these claims will not have a material effect on our financial
position or results of operations. See "Item 1. Business - Potential
Liability and Insurance."
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 14, 1998, we held a special meeting of stockholders to approve
an amendment to our Certificate of Incorporation to increase the number of
authorized shares of our Common Stock from 30,000,000 to 50,000,000. The number
of votes cast concerning this amendment was as follows:
For: 14,029,273
Against: 27,397
Absentions: 10,934
Broker non-votes: 0
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PART II
The information required by Items 5 through 8 of this report is set forth
on pages 19 through 42 of our Annual Report to Stockholders for the fiscal
year ended October 4, 1998. Such information is incorporated in this report and
made a part hereof by reference. Item 9 is not applicable.
PART III
The information required by Items 10 through 13 of this report is set forth
in the sections entitled "Security Ownership of Principal Stockholders,
Directors and Executive Officers," "Election of Directors," and "Executive
Officers, Compensation and Other Information" in our Proxy Statement for our
1999 Annual Meeting of Stockholders. Such information is incorporated in this
report and made a part hereof by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
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The Financial Statements filed as part of this report are listed
in the accompanying index at page 19.
3. EXHIBITS.
3.1 Restated Certificate of Incorporation of the Company
(incorporated herein by reference to Exhibit 3.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 1, 1995).
3.2 Bylaws of the Company as amended to date (incorporated herein by
reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1, No. 33-43723).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1997).
3.4 Certificate of Amendment of Certificate of Incorporation of the
Company.
10.1 Credit Agreement dated as of September 15, 1995 between the
Company and Bank of America Illinois, as amended by the First
Amendment to Credit Agreement dated as of November 27, 1995
(incorporated herein by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 1, 1995).
10.2 Second Amendment dated as of June 20, 1997 to the Credit
Agreement dated as of September 15, 1995 between the Company and
Bank of America Illinois (incorporated herein by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 29, 1997).
10.3 Third Amendment dated as of December 15, 1997 to the Credit
Agreement dated as of September 15, 1995 between the Company and
Bank of America National Trust and Savings Association
(incorporated herein by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1997).
10.4 Fourth Amendment dated as of January 30, 1997 to the Credit
Agreement dated as of September 15, 1995 between the Company and
Bank of America National Trust and Savings Association.
(incorporated herein by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 28, 1997).
10.5 Fifth Amendment dated as of July 6, 1998 to the Credit Agreement
dated as of September 15, 1995 between the Company and Bank of
America National Trust and Savings Association. (incorporated
herein by reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended June 28, 1998).
10.6 Security Agreement dated as of September 15, 1995 among the
Company, GeoTrans, Inc., Simons Li & Associates, Inc.,
Hydro-Search, Inc., PRC Environmental Management, Inc. and Bank
of America Illinois (incorporated herein by reference to Exhibit
10.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended October 1, 1995).
10.7 Pledge Agreement dated as of September 15, 1995 between the
Company and Bank of America Illinois (incorporated herein by
reference to Exhibit 10.3 to the Company's Annual Report on Form
10-K for the fiscal year ended October 1, 1995).
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10.8 Guaranty dated as of September 15, 1995, executed by the Company
in favor of Bank of America Illinois (incorporated herein by
reference to Exhibit 10.4 to the Company's Annual Report on Form
10-K for the fiscal year ended October 1, 1995).
10.9 1989 Stock Option Plan dated as of February 1, 1989
(incorporated herein by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, No. 33-43723).
10.10 Form of Incentive Stock Option Agreement executed by the Company
and certain individuals in connection with the Company's 1989
Stock Option Plan (incorporated herein by reference to Exhibit
10.14 to the Company's Registration Statement on Form S-1, No.
33-43723).
10.11 Executive Medical Reimbursement Plan (incorporated herein by
reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1, No. 33-43723).
10.12 1992 Incentive Stock Plan (incorporated herein by reference to
Exhibit 10.18 to the Company's Annual Report on Form 10-K for
the fiscal year ended October 3, 1993).
10.13 Form of Incentive Stock Option Agreement used by the Company in
connection with the Company's 1992 Incentive Stock Plan
(incorporated herein by reference to Exhibit 10.19 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 3, 1993).
10.14 1992 Stock Option Plan for Nonemployee Directors (incorporated
herein by reference to Exhibit 10.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 3, 1993).
10.15 Form of Nonqualified Stock Option Agreement used by the Company
in connection with the Company's 1992 Stock Option Plan for
Nonemployee Directors (incorporated herein by reference to
Exhibit 10.21 to the Company's Annual Report on Form 10-K for
the fiscal year ended October 3, 1993).
10.16 1994 Employee Stock Purchase Plan (incorporated herein by
reference to Exhibit 10.22 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 2, 1994).
10.17 Form of Stock Purchase Agreement used by the Company in
connection with the Company's 1994 Employee Stock Purchase Plan
(incorporated herein by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 2, 1994).
10.18 Employment Agreement dated as of June 11, 1997 between the
Company and Daniel A. Whalen (incorporated herein by reference
to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 29, 1997).
10.19 Registration Rights Agreement dated as of June 11, 1997 among
the Company and the parties listed on Schedule A attached
thereto (incorporated herein by reference to Exhibit 10.17 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended June 29, 1997).
10.20 Registration Rights Agreement dated as of July 11, 1997 among
the Company and the parties listed on Schedule A attached
thereto (incorporated herein by reference to Exhibit 10.18 to
the Company's Annual Report on Form 10-K for the fiscal year
ended September 28, 1997).
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10.21 Registration Rights Agreement dated as of March 26, 1998 among
the Company and the parties listed on Schedule A attached
thereto (incorporated herein by reference to Exhibit 10.20 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended March 29, 1998).
10.22 Registration Rights Agreement dated as of July 9, 1998 among the
Company and the parties listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit 10.22 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 28, 1998).
10.23 Registration Rights Agreement dated as of September 22, 1998
among the Company and the parties listed on Schedule A attached
thereto.
13. Annual Report to Stockholders for the fiscal year ended October
4, 1998, portions of which are incorporated by reference in this
report as set forth in Part II hereof. With the exception of
these portions, such Annual Report is not to be deemed filed as
part of this report.
21. Subsidiaries of the Company.
23. Independent Auditors' Consent.
27. Financial Data Schedule.
(b) Reports on Form 8-K
1. Current Report on Form 8-K for event of September 22, 1998,
as filed with the Securities and Exchange Commission on
October 7, 1998.
2. Current Report on Form 8-K/A (Amendment No. 1) for event
of September 22, 1998, as filed with the Securities and
Exchange Commission on December 1, 1998.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
TETRA TECH, INC.
Date: December 30, 1998 By: /s/ Li-San Hwang
-------------------------------------
Li-San Hwang, Chairman of the Board of
Directors, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman of the Board of Directors, December 30, 1998
/s/ Li-San Hwang President and Chief Executive Officer
- ----------------------------------- (Principal Executive Officer)
Li-San Hwang
Vice President, Chief Financial Officer December 30, 1998
/s/ James M. Jaska and Treasurer (Principal Financial and
- ----------------------------------- Accounting Officer)
James M. Jaska
/s/ Daniel A. Whalen Director December 30, 1998
- -----------------------------------
Daniel A. Whalen
/s/ J. Christopher Lewis Director December 30, 1998
- -----------------------------------
J. Christopher Lewis
/s/ Patrick C. Haden Director December 30, 1998
- -----------------------------------
Patrick C. Haden
/s/ James J. Shelton Director December 30, 1998
- -----------------------------------
James J. Shelton
</TABLE>
24
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements, together with the Notes thereto and
report thereon of Deloitte & Touche LLP dated November 13, 1998, appearing on
pages 27 through 41 of the accompanying 1998 Annual Report to Stockholders,
are incorporated by reference in this Annual Report on Form 10-K. With the
exception of the aforementioned information and Part II information set forth on
pages 19 through 26, the 1998 Annual Report to Stockholders is not to be
deemed filed as part of this report.
FINANCIAL STATEMENTS SCHEDULES
Page No.
--------
Report of Independent Accountants on Financial Statement
Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . 20
Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts and
Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . 21
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
Tetra Tech, Inc.:
We have audited the consolidated financial statements of Tetra Tech, Inc. and
its subsidiaries as of October 4, 1998 and September 28, 1997, and for each
of the three years in the period ended October 4, 1998, and have issued our
report thereon dated November 13, 1998; such financial statements and report
are included in your 1998 Annual Report to Stockholders and are incorporated
herein by reference. Our audits also included the financial statement
schedule of Tetra Tech, Inc. and its subsidiaries, listed in Item 14. This
financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
November 13, 1998
26
<PAGE>
TETRA TECH, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED
SEPTEMBER 29, 1996, SEPTEMBER 28, 1997 AND OCTOBER 4, 1998
<TABLE>
<CAPTION>
Balance at Additions Charges to Deductions
Beginning of through Costs and Net of Balance at
Period Acquisitions Expenses Recoveries End of Period
------------ ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Fiscal year ended September 29, 1996
Allowance for loss on accounts
receivable . . . . . . . . . . . $ 11,153,000 $ 1,365,000 $ 241,000 $ (1,658,000) $ 11,101,000
Fiscal year ended September 28, 1997
Allowance for loss on accounts
receivable . . . . . . . . . . . $ 11,101,000 $ 228,000 $ (56,000) $ (120,000) $ 11,153,000
Fiscal year ended October 4, 1998
Allowance for loss on accounts
receivable. . . . . . . . . $ 11,153,000 $ 3,187,000 $ (334,000) $ (1,321,000) $ 12,685,000
</TABLE>
27
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
TETRA TECH, INC.
Li-San Hwang and Richard A. Lemmon hereby certify that:
A. They are the President and the Secretary, respectively, of Tetra Tech,
Inc., a Delaware corporation (the "Corporation").
B. The Certificate of Incorporation of the Corporation is amended so that
the first paragraph of Article IV is amended and superseded in full by the
following paragraph:
"ARTICLE IV
The total number of shares of stock that the corporation shall have
authority to issue is fifty-two million (52,000,000), consisting of
fifty million (50,000,000) shares of common stock, par value $.01, and
two million (2,000,000) shares of preferred stock, par value of $.01.
The designation and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof are as follows:
C. The foregoing Amendment to Certificate of Incorporation of the
Corporation was duly adopted by a majority of the duly elected directors
of the Corporation in accordance with the provisions of Section 242 of
the Delaware General Corporation Law and in accordance with their
direction was submitted to the stockholders of the Corporation.
D. Thereafter, pursuant to the resolution of the directors of the
Corporation, the vote of the stockholders of the Corporation was
solicited wherein a majority of the outstanding shares of capital stock
of the Corporation entitled to vote thereon approved the foregoing
Amendment to the Certificate of Incorporation.
IN WITNESS WHEREOF, Li-San Hwang and Richard A. Lemmon being the
President and Secretary, respectively, of the Corporation, do hereby certify
under penalty of perjury under the laws of the State of Delaware that the
facts hereinabove stated are truly set forth, and accordingly each of us has
hereunto set our hands this 14th day of September, 1998.
/s/ LI-SAN HWANG /s/ RICHARD A. LEMMON
- ----------------------- ----------------------------
Li-San Hwang, President Richard A. Lemmon, Secretary
<PAGE>
Exhibit 10.23
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is entered into as of
July 9, 1998 by and among Tetra Tech, Inc., a Delaware corporation ("Tetra
Tech"), and the parties listed on SCHEDULE A attached hereto (each, a "Holder"
and collectively, the "Holders").
R E C I T A L S
A. Tetra Tech and the Holders are parties to a Stock Purchase Agreement
dated as of June 30, 1998 (the "Stock Purchase Agreement"), pursuant to which
Tetra Tech will acquire all of the outstanding shares of capital stock of
McNamee, Porter & Seeley, Inc., a Michigan corporation ("MPS"); and
B. Pursuant to the Stock Purchase Agreement, the shareholders of MPS will
receive shares of the common stock, $.01 par value, of Tetra Tech ("Tetra Tech
Common Stock"); and
C. This Agreement is the Registration Rights Agreement referred to in
SECTION 7.10 of the Stock Purchase Agreement and, pursuant thereto, must be
entered into by the parties as a condition to the consummation of the
transactions contemplated by the Stock Purchase Agreement.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"FORM S-3" shall mean such form under the Securities Act as in effect
on the date hereof or any successor registration form under the Securities Act
subsequently adopted by the SEC which permits inclusion or incorporation of
substantial information by reference to other documents filed by Tetra Tech with
the SEC.
<PAGE>
"PROSPECTUS" shall mean the prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement, with respect
to the terms of the offering of any portion of the Registrable Securities
covered by the Registration Statement and by all other amendments and
supplements to the prospectus, including post-effective amendments and all
material incorporated by reference in such Prospectus.
"REGISTER", "REGISTERED" and "REGISTRATION" shall mean and refer to a
registration effected by preparing and filing a Registration Statement and
taking all other actions that are necessary or appropriate in connection
therewith, and the declaration or ordering of effectiveness of such Registration
Statement by the SEC.
"REGISTRATION EXPENSES" shall have the meaning set forth in SECTION 4.
"REGISTRABLE SECURITIES" shall mean the shares of Tetra Tech Common
Stock (i) issued pursuant to the Stock Purchase Agreement, and (ii) issued as a
dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in (i) above; PROVIDED, HOWEVER, that
Registrable Securities shall not include any shares of Tetra Tech Common Stock
that have previously been registered or sold to the public or have been sold
pursuant to Rule 144 ( or similar successor Rule).
"REGISTRATION STATEMENT" shall mean any registration statement of
Tetra Tech in compliance with the Securities Act that covers Registrable
Securities pursuant to the provisions of this Agreement, including, without
limitation, the Prospectus, all amendments and supplements to such Registration
Statement, including all post-effective amendments, all exhibits and all
material incorporated by reference in such Registration Statement.
"RULE 144" shall mean Rule 144 promulgated under the Securities Act or
any similar successor rule, as the same shall be in effect from time to time.
"RULE 144A" shall mean Rule 144A promulgated under the Securities Act
or any similar successor rule, as the same shall be in effect from time to time.
"RULE 415" shall mean Rule 415 promulgated under the Securities Act,
or any similar successor rule, as the same shall be in effect from time to time.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended
from time to time.
"SEC" shall mean the Securities and Exchange Commission.
<PAGE>
"UNDERWRITTEN OFFERING" shall mean a registration in which securities
of Tetra Tech are sold to an underwriter or through an underwriter as agent for
reoffering to the public.
2. REGISTRATION.
(a) Within 60 days after the date hereof, Tetra Tech shall file a
Registration Statement on Form S-3, providing for the sale by the Holders,
pursuant to Rule 415, and/or any similar rule that may be adopted by the SEC, of
the Registrable Securities, and Tetra Tech shall use commercially reasonable
efforts to cause such Registration Statement to become effective on or before
November 9, 1998 and to keep such Registration Statement continuously effective
for a period ending on the date on such all Holders are eligible to sell
Registrable Securities under Rule 144 (or similar successor rule) without any
volume limitation. If, at the time Tetra Tech is required to file a
Registration Statement pursuant to this SECTION 2(A), Tetra Tech is not eligible
to file a Registration Statement on Form S-3 to register resales by
stockholders, Tetra Tech shall initially file a Registration Statement on Form
S-1 and shall comply with the provisions of the immediately preceding sentence.
Upon becoming eligible to use the Registration Statement on Form S-3 to register
resales by stockholders (whether pursuant to a ruling or waiver from the SEC or
otherwise), Tetra Tech shall promptly file a Registration Statement on Form S-3
or convert the existing Registration Statement to Form S-3 relating to the offer
and sale of Registrable Securities by the Holders from time to time.
Thereafter, Tetra Tech shall use commercially reasonable efforts to cause such
new or amended Registration Statement to be declared effective by the SEC as
promptly as practicable.
(b) No Holder shall have the right to register securities under this
Agreement unless such Holder provides and/or confirms in writing prior to or
after the filing of the Registration Statement such information (including,
without limitation, information as to the number of Registrable Securities that
such Holder has sold pursuant to any such Registration Statement from time to
time) as Tetra Tech reasonably requests in connection with such Registration
Statement.
(c) Notwithstanding the foregoing, for a period not to exceed 90 days
in any 12-month period, Tetra Tech shall not be obligated to prepare and file,
or be prevented from delaying or abandoning, the Registration Statement required
hereunder if Tetra Tech, in its good faith judgment, reasonably believes that
the filing or maintenance of such Registration Statement would require the
disclosure of material non-public information regarding Tetra Tech and,
accordingly, that the filing thereof, at the time requested, or the offering of
Tetra Tech Common Stock pursuant thereto, would materially and adversely affect
(A) a pending or scheduled public offering or private placement of securities of
Tetra Tech, (B) an acquisition, merger, consolidation or similar transaction by
or of Tetra Tech, (C) preexisting and continuing negotiations, discussions or
pending proposals with respect to any of the foregoing transactions, or (D) the
financial condition of Tetra Tech in view of the disclosure of any
3.
<PAGE>
pending or threatened litigation, claim, assessment or governmental
investigation which might be required thereby.
In the event that Tetra Tech, in good faith, reasonably believes that such
conditions are continuing after such 90-day period, it may, with the consent of
the Holders of a majority of the Registrable Securities subject (or to be
subject) to the Registration Statement, which consent shall not be unreasonably
withheld, extend such 90-day period for an additional 30 days. Any further
delay shall require the consent of the Holders of all such shares.
No seller of Registrable Securities shall (until further notice) effect
sales of shares covered by the Registration Statement after receipt of
telegraphic, telecopied or written notice from Tetra Tech to suspend sales to
permit Tetra Tech to correct or update a registration statement or prospectus.
3. REGISTRATION PROCEDURES. In connection with Tetra Tech's registration
obligations pursuant to SECTION 2 hereof, Tetra Tech will use commercially
reasonable efforts to effect such registration to permit the sale of the
Registrable Securities covered thereby in accordance with the intended method or
methods of disposition thereof, and pursuant thereto Tetra Tech will as
expeditiously as possible:
(a) prepare and file with the SEC a Registration Statement with
respect to such Registrable Securities and use its commercially reasonable
efforts to cause such Registration Statement to become effective; PROVIDED that,
before filing any Registration Statement or Prospectus or any amendments or
supplements thereto, Tetra Tech will furnish to the Holders of the Registrable
Securities covered by such Registration Statement and their counsel, copies of
all such documents proposed to be filed at least ten days prior thereto, and
Tetra Tech will not file any such Registration Statement or amendment thereto or
any Prospectus or any supplement thereto to which any such Holder shall
reasonably object within such ten day period; PROVIDED, FURTHER, that Tetra Tech
will not name or otherwise provide any information with respect to any Holder in
any Registration Statement or Prospectus without the express written consent of
such Holder, unless required to do so by the Securities Act and the rules and
regulations thereunder;
(b) prepare and file with the SEC such amendments, post-effective
amendments and supplements to the Registration Statement and the Prospectus as
may be necessary to comply with the provisions of the Securities Act and the
rules and regulations thereunder with respect to the disposition of all
securities covered by such Registration Statement;
(c) notify the selling Holders (i) when the Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and, with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the SEC for amendments or
supplements to the Registration Statement or the Prospectus or for additional
information, (iii) of the issuance by the SEC of any stop order
4.
<PAGE>
suspending the effectiveness of the Registration Statement or the initiation
of any proceedings for that purpose, (iv) of the receipt by Tetra Tech of any
notification with respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose and (v) of the happening of
any event which makes any statement made in the Registration Statement, the
Prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement, the
Prospectus or any document incorporated therein by reference in order to make
the statements therein not misleading in light of the circumstances then
existing;
(d) make every commercially reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement at the earliest possible moment;
(e) deliver to each selling Holder, without charge, such reasonable
number of conformed copies of the Registration Statement (and any post-effective
amendment thereto) and such number of copies of the Prospectus (including each
preliminary prospectus) and any amendment or supplement thereto (and any
documents incorporated by reference therein) as such Holder may reasonably
request. Tetra Tech consents to the use of the Prospectus or any amendment or
supplement thereto by each of the selling Holders in connection with the offer
and sale of the Registrable Securities covered by the Prospectus or any
amendment or supplement thereto;
(f) prior to any offering of Registrable Securities covered by a
Registration Statement, register or qualify or cooperate with the selling
Holders in connection with the registration or qualification of such Registrable
Securities for offer and sale under the securities or blue sky laws of such
jurisdictions as any such selling Holder reasonably requests, and use
commercially reasonable efforts to keep each such registration or qualification
effective, including through new filings, or amendments or renewals, during the
period such Registration Statement is required to be kept effective pursuant to
the terms of this Agreement; and do any and all other acts or things necessary
or advisable to enable the disposition in all such jurisdictions reasonably
requested by the Holders of the Registrable Securities covered by such
Registration Statement, PROVIDED that under no circumstances shall Tetra Tech be
required in connection therewith or as a condition thereof to qualify to do
business or to file a general consent to service of process in any such states
or jurisdictions;
(g) cooperate with the selling Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold, free of any and all restrictive legends, such certificates to be in
such denominations and registered in such names as the Holders may request;
(h) upon the occurrence of any event contemplated by SECTION 3(C)(V)
above, prepare a supplement or post-effective amendment to the Registration
Statement or the Prospectus or any document incorporated therein by reference or
file any other required
5.
<PAGE>
document so that, as thereafter delivered to the purchasers of the
Registrable Securities, the Prospectus will not contain an untrue statement
of a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(i) make generally available to the holders of Tetra Tech's
outstanding securities earnings statements satisfying the provisions of
Section 11(a) of the Securities Act, no later than 60 days after the end of any
12 month period (or 90 days, if such period is a fiscal year) beginning with the
first month of Tetra Tech's first fiscal quarter commencing after the effective
date of the Registration Statement, which statements shall cover said 12 month
period;
(j) provide and cause to be maintained a transfer agent and registrar
for all Registrable Securities covered by each Registration Statement from and
after a date not later than the effective date of such Registration Statement;
(k) use its best efforts to cause all Registrable Securities covered
by each Registration Statement to be listed, subject to notice of issuance,
prior to the date of the first sale of such Registrable Securities pursuant to
such Registration Statement, on each securities exchange on which the Tetra Tech
Common Stock is then listed, and admitted to trading on the Nasdaq Stock Market,
if the Tetra Tech Common Stock is then admitted to trading on the Nasdaq Stock
Market; and
(l) enter into such agreements and take such other actions as a
majority of the Holders shall reasonably request in order to expedite or
facilitate the disposition of such Registrable Securities.
Each Holder agrees that, upon receipt of any notice from Tetra Tech of the
happening of any event of the kind described in SECTION 3(C)(V) hereof, such
Holder will forthwith discontinue disposition of Registrable Securities under
the Prospectus related to the applicable Registration Statement until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by SECTION 3(H) hereof, or until it is advised in writing by Tetra
Tech that the use of the Prospectus may be resumed. It shall be a condition
precedent to the obligations of Tetra Tech to take any action pursuant to this
SECTION 3 with respect to the Registrable Securities of any selling Holder that
such Holder shall furnish to Tetra Tech such information regarding itself and
the Registrable Securities held by it as shall be required by the Securities Act
to effect the registration of such Holder's Registrable Securities.
4. REGISTRATION EXPENSES. All expenses incident to any registration to
be effected hereunder and incident to Tetra Tech's performance of or compliance
with this Agreement, including without limitation all registration and filing
fees, fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, National Association of Securities
Dealers, Inc., stock exchange and qualification fees, fees and disbursements of
Tetra Tech's counsel and of independent certified public accountants of Tetra
6.
<PAGE>
Tech (including the expenses of any special audit required by or incident to
such performance), the fees and disbursements of one counsel and one
accountant representing the Holders in such offering, expenses of the
underwriters that are customarily requested in similar circumstances by such
underwriters (excluding discounts, commissions or fees of underwriters,
selling brokers, dealer managers or similar securities industry professionals
relating to the distribution of the Registrable Securities, which will be
borne by the Holders), all such expenses being herein called "Registration
Expenses," will be borne by Tetra Tech. Tetra Tech will also pay its
internal expenses, the expense of any annual audit and the fees and expenses
of any person retained by Tetra Tech.
5. INDEMNIFICATION.
(a) INDEMNIFICATION BY TETRA TECH. Tetra Tech agrees to indemnify
and hold harmless each Holder of Registrable Securities, its officers,
directors, partners and employees and each person who controls such Holder
(within the meaning of Section 15 of the Securities Act) from and against any
and all losses, claims, damages and liabilities (including any investigation,
legal or other expenses reasonably incurred in connection with, and any amount
paid in settlement of, any action, suit or proceeding or any claim asserted)
(collectively, "Damages") to which such Holder may become subject under the
Securities Act, the Exchange Act or other federal or state securities law or
regulation, at common law or otherwise, insofar as such Damages arise out of or
are based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement, Prospectus or preliminary
prospectus or any amendment or supplement thereto, (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading and (iii) any violation or alleged
violation by Tetra Tech of the Securities Act, the Exchange Act or any state
securities or blue sky laws in connection with the Registration Statement,
Prospectus or preliminary prospectus or any amendment or supplement thereto,
PROVIDED that Tetra Tech will not be liable to any Holder to the extent that
such Damages arise from or are based upon any untrue statement or omission
(x) based upon written information furnished to Tetra Tech by such Holder
expressly for the inclusion in such Registration Statement, (y) made in any
preliminary prospectus if such Holder failed to deliver a copy of the Prospectus
with or prior to the delivery of written confirmation of the sale by such Holder
to the party asserting the claim underlying such Damages and such Prospectus
would have corrected such untrue statement or omission and (z) made in any
Prospectus if such untrue statement or omission was corrected in an amendment or
supplement to such Prospectus and such Holder failed to deliver such amendment
or supplement prior to or concurrently with the sale of Registrable Securities
to the party asserting the claim underlying such Damages.
(b) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. Each Holder
of Registrable Securities whose Registrable Securities are sold under a
Prospectus which is a part of a Registration Statement agrees to indemnify and
hold harmless Tetra Tech, its directors and each officer who signed such
Registration Statement and each person who controls Tetra Tech (within the
meaning of Section 15 of the Securities Act), and each other Holder of
7.
<PAGE>
Registrable Securities whose Registrable Securities are sold under the
Prospectus which is a part of such Registration Statement (and such Holder's
officers, directors and employees and each person who controls such Holder
within the meaning of Section 15 of the Securities Act), under the same
circumstances as the foregoing indemnity from Tetra Tech to each Holder of
Registrable Securities to the extent that such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement of
a material fact or omission of a material fact that was made in the
Prospectus, the Registration Statement, or any amendment or supplement
thereto, in reliance upon and in conformity with information relating to such
Holder furnished in writing to Tetra Tech by such Holder expressly for use
therein, PROVIDED that in no event shall the aggregate liability of any
selling Holder of Registrable Securities exceed the amount of the net
proceeds received by such Holder upon the sale of the Registrable Securities
giving rise to such indemnification obligation. Tetra Tech and the selling
Holders shall be entitled to receive indemnities from underwriters, selling
brokers, dealer managers and similar securities industry professionals
participating in the distribution, to the same extent as customarily
furnished by such persons in similar circumstances.
(c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any person entitled to
indemnification hereunder will (i) give prompt notice to the indemnifying party
of any claim with respect to which it seeks indemnification and (ii) permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; PROVIDED, HOWEVER, that any person
entitled to indemnification hereunder shall have the right to employ separate
counsel and to participate in the defense of such claim, but the fees and
expenses of such counsel shall be at the expense of such person and not of the
indemnifying party unless (A) the indemnifying party has agreed to pay such fees
or expenses, (B) the indemnifying party shall have failed to assume the defense
of such claim and employ counsel reasonably satisfactory to such person or
(C) in the reasonable judgment of such person and the indemnifying party, based
upon advice of their respective counsel, a conflict of interest may exist
between such person and the indemnifying party with respect to such claims (in
which case, if the person notifies the indemnifying party in writing that such
person elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the defense of
such claim on behalf of such person). If such defense is not assumed by the
indemnifying party, the indemnifying party will not be subject to any liability
for any settlement made without its consent (but such consent will not be
unreasonably withheld). No indemnified party will be required to consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by all claimants or plaintiffs to such
indemnified party of a release from all liability in respect to such claim or
litigation. Any indemnifying party who is not entitled to, or elects not to,
assume the defense of a claim will not be obligated to pay the fees and expenses
of more than one counsel for all parties indemnified by such indemnifying party
with respect to such claim. As used in this SECTION 5(C), the terms
"indemnifying party", "indemnified party" and other terms of similar import are
intended to include only Tetra Tech (and its officers, directors and control
persons as set forth above) on the one hand, and the Holders (and their
officers, directors, partners, employees, attorneys and control persons as set
forth above) on the other hand, as applicable.
8.
<PAGE>
(d) CONTRIBUTION. If for any reason the foregoing indemnity is
unavailable, then the indemnifying party shall contribute to the amount paid
or payable by the indemnified party as a result of such losses, claims,
damages, liabilities or expenses (i) in such proportion as is appropriate to
reflect the relative fault of the indemnifying party and the indemnified
party in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying
party and indemnified party shall be determined by reference to, among other
things, whether the untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact
relates to information supplied by such indemnifying party or by such
indemnified party, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The parties acknowledge and agree that it would not be just and equitable if
contribution pursuant to this SECTION 5(D) were determined by pro rata
allocation or by any other method of allocation which does not take into
account the equitable considerations referred to in this SECTION 5(D).
Notwithstanding the foregoing, no Holder shall be required to contribute any
amount in excess of the amount such Holder would have been required to pay to
an indemnified party if the indemnity under SECTION 5(B) hereof was
available. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The obligation of any person to contribute pursuant to
this SECTION 5(D) shall be several and not joint.
(e) TIMING OF PAYMENTS. An indemnifying party shall make payments of
all amounts required to be made pursuant to the foregoing provisions of this
SECTION 5 to or for the account of the indemnified party from time to time
promptly upon receipt of bills or invoices relating thereto or when otherwise
due or payable.
(f) SURVIVAL. The indemnity and contribution agreements contained in
this SECTION 5 shall remain in full force and effect, regardless of any
investigation made by or on behalf of Tetra Tech, a participating Holder, its
officers, directors, partners, attorneys, agents or any person, if any, who
controls Tetra Tech or such Holder as aforesaid, and shall survive the transfer
of such Registrable Securities by such Holder.
6. PREPARATION; REASONABLE INVESTIGATION. In connection with the
preparation and filing of a Registration Statement pursuant to the terms of this
Agreement:
(a) Tetra Tech shall, with respect to a Registration Statement filed
pursuant to SECTION 2, give the Holders of such Registrable Securities so
registered, their underwriters, if any, and their respective counsel and
accountants the opportunity to participate in the preparation of such
Registration Statement (other than reports and proxy statements incorporated
therein by reference and properly filed with the SEC) and each Prospectus
included therein or filed with the SEC, and each amendment thereof or supplement
thereto; and
9.
<PAGE>
(b) Tetra Tech shall give the Holders of such Registrable Securities
so registered, their underwriters, if any, and their respective counsel and
accountants such reasonable access to its books and records and such
opportunities to discuss the business of Tetra Tech with its officers and the
independent public accountants who have certified its financial statements as
shall be necessary, in the opinion of such Holders or such underwriters, to
conduct a reasonable investigation within the meaning of Section 11(b)(3) of the
Securities Act.
7. RULE 144. Tetra Tech covenants that it will use commercially
reasonable efforts to file, on a timely basis, the reports required to be filed
by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder, and it will take such further action
as any Holder may reasonably request (including, without limitation, compliance
with the current public information requirements of Rule 144(c) and Rule 144A),
all to the extent required from time to time to enable such Holder to sell
Registrable Securities without registration under the Securities Act within the
limitation of the conditions provided by Rule 144, Rule 144A or any similar rule
or regulation hereafter adopted by the SEC. Upon the request of any Holder,
Tetra Tech will promptly deliver to such Holder a written statement verifying
that it has complied with such information and requirements.
8. SPECIFIC PERFORMANCE. Each Holder, in addition to being entitled to
exercise all rights provided herein or granted by law, including recovery of
damages, will be entitled to specific performance of its rights under this
Agreement. Tetra Tech agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this Agreement and hereby agrees to waive the defense in any action for
specific performance that a remedy at law would be adequate.
9. NOTICES. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by United States first-class
mail, postage prepaid, sent by facsimile or delivered personally by hand or
nationally recognized courier addressed (a) if to a Holder, as indicated on the
list of Holders attached hereto as SCHEDULE A, or at such other address as such
Holder or permitted assignee shall have furnished to Tetra Tech in writing, or
(b) if to Tetra Tech, at such address or facsimile number as Tetra Tech shall
have furnished to each Holder in writing. All such notices and other written
communications shall be effective on the date of mailing, facsimile transfer or
delivery.
10. SUCCESSORS AND ASSIGNS: ASSIGNMENT OF RIGHTS. The rights and benefits
of a Holder hereunder may not be assigned to a transferee or assignee without
the consent of Tetra Tech; PROVIDED, HOWEVER, that, no later than the 10th day
prior to the filing of the Registration Statement under SECTION 2 hereof, the
rights and benefits of a Holder hereunder may be transferred in connection with
a transfer or assignment of any Registrable Securities held by such Holder
(i) by gift to immediate family members of such Holder, or trusts or other
entities for the sole benefit thereof, or (ii) by gift to any entity in which
such Holder, his or her immediate family members, or trusts or other entities
for the sole benefit thereof beneficially
10.
<PAGE>
own all of the voting securities; PROVIDED, HOWEVER, that in each case, the
transferee executes an instrument pursuant to which the transferee agrees to
be bound by the terms and conditions hereof as a Holder, and such other
documents as Tetra Tech or its counsel may reasonably require, after which,
such transferee shall be deemed a "Holder" hereunder. Any transfer of
Registrable Securities, and rights hereunder, shall be subject to compliance
with applicable securities laws and the restrictions contained in the
Investment Letter executed by each Holder pursuant to the Stock Purchase
Agreement.
11. SEVERABILITY. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
12. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement, the Stock
Purchase Agreement and the other agreements contemplated thereby constitute the
full and entire understanding and agreement among the parties with regard to the
subjects hereof and thereof. Without limiting the foregoing, the rights of the
Holders to registration pursuant to the terms of this Agreement shall be subject
to the limitations on resale contained in the Investment Letter (as defined in
the Stock Purchase Agreement). Neither this Agreement nor any term hereof may
be amended, waived, discharged or terminated, except by a written instrument
signed by Tetra Tech and the holders of at least 51% of the Registrable
Securities and any such amendment, waiver, discharge or termination shall be
binding upon all the parties hereto, but in no event shall the obligation of any
party hereto be materially increased, except upon the written consent of such
party.
13. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be original, and all of which together shall
constitute one instrument.
14. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware without giving effect to
principles of conflicts of laws thereof.
15. NO THIRD PARTY BENEFICIARIES. The covenants and agreements set forth
herein are for the sole and exclusive benefit of the parties hereto and their
respective successors and assigns and such covenants and agreements shall not be
construed as conferring, and are not intended to confer, any rights or benefits
upon any other persons.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
11.
<PAGE>
TETRA TECH, INC.
By: /s/ Li-San Hwang
-----------------------------------------------
Li-San Hwang
Chairman, Chief Executive Officer and President
/s/ Khalil Z. Atasi
----------------------------------------------------
Khalil Z. Atasi
/s/ Dennis J. Benoit
----------------------------------------------------
Dennis J. Benoit
/s/ Glenn S. Burkhardt
----------------------------------------------------
Glenn S. Burkhardt, as Trustee of the Glenn S.
Burkhardt Trust dated September 12, 1996
/s/ Thomas M. Doran
----------------------------------------------------
Thomas M. Doran, as Trustee of the Thomas M. Doran
Trust dated June 26, 1996
/s/ Charles D. Fifield
----------------------------------------------------
Charles D. Fifield
/s/ Richard W. Force
----------------------------------------------------
Richard W. Force, as Trustee of the Richard W. Force
Trust dated June 9, 1992
/s/ S. Joh Kang
----------------------------------------------------
S. Joh Kang, as Trustee of the Shin Joh Kang Trust
dated January 17, 1992
/s/ Kenneth E. Kingsley
----------------------------------------------------
Kenneth E. Kingsley
/s/ Donald E. Lund
----------------------------------------------------
Donald E. Lund
12.
<PAGE>
/s/ John P. Oyer
----------------------------------------------------
John P. Oyer, as Trustee of the John P. Oyer Trust
dated January 21, 1997
/s/ Suresh K. Sangal
----------------------------------------------------
Suresh K. Sangal, as Trustee of the Suresh Kumar
Sangal Trust dated July 22, 1992
/s/ Philip C. Youngs
----------------------------------------------------
Philip C. Youngs
13.
<PAGE>
SCHEDULE A
SCHEDULE OF HOLDERS
<TABLE>
<CAPTION>
Number of Shares of Tetra Tech
Holder's Name/Address/Facsimile No. Common Stock Issued Pursuant
to the Stock Purchase Agreement
------------------------------------------ ----------------------------------
<S> <C>
Khalil Z. Atasi 11,365 shares
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
Dennis J. Benoit 11,365 shares
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
Glenn S. Burkhardt, as Trustee of the Glenn 21,025 shares
S. Burkhardt Trust dated September 12, 1996
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
Thomas M. Doran, as Trustee of the Thomas 21,025 shares
M. Doran Trust dated June 26, 1996
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
Charles D. Fifield 17,616 shares
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
</TABLE>
14.
<PAGE>
<TABLE>
<S> <C>
Richard W. Force, as Trustee of the Richard 21,025 shares
W. Force Trust dated June 9, 1992
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
S. Joh Kang, as Trustee of the Shin Joh 21,025 shares
Kang Trust dated January 17, 1992
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
Kenneth E. Kingsley 11,365 shares
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
Donald E. Lund 21,025 shares
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
John P. Oyer, as Trustee of the John P. 21,025 shares
Oyer Trust dated January 21, 1997
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
Suresh K. Sangal, as Trustee of the Suresh 21,025 shares
Kumar Sangal Trust dated July 22, 1992
c/o McNamee, Porter & Seeley, Inc.
</TABLE>
15.
<PAGE>
<TABLE>
<S> <C>
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
Philip C. Youngs 21,025 shares
c/o McNamee, Porter & Seeley, Inc.
3131 South State Street
Ann Arbor, Michigan 48108
Facsimile: (734) 665-2570
</TABLE>
16.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------
Oct. 4,(2) Sept. 28,(3) Sept. 29,(4) Oct. 1,(5) Oct. 2,(6)
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA
Gross revenue.......................... $ 382,934 $ 246,767 $ 220,099 $ 120,034 $ 96,472
Subcontractor costs.................... 85,337 55,976 59,062 32,160 28,653
---------- ---------- ---------- ---------- ---------
Net revenue............................ 297,597 190,791 161,037 87,874 67,819
Cost of net revenue.................... 223,871 141,019 122,084 65,484 51,069
---------- ---------- ---------- ---------- ---------
Gross profit........................... 73,726 49,772 38,953 22,390 16,750
Selling, general and administrative
expenses............................ 33,913 25,173 21,218 10,634 7,589
---------- ---------- ---------- ---------- ---------
Income from operations................. 39,813 24,599 17,735 11,756 9,161
Net interest income (expense).......... (1,910) (20) (776) 833 354
---------- ---------- ---------- ---------- ---------
Income before minority interest and
income tax expense.................. 37,903 24,579 16,959 12,589 9,515
Minority interest...................... 1,397 -- -- -- --
---------- ---------- ---------- ---------- ---------
Income before income tax expense....... 36,506 24,579 16,959 12,589 9,515
Income tax expense..................... 15,920 10,323 6,854 5,036 3,806
---------- ---------- ---------- ---------- ---------
Net income............................. $ 20,586 $ 14,256 $ 10,105 $ 7,553 $ 5,709
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Basic earnings per share (1)........... $ 0.74 $ 0.61 $ 0.46 $ 0.37 $ 0.28
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Diluted earnings per share (1)......... $ 0.71 $ 0.58 $ 0.45 $ 0.36 $ 0.27
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Weighted average common shares
outstanding: (1)
Basic............................. 27,970 23,371 21,851 20,585 20,464
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Diluted........................... 29,191 24,656 22,581 21,146 20,811
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
</TABLE>
<TABLE>
<CAPTION>
Oct. 4, Sept. 28, Sept. 29, Oct. 1, Oct. 2,
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital........................ $ 77,049 $ 42,539 $ 32,739 $ 39,872 $ 24,833
Total assets........................... 266,610 159,513 88,463 92,930 51,606
Long-term obligations, excluding
current portion..................... 33,546 -- -- 19,045 --
Stockholders' equity................... 167,781 107,641 63,269 41,496 33,507
</TABLE>
- -----
(Continued)
<PAGE>
(1) REFLECTS THE EFFECT, ON A RETROACTIVE BASIS, OF A 5-FOR-4 STOCK SPLIT,
EFFECTED IN THE FORM OF A 25% STOCK DIVIDEND, IN SEPTEMBER 1998.
(2) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF TETRA
TECH NUS, INC. (ACQUIRED DECEMBER 31, 1997), WHALEN/SENTREX LLC (FORMED
MARCH 2, 1998), C.D.C. ENGINEERING, INC. (ACQUIRED MARCH 26, 1998),
MCNAMEE, PORTER & SEELEY, INC. (ACQUIRED JULY 8, 1998) AND THE SENTREX
GROUP OF COMPANIES (ACQUIRED SEPTEMBER 22, 1998) FROM THE DATES SET FORTH
IN THE RELATED PURCHASE AGREEMENTS..
(3) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF IWA
ENGINEERS (ACQUIRED DECEMBER 11, 1996), FLO ENGINEERING, INC. (ACQUIRED
DECEMBER 20, 1996), SCM CONSULTANTS, INC. (ACQUIRED MARCH 19, 1997), WHALEN
& COMPANY, INC. (ACQUIRED JUNE 11, 1997) AND COMMSITE DEVELOPMENT
CORPORATION (ACQUIRED JULY 11, 1997) FROM THE DATES SET FORTH IN THE
RELATED PURCHASE AGREEMENTS.
(4) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF KCM,
INC. (ACQUIRED NOVEMBER 7, 1995) FROM THE DATE SET FORTH IN THE RELATED
PURCHASE AGREEMENT.
(5) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF TETRA
TECH EM INC., FORMERLY KNOWN AS PRC ENVIRONMENTAL MANAGEMENT, INC.
(ACQUIRED SEPTEMBER 15, 1995) FROM THE DATE SET FORTH IN THE RELATED
PURCHASE AGREEMENT.
(6) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF
SIMONS, LI & ASSOCIATES, INC. (ACQUIRED OCTOBER 4, 1993) AND HYDRO-SEARCH,
INC. (ACQUIRED JUNE 3, 1994) FROM THE DATES SET FORTH IN THE RELATED
PURCHASE AGREEMENTS.
(Concluded)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED BELOW, THE MATTERS
DISCUSSED IN THIS SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER
OF RISKS AND UNCERTAINTIES. OUR ACTUAL LIQUIDITY NEEDS, CAPITAL RESOURCES AND
OPERATING RESULTS MAY DIFFER MATERIALLY FROM THE DISCUSSION SET FORTH BELOW IN
THESE FORWARD-LOOKING STATEMENTS. FOR ADDITIONAL INFORMATION, REFER TO THE NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS.
OVERVIEW
Tetra Tech, Inc. is a leading provider of specialized management consulting
and technical services in three principal business areas: resource management,
infrastructure and communications. As a specialized management consultant, we
assist our clients in defining problems and developing innovative and
cost-effective solutions. Our management consulting services are complemented by
our technical services. These technical services, which implement solutions,
include research and development, applied science, engineering and architectural
design, construction management, and operations and maintenance. Our clients
include a diverse base of public and private organizations located in the United
States and internationally.
Since our initial public offering in December 1991, we increased the size
and scope of our business and have expanded our service offerings through a
series of strategic acquisitions and internal growth. From fiscal 1991 through
fiscal 1998, we generated a net revenue compounded annual growth rate of
approximately 34.2% and achieved a net income compounded annual growth rate of
approximately 36.4%.
We derive our gross revenues from fees from professional services. Our
services are billed under various types of contracts with our clients,
including:
- Fixed-price;
- Fixed-rate time and materials;
- Cost-reimbursement plus fixed fee; and
- Cost-reimbursement plus fixed and award fee.
In the course of providing our services, we routinely subcontract services.
These subcontractor costs are passed through to clients and, in accordance with
industry practice, are included in our gross revenue. Because subcontractor
services can change significantly from project to project, we believe net
revenue, which is gross revenue less the cost of subcontractor services, is a
more appropriate measure of our performance.
Our cost of net revenue includes professional compensation and certain
direct and indirect overhead costs such as rents, utilities and travel.
Professional compensation represents the majority of these costs. Our selling,
general and administrative (SG&A) expenses are comprised primarily of our
corporate headquarters' costs related to the executive offices, corporate
accounting, information technology, marketing, and bid and proposal costs. These
costs are generally unrelated to specific client projects. In addition, we
include amortization of certain intangible assets resulting from acquisitions in
SG&A expenses.
We provide services to a diverse base of Federal, state and local
government agencies, and private and international clients. The following table
presents, for the periods indicated, the approximate percentage of our net
revenue attributable to these client sectors:
<PAGE>
<TABLE>
<CAPTION>
Percentage of Net Revenue
-----------------------------------
Client Fiscal 1998 Fiscal 1997 Fiscal 1996
------ ----------- ----------- -----------
<S> <C> <C> <C>
Federal government................. 48.7% 52.3% 61.7%
State and local government......... 12.7 14.8 16.6
Private............................ 35.4 29.2 20.1
International...................... 3.2 3.7 1.6
----------- ----------- -----------
Total.............................. 100.0% 100.0% 100.0%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
RECENT ACQUISITIONS
As a part of our growth strategy, we expect to pursue complementary
acquisitions to expand our geographical reach and the breadth and depth of our
service offerings. During fiscal 1998, we purchased ten companies in the
following five separate transactions:
- TETRA TECH NUS, INC.- In December 1997, we acquired, through our
wholly-owned subsidiary Tetra Tech NUS, Inc. (NUS), the assets of certain
environmental services businesses of Brown & Root, Inc. and Halliburton
Corporation. The purchase was valued at approximately $25.2 million. NUS is a
nationwide firm providing consulting, engineering and design services for the
environmental remediation of contaminated air, water and soil conditions.
- WHALEN/SENTREX LLC- In March 1998, our wholly-owned subsidiary Whalen
Service Corps Inc. agreed to participate in a partnership with Sentrex Cen-Comm
and ANTEC Corporation. The partnership purchased certain assets from ANTEC
Corporation for a price of approximately $0.6 million. The partnership,
Whalen/Sentrex LLC, a Colorado-based firm, provides nationwide design,
engineering, information management and construction services to support
advanced communication system upgrades to the broadband information transport
industries.
- C.D.C. ENGINEERING, INC.- In March 1998, we acquired C.D.C. Engineering,
Inc. (CDE). The purchase was valued at approximately $1.5 million. CDE, a
California-based consulting and engineering firm, specializes in civil
engineering, transportation engineering, structural engineering and land
surveying.
- MCNAMEE, PORTER & SEELEY, INC.- In July 1998, we acquired McNamee, Porter
& Seeley, Inc. (MPS). The purchase was valued at approximately $14.2 million.
MPS, a Michigan-based firm, provides engineering services throughout the Midwest
with expertise in the areas of water, industrial wastewater and process
controls.
- SENTREX GROUP OF COMPANIES- In September 1998, we acquired, through our
wholly-owned subsidiary, Tetra Tech Canada Ltd., six Canadian corporations that
are collectively referred to as the Sentrex Group of Companies (SGOC). The
purchase was valued at approximately $19.2 million. SGOC provides engineering
and technical services to the cable television, telephony and data networking
industries. As a result of the SGOC acquisition, we now own 100% of
Whalen/Sentrex LLC.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating information as a percentage of net revenue:
<TABLE>
<CAPTION>
Percentage Relationship to Net Revenue
--------------------------------------
Fiscal Year Ended
--------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
------- --------- --------
<S> <C> <C> <C>
Net revenue............................. 100.0% 100.0% 100.0%
Cost of net revenue..................... 75.2 73.9 75.8
------- --------- --------
Gross profit............................ 24.8 26.1 24.2
Selling, general and administrative
expenses............................. 11.4 13.2 13.2
------- --------- --------
Income from operations.................. 13.4 12.9 11.0
Net interest income (expense)........... (0.7) -- (0.5)
------- --------- --------
Income before minority interest and
income tax expense................... 12.7 12.9 10.5
Minority interest....................... (0.5) -- --
------- --------- --------
Income before income tax expense........ 12.2 12.9 10.5
Income tax expense...................... 5.3 5.4 4.2
------- --------- --------
Net income.............................. 6.9% 7.5% 6.3%
------- --------- --------
------- --------- --------
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
NET REVENUE. Net revenue increased $106.8 million, or 56.0%, to $297.6
million in fiscal 1998 from $190.8 million in fiscal 1997. All four client
sectors continued to show net revenue increases in actual dollars. These
increases were attributable to increases in our existing Federal government
contracts, the introduction of new lines of service in our communications
business and to companies acquired in fiscal 1998. As a percentage of net
revenue, increases were realized in the private sector. Net revenue from the
companies acquired in fiscal 1998 totaled $72.0 million. Excluding the net
revenue from these companies, we realized 18.2% growth in our net revenue. Gross
revenue increased $136.2 million, or 55.2%, to $382.9 million in fiscal 1998
from $246.8 million in fiscal 1997. In fiscal 1998, subcontractor costs
comprised 22.3% of gross revenue compared to 22.7% for fiscal 1997.
COST OF NET REVENUE. Cost of net revenue increased $82.9 million, or 58.8%,
to $223.9 million in fiscal 1998 from $141.0 million in fiscal 1997. As a
percentage of net revenue, cost of net revenue increased from 73.9% in fiscal
1997 to 75.2% in fiscal 1998. This increase was primarily attributable to higher
costs of Federal government contracts, as well as costs incurred in connection
with the additional net revenue from the acquired companies. Professional
compensation, the largest component of our cost of net revenue, rose as the
number of our employees increased by 1,400, or 61.9%, to 3,662 in fiscal 1998
from 2,262 in fiscal 1997. Excluding the employees provided from acquired
companies, our number of employees increased by 265, or 11.7%. Gross profit
increased $24.0 million, or 48.1%, to $73.7 million in fiscal 1998 from $49.8
million in fiscal 1997. However, as a percentage of net revenue, gross profit
decreased from 26.1% in fiscal 1997 to 24.8% in fiscal 1998, primarily due to a
change in the relative mix of our Federal government contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $8.7
million, or 34.7%, to $33.9 million in fiscal 1998 from $25.2 million in fiscal
1997. This increase was primarily attributable to additional headquarters' costs
associated with centralizing corporate functions as well as additional
amortization expense relating to acquired companies. As a percentage of net
revenue, SG&A
<PAGE>
expenses decreased from 13.2% in fiscal 1997 to 11.4% in fiscal 1998 due to
operating efficiencies. The amortization expenses related to acquisitions
increased $1.4 million, or 89.1%, to $3.0 million in fiscal 1998 from $1.6
million in fiscal 1997.
NET INTEREST EXPENSE. Net interest expense increased from less than $0.1
million to $1.9 million from fiscal 1997 to fiscal 1998. This increase was
primarily attributable to the financing and working capital needs of certain
acquisitions.
INCOME TAX EXPENSE. Income tax expense increased $5.6 million, or 54.2%, to
$15.9 million in fiscal 1998 from $10.3 million in fiscal 1997. This increase
was due to higher income before income taxes and an increase in our effective
tax rate from 42.0% in fiscal 1997 to 43.6% in fiscal 1998. This increase was
primarily attributable to amortization amounts which were not tax deductible.
FISCAL 1997 COMPARED TO FISCAL 1996
NET REVENUE. Net revenue increased $29.8 million, or 18.5%, to $190.8
million in fiscal 1997 from $161.0 million in fiscal 1996. This increase in net
revenue was primarily attributable to revenue associated with companies acquired
in fiscal 1997 which totaled $24.6 million. Despite the weakened condition of
the environmental industry, which was impacted by the decrease in Federal
government activity, we attained a 3.2% growth in our net revenue, excluding
revenue related to acquired companies. Gross revenue increased $26.7 million, or
12.1%, to $246.8 million in fiscal 1997 from $220.1 million in fiscal 1996. In
fiscal 1997, subcontractor costs were 22.7% of gross revenue, compared to 26.8%
for fiscal 1996. This decrease was due to the nature of the projects undertaken.
COST OF NET REVENUE. Cost of net revenue increased $18.9 million, or 15.5%,
to $141.0 million in fiscal 1997 from $122.1 million in fiscal 1996. This
increase was primarily attributable to costs incurred in connection with the
additional net revenue from the acquired companies. As a percentage of net
revenue, cost of net revenue decreased from 75.8% in fiscal 1996 to 73.9% in
fiscal 1997. Professional compensation, the largest component of our cost of net
revenue, rose as the number of employees increased by 363, or 19.1%, to 2,262 in
fiscal 1997 from 1,899 in fiscal 1996. Excluding the employees provided from
acquired companies, our number of employees remained relatively flat. Gross
profit increased $10.8 million, or 27.8%, to $49.8 million in fiscal 1997 from
$39.0 million in fiscal 1996, primarily due to efficiencies in operations,
acquisitions and higher profit margins realized in the acquired businesses in
the communications industry.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $4.0
million, or 18.6%, to $25.2 million in fiscal 1997 from $21.2 million in fiscal
1996. However, as a percentage of net revenue, SG&A expenses remained flat at
13.2% for fiscal 1997. The amortization of intangible assets relating to
acquisitions increased $0.4 million, or 29.8%, to $1.6 million in fiscal 1997
from $1.2 million in fiscal 1996.
NET INTEREST EXPENSE. Net interest expense decreased $0.8 million to less
than $0.1 million in fiscal 1997 due to the reduction of the average outstanding
borrowings from fiscal 1996 to fiscal 1997.
INCOME TAX EXPENSE. Income tax expense increased $3.4 million, or 50.6%, to
$10.3 million in fiscal 1997 from $6.9 million in fiscal 1996. Our effective tax
rate increased from 40.4% in fiscal 1996 to 42.0% in fiscal 1997. This increase
was primarily attributable to amortization amounts which were not tax
deductible.
<PAGE>
UNAUDITED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly operating
results for each of our last three fiscal years ended September 29, 1996,
September 28, 1997 and October 4, 1998. This data is also expressed as a
percentage of net revenue for the respective quarters. The information has been
derived from unaudited consolidated financial statements that, in our opinion,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such quarterly information. The operating
results for any quarter are not necessarily indicative of the results to be
expected for any future period.
<TABLE>
<CAPTION>
Fiscal 1996 Quarter Ended Fiscal 1997 Quarter Ended
-------------------------------------- --------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sep. 29, Dec. 29, Mar. 30, Jun. 29, Sep. 28,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue $ 38,023 $ 40,076 $ 40,314 $ 42,624 $ 40,423 $ 43,914 $ 48,621 $ 57,833
Cost of net revenue 29,483 30,676 30,479 31,446 31,051 33,367 35,660 40,941
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 8,540 9,400 9,835 11,178 9,372 10,547 12,961 16,892
Selling, general and
administrative expenses 4,810 5,281 5,329 5,798 4,979 5,655 6,754 7,785
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 3,730 4,119 4,506 5,380 4,393 4,892 6,207 9,107
Net interest income (expense) (348) (291) (131) (6) 49 31 4 (104)
-------- -------- -------- -------- -------- -------- -------- --------
Income before minority interest
and income tax expense 3,382 3,828 4,375 5,374 4,442 4,923 6,211 9,003
Minority interest -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
tax expense 3,382 3,828 4,375 5,374 4,442 4,923 6,211 9,003
Income tax expense 1,353 1,531 1,750 2,220 1,846 2,051 2,567 3,859
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 2,029 $ 2,297 $ 2,625 $ 3,154 $ 2,596 $ 2,872 $ 3,644 $ 5,144
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Fiscal 1998 Quarter Ended
--------------------------------------
Dec. 28, Mar. 29, Jun. 28, Oct. 4,
1997 1998 1998 1998
-------- -------- -------- --------
(in thousands)
Net revenue $ 53,664 $ 71,806 $ 75,149 $ 96,978
Cost of net revenue 40,339 54,786 54,405 74,341
-------- -------- -------- --------
Gross profit 13,325 17,020 20,744 22,637
Selling, general and
administrative expenses 6,146 8,148 9,333 10,286
-------- -------- -------- --------
Income from operations 7,179 8,872 11,411 12,351
Net interest income (expense) (73) (596) (510) (731)
-------- -------- -------- --------
Income before minority interest
and income tax expense 7,106 8,276 10,901 11,620
Minority interest -- 203 1,194 --
-------- -------- -------- --------
Income before income
tax expense 7,106 8,073 9,707 11,620
Income tax expense 3,055 3,552 4,214 5,099
-------- -------- -------- --------
Net income $ 4,051 $ 4,521 $ 5,493 $ 6,521
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1996 Quarter Ended Fiscal 1997 Quarter Ended
-------------------------------------- --------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sep. 29, Dec. 29, Mar. 30, Jun. 29, Sep. 28,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 77.5 76.5 75.6 73.8 76.8 76.0 73.3 70.8
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 22.5 23.5 24.4 26.2 23.2 24.0 26.7 29.2
Selling, general and
administrative expenses 12.7 13.2 13.2 13.6 12.3 12.9 13.9 13.5
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 9.8 10.3 11.2 12.6 10.9 11.1 12.8 15.7
Net interest income (expense) (0.9) (0.7) (0.3) -- 0.1 0.1 -- (0.2)
-------- -------- -------- -------- -------- -------- -------- --------
Income before minority interest
and income tax expense 8.9 9.6 10.9 12.6 11.0 11.2 12.8 15.6
Minority interest -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
tax expense 8.9 9.6 10.9 12.6 11.0 11.2 12.8 15.6
Income tax expense 3.6 3.8 4.3 5.2 4.6 4.7 5.3 6.7
-------- -------- -------- -------- -------- -------- -------- --------
Net income 5.3% 5.7% 6.5% 7.4% 6.4% 6.5% 7.5% 8.9%
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Fiscal 1998 Quarter Ended
--------------------------------------
Dec. 28, Mar. 29, Jun. 28, Oct. 4,
1997 1998 1998 1998
-------- -------- -------- --------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 75.2 76.3 72.4 76.7
-------- -------- -------- --------
Gross profit 24.8 23.7 27.6 23.3
Selling, general and
administrative expenses 11.5 11.3 12.4 10.6
-------- -------- -------- --------
Income from operations 13.4 12.4 15.2 12.7
Net interest income (expense) (0.1) (0.8) (0.7) (0.8)
-------- -------- -------- --------
Income before minority interest
and income tax expense 13.2 11.5 14.5 12.0
Minority interest -- 0.3 1.6 --
-------- -------- -------- --------
Income before income
tax expense 13.2 11.2 12.9 12.0
Income tax expense 5.7 4.9 5.6 5.3
-------- -------- -------- --------
Net income 7.5% 6.3% 7.3% 6.7%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Our revenues and operating results fluctuate from quarter to quarter as a
result of a number of factors, such as: (1) the seasonality of the spending
cycle of our public sector clients, notably the Federal government; (2) employee
hiring and utilization rates; (3) the number and significance of client
engagements commenced and completed during a quarter; (4) delays incurred in
connection with an engagement; (5) the ability of clients to terminate
engagements without penalties; (6) the size and scope
<PAGE>
of engagements; (7) the timing and size of the return on investment capital; and
(8) general economic and political conditions. Variations in any of these
factors can cause significant variations in operating results from quarter to
quarter and could result in losses.
LIQUIDITY AND CAPITAL RESOURCES
We expect that internally generated funds, our existing cash balances,
and availability under the Credit Agreement will be sufficient to meet our
capital requirements through the end of fiscal 1999.
As of October 4, 1998, our working capital was $77.0 million, an
increase of $34.5 million from $42.5 million on September 28, 1997, of which
cash and cash equivalents totaled $4.9 million. In fiscal 1998, we augmented
cash used in operations with borrowings under our credit facility. In fiscal
1998, $6.6 million was used in operating activities and $41.3 million was
used in investing activities, of which $37.8 million was related to business
acquisitions. In fiscal 1997, we generated $1.1 million from operating
activities and used $3.8 million in investing activities, of which $1.2
million was related to business acquisitions. The decreases in cash provided
from operating activities in fiscal 1998 and fiscal 1997 primarily resulted
from the payment of liabilities assumed in connection with the fiscal 1998
acquisitions of approximately $6.4 million, as well as the acquisitions of
Whalen & Company, Inc. in fiscal 1997 and McNamee, Porter & Seeley, Inc. in
fiscal 1998. In these acquisitions we agreed that we would not acquire the
accounts receivable. As a result, we experienced a lag in cash flow to fund
the business' operations. As an ongoing effort, we attempt to increase our
efficiencies in the timing of billings and the collection of receivables. Our
capital expenditures during fiscal years 1998, 1997, and 1996 were
approximately $3.5 million, $2.6 million and $2.4 million, respectively. The
expenditures were primarily for computer equipment, leasehold improvements
and office expansion.
We have a credit agreement with a bank (the "Credit Agreement") which, as
of October 4, 1998, provided us with a revolving credit facility (the
"Facility") of $70.0 million. The Credit Agreement provides for mandatory
reductions of $5.0 million on December 15, 1998 and December 15, 1999. We
amended the Credit Agreement during fiscal 1998 in order to accommodate the
fiscal 1998 acquisitions, as well as to position ourselves to pursue future
acquisitions. The Facility matures on December 15, 2000 or earlier at our
discretion upon payment in full of loans and other obligations. Throughout
fiscal 1998, maximum borrowings under the Facility were $49.0 million. At
October 4, 1998, borrowings and standby letters of credit totaled $47.0 million
and $2.2 million, respectively.
We continuously evaluate the marketplace for strategic acquisition
opportunities. Once an opportunity is identified, we examine the effect an
acquisition may have on the business environment, as well as on our results of
operations. We proceed with an acquisition if we determine that the acquisition
is anticipated to have an accretive effect on future operations. However, as
successful integration and implementation are essential to achieve favorable
results, no assurances can be given that all acquisitions will provide accretive
results. Our strategy is to position ourselves to address existing and emerging
markets. We view acquisitions as a key component of our growth strategy, and we
intend to use both cash and our securities, as we deem appropriate, to fund such
acquisitions.
We believe our operations have not been and, in the foreseeable future, we
do not expect to be materially adversely affected by inflation or changing
prices.
RECENTLY ISSUED FINANCIAL STANDARDS
<PAGE>
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, EARNINGS PER SHARE,
which we adopted in fiscal year 1998. The Statement replaces the presentation of
primary EPS with a presentation of basic EPS, which excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. The Statement also
requires the dual presentation of basic and diluted EPS on the face of the
income statement for all companies with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. EPS has
been retroactively restated to reflect the requirements of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
The Statement is effective for fiscal years beginning after December 15, 1997.
The Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. The Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. We will adopt this Statement
in fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. The Statement is effective for fiscal
years beginning after December 15, 1997. The Statement establishes standards for
the way that public business enterprises report information about operating
segments as well as related disclosures about products and services, geographic
areas, and major clients. The Statement also requires that a public business
report descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. The Statement need
not be applied to interim financial statements in the initial year of its
application. We have not completed our analysis of the effect of SFAS No. 131 on
our financial statements. We will adopt this Statement in fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES AND
HEDGING ACTIVITIES. The Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Statement requires companies to
recognize all derivative instruments on their balance sheet as either assets or
liabilities measured at fair value. The Statement also specifies a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. We will adopt this Statement in fiscal year 2001.
MARKET RISKS
We currently utilize no material derivative financial instruments which expose
us to significant market risk. We are exposed to cash flow risk due to interest
rate fluctuations with respect to our long-term debt. At our option, we borrow
on our Facility (a) at a base rate (the greater of the federal funds rate plus
0.50% or the bank's reference rate) or (b) at a eurodollar rate plus a margin
which ranges from 0.75% to 1.25%. Borrowings at the base rate have no designated
term and may be repaid without penalty anytime prior to the Facility's maturity
date. Borrowings at a eurodollar rate have a term no less than 30 days and no
greater than 90 days. Typically, at the end of such term, such borrowings may be
rolled over at our discretion into either a borrowing at the base rate or a
borrowing at a eurodollar rate with similar terms, not to exceed the maturity
date of the Facility. The Facility matures on December 15, 2000 or earlier at
<PAGE>
our discretion upon payment in full of loans and other obligations. Accordingly,
we classify total outstanding debt between current liabilities and long-term
debt based on anticipated payments within and beyond one year's period of time.
We presently anticipate repaying our long-term debt in the amounts of
$14,065,000, $15,546,000 and $18,000,000 in fiscal 1999, 2000 and 2001,
respectively. Assuming we pay our long-term debt in such amounts ratably
throughout the year, and our average interest rate on our long-term debt
increases or decreases by one percentage point, our interest expense would
increase or decrease by $406,000, $258,000 and $90,000 in fiscal 1999, 2000 and
2001, respectively. However, there can be no assurance that the Company will, or
will be able to, repay its long-term debt in the manner described. For example,
we could incur additional debt under this credit facility or our operating
results could be worse than we expect.
YEAR 2000
We are working to resolve the potential impact of the year 2000 on our
business operations and the ability of our computerized information systems to
accurately process information that may be date-sensitive. Any of our programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures.
We utilize a number of computer programs across our entire operation. The
primary information technology (IT) systems we utilize are (1) the accounting
and financial systems which include general ledger, accounts payable, accounts
receivable, billing and collection, fixed assets, job cost accounting and
payroll, and (2) human resource information management systems. We do not
believe we have a material amount of non-IT systems on which we rely.
We have established both a year 2000 review committee and a year 2000
action team. The purpose of the review committee is to develop and communicate
our year 2000 plan to achieve our year 2000 compliance mission. The purpose of
the action team is to identify, remediate and implement plans to resolve our
year 2000 related issues. Through the review committee and the action team, we
are in the process of completing our full assessment of all issues relating to
the year 2000. We have developed questionnaires regarding year 2000 readiness to
be used internally and externally. We have completed our internal assessment and
we are in the process of assessing the year 2000 issues of our clients and
vendors. Based on the information collected to date, we do not believe that the
cost of addressing our year 2000 issues will have a material adverse impact on
our financial position. We plan to devote all resources required to resolve any
significant year 2000 issues in a timely manner.
STATE OF READINESS
We began our risk assessment in 1995. Since that time we have procured and
implemented certain accounting and financial reporting systems as well as
contract administration and billing systems that have been certified as year
2000 compliant by our vendors. Currently, approximately 72% of our gross revenue
is recognized on these year 2000 compliant systems. We have successfully
converted 7 of our 18 operating units to these year 2000 compliant systems. We
are planning to convert four additional operating units by July 1999. The
operating units that will not be converted to the systems currently in place are
in the process of upgrading their existing systems to a year 2000 compliant
version or will procure and implement a year 2000 compliant software. In all
cases, we believe that our financial and accounting systems will be year 2000
compliant in a timely manner and will not be materially impacted by the year
2000.
We are currently installing a year 2000 compliant human resource
information management system. Ten operating units including our corporate units
will be supported by this system. The
<PAGE>
anticipated completion date is April 1999. We plan to convert the remaining
operating units following April 1999. In all cases, we believe that our human
resource management information systems will be year 2000 compliant in a timely
manner and will not be materially impacted by the year 2000.
We have expended or obligated approximately $2.6 million on the procurement
of these systems, the conversion of data from legacy systems to these systems,
and on the implementation and testing of these systems.
We have extensive business with the Federal government. Should the Federal
government, specifically the Department of Defense, experience significant
business interruptions relating to non-year 2000 compliance, we could be
materially impacted. To the extent that other third parties upon which we rely,
such as banking institutions, clients and vendors, are unable to address their
year 2000 issues in a timely manner, we could be materially impacted. We believe
that the worst case scenario relating to the year 2000 would be an extensive
period of time in which the Federal government and other third parties could not
process payments promptly.
RISKS
We believe the risks associated with non-year 2000 compliance include: (1)
our inability to invoice and process payments, (2) our inability to produce
accurate and timely financials, (3) the impact on our cash flow and working
capital needs, (4) the impact on our profitability, and (5) our liability to
third parties for not meeting contracted deliverables.
CONTINGENCY PLANS
We currently do not have formal contingency plans for the failure of our
financial and accounting systems. We have substantial experience in the
conversion process from multiple legacy systems to our current year 2000
certified systems. We have an experienced and dedicated staff to perform the
functions identified and are reasonably confident that the projected conversions
will be accomplished as projected.
We currently do not have formal contingency plans for the failure of our
human resource information management system. Our implementation strategy is to
install the system as simply as possible, with little customization. Our vendor
supports our implementation strategy and has agreed to a financial penalty if
the implementation is not achieved within three months, or by April 1999. If the
implementation is not achieved by April 1999, we believe there will still be
sufficient time to meet the year 2000 deadline.
We maintain, as a matter of policy and practice, mitigation plans in the
event of systems failure which includes regular backup of historical
information.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Tetra Tech, Inc.:
We have audited the accompanying consolidated balance sheets of Tetra Tech,
Inc. and its subsidiaries as of October 4, 1998 and September 28, 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended October 4, 1998. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tetra Tech, Inc. and its
subsidiaries as of October 4, 1998 and September 28, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended October 4, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
November 13, 1998
<PAGE>
TETRA TECH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Oct. 4, Sept. 28,
1998 1997
---------------- ----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents..................................... $ 4,889,000 $ 12,262,000
Accounts receivable - net..................................... 68,834,000 30,089,000
Unbilled receivables - net.................................... 59,888,000 35,145,000
Prepaid and other current assets.............................. 4,955,000 2,522,000
Deferred income taxes......................................... 3,766,000 867,000
--------------- --------------
Total Current Assets....................................... 142,332,000 80,885,000
--------------- --------------
Property and Equipment:
Equipment, furniture and fixtures............................. 25,616,000 16,838,000
Leasehold improvements........................................ 1,348,000 1,177,000
--------------- --------------
Total...................................................... 26,964,000 18,015,000
Accumulated depreciation and amortization..................... (13,219,000) (9,592,000)
--------------- --------------
Property and Equipment - Net...................................... 13,745,000 8,423,000
--------------- --------------
Intangible Assets - Net........................................... 108,638,000 69,439,000
Other Assets...................................................... 1,895,000 766,000
--------------- --------------
Total Assets...................................................... $ 266,610,000 $ 159,513,000
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................................. $ 24,027,000 $ 11,621,000
Accrued compensation.......................................... 15,614,000 10,981,000
Other current liabilities..................................... 8,283,000 6,386,000
Income taxes payable.......................................... 3,294,000 1,358,000
Current portion of long-term obligations...................... 14,065,000 8,000,000
--------------- --------------
Total Current Liabilities.................................. 65,283,000 38,346,000
--------------- --------------
Long-term Obligations............................................. 33,546,000 --
--------------- --------------
Commitments and Contingencies (Notes 9 and 11)
Redeemable Preferred Stock........................................ -- 13,526,000
--------------- --------------
Stockholders' Equity:
Preferred stock - authorized, 2,000,000 shares of $.01 par value;
issued and outstanding 0 at October 4, 1998 and 1,231,840 at
September 28, 1997.......................................... -- --
Exchangeable stock of a subsidiary............................ 15,411,000 --
Common stock - authorized, 50,000,000 shares of $.01 par
value; issued and outstanding 28,630,600 at October 4, 1998
and 25,892,818 shares at September 28, 1997................. 287,000 259,000
Additional paid-in capital.................................... 87,565,000 63,450,000
Retained earnings............................................. 64,518,000 43,932,000
--------------- --------------
Total Stockholders' Equity........................................ 167,781,000 107,641,000
--------------- --------------
Total Liabilities and Stockholders' Equity........................ $ 266,610,000 $ 159,513,000
--------------- --------------
--------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenue:
Gross revenue................................. $ 382,934,000 $ 246,767,000 $ 220,099,000
Subcontractor costs........................... 85,337,000 55,976,000 59,062,000
---------------- ---------------- --------------
Net Revenue........................................ 297,597,000 190,791,000 161,037,000
Cost of Net Revenue................................ 223,871,000 141,019,000 122,084,000
---------------- ---------------- --------------
Gross Profit....................................... 73,726,000 49,772,000 38,953,000
Selling, General and Administrative Expenses....... 33,913,000 25,173,000 21,218,000
---------------- ---------------- --------------
Income From Operations............................. 39,813,000 24,599,000 17,735,000
Interest Expense................................... 2,329,000 320,000 1,076,000
Interest Income.................................... 419,000 300,000 300,000
---------------- ---------------- --------------
Income Before Minority Interest and Income
Tax Expense..................................... 37,903,000 24,579,000 16,959,000
Minority Interest.................................. 1,397,000 -- --
---------------- ---------------- --------------
Income Before Income Tax Expense................... 36,506,000 24,579,000 16,959,000
Income Tax Expense................................. 15,920,000 10,323,000 6,854,000
---------------- ---------------- --------------
Net Income......................................... $ 20,586,000 $ 14,256,000 $ 10,105,000
---------------- ---------------- --------------
---------------- ---------------- --------------
Basic Earnings Per Share........................... $ 0.74 $ 0.61 $ 0.46
---------------- ---------------- --------------
---------------- ---------------- --------------
Diluted Earnings Per Share......................... $ 0.71 $ 0.58 $ 0.45
---------------- ---------------- --------------
---------------- ---------------- --------------
Weighted Average Common Shares Outstanding:
Basic........................................ 27,970,000 23,371,000 21,851,000
---------------- ---------------- --------------
---------------- ---------------- --------------
Diluted...................................... 29,191,000 24,656,000 22,581,000
---------------- ---------------- --------------
---------------- ---------------- --------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED SEPTEMBER 29, 1996, SEPTEMBER 28, 1997 AND OCTOBER 4, 1998
<TABLE>
<CAPTION>
EXCHANGEABLE STOCK COMMON STOCK ADDITIONAL
------------------------- ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 1, 1995
as previously reported.............. -- $ -- 16,544,136 $ 165,000 $ 21,760,000 $ 19,571,000 $ 41,496,000
Five-for-four common stock
split (see Note 7)............. 4,136,034 42,000 (42,000)
----------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 1995 -- -- 20,680,170 207,000 21,718,000 19,571,000 41,496,000
Net income....................... 10,105,000 10,105,000
Payment for fractional shares.... (264) (3,000) (3,000)
Shares issued in acquisition.... 1,234,744 12,000 10,301,000 10,313,000
Stock options exercised.......... 158,790 2,000 682,000 684,000
Tax benefit for disqualifying
dispositions of stock options.. 674,000 674,000
----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 29, 1996 -- -- 22,073,440 221,000 33,372,000 29,676,000 63,269,000
Net income....................... 14,256,000 14,256,000
Shares issued in acquisitions.... 3,439,330 34,000 27,016,000 27,050,000
Stock options exercised.......... 225,949 2,000 1,308,000 1,310,000
Shares issued in Employee Stock
Purchase Plan.................. 154,099 2,000 1,280,000 1,282,000
Tax benefit for disqualifying
dispositions of stock options.. 474,000 474,000
----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28, 1997 -- -- 25,892,818 259,000 63,450,000 43,932,000 107,641,000
Net income....................... 20,586,000 20,586,000
Shares issued in acquisitions.... 345,948 4,000 5,520,000 5,524,000
Stock options exercised.......... 352,265 4,000 2,613,000 2,617,000
Payment for fractional shares.... (726) (7,000) (7,000)
Shares issued in Employee Stock
Purchase Plan.................. 115,545 1,000 1,505,000 1,506,000
Preferred shares converted to
common stock................... 1,924,750 19,000 13,507,000 13,526,000
Exchangeable shares of a subsidiary
issued in acquisitions......... 920,354 15,411,000 15,411,000
Tax benefit for disqualifying
dispositions of stock options. 977,000 977,000
----------------------------------------------------------------------------------------
BALANCE, OCTOBER 4, 1998 920,354 $15,411,000 28,630,600 $ 287,000 $ 87,565,000 $ 64,518,000 $167,781,000
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 20,586,000 $ 14,256,000 $ 10,105,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 6,595,000 4,514,000 3,613,000
Deferred income taxes.................................... (2,899,000) 1,490,000 (519,000)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable...................................... (23,561,000) (3,776,000) 18,043,000
Unbilled receivables..................................... (11,537,000) (8,037,000) (5,916,000)
Prepaid and other current assets......................... (1,375,000) 1,823,000 246,000
Accounts payable......................................... 10,203,000 (3,551,000) (4,080,000)
Accrued compensation..................................... (32,000) (3,909,000) (1,431,000)
Other current liabilities................................ (6,548,000) (1,412,000) (192,000)
Income taxes payable..................................... 1,948,000 (254,000) 1,255,000
------------ ------------ ------------
Net Cash (Used In) Provided By Operating Activities.. (6,620,000) 1,144,000 21,124,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... (3,511,000) (2,640,000) (2,385,000)
Proceeds from sale of property and equipment.................. -- 44,000 71,000
Payments for business acquisitions, net of cash acquired...... (37,778,000) (1,237,000) (6,441,000)
------------ ------------ ------------
Net Cash Used In Investing Activities................ (41,289,000) (3,833,000) (8,755,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations............................. (39,580,000) (6,797,000) (25,048,000)
Proceeds from issuance of long-term obligations............... 76,000,000 13,000,000 5,003,000
Payments on obligations under capital leases.................. -- -- (6,000)
Proceeds from issuance of common stock........................ 4,116,000 2,619,000 681,000
------------ ------------ ------------
Net Cash Provided By (Used In) Financing Activities.. 40,536,000 8,822,000 (19,370,000)
------------ ------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents............. (7,373,000) 6,133,000 (7,001,000)
Cash and Cash Equivalents at Beginning of Year................... 12,262,000 6,129,000 13,130,000
------------ ------------ ------------
Cash and Cash Equivalents at End of Year......................... $ 4,889,000 $ 12,262,000 $ 6,129,000
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................... $ 2,129,000 $ 309,000 $ 1,149,000
------------ ------------ ------------
------------ ------------ ------------
Income taxes............................................... $ 17,195,000 $ 9,407,000 $ 6,123,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
---------------- --------------- ------------
<S> <C> <C> <C>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
In fiscal 1998, the Company purchased all of the capital stock of C.D.C.
Engineering, Inc., McNamee, Porter & Seeley, Inc. and the Sentrex
Group of Companies. The Company also purchased certain assets of
Brown & Root, Inc. and Halliburton Corporation. In conjunction with
these acquisitions, liabilities were assumed as follows:
Fair value of assets acquired.......................................... $ 79,639,000
Cash paid.............................................................. (37,778,000)
Issuance of common and exchangeable stock.............................. (20,935,000)
Other acquisition costs................................................ (985,000)
------------
Liabilities assumed................................................ $ 19,941,000
------------
------------
In fiscal 1997, the Company purchased all of the capital stock of IWA
Engineers, FLO Engineering, Inc., SCM Consultants, Inc., Whalen &
Company, Inc., Whalen Service Corps Inc. and CommSite Development
Corporation. In conjunction with these acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired........................................... $ 66,386,000
Cash paid.............................................................. (8,811,000)
Purchase price payable................................................. (729,000)
Issuance of common and preferred stock................................. (40,577,000)
Other acquisition costs................................................ (2,111,000)
------------
Liabilities assumed................................................ $ 14,158,000
------------
------------
In fiscal 1996, the Company purchased all of the capital stock of KCM,
Inc. In conjunction with this acquisition, liabilities were assumed
as follows:
Fair value of assets acquired.......................................... $ 20,393,000
Cash paid.............................................................. (2,645,000)
Issuance of common stock............................................... (10,313,000)
Other acquisition costs................................................ (415,000)
------------
Liabilities assumed................................................ $ 7,020,000
------------
------------
</TABLE>
(Concluded)
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 4, 1998,
SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Tetra Tech, Inc. (the "Company") provides specialized management
consulting and technical services in three principal business areas: resource
management, infrastructure and communications. The Company's management
consulting services are complemented by its technical services. These technical
services, which implement solutions, include research and development, applied
science, engineering and architectural design, construction management, and
operations and maintenance.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
FISCAL YEAR - The Company reports results of operations based on 52- or
53-week periods ending near September 30. Fiscal year 1998 contained 53 weeks.
Fiscal years 1997 and 1996 contained 52 weeks.
CONTRACT REVENUE AND COSTS - In the course of providing its services, the
Company routinely subcontracts for services. These costs are passed through to
clients and, in accordance with industry practice, are included in the Company's
gross revenue. Because subcontractor services can change significantly from
project to project, changes in gross revenue may not be indicative of business
trends. Accordingly, the Company also reports net revenue, which is gross
revenue less the cost of subcontractor services. Contract revenues and contract
costs on both cost-type and fixed-price-type contracts are recorded using the
percentage-of-completion (cost-to-cost) method. Under this method, contract
revenue on long-term contracts are recognized in the ratio that contract costs
incurred bear to total estimated costs. Costs and income on long-term contracts
are subject to revision throughout the lives of the contracts and any required
adjustments are made in the period in which the revisions become known. Losses
on contracts are recorded in full as they are identified.
Selling, general and administrative costs are expensed in the period
incurred.
Contract revenue under Federal government contracts and subcontracts
accounted for approximately 48.7%, 52.3% and 61.7%, of net contract revenue for
the years ended October 4, 1998, September 28, 1997 and September 29, 1996,
respectively.
CASH AND CASH EQUIVALENTS - Cash equivalents include all investments with
initial maturities of 90 days or less.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost and
are depreciated over their estimated useful lives using the straight-line
method. Expenditures for maintenance and repairs are expensed as incurred.
<PAGE>
Generally, estimated useful lives range from three to ten years for
equipment, furniture and fixtures. Leasehold improvements are amortized on a
straight-line basis over the shorter of their estimated useful lives or the
remaining terms of the leases.
LONG-LIVED ASSETS - The Company reviews the recoverability of long-lived
assets to determine if there has been any impairment. This assessment is
performed based on the estimated undiscounted cash flows compared with the
carrying value of the assets. If the future cash flows (undiscounted and
without interest charges) are less than the carrying value, a writedown would
be recorded to reduce the related asset to its estimated fair value.
Long-lived assets as of October 4, 1998 and September 28, 1997 consist
principally of goodwill resulting from business acquisitions which is being
amortized over periods ranging from 15 to 30 years. The accumulated
amortization of intangible assets as of October 4, 1998 and September 28,
1997 was $6,490,000 and $3,522,000, respectively.
INCOME TAXES - The Company files a consolidated federal income tax return
and combined California franchise tax reports, as well as other returns which
are required in the states in which the Company does business, which include the
Company and its subsidiaries. Income taxes are recognized for (a) the amount of
taxes payable or refundable for the current period, and (b) deferred income tax
assets and liabilities for the future tax consequences of events that have been
recognized in the Company's financial statements or income tax returns. The
effects of income taxes are measured based on enacted tax laws and rates.
EARNINGS PER SHARE - Due to the Company's complex capital structure, the
Company presents both basic and diluted Earnings Per Share (EPS). Basic EPS
excludes dilution and is computed by dividing the income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing net income by the weighted average
number of common shares outstanding and dilutive potential common shares. The
Company includes as potential common shares the weighted average number of
shares of exchangeable stock of a subsidiary, the weighted average number of
shares of redeemable preferred stock and the weighted average dilutive effects
of outstanding stock options. The exchangeable stock of a subsidiary is
non-voting and is exchangeable share for share for the Company's common stock.
The redeemable preferred stock has voting and dividend rights substantially
similar to those of common. The redeemable preferred stock outstanding at
September 28, 1997 was converted to common stock during the fiscal year ended
October 4, 1998. Basic and diluted EPS reflect, on a retroactive basis, a
5-for-4 stock split effected in the form of a 25% stock dividend, wherein one
additional share of stock was issued on September 15, 1998 for each four shares
outstanding as of the record date of July 27, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, UNBILLED RECEIVABLES
AND ACCOUNTS PAYABLE- The carrying amounts approximate fair value
because of the short maturities of these instruments.
REVOLVING CREDIT FACILITY - The carrying amount approximates fair
value because the interest rates are based upon variable reference
rates.
CONCENTRATION OF CREDIT RISK - Financial instruments which subject the
Company to credit risk consist primarily of temporary cash investments and
accounts receivable. The Company places its temporary cash investments with high
credit quality financial institutions and, by policy, limits the amount of
investment exposure to any one financial institution. As of October 4, 1998,
approximately 44% of accounts receivable was due from various agencies of the
Federal government. The remaining accounts receivable are generally diversified
due to the large number of organizations comprising the
<PAGE>
Company's customer base and their geographic dispersion. The Company performs
ongoing credit evaluations of its clients and maintains an allowance for
potential credit losses.
USE OF ESTIMATES - 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial Acounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 128, EARNINGS PER SHARE, which the Company adopted in fiscal year 1998. The
Statement replaces the presentation of primary EPS with a presentation of basic
EPS, which excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. The Statement also requires the dual presentation of basic and
diluted EPS on the face of the income statement for all companies with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Diluted EPS is computed similarly to fully diluted EPS
pursuant to APB Opinion No. 15. EPS has been retroactively restated to reflect
the requirements of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
The Statement is effective for fiscal years beginning after December 15, 1997.
The Statement establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company will adopt this
Statement in fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED Information. The Statement is effective for fiscal
years beginning after December 15, 1997. The Statement establishes standards for
the way that public business enterprises report information about operating
segments as well as related disclosures about products and services, geographic
areas, and major clients. The Statement also requires that a public business
report descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. The Statement need
not be applied to interim financial statements in the initial year of its
application. The Company has not yet completed its analysis of the effect of
SFAS No. 131 on its financial statements. The Company will adopt this Statement
in fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES AND
HEDGING ACTIVITIES. The Statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. The Statement requires companies to
recognize all derivative instruments on their balance sheet as either assets or
liabilities measured at fair value. The Statement also specifies a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. The Company does not anticipate that the adoption
of SFAS No. 133 will have a material effect on the Company's financial
statements. The Company will adopt this Statement in fiscal year 2001.
2. MERGERS AND ACQUISITIONS
<PAGE>
On September 22, 1998, the Company acquired, through its wholly-owned
subsidiary Tetra Tech Canada Ltd. (TtC), 100% of the capital stock of 1056584
Ontario Limited, 1056585 Ontario Limited, Venture Cable Limited, Cen-Comm
Communications, Inc., Sentrex Electronics Inc. and LAL Corp., collectively, the
Sentrex Group of Companies (SGOC), providers of engineering and technical
services to the cable television, telephony and data networking industries. The
purchase has been valued at approximately $19,227,000 consisting of cash and
920,354 shares of TtC exchangeable stock. The TtC exchangeable stock is
exchangeable, share for share, for Company common stock as described in the
related purchase agreement.
On July 8, 1998, the Company acquired 100% of the capital stock of McNamee,
Porter & Seeley, Inc. (MPS), a provider of engineering services with expertise
in the areas of water, industrial wastewater and process controls. The purchase
was valued at approximately $14,247,000 consisting of cash and 274,888 shares of
Company common stock. Simultaneously with the acquisition, MPS distributed to
its former stockholders accounts receivable having a net value of $8,040,000.
On March 26, 1998, the Company acquired 100% of the capital stock of C.D.C.
Engineering, Inc. (CDE), a consulting and engineering firm specializing in civil
engineering, transportation engineering, structural engineering and land
surveying. The purchase has been valued at approximately $1,502,000, consisting
of cash and 71,060 shares of Company common stock.
On March 2, 1998, Whalen Service Corps Inc. (WSC) agreed to participate in
a partnership with Sentrex Cen-Comm and ANTEC Corporation to provide design,
engineering, information management and construction services to support
advanced communication system upgrades to the broadband information transport
industries. The agreement required the purchase of certain assets of TANCO LLC
from ANTEC Corporation for a price in cash of approximately $623,000. WSC
initially held a 51% majority interest in Whalen/Sentrex LLC, a California
limited liability company while LAL Corp. held the remaining 49% minority
interest. Upon completion of the SGOC acquisition, the Company beneficially owns
100% of Whalen/Sentrex LLC.
On December 31, 1997, the Company acquired, through its wholly-owned
subsidiary Tetra Tech NUS, Inc., the assets of certain environmental services
businesses of Brown & Root, Inc. and Halliburton Corporation, both of which are
subsidiaries of Halliburton Company (collectively, NUS). NUS provides
consulting, engineering and design services for the environmental remediation of
contaminated air, water and soil conditions. The purchase price has been valued
at approximately $25,217,000, as adjusted, and consisted of cash.
On July 11, 1997, the Company acquired 100% of the capital stock of
CommSite Development Corporation (CDC), a wireless telecommunications site
development service firm. The purchase has been valued at approximately
$5,702,000 consisting of cash and 397,598 shares of Company common stock, as
adjusted based on CDC's Net Asset Value on July 11, 1997 as described in the
related purchase agreement.
On June 11, 1997, the Company acquired 100% of the capital stock of Whalen
& Company, Inc. and Whalen Service Corps Inc. (collectively, WAC). WAC, a
wireless telecommunications firm, provides a full range of wireless
telecommunications site development services for PCS, cellular, ESMR,
air-to-ground, microwave, paging, fiber optic and switching centers technology.
The purchase has been valued at approximately $41,738,000 consisting of cash and
4,549,750 shares of Company common stock. Initially, the Company issued
1,231,840 shares of redeemable preferred stock. The shares of redeemable
preferred stock were subsequently converted into common stock prior to the stock
split which occurred on December 1, 1997. The common and preferred stock were
issued in a private placement and had a combined value of
<PAGE>
$31,972,000. On the business day prior to the merger, WAC distributed to its
stockholders (i) cash in the amount of $4,138,000 and (ii) accounts receivable
having a net value of $18,456,000.
On March 20, 1997, the Company acquired 100% of the capital stock of SCM
Consultants, Inc. (SCM), a consulting and engineering firm providing design of
irrigation, water and wastewater systems, as well as facility and infrastructure
engineering services, to state and local government, private and industrial
clients. The purchase was valued at approximately $2,431,000, consisting of cash
and 246,965 shares of Company common stock, as adjusted based upon SCM's Net
Asset Value on March 30, 1997 as described in the related purchase agreement.
On December 18, 1996, the Company acquired 100% of the capital stock of FLO
Engineering, Inc. (FLO), a consulting and engineering firm specializing in water
resource engineering involving hydraulic engineering and hydrographic data
collection. The purchase was valued at approximately $724,000, consisting of
cash and 50,172 shares of Company common stock, as adjusted based upon FLO's Net
Asset Value on December 29, 1996 as described in the related purchase agreement.
On December 11, 1996, the Company acquired 100% of the capital stock of IWA
Engineers (IWA), an architecture and engineering firm providing a wide range of
planning, engineering, and design capabilities in water, wastewater, and
facility design, and serving state and local government and private clients. The
purchase was valued at approximately $1,632,000, consisting of cash and 119,593
shares of Company common stock, as adjusted based upon IWA's Net Asset Value on
December 29, 1996 as described in the related purchase agreement.
On November 7, 1995, the Company acquired 100% of the capital stock of
KCM, Inc. (KCM), an engineering services firm specializing in areas of water
quality, water and wastewater systems, surface water management, fisheries and
facilities. The purchase was valued at approximately $13,373,000, consisting of
cash and 1,234,744 shares of Company common stock issued in a private placement.
All of the acquisitions above have been accounted for as purchases and
accordingly, the purchase prices of the businesses acquired have been allocated
to the assets and liabilities acquired based upon their fair market values. The
excess of the purchase cost of the acquisitions over the fair value of the net
assets acquired was recorded as goodwill and is included in Intangible Assets
Net in the accompanying balance sheets. The Company values stock exchanged in
acquisitions based on extended restriction periods and economic factors specific
to the Company's circumstances. During fiscal 1998, stock exchanged in
acquisitions was discounted by 15%. During fiscal 1997, the discount on stock
exchanged in acquisitions ranged from 16% to 28%. During fiscal 1996, stock
exchanged in the acquisition was discounted by 26%. The results of operations of
each of the companies acquired have been included in the Company's financial
statements from their respective acquisition effective dates as set forth in the
related purchase agreements.
The effect of unaudited pro forma operating results of the SGOC, CDE, SCM,
FLO and IWA acquisitions, had they been acquired on September 30, 1996, is not
material.
<PAGE>
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired MPS, NUS, CDC and WAC on
September 30, 1996:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------
Oct. 4, 1998 Sept. 28, 1997
-----------------------------------------------------------
<S> <C> <C>
Gross revenue $ 429,591,000 $ 420,294,000
Income before income tax expense 37,958,000 33,637,000
Net income 21,446,000 19,510,000
Basic earnings per share $ 0.76 $ 0.72
Diluted earnings per share 0.73 0.69
Weighted average shares common outstanding:
Basic 28,176,000 26,977,000
Diluted 29,397,000 28,262,000
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at October 4, 1998 and
September 28, 1997:
<TABLE>
<CAPTION>
Oct. 4, 1998 Sept. 28, 1997
--------------- ---------------
<S> <C> <C>
Billed accounts receivable............................... $ 71,745,000 $ 31,435,000
--------------- ---------------
Unbilled accounts receivable:
Billable amounts not invoiced, amounts billable at
stipulated stages of completion of contract work,
and unbilled amounts pending negotiation or
receipt of contract modifications................ 58,384,000 31,626,000
Costs and fee retention billable upon audit of total
contract costs .................................. 11,278,000 13,326,000
--------------- ---------------
Total unbilled accounts receivable ...................... 69,662,000 44,952,000
--------------- ---------------
Allowance for uncollectible accounts:
Allowance for doubtful accounts..................... (2,911,000) (1,346,000)
Allowance for disallowed costs ..................... (9,774,000) (9,807,000)
--------------- ---------------
Total allowance for uncollectible accounts.............. (12,685,000) (11,153,000)
--------------- ---------------
Total ................................................... $ 128,722,000 $ 65,234,000
--------------- ---------------
--------------- ---------------
</TABLE>
The accounts receivable valuation allowance includes amounts to provide
for doubtful accounts and for the potential disallowance of billed and unbilled
costs. The Company's contracts with the Federal government are subject to audit
by the government, primarily the Defense Contract Audit Agency (DCAA), which
reviews the Company's overhead rates, operating systems and cost proposals.
During the course of its audit, the DCAA may disallow costs if it determines
that the Company improperly accounted for such costs in a manner inconsistent
with Cost Accounting Standards. Historically, the Company has not had any
material cost disallowances by the DCAA as a result of audit, however, there can
be no assurance that DCAA audits will not result in material cost disallowances
in the future. On September 15, 1995, the Company acquired Tetra Tech EM Inc.
(EMI). EMI likewise contracts with the Federal government. At the time of
acquisition, audits had not been performed for years beyond 1986. As of
September 1998, audits and negotiations relating to the EMI contracts for years
1987 through 1995 had been completed, and cost disallowances as a result of
audits totaled approximately $2,900,000. It has been determined by the Federal
government that for these periods the Company is entitled to payments,
<PAGE>
however, the collectibility of such payments cannot be assured as each agency
must obtain separate funding approval. Allowances to provide for doubtful
accounts have been determined through reviews of specific amounts determined to
be uncollectible, plus a general allowance for other amounts for which some
potential loss has been determined to be probable based on current events and
circumstances. Given the above, management believes that the resolution of these
matters will not have a material adverse effect on the Company's financial
position or results of operations.
As of October 4, 1998, the Company has approximately $5,200,000 under
retainage provisions of contracts and approximately $2,166,000 of accounts
receivable which may not be realized within one year.
4. INCOME TAXES
Income tax expense for the years ended October 4, 1998, September 28, 1997
and September 29, 1996 consisted of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Current:
Federal............................ $ 15,284,000 $ 9,220,000 $ 5,849,000
State.............................. 3,535,000 2,291,000 1,462,000
Deferred ............................. (2,899,000) (1,188,000) (457,000)
------------- ------------- -------------
Total income tax expense.............. $ 15,920,000 $ 10,323,000 $ 6,854,000
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Temporary differences comprising the net deferred income tax asset shown on
the consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
Oct. 4, Sept. 28,
1998 1997
------------- -------------
<S> <C> <C>
Allowance for doubtful accounts............................. $ 3,662,000 $ 2,513,000
Cash to accrual............................................. (1,250,000) (2,275,000)
Accrued vacation............................................ 1,247,000 495,000
State taxes................................................. 1,038,000 (21,000)
Prepaid expense............................................. (632,000) (104,000)
Depreciation................................................ (299,000) (369,000)
Other....................................................... -- 628,000
------------- -------------
Net deferred income tax asset............................... $ 3,766,000 $ 867,000
------------- -------------
------------- -------------
</TABLE>
Total income tax expense was different than the amount computed by applying
the federal statutory rate as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------------
Oct. 4, 1998 Sept. 28, 1997 Sept. 29, 1996
------------------------ ------------------------- -----------------------
Amount % Amount % Amount %
------------- ------ ------------- ------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Tax at federal statutory rate.......... $ 12,777,000 35.0% $ 8,603,000 35.0% $ 5,936,000 35.0%
State taxes, net of federal benefit.... 1,898,000 5.2 1,348,000 5.5 933,000 5.5
Goodwill............................... 990,000 2.7 528,000 2.1 384,000 2.3
Other.................................. 255,000 0.7 (156,000) (0.6) (399,000) (2.4)
------------- ------ ------------- ------- ------------ ------
Total income tax expense............... $ 15,920,000 43.6% $10,323,000 42.0% $6,854,000 40.4%
------------- ------ ------------- ------- ------------ ------
------------- ------ ------------- ------- ------------ ------
</TABLE>
<PAGE>
5. LONG-TERM OBLIGATIONS
The Company has a credit agreement (as amended, the "Credit Agreement")
with a bank to support its working capital and acquisition needs. At October 4,
1998, the Credit Agreement provided a revolving credit facility of $70,000,000.
The Credit Agreement provides for mandatory reductions of $5,000,000 on December
15, 1998 and December 15, 1999.
Interest on borrowings under the Credit Agreement is payable at the
Company's option (a) at a base rate (the greater of the federal funds rate plus
0.50% or the bank's reference rate) as defined in the Credit Agreement or (b) at
a eurodollar rate plus a margin which ranges from 0.75% to 1.25%. The weighted
average interest rate on outstanding borrowings at October 4, 1998 was 6.34375%.
Borrowings under the Credit Agreement are secured by the Company's
accounts receivable and the stock of five of the Company's subsidiaries.
The Credit Agreement contains various covenants including, but not limited
to, restrictions related to tangible net worth, net income, additional
indebtedness, asset sales, mergers and acquisitions, creation of liens, and
dividends on capital stock (other than stock dividends).
The Credit Agreement matures on December 15, 2000 or earlier at the
discretion of the Company upon payment in full of loans and other obligations.
As of October 4, 1998, outstanding borrowings totaled $47,000,000 and standby
letters of credit totaled $2,207,000.
6. EXCHANGEABLE STOCK OF A SUBSIDIARY
In connection with the SGOC acquisition, the Company issued 920,354 shares
of exchangeable stock of its subsidiary Tetra Tech Canada Ltd. (the
"Exchangeable Shares"), a corporation existing under the laws of the Province of
Ontario, Canada. The Exchangeable Shares are non-voting but carry exchange
rights whereas a holder of Exchangeable Shares shall be entitled, at any time
after five months from the date of issue of the Exchangeable Shares, to require
the Company to redeem all or any part of the Exchangeable Shares for an amount
per share equal to (a) the current market price of a share of the Company's
common stock, which shall be satisfied in full by the Company causing to be
delivered to such holder one share of the Company's common stock for each
Exchangeable Share presented and surrendered, plus (b) a dividend amount, if
any. The Exchangeable Shares cannot be put back to the Company for cash.
7. STOCKHOLDERS' EQUITY
On September 14, 1998, a Special Meeting of the Stockholders (the "Special
Meeting") was held. During the Special Meeting, the stockholders approved a
proposal to amend the Company's Certificate of Incorporation to increase the
number of authorized shares of common stock, $.01 par value per share, from
30,000,000 to 50,000,000. On September 15, 1998, the Company paid a
five-for-four split of the Company's common stock, effected in the form of a 25%
stock dividend, payable on September 15, 1998 to the stockholders of record on
July 27, 1998. All agreements concerning stock options and other commitments
payable in shares of the Company's common stock are affected by the
five-for-four split. All references to number of shares (except shares
authorized), stock options, share prices and per share information in the
consolidated financial statements have been adjusted to reflect the stock split
on a retroactive basis.
<PAGE>
Pursuant to the Company's 1989 Stock Option Plan, key employees may be
granted options to purchase an aggregate of 953,672 shares of the Company's
common stock at prices ranging from 85% to 100% of the market value on the date
of grant. All options granted to date by the Company have been at 100% of the
market value as determined by the Board of Directors at the date of grant. These
options become exercisable beginning one year from date of grant, become fully
vested in four years and terminate ten years from the date of grant.
The Company also has a 1992 Incentive Stock Plan under which key employees
may be granted options to purchase an aggregate of 4,609,375 shares of the
Company's common stock at prices not less than the market value on the date of
grant. From such date of grant, these options become exercisable after one year,
are fully vested no later than five years after grant and terminate no later
than ten years after grant.
Pursuant to the Company's 1992 Non-employee Director Plan, non-employee
directors may be granted options to purchase an aggregate of 114,438 shares of
the Company's common stock at prices not less than the market value on the date
of grant. These options vest and become exercisable when, and only if, the
optionee continues to serve as a director until the Annual Meeting following the
year in which the options were granted.
The Company also has an Employee Stock Purchase Plan (the "Purchase Plan")
which provides for the granting of Purchase Rights to purchase common stock to
regular full and part-time employees or officers of the Company and its
subsidiaries. Under the Purchase Plan, shares of common stock will be issued
upon exercise of the Purchase Rights. Under the Purchase Plan, an aggregate of
878,906 shares may be issued pursuant to the exercise of Purchase Rights. The
maximum amount that an employee can contribute during a Purchase Right Period is
$4,000, and the minimum contribution per payroll period is $25.
Under the Purchase Plan, the exercise price of a Purchase Right will be the
lesser of 100% of the fair market value of such shares on the first day of the
Purchase Right Period or 85% of the fair market value on the last day of the
Purchase Right Period. For this purpose, the fair market value of the stock is
its closing price as reported on the Nasdaq Stock Market on the day in question.
<PAGE>
During the three years in the period ended October 4, 1998, option activity
was as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Options Exercise Price
-------------- -----------------
<S> <C> <C>
Balance, October 1, 1995........................ 1,565,270 $ 5.82
Granted.................................... 644,667 11.36
Exercised.................................. (158,791) 4.30
Cancelled.................................. (81,901) 7.11
------------ ------------
Balance, September 29, 1996..................... 1,969,245 7.70
Granted.................................... 762,692 12.56
Exercised.................................. (225,948) 5.80
Cancelled.................................. (167,614) 9.62
------------ ------------
Balance, September 28, 1997..................... 2,338,375 9.33
Granted.................................... 569,566 16.89
Exercised.................................. (352,265) 7.43
Cancelled.................................. (187,206) 12.61
------------ ------------
Outstanding at October 4, 1998.................. 2,368,470 $ 11.17
------------ ------------
------------ ------------
Exercisable at October 4, 1998.................. 1,086,166 $ 8.04
------------ ------------
------------ ------------
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
------------------ ----------- --------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.69 - $1.18 47,711 2.47 $ 1.08 47,711 $ 1.08
$3.14 - $6.96 431,888 5.13 5.57 419,678 5.53
$7.01 - $12.32 921,779 7.14 10.11 525,724 9.78
$12.80 - $15.70 660,917 8.79 13.95 93,053 13.08
$16.00 - $20.88 306,175 9.49 17.85 -- --
------------ ----------- ---------- ----------- ----------
2,368,470 7.44 $ 11.17 1,086,166 $ 8.04
------------ ----------- ---------- ----------- ----------
------------ ----------- ---------- ----------- ----------
</TABLE>
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its employee stock
option plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Pro forma net income and net income per share
had the Company accounted for stock options issued to employees in accordance
with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------
Oct. 4, 1998 Sept. 28, 1997 Sept. 29, 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
Net income-as reported.............................. $ 20,586,000 $ 14,256,000 $ 10,105,000
Net income-pro forma................................ 18,980,000 13,059,000 9,598,000
Basic earnings per share-as reported................ $ 0.74 $ 0.61 $ 0.46
Diluted earnings per share-as reported.............. 0.71 0.58 0.45
Basic earnings per share-pro forma.................. 0.68 0.56 0.44
Diluted earnings per share-pro forma................ 0.65 0.53 0.43
</TABLE>
<PAGE>
The pro forma effects of applying SFAS No. 123 may not be representative of
the effects on reported net income and net income per share for future years
since options vest over several years and additional awards are made each year.
The fair value of the Company's stock options used to compute pro forma net
income and pro forma earnings per share disclosures is the estimated value using
the Black-Scholes option-pricing model. The weighted average fair values per
share of options granted in fiscal 1998, 1997 and 1996 are $5.79, $4.13 and
$3.65, respectively. The following assumptions were used in completing the
model:
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------
Oct. 4, 1998 Sept. 28, 1997 Sept. 29, 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
Dividend yield...................................... 0.0% 0.0% 0.0%
Expected volatility................................. 42.5% 40.5% 39.1%
Risk-free rate of return, annual.................... 6.4% 6.4% 6.4%
Expected life....................................... 3.11 yrs. 2.76 yrs. 2.76 yrs.
</TABLE>
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earning
per share:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------
Oct. 4, 1998 Sept 28, 1997 Sept. 29, 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Numerator--
Net income: $ 20,586,000 $ 14,256,000 $ 10,105,000
--------------- --------------- ---------------
Denominator:
Denominator for basic earnings per share--
weighted-average shares 27,970,000 23,371,000 21,851,000
Effect of dilutive securities:
Stock options 1,040,000 709,000 730,000
Redeemable preferred stock 151,000 576,000 --
Exchangeable stock of a subsidiary 30,000 -- --
-------------- -------------- --------------
Dilutive potential common shares 1,221,000 1,285,000 730,000
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 29,191,000 24,656,000 22,581,000
-------------- -------------- --------------
-------------- -------------- --------------
Basic earnings per share $ 0.74 $ 0.61 $ 0.46
-------------- -------------- --------------
-------------- -------------- --------------
Diluted earnings per share $ 0.71 $ 0.58 $ 0.45
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
9. LEASES
The Company leases land, buildings and equipment under various
operating leases. Rent expense under all operating leases was approximately
$13,458,000, $10,204,000 and $9,462,000 for the fiscal years ended October 4,
1998, September 28, 1997 and September 29, 1996, respectively. Amounts
<PAGE>
payable under noncancelable operating lease commitments are as follows during
the fiscal years ending in:
<TABLE>
<CAPTION>
<S> <C>
1999....................................................................... $ 14,838,000
2000....................................................................... 11,979,000
2001....................................................................... 9,569,000
2002....................................................................... 5,697,000
2003....................................................................... 3,903,000
Thereafter................................................................. 4,036,000
--------------
Total...................................................................... $ 50,022,000
--------------
--------------
</TABLE>
10. RETIREMENT PLANS
The Company and its subsidiaries have established defined contribution
plans and 401(k) plans. Generally, employees are eligible to participate in the
defined contribution plans upon completion of one year of service and in the
401(k) plans upon commencement of employment. For the fiscal years ended October
4, 1998, September 28, 1997 and September 29, 1996 employer contributions
relating to the plans were approximately $3,952,000, $3,536,000 and $4,002,000,
respectively.
11. CONTINGENCIES
The Company is subject to certain claims and lawsuits typically filed
against the engineering and consulting professions, primarily alleging
professional errors or omissions. The Company carries professional liability
insurance, subject to certain deductibles and policy limits against such claims.
Management is of the opinion that the resolution of these claims will not have a
material adverse effect on the Company's financial position.
12. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
In the opinion of management, the following unaudited quarterly data for
the years ended October 4, 1998 and September 28, 1997 reflect all
adjustments necessary for a fair statement of the results of operations. All
such adjustments are of a normal recurring nature. (In thousands, except per
share data)
<TABLE>
<CAPTION>
First Second Third Fourth
Fiscal Year 1998 Quarter Quarter Quarter Quarter
- ---------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross revenue................................ $ 66,438 $ 92,727 $ 98,231 $ 125,538
Net revenue.................................. 53,664 71,806 75,149 96,978
Gross profit................................. 13,325 17,020 20,744 22,637
Income from operations....................... 7,179 8,872 11,411 12,351
Net income................................... 4,051 4,521 5,493 6,521
Basic earnings per share..................... $ 0.15 $ 0.16 $ 0.20 $ 0.23
Diluted earnings per share .................. 0.14 0.16 0.19 0.22
Weighted average common shares
outstanding:
Basic................................... 27,217 27,905 28,147 28,567
Diluted................................. 28,834 28,956 29,201 29,719
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
First Second Third Fourth
Fiscal Year 1997 Quarter Quarter Quarter Quarter
- ---------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross revenue................................ $ 54,938 $ 55,545 $ 60,922 $ 75,362
Net revenue.................................. 40,423 43,914 48,621 57,833
Gross profit................................. 9,372 10,547 12,961 16,892
Income from operations....................... 4,393 4,892 6,207 9,107
Net income................................... 2,596 2,872 3,644 5,144
Basic earnings per share..................... $ 0.12 $ 0.13 $ 0.16 $ 0.20
Diluted earnings per share .................. 0.11 0.13 0.15 0.18
Weighted average common shares
outstanding:
Basic................................... 22,110 22,306 23,178 25,811
Diluted................................. 22,951 22,865 24,065 28,656
</TABLE>
<PAGE>
SECURITIES INFORMATION
Tetra Tech's common stock is traded on the Nasdaq Stock Market under the
symbol WATR. There were 891 stockholders of record as of December 9, 1998. Tetra
Tech has not paid any cash dividends since its inception and does not intend to
pay any cash dividends on its common stock in the foreseeable future. The high
and low sales prices for the common stock for the last two fiscal years, as
reported by the National Association of Securities Dealers, Inc., are set forth
in the following tables. The prices have been adjusted to reflect the effect, on
a retroactive basis, of a five-for-four stock split, effected in the form of a
25% stock dividend, in September 1998.
<TABLE>
<CAPTION>
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter $17.76 $14.90
Second Quarter 19.20 15.20
Third Quarter 20.20 15.60
Fourth Quarter 23.00 15.40
<CAPTION>
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter $16.32 $11.92
Second Quarter 13.28 7.84
Third Quarter 14.80 8.88
Fourth Quarter 18.08 13.44
</TABLE>
<PAGE>
Exhibit 21
SUBSIDIARIES OF TETRA TECH, INC.
HSI GeoTrans, Inc., a Virginia corporation
Simons, Li & Associates, Inc. a Colorado corporation
Tetra Tech EM Inc., a Delaware corporation
KCM, Inc., a Washington corporation
Tetra Tech Technical Services, Inc., a Delaware corporation
IWA Engineers, a California corporation
FLO Engineering, Inc., a Colorado corporation
SCM Consultants, Inc., a Washington corporation
Whalen & Company, Inc., a Delaware corporation
Whalen Service Corps Inc., a Delaware corporation
CommSite Development Corporation, a California corporation
C.D.C. Engineering, Inc., a California corporation
McNamee, Porter & Seeley, Inc., a Delaware corporation
Tetra Tech Canada Ltd., a Province of Ontario, Canada corporation (dba Sentrex
Communications Company)
IWA Services, Inc., a California corporation
Integration Technologies, Inc., a Delaware corporation
All of such subsidiaries, other than Tetra Tech Canada Ltd., are wholly-owned by
Tetra Tech, Inc.
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-26199, 333-48569, 333-61159 and 333-64165 of Tetra Tech, Inc. on Form S-8
and 333-2766 of Tetra Tech, Inc. on Form S-3 of our reports dated November
13, 1998, appearing in, and incorporated by reference in, this Annual Report
on Form 10-K for the year ended October 4, 1998.
DELOITTE & TOUCHE LLP
Los Angeles, California
December 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-04-1998
<PERIOD-END> OCT-04-1998
<CASH> 4,889
<SECURITIES> 0
<RECEIVABLES> 141,407
<ALLOWANCES> 12,685
<INVENTORY> 0
<CURRENT-ASSETS> 142,332
<PP&E> 26,964
<DEPRECIATION> 13,219
<TOTAL-ASSETS> 266,610
<CURRENT-LIABILITIES> 65,283
<BONDS> 0
0
0
<COMMON> 287
<OTHER-SE> 87,565
<TOTAL-LIABILITY-AND-EQUITY> 266,610
<SALES> 382,934
<TOTAL-REVENUES> 382,934
<CGS> 309,208
<TOTAL-COSTS> 309,208
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,329
<INCOME-PRETAX> 36,506
<INCOME-TAX> 15,920
<INCOME-CONTINUING> 20,586
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,586
<EPS-PRIMARY> 0.74
<EPS-DILUTED> 0.71
</TABLE>
