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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 3, 1999.
/ / 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)
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DELAWARE 95-4148514
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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
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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 10, 1999 was $480,698,570.
The number of shares of Common Stock, $.01 par value, outstanding (the only
class of common stock of the registrant outstanding) was 38,461,322 on December
10, 1999.
Portions of registrant's Annual Report to Stockholders for the fiscal year ended
October 3, 1999 are incorporated by reference in Part II of this report.
Portions of registrant's Proxy Statement for its 2000 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. As of the end of
our last fiscal year, we had more than 5,000 employees worldwide, primarily
located in North America in more than 150 locations. In addition, we have
established a presence in Asia, South America and Europe. From fiscal 1991
through fiscal 1999, we generated a net revenue compounded annual growth rate of
approximately 34.9%, and achieved a net income compounded annual growth rate of
approximately 37.0%.
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
$31 billion in 1998.
- 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 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 cost savings through increased operating
efficiencies.
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INFRASTRUCTURE. Continued population and economic growth place
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 as
wireless communications providers are seeking access to the Internet. 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
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
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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 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 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;
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- 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;
- CONTRACT 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 33 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 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
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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 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
educational, healthcare and research facilities. We have completed
engineering and construction projects for a wide range of clients with
specialized needs such as security systems, training and audiovisual
facilities, 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 high-rise office buildings, museums, 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 for rapid information
transport 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
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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 PROJECT: 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.
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 a Superfund site in Port Comfort, Texas 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.
- Currently providing environmental remediation and
operations and maintenance (O&M) services at Tinker Air
Force Base in Oklahoma, and at Wright-Patterson Air Force
Base in Ohio. O&M services include groundwater treatment
systems, product recovery systems and landfill caps.
Remediation projects have included installation of
groundwater monitoring wells, excavation and disposal of
contaminated soils, and installation of soil and
groundwater treatment systems.
- Currently serving as prime contractor for environmental and
natural resource planning at U.S. Navy facilities in four
western states. Conducted air emissions modeling, noise impact
studies and biological resource surveys.
Infrastructure - Completed the development and analysis of alternative flood
control measures for the Los Angeles River.
- Provided design and program management for Taiwan's National
Museum of Marine Biology/Aquarium. Responsible
for civil, structural and mechanical
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engineering and for aquatic life support systems. Designed
water, wastewater and parking facilities.
- Currently providing mechanical, electrical, plumbing and fire
protection engineering for Columbus Centre, a mixed-use
project in New York City.
- Currently providing project management for upgrading
residuals management facilities at four drinking water treatment
plants in the Detroit, Michigan area that are among the largest
such plants in the U.S.
- Provided design for sections of a major six-lane toll road in
Southern California that includes new bridges, a tunnel
and numerous large regional drainage facilities.
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.
- Providing services to install over 730 miles of cable to
provide telephony and expanded channel capacity to
approximately 135,000 homes in the Seattle, Washington area.
- Providing turnkey services including site selection and
optimization, architectural and engineering design, site
construction, and electronics installation and optimization
for cell site development in the Los Angeles area for a major
cellular communications carrier.
- Providing site acquisition through construction permitting
services for approximately 400 sites for a wireless
communications firm in several Tennessee and Kentucky markets.
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CLIENTS
We have developed a diverse client base of hundreds of clients both in
the public and private sectors. During fiscal 1999, the DOD, EPA and DOE
accounted for approximately 21.9%, 11.6% and 3.3%, 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 1999.
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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 California Department of Lockheed Martin
Protection Agency; U.S. Health Services; Corporation; Merck & Co.;
Air Force; U.S. Navy; U.S. Washington Department of General Electric Company;
Army; U.S. Coast Guard; Ecology; Prince Georges Westwood Squibb
U.S. Forest Service County, Maryland; Clarmont Pharmaceuticals, Inc.;
County, Ohio; City of San Hewlett-Packard Corporation
Jose, California
INFRASTRUCTURE U.S. Army Corps of City of Tucson, Arizona; Universal Studios, Inc.;
Engineers; U.S. Bureau of City of Breckenridge, Boeing Corporation; E.I.
Reclamation; U.S. Air Colorado; Washington DuPont de Nemours and
Force; Federal Emergency Department of Company; Ford Motor
Management Agency Transportation; City of Company; Chrysler
Detroit, Michigan; City of Corporation; Disney
Portland, Oregon; Texas Imagineering
Parks and Wildlife
Department; King County,
Washington; Delaware
Department of
Transportation; Delaware
Department of Corrections
COMMUNICATIONS Henrico County, Virginia AT&T Wireless Services;
AT&T Broadband and
Internet Services; Nextel
Communications, Inc.;
Airtouch Communications,
Inc.; Motorola, Inc.;
Sprint Communications
Company; GTE Corporation;
Lucent Technologies, Inc.;
Ericsson
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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 1999,
34.6%, 31.3% and 34.1% 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
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.
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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 DCAA recently completed audits of EMI for the fiscal years 1987
through 1995. As a result of these audits and our negotiations with the
DCAA, the DCAA disallowed approximately $4.4 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.
Most of our agreements permit termination without cause 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
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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., EA Engineering, Science & Technology,
Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT Group, Inc.; Mastec,
Inc.; Montgomery Watson; Quanta Service, Inc.; Roy F. Weston, Inc.; Wireless
Facilities, Inc.; and URS Corporation.
BACKLOG
At October 3, 1999, our gross revenue backlog was approximately $602.4
million, compared to $405.0 million at October 4, 1998. 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 $467.1
million of the gross revenue backlog at October 3, 1999 will be recognized
during fiscal 2000. 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 government and other
clients are terminable at will. If any of these clients terminate their
contracts prior to completion, we may not be able to recognize that 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; the Comprehensive
Environmental Response, Compensation, and Liability 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. The professional liability policies
are "claims made" policies. This means that only claims made during the term of
the policy are covered. If we terminate our professional liability policies and
do not obtain retroactive coverage, we
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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 3, 1999, we had approximately 5,443 total employees or
approximately 4,953 full-time equivalent employees. 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. We currently have 206
employees represented by four labor organizations. 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 RESULTS OF OPERATIONS AND THAT UPON THE OCCURRENCE OF ANY OF
THESE EVENTS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY THAT COULD ADVERSELY
IMPACT OUR BUSINESS AND OPERATING RESULTS
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 1999, we purchased 11 companies in nine 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.
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.
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OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD HAVE A
NEGATIVE EFFECT ON THE PRICE OF OUR COMMON STOCK
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 of expenses incurred for corporate initiatives;
- 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.
THE VALUE OF OUR COMMON STOCK COULD CONTINUE TO BE VOLATILE
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.
IF WE ARE NOT ABLE TO SUCCESSFULLY MANAGE OUR GROWTH STRATEGY, OUR BUSINESS AND
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED
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 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.
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THE LOSS OF KEY PERSONNEL OR OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL COULD SIGNIFICANTLY DISRUPT OUR BUSINESS
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.
CHANGES IN EXISTING LAWS AND REGULATIONS COULD REDUCE THE DEMAND FOR OUR
SERVICES
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.
OUR REVENUES FROM AGENCIES OF THE FEDERAL GOVERNMENT ARE CONCENTRATED, AND A
REDUCTION IN SPENDING BY THESE AGENCIES COULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS
Agencies of the Federal government are among our most significant
clients. During fiscal 1999, approximately 36.8% of our net revenue was derived
from three federal agencies as follows: 21.9% of our net revenue was derived
from the Department of Defense (DOD), 11.6% from the Environmental Protection
Agency (EPA), and 3.3% 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.
OUR CONTRACTS WITH GOVERNMENTAL AGENCIES ARE SUBJECT TO AUDIT, WHICH COULD
RESULT IN THE DISALLOWANCE OF CERTAIN COSTS
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 through 1995. As a result of these
audits and our negotiations with the DCAA, the DCAA disallowed approximately
$4.4 million in costs.
OUR BUSINESS AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY LOSSES
UNDER FIXED-PRICE CONTRACTS OR TERMINATION OF CONTRACTS AT THE CLIENT'S
DISCRETION
We contract with Federal and state governments as well as with the
commercial sector. These contracts are often subject to termination at the
discretion of the client with or without cause. Additionally, we enter into
various contracts with our clients, including fixed-price contracts. In
fiscal 1999, approximately 34.6% 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,
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unforeseen costs or difficulties, delays beyond our control and economic and
other changes that may occur during the contract period. Losses under
fixed-price contracts or termination of contracts at the discretion of the
client could have a material adverse effect on our business.
In fiscal 1999, we had a contract change with Tele-Communications,
Inc. involving three turnkey contracts. This change was due in part to
Tele-Communications, Inc.'s change in strategy from the use of turnkey
contracts to the use of direct service contracts in the upgrading of its
network systems.
OUR INABILITY TO FIND QUALIFIED SUBCONTRACTORS COULD ADVERSELY AFFECT THE
QUALITY OF OUR SERVICE AND OUR ABILITY TO PERFORM UNDER CERTAIN CONTRACTS
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 1999, subcontractor
costs comprised 23.7% 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.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY
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.; EA Engineering, Science &
Technology, Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT Group,
Inc.; Mastec, Inc.; Montgomery Watson; Quanta Services; Roy F. Weston, Inc.;
Wireless Facilities, Inc.; and URS Corporation.
OUR SERVICES EXPOSE US TO SIGNIFICANT RISKS OF LIABILITY AND OUR INSURANCE
POLICIES MAY NOT PROVIDE ADEQUATE COVERAGE
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. The professional liability
policies are "claims made" policies. Thus, only claims made during the term of
the policy are covered. If we terminate our professional liability 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 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.
WE MAY BE PRECLUDED FROM PROVIDING CERTAIN SERVICES DUE TO CONFLICT OF INTEREST
ISSUES
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
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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.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO RISKS SUCH AS FOREIGN CURRENCY
FLUCTUATIONS
In fiscal 1999, approximately 3.3% 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.
WE COULD EXPERIENCE BUSINESS INTERRUPTIONS RELATING TO THE YEAR 2000
We have worked to resolve the potential impact of the year 2000
(Y2K) 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 Y2K
compliant by our vendors. We believe that our financial and accounting and
human resource management information systems are now Y2K compliant and will
not be materially impacted by the year 2000.
We have extensive business with the Federal government. Should the
Federal government, especially the DOD, experience significant business
interruptions relating to non-Y2K 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 Y2K issues in a timely manner, our business could be materially
impacted. We believe that the worst case scenario relating to the Y2K 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.
Additional risks associated with non-Y2K compliance include:
- Our inability to invoice and process payments;
- Our inability to produce accurate and timely financials;
- The impact on our cash flow and working capital needs;
- The impact on our profitability; and
- Our potential liability to third parties for not meeting
contracted deliverables.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT DIFFICULT FOR A
THIRD PARTY TO ACQUIRE OUR COMPANY AND COULD DEPRESS THE PRICE OF OUR COMMON
STOCK
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.
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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.
ITEM 2. PROPERTIES.
Our corporate headquarters facilities are located in Pasadena,
California. These facilities contain approximately 1.2 million square feet of
office space, and are subject to leases which expire beyond the year 2001. We
lease office space in approximately 189 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 and for additional offices.
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. Management is of the
opinion 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.
Not applicable.
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PART II
The information required by Items 5 through 8 of this report is set
forth on pages 17 through 41 of our Annual Report to Stockholders for the
fiscal year ended October 3, 1999. 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
2000 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.
<TABLE>
<S> <C> <C>
(a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
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 3.4 to the Company's
Annual Report on Form 10-K for the fiscal year
ended October 4, 1998).
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
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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 Sixth Amendment dated as of July 21, 1999 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 10.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 4, 1999).
10.7 Seventh Amendment dated as of December 24, 1999 to the
Credit Agreement dated as of September 15, 1995 between the
Company and Bank of America National Trust and Savings
Association.
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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
20
<PAGE>
Exhibit 10.23 to the Company's Annual Report on Form 10-K for
the fiscal year ended October 2, 1994).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 Registration Rights Agreement dated as of September 22, 1998
among the Company and the parties listed on Schedule A
attached thereto (incorporated herein by reference to Exhibit
10.23 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 4, 1998).
10.26 Registration Rights Agreement dated as of February 26, 1999
among the Company and the parties listed on Schedule A
attached thereto (incorporated herein by reference to Exhibit
10.24 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 4, 1999).
10.27 Registration Rights Agreement dated as of May 7, 1999 among
the Company and the parties listed on Schedule A attached
thereto (incorporated herein by reference to Exhibit 10.26 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 4, 1999).
10.28 Registration Rights Agreement dated as of May 21, 1999 among
the Company and the parties listed on Schedule A attached
thereto (incorporated herein by reference to Exhibit 10.27 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 4, 1999).
10.29 Registration Rights Agreement dated as of June 18, 1999 among
the Company and the parties listed on Schedule A attached
thereto (incorporated herein by reference to Exhibit 10.28 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 4, 1999).
10.30 Registration Rights Agreement dated as of September 3, 1999
among the Company and the parties listed on Schedule A
attached thereto.
21
<PAGE>
13 Annual Report to Stockholders for the fiscal year ended
October 3, 1999, 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
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
None.
</TABLE>
22
<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, 1999 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,
/s/ Li-San Hwang President and Chief Executive officer
- ----------------------------------------------- (Principal Executive Officer) December 30, 1999
Li-San Hwang
Vice President, Chief Financial Officer
/s/ James M. Jaska and Treasurer (Principal Financial and
- ----------------------------------------------- Accounting Officer) December 30, 1999
James M. Jaska
/s/ Daniel A. Whalen
- ----------------------------------------------- Director December 30, 1999
Daniel A. Whalen
/s/ J. Christopher Lewis
- ----------------------------------------------- Director December 30, 1999
J. Christopher Lewis
/s/ Patrick C. Haden
- ----------------------------------------------- Director December 30, 1999
Patrick C. Haden
/s/ James J. Shelton
- ----------------------------------------------- Director December 30, 1999
James J. Shelton
</TABLE>
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements, together with the Notes
thereto and report thereon of Deloitte & Touche LLP dated November 16, 1999
(except for Note 5, as to which the date is December 24, 1999), appearing on
pages 25 through 41 of the accompanying 1999 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 17 through 24, the 1999 Annual Report to Stockholders is not to be
deemed filed as part of this report.
FINANCIAL STATEMENTS SCHEDULES
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Accountants on Financial Statement
Schedules...................................................... 25
Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts and
Reserves....................................................... 26
</TABLE>
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Tetra Tech, Inc.:
We have audited the consolidated financial statements of Tetra Tech, Inc. and
its subsidiaries as of October 3, 1999 and October 4, 1998, and for each of
the three years in the period ended October 3, 1999, and have issued our
report thereon dated November 16, 1999 (except for Note 5, as to which the
date is December 24, 1999); such financial statements and report are included
in your 1999 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 16, 1999 (except for Note 5, as to which the date is December 24, 1999)
25
<PAGE>
TETRA TECH, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED
SEPTEMBER 28, 1997, OCTOBER 4, 1998 AND OCTOBER 3, 1999
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS CHARGES TO DEDUCTIONS
BEGINNING OF THROUGH COSTS AND NET OF BALANCE AT
PERIOD ACQUISITIONS EARNINGS RECOVERIES END OF PERIOD
------------ ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
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
Fiscal year ended October 3, 1999
Allowance for loss on accounts
receivable........................... $ 12,685,000 $ 747,000 $ (667,000) $ (4,236,000) $ 8,529,000
</TABLE>
26
<PAGE>
SEVENTH AMENDMENT
THIS SEVENTH AMENDMENT (this "Seventh Amendment") dated as of December
24, 1999 is to the Credit Agreement (the "Credit Agreement") dated as of
September 15, 1995 between TETRA TECH, INC. (the "Company") and BANK OF
AMERICA, N.A. (formerly known as Bank of America National Trust and Savings
Association) (the "Bank"). Unless otherwise defined herein, terms defined in
the Credit Agreement are used herein as defined therein.
WHEREAS, the parties hereto have entered into the Credit Agreement which
provides for the Bank to make Loans to, and to issue Letters of Credit for
the account of, the Company from time to time; and
WHEREAS, the parties hereto desire to amend the Credit Agreement as set
forth below;
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration (the receipt and sufficiency of which are hereby
acknowledged), the parties hereto agree as follows:
SECTION 1 AMENDMENTS. Effective on (and subject to the occurrence of)
the Seventh Amendment Effective Date (as defined below), the Credit Agreement
shall be amended as follows:
Section 1.1 SECTION 2.1. Section 2.1(x) of the Credit Agreement is
amended in its entirety to read as follows:
"(x) the sum of (i) the aggregate outstanding principal amount of all
Loans plus (ii) the aggregate Stated Amount of all Letters of Credit (the
"Total Outstandings") shall not at any time exceed $93,000,000 (less any
reductions to the Commitment made pursuant to SECTION 6.1), PROVIDED
that the Total Outstandings shall not exceed $88,000,000 prior to the date
on which the Company delivers to the Bank an audit report without any
qualification unacceptable to the Bank (an "Acceptable Audit Report") for
the Fiscal Year ending October 3, 1999, and PROVIDED, FURTHER, that the
amount of the Commitment shall be reduced to the amount of the Total
Outstandings on the earlier of the date on which the Company receives an
audit report for the Fiscal Year ending October 3, 1999 which is not an
Acceptable Audit Report and December 31, 1999 (unless the Bank has
received an Acceptable Audit Report on or before such date), and".
Section 1.2 SECTION 5.3. Section 5 of the Credit Agreement is amended by
adding the following in appropriate numerical sequence:
<PAGE>
"5.3 ADDITIONAL FEES. The Company further agrees to pay the Bank
the following fees if applicable: (x) a usage fee of $25,000 on the
first date on which the sum of (i) the aggregate outstanding principal
amount of all Loans PLUS (ii) the aggregate Stated Amount of all Letters
of Credit exceeds $85,000,000; (y) a fee of $250,000 on December 31, 1999
if the Company fails to deliver to the Bank an Acceptable Audit Report
(as defined in SECTION 2.1) on or before December 31, 1999."
Section 1.3 SECTION 6.1.1. Section 6.1.1 of the Credit Agreement is
amended in its entirety to read as follows:
"6.1.1 SCHEDULED REDUCTIONS OF COMMITMENT. The amount of the
Commitment shall be permanently reduced to $60,000,000 on February 1, 2000.".
Section 1.4 EXHIBIT A. EXHIBIT A to the Credit Agreement is hereby
amended in its entirety to read in the form of Exhibit A hereto.
SECTION 2 REPRESENTATIONS AND WARRANTIES. The Company represents
and warrants to the Bank that (a) each warranty set forth in Section 9 of the
Credit Agreement is true and correct as if made on the date hereof, (b) the
execution and delivery by the Company of this Seventh Amendment and the New
Note (as defined below), and the performance by the Company of its
obligations under the Credit Agreement as amended hereby (as so amended, the
"Amended Credit Agreement") and the New Note (i) are within the corporate
powers of the Company and each Subsidiary, (ii) have been duly authorized by
all necessary corporate action, (iii) have received all necessary
governmental approval and (iv) do not and will not contravene or conflict
with any provision of law or of the charter or by-laws of the Company or any
Subsidiary or of any indenture, loan agreement or other material contract,
order or decree which is binding upon the Company or any Subsidiary, and (c)
this Seventh Amendment, the Amended Credit Agreement, and the New Note are
the legal, valid and binding obligations of the Company and each Subsidiary
which is party hereto, enforceable against the Company and each Subsidiary in
accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency or other similar laws of general application affecting
the enforcement of creditor's rights or by general principles of equity
limiting the availability of equitable remedies.
SECTION 3 EFFECTIVENESS. The amendments set forth in Section 1
shall become effective, as of the day and year first above written, on such
date (the "Seventh Amendment Effective Date") that the Bank shall have
received (i) an amendment fee of $25,000, (ii) counterparts of this Seventh
Amendment executed by the parties hereto, and (iii) each of the following
documents in form and substance satisfactory to the Bank:
<PAGE>
(a) RESOLUTIONS OF COMPANY. Certified copies of resolutions of the
Board of Directors of the Company authorizing the execution and delivery of
this Seventh Amendment and the performance of its obligations under the
Amended Credit Agreement.
(b) INCUMBENCY AND SIGNATURE CERTIFICATE OF COMPANY. A certificate of
the Secretary or the Assistant Secretary of the Company certifying the names
and true signatures of the officers of the Company authorized to execute,
deliver and perform, as applicable, this Seventh Amendment and all other
documents to be executed in connection therewith.
(c) NEW NOTE. A promissory note of the Company (the "New Note") in the
form of EXHIBIT A hereto.
(d) OPINION. The opinion of Riordan & McKinzie, counsel to the Company
and its Subsidiaries, in form and substance satisfactory to the Bank.
(e) SYNDICATION LETTER. An executed syndication mandate letter in the
form previously delivered to the Company by the Bank.
SECTION 4 MISCELLANEOUS.
Section 4.1 CONTINUING EFFECTIVENESS, ETC. As herein amended, the
Credit Agreement shall remain in full force and effect and is hereby ratified
and confirmed in all respects.
Section 4.2 COUNTERPARTS. This Seventh Amendment may be executed in
any number of counterparts and by the different parties on separate
counterparts, and each such counterpart shall be deemed to be an original but
all such counterparts shall together constitute one and the same Seventh
Amendment.
Section 4.3 GOVERNING LAW. This Seventh Amendment shall be a
contract made under and governed by the laws of the State of Illinois
applicable to contracts made and to be performed entirely within such State.
Section 4.4 SUCCESSORS AND ASSIGNS. This Seventh Amendment shall be
binding upon the Company and the Bank and their respective successors and
assigns, and shall inure to the benefit of the Company and the Bank and the
successors and assigns of the Bank.
Section 4.5 EXPENSES. The Company agrees to pay the reasonable
costs and expenses of the agent (including attorney costs) in connection with
the preparation, execution and delivery of this Seventh Amendment.
<PAGE>
delivered at Chicago, Illinois, as of the day and year first above written.
TETRA TECH, INC.
By /s/ James M. Jaska
-----------------------------
Title Chief Financial Officer
-----------------------------
BANK OF AMERICA, N.A. (formerly Bank
of America National Trust and Savings
Association)
By /s/ Jennifer L. Gerdes
--------------------------------
Title Vice President
--------------------------------
<PAGE>
Each of the undersigned hereby acknowledges and agrees to the foregoing
Seventh Amendment and the amended credit agreement and hereby confirms the
continuing effectiveness of the guaranty and the security agreement with
respect to the Amended Credit Agreement.
HSI GEOTRANS, INC.
BY: /s/ James M. Jaska
Title: Assistant Treasurer
SIMONS, LI & ASSOCIATES, INC.
By: /s/ James M. Jaska
Title: Treasurer
TETRA TECH EM, INC.
By: /s/ James M. Jaska
Title: Treasurer
WHALEN & COMPANY, INC.
By: /s/ James M. Jaska
Title: Treasurer
TETRA TECH NUS, INC.
By: /s/ James M. Jaska
Title: Treasurer
<PAGE>
MFG, INC.
By: /s/ James M. Jaska
Title: Treasurer
COLLINS-PINA CONSULTING
ENGINEERS, INC.
By: /s/ James M. Jaska
Title: Treasurer
DEA CONSTRUCTION COMPANY, INC.
By: /s/ James M. Jaska
Title: Treasurer
BAHA COMMUNICATIONS, INC.
By: /s/ James M. Jaska
Title: Treasurer
UTILITIES & C.C., INC.
By: /s/ James M. Jaska
Title: Treasurer
ASL CONSULTING ENGINEERS, INC.
By: /s/ James M. Jaska
Title: Treasurer
<PAGE>
COSENTINI ASSOCIATES, INC.
By: /s/ James M. Jaska
Title: Treasurer
<PAGE>
EXHIBIT A
FORM OF NOTE
$93,000,000 December 24, 1999
Chicago, Illinois
The undersigned, for value received, promises to pay to the order of
BANK OF AMERICA, N.A. (formerly Bank of America National Trust and Savings
Association), a national banking association having an office at 231 South
LaSalle Street, Chicago, Illinois (the "Bank") at the principal office of the
Bank in Chicago, Illinois, NINETY-THREE MILLION DOLLARS or, if less, the
aggregate unpaid amount of all Loans made by the undersigned pursuant to the
Credit Agreement referred to below (as shown on the schedule attached hereto
(and any continuation thereof) or in the records of the Bank), such principal
amount to be payable in installments as set forth in the Credit Agreement.
The undersigned further promises to pay interest on the unpaid principal
amount of each Loan from the date of such Loan until such Loan is paid in
full, payable at the rate(s) and at the time(s) set forth in the Credit
Agreement. Payments of both principal and interest are to be made in lawful
money of the United States of America.
This Note evidences indebtedness incurred under, and is subject to the
terms and provisions of, the Credit Agreement, dated as of September 15, 1995
(as amended or otherwise modified from time to time, the "Credit Agreement";
terms not otherwise defined herein are used herein as defined in the Credit
Agreement), between the undersigned and the Bank, to which Credit Agreement
reference is hereby made for a statement of the terms and provisions under
which this Note may or must be paid prior to its due date or its due date
accelerated.
In addition to and not in limitation of the foregoing and the provisions
of the Credit Agreement, the undersigned further agrees, subject only to any
limitation imposed by applicable law, to pay all expenses, including
reasonable attorneys' fees and legal expenses, incurred by the holder of this
Note in endeavoring to collect any amounts payable hereunder which are not
paid when due, whether by acceleration or otherwise.
This Note is made under and governed by the laws of the State of
Illinois applicable to contracts made and to be performed entirely within
such State.
TETRA TECH, INC.
By: /s/ James M. Jaska
---------------------------
Title: Chief Financial Officer
---------------------------
<PAGE>
Schedule Attached to Note dated December 24, 1999 of TETRA TECH, INC. payable
to the order of BANK OF AMERICA, N.A.
Date and Date and
Amount of Amount of
Loan or of Repayment or of Interest
Conversion from Conversion into Period/ Unpaid
another type of another type of Maturity Principal Notation
Loan Loan Date Balance Made by
1. FLOATING RATE LOANS
______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
2. EURODOLLAR LOANS
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
<PAGE>
EXHIBIT 10.30
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is entered into
as of September 3, 1999 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 the Agreement and Plan of
Reorganization of even date (the "Reorganization Agreement"), pursuant to which
PDR Engineers, Inc., a Kentucky corporation ("PDR"), will merge with and into
PDR Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary
of Tetra Tech.
B. Pursuant to the Reorganization Agreement, the shareholders of PDR
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 6.2 of the Reorganization Agreement and, pursuant thereto, must be
entered into by the parties in connection with the consummation of the
transactions contemplated by the Reorganization 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.
1
<PAGE>
"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.
"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 Reorganization 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.
2
<PAGE>
"SEC" shall mean the Securities and Exchange Commission.
"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 FOR HOLDERS.
(a) 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.
Tetra Tech shall use commercially reasonable efforts to cause such Registration
Statement to become effective on or before January 3, 2000, and to keep such
Registration Statement continuously effective for a period ending on the date on
which all such 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
3(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, Tetra Tech shall not be obligated to prepare and file the Registration
Statement required hereunder if Tetra Tech, in its good faith judgment,
reasonably believes that the filing 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
(i) a pending or scheduled public offering or private placement of securities of
Tetra Tech, (ii) an acquisition, merger, consolidation or similar transaction by
or of Tetra Tech, (iii) preexisting and
3
<PAGE>
continuing negotiations, discussions or pending proposals with respect to any
of the foregoing transactions, or (iv) the financial condition of Tetra Tech
in view of the disclosure of any 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.
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:
(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 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
4
<PAGE>
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 (including underwriting
agreements in customary form containing, among other things, reasonable and
customary indemnities) 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; and
(m) cooperate with the selling Holders and the managing
underwriter or underwriters in their marketing efforts with respect to the sale
of the Registrable Securities, including participation by Tetra Tech management
in "road show" presentations.
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
6
<PAGE>
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 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
7
<PAGE>
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
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
8
<PAGE>
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 7(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.
(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.
9
<PAGE>
(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
(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.
10
<PAGE>
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 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 Reorganization 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
Reorganization 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 Reorganization 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.
11
<PAGE>
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 California 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.
TETRA TECH, INC.
By: /s/ Li-San Hwang
-------------------------------------
Li-San Hwang
Chairman, Chief Executive Officer and President
/s/ Elbert C. Ray
-------------------------------------
Elbert C. Ray
/s/ Steven D. Singleton
-------------------------------------
Steven D. Singleton
/s/ Davis B. Servis
-------------------------------------
Davis B. Servis
/s/ Michael A. Cooper
-------------------------------------
Michael A. Cooper
12
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
SCHEDULE OF HOLDERS
Number of Shares of Tetra Tech
Common Stock Issued Pursuant
Holder's Name/Address/Facsimile No. to the Reorganization Agreement
- --------------------------------------- -----------------------------------
<S> <C>
Elbert C. Ray 134,082
800 Corporate Drive, Suite 100
Lexington, Kentucky 40503
Facsimile: (606) 224-1025
Steven D. Singleton 24,412
800 Corporate Drive, Suite 100
Lexington, Kentucky 40503
Facsimile: (606) 224-1025
David B. Servis 30,849
800 Corporate Drive, Suite 100
Lexington, Kentucky 40503
Facsimile: (606) 224-1025
Michael A. Cooper 47,182
800 Corporate Drive, Suite 100
Lexington, Kentucky 40503
Facsimile: (606) 224-1025
</TABLE>
13
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------------------------
Oct. 3, Oct. 4, Sept. 28, Sept. 29, Oct. 1,
1999 1998 1997 1996 1995
------- ------- --------- -------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Gross revenue.......................... $ 566,490 $ 382,934 $ 246,767 $ 220,099 $ 120,034
Net revenue............................ 432,080 297,597 190,791 161,037 87,874
Income from operations................. 55,424 39,813 24,599 17,735 11,756
Net income............................. 29,115 20,586 14,256 10,105 7,553
Basic earnings per share (1)........... 0.78 0.59 0.49 0.37 0.29
Diluted earnings per share (1) ........ 0.74 0.56 0.46 0.36 0.29
Weighted average common shares
outstanding: (1)
Basic............................. 37,159 34,962 29,214 27,314 25,731
Diluted........................... 39,550 36,488 30,820 28,226 26,432
Net cash flow from operating
activities (2)...................... 30,258 (6,620) 1,144 21,124 13,578
Working capital........................ 86,313 77,049 42,539 32,739 39,872
Total assets........................... 380,478 266,610 159,513 88,463 92,930
Long-term obligations, excluding
current portion..................... 37,289 33,546 -- -- 19,045
Stockholders' equity................... 234,432 167,781 107,641 63,269 41,496
</TABLE>
(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 JUNE 1999.
(2) NET CASH FROM OPERATING ACTIVITIES WAS REDUCED BY $9.3 MILLION, $10.3
MILLION AND $15.6 MILLION FOR THE YEARS ENDED OCTOBER 3, 1999, OCTOBER 4,
1998 AND SEPTEMBER 28, 1997, RESPECTIVELY, AS A RESULT OF OUR ASSIGNMENT OF
ACCOUNTS RECEIVABLE TO THE FORMER OWNERS OF CERTAIN ACQUIRED COMPANIES.
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------------------------
Oct. 3,(2) Oct. 4,(3) Sept. 28,(4) Sept. 29,(5) Oct. 1,(6)
1999 1998 1997 1996 1995
---------- ------- --------- --------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME DATA
Gross revenue.......................... $ 566,490 $ 382,934 $ 246,767 $ 220,099 $ 120,034
Subcontractor costs.................... 134,410 85,337 55,976 59,062 32,160
---------- ---------- ---------- ---------- ---------
Net revenue............................ 432,080 297,597 190,791 161,037 87,874
Cost of net revenue.................... 327,336 223,871 141,019 122,084 65,484
---------- ---------- ---------- ---------- ---------
Gross profit........................... 104,744 73,726 49,772 38,953 22,390
Selling, general and administrative
expenses............................ 49,320 33,913 25,173 21,218 10,634
---------- ---------- ---------- ---------- ---------
Income from operations................. 55,424 39,813 24,599 17,735 11,756
Net interest (expense) income.......... (3,135) (1,910) (20) (776) 833
----------- ---------- ---------- --------- ---------
Income before minority interest and
income tax expense.................. 52,289 37,903 24,579 16,959 12,589
Minority interest...................... -- 1,397 -- -- --
---------- ---------- ---------- ---------- ---------
Income before income tax expense....... 52,289 36,506 24,579 16,959 12,589
Income tax expense..................... 23,174 15,920 10,323 6,854 5,036
---------- ---------- ---------- ---------- ---------
Net income............................. $ 29,115 $ 20,586 $ 14,256 $ 10,105 $ 7,553
========== ========== ========== ========== =========
Basic earnings per share (1)........... $ 0.78 $ 0.59 $ 0.49 $ 0.37 $ 0.29
========== ========== ========== ========== =========
Diluted earnings per share (1)......... $ 0.74 $ 0.56 $ 0.46 $ 0.36 $ 0.29
========== ========== ========== ========== =========
Weighted average common shares
outstanding: (1)
Basic............................. 37,159 34,962 29,214 27,314 25,731
========== ========== ========== ========== =========
Diluted........................... 39,550 36,488 30,820 28,226 26,432
========== ========== ========== ========== =========
<CAPTION>
Oct. 3, Oct. 4, Sept. 28, Sept. 29, Oct. 1,
1999 1998 1997 1996 1995
------- ------- --------- --------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital........................ $ 86,313 $ 77,049 $ 42,539 $ 32,739 $ 39,872
Total assets........................... 380,478 266,610 159,513 88,463 92,930
Long-term obligations, excluding
current portion..................... 37,289 33,546 -- -- 19,045
Stockholders' equity................... 234,432 167,781 107,641 63,269 41,496
</TABLE>
(Continued)
2
<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 JUNE 1999.
(2) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF MFG,
INC. (FORMERLY MCCULLEY, FRICK & GILMAN, INC., ACQUIRED FEBRUARY 26, 1999),
COLLINS/PINA CONSULTING ENGINEERS, INC. (ACQUIRED MAY 7, 1999), D.E.A.
CONSTRUCTION COMPANY (ACQUIRED MAY 19, 1999), BAHA COMMUNICATIONS, INC.
(ACQUIRED MAY 21, 1999), UTILITIES & C.C., INC. (ACQUIRED JUNE 18, 1999),
ASL CONSULTANTS, INC. (ACQUIRED JUNE 25, 1999), COSENTINI ASSOCIATES, INC.
(FORMERLY PARTNERSHIP INTERESTS AND CERTAIN COMPANIES AFFILIATED WITH
COSENTINI ASSOCIATES LLP, ACQUIRED JUNE 30, 1999), PDR ENGINEERS, INC.
(ACQUIRED SEPTEMBER 3, 1999), AND EVERGREEN UTILITY CONTRACTORS, INC.,
CONTINENTAL UTILITY CONTRACTORS, INC. AND GIG HARBOR CONSTRUCTION, INC.
(COLLECTIVELY ACQUIRED OCTOBER 2, 1999) FROM THE EFFECTIVE ACQUISITION
DATES.
(3) 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 AND
SUBSEQUENTLY MERGED INTO TETRA TECH, INC. ON JULY 29, 1999), MCNAMEE,
PORTER & SEELEY, INC. (ACQUIRED JULY 8, 1998) AND THE SENTREX GROUP OF
COMPANIES (ACQUIRED SEPTEMBER 22, 1998) FROM THE EFFECTIVE ACQUISITION
DATES.
(4) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF IWA
ENGINEERS (ACQUIRED DECEMBER 11, 1996 AND SUBSEQUENTLY MERGED INTO TETRA
TECH, INC. ON JULY 29, 1999), FLO ENGINEERING, INC. (ACQUIRED DECEMBER 20,
1996 AND SUBSEQUENTLY MERGED INTO TETRA TECH, INC. ON JULY 29, 1999), SCM
CONSULTANTS, INC. (ACQUIRED MARCH 19, 1997), WHALEN & COMPANY, INC.
(ACQUIRED JUNE 11, 1997) AND COMMSITE DEVELOPMENT CORPORATION (ACQUIRED
JULY 11, 1997 AND SUBSEQUENTLY MERGED INTO WHALEN & COMPANY, INC. ON
JANUARY 4, 1999) FROM THE EFFECTIVE ACQUISITION DATES.
(5) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF KCM,
INC. (ACQUIRED NOVEMBER 7, 1995) FROM THE EFFECTIVE ACQUISITION DATE.
(6) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF TETRA
TECH EM INC. (FORMERLY KNOWN AS PRC ENVIRONMENTAL MANAGEMENT, INC. AND
ACQUIRED SEPTEMBER 15, 1995) FROM THE EFFECTIVE ACQUISITION DATE.
(Concluded)
3
<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 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 1999, we generated a net revenue compounded annual growth
rate of approximately 34.9% and achieved a net income compounded annual
growth rate of approximately 37.0%.
We derive our revenue 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 our 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.
4
<PAGE>
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:
<TABLE>
<CAPTION>
Percentage of Net Revenue
----------------------------------------
Client Fiscal 1999 Fiscal 1998 Fiscal 1997
------ ----------- ----------- -----------
<S> <C> <C> <C>
Federal government............................... 39.1% 48.7% 52.3%
State and local government....................... 16.3 12.7 14.8
Private.......................................... 41.3 35.4 29.2
International.................................... 3.3 3.2 3.7
----------- ----------- -----------
Total............................................ 100.0% 100.0% 100.0%
=========== =========== ===========
</TABLE>
Our revenue and operating results fluctuate from quarter to quarter as
a result of a number of factors, such as:
- 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 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 can cause significant variations in operating
results from quarter to quarter and could result in losses.
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 1999, we purchased 11 companies in the
following nine transactions:
- MCCULLEY, FRICK & GILMAN, INC.- In February 1999, we acquired
McCulley, Frick & Gilman, Inc. (MFG). The purchase was valued at approximately
$8.1 million. MFG, a Colorado-based firm, provides professional environmental
science and consulting services to private-sector clients throughout the United
States.
- COLLINS/PINA CONSULTING ENGINEERS, INC.- In May 1999, we acquired
Collins/Pina Consulting Engineers, Inc. (CPC). The purchase was valued at
approximately $2.7 million. CPC, an Arizona-based firm, provides consulting
engineering and related services primarily in the state of Arizona.
- D.E.A. CONSTRUCTION COMPANY - In May 1999, we acquired D.E.A.
Construction Company (DCC). The purchase was valued at approximately $15.5
million. DCC, a Colorado-based construction and field services firm, provides
design, construction and maintenance of communications and
5
<PAGE>
information transport systems to the communications industry primarily in
Colorado and surrounding states.
- BAHA COMMUNICATIONS, INC.- In May 1999, we acquired BAHA
Communications, Inc. (BCI). The purchase was valued at approximately $2.6
million, excluding the value of the accounts receivable which were assigned
to the former owners at the time of acquisition. BCI, a Nevada-based
construction and field services firm, provides infrastructure installation
and maintenance services to the wireless personal communications industry
primarily in Nevada and the Southwestern United States.
- UTILITIES & C.C., INC. - In June 1999, we acquired Utilities &
C.C., Inc. (UCC). The purchase was valued at approximately $2.2 million. UCC,
a Northern California-based construction and field services firm, provides
infrastructure installation and maintenance services to the wireless personal
communications industry primarily in California.
- ASL CONSULTANTS, INC. - In June 1999, we acquired ASL Consultants,
Inc. (ASL). The purchase was valued at approximately $10.1 million. ASL, a
Southern California-based consulting engineering firm, provides water and
wastewater treatment, transportation, and other engineering services
primarily in California and Arizona.
- COSENTINI ASSOCIATES - In June 1999, we acquired the outstanding
shares and partnership interests of certain companies affiliated with
Cosentini Associates LLP (collectively, CAA). The purchase was valued at
approximately $5.3 million, excluding the value of the accounts receivable
which were assigned to the former owners at the time of acquisition. CAA, a
New York-based engineering firm, provides engineering services for major
buildings primarily in the Northeastern United States.
- PDR ENGINEERS, INC. - In September 1999, we acquired PDR
Engineers, Inc. (PDR). The purchase was valued at approximately $6.6 million.
PDR, a Kentucky-based consulting engineering firm, provides water and
wastewater treatment, transportation, and other engineering services
primarily in the Southeastern United States.
- EVERGREEN UTILITY CONTRACTORS, INC. - In October 1999, we acquired
Evergreen Utility Contractors, Inc., Continental Utility Contractors, Inc.
and Gig Harbor Construction, Inc. (collectively, EUC). The purchase was
valued at approximately $11.8 million. EUC, a Washington-based engineering
firm, provides engineering and network services for cable TV and fiber optic
telephone networks in the Pacific Northwestern United States.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating information as a percentage of net revenue:
<TABLE>
<CAPTION>
Percentage of Net Revenue
----------------------------------------
Fiscal Year Ended
----------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Net revenue............................. 100.0% 100.0% 100.0%
Cost of net revenue..................... 75.8 75.2 73.9
--------- --------- --------
Gross profit............................ 24.2 24.8 26.1
Selling, general and administrative
expenses............................. 11.4 11.4 13.2
--------- --------- --------
Income from operations.................. 12.8 13.4 12.9
Net interest (expense) income .......... (0.7) (0.7) --
--------- --------- --------
Income before minority interest and
income tax expense................... 12.1 12.7 12.9
6
<PAGE>
Minority interest....................... -- (0.5) --
--------- --------- --------
Income before income tax expense........ 12.1 12.2 12.9
Income tax expense...................... 5.4 5.3 5.4
--------- --------- --------
Net income.............................. 6.7% 6.9% 7.5%
========= ========= =======
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
NET REVENUE. Net revenue increased $134.5 million, or 45.2%, to
$432.1 million in fiscal 1999 from $297.6 million in fiscal 1998. All four
client sectors continued to show net revenue increases in actual dollars.
These increases were primarily attributable to the expansion of our
infrastructure services throughout the United States, the continued expansion
of new lines of service in our communications business and companies acquired
in fiscal 1999. As a percentage of net revenue, increases were realized in
the state and local sector, the private sector and the international sector.
Net revenue from the companies acquired in fiscal 1999 totaled $61.5 million.
Excluding the net revenue from these companies, we realized 24.5% growth in
our net revenue. Gross revenue increased $183.6 million, or 47.9%, to $566.5
million in fiscal 1999 from $382.9 million in fiscal 1998. In fiscal 1999,
subcontractor costs comprised 23.7% of gross revenue compared to 22.3% for
fiscal 1998.
COST OF NET REVENUE. Cost of net revenue increased $103.5 million,
or 46.2%, to $327.3 million in fiscal 1999 from $223.9 million in fiscal
1998. As a percentage of net revenue, cost of net revenue increased from
75.2% in fiscal 1998 to 75.8% in fiscal 1999. This increase was primarily
attributable to higher costs incurred from the acquired companies.
Professional compensation, the largest component of our cost of net revenue,
rose as the number of our employees increased by 1,781, or 48.6%, to 5,443 in
fiscal 1999 from 3,662 in fiscal 1998. Excluding the employees provided from
acquired companies, our number of employees increased by 74, or 2.0%. Gross
profit increased $31.0 million, or 42.1%, to $104.7 million in fiscal 1999
from $73.7 million in fiscal 1998. In addition, included in our net revenue
and gross profit was $1.75 million relating to the reversal of an over
accrual of an allowance for disallowed costs (See Note 3. in Notes to
Consolidated Financial Statements). However, as a percentage of net revenue,
gross profit decreased from 24.8% in fiscal 1998 to 24.2% in fiscal 1999,
primarily due to lower margins of acquired companies.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses
increased $15.4 million, or 45.4%, to $49.3 million in fiscal 1999 from $33.9
million in fiscal 1998. This increase was primarily attributable to
additional headquarters' costs associated with centralizing corporate
functions, other corporate initiatives, costs associated with year 2000
compliance, as well as additional amortization expense relating to acquired
companies. As a percentage of net revenue, SG&A expenses remained at 11.4%.
The amortization expense related to acquisitions increased $1.8 million, or
63.1%, to $4.8 million in fiscal 1999 from $3.0 million in fiscal 1998.
NET INTEREST EXPENSE. Net interest expense increased $1.2 million,
or 64.1%, from $1.9 million to $3.1 million from fiscal 1998 to fiscal 1999.
This increase was primarily attributable to the financing and working capital
needs of certain acquisitions.
INCOME TAX EXPENSE. Income tax expense increased $7.3 million, or
45.6%, to $23.2 million in fiscal 1999 from $15.9 million in fiscal 1998.
This increase was due to higher income before income taxes and an increase in
our effective tax rate from 43.6% in fiscal 1998 to 44.3% in fiscal 1999.
This increase was primarily attributable to increased amounts of
non-deductible goodwill resulting from our business acquisitions.
7
<PAGE>
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 expenses decreased from 13.2%
in fiscal 1997 to 11.4% in fiscal 1998 due to operating efficiencies. The
amortization expense 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.
UNAUDITED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly operating
results for each of our last three fiscal years ended October 3, 1999,
October 4, 1998 and September 28, 1997. 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.
8
<PAGE>
<TABLE>
<CAPTION>
Fiscal 1999 Quarter Ended Fiscal 1998 Quarter Ended
---------------------------------- ------------------------------------
Jan. 3, Apr. 4, Jul. 4, Oct. 3, Dec. 28, Mar. 29, Jun. 28, Oct. 4,
1999 1999 1999 1999 1997 1998 1998 1998
------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue $89,245 $96,955 $120,739 $125,141 $53,664 $71,806 $75,149 $96,978
Cost of net revenue 70,187 74,402 88,189 94,558 40,339 54,786 54,405 74,341
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 19,058 22,553 32,550 30,583 13,325 17,020 20,744 22,637
Selling, general and
administrative expenses 8,871 10,684 16,951 12,814 6,146 8,148 9,333 10,286
------- ------- ------- ------- ------- ------- ------- -------
Income from operations 10,187 11,869 15,599 17,769 7,179 8,872 11,411 12,351
Net interest (expense) income (699) (532) (550) (1,354) (73) (596) (510) (731)
-------- ------- -------- ------- ------- ------ ------- ------
Income before minority
interest and income tax expense 9,488 11,337 15,049 16,415 7,106 8,276 10,901 11,620
Minority interest - - - - - 203 1,194 -
------- ------- ------- ------- -------- ------- ------- -------
Income before income
tax expense 9,488 11,337 15,049 16,415 7,106 8,073 9,707 11,620
Income tax expense 4,061 4,875 6,546 7,692 3,055 3,552 4,214 5,099
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 5,427 $ 6,462 $ 8,503 $ 8,723 $ 4,051 $ 4,521 $ 5,493 $ 6,521
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
Fiscal 1997 Quarter Ended
------------------------------------
Dec. 29, Mar. 30, Jun. 29, Sep. 28,
1996 1997 1997 1997
------- ------- ------- ------
(in thousands)
<S> <C> <C> <C> <C>
Net revenue $40,423 $43,914 $48,621 $57,833
Cost of net revenue 31,051 33,367 35,660 40,941
------- ------- ------- -------
Gross profit 9,372 10,547 12,961 16,892
Selling, general and
administrative expenses 4,979 5,655 6,754 7,785
------- ------- ------- -------
Income from operations 4,393 4,892 6,207 9,107
Net interest (expense) income 49 31 4 (104)
------- ------- ------- ------
Income before minority
interest and income tax expense 4,442 4,923 6,211 9,003
Minority interest - - - -
------- ------- ------- -------
Income before income
tax expense 4,442 4,923 6,211 9,003
Income tax expense 1,846 2,051 2,567 3,859
------- ------- ------- -------
Net income $ 2,596 $ 2,872 $ 3,644 $ 5,144
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999 Quarter Ended Fiscal 1998 Quarter Ended
----------------------------------- -----------------------------------
Jan. 3, Apr. 4, Jul. 4, Oct. 3, Dec. 28, Mar. 29, Jun. 28, Oct. 4,
1999 1999 1999 1999 1997 1998 1998 1998
------- ------- ------- ------- ------- ------- ------- -------
<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 78.6 76.7 73.0 75.6 75.2 76.3 72.4 76.7
------- -------- ------- ------- -------- ------- ------- --------
Gross profit 21.4 23.3 27.0 24.4 24.8 23.7 27.6 23.3
Selling, general and
administrative expenses 10.0 11.1 14.1 10.2 11.5 11.3 12.4 10.6
------- -------- ------- ------- -------- ------- ------- --------
Income from operations 11.4 12.2 12.9 14.2 13.3 12.4 15.2 12.7
Net interest (expense) income (0.8) (0.5) (0.4) (1.1) (0.1) (0.9) (0.7) (0.7)
------- -------- ------- ------- -------- ------- ------- --------
Income before minority
interest and income tax 10.6 11.7 12.5 13.1 13.2 11.5 14.5 12.0
expense
Minority interest - - - - - 0.3 1.6 -
------- -------- ------- ------- -------- ------- ------- --------
Income before income
tax expense 10.6 11.7 12.5 13.1 13.2 11.2 12.9 12.0
Income tax expense 4.5 5.0 5.5 6.1 5.7 4.9 5.6 5.3
------- -------- ------- ------- -------- ------- ------- --------
Net income 6.1% 6.7% 7.0% 7.0% 7.5% 6.3% 7.3% 6.7%
======= ======== ======= ======= ======== ======= ======= ========
<CAPTION>
Fiscal 1997 Quarter Ended
------------------------------------
Dec. 29, Mar. 30, Jun. 29, Sep. 28,
1996 1997 1997 1997
------- ------- ------- ------
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 76.8 76.0 73.3 70.8
------- ------- -------- -------
Gross profit 23.2 24.0 26.7 29.2
Selling, general and
administrative expenses 12.3 12.9 13.9 13.5
------- ------- -------- -------
Income from operations 10.9 11.1 12.8 15.7
Net interest (expense) income 0.1 0.1 - (0.1)
- ------- ------- ------- --------
Income before minority
interest and income tax expense 11.0 11.2 12.8 15.6
Minority interest - - - -
------- ------- -------- ------
Income before income
tax expense 11.0 11.2 12.8 15.6
Income tax expense 4.6 4.7 5.3 6.7
------- ------- -------- -------
Net income 6.4% 6.5% 7.5% 8.9%
======= ======= ======== =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
We are currently in the process of refinancing our existing
revolving credit facility, which must be reduced to $60.0 million on February
1, 2000, with a new senior secured credit facility in the amount of $150.0
million. In connection with this refinancing, we have signed a syndication
mandate letter under which Banc of America LLC has agreed to form a syndicate
of financial institutions, led by Bank of America, N.A., to provide the new
facility. We expect that internally generated funds, our existing cash
balances and availability under the new facility will be sufficient to meet
our capital requirements through the end of fiscal 2000. However, no
assurance can be given that we will successfully complete the refinancing. If
we are unable to refinance our indebtedness, we will need to obtain alternate
financing to reduce our existing facility and meet our fiscal 2000 capital
needs.
As of October 3, 1999, our working capital was $86.3 million, an
increase of $9.3 million from $77.0 million on October 4, 1998, of which cash
and cash equivalents totaled $8.2 million. In fiscal 1999, we augmented cash
provided by operations with borrowings under our credit facility and proceeds
from our secondary offering. In fiscal 1999, $30.3 million was provided by
operating activities and $57.7 million was used in investing activities, of
which $50.7 million was related to business acquisitions. In fiscal 1998, we
used $6.6 million in operating activities and $41.3 million in investing
activities, of which $37.8 million was related to business acquisitions. In both
fiscal years 1999 and 1998, cash provided by/used in operating activities was
effected by the structure of certain transactions. One of our acquisition
structures is to assign accounts receivable to the former owners at the time of
the transaction in lieu of cash consideration. This structure allows us to
reduce our cash used in investing activities. However, cash must be invested in
future periods to finance the working capital needs of the acquired
9
<PAGE>
company. In fiscal 1999, in the BCI and CAA acquisitions, accounts receivable
in the aggregate amount of $19.4 million were assigned to the former owners.
Collections on these receivables during fiscal 1999 totaled $9.3 million. If
we had not assigned these receivables at the time of acquisition, cash
provided by operating activities in fiscal 1999 could have been $39.6
million. In fiscal years 1997 and 1998, we acquired WAC and MPS utilizing
this same structure. In fiscal 1997, we assigned $18.5 million in receivables
to the former owners of WAC and in fiscal 1998, we assigned $8.0 million in
receivables to the former owners of MPS. In fiscal 1998, cash collected on
these assigned receivables totaled $10.3 million. If we had not assigned
these receivables at the time of acquisition, cash provided by operating
activities in fiscal 1998 could have been $3.7 million. Our capital
expenditures during fiscal years 1999 and 1998 were approximately $7.0
million and $3.5 million, respectively. The expenditures were primarily for
computer equipment and office expansion.
We have a credit agreement with a bank (the "Credit Agreement")
which, as of October 3, 1999, provided us with a revolving credit facility
(the "Facility") of $85.0 million. On December 24, 1999, we amended the
Credit Agreement to provide for a facility of $93.0 million. The Facility
must be reduced to $60.0 million on February 1, 2000 and it matures on
December 15, 2000 or earlier at our discretion upon payment in full of loans
and other obligations. Throughout fiscal 1999, maximum borrowings under the
Facility were $65.0 million. At October 3, 1999, borrowings and standby
letters of credit totaled $57.5 million and $1.5 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
or could expand our service offerings. 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
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME, which we adopted in fiscal 1999. The Statement
establishes standards for the 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 and is displayed
with the same prominence as other financial statements.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which we adopted in fiscal
year 1999. 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
10
<PAGE>
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.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVES AND HEDGING ACTIVITIES. The Statement, as amended, is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. 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 types 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 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 $24.0 million of our
long-term debt in fiscal 2000. As our facility matures in December 2000, we
anticipate repaying the outstanding debt of $37.3 million by seeking an
alternate financing arrangement. Assuming we pay our long-term debt in the
amounts of $24.0 million, $24.0 million and $13.3 million for the next three
years ratably throughout each year, we obtain financing arrangements with
similar interest provisions, and our average interest rate on our long-term debt
increases or decreases by one percentage point, our interest expense could
increase or decrease by $0.5 million, $0.3 million and $0.1 million in fiscal
2000, 2001 and 2002, respectively. However there can be no assurance that we
will, or will be able to, repay our debt in the prescribed manner or obtain
alternate financing. We could incur additional debt under this credit facility
or our operating results could be worse than we expect.
YEAR 2000
Since fiscal 1995, we have worked to resolve the potential impact of
the year 2000 (Y2K) 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 established both a Y2K review committee and a Y2K action team. The
purpose of the review committee was to develop and communicate our Y2K plan to
achieve our Y2K compliance mission. The
11
<PAGE>
purpose of the action team was to identify, remediate and implement plans to
resolve our Y2K related issues. Through the review committee and the action
team, we assessed all issues we believe to have that relate to Y2K. We
developed questionnaires regarding Y2K readiness used both internally and
externally. We completed both our internal assessment and assessed the Y2K
issues of our clients and vendors. Based on the information collected to date,
we do not believe that our Y2K issues will have a material adverse impact on
our financial position. We plan to continue to devote all resources required to
resolve any significant Y2K issues that may arise 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 Y2K
compliant by our vendors. At the end of fiscal 1998, approximately 72% of our
gross revenue was recognized on these Y2K compliant systems. During fiscal 1999
we converted the remaining operating units to Y2K compliant systems. For the
companies we acquired in fiscal 1999, we obtained warranties from the former
owners regarding the companies' Y2K compliance. In all cases, we believe that
our financial and accounting systems are Y2K compliant and we will not be
materially impacted by the year 2000.
We installed a Y2K compliant human resource information management
system. We believe that our human resource management information systems are
Y2K compliant and we will not be materially impacted by the year 2000.
We have expended 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.
RISKS
We have extensive business with the Federal government. Should the
Federal government, specifically the Department of Defense, experience
significant business interruptions relating to Y2K 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
Y2K issues in a timely manner, we could be materially impacted. We believe that
the worst case scenario relating to Y2K would be an extensive period of time
in which the Federal government and other third parties could not process
payments promptly.
We believe the risks associated with non-Y2K 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 or our human resource information
management system.
We maintain, as a matter of policy and practice, mitigation plans in
the event of systems failure which includes regular backup of certain historical
information on both electronic and paper mediums.
12
<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 3, 1999 and October 4, 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended October 3, 1999. 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 3, 1999 and October 4, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
October 3, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
November 16, 1999 (except for Note 5, as to which the date is December 24, 1999)
13
<PAGE>
TETRA TECH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Oct. 3, Oct. 4,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 8,189,000 $ 4,889,000
Accounts receivable - net.................................. 91,376,000 68,834,000
Unbilled receivables - net................................. 85,072,000 59,888,000
Prepaid expenses and other current assets.................. 7,174,000 4,955,000
Deferred income taxes...................................... 3,259,000 3,766,000
-------------- --------------
Total Current Assets.................................... 195,070,000 142,332,000
-------------- --------------
Property and Equipment:
Equipment, furniture and fixtures.......................... 39,488,000 25,616,000
Leasehold improvements..................................... 3,343,000 1,348,000
-------------- --------------
Total................................................... 42,831,000 26,964,000
Accumulated depreciation and amortization.................. (21,085,000) (13,219,000)
-------------- --------------
Property and Equipment - Net................................... 21,746,000 13,745,000
-------------- --------------
Intangible Assets - Net........................................ 160,686,000 108,638,000
Other Assets................................................... 2,976,000 1,895,000
-------------- --------------
Total Assets................................................... $ 380,478,000 $ 266,610,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $ 32,570,000 $ 24,027,000
Accrued compensation....................................... 21,900,000 15,614,000
Billings in excess of costs on uncompleted contracts....... 5,872,000 694,000
Other current liabilities.................................. 14,606,000 7,589,000
Income taxes payable....................................... 9,809,000 3,294,000
Current portion of long-term obligations................... 24,000,000 14,065,000
-------------- --------------
Total Current Liabilities............................... 108,757,000 65,283,000
-------------- --------------
Long-term Obligations.......................................... 37,289,000 33,546,000
-------------- --------------
Commitments and Contingencies (Notes 8 and 10)
Stockholders' Equity:
Preferred stock - authorized, 2,000,000 shares of $.01 par
value; issued and outstanding 0 at October 3, 1999 and
October 4, 1998.......................................... -- --
Exchangeable stock of a subsidiary......................... 13,239,000 15,411,000
Common stock - authorized, 50,000,000 shares of $.01 par
value; issued and outstanding 38,433,621 shares at
October 3, 1999 and 35,788,250 shares at October 4, 1998. 384,000 357,000
Additional paid-in capital................................. 127,978,000 87,495,000
Accumulated other comprehensive income..................... (802,000) --
Retained earnings.......................................... 93,633,000 64,518,000
-------------- --------------
Total Stockholders' Equity..................................... 234,432,000 167,781,000
-------------- --------------
Total Liabilities and Stockholders' Equity..................... $ 380,478,000 $ 266,610,000
============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
14
<PAGE>
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Revenue:
Gross revenue.............................. $ 566,490,000 $ 382,934,000 $ 246,767,000
Subcontractor costs........................ 134,410,000 85,337,000 55,976,000
-------------- -------------- --------------
Net Revenue..................................... 432,080,000 297,597,000 190,791,000
Cost of Net Revenue............................. 327,336,000 223,871,000 141,019,000
-------------- -------------- --------------
Gross Profit.................................... 104,744,000 73,726,000 49,772,000
Selling, General and Administrative Expenses.... 49,320,000 33,913,000 25,173,000
-------------- -------------- --------------
Income From Operations.......................... 55,424,000 39,813,000 24,599,000
Interest Expense................................ 3,561,000 2,329,000 320,000
Interest Income................................. 426,000 419,000 300,000
-------------- -------------- --------------
Income Before Minority Interest and Income
Tax Expense.................................. 52,289,000 37,903,000 24,579,000
Minority Interest............................... -- 1,397,000 --
-------------- -------------- --------------
Income Before Income Tax Expense................ 52,289,000 36,506,000 24,579,000
Income Tax Expense.............................. 23,174,000 15,920,000 10,323,000
-------------- -------------- --------------
Net Income...................................... $ 29,115,000 $ 20,586,000 $ 14,256,000
============== ============== ==============
Basic Earnings Per Share........................ $ 0.78 $ 0.59 $ 0.49
============== ============== ==============
Diluted Earnings Per Share...................... $ 0.74 $ 0.56 $ 0.46
============== ============== ==============
Weighted Average Common Shares Outstanding:
Basic..................................... 37,159,000 34,962,000 29,214,000
============== ============== ==============
Diluted................................... 39,550,000 36,488,000 30,820,000
============== ============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
15
<PAGE>
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED OCTOBER 3, 1999, OCTOBER 4, 1998 AND SEPTEMBER 28, 1997
<TABLE>
<CAPTION>
ACCUMULATED
EXCHANGEABLE STOCK COMMON STOCK ADDITIONAL OTHER
---------------------- -------------------- PAID-IN RETAINED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME/(LOSS) TOTAL
---------- ---------- ---------- -------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 29, 1996
as previously reported....... -- $ -- 22,073,440 $221,000 $ 33,372,000 $29,676,000 $ -- $63,269,000
Five-for-four common stock
split (see Note 6)....... 5,518,360 55,000 (55,000) --
--------- ---------- ---------- ------- ------------ ----------- ---------- ------------
BALANCE, SEPTEMBER 29, 1996.... -- -- 27,591,800 276,000 33,317,000 29,676,000 -- 63,269,000
Net income and
comprehensive income..... 14,256,000 14,256,000
Shares issued in
acquisitions............. 4,299,163 43,000 27,007,000 27,050,000
Stock options exercised.... 282,436 3,000 1,307,000 1,310,000
Shares issued in Employee
Stock Purchase Plan...... 192,624 2,000 1,280,000 1,282,000
Tax benefit for
disqualifying
dispositions of stock
options.................. 474,000 474,000
--------- ----------- ---------- ------- ------------ ----------- --------- ------------
BALANCE, SEPTEMBER 28, 1997.... -- -- 32,366,023 324,000 63,385,000 43,932,000 -- 107,641,000
Net income and
comprehensive income.... 20,586,000 20,586,000
Shares issued in
acquisitions............ 920,354 15,411,000 432,435 4,000 5,520,000 20,935,000
Stock options exercised... 440,331 4,000 2,613,000 2,617,000
Shares issued in Employee
Stock Purchase Plan .... 144,431 1,000 1,505,000 1,506,000
Preferred shares converted
to common............... 2,405,938 24,000 13,502,000 13,526,000
Tax benefit for
disqualifying
dispositions of stock
options ................ 977,000 977,000
Payment for fractional
shares.................. (908) (7,000) (7,000)
--------- ----------- ---------- -------- ------------ ----------- --------- -------------
BALANCE, OCTOBER 4, 1998 ...... 920,354 15,411,000 35,788,250 357,000 87,495,000 64,518,000 -- 167,781,000
Comprehensive income:
Net income ............. 29,115,000 29,115,000
Foreign currency
translation adjustment. (802,000) (802,000)
-------------
Comprehensive income... 28,313,000
-------------
Shares issued in secondary
offering............... 1,250,000 12,000 22,159,000 22,171,000
Shares issued in
acquisitions............ 787,051 8,000 11,563,000 11,571,000
Stock options exercised... 289,972 3,000 1,920,000 1,923,000
Shares issued in Employee
Stock Purchase Plan..... 156,361 2,000 2,220,000 2,222,000
Exchangeable shares of a
subsidiary exchanged
for common shares....... (129,712) (2,172,000) 162,140 2,000 2,170,000 --
Tax benefit for
disqualifying
dispositions of stock
options................. 473,000 473,000
Payment for fractional
shares.................. (153) (22,000) (22,000)
--------- ----------- ---------- -------- ------------ ----------- --------- -------------
BALANCE, OCTOBER 3, 1999....... 790,642 $13,239,000 38,433,621 $384,000 $127,978,000 $93,633,000 $(802,000) $234,432,000
========= =========== ========== ======== ============ =========== ========= ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE>
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 29,115,000 $20,586,000 $14,256,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 12,708,000 6,595,000 4,411,000
Deferred income taxes.................................... (211,000) (2,899,000) 1,490,000
Provision for losses on receivables...................... (667,000) (334,000) (56,000)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable...................................... 4,713,000 (23,262,000) (3,617,000)
Unbilled receivables..................................... (13,727,000) (11,502,000) (8,037,000)
Prepaid expenses and other current assets................ 998,000 (1,375,000) 1,823,000
Accounts payable......................................... (8,306,000) 10,203,000 (3,551,000)
Accrued compensation..................................... (935,000) (32,000) (3,909,000)
Other current liabilities................................ 3,973,000 (6,548,000) (1,412,000)
Income taxes payable..................................... 2,597,000 1,948,000 (254,000)
------------ ----------- ------------
Net Cash Provided By (Used In) Operating Activities.. 30,258,000 (6,620,000) 1,144,000
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... (7,040,000) (3,511,000) (2,640,000)
Proceeds from sale of property and equipment.................. -- -- 44,000
Payments for business acquisitions, net of cash acquired...... (50,655,000) (37,778,000) (1,237,000)
------------- ------------ ------------
Net Cash Used In Investing Activities................ (57,695,000) (41,289,000) (3,833,000)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations............................. (67,605,000) (39,580,000) (6,797,000)
Proceeds from issuance of long-term obligations............... 72,841,000 76,000,000 13,000,000
Proceeds from issuance of common stock........................ 26,576,000 4,116,000 2,619,000
------------ ----------- -----------
Net Cash Provided By Financing Activities............ 31,812,000 40,536,000 8,822,000
------------ ----------- -----------
Effect of Rate Changes on Cash................................... (1,075,000) -- --
------------ ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents............. 3,300,000 (7,373,000) 6,133,000
Cash and Cash Equivalents at Beginning of Year................... 4,889,000 12,262,000 6,129,000
------------ ----------- -----------
Cash and Cash Equivalents at End of Year......................... $ 8,189,000 $ 4,889,000 $12,262,000
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................... $ 3,524,000 $ 2,129,000 $ 309,000
============ =========== ===========
Income taxes............................................... $ 20,067,000 $17,195,000 $ 9,407,000
============ =========== ===========
(Continued)
17
<PAGE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
In fiscal 1999, the Company purchased all of the capital
stock of McCulley, Frick & Gilman, Inc., Collins/Pina
Consulting Engineers, Inc., D.E.A. Construction Company,
BAHA Communications, Inc., Utilities & C.C., Inc., ASL
Consultants, Inc., Cosentini Associates, Evergreen Utility
Contractors, Inc., Continental Utility Contractors, Inc.,
Gig Harbor Construction, Inc. and PDR Engineers, Inc.
In conjunction with these acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired.......................... $110,616,000
Cash paid.............................................. (52,275,000)
Issuance of common stock............................... (11,571,000)
Purchase price payable (282,000)
Other acquisition costs................................ (965,000)
-------------
Liabilities assumed................................ $ 45,523,000
============
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.......................... $ 80,209,000
Cash paid.............................................. (38,348,000)
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
============
</TABLE>
(Concluded)
See accompanying Notes to Consolidated Financial Statements.
18
<PAGE>
TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 3, 1999,
OCTOBER 4, 1998 AND SEPTEMBER 28, 1997
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, its wholly-owned subsidiaries and its
majority-owned subsidiary Tetra Tech Canada Ltd. 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 years 1999 and 1997 contained
52 weeks. Fiscal year 1998 contained 53 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 revenue 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 is 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.
Net revenue under Federal government contracts and subcontracts
accounted for approximately 39.1%, 48.7% and 52.3%, of net revenue for the years
ended October 3, 1999, October 4, 1998 and September 28, 1997, 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.
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.
19
<PAGE>
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.
Intangible assets as of October 3, 1999 and October 4, 1998 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 3, 1999 and October 4, 1998 was $11.0 million
and $6.5 million, 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 income
available to common stockholders 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
on a 1.25 to one basis. The redeemable preferred stock had 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
June 15, 1999 for each four shares outstanding as of the record date of May
14, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
cash equivalents, accounts receivable, unbilled receivables and accounts payable
approximate fair value because of the short maturities of these instruments. The
carrying amount of the revolving credit facility and other long-term debt
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 cash and cash equivalents, accounts
receivable and unbilled receivables. 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 3, 1999, approximately 25.5% 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
Company's client base and their geographic dispersion. The Company performs
ongoing credit evaluations of its clients and maintains an allowance for
potential credit losses.
20
<PAGE>
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 June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 130, REPORTING COMPREHENSIVE INCOME which the Company adopted in fiscal year
1999. 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.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION which the Company adopted in fiscal
year 1999. 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,
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.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES
AND HEDGING ACTIVITIES. The Statement, as amended, is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. 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
types of items and transactions that may be hedged, and specifies detailed
criteria to be met to qualify for hedge accounting. The Company has not yet
completed its analysis of the effect of SFAS No. 133 on its financial
statements. The Company will adopt this Statement in fiscal year 2001.
2. MERGERS AND ACQUISITIONS
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 149,491
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 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 62,715 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 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
21
<PAGE>
clients. The purchase was valued at approximately $2,431,000, consisting of
cash and 308,706 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 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
5,687,187 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. The common and
preferred stock were issued in a private placement and had a combined value of
$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 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 496,997 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 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 was valued at
approximately $25.2 million, as adjusted, and consisted of cash.
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 $0.3 million. 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.
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 was valued at approximately $1.5 million,
consisting of cash and 88,825 shares of Company common stock.
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 $14.9 million, consisting of cash and
343,610 shares of Company common stock. Simultaneously with the acquisition, MPS
assigned to its former owners accounts receivable having a net value of $8.0
million.
On September 22, 1998, the Company acquired, through its majority-owned
subsidiary Tetra Tech Canada Ltd. (TtC), 100% of the capital stock of 1056584
Ontario Limited, 1056585 Ontario Limited, Ventrure Cable Limited, Cen-Comm
Communication, Inc., Sentrex Electronics, Inc. and LAL Corp., (collectively,
the Sentrex Group of Companies (SGOC)), providers of engineering and technical
22
<PAGE>
services to the cable television, telephony and data networking industries. The
purchase was valued at approximately $19.2 million, consisting of cash and
920,354 shares of TtC exchangeable stock. The TtC exchangeable stock is
exchangeable, share for share, subject to adjustment, for Company common stock
as described in the related purchase agreement. Upon completion of the SGOC
acquisition, the Company beneficially owns 100% of Whalen/Sentrex LLC.
On January 4, 1999, the Company merged CDC into WAC. The Company
believes this combination strengthens its geographic presence in Northern
California.
On February 26, 1999, the Company acquired 100% of the capital stock of
McCulley, Frick & Gilman, Inc. (MFG), a provider of professional environmental
science and consulting services to private-sector clients. The purchase was
valued at approximately $8.1 million, as adjusted, consisting of cash and
237,413 shares of Company common stock of which, 5,923 shares were issued in
October 1999 pursuant to the purchase price adjustment clause in the related
purchase agreement.
On May 7, 1999, the Company acquired 100% of the capital stock of
Collins/Pina Consulting Engineers, Inc. (CPC), a provider of consulting
engineering and related services primarily in the state of Arizona. The purchase
was valued at approximately $2.7 million, as adjusted, consisting of cash and
4,938 shares of Company common stock.
On May 19, 1999, the Company acquired 100% of the capital stock of
D.E.A. Construction Company (DCC), a provider of engineering and network
infrastructure services for cable television and fiber optic telephone networks
including design and construction and maintenance capabilities of communications
and information transport systems. The purchase was valued at approximately
$15.5 million, as adjusted, consisting of cash.
On May 21, 1999, the Company acquired 100% of the capital stock of BAHA
Communications, Inc. (BCI), a supplier of infrastructure installation and
maintenance services to the wireless personal communications industry. The
purchase was valued at approximately $2.6 million, consisted of 176,168 shares
of Company common stock, and is subject to a purchase price and purchase
allocation adjustment based on the final determination of BCI's net asset value
as of June 30, 1999. Of the 176,168 shares of Company common stock, 29,272
shares are being held in escrow as contingent consideration until July 31, 2000
and will be released dependent upon BCI's operational performance, as specified
in the related escrow agreement, during the previous 12-month period.
Simultaneously with the acquisition, BCI assigned to its former owners accounts
receivable having a net value of $1.0 million.
On June 18, 1999, the Company acquired 100% of the capital stock of
Utilities & C.C., Inc. (UCC), a supplier of infrastructure installation and
maintenance services to the wireless personal communications industry. The
purchase was valued at approximately $2.2 million, as adjusted, consisting of
144,482 shares of Company common stock of which, 6,552 shares were issued in
October 1999 pursuant to the purchase price adjustment clause in the related
purchase agreement.
On June 25, 1999, the Company acquired 100% of the capital stock of ASL
Consultants, Inc. (ASL), a provider of water and wastewater treatment,
transportation, and other engineering services. The purchase was valued at
approximately $10.1 million, consisting of cash, and is subject to a purchase
price and purchase allocation adjustment based upon the final determination of
ASL's net asset value as of July 2, 1999.
On June 30, 1999, the Company acquired 100% of the capital stock of
L.M.W. Associates, Inc., Cosentini Associates, Inc. and Cobin, Inc., and 100% of
the limited liability partnership interests of
23
<PAGE>
Cosentini Associates IL LLP, Cosentini Associates MA LLP, Cosentini
Associates DC LLP and Cosentini Associates FL LLP (collectively, CAA). The
purchase was valued at approximately $5.3 million, consisting of cash, and is
subject to a purchase price and purchase allocation adjustment based upon the
final determination of CAA's net asset value as of June 30, 1999.
Simultaneously with the acquisition, CAA assigned to its former owners
accounts receivable having a gross value of $18.4 million.
On August 3, 1999, the Company merged its wholly-owned subsidiaries,
Simons Li & Associates, Inc. (SLA), IWA, FLO, and CDE into a single operating
division of the Company. The Company believes this combination provides synergy
and cohesiveness for the combined group.
On August 4, 1999, the Company merged its wholly owned-subsidiary
Integration Technologies, Inc. (IT) into its newly acquired wholly-owned
subsidiary, DCC. IT and DCC provide substantially similar services to the same
client in similar markets. The Company believes this combination provides a
stonger market position.
On September 3, 1999, the Company acquired 100% of the capital stock of
PDR Engineers, Inc. (PDR), a provider of engineering consulting services to
Federal, state and local government and private-sector clients. The purchase was
valued at approximately $6.6 million, consisting of cash and 236,525 shares of
Company common stock, and is subject to a purchase price and purchase allocation
adjustment based upon the final determination of PDR's net asset value as of
September 3, 1999.
On October 2, 1999, the Company acquired 100% of the capital stock of
Evergreen Utility Contractors, Inc., Continental Utility Contractors, Inc. and
Gig Harbor Construction, Inc. (collectively, EUC), a provider of engineering and
network services for cable TV and fiber optic networks in the Pacific Northwest
Region of the U.S. The purchase was valued at approximately $11.8 million,
consisting of cash, and is subject to a purchase price and purchase allocation
adjustment based upon the final determination of EUC's net asset value as of
October 2, 1999.
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 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 consolidated 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 and 1999, stock
exchanged in acquisitions was discounted by 15.0%. During fiscal 1997, the
discount on stock exchanged in acquisitions ranged from 16% to 28%. The results
of operations of each of the companies acquired have been included in the
Company's financial statements from the effective acquisition dates.
The effect of unaudited pro forma operating results of the SGOC and CDE
acquisitions, had they been acquired on September 29, 1997, is not material.
The following table presents summarized unaudited pro forma
operating results assuming that the Company had acquired EUC, PDR, CAA, ASL,
UCC, BCI, DCC, CPC, MFG, MPS and NUS on September 29, 1997:
24
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998
-------------------------- ---------------------------
<S> <C> <C>
Gross revenue $ 660,815,000 $ 558,727,000
Income before income tax expense 58,996,000 48,269,000
Net income 32,861,000 22,275,000
Basic earnings per share $ 0.88 $ 0.62
Diluted earnings per share 0.82 0.59
Weighted average common shares outstanding:
Basic 37,559,000 36,019,000
Diluted 39,950,000 37,545,000
</TABLE>
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at October 3, 1999 and
October 4, 1998:
<TABLE>
<CAPTION>
Oct. 3, 1999 Oct. 4, 1998
--------------- ---------------
<S> <C> <C>
Billed accounts receivable.................................... $ 95,465,000 $ 71,745,000
--------------- ---------------
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..................... 84,230,000 58,384,000
Costs and fee retention billable upon audit of total
contract costs ....................................... 5,282,000 11,278,000
--------------- ---------------
Total unbilled accounts receivable ........................... 89,512,000 69,662,000
--------------- ---------------
Allowance for uncollectible accounts:
Allowance for doubtful accounts.......................... (4,089,000) (2,911,000)
Allowance for disallowed costs .......................... (4,440,000) (9,774,000)
--------------- ---------------
Total allowance for uncollectible accounts................... (8,529,000) (12,685,000)
--------------- ---------------
Total ........................................................ $ 176,448,000 $ 128,722,000
=============== ===============
</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, except for
disallowances of acquired receivables as further described. 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 and reserves for
disallowances relating to those unaudited years were adjusted to reflect the
estimated ultimate disallowances relating to those receivables. As of September
1999, audits and negotiations relating to the EMI contracts for years 1987
through 1995 were complete, and cost disallowances as a result of these audits
totaled approximately $4.4 milllion. Beyond the $4.4 million in
25
<PAGE>
cost disallowances, there remains uncollected receivables of approximately
$2.1 million. Although it has been determined that the Company is entitled to
these payments, collectibility of such amounts cannot be assured as each
Federal agency must obtain separate funding approval. The reserves
established for these receivables exceeded the disallowances and the
uncollected amounts by $1.75 million. Accordingly, this excess was taken into
income during fiscal 1999.
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 is 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 3, 1999, the Company has approximately $5.3 million under
retainage provisions of contracts and approximately $1.7 million of accounts
receivable which may not be realized within one year.
4. INCOME TAXES
Income tax expense for the years ended October 3, 1999, October 4, 1998
and September 28, 1997 consisted of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Current:
Federal............................ $ 18,763,000 $ 15,284,000 $ 9,220,000
State.............................. 4,661,000 3,535,000 2,291,000
Deferred ............................. (250,000) (2,899,000) (1,188,000)
-------------- -------------- --------------
Total income tax expense.............. $ 23,174,000 $ 15,920,000 $ 10,323,000
============== ============== ==============
Temporary differences comprising the net deferred income tax asset
shown on the consolidated balance sheets were as follows:
<CAPTION>
Oct. 3, Oct. 4,
1999 1998
-------------- --------------
<S> <C> <C>
Allowance for doubtful accounts............................. $ 1,787,000 $ 3,662,000
Cash to accrual............................................. (1,119,000) (1,250,000)
Accrued vacation............................................ 2,189,000 1,247,000
State taxes................................................. 1,477,000 1,038,000
Prepaid expense............................................. (307,000) (632,000)
Depreciation................................................ (1,047,000) (299,000)
Other....................................................... 279,000 --
------------- -------------
Net deferred income tax asset............................... $ 3,259,000 $ 3,766,000
============= =============
</TABLE>
26
<PAGE>
Total income tax expense was different than the amount computed by
applying the federal statutory rate as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
------------------------ ------------------------- ---------------------
Amount % Amount % Amount %
------------- -------- ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Tax at federal statutory rate.......... $ 18,301,000 35.0% $ 12,777,000 35.0% $ 8,603,000 35.0%
State taxes, net of federal benefit.... 2,719,000 5.2 1,898,000 5.2 1,348,000 5.5
Goodwill............................... 1,434,000 2.7 990,000 2.7 528,000 2.1
Other.................................. 720,000 1.4 255,000 0.7 (156,000) (0.6)
------------- -------- ------------- -------- ------------ --------
Total income tax expense............... $ 23,174,000 44.3% $ 15,920,000 43.6% $ 10,323,000 42.0%
============= ======== ============= ======== ============ ========
</TABLE>
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 3, 1999, the Credit Agreement provided a revolving credit facility
of $85.0 million. On December 24, 1999, the Company amended the Credit
Agreement to provide a revolving credit facility of $93.0 million. The
facility must be reduced to $60.0 million on February 1, 2000 and matures on
December 15, 2000 or earlier at the discretion of the Company upon payment in
full of loans and other obligations.
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 under the Credit Agreement at
October 3, 1999 was 6.58%.
Borrowings under the Credit Agreement are secured by the Company's
accounts receivable and the stock of 12 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, capital expenditures,
creation of liens, and dividends on capital stock (other than stock dividends).
For the fiscal year ended October 3, 1999, the Company exceeded its capital
expenditure limitation by $0.04 million. The bank provided a waiver for this
covenant.
As of October 3, 1999, outstanding borrowings totaled $57.5 million and
standby letters of credit totaled $1.5 million.
At October 3, 1999, approximately $3.8 million of additional debt
existed from acquired companies. Of this amount, $2.5 million was paid on
October 6, 1999. The weighted average interest rate on these outstanding
borrowings at October 3, 1999 was 8.88%. It is the Company's intention to pay
the remainder of this debt in fiscal 2000 and terminate all such agreements.
6. STOCKHOLDERS' EQUITY
On June 15, 1999, the Company paid a five-for-four split of the
Company's common stock, effected in the form of a 25% stock dividend, to the
stockholders of record on May 14, 1999. 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
27
<PAGE>
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.
In February 1999, the Company, along with certain selling stockholders,
offered a total of 3,968,750 shares of its common stock through a public
offering. The Company offered 1,250,000 shares and received approximately $22.2
million in net proceeds which were used for the partial repayment of outstanding
indebtedness under the Company's revolving credit facility.
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 under which a holder of Exchangeable Shares is 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 or dividend shares, if any. The Exchangeable Shares cannot be
put back to the Company for cash.
Pursuant to the Company's 1989 Stock Option Plan, key employees may be
granted options to purchase an aggregate of 1,192,090 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 5,761,718 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 143,047 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
1,098,632 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.
28
<PAGE>
During the three years in the period ended October 3, 1999, option
activity was as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Options Exercise Price
------------ ----------------
<S> <C> <C>
Balance, September 29, 1996..................... 2,461,556 $ 6.16
Granted.................................... 953,365 10.05
Exercised.................................. (282,435) 4.64
Cancelled.................................. (209,518) 7.70
------------
Balance, September 28, 1997..................... 2,922,968 7.46
Granted.................................... 711,957 13.51
Exercised.................................. (440,331) 5.94
Cancelled.................................. (234,007) 10.09
------------
Balance, October 4, 1998........................ 2,960,587 8.94
Granted.................................... 899,284 16.51
Exercised.................................. (289,972) 6.63
Cancelled.................................. (189,386) 11.02
------------
Outstanding at October 3, 1999.................. 3,380,513 $ 11.27
------------
------------
Exercisable at October 3, 1999.................. 1,676,411 $ 7.78
------------
------------
</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 Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
------------------ ----------- --------------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
$0.55 - $0.75 10,531 1.03 $ 0.70 10,531 $ 0.70
$0.94 - $0.94 24,554 1.75 0.94 24,554 0.94
$2.56 - $3.82 108,606 3.14 3.47 108,606 3.47
$4.27 - $6.31 600,932 4.77 5.24 600,932 5.24
$7.10 - $10.43 1,142,851 6.87 9.44 728,124 9.29
$11.01 - $16.50 874,488 8.58 13.88 203,664 13.38
$16.56 - $20.63 618,551 9.40 18.78 -- --
------------ ----------- ---------- ----------- ----------
3,380,513 7.23 $ 11.27 1,676,411 $ 7.78
============ =========== ========== ===========
</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 earnings 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:
29
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Net income-as reported.............................. $ 29,115,000 $ 20,586,000 $ 14,256,000
Net income-pro forma................................ 27,004,000 18,945,000 13,091,000
Basic earnings per share-as reported................ $ 0.78 $ 0.59 $ 0.49
Diluted earnings per share-as reported.............. 0.74 0.56 0.46
Basic earnings per share-pro forma.................. 0.73 0.54 0.45
Diluted earnings per share-pro forma................ 0.68 0.52 0.42
</TABLE>
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 1999, 1998 and 1997 are $6.59, $4.90 and
$3.30, respectively. The following assumptions were used in completing the
model:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
------------------- ------------------- ------------------
<S> <C> <C> <C>
Dividend yield...................................... 0.0% 0.0% 0.0%
Expected volatility................................. 42.2% 42.5% 40.5%
Risk-free rate of return, annual.................... 6.4% 6.4% 6.4%
Expected life....................................... 3.26 yrs. 3.11 yrs. 2.76 yrs.
</TABLE>
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------------------
Oct. 3, Oct. 4, Sept. 28,
1999 1998 1997
--------------- --------------- ------------
<S> <C> <C> <C>
Numerator--
Net income............................................... $ 29,115,000 $ 20,586,000 $ 14,256,000
--------------- --------------- ---------------
Denominator--
Denominator for basic earnings per share--
weighted average shares............................. 37,159,000 34,962,000 29,214,000
Effect of dilutive securities:
Stock options....................................... 1,320,000 1,300,000 886,000
Redeemable preferred stock.......................... -- 189,000 720,000
Exchangeable stock of a subsidiary.................. 1,071,000 37,000 --
-------------- -------------- --------------
Dilutive potential common shares......................... 2,391,000 1,526,000 1,606,000
Denominator for diluted earnings per share--
adjusted weighted average shares and
assumed conversions............................... 39,550,000 36,488,000 30,820,000
=============== =============== ===============
Basic earnings per share.................................... $ 0.78 $ 0.59 $ 0.49
=============== =============== ===============
Diluted earnings per share.................................. $ 0.74 $ 0.56 $ 0.46
=============== =============== ===============
</TABLE>
30
<PAGE>
8. LEASES
The Company leases land, buildings and equipment under various
operating leases. Rent expense under all operating leases was approximately
$20.6 million, $13.4 million and $10.2 million for the fiscal years ended
October 3, 1999, October 4, 1998 and September 28, 1997, respectively. Amounts
payable under noncancelable operating lease commitments are as follows during
the fiscal years ending in:
<TABLE>
<S> <C>
2000....................................................................... $ 21,979,000
2001....................................................................... 17,652,000
2002....................................................................... 12,366,000
2003....................................................................... 8,752,000
2004....................................................................... 6,080,000
Thereafter................................................................. 9,467,000
--------------
Total...................................................................... $ 76,296,000
==============
</TABLE>
9. 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
3, 1999, October 4, 1998 and September 28, 1997 employer contributions relating
to the plans were approximately $6.4 million, $4.0 million and $3.5 million,
respectively.
10. 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 and results of
operations.
11. OPERATING SEGMENTS
The Company's management has organized its operations into three
operating segments: Resource Management, Infrastructure, and Communications. The
Resource Management Operating Segment provides specialized environmental
engineering and consulting services primarily relating to water quality and
water availability to both public and private organizations. The Infrastructure
Operating Segment provides engineering services to provide additional
development, as well as upgrading and replacement of existing infrastructure to
both public and private organizations. The Communications Operating Segment
provides a comprehensive set of services including engineering, consulting and
field services to telecommunications companies, wireless service providers and
cable operators. Management has established these operating segments based upon
the services provided, the different marketing strategies, and the specialized
needs of the clients. The Company accounts for inter-segment sales and transfers
as if the sales and transfers were to third parties, that is, by applying a
negotiated fee onto the cost of the services performed. Management evaluates the
performance of these operating segments based upon their respective income from
operations before the effect of any acquisition related amortization and any fee
from inter-segment sales and transfers.
31
<PAGE>
The following table sets forth (in thousands) summarized financial
information on the Company's reportable segments.
Reportable Segments:
<TABLE>
<CAPTION>
Resource
Fiscal year ended October 3, 1999 Management Infrastructure Communications Total
---------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Gross Revenue......................... $340,955 $135,589 $102,378 $578,922
Net Revenue........................... 231,518 111,776 88,765 432,059
Income from Operations................ 30,147 15,703 14,905 60,755
Depreciation Expense.................. 1,446 4,430 1,565 7,441
Segment Assets........................ 154,375 48,633 44,444 247,452
</TABLE>
<TABLE>
<CAPTION>
Resource
Fiscal year ended October 4, 1998 Management Infrastructure Communications Total
---------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Gross Revenue......................... $279,582 $ 56,464 $ 54,739 $390,785
Net Revenue........................... 198,701 47,174 51,084 296,959
Income from Operations................ 24,572 8,337 9,967 42,876
Depreciation Expense.................. 1,851 1,101 530 3,482
Segment Assets........................ 124,951 20,329 24,931 170,211
</TABLE>
<TABLE>
<CAPTION>
Resource
Fiscal year ended September 28, 1997 Management Infrastructure Communications Total
---------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Gross Revenue......................... $196,466 38,401 $ 15,488 $250,355
Net Revenue........................... 144,964 30,397 15,419 190,780
Income from Operations................ 16,668 4,733 4,998 26,399
Depreciation Expense.................. 1,981 524 210 2,715
Segment Assets........................ 79,039 17,329 8,324 104,692
</TABLE>
Reconciliations:
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------
Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
-------------- ------------- --------------
<S> <C> <C> <C>
GROSS REVENUE
Gross revenue from reportable segments.................. $ 578,922 $ 390,785 $ 250,355
Elimination of inter-segment revenue.................... (15,850) (11,237) (4,614)
Other revenue........................................... 3,418 3,386 1,026
----------- ----------- -----------
Total consolidated gross revenue.................... $ 566,490 $ 382,934 $ 246,767
=========== =========== ===========
NET REVENUE
Net revenue from reportable segments.................... $ 432,059 $ 296,959 $ 190,780
Other revenue........................................... 21 638 11
----------- ----------- -----------
Total consolidated net revenue...................... $ 432,080 $ 297,597 $ 190,791
=========== =========== ===========
INCOME FROM OPERATIONS
Income from operations of reportable segments........... $ 60,755 $ 42,876 $ 26,399
Elimination of inter-segment income..................... (730) (1,286) (404)
Other income/(expense).................................. 240 1,191 174
Amortization of intangibles............................. (4,841) (2,968) (1,570)
----------- ----------- -----------
Total consolidated income from operations........... $ 55,424 $ 39,813 $ 24,599
=========== =========== ===========
TOTAL ASSETS
Total assets from reportable segments................... $ 247,452 $ 170,211 $ 104,692
Goodwill not allocated to segments...................... 160,686 108,638 69,439
Elimination of inter-segment assets..................... (27,660) (12,239) (14,618)
----------- ----------- -----------
Total consolidated total assets..................... $ 380,478 $ 266,610 $ 159,513
=========== =========== ===========
</TABLE>
32
<PAGE>
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------------------------------------
(in thousands) Oct. 3, 1999 Oct. 4, 1998 Sept. 28, 1997
-------------------------------- -------------------------------- --------------------------
Net Long-Lived Net Long-Lived Net Long-Lived
Revenue (a) Assets (b) Revenue (a) Assets (b) Revenue (a) Assets (b)
------------ ----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
United States............. $ 417,983 $ 185,408 $ 288,020 $ 124,278 $ 183,820 $ 78,628
Foreign countries......... 14,097 -- 9,576 -- 7,151 --
</TABLE>
(a) Net revenue is attributed to countries based on the location of clients
(b) Long-lived assets include non-current assets of the Company.
MAJOR CLIENTS
The Company's net revenue attributable to the U.S. Federal
government was approximately $169.3 million, $144.4 million and $99.7 million
for fiscal years ended October 3, 1999, October 4, 1998 and September 28,
1997, respectively. Both the Resource Management and Infrastructure operating
segments report revenue from the U.S. government.
12. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
In the opinion of management, the following unaudited quarterly data
for the years ended October 3, 1999 and October 4, 1998 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 1999 Quarter Quarter Quarter Quarter
- ---------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Gross revenue................................ $ 113,973 $ 128,083 $ 157,091 $ 167,343
Net revenue.................................. 89,245 96,955 120,739 125,141
Gross profit................................. 19,058 22,553 32,550 30,583
Income from operations....................... 10,187 11,869 15,599 17,769
Net income................................... 5,427 6,462 8,503 8,723
Basic earnings per share..................... $ 0.15 $ 0.18 $ 0.22 $ 0.23
Diluted earnings per share .................. 0.14 0.16 0.21 0.22
Weighted average common shares
outstanding:
Basic................................... 35,820 36,793 37,801 38,223
Diluted................................. 38,387 39,263 40,145 40,404
</TABLE>
33
<PAGE>
<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..................... $ 0.12 $ 0.13 $ 0.16 $ 0.18
Diluted earnings per share .................. 0.11 0.12 0.15 0.18
Weighted average common shares
outstanding:
Basic................................... 34,021 34,881 35,184 35,708
Diluted................................. 36,042 36,195 36,501 37,149
</TABLE>
34
<PAGE>
SECURITIES INFORMATION
Tetra Tech's common stock is traded on the Nasdaq Stock Market under
the symbol WATR. There were 1,390 stockholders of record as of December 10,
1999. 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 June 1999.
<TABLE>
<CAPTION>
FISCAL YEAR 1999 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter $ 22.40 $ 12.50
Second Quarter 21.50 13.70
Third Quarter 20.70 15.20
Fourth Quarter 20.00 13.50
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
<S> <C> <C>
First Quarter $ 14.21 $ 11.92
Second Quarter 15.36 12.16
Third Quarter 16.16 12.48
Fourth Quarter 18.40 12.32
</TABLE>
35
<PAGE>
Exhibit 21
SUBSIDIARIES OF TETRA TECH, INC.
HSI GeoTrans, Inc., a Virginia corporation
Tetra Tech EM Inc., a Delaware corporation
KCM, Inc., a Washington corporation
Tetra Tech Technical Services, Inc., a Delaware corporation
SCM Consultants, Inc., a Washington corporation
Whalen & Company, Inc., a Delaware corporation
Whalen Service Corps Inc., a Delaware corporation
Tetra Tech NUS, Inc. a Delaware 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
MFG, Inc., a Delaware corporation
Collins/Pina Consulting Engineers, Inc., an Arizona corporation
D.E.A. Construction Company, a Colorado corporation
BAHA Communications, Inc., a Nevada corporation
Utilities & C. C., Inc., a California corporation
ASL Consultants, Inc., a California corporation
Cosentini Associates, Inc., a New York corporation
PDR Engineers, Inc., a Delaware corporation
Evergreen Utility Contractors, Inc., a Washington corporation
Gig Harbor Construction, 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.
033-47533, 033-80606 and 333-11757 of Tetra Tech, Inc. on Form S-8 and
333-02766, 333-26199, 333-48569, 333-61159, 333-64165, 333-70053, 333-72989,
333-86341 of Tetra Tech, Inc. on Form S-3 of our reports dated November 16,
1999 (except for Note 5, as to which the date is December 24, 1999),
appearing in, and incorporated by reference in, this Annual Report on Form
10-K for the year ended October 3, 1999.
DELOITTE & TOUCHE LLP
Los Angeles, California
December 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-03-1999
<PERIOD-START> OCT-05-1998
<PERIOD-END> OCT-03-1999
<CASH> 8,189
<SECURITIES> 0
<RECEIVABLES> 184,977
<ALLOWANCES> 8,529
<INVENTORY> 0
<CURRENT-ASSETS> 195,070
<PP&E> 42,831
<DEPRECIATION> 21,085
<TOTAL-ASSETS> 380,478
<CURRENT-LIABILITIES> 108,757
<BONDS> 0
0
0
<COMMON> 384
<OTHER-SE> 234,048
<TOTAL-LIABILITY-AND-EQUITY> 380,478
<SALES> 566,490
<TOTAL-REVENUES> 566,490
<CGS> 461,746
<TOTAL-COSTS> 461,746
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,561
<INCOME-PRETAX> 52,289
<INCOME-TAX> 23,174
<INCOME-CONTINUING> 29,115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,115
<EPS-BASIC> 0.78
<EPS-DILUTED> 0.74
</TABLE>
