<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-19655
TETRA TECH, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-4148514
------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
670 N. Rosemead Boulevard, Pasadena, California 91107
-----------------------------------------------------
(Address of principal executive offices)
(626) 351-4664
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(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 periods 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
--- ---
As of February 4, 2000, the total number of outstanding shares of the
Registrant's common stock was 38,496,896.
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TETRA TECH, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Risk Factors 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 29
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1.
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
In thousands, except share data January 2, October 3,
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 9,001 $ 8,189
Accounts receivable - net.......................................... 99,678 91,376
Unbilled receivables - net......................................... 88,583 85,072
Prepaid and other current assets................................... 9,140 7,174
Deferred income taxes.............................................. 3,259 3,259
------------ ------------
Total Current Assets............................................ 209,661 195,070
------------ ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements............................................. 2,773 3,343
Equipment, furniture and fixtures.................................. 43,583 39,488
------------ ------------
Total........................................................... 46,356 42,831
Accumulated depreciation and amortization.......................... (23,246) (21,085)
----------- ------------
PROPERTY AND EQUIPMENT - NET........................................... 23,110 21,746
------------ ------------
INTANGIBLE ASSETS - NET................................................ 159,989 160,686
OTHER ASSETS........................................................... 2,861 2,976
------------ ------------
TOTAL ASSETS........................................................... $ 395,621 $ 380,478
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................... $ 29,759 $ 32,570
Accrued compensation............................................... 17,709 21,900
Billings in excess of costs on uncompleted contracts............... 5,709 5,872
Other current liabilities.......................................... 11,145 14,606
Current portion of long-term obligations........................... 22,000 24,000
Income taxes payable............................................... 8,904 9,809
------------ ------------
Total Current Liabilities....................................... 95,226 108,757
------------ ------------
LONG-TERM OBLIGATIONS.................................................. 57,718 37,289
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - authorized, 2,000,000 shares of $.01 par value;
issued and outstanding 0 shares at January 2, 2000 and
October 3, 1999.................................................. -- --
Exchangeable stock of a subsidiary................................. 13,239 13,239
Common stock - authorized, 50,000,000 shares of $.01 par value;
issued and outstanding 38,466,095 and 38,433,621 shares at
January 2, 2000 and October 3, 1999, respectively................ 385 384
Additional paid-in capital......................................... 128,258 127,978
Accumulated other comprehensive income............................. (400) (802)
Retained earnings.................................................. 101,195 93,633
------------ -----------
TOTAL STOCKHOLDERS' EQUITY............................................. 242,677 234,432
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 395,621 $ 380,478
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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Tetra Tech, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
In thousands, except per share data Three Months Ended
----------------------------------
January 2, January 3,
2000 1999
--------------- --------------
<S> <C> <C>
Gross Revenue............................................................... $ 170,241 $ 113,973
Subcontractor costs...................................................... 41,070 24,728
----------- -----------
Net Revenue................................................................. 129,171 89,245
Cost of Net Revenue......................................................... 100,417 70,187
----------- -----------
Gross Profit................................................................ 28,754 19,058
Selling, General and Administrative Expenses................................ 12,553 7,876
Amortization of Intangibles................................................. 1,468 995
----------- -----------
Income From Operations...................................................... 14,733 10,187
Interest Expense............................................................ 1,284 838
Interest Income............................................................. 56 139
----------- -----------
Income Before Income Tax Expense............................................ 13,505 9,488
Income Tax Expense.......................................................... 5,942 4,061
----------- -----------
Net Income.................................................................. $ 7,563 $ 5,427
=========== ===========
Basic Earnings Per Share.................................................... $ 0.20 $ 0.15
=========== ===========
Diluted Earnings Per Share.................................................. $ 0.19 $ 0.14
=========== ===========
Weighted Average Common Shares Outstanding:
Basic.................................................................... 38,453 35,820
=========== ===========
Diluted.................................................................. 40,418 38,387
=========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
In thousands Three Months Ended
----------------------------------
January 2, January 3,
2000 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 7,562 $ 5,427
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization......................................... 3,629 1,990
Provision for losses on receivables................................... (727) (28)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable................................................... (7,631) (11,586)
Unbilled receivables.................................................. (2,567) 570
Prepaid and other assets.............................................. (1,846) (1,380)
Accounts payable...................................................... (3,803) (5,895)
Accrued compensation.................................................. (4,191) (3,365)
Other current liabilities............................................. (2,368) 5,546
Income taxes payable.................................................. (905) 1,113
----------- -----------
Net Cash Used In Operating Activities............................. (12,847) (7,608)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................................ (3,430) (1,254)
Payments for business acquisitions, net of cash acquired.................... (1,834) --
---------- -----------
Net Cash Used In Investing Activities............................. (5,264) (1,254)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations........................................... (10,571) (4,000)
Proceeds from issuance of long-term obligations............................. 29,000 8,032
Net proceeds from issuance of common stock.................................. 92 375
----------- -----------
Net Cash Provided By Financing Activities......................... 18,521 4,407
----------- -----------
EFFECT OF RATE CHANGES ON CASH.............................................. 402 --
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 812 (4,455)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................ 8,189 4,889
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. $ 9,001 $ 434
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest.............................................................. $ 1,273 $ 850
Income taxes.......................................................... $ 6,847 $ 2,948
</TABLE>
(Continued)
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Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
<TABLE>
<CAPTION>
In thousands Three Months Ended
----------------------------------
January 2, January 3,
2000 1999
-------------- --------------
<S> <C> <C>
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In October 1999, the Company purchased all of the capital stock of LC of
Illinois, Inc. and HFC Technologies, Inc. In conjunction with this
acquisition, liabilities were assumed as follows:
Fair value of assets acquired....................................... $ 2,795
Cash paid........................................................... (1,700)
Other acquisition costs............................................. (80)
-----------
Liabilities assumed.............................................. $ 1,015
===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
(Concluded)
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<PAGE>
TETRA TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheets as of January
2, 2000, the condensed consolidated statements of income and the condensed
consolidated statements of cash flows for the three-month periods ended
January 2, 2000 and January 3, 1999 are unaudited, and in the opinion of
management include all adjustments, consisting of only normal and recurring
adjustments, necessary for a fair presentation of the financial position and
the results of operations for the periods presented.
The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
October 3, 1999.
The results of operations for the three-month period ended January 2,
2000 are not necessarily indicative of the results to be expected for the fiscal
year ending October 1, 2000.
2. 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 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 and the weighted average
dilutive effects of outstanding stock options. The exchangeable stock of a
subsidiary is non-voting and is exchangeable for the Company's common stock on a
1.25 to one basis. 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.
3. CURRENT ASSETS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents totaled $9.0 million and $8.2 million at January 2, 2000 and October
3, 1999, respectively.
4. MERGERS AND ACQUISITIONS
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,
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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, 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 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
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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., IWA Engineers, FLO Engineering, Inc. and C.D.C.
Engineering, Inc. 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
stronger 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.
On October 25, 1999, the Company acquired 100% of the capital stock of
LC of Illinois, Inc. and HFC Technologies, Inc. (collectively, LCI), a
provider of engineering and network infrastructure services for cable television
and fiber optic telephone networks including design, construction and
maintenance capabilities for communications and information transport systems.
The purchase was valued at approximately $1.8 million, consisting of cash, and
is subject to a purchase price and purchase allocation adjustment based upon the
final determination of LCI's net asset value as of October 25, 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 condensed 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 1999, stock
exchanged in acquisitions was discounted by 15%. The results of operations of
each of the companies acquired have been included in the Company's financial
statements from the effective acquisition dates.
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<PAGE>
The effect of unaudited pro forma operating results of the LCI
transaction, had it been acquired on October 5, 1998, is not material.
Pro forma operating results assuming the Company had acquired MFG, CPC,
DCC, BCI, UCC, ASL, CAA, PDR and EUC on October 5, 1998 is presented in Note 6.
UNAUDITED PRO FORMA OPERATING RESULTS.
5. ACCOUNTS RECEIVABLE
Accounts receivable are presented net of a valuation allowance to
provide for doubtful accounts and for the potential disallowance of billed and
unbilled costs. The allowance for doubtful accounts as of January 2, 2000 and
October 3, 1999 was $4.1 million. The allowance for disallowed costs as of
January 2, 2000 and October 3, 1999 was $3.7 million and $4.4 million,
respectively. Disallowance of billed and unbilled costs is primarily associated
with contracts with the U.S. government which contain clauses that subject
contractors to several levels of audit. During the three months ended January 2,
2000, the Company recovered $0.76 million of previously reserved for
receivables. Accordingly, the Company reversed $0.76 million of allowances for
disallowed costs. Management believes that resolution of these matters will not
have a material adverse impact on the Company's financial position or results of
operations.
6. UNAUDITED PRO FORMA OPERATING RESULTS
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired MFG, CPC, DCC, BCI, UCC, ASL,
CAA, PDR and EUC on October 5, 1998:
<TABLE>
<CAPTION>
PRO FORMA THREE MONTHS ENDED
JANUARY 3, 1999
----------------------------
(In thousands, except per share data)
<S> <C>
Gross revenue $ 152,777
Income from operations 13,332
Net income 6,342
Basic earnings per share 0.18
Diluted earnings per share 0.16
Weighted average shares outstanding:
Basic 36,020
Diluted 38,587
</TABLE>
7. 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
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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.
The following tables set forth (in thousands) summarized financial
information on the Company's reportable segments:
REPORTABLE SEGMENTS:
<TABLE>
<CAPTION>
Resource
Three months ended January 2, 2000 Management Infrastructure Communications Total
---------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Gross Revenue.......................... $ 84,385 $ 52,397 $ 37,307 $ 174,089
Net Revenue............................ 56,122 41,587 29,758 127,467
Income from Operations................. 7,062 4,920 4,531 16,513
Depreciation Expense................... 567 925 604 2,096
Resource
Three months ended January 3, 1999 Management Infrastructure Communications Total
---------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Gross Revenue.......................... $ 70,587 $ 22,206 $ 23,668 $ 116,461
Net Revenue............................ 49,198 18,293 21,346 88,837
Income from Operations................. 4,977 2,417 3,750 11,144
Depreciation Expense................... 511 353 82 946
</TABLE>
RECONCILIATIONS:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
Jan. 2, 2000 Jan. 3, 1999
--------------- ---------------
<S> <C> <C>
GROSS REVENUE
Gross revenue from reportable segments............................... $ 174,089 $ 116,461
Elimination of inter-segment revenue................................. (5,551) (3,218)
Other revenue........................................................ 1,703 730
------------ ------------
Total consolidated gross revenue................................. $ 170,241 $ 113,973
============ ============
NET REVENUE
Net revenue from reportable segments................................. $ 127,467 $ 88,837
Other revenue........................................................ 1,704 408
------------ ------------
Total consolidated net revenue................................... $ 129,171 $ 89,245
============ ============
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<S> <C> <C>
INCOME FROM OPERATIONS
Income from operations of reportable segments........................ $ 16,513 $ 11,144
Elimination of inter-segment income.................................. (339) (82)
Other income......................................................... 27 120
Amortization of intangibles.......................................... (1,468) (995)
------------ ------------
Total consolidated income from operations............................ $ 14,733 $ 10,187
============ ============
</TABLE>
MAJOR CLIENTS
The Company's net revenue attributable to the U.S. Federal
government was approximately $39.2 million and $37.1 million for the three
months ended January 2, 2000 and January 3, 1999, respectively. Both the
Resource Management and Infrastructure operating segments report revenue from
the U.S. government.
8. COMPREHENSIVE INCOME
Comprehensive income is the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from non-owner sources. These sources include net income and
other revenues, expenses, gains and losses incurred. The Company includes as
other comprehensive income translation gains and losses from subsidiaries
with functional currencies different than that of the Company. For the three
months ended January 2, 2000, comprehensive income was approximately $8.0
million. For the three months ended January 2, 2000, the Company incurred net
translation gains of $0.4 million. The Company incurred no translation gains
or losses for the three months ended January 3, 1999.
9. SUBSEQUENT EVENT
On January 31, 2000, the Company amended its revolving credit
facility to defer the mandatory reduction of this facility to $60.0 million
to the earlier of March 31, 2000 or the completion of the refinancing of this
facility to a facility with a potential credit capacity of $150.0 million.
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ITEM 2.
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS
FILING.
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 have increased
the size and scope of our business and have expanded our service offerings
through a series of strategic acquisitions and internal growth.
We 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 clients and, in
accordance with industry practice, are included in 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 our executive offices, corporate
finance and accounting, information technology, marketing, and bid and proposal
costs. These costs are generally unrelated to specific client projects and can
vary as expenses are
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incurred supporting corporate activities and initiatives. In addition, we
include amortization of certain intangible assets resulting from acquisitions
in SG&A expenses.
We provide our services to a diverse base of Federal, state and
local government agencies, and private sector and international clients. The
following table presents, for the periods indicated, the approximate
percentage of net revenue attributable to these client sectors:
<TABLE>
<CAPTION>
Percentage of Net Revenue
----------------------------------------
Quarter Ended
----------------------------------------
Client Sector January 2, 2000 January 3, 1999
------------- --------------- ---------------
<S> <C> <C>
Federal government 30.4% 41.5%
State and local government 16.8 13.0
Private sector 50.1 40.2
International 2.7 5.3
------ ------
100.0% 100.0%
====== ======
</TABLE>
RECENT ACQUISITION
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 2000, we made the following acquisition:
LC OF ILLINOIS, INC. -- In October 1999, we acquired LC of Illinois,
Inc. and HFC Technologies, Inc. (collectively, LCI). The purchase was valued at
approximately $1.8 million. LCI, an Illinois-based construction and field
services firm, provides construction and maintenance of communications and
information transport systems to the communications industry primarily in the
Midwestern United States.
RESULTS OF OPERATIONS
The following table presents certain operating information as a
percentage of net revenue:
<TABLE>
<CAPTION>
Percentage of Net Revenue
----------------------------------------
Quarter Ended
----------------------------------------
January 2, 2000 January 3, 1999
------------------- -----------------
<S> <C> <C>
Net revenue 100.0% 100.0%
Cost of net revenue 77.7 78.6
------ ------
Gross profit 22.3 21.4
Selling, general and
administrative expenses 9.7 8.9
Amortization of intangibles 1.2 1.1
------ ------
Income from operations 11.4 11.4
Net interest (expense) income (0.9) (0.8)
------ ------
Income before income tax expense 10.5 10.6
Income tax expense 4.6 4.6
------ ------
Net income 5.9% 6.1%
====== ======
</TABLE>
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<PAGE>
NET REVENUE. Net revenue increased $40.0 million, or 44.7%, to
$129.2 million for the three months ended January 2, 2000 from $89.2 million
for the comparable period last year. Included in net revenue for the three
months ended January 2, 2000 was $0.76 million relating to the over accrual
of an allowance for disallowed costs. This allowance relates to amounts
previously not recognized as revenue as they were deemed to be unallowable.
These amounts were subsequently recovered and therefore included as revenue.
Excluding this adjustment, net revenue increased 43.9% for the quarter.
Excluding international operations, all client sectors continued to show net
revenue increases in actual dollars. As a percentage of net revenue, a
decrease was realized in the Federal government sector due to the growth in
revenue from private sector clients and revenue associated with acquired
companies. These acquisitions provided increases in our revenue from both
state and local governments and private sector clients. For the three months
ended January 2, 2000, net revenue provided by companies acquired in the past
one year on acquired contracts totaled $36.9 million. Excluding this net
revenue, we recognized 3.4% internal or organic growth in our net revenue.
Gross revenue increased $56.3 million, or 49.4%, to $170.2 million for
the three months ended January 2, 2000 from $114.0 million for the comparable
period last year. Gross revenue provided by companies acquired in the past one
year on acquired contracts totaled $44.5 million. Excluding this gross revenue,
we recognized 10.3% internal or organic growth in our gross revenue.
COST OF NET REVENUE. Cost of net revenue increased $30.2 million, or
43.1%, to $100.4 million for the three months ended January 2, 2000 from
$70.2 million for the comparable period last year. These increases were
primarily due to the volume increases in our infrastructure and
communications business areas, as well as the higher cost of net revenue for
the acquired companies. However, as a percentage of net revenue, cost of net
revenue for the three months ended January 2, 2000 was 77.7% compared to
78.6% for the comparable period last year. Included in net revenue for the
three months ended January 2, 2000 was $0.76 million for the reversal of an
allowance for disallowed costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses,
excluding amortization of intangibles, increased $4.7 million, or 59.4%, to
$12.6 million for the three months ended January 2, 2000 from $7.9 million
for the comparable period last year. As a percentage of net revenue, SG&A
expenses, excluding amortization of intangibles, increased to 9.7% for the
three months ended January 2, 2000 from 8.8% for the comparable period last
year. For the three months ended January 2, 2000, amortization of intangibles
increased $0.5 million, or 47.5%, to $1.5 million from $1.0 million for the
comparable period last year. Amortization expense relating to acquisitions
increased to 1.2% of net revenue for the three months ended January 2, 2000
from 1.1% for the comparable period last year. As a percentage of net
revenue, the increase in SG&A expenses was primarily related to the timing of
expenses associated with the further development of our corporate systems and
processes and higher costs of acquired companies.
NET INTEREST EXPENSE. For the three months ended January 2, 2000, net
interest expense increased $0.5 million, or 75.7%, to $1.2 million from $0.7
million for the
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comparable period last year. This increase was primarily attributable to
borrowings on our line of credit which facilitated previous acquisitions and
working capital needs.
INCOME TAX EXPENSE. Income tax expense increased $1.9 million, or
46.3%, to $5.9 million for the three months ended January 2, 2000 from $4.1
million for the comparable period last year. Our current effective tax rate
is 44.0% compared to 42.8% in the comparable period last year. This increase
is primarily attributable to amortization amounts relating to acquisitions
which are not tax deductible.
LIQUIDITY AND CAPITAL RESOURCES
As of January 2, 2000, our working capital was $114.4 million, an
increase of $28.1 million from October 3, 1999, of which cash and cash
equivalents totaled $9.0 million. In addition, we have a credit agreement (the
"Credit Agreement") with a bank which provides for a revolving credit facility
(the "Facility") of $93.0 million. Under the Credit Agreement, we may also
request standby letters of credit up to the aggregate sum of $20.0 million
outstanding at any one time. The Credit Agreement currently provides for a
mandatory reduction of the Facility to $60.0 million on the earlier of March 31,
2000 or the completion of the refinancing of the Facility. The Facility matures
on December 15, 2000 or earlier at our discretion upon payment in full of loans
and other obligations. We are currently in the process of refinancing the
Facility with a $150.0 facility to be provided by a syndicate of banks. As of
January 2, 2000, borrowings and standby letters of credit totaled $78.0 million
and $1.7 million, respectively.
In the three months ended January 2, 2000, cash used in operating
activities was $12.8 million compared to $7.6 million for the comparable period
last year. The increase is primarily attributable to the timing of payments for
liabilities. For the three months ended January 2, 2000, cash used in investing
activities was $5.3 million compared to $1.3 million for the comparable period
last year. The increase was primarily due to increases in capital expenditures.
For the three months ended January 2, 2000, cash provided by financing
activities was $18.5 million primarily from the proceeds from the incurrence of
long-term debt, compared to $4.4 million for the comparable period last year.
We continuously evaluate the marketplace for strategic 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 our future operations. However, as successful integration
and implementation are essential to achieve favorable results, no assurances can
be given that all acquisitions will provide accretive results. Our strategy is
to position ourselves to address existing and emerging markets. We view
acquisitions as a key component of our growth strategy, and we intend to use
both cash and our securities, as we deem appropriate, to fund such acquisitions.
We expect that existing cash balances, internally generated funds, and
availability under the Credit Agreement, assuming the completion of our
refinancing, 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 of our Credit Facility. If we are unable to refinance
our
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indebtedness, we will need to obtain alternate financing to reduce our
Facility and meet our fiscal 2000 capital needs.
We believe our operations have not been and, in the foreseeable future,
do not expect to be materially adversely affected by inflation or changing
prices.
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 obligations.
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
upon payment in full of loans and other obligations. Accordingly, we classify
total outstanding obligations between current liabilities and long-term
obligations based on anticipated payments within and beyond one year's period
of time. We currently anticipate refinancing our current Facility and
repaying $22.0 million of our outstanding indebtedness in the next 12 months.
However, there can be no assurance that we will, or will be able to,
refinance our current Facility or repay our long-term obligations in the
manner described. We could incur additional debt under the Facility or our
operating results could be worse than currently anticipated.
YEAR 2000
We worked in a comprehensive manner to resolve the potential impact of
the year 2000 (Y2K) on our business operations and those of our clients and
vendors and the ability of information systems upon which we rely to accurately
process information that may be date-sensitive. We expended approximately $2.6
million on our efforts. As a result of these efforts, we have not experienced
any business interruptions relating to Y2K to date. We will continue to monitor
our systems and significant relationships with third parties. We do not believe
Y2K will have a material impact on our results of operations or financial
position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Please refer to the information we have included under the heading
"Market Risks" in ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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RISK FACTORS
SOME OF THE INFORMATION IN THIS QUARTERLY REPORT ON FORM 10-Q 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
QUARTERLY REPORT ON FORM 10-Q, PROVIDE EXAMPLES OF RISKS, UNCERTAINTIES AND
EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTATIONS
DESCRIBED IN FORWARD-LOOKING STATEMENTS. THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM
10-Q COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION
AND OPERATING RESULTS. 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.
During the three months ended January 2, 2000, we purchased two companies in one
transaction. 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. Competition
may 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 potential
acquisitions;
- We may ultimately fail to consummate an acquisition even if
announced 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.
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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 typically encounter. 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.
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 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 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
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- 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.
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 certain principals and stockholders of
companies we have acquired, we generally do not have non-compete or employment
agreements with key employees who were not once equity shareholders 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 the three months ended January 2, 2000, approximately 30.4% of
our net revenue was derived from Federal agencies, of which 17.0% was derived
from the Department of Defense (DOD), 9.2% from the Environmental Protection
Agency (EPA), 2.2% from the Department of Energy (DOE), and 2.0% from various
other Federal government agencies. Some contracts with Federal
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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 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
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. At the time of acquisition,
audits had not yet been completed or finalized. Accordingly, reserves were
established for potential disallowances. Since then, the DCAA has completed
audits of EMI's contracts for the fiscal years 1987 through 1995. As a result of
these audits and negotiations with the DCAA, the DCAA has disallowed to date
approximately $4.4 million in costs which have been applied against the
established reserves.
OUR BUSINESS AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY LOSSES UNDER
FIXED-PRICE CONTRACTS OR TERMINATION OF CONTRACT AT THE CLIENT'S DISCRETION
We contract with Federal and state governments as well as with the
private sector. These contracts are often subject to termination at the
discretion of the client with or without cause. Additionally, we enter into
various types of contracts with our clients, including fixed-price contracts.
Fixed-price contracts protect clients and expose us to a number of risks.
These risks include underestimation of costs, problems with new technologies,
unforeseen costs or difficulties, delays beyond our control and economic and
other changes that may occur during the contract period. 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.
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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. Reliance on subcontractors
varies from project to project. In the three months ended January 2, 2000,
subcontractor costs comprised 24.1% 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 may have greater
financial and marketing resources than ours.
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 Service, Inc.; Roy F. Weston,
Inc.; URS Greiner Corporation; and Wireless Facilities, Inc.
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. Professional liability
policies are "claims made" policies; thus, only claims made during the term of
the policy are covered. Should we terminate our professional liability policy
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and 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. Additionally, our insurance policies may not
protect us against potential liability due to various exclusions and retentions.
Should 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. Partially or
completely uninsured claims, 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 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 the three months ended January 2, 2000, approximately 2.7% 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.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) EXHIBITS
<S> <C> <C>
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 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).
3.3 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).
3.4 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).
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10.4 Fourth Amendment dated as of January 30, 1997
to the Credit Agreement dated as of September
15, 1995 between the Company and Bank of
America National Trust and Savings Association
(incorporated herein by reference to Exhibit
10.4 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended December 28,
1997).
10.5 Fifth Amendment dated as of July 6, 1998 to the
Credit Agreement dated as of September 15, 1995
between the Company and Bank of America
National Trust and Savings Association
(incorporated herein by reference to Exhibit
10.5 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended June 28,
1998).
10.6 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
(incorporated herein by reference to Exhibit
10.7 to the Company's Annual Report on Form
10-K for the fiscal year ended October 3,
1999).
10.8 Eighth Amendment dated as of January 31, 2000
to the Credit Agreement dated as of September
15, 1995 between the Company and Bank of
America National Trust and Savings Association.
10.9 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).
10.10 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).
10.11 Guaranty dated as of September 15, 1995,
executed by the Company in favor of Bank of
America Illinois (incorporated herein by
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reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year
ended October 1, 1995).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 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).
10.18 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).
10.19 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).
10.20 Form of Stock Purchase Agreement used by the
Company in connection with the Company's 1994
Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the
fiscal year ended October 2, 1994).
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10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 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).
10.27 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).
10.28 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
-27-
<PAGE>
Quarterly Report on Form 10-Q for the fiscal
quarter ended July 4, 1999).
10.29 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).
10.30 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).
10.31 Registration Rights Agreement dated as of
September 3, 1999 among the Company and the
parties listed on Schedule A attached thereto.
(incorporated herein by reference to Exhibit
10.30 to the Company's Annual Report on Form
10-K for the fiscal year ended October 3,
1999).
11 Computation of Net Income Per Common Share.
27 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K
None
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 16, 2000 TETRA TECH, INC.
By: /s/ Li-San Hwang
------------------------------
Li-San Hwang
Chairman of the Board of Directors,
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ James M. Jaska
--------------------------------
James M. Jaska
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)
-29-
<PAGE>
EIGHTH AMENDMENT
THIS EIGHTH AMENDMENT (this "Eighth Amendment") dated as of January 31,
2000 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 Eighth Amendment Effective Date (as defined below), the
Credit Agreement shall be amended as follows:
Section 1.1 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 March
31, 2000."
Section 1.2 SECTION 5.4. Section 5 of the Credit Agreement is amended
by adding the following in appropriate numerical sequence:
"5.4 UTILIZATION FEE. The Company agrees to pay the Bank a
utilization fee, for each day on or after February 1, 2000 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
$60,000,000, in an amount equal to 0.5% per annum of such excess. The
utilization fee (a) shall be payable on the last Business Day of each
month and on the Revolving Termination Date; and (b) shall be computed
on the basis of a year of 360 days."
<PAGE>
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 Eighth Amendment and the
performance by the Company of its obligations under the Credit Agreement as
amended hereby (as so amended, the "Amended Credit Agreement") (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 Eighth Amendment and the Amended Credit Agreement
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 "Eighth Amendment Effective Date") that the Bank shall have
received counterparts of this Eighth Amendment executed by the parties hereto.
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 Eighth 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 Eighth
Amendment.
Section 4.3 GOVERNING LAW. This Eighth 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 Eighth 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 Eighth Amendment.
-2-
<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 Eighth
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: Asst. Treasurer
SIMONS, LI & ASSOCIATES, INC.
By: /s/ James M. Jaska
Title: Asst. Treasurer
TETRA TECH EM, INC.
By: /s/ James M. Jaska
Title: Treasurer
WHALEN & COMPANY, INC.
By: /s/ James M. Jaska
Title: Chief Financial Officer
TETRA TECH NUS, INC.
By: /s/ James M. Jaska
Title: Treasurer
MFG, INC.
By: /s/ James M. Jaska
Title: Treasurer
<PAGE>
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
COSENTINI ASSOCIATES, INC.
By: /s/ James M. Jaska
Title: Treasurer
<PAGE>
Exhibit 11
Tetra Tech, Inc.
Computation of Earnings Per Common Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
January 2, January 3,
2000 1999
--------------- ----------------
<S> <C> <C>
Basic:
Common stock outstanding, beginning of period........................... 38,433,621 35,788,250
Stock options exercised................................................. 19,856 66,705
Stock purchase plan issuance............................................ 143 191
Issuance of common stock................................................ 12,475 --
--------------- ---------------
Common stock outstanding, end of period................................. 38,466,095 35,855,146
=============== ================
Weighted average common stock outstanding during the period............. 38,453,384 35,819,528
=============== ================
Net income as reported in condensed consolidated financial statements... $ 7,563,000 $ 5,427,000
=============== ================
Basic Earnings Per Share................................................ $ 0.20 $ 0.15
=============== ================
Diluted:
Weighted average common stock outstanding during the period............. 38,453,384 35,819,528
Potential common shares under the treasury stock method assuming the
exercise of options and warrants and the conversion of preferred stock
and exchangeable stock of a subsidiary................................ 1,964,451 2,567,840
--------------- ----------------
Total............................................................. 40,417,835 38,387,368
=============== ================
Net income as reported in condensed consolidated financial statements... $ 7,563,000 $ 5,427,000
=============== ================
Diluted Earnings Per Share.............................................. $ 0.19 $ 0.14
=============== ================
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-01-2000
<PERIOD-END> JAN-02-2000
<CASH> 9,001
<SECURITIES> 0
<RECEIVABLES> 196,063
<ALLOWANCES> 7,802
<INVENTORY> 0
<CURRENT-ASSETS> 209,661
<PP&E> 46,356
<DEPRECIATION> 23,246
<TOTAL-ASSETS> 395,621
<CURRENT-LIABILITIES> 95,226
<BONDS> 0
0
0
<COMMON> 385
<OTHER-SE> 242,292
<TOTAL-LIABILITY-AND-EQUITY> 395,621
<SALES> 170,241
<TOTAL-REVENUES> 170,241
<CGS> 141,487
<TOTAL-COSTS> 141,487
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,284
<INCOME-PRETAX> 13,505
<INCOME-TAX> 5,942
<INCOME-CONTINUING> 7,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,563
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.19
</TABLE>
