EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Years Ended
--------------------------------------------------------
Sept. 29, (2) Oct. 1, (3) Oct. 2, (4) Oct.3, Sept. 27,
($ in thousands, except per share data) 1996 1995 1994 1993 1992
- --------------------------------------- ------------- ----------- ----------- -------- -----------
STATEMENT OF OPERATIONS DATA
Gross revenue $220,099 $120,034 $96,472 $74,488 $65,626
Subcontractor costs 59,062 32,160 28,653 23,323 22,087
-------- -------- ------- ------- -------
Net revenue 161,037 87,874 67,819 51,165 43,539
Cost of net revenue 122,084 65,484 51,069 38,628 33,791
-------- -------- ------- ------- -------
Gross profit 38,953 22,390 16,750 12,537 9,748
Selling, general and administrative
expenses 21,218 10,634 7,589 5,696 4,609
-------- -------- ------- ------- -------
Income from operations 17,735 11,756 9,161 6,841 5,139
Net interest income (expense) (776) 833 354 290 (61)
-------- -------- ------- ------- -------
Income before income taxes 16,959 12,589 9,515 7,131 5,078
Income tax expense 6,854 5,036 3,806 2,852 2,031
-------- -------- ------- ------- -------
Net income $ 10,105 $ 7,553 $ 5,709 $ 4,279 $ 3,047
======== ======== ======= ======= =======
Net income per share(1) $ 0.70 $ 0.56 $ 0.43 $ 0.33 $ 0.25
======== ======== ======= ======= =======
Weighted average shares
outstanding(1) 14,452 13,534 13,319 13,067 12,126
Sept. 29, Oct. 1, Oct. 2, Oct.3, Sept. 27,
($ in thousands) 1996 1995 1994 1993 1992
- --------------------------------------- ------------- ----------- ----------- -------- -----------
BALANCE SHEET DATA
Working capital $ 32,739 $ 39,872 $24,833 $23,722 $19,335
Total assets 88,463 92,930 51,606 38,572 30,078
Long-term obligations, excluding
current installments -- 19,045 -- -- --
Stockholders' equity 63,269 41,496 33,507 26,446 21,984
(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 1996.
(2) Includes the results of operations and financial position of KCM, Inc.
(acquired November 7, 1995).
(3) Includes the results of operations and financial position of PRC
Environmental Management, Inc. (acquired September 15, 1995).
(4) Includes the results of operations and financial position of Simons, Li &
Associates, Inc. (acquired October 4, 1993) and Hydro-Search, Inc.
(acquired June 3, 1994).
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Tetra Tech, Inc. (the "Company"), in the course of providing its services,
routinely subcontracts for services such as laboratory testing, soil cartage
and other services and capabilities. 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. One of the Company's business strategies is
to serve as the prime contractor on contracts, which results in the use of
subcontractors. The Company believes that in the early stages of establishing a
new service capability, ongoing fixed expenses must be controlled by selectively
utilizing qualified subcontractors to assist in providing such capability.
Additionally, qualified subcontractors are utilized to provide services in areas
in which the Company does not intend to develop internal capabilities.
Net revenue includes the fees for services provided directly by the Company
and fees charged by the Company for arranging subcontractor services. Cost of
net revenue incorporates the expenses of the Company's 87 locations performing
services under contracts, including professional salaries and certain direct and
indirect overhead costs such as rents, utilities and travel.
Selling, general and administrative ("SG&A") expense is comprised primarily
of corporate headquarters costs related to the executive offices, corporate
accounting, data processing, marketing and bid and proposal costs. These costs
are generally unrelated to specific client projects. In addition, amortization
of certain intangible assets resulting from purchase accounting adjustments
associated with acquisitions is included in SG&A expense.
The Company provides 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 the Company's
net revenue attributable to Federal government, state and local government, and
private and international clients:
Percentage of Net Revenue
-------------------------
Fiscal Fiscal Fiscal
Client 1996 1995 1994
- ------ ------ ------ ------
Federal government 61.7% 54.8% 52.2%
State and local government 16.6 11.1 14.5
Private 20.1 34.1 33.3
International 1.6 -- --
------ ------ ------
Total 100.0% 100.0% 100.0%
====== ====== ======
A significant portion of the Company's net revenue is derived from contracts
with the Federal government which are subject to termination at any time by the
client. Some of these contracts are subject to annual approval of funding.
Accordingly, Federal budget allocation changes may have an effect on the future
operations of the Company.
RESULTS OF OPERATIONS
The Results of Operations table presents for the periods indicated the
percentage relationship which certain items in the Company's Consolidated
Statements of Operations bear to net revenue and the percentage increase or
(decrease) in the dollar amount of such items.
Percentage Relationship to Net Revenue Period to Period
Fiscal Years Ended Change
-------------------------------------- ------------------------
Sept.29, Oct. 1, Oct. 2, 1996 vs. 1995 vs.
RESULTS OF OPERATIONS 1996 1995 1994 1995 1994
- --------------------- ------- ------- ------- -------- --------
Net revenue 100.0% 100.0% 100.0% 83.3% 29.6%
Cost of net revenue 75.8 74.5 75.3 6.4 28.2
----- ----- ----- ----- -----
Gross profit 24.2 25.5 24.7 74.0 33.7
Selling, general and
administrative expenses 13.2 12.1 11.2 99.5 40.1
----- ----- ----- ----- -----
Income from operations 11.0 13.4 13.5 51.0 28.3
Net interest income (expense) (0.5) 0.9 0.5 (193.2) 135.3
----- ----- ----- ----- -----
Income before income taxes 10.5 14.3 14.0 34.7 32.3
Income tax expense 4.2 5.7 5.6 36.1 32.3
----- ----- ----- ----- -----
Net income 6.3% 8.6% 8.4% 33.8% 32.3%
===== ===== ===== ===== =====
FISCAL 1996 COMPARED TO FISCAL 1995
Net Revenue. Net revenue increased from $87,874,000 to $161,037,000, or 83.3%,
from fiscal 1995 to fiscal 1996. All four client sectors--Federal government,
state and local government, and private and international--continued to show net
revenue increases in actual dollars. The increase in net revenue associated with
entities acquired in fiscal 1996 (see Note 2 to Consolidated Financial
Statements) totalled $77,678,000. Gross revenue increased from $120,034,000 to
$220,099,000, or 83.4%, from fiscal 1995 to fiscal 1996. In both fiscal 1995 and
fiscal 1996, subcontractor costs were 26.8% of gross revenue.
Cost of Net Revenue. Cost of net revenue increased from $65,484,000 to
$122,084,000, or 86.4%, from fiscal 1995 to fiscal 1996. This increase was
attributable to costs incurred in connection with the additional net revenue
from the PRC Environmental Management, Inc. ("EMI") and KCM, Inc. acquisitions,
and growth in project volume. The number of employees increased from 1,706 at
the end of fiscal 1995 to 1,899 (118 from the fiscal 1996 acquisitions) at the
end of fiscal 1996. As a percentage of net revenue, cost of net revenue
increased from 74.5% in fiscal 1995 to 75.8% in fiscal 1996 due primarily to the
acquisitions. Gross profit increased from $22,390,000 to $38,953,000, or 74.0%,
from fiscal 1995 to fiscal 1996. However, as a percentage of net revenue, gross
profit decreased from 25.5% in fiscal 1995 to 24.2% in fiscal 1996, primarily as
a result of the amount of EMI's cost-type contracts.
Selling, General and Administrative Expenses. SG&A expenses increased from
$10,634,000 to $21,218,000, or 99.5%, from fiscal 1995 to fiscal 1996. As a
percentage of net revenue, SG&A expenses increased from 12.1% in fiscal 1995 to
13.2% in fiscal 1996. These increases were due principally to the entities
acquired (see Note 2 to Consolidated Financial Statements), associated goodwill
amortization and to the Company's continuing efforts to identify and secure new
contracts by increasing its business development expenditures.
Net Interest Income/Expense. Net interest income decreased from $833,000 in
fiscal 1995 to $776,000 of interest expense in fiscal 1996, or 193.2%, due to
the cost of long-term obligations incurred for the purchase of EMI in September
1995.
Income Tax Expense. Income tax expense increased from $5,036,000 to $6,854,000,
or 36.1%, from fiscal 1995 to fiscal 1996 as a result of an increase in income
before taxes.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Revenue. Net revenue increased from $67,819,000 to $87,874,000, or 29.6%,
from fiscal 1994 to fiscal 1995. All three client sectors in those
years--Federal government, state and local government, and private--continued to
show net revenue increases in actual dollars. The increase in net revenue
associated with entities acquired in fiscal 1994 and 1995 (see Note 2 to
Consolidated Financial Statements) totalled $10,409,000. Gross revenue increased
from $96,472,000 to $120,034,000, or 24.4%, from fiscal 1994 to fiscal 1995. In
fiscal 1995, subcontractor costs were 26.8% of gross revenue as compared to
29.7% in fiscal 1994.
Cost of Net Revenue. Cost of net revenue increased from $51,069,000 to
$65,484,000, or 28.2%, from fiscal 1994 to fiscal 1995. This increase was
attributable to costs incurred to support the growth in project volume. The
number of employees increased from 893 at the end of fiscal 1994 to 1,706 (776
from the 1995 acquisition) at the end of fiscal 1995. As a percentage of net
revenue, cost of net revenue decreased from 75.3% in fiscal 1994 to 74.5% in
fiscal 1995. The percentage decline was a result of overall improved project
management. As a result, gross profit increased from $16,750,000 to $22,390,000,
or 33.7%, from fiscal 1994 to fiscal 1995.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses. SG&A expenses increased from
$7,589,000 to $10,634,000, or 40.1%, from fiscal 1994 to fiscal 1995. As a
percentage of net revenue, SG&A expenses increased from 11.2% in fiscal 1994 to
12.1% in fiscal 1995. These increases were due principally to the entities
acquired (see Note 2 to Consolidated Financial Statements) and to the Company's
continuing efforts to identify and secure new contracts by increasing its
business development expenditures.
Net Interest Income. Net interest income increased from $354,000 in fiscal 1994
to $833,000 in fiscal 1995, or 135.3%, due to the generation of interest income
on invested funds throughout fiscal 1995.
Income Tax Expense. Income tax expense increased from $3,806,000 to $5,036,000,
or 32.3%, from fiscal 1994 to fiscal 1995 as a result of an increase in income
before taxes.
INFLATION
Management believes that the Company's operations have not been adversely
affected by inflation or changing prices.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of September 29, 1996 was $32,739,000, a
decrease of $7,133,000 from October 1, 1995. Cash and cash equivalents as of
September 29, 1996 totalled $6,129,000. In fiscal 1995, the Company augmented
cash generated from operations with a $30,000,000 credit facility, while in
fiscal 1996, the Company financed its operations through cash generated from
operations. In fiscal 1996, the Company generated $21,124,000 from operating
activities and used $8,755,000 for investing activities ($6,441,000 of which
related to business acquisitions). In fiscal 1995, the Company generated
$13,578,000 in cash from operating activities and used $36,729,000 for investing
activities ($35,462,000 of which related to business acquisitions). The increase
in cash from operating activities in both fiscal 1996 and fiscal 1995 resulted
primarily from the management of receivables and increase in net income.
The Company has a credit agreement (as amended, the "Credit Agreement") with
a bank to support its working capital and acquisition needs. The Credit
Agreement provided a revolving credit facility (the "Facility") of $30,000,000,
although the Company voluntarily reduced the Facility to $15,000,000 at
September 29, 1996. Interest on borrowings under the Facility is payable at the
Company's option (a) at a base rate (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 1.25% to 1.75%. Borrowings under the Facility
are secured by the Company's accounts receivable and the stock of four of the
Company's subsidiaries. The Credit Agreement contains various covenants
including, but not limited to, restrictions related to tangible net worth, net
income, additional indebtedness, asset sales, mergers and acquisitions, creation
of liens, and dividends on capital stock (other than stock dividends). The
Facility matures on September 15, 1998 or earlier at the discretion of the
Company upon payment in full of loans and other obligations. Throughout fiscal
1996, maximum borrowings under the Facility were $20,000,000. At September 29,
1996 there were no borrowings under the Facility, however, standby letters of
credit issued thereunder totalled $1,815,000.
Capital expenditures during fiscal years 1996, 1995 and 1994 were
approximately $2,385,000, $1,453,000 and $1,433,000, respectively. The
expenditures were principally for computer equipment, leasehold improvements and
office expansion.
The Company expects that internally generated funds, its existing cash
balances, and its available line of credit will be sufficient to meet the
Company's capital requirements through the end of fiscal 1997.
CONSOLIDATED BALANCE SHEETS
Tetra Tech, Inc.
- ---------------
Sept. 29, Oct. 1,
1996 1995
------------ ------------
ASSETS
Current Assets:
- --------------
Cash and cash equivalents $ 6,129,000 $ 13,130,000
Accounts receivable--net 22,306,000 22,886,000
Unbilled receivables--net 25,201,000 29,618,000
Prepaid and other current assets 1,939,000 1,869,000
Deferred income taxes 2,358,000 4,758,000
------------ ------------
Total Current Assets 57,933,000 72,261,000
------------ ------------
Property and Equipment:
Equipment, furniture and fixtures 13,072,000 10,959,000
Leasehold improvements 733,000 433,000
------------ ------------
Total 13,805,000 11,392,000
Accumulated depreciation and amortization (6,790,000) (5,001,000)
------------ ------------
Property and Equipment--Net 7,015,000 6,391,000
------------ ------------
Intangible Assets--Net 22,047,000 14,044,000
Other Assets 1,468,000 234,000
------------ ------------
Total Assets $ 88,463,000 $ 92,930,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
- -------------------
Accounts payable $ 13,423,000 $ 14,820,000
Accrued compensation 7,311,000 8,287,000
Other current liabilities 3,356,000 2,954,000
Purchase price payable -- 5,000,000
Income taxes payable 1,104,000 328,000
Current portion of long-term obligations -- 1,000,000
------------ ------------
Total Current Liabilities 25,194,000 32,389,000
------------ ------------
Long-Term Obligations -- 19,045,000
------------ ------------
Commitments and Contingencies (Notes 7 and 9)
Stockholders' Equity:
- -------------------
Preferred stock--authorized 2,000,000 shares; none issued
and outstanding
Common stock--authorized 15,000,000 shares of $.01 par value;
issued and outstanding 14,127,002 shares at September 29, 1996,
and 13,235,309 shares at October 1, 1995 141,000 132,000
Additional paid-in capital 33,452,000 21,793,000
Retained earnings 29,676,000 19,571,000
------------ ------------
Total Stockholders' Equity 63,269,000 41,496,000
------------ ------------
Total Liabilities and Stockholders' Equity $ 88,463,000 $ 92,930,000
============ ============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Tetra Tech, Inc. Fiscal Years Ended
- --------------- -------------------------------------------------------------
Sept. 29, Oct. 1, Oct. 2,
1996 1995 1994
------------- ------------- -------------
REVENUE:
Gross revenue $ 220,099,000 $ 120,034,000 $ 96,472,000
Subcontractor costs 59,062,000 32,160,000 28,653,000
------------- ------------- -------------
Net Revenue 161,037,000 87,874,000 67,819,000
Cost of Net Revenue 122,084,000 65,484,000 51,069,000
------------- ------------- -------------
Gross Profit 38,953,000 22,390,000 16,750,000
Selling, General and Administrative Expenses 21,218,000 10,634,000 7,589,000
------------- ------------- -------------
Income From Operations 17,735,000 11,756,000 9,161,000
Interest Expense 1,076,000 90,000 22,000
Interest Income 300,000 923,000 376,000
------------- ------------- -------------
Income Before Income Taxes 16,959,000 12,589,000 9,515,000
Income Tax Expense 6,854,000 5,036,000 3,806,000
------------- ------------- -------------
Net Income $ 10,105,000 $ 7,553,000 $ 5,709,000
============= ============= =============
Net Income Per Common and
Common Equivalent Share $ 0.70 $ 0.56 $ 0.43
============= ============ =============
Weighted Average Shares Outstanding 14,451,616 13,533,538 13,319,130
============= ============ =============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Tetra Tech, Inc. Fiscal Years Ended September 29, 1996, October 1, 1995 and October 2, 1994
- --------------- -------------------------------------------------------------------------------------------
Common Common Additional
Stock Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- ---------- ------------ ------------ --------- ------------
BALANCE,
OCTOBER 3, 1993
as previously reported 10,338,094 $104,000 $20,123,000 $6,309,000 $(90,000) $26,446,000
Five-for-four
common stock
split (Note 6) 2,584,523 26,000 (26,000) 0
---------- -------- ----------- ---------- --------- -----------
BALANCE,
OCTOBER 3, 1993
as adjusted 12,922,617 130,000 20,097,000 6,309,000 (90,000) 26,446,000
Net income 5,709,000 5,709,000
Payment for
fractional shares (390) (4,000) (4,000)
Shares issued in Simons,
Li & Associates, Inc.
acquisition 136,891 1,000 1,112,000 1,113,000
Stock options exercised 63,633 1,000 150,000 151,000
Stock purchase plan 28,548 219,000 219,000
Treasury stock
purchased (11,255) (127,000) (127,000)
---------- --------- ----------- ------------ ---------- -----------
BALANCE,
OCTOBER 2, 1994 13,140,044 132,000 21,574,000 12,018,000 (217,000) 33,507,000
Net income 7,553,000 7,553,000
Payment for
fractional shares (195) (3,000) (3,000)
Stock options exercised 109,896 1,000 628,000 629,000
Treasury stock retired (217,000) 217,000 0
Stock purchased
and retired (14,436) (1,000) (189,000) (190,000)
---------- -------- ----------- ----------- --------- -----------
BALANCE,
OCTOBER 1, 1995 13,235,309 132,000 21,793,000 19,571,000 0 41,496,000
Net income 10,105,000 10,105,000
Payment for fractional
shares (169) (3,000) (3,000)
Shares issued in
KCM, Inc. acquisition 790,236 8,000 10,305,000 10,313,000
Stock options exercised 101,626 1,000 683,000 684,000
Tax benefit for
disqualifying
dispositions of
stock options 674,000 674,000
---------- -------- ----------- ---------- --------- -----------
BALANCE,
SEPTEMBER 29, 1996 14,127,002 $141,000 $33,452,000 $29,676,000 $ 0 $63,269,000
========== ======== =========== =========== ========= ===========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Tetra Tech, Inc. Fiscal Years Ended
- ---------------- --------------------------------------------
Sept. 29, Oct. 1, Oct. 2,
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITES:
Net income $ 10,105,000 $ 7,553,000 $ 5,709,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,613,000 1,894,000 1,372,000
Deferred income taxes (519,000) (278,000) 129,000
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable 18,043,000 4,335,000 465,000
Unbilled receivables (5,916,000) (1,581,000) 810,000
Prepaid and other assets 246,000 (226,000) (428,000)
Accounts payable (4,080,000) 446,000 1,276,000
Accrued compensation (1,431,000) 1,165,000 1,234,000
Other current liabilities (192,000) 716,000 142,000
Income taxes payable 1,255,000 (446,000) 406,000
------------ ------------ ------------
Net Cash Provided By Operating Activities 21,124,000 13,578,000 11,115,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for short-term investments -- (3,003,000) --
Proceeds from short-term investments -- 3,173,000 --
Capital expenditures (2,385,000) (1,453,000) (1,433,000)
Proceeds from sale of property and equipment 71,000 16,000 3,000
Payment for business acquisitions, net
of cash acquired (6,441,000) (35,462,000) (7,067,000)
------------ ------------ ------------
Net Cash Used In Investing Activities (8,755,000) (36,729,000) (8,497,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations (25,048,000) (2,045,000) (335,000)
Proceeds from issuance of long-term obligations 5,003,000 22,000,000 --
Payments on obligations under capital leases (6,000) -- --
Proceeds from issuance of common stock 681,000 626,000 366,000
Payments to acquire common stock -- (190,000) (127,000)
------------ ------------ ------------
Net Cash Provided By (Used In)
Financing Activities (19,370,000) 20,391,000 (96,000)
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (7,001,000) (2,760,000) 2,522,000
Cash and Cash Equivalents at Beginning of Year 13,130,000 15,890,000 13,368,000
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 6,129,000 $ 13,130,000 $ 15,890,000
============ ============ ============
Fiscal Years Ended
--------------------------------------------
Sept. 29, Oct. 1, Oct. 2,
1996 1995 1994
------------ ------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,149,000 $ 18,000 $ 24,000
Income taxes $ 6,123,000 $ 5,879,000 $ 3,270,000
SUPPLEMENTAL NON-CASH INVESTING AND
FINANCING ACTIVITIES:
In fiscal 1996, the Company purchased all of the
capital stock of KCM, Inc. In conjunction with
this acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 20,393,000
Cash paid (2,645,000)
Issuance of common stock (10,313,000)
Other acquisition costs (415,000)
------------
Liabilities assumed $ 7,020,000
============
In fiscal 1995, the Company purchased all of the
capital stock of PRC Environmental Management,
Inc. In conjunction with this acquisition, liabilities
were assumed as follows:
Fair value of assets acquired $ 47,377,000
Cash paid (35,000,000)
Purchase price payable (5,000,000)
Other acquisition costs (600,000)
------------
Liabilities assumed $ 6,777,000
============
In fiscal 1994, the Company purchased all of the
capital stock of Simons, Li & Associates, Inc.
and acquired substantially all of the assets and
assumed certain liabilities of Simon Hydro-Search,
Inc. In conjunction with these acquisitions,
liabilities were assumed as follows:
Fair value of assets acquired $ 11,360,000
Cash paid (7,194,000)
Issuance of common stock (1,113,000)
------------
Liabilities assumed $ 3,053,000
============
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tetra Tech, Inc.
Fiscal Years Ended September 29, 1996,
October 1, 1995 and October 2, 1994
1. SIGNIFICANT ACCOUNTING POLICIES
Business--Tetra Tech, Inc. (the "Company") provides comprehensive environmental
engineering and consulting services addressing complex water contamination and
other environmental matters.
Principles of Consolidation--The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, GeoTrans, Inc.
("GeoTrans"), Simons, Li & Associates, Inc. ("SLA"), Hydro-Search, Inc. ("HSI"),
PRC Environmental Management, Inc. ("EMI"), KCM, Inc. ("KCM"), and Tetra Tech
Technical Services, Inc. ("TtTS"). 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 on the Sunday nearest to September 30. Fiscal years 1996, 1995
and 1994 each contained 52 weeks.
Contract Revenues and Costs--In the course of providing its services, the
Company routinely subcontracts for services such as laboratory testing, soil
cartage and other services and capabilities. These costs are passed through to
clients and, in accordance with industry practice, are included in the Company's
gross revenue. Because subcontractor services can change significantly from
project to project, changes in gross revenue may not be indicative of business
trends. Accordingly, the Company also reports net revenue, which is gross
revenue less the cost of subcontractor services. Contract revenues and contract
costs on both cost-type and fixed-price-type contracts are recorded using the
percentage-of-completion (cost-to-cost) method. Under this method, contract
revenues on long-term contracts are recognized in the ratio that contract costs
incurred bear to total estimated costs. Costs and income on long-term contracts
are subject to revision throughout the lives of the contracts and any required
adjustments are made in the period in which the revisions become known. Losses
on contracts are recorded in full as they are identified.
General and administrative costs are expensed in the period incurred.
Contract revenues under United States government contracts and subcontracts
accounted for approximately 62%, 55% and 52% of net contract revenue for the
years ended September 29, 1996, October 1, 1995 and October 2, 1994,
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.
Intangible Assets--The Company reviews the recoverability of intangible 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 intangible 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 September 29, 1996 and October 1, 1995 consists principally of
goodwill resulting from business acquisitions which is being amortized over
periods ranging from 15 to 40 years.
Income Taxes--The Company files a consolidated federal income tax return and
combined California franchise tax reports, 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.
Net Income Per Common Share--Per share information is computed using the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options and warrants (using the treasury
stock method).
Fair Value of Financial Instruments--
Cash and Cash Equivalents, Accounts Receivable, Unbilled Receivables and
Accounts Payable--The carrying amounts approximate fair value because of the
short maturities of these instruments.
Revolving Credit Facility--The carrying amount approximates fair value because
the interest rates are based upon variable reference rates.
Concentration of Credit Risk--Financial instruments which subject the Company
to credit risk consist primarily of temporary cash investments and accounts
receivable. The Company places its temporary cash investments with high credit
qualified financial institutions and, by policy, limits the amount of investment
exposure to any one financial institution. Approximately 70% of accounts
receivable is due from various agencies of the Federal government. The remaining
accounts receivable are generally diversified due to the large number of
entities comprising the Company's customer base and their geographic dispersion.
The Company performs ongoing credit evaluations of its customers and maintains
an allowance for potential credit losses.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Accounting Pronouncements--During the fiscal year ended September 29, 1996, the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Among other provisions, the statement changed current accounting
practices for the evaluation of impairment of long-lived assets. The adoption
did not have a material effect on the Company's financial statements.
In 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which will be effective for the Company beginning September 30,
1996. SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock-based compensation awards to employees and will disclose the required pro
forma effect on net income and earnings per share upon adoption of SFAS No.
123.
2. ACQUISITIONS
In November 1995, the Company acquired 100% of the capital stock of KCM, Inc.
("KCM"), an engineering services firm specializing in areas of water quality,
water and wastewater systems, surface water management, fisheries and
facilities. The purchase price of $12,958,000 consisted of cash and Company
stock which was issued under Regulation D under the Securities Act of 1933, as
amended, and had a value of $10,313,000.
On September 15, 1995, the Company acquired 100% of the capital stock of PRC
Environmental Management, Inc. ("EMI") from The Black & Decker Corporation. EMI
provides a full range of environmental consulting and engineering services,
including feasibility studies, remedial investigations and design, construction
management, economic and financial analysis, environmental audits, risk
management services and regulatory compliance assistance. EMI's customers
include the U.S. Environmental Protection Agency, U.S. Department of Defense and
other governmental and commercial entities. The purchase price was approximately
$40,000,000.
The acquisitions of EMI and KCM have been accounted for as purchases. The
excess of the purchase cost of the acquisitions over the fair value of the net
assets acquired was recorded as goodwill and is included in Intangible
Assets--Net in the accompanying balance sheets. The results of operations of EMI
and KCM have been included in the Company's financial statements from their
respective acquisition dates.
NOTES TO CONSOLIDATD FINANCIAL STATEMENTS
Tetra Tech, Inc.
- ---------------
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired KCM and EMI on October 3, 1994:
Fiscal Years Ended
-------------------------
Sept. 29, Oct. 1,
($ in thousands, except per share data) 1996 1995
- --------------------------------------- --------- ---------
Gross revenue $ 222,150 $ 232,008
Income before income taxes 17,119 10,842
Net income 10,200 6,505
Net income per share 0.70 0.45
Weighted average shares outstanding 14,546 14,324
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at September 29, 1996 and October
1, 1995:
1996 1995
------------ ------------
Billed accounts receivable $ 23,338,000 $ 24,782,000
------------ ------------
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 25,067,000 28,207,000
Costs and fee retention billable upon
audit of total contract costs 10,203,000 10,668,000
------------ ------------
Total unbilled accounts receivable 35,270,000 38,875,000
------------ ------------
Allowance for uncollectible accounts and
disallowed costs (11,101,000) (11,153,000)
------------ ------------
Total $ 47,507,000 $ 52,504,000
============ ============
The accounts receivable valuation allowance includes amounts to provide for
doubtful accounts and for the potential disallowance of billed and unbilled
costs. Disallowance of billed and unbilled costs is primarily associated with
contracts with the U.S. government which contain clauses that subject
contractors to many levels of audit. Payments made to EMI on U.S. government
contracts are subject to proposed adjustments upon audit. Audits for the years
1986, 1987, 1992 and 1993 have been completed, and cost disallowances of
approximately $2.3 million have been proposed. Final negotiations between EMI
and the U.S. government are in process, and EMI is vigorously contesting
substantially all of the proposed disallowances. Audits for the years 1988,
1989, 1990, 1991, 1994 and 1995 and the period from January 1, 1996 to September
29, 1996 have yet to be completed. Allowances to provide for doubtful accounts
have been determined through reviews of specific amounts determined to be
uncollectible, plus a general allowance for other amounts for which some
potential loss has been determined to be probable based on current events and
circumstances. Given the above, management believes that resolution of these
matters will not have a material adverse impact on the Company's financial
position or results of operations.
The Company has approximately $2,400,000 under retainage provisions of
contracts. Accounts receivable include approximately $4,748,891 that may not be
realized within one year.
4. INCOME TAXES
The provision for income taxes for the years ended September 29, 1996, October
1, 1995 and October 2, 1994 consisted of the following:
Sept. 29, Oct. 1, Oct. 2,
1996 1995 1994
----------- ----------- -----------
Current:
Federal $ 5,849,000 $ 4,185,000 $ 2,915,000
State 1,462,000 1,129,000 762,000
Deferred (457,000) (278,000) 129,000
----------- ----------- -----------
Total provision $ 6,854,000 $ 5,036,000 $ 3,806,000
=========== =========== ===========
Temporary differences comprising net deferred income taxes shown on the
consolidated balance sheets were as follows:
Sept. 29, Oct. 1,
1996 1995
----------- -----------
Allowance for doubtful
accounts $ 4,458,000 $ 4,635,000
Cash to accrual (2,265,000) (211,000)
Accrued vacation 606,000 547,000
Prepaid expense (584,000) (324,000)
Depreciation (399,000) (157,000)
Other 542,000 268,000
----------- -----------
Deferred income taxes $ 2,358,000 $ 4,758,000
=========== ===========
Total tax expense was different than the amount computed by applying the
federal statutory rate as follows:
Sept. 29, 1996 Oct. 1, 1995 Oct. 2, 1994
-------------------------------------------------------------------------------------
Amount % Amount % Amount %
----------- ----- ----------- ----- ----------- -----
Tax at federal statutory rate $ 5,936,000 35.0% $ 4,406,000 35.0% $ 3,330,000 35.0%
State taxes, net of federal benefit 933,000 5.5 692,000 5.5 528,000 5.5
Other (15,000) (0.1) (62,000) (0.5) (52,000) (0.5)
----------- ---- ----------- ---- ----------- ----
Total provision $ 6,854,000 40.4% $ 5,036,000 40.0% $ 3,806,000 40.0%
=========== ==== =========== ==== =========== ====
5. LONG-TERM OBLIGATIONS
In September 1995, the Company entered into a credit agreement (as amended, the
"Credit Agreement") with a bank to support its working capital and acquisition
needs. The Credit Agreement initially provided a revolving credit facility of
$30,000,000 which the Company voluntarily reduced to $15,000,000 at September
29, 1996. Under the Credit Agreement, the Company may also request standby
letters of credit up to the aggregate sum of $5,000,000 outstanding at any one
time.
Interest on borrowings under the Credit Agreement is payable at the
Company's option (a) at a base rate (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 1.25% to 1.75%. The interest rate on outstanding
borrowings at October 1, 1995 was 7.5625%.
Borrowings under the Credit Agreement are secured by the Company's accounts
receivable and the stock of four of the Company's subsidiaries.
The Credit Agreement contains various covenants including, but not limited
to, restrictions related to tangible net worth, net income, additional
indebtedness, asset sales, mergers and acquisitions, creation of liens, and
dividends on capital stock (other than stock dividends).
The Credit Agreement matures on September 15, 1998 or earlier at the
discretion of the Company upon payment in full of loans and other obligations.
As at September 29, 1996, there were no borrowings outstanding, however, standby
letters of credit totalled $1,815,000.
6. STOCKHOLDERS' EQUITY
On May 23, 1996, the Board of Directors declared a five-for-four split of the
Company's Common Stock, effected in the form of a 25% stock dividend, payable on
June 21, 1996 to shareholders of record on June 7, 1996. All agreements
concerning stock options and other commitments payable in shares of the
Company's Common Stock are affected by the five-for-four split. All references
to number of shares (except shares authorized), stock options and per share
information in the consolidated financial statements have been adjusted to
reflect the stock split on a retroactive basis.
Pursuant to the Company's 1989 Stock Option Plan, key employees may be
granted options to purchase 610,351 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 date of grant. Additionally, in connection
with acquisitions in 1988 and 1990, the Company issued options to purchase
281,605 shares of the Company's Common Stock.
The Company also has a 1992 Incentive Stock Plan under which key employees
may be granted options to purchase 2,156,250 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tetra Tech, Inc.
- ---------------
Pursuant to the Company's 1992 Nonemployee Director Plan, nonemployee
directors may be granted options to purchase 73,241 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-time and regular part-time employees and officers of the Company or
any of its Subsidiaries, including directors who are also 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, 562,500 shares may be issued pursuant to the exercise of Purchase Rights.
Each Purchase Right lasts for a period of 52 weeks ("Purchase Right
Period"). The first Purchase Right Period began after the stockholders adopted
the Purchase Plan at the Annual Meeting on February 8, 1996. However, the
Committee may elect to suspend and/or recommence the Purchase Plan at anytime
following the end of a Purchase Right Period.
Prior to the beginning of each Purchase Right Period, employees may elect to
contribute fixed amounts to the Purchase Plan during that Purchase Right Period
to purchase Common Stock. Employees can only commence participation in the
Purchase Plan on the first day of a Purchase Right Period. 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.
The amounts that employees contribute to the Purchase Plan will
automatically be used to purchase Common Stock on the last day of the Purchase
Right Period, unless they elect to withdraw from the Purchase Plan or are
terminated prior to that date. If the Company is sold, all Purchase Rights will
become exercisable immediately preceding the sale. Employees who elect to
suspend their contributions can elect either to withdraw their contributions or
leave those amounts in the Purchase Plan to be used to purchase Common Stock at
the end of the Purchase Right Period. No interest is credited on any amounts
contributed to the Purchase Plan.
If the Common Stock is disposed of by a participant prior to the expiration
of the holding periods required to qualify for long-term capital gains
treatment, the participant is required to notify the Company in the event of
such a premature disposition.
During the three years ended September 29, 1996, option activity was as
follows:
Number of Option Price
Options Per Share Total
--------- ----------------- ------------
Balance,
October 3,
1993 435,961 $ 1.08 - $ 7.98 $ 1,992,000
Granted 512,158 $ 8.06 - $ 12.16 4,826,000
Exercised (63,633) $ 1.08 - $ 7.53 (151,000)
Cancelled (41,026) $ 1.47 - $ 9.22 (266,000)
--------- ----------------- ------------
Balance,
October 2,
1994 843,460 $ 1.08 - $ 12.16 6,401,000
Granted 347,770 $ 10.88 - $ 17.30 4,038,000
Exercised (109,896) $ 1.08 - $ 10.24 (629,000)
Cancelled (79,561) $ 1.47 - $ 11.04 (690,000)
--------- ----------------- ------------
Balance,
October 1,
1995 1,001,773 $ 1.08 - $ 17.30 9,120,000
Granted 412,587 $ 16.00 - $ 21.00 7,318,000
Exercised (101,626) $ 1.08 - $ 12.48 (684,000)
Cancelled (52,417) $ 1.08 - $ 17.60 (583,000)
--------- ----------------- ------------
Balance,
September 29,
1996 1,260,317 $ 1.08 - $ 21.00 $ 15,171,000
========= ================= ============
At September 29, 1996, the status of each plan was as follows:
1989 Stock Option Plan: Options to purchase 114,674 shares were exercisable and
no further options will be granted under this plan.
1992 Incentive Stock Plan: Options to purchase 293,283 shares were exercisable
and options to purchase 954,111 shares were available for future grant.
1992 Nonemployee Director Plan: Options to purchase 9,764 shares were
exercisable and options to purchase 56,154 shares were available for future
grant.
7. LEASES
The Company leases land, buildings and equipment under various operating leases.
Rent expense under all operating leases was approximately $9,462,000, $5,332,000
and $3,732,000 for the years ended September 29, 1996, October 1, 1995 and
October 2, 1994, respectively. Amounts payable under noncancelable operating
lease commitments are as follows during the fiscal years ending in:
1997 $ 7,873,000
1998 6,065,000
1999 4,029,000
2000 3,083,000
2001 2,575,000
Thereafter 5,136,000
------------
Total $ 28,761,000
============
8. 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 years ended September 29, 1996,
October 1, 1995 and October 2, 1994 expenses relating to the plans were
approximately $4,002,000, $1,971,000 and $1,479,000, respectively.
9. 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 statements.
10 QUARTERLY FINANCIAL INFORMATION--UNAUDITED
In the opinion of management, the following unaudited quarterly data for the
years ended September 29, 1996 and October 1, 1995 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.)
First Second Third Fourth
Fiscal 1996 Quarter Quarter Quarter Quarter
- ----------- -------- -------- -------- --------
Gross revenue $ 54,162 $ 53,929 $ 54,152 $ 57,856
Net revenue 38,023 40,076 40,314 42,624
Gross profit 8,540 9,400 9,835 11,178
Income from operations 3,730 4,119 4,506 5,380
Net income 2,029 2,297 2,625 3,154
Net income per share $ 0.14 $ 0.16 $ 0.18 $ 0.22
Weighted average shares outstanding 14,151 14,504 14,565 14,601
Fiscal 1995
- -----------
Gross revenue $ 27,646 $ 27,852 $ 29,150 $ 35,386
Net revenue 19,947 21,151 21,499 25,277
Gross profit 4,897 5,244 5,277 6,972
Income from operations 2,403 2,613 2,919 3,821
Net income 1,551 1,688 1,907 2,407
Net income per share $ 0.12 $ 0.13 $ 0.14 $ 0.18
Weighted average shares outstanding 13,439 13,449 13,551 13,670
SECURITIES INFORMATION
Tetra Tech, Inc.
- ---------------
Tetra Tech's Common Stock is traded on the Nasdaq Stock Market under the symbol
WATR. There were 337 stockholders of record as of December 2, 1996. 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 5-for-4 stock split, effected in the form of a 25% stock
dividend, in June 1996.
Fiscal 1996 High Low
- ----------- ------- -------
First Quarter $ 19.00 $ 16.40
Second Quarter 19.00 15.60
Third Quarter 22.40 15.80
Fourth Quarter 24.50 17.25
Fiscal 1995 High Low
- ----------- ------- -------
First Quarter $ 12.80 $ 10.40
Second Quarter 12.96 10.24
Third Quarter 14.88 12.48
Fourth Quarter 19.00 14.00
INDEPENDENT AUDITORS' REPORT
TETRA TECH, INC.:
We have audited the accompanying consolidated balance sheets of Tetra Tech, Inc.
and its subsidiaries as of September 29, 1996 and October 1, 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended September 29, 1996. 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 September 29, 1996 and October 1, 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended September 29, 1996 in conformity with generally accepted accounting
principles.
Los Angeles, California
November 12, 1996