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 December 31, 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.
------------------------------------------------------
(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
----------------------------------------------------
(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 5, 2001, the total number of outstanding shares of the
Registrant's common stock was 40,348,106.
TETRA TECH, INC.
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flow 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 18
Risk Factors 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 29
2
PART I. FINANCIAL INFORMATION
ITEM 1.
Tetra Tech, Inc.
Condensed Consolidated Balance Sheets
In thousands, except share data December 31, 2000 October 1, 2000
------------------ ---------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 7,841 $ 7,557
Accounts receivable - net ......................................... 157,637 153,527
Unbilled receivables - net ........................................ 128,722 122,102
Prepaid and other current assets .................................. 15,914 11,203
Deferred income taxes ............................................. 2,551 2,551
--------- ---------
Total Current Assets ........................................... 312,665 296,940
--------- ---------
PROPERTY AND EQUIPMENT:
Leasehold improvements ............................................ 4,710 4,182
Equipment, furniture and fixtures ................................. 61,876 59,361
--------- ---------
Total .......................................................... 66,586 63,543
Accumulated depreciation and amortization ......................... (31,135) (28,331)
--------- ---------
PROPERTY AND EQUIPMENT - NET .......................................... 35,451 35,212
--------- ---------
INTANGIBLE ASSETS - NET ............................................... 202,158 190,452
OTHER ASSETS .......................................................... 3,764 3,434
--------- ---------
TOTAL ASSETS .......................................................... $ 554,038 $ 526,038
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 38,980 $ 50,304
Accrued compensation .............................................. 22,580 25,705
Billings in excess of costs on uncompleted contracts .............. 26,279 15,947
Other current liabilities ......................................... 20,740 17,523
Current portion of long-term obligations .......................... 26,000 26,000
Income taxes payable .............................................. 10,979 7,120
--------- ---------
Total Current Liabilities ...................................... 145,558 142,599
--------- ---------
LONG-TERM OBLIGATIONS ................................................. 91,269 85,532
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - authorized, 2,000,000 shares of $.01 par
value; issued and outstanding 0 shares at December 31, 2000
and October 1, 2000 ............................................. -- --
Exchangeable stock of a subsidiary ................................ 13,887 13,887
Common stock - authorized, 50,000,000 shares of $.01 par value;
issued and outstanding 40,281,827 and 39,830,633 shares at
December 31, 2000 and October 1, 2000, respectively ............. 403 398
Additional paid-in capital ........................................ 160,331 150,391
Accumulated other comprehensive income (loss) ..................... (855) (844)
Retained earnings ................................................. 143,445 134,075
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ............................................ 317,211 297,907
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $ 554,038 $ 526,038
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
Tetra Tech, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
In thousands, except per share data Three Months Ended
---------------------------
December 31, January 2,
2000 2000
------------ ----------
Gross Revenue ..................................... $229,330 $170,241
Subcontractor costs ............................ 62,192 41,070
-------- --------
Net Revenue ....................................... 167,138 129,171
Cost of Net Revenue ............................... 128,405 100,417
-------- --------
Gross Profit ...................................... 38,733 28,754
Selling, General and Administrative Expenses ...... 18,559 12,553
Amortization of Intangibles ....................... 2,024 1,468
-------- --------
Income From Operations ............................ 18,150 14,733
Interest Expense .................................. 2,155 1,284
Interest Income ................................... 161 56
-------- --------
Income Before Income Tax Expense .................. 16,156 13,505
Income Tax Expense ................................ 6,786 5,942
-------- --------
Net Income ........................................ $ 9,370 $ 7,563
======== ========
Basic Earnings Per Share .......................... $ 0.23 $ 0.20
======== ========
Diluted Earnings Per Share ........................ $ 0.22 $ 0.19
======== ========
Weighted Average Common Shares Outstanding:
Basic .......................................... 40,014 38,453
======== ========
Diluted ........................................ 43,084 40,418
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands Three Months Ended
----------------------------
December 31, January 2,
2000 2000
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 9,370 $ 7,563
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............................. 4,828 3,629
Provision for losses on receivables ....................... (9) (727)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable ....................................... (1,618) (7,631)
Unbilled receivables ...................................... (4,456) (2,567)
Prepaid and other assets .................................. (4,921) (1,846)
Accounts payable .......................................... (12,118) (3,803)
Accrued compensation ...................................... (4,779) (4,191)
Billings in excess of costs on uncompleted contracts....... 10,332 (164)
Other current liabilities ................................. 1,651 (2,205)
Income taxes payable ...................................... 3,748 (905)
-------- --------
Net Cash Provided By (Used In) Operating Activities ... 2,028 (12,847)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................ (2,549) (3,430)
Payments for business acquisitions, net of cash acquired ........ (3,474) (1,834)
-------- --------
Net Cash Used In Investing Activities ................. (6,023) (5,264)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations ............................... (19,955) (10,571)
Proceeds from issuance of long-term obligations ................. 23,000 29,000
Net proceeds from issuance of common stock ...................... 1,245 92
-------- --------
Net Cash Provided By Financing Activities ............. 4,290 18,521
-------- --------
EFFECT OF RATE CHANGES ON CASH .................................. (11) 402
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 284 812
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................ 7,557 8,189
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 7,841 $ 9,001
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .................................................. $ 2,248 $ 1,273
Income taxes .............................................. $ 3,038 $ 6,847
(Continued)
5
Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
In thousands Three Months Ended
----------------------------
December 31, January 2,
2000 2000
------------ ----------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
In December 2000, the Company purchased all of the
capital stock of Rocky Mountain Consultants, Inc.
In conjunction with this acquisition, liabilities
were assumed as follows:
Fair value of assets acquired ........................... $ 21,388
Cash paid ............................................... (5,800)
Issuance of common stock ................................ (8,700)
Other acquisition costs ................................. (70)
--------
Liabilities assumed .................................. $ 6,818
========
In October 1999, the Company purchased all of the
capital stock of LC of Illinois, Inc. and HFC
Technologies, Inc. In conjunction with these
acquisitions, liabilities were assumed as follows:
Fair value of assets acquired ........................... $ 2,606
Cash paid ............................................... (1,513)
Other acquisition costs ................................. (80)
--------
Liabilities assumed .................................. $ 1,013
========
See accompanying Notes to Condensed Consolidated Financial Statements.
(Concluded)
6
TETRA TECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated balance sheet as of December 31,
2000, the condensed consolidated statements of income and the condensed
consolidated statements of cash flows for the three months ended December 31,
2000 and January 2, 2000 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 1, 2000.
The results of operations for the three months ended December 31, 2000 are
not necessarily indicative of the results to be expected for the fiscal year
ending September 30, 2001.
2. ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which was amended by SFAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
These Statements required derivatives to be measured at fair value and to be
recorded as assets or liabilities on the balance sheet. The accounting for
gains or losses resulting from changes in the fair values of those
derivatives would be dependent upon the use of the derivative and whether it
qualifies for hedge accounting. These Statements are effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company adopted
these Statements in the first quarter of fiscal year 2001 and the adoption of
SFAS No. 133 and SFAS No. 138 has had no material impact on the Company's
results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION, which outlines the
basic criteria that must be met to recognize revenue and provides guidance
for disclosures related to revenue recognition policies. SAB No. 101 requires
companies to report any changes in revenue recognition as a cumulative change
in accounting principle at the time of implementation in accordance with
Accounting Principles Board Opinion No. 20, ACCOUNTING CHANGES. SAB No. 101,
as amended, is effective no later than the fourth quarter of fiscal years
beginning after December 15, 1999. The Company will adopt SAB No. 101 in the
fourth quarter of fiscal year 2001. The Company believes its existing revenue
recognition policies and procedures are in compliance with SAB No. 101, and
that the adoption of SAB No. 101 will have no material impact on the
Company's results of operations or financial position.
7
3. EARNINGS PER SHARE
Basic Earnings Per Share (EPS) excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS is computed by
dividing net income by the weighted average number of common shares outstanding
and dilutive potential common shares. The Company includes as potential common
shares the weighted average number 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 on a one to
one basis, as adjusted for stock splits and stock dividends subsequent to the
original issuance, for the Company's common stock.
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended
--------------------------------
Dec. 31, 2000 Jan. 2, 2000
------------- ------------
Numerator--
Net income ....................................... $ 9,370,000 $ 7,563,000
----------- -----------
Denominator--
Denominator for basic earnings per share--
weighted average shares ..................... 40,014,000 38,453,000
Effect of dilutive securities:
Stock options ............................... 2,053,000 981,000
Exchangeable stock of a subsidiary .......... 1,017,000 984,000
----------- -----------
Dilutive potential common shares ................. 3,070,000 1,965,000
----------- -----------
Denominator for diluted earnings per share--
adjusted weighted average shares and
assumed conversions ....................... 43,084,000 40,418,000
=========== ===========
Basic earnings per share ............................ $ 0.23 $ 0.20
=========== ===========
Diluted earnings per share .......................... $ 0.22 $ 0.19
=========== ===========
4. CASH AND CASH EQUIVALENTS
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 $7.8 million and $7.6 million at December 31, 2000 and
October 1, 2000, respectively.
5. MERGERS AND ACQUISITIONS
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
8
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 $1.6
million and consisted of cash.
On March 30, 2000, Tetra Tech Engineers, P.C. acquired certain assets of
Edward A. Sears Associates (ESA), a provider of engineering services to
hospitals in New York. Concurrent with this transaction, the Company's
subsidiary, Cosentini Associates, Inc., acquired certain non-licensed assets of
ESA from Tetra Tech Engineers, P.C. The purchase was valued at approximately
$0.4 million and consisted of cash.
On April 3, 2000, the Company acquired 100% of the capital stock of eXpert
Wireless Solutions, Inc. (EWS), a provider of radio-frequency engineering and
consulting services to the wireless communications industry. The purchase was
valued at approximately $18.8 million and consisted of cash (of which $500,000
is dependent on operational performance) and 407,877 shares of Company common
stock. Additionally, concurrently with the acquisition, EWS distributed to its
former shareholders accounts receivable valued at approximately $1.8 million.
On May 3, 2000, the Company, through its majority-owned subsidiary, Tetra
Tech Canada Ltd., acquired 100% of the capital stock of 1261248 Ontario, Inc.,
which does business as Engineered Communications (ENG), a provider of
engineering and network services for the wired communications industry in
Ontario, Canada. The purchase was valued at approximately $1.5 million and
consisted of cash and 33,606 shares of exchangeable stock of the Company's
majority-owned subsidiary.
On May 17, 2000, the Company acquired 100% of the capital stock of FHC,
Inc. (FHC), a provider of engineering consulting services primarily to the state
and local governments in Oklahoma. The purchase was valued at approximately $5.2
million and consisted of cash and 56,334 shares of Company common stock.
On May 24, 2000, the Company acquired 100% of the capital stock of Rizzo
Associates, Inc. (RAI), a provider of engineering consulting services to state
and local governments and commercial clients in the upper Northeast region of
the U.S. This purchase was valued at approximately $10.3 million and consisted
of cash and 112,436 shares of Company common stock.
On June 16, 2000, the Company acquired 100% of the capital stock of Drake
Contractors, Inc. (DCI), a provider of infrastructure installation and
maintenance services primarily in Colorado. The purchase was valued at
approximately $5.5 million and consisted of cash (of which $1.0 million is
contingent on operational performance). Additionally, concurrent with the
acquisition, DCI distributed to its former shareholders accounts receivable
valued at approximately $2.1 million.
On July 5, 2000, the Company, through its majority-owned subsidiary, Tetra
Tech Canada Ltd., acquired 100% of the capital stock of Wm. Bethlehem Trenching
Ltd. (BTL), a provider of infrastructure installation and maintenance services
primarily in Ontario, Canada. The purchase was valued at approximately $0.3
million and consisted of cash.
9
On December 21, 2000, the Company acquired 100% of the capital stock of
Rocky Mountain Consultants, Inc. (RMC), a provider of water-related engineering
and facility development services to state and local governments and private
clients primarily in the western and midwestern United States. The purchase was
valued at approximately $14.6 million and consisted of cash of $5.8 million and
296,667 shares of Company common stock and is subject to a purchase price and
purchase allocation adjustment based upon the final determination of RMC's net
asset value as of December 21, 2000.
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, high volatility
in the trading price of the Company's common stock and other economic factors
specific to the Company's circumstances. During fiscal 2000, stock exchanged in
acquisitions was discounted by 15%. During fiscal 2001, the stock exchanged in
acquisitions was not discounted. The results of operations of each of the
companies acquired have been included in the Company's financial statements from
the effective acquisition dates.
6. 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 December 31, 2000 and October
1, 2000 was $6.7 million and $5.5 million, respectively. The allowance for
disallowed costs as of December 31, 2000 and October 1, 2000 was $1.6 million.
Disallowance of billed and unbilled costs is primarily associated with contracts
with the Federal government which contain clauses that subject contractors to
several levels of audit. The Company establishes reserves on those contract
receivables where collectibility is not assured. Management believes that
resolution of these matters will not have a material adverse impact on the
Company's financial position or results of operations.
7. UNAUDITED PRO FORMA OPERATING RESULTS
The table below presents summarized unaudited pro forma operating results
assuming that the Company had acquired EWS, FHC, RAI and RMC on October 4, 1999.
The effect of unaudited pro forma results of LCI, ENG, ESA, DCI and BTL had they
been acquired on October 4, 1999 is not material. These amounts are based on
historical results and assumptions and estimates which the Company believes to
be reasonable. The pro forma results do not reflect anticipated cost savings and
do not necessarily represent results which would have occurred if these
acquisitions had actually taken place on October 4, 1999.
10
In thousands, except per share data Pro Forma Three Months Ended
-------------------------------------
December 31, 2000 January 2, 2000
----------------- ---------------
Gross revenue .......................... $231,200 $187,051
Income from operations ................. 18,476 15,815
Net income ............................. 9,518 7,676
Basic earnings per share ............... 0.24 0.20
Diluted earnings per share ............. 0.22 0.19
Weighted average shares outstanding:
Basic ............................. 40,064 38,671
Diluted ........................... 43,134 40,636
8. OPERATING SEGMENTS
The Company's management has organized its operations into three operating
segments: Resource Management, Infrastructure, and Communications. The Resource
Management operating segment provides specialized environmental engineering and
consulting services primarily relating to water quality and water availability
to both public and private organizations. The Infrastructure operating segment
provides engineering services to provide additional development, as well as
upgrading and replacement of existing infrastructure to both public and private
organizations. The Communications operating segment provides a comprehensive set
of services including engineering, consulting and operational services to
communications 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.
The following tables set forth (in thousands) summarized financial
information on the Company's reportable segments:
REPORTABLE SEGMENTS:
Resource
Three months ended Dec. 31, 2000 Management Infrastructure Communications Total
---------- -------------- -------------- ---------
Gross Revenue ................ $ 91,975 $ 71,305 $ 74,733 $238,013
Net Revenue .................. 61,752 55,683 48,587 166,022
Income from Operations ....... 6,715 5,574 7,589 19,878
Depreciation Expense ......... 416 1,150 1,109 2,675
Resource
Three months ended Jan. 2, 2000 Management Infrastructure Communications Total
---------- -------------- -------------- ---------
Gross Revenue ................ $ 84,385 $ 52,397 $ 37,307 $174,089
Net Revenue .................. 56,122 41,587 29,758 127,467
Income from Operations ....... 6,872 4,835 4,467 16,174
Depreciation Expense ......... 567 925 604 2,096
11
RECONCILIATIONS:
Three Months Ended
-------------------------------
Dec. 31, 2000 Jan. 2, 2000
------------- ------------
GROSS REVENUE
Gross revenue from reportable segments .......... $ 238,013 $ 174,089
Elimination of inter-segment revenue ............ (9,798) (5,551)
Other revenue ................................... 1,116 1,703
--------- ---------
Total consolidated gross revenue ............ $ 229,330 $ 170,241
========= =========
NET REVENUE
Net revenue from reportable segments ............ $ 166,022 $ 127,467
Other revenue ................................... 1,116 1,704
--------- ---------
Total consolidated net revenue .............. $ 167,138 $ 129,171
========= =========
INCOME FROM OPERATIONS
Income from operations of reportable segments ... $ 19,878 $ 16,174
Other income .................................... 296 27
Amortization of intangibles ..................... (2,024) (1,468)
--------- ---------
Total consolidated income from operations ... $ 18,150 $ 14,733
========= =========
MAJOR CLIENTS
The Company's net revenue attributable to the U.S. government was
approximately $41.2 million and $39.2 million for the three months ended
December 31, 2000 and January 2, 2000, respectively. Both the Resource
Management and Infrastructure operating segments realize net revenue from the
U.S. government.
9. 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 December 31, 2000
and January 2, 2000, comprehensive income was approximately $9.4 million and
$8.0 million, respectively. For the three months ended December 31, 2000 and
January 2, 2000, the Company incurred net translation losses of $0.0 million and
net translation gains of $0.4 million, respectively.
12
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 NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
OVERVIEW
Tetra Tech, Inc. is a leading provider of specialized management consulting
and technical services in three principal business areas: resource management,
infrastructure and communications. As a specialized management consultant, we
assist our clients in defining problems and developing innovative and
cost-effective solutions. Our management consulting services are complemented by
our technical services. These technical services, which implement solutions,
include research and development, applied science, engineering and architectural
design, construction management, and operations and maintenance. Our clients
include a diverse base of public and private organizations located in the United
States and internationally.
Since our initial public offering in December 1991, we 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 incurred supporting corporate activities and initiatives.
13
We provide our services to a diverse base of Federal, state and local
government agencies, and commercial sector and international clients. The
following table presents, for the periods indicated, the approximate percentage
of net revenue attributable to these client sectors:
Percentage of Net Revenue
------------------------------------
Quarter Ended
------------------------------------
Client Sector December 31, 2000 January 2, 2000
------------- ----------------- ---------------
Federal government 24.7% 30.4%
State and local government 15.5 16.8
Private sector 55.7 50.1
International 4.1 2.7
----- -----
100.0% 100.0%
===== =====
We manage our business in three operating segments: Resource Management,
Infrastructure and Communications. The following table presents, for the periods
indicated, the approximate percentage of net revenue attributable to the
operating segments:
Percentage of Net Revenue
------------------------------------
Quarter Ended
------------------------------------
Operating Segment December 31, 2000 January 2, 2000
----------------- ----------------- ---------------
Resource Management 36.9% 43.5%
Infrastructure 33.3 32.2
Communications 29.1 23.0
Other revenue 0.7 1.3
----- -----
100.0% 100.0%
===== =====
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 the first quarter of fiscal 2001, we made the
following acquisition:
ROCKY MOUNTAIN CONSULTANTS, INC. -- In December 2000, we acquired Rocky
Mountain Consultants, Inc. (RMC). The purchase price was valued at approximately
$14.6 million. RMC, a Colorado-based engineering services firm, provides
water-related engineering and facility development services to state and local
governments and private clients primarily in the western and midwestern United
States.
14
RESULTS OF OPERATIONS
The following table presents the percentage relationship of selected items
to net revenue in our condensed consolidated statements of income:
Percentage of Net Revenue
-----------------------------------
Quarter Ended
-----------------------------------
December 31, 2000 January 2, 2000
----------------- ---------------
Net revenue 100.0% 100.0%
Cost of net revenue 76.8 77.7
----- -----
Gross profit 23.2 22.3
Selling, general and
administrative expenses 11.1 9.7
Amortization of intangibles 1.2 1.2
----- -----
Income from operations 10.9 11.4
Net interest expense 1.2 0.9
----- -----
Income before income tax expense 9.7 10.5
Income tax expense 4.1 4.6
----- -----
Net income 5.6% 5.9%
===== =====
NET REVENUE. Net revenue increased $38.0 million, or 29.4%, to $167.1
million for the three months ended December 31, 2000 from $129.2 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 reversals of
previously established allowances 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 amount, net revenue increased 30.2% for
the quarter. All client sectors continued to show net revenue increases in
actual dollars. As a percentage of net revenue, decreases were realized in
the Federal and state and local government sectors due to the growth in
revenue from private sector clients and revenue associated with acquired
companies. We segregate from our total revenue, revenue from companies
acquired during the current fiscal year as well as revenue recognized from
acquired companies during the first 12 months following their respective
effective dates of acquisition. Revenue recognized from acquired companies
during such first 12 months is referred to as acquisitive revenue. Organic
revenue is measured as total revenue less any acquisitive revenue. Net
revenue provided by companies acquired during the three months ended December
31, 2000 totaled $3.2 million. Excluding this net revenue and the net revenue
provided by the reserve reversal, we realized 27.7% growth in our net revenue
from the comparable three month period last year. Acquisitive net revenue for
the three months ended December 31, 2000 totaled $19.0 million. Excluding
this net revenue and the net revenue provided by the reserve reversal, we
realized organic growth in our net revenue of 15.3% from the comparable
period last year.
Gross revenue increased $59.1 million, or 34.7%, to $229.3 million for
the three months ended December 31, 2000 from $170.2 million for the
comparable period last year. Gross revenue provided by companies acquired
during the three months ended December 31, 2000 totaled $3.8 million.
Excluding the gross revenue and the gross revenue provided by the reserve
reversal, we realized 32.8% growth in our gross revenue from the comparable
period last year. Acquisitive gross revenue for the three months ended
December 31, 2000 totaled $23.5 million. Excluding this gross revenue and the
gross revenue provided by the reserve reversal, we realized organic growth in
our gross revenue of 21.4%.
COST OF NET REVENUE. Cost of net revenue increased $28.0 million, or 27.9%,
to $128.4 million for the three months ended December 31, 2000 from $100.4
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 acquired companies. As a
percentage of net revenue, cost of net revenue for the three months ended
December 31, 2000 was 76.8% compared to 77.7% for the comparable period last
year.
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses, excluding
amortization of intangibles, increased $6.0 million, or 47.8%, to $18.6 million
for the three months ended December 31, 2000 from $12.6 million for the
comparable period last year. As a percent of net revenue, SG&A expenses,
excluding amortization of intangibles, increased to 11.1% for the three months
ended December 31, 2000 from 9.7% for the comparable period last year. For the
three months ended December 31, 2000, amortization of intangibles increased $0.5
million, or 37.9%, to $2.0 million from $1.5 million for the comparable period
last year. Amortization expense relating to acquisitions remained at 1.2% of net
revenue for the three months ended December 31, 2000. The increase in expenses
for the quarter was primarily related to the automation of our corporate
business systems and processes, business development activities, timing of
professional services expenses, as well as higher administration costs
associated with acquired companies. However, we believe that the growth in our
SG&A expenses are principally a reflection of the growth of our business as
indicated by the percentage of net revenue figures.
NET INTEREST EXPENSE. For the three months ended December 31, 2000, net
interest expense increased $0.8 million, or 62.4%, to $2.0 million from $1.2
million for the comparable period last year. This increase was primarily
attributable to borrowings on our line of credit for acquisitions and working
capital needs.
INCOME TAX EXPENSE. Income tax expense increased $0.8 million, or 14.2%, to
$6.8 million for the three months ended December 31, 2000 from $5.9 million for
the comparable period last year. Our current effective tax rate is 42.0%
compared to 44.0% in the comparable period last year. This decrease is primarily
attributable to estimated tax credits.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, our working capital was $167.1 million, an
increase of $12.8 million from October 1, 2000, of which cash and cash
equivalents totaled $7.8 million. In addition, we have a credit agreement (the
"Credit Agreement") with a bank which provides for a revolving credit facility
(the "Facility") of $150.0 million. Under our Credit Agreement, we may also
request standby letters of credit up to the aggregate sum of $25.0 million
outstanding at any given time. The Facility matures on March 17, 2005 or earlier
at our discretion upon payment in full of loans and other obligations. As of
December 31, 2000, borrowings and standby letters of credit on the Facility
totaled $117.0 million and $1.5 million, respectively.
In the three months ended December 31, 2000, cash provided by operating
activities was $2.0 million compared to cash used in operating activities of
$12.8 million for the comparable period last year. This change is primarily
attributable to the timing of payments for liabilities. For the three months
ended December 31, 2000, cash used in investing activities was $6.0 million
compared to $5.3 million for the comparable period last year. The increase was
primarily due to increases in capital expenditures in the communications
business area. For the three months ended December 31, 2000, cash provided by
financing activities was $4.3 million compared to $18.5 million for the
comparable period last year. This decrease was primarily attributable to the
decrease of net borrowings as a result of the increase in cash provided by
operating activities.
16
We expect that internally generated funds, our existing cash balances and
availability under the Credit Agreement will be sufficient to meet our capital
requirements through the end of fiscal 2001.
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 future operations. However, as successful integration and
implementation are essential to achieve favorable results, no assurances can be
given that all acquisitions will provide accretive results. Our strategy is to
position ourselves to address existing and emerging markets. We view
acquisitions as a key component of our growth strategy, and we intend to use
both cash and our securities, as we deem appropriate, to fund such acquisitions.
We believe our operations have not been and, in the foreseeable future, do
not expect to be materially adversely affected by inflation or changing prices.
RECENTLY ISSUED FINANCIAL STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which was amended by SFAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES.
These Statements required derivatives to be measured at fair value and to be
recorded as assets or liabilities on the balance sheet. The accounting for gains
or losses resulting from changes in the fair values of those derivatives would
be dependent upon the use of the derivative and whether it qualifies for hedge
accounting. These Statements are effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. We adopted these Statements in the first
quarter of fiscal year 2001 and the adoption of SFAS No. 133 and SFAS No. 138
has had no material impact on our results of operations or financial position.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, REVENUE RECOGNITION, which outlines the basic
criteria that must be met to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. SAB No. 101 requires
companies to report any changes in revenue recognition as a cumulative change in
accounting principle at the time of implementation in accordance with Accounting
Principles Board Opinion No. 20, ACCOUNTING CHANGES. SAB No. 101, as amended, is
effective no later than the fourth quarter of fiscal years beginning after
December 15, 1999. We will adopt SAB No. 101 in the fourth quarter of fiscal
year 2001. We believe our existing revenue recognition policies and procedures
are in compliance with SAB No. 101, and that the adoption of SAB No. 101 will
have no material impact on our results of operations or financial position.
17
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 repaying $26.0 million of our outstanding indebtedness in the next
twelve months. Assuming we repay $26.0 million ratably during the next twelve
months, and our average interest rate increases or decreases by one percentage
point, our interest expense could increase or decrease by approximately $1.0
million during the next twelve months. However, there can be no assurance that
we will, or will be able to 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.
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.
18
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 2000, we purchased nine companies in eight separate transactions.
During the three months ended December 31, 2000, we purchased one company. 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 of or increased price for
suitable acquisition candidates;
- We may not be able to obtain the necessary financing, on favorable
terms or at all, to finance any of our potential acquisitions;
- We may ultimately fail to consummate an acquisition even if we
announce that we plan to acquire a company;
- We may fail to successfully integrate or manage these acquired
companies due to differences in business backgrounds or corporate
cultures;
- These acquired companies may not perform as we expect;
- We may find it difficult to provide a consistent quality of service
across our geographically diverse operations; and
19
- If we fail to successfully integrate any acquired company, our
reputation could be damaged. This could make it more difficult to
market our services or to acquire additional companies in the future.
In addition, our acquisition strategy may divert management's attention away
from our primary service offerings, result in the loss of key clients or
personnel and expose us to unanticipated liabilities.
Finally, acquired companies that derive a significant portion of their
revenues from the Federal government and that do not follow the same cost
accounting policies and billing procedures as we do may be subject to larger
cost disallowances for greater periods than we 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 our public sector clients and
the spending patterns of our private sector clients;
- Employee hiring and utilization rates;
- The number and significance of client engagements commenced and
completed during a quarter;
- Delays incurred in connection with an engagement;
- The ability of our clients to terminate engagements without penalties;
- The size and scope of engagements;
- The timing of expenses incurred for corporate initiatives;
- The timing and size of the return on investment capital; and
- General economic and political conditions.
Variations in any of these factors could cause significant fluctuations in our
operating results from quarter to quarter and could result in net losses.
THE VALUE OF OUR COMMON STOCK COULD CONTINUE TO BE VOLATILE
The trading price of our common stock has fluctuated widely. In addition,
in recent years the stock market has experienced extreme price and volume
fluctuations. The overall market and the price of our common stock may continue
to fluctuate greatly. The trading price of our common stock may be significantly
affected by various factors, including:
20
- Quarter to quarter variations in our operating results;
- Changes in environmental legislation;
- Changes in investors' and analysts' perception of the business risks
and conditions of our business;
- Broader market fluctuations; and
- General economic or political conditions.
IF WE ARE NOT ABLE TO SUCCESSFULLY MANAGE OUR GROWTH STRATEGY, OUR BUSINESS AND
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED
We are growing rapidly. Our growth presents numerous managerial,
administrative, operational and other challenges. Our ability to manage the
growth of our operations will require us to continue to improve our operational,
financial and human resource management information systems and our other
internal systems and controls. In addition, our growth will increase our need to
attract, develop, motivate and retain both our management and professional
employees. The inability of our management to manage our growth effectively or
the inability of our employees to achieve anticipated performance or utilization
levels could have a material adverse effect on our business.
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 holders of these
companies. We do not maintain key-man life insurance policies on any of our
executive officers or senior managers.
Our future growth and success depends on our ability to attract and retain
qualified scientists and engineers. The market for these professionals is
competitive and we may not be able to attract and retain such professionals.
CHANGES IN EXISTING LAWS AND REGULATIONS COULD REDUCE THE DEMAND FOR OUR
SERVICES
A significant amount of our resource management business is generated
either directly or indirectly as a result of existing Federal and state
governmental laws, regulations and programs. Any changes in these laws or
regulations that reduce funding or affect the sponsorship of these programs
could reduce the demand for our services and could have a material adverse
effect on our business.
21
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 December 31, 2000, approximately 24.7% of our net
revenue was derived from Federal agencies of which 13.4% was derived from the
Department of Defense (DOD), 7.9% from the Environmental Protection Agency
(EPA), 1.4% from the Department of Energy (DOE) and 2.0% from various other
Federal agencies. Some contracts with Federal government agencies require annual
funding approval and may be terminated at their discretion. A reduction in
spending by Federal government agencies could limit the continued funding of our
existing contracts with them and could limit our ability to obtain additional
contracts. These limitations, if significant, could have a material adverse
effect on our business.
Additionally, the failure of clients to pay significant amounts due us for
our services could adversely affect our business. For example, we recently
received notification from a Federal government agency that we are entitled to
payments in excess of our billings. However, the agency involved must obtain
specific funding approval for amounts owed to us and there can be no assurance
this funding approval will be obtained.
OUR CONTRACTS WITH GOVERNMENTAL AGENCIES ARE SUBJECT TO AUDIT, WHICH COULD
RESULT IN THE DISALLOWANCE OF CERTAIN COSTS
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.
OUR BUSINESS AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY LOSSES UNDER
FIXED-PRICE CONTRACTS OR TERMINATION OF CONTRACTS AT THE CLIENT'S DISCRETION
We contract with Federal and state governments as well as with the
commercial sector. These contracts are often subject to termination at the
discretion of the client with or without cause. Additionally, we enter into
various types of contracts with our clients, including fixed-price contracts.
During the three months ended December 31, 2000, approximately 46.9% of our
revenue was derived from fixed-price contracts. Fixed-price contracts protect
clients and expose us to a number of risks. These risks include underestimation
of costs, problems with new technologies, unforeseen costs or difficulties,
delays beyond our control and economic and other changes that may occur during
the contract period. Losses under fixed-price contracts or termination of
contracts at the discretion of the client could have a material adverse effect
on our business.
22
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 December 31 2000,
subcontractor costs comprised 27.1% 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 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; CH2M Hill
Companies Ltd.; Earth Tech, Inc.; IT Group, Inc.; Mastec, Inc.; Montgomery
Watson; o2 Wireless Solutions, Inc.; Quanta Services; Roy F. Weston, Inc.;
Science Applications International Corporation; URS 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 policies
23
and do not obtain retroactive coverage, we would be uninsured for claims made
after termination even if these claims are based on events or acts that occurred
during the term of the policy. Additionally, our insurance policies may not
protect us against potential liability do to various exclusions and retentions.
In addition, if we expand into new markets, we may not be able to obtain
insurance coverage for such activities or, if insurance is obtained, the dollar
amount of any liabilities incurred could exceed our insurance coverage.
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 December 31, 2000, approximately 4.1% 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.
24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
3.1 Restated Certificate of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's Annual Report
on Form 10-K for the fiscal year ended October 1, 1995).
3.2 Bylaws of the Company as amended to date (incorporated herein by
reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1, No. 33-43723).
3.3 Certificate of Amendment of Certificate of Incorporation of the
Company (incorporated herein by reference to Exhibit 3.4 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 4, 1998).
10.1 Credit Agreement dated as of March 17, 2000 among the Company and
the financial institutions named therein (incorporated herein by
reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended April 2, 2000).
10.2 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).
10.3 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).
10.4 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).
10.5 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).
10.6 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).
25
10.7 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).
10.8 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).
10.9 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).
10.10 Form of Stock Purchase Agreement used by the Company in connection
with the Company's 1994 Employee Stock Purchase Plan (incorporated
herein by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 2, 1994).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
26
10.16 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).
10.17 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).
10.18 Registration Rights Agreement dated as of May 7, 1999 among the
Company and the parties listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit 10.26 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 4, 1999).
10.19 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).
10.20 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).
10.21 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).
10.22 Registration Rights Agreement dated as of March 31, 2000 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 July 2, 2000).
10.23 Registration Rights Agreement dated as of May 3, 2000 among the
Company and the parties listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 2, 2000).
27
10.24 Registration Rights Agreement dated as of May 17, 2000 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 July 2, 2000).
10.25 Registration Rights Agreement dated as of May 24, 2000 among the
Company and the parties listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit 10.25 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 2, 2000).
10.26 Registration Rights Agreement dated as of December 21, 2000 among
the Company and the parties listed on Schedule A attached thereto
(incorporated herein by reference to Exhibit 10.26 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 1, 2000).
(b) REPORTS ON FORM 8-K
On December 13, 2000, we filed with the Securities and Exchange
Commission a Current Report on Form 8-K. The item reported in the Form 8-K
was Item 5 (Other Events), which related to the change in our ticker symbol
from "WATR" to "TTEK". We did not file any financial statements in connection
with this Form 8-K. The date of the Form 8-K was December 13, 2000.
28
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 14, 2001 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
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
29