FINANCIAL HIGHLIGHTS
Fiscal Years Ended
-----------------------------------------------------------------
Sept. 28, Sept. 29, Oct. 1, Oct. 2, Oct. 3,
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Gross revenue. . . . . . . . . . . . . . . $ 246,767 $ 220,099 $ 120,034 $ 96,472 $ 74,488
Net revenue. . . . . . . . . . . . . . . . 190,791 161,037 87,874 67,819 51,165
Income from operations . . . . . . . . . . 24,599 17,735 11,756 9,161 6,841
Net income . . . . . . . . . . . . . . . . 14,256 10,105 7,553 5,709 4,279
Weighted average shares
outstanding(1) . . . . . . . . . . . . . 19,725 18,065 16,917 16,649 16,334
Net income per share(1). . . . . . . . . . 0.72 0.56 0.45 0.34 0.26
Cash flow from operating activities. . . . 1,144 21,124 13,578 11,115 5,428
Working capital. . . . . . . . . . . . . . 42,539 32,739 39,872 24,833 23,722
Total assets . . . . . . . . . . . . . . . 159,513 88,463 92,930 51,606 38,572
Long-term obligations. . . . . . . . . . . -- -- 19,045 -- --
Stockholders' equity . . . . . . . . . . . 107,641 63,269 41,496 33,507 26,446
- ----------
(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 DECEMBER 1997.
1
SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Years Ended
-----------------------------------------------------------------------
Sept. 28,(2) Sept. 29,(3) Oct. 1, (4) Oct. 2,(5) Oct. 3,
1997 1996 1995 1994 1993
------------ ------------ ------------ ----------- -----------
(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA
Gross revenue. . . . . . . . . . . $ 246,767 $ 220,099 $ 120,034 $ 96,472 $ 74,488
Subcontractor costs. . . . . . . . 55,976 59,062 32,160 28,653 23,323
---------- ---------- ---------- --------- ---------
Net revenue. . . . . . . . . . . . 190,791 161,037 87,874 67,819 51,165
Cost of net revenue. . . . . . . . 141,019 122,084 65,484 51,069 38,628
---------- ---------- ---------- --------- ---------
Gross profit . . . . . . . . . . . 49,772 38,953 22,390 16,750 12,537
Selling, general and
administrative expenses. . . . 25,173 21,218 10,634 7,589 5,696
---------- ---------- ---------- --------- ---------
Income from operations . . . . . . 24,599 17,735 11,756 9,161 6,841
Net interest income (expense). . . (20) (776) 833 354 290
---------- ---------- ---------- --------- ---------
Income before income taxes . . . . 24,579 16,959 12,589 9,515 7,131
Income tax expense . . . . . . . . 10,323 6,854 5,036 3,806 2,852
---------- ---------- ---------- --------- ---------
Net income . . . . . . . . . . . . $ 14,256 $ 10,105 $ 7,553 $ 5,709 $ 4,279
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Net income per share(1). . . . . . $ 0.72 $ 0.56 $ 0.45 $ 0.34 $ 0.26
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Weighted average shares
outstanding(1) . . . . . . . . 19,725 18,065 16,917 16,649 16,334
Sept. 28, Sept. 29, Oct. 1, Oct. 2, Oct. 3,
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------
(in thousands)
BALANCE SHEET DATA
Working capital. . . . . . . . . . $ 42,539 $ 32,739 $ 39,872 $ 24,833 $ 23,722
Total assets . . . . . . . . . . . 159,513 88,463 92,930 51,606 38,572
Long-term obligations, excluding
current installments . . . . . -- -- 19,045 -- --
Stockholders' equity . . . . . . . 107,641 63,269 41,496 33,507 26,446
- ----------
(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 DECEMBER 1997.
(2) INCLUDES THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF IWA ENGINEERS
(ACQUIRED DECEMBER 11, 1996), FLO ENGINEERING, INC. (ACQUIRED DECEMBER 20,
1996), SCM CONSULTANTS, INC. (ACQUIRED MARCH 19, 1997), WHALEN & COMPANY,
INC. (ACQUIRED JUNE 11, 1997) AND COMMSITE DEVELOPMENT CORPORATION
(ACQUIRED JULY 11, 1997) FROM THE DATES SET FORTH IN THE RELATED PURCHASE
AGREEMENTS.
(3) INCLUDES THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF KCM, INC.
(ACQUIRED NOVEMBER 7, 1995) FROM THE DATE SET FORTH IN THE RELATED PURCHASE
AGREEMENT.
(4) INCLUDES THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF TETRA TECH EM
INC., FORMERLY KNOWN AS PRC ENVIRONMENTAL MANAGEMENT, INC. (ACQUIRED
SEPTEMBER 15, 1995.) FROM THE DATE SET FORTH IN THE RELATED PURCHASE
AGREEMENT.
(5) INCLUDES THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF SIMONS, LI &
ASSOCIATES, INC. (ACQUIRED OCTOBER 4, 1993) AND HYDRO-SEARCH, INC.
(ACQUIRED JUNE 3, 1994) FROM THE DATES SET FORTH IN THE RELATED PURCHASE
AGREEMENTS.
2
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 95 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) expenses are 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 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,
private and international clients:
Percentage of Net Revenue
-----------------------------------------
Client Fiscal 1997 Fiscal 1996 Fiscal 1995
------ ----------- ----------- -----------
Federal government . . . . . . . 52.3% 61.7% 54.8%
State and local government . . . 14.8 16.6 11.1
Private. . . . . . . . . . . . . 29.2 20.1 34.1
International. . . . . . . . . . 3.7 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.
3
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. The Company's actual liquidity needs, capital
resources and results may differ materially from the discussion set forth below
in such forward-looking statements.
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 Income 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. 28, Sept. 29, Oct. 1, 1997 vs. 1996 vs.
1997 1996 1995 1996 1995
--------- --------- ------- -------- --------
Net revenue. . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 18.5% 83.3%
Cost of net revenue. . . . . . . . . . . . . 73.9 75.8 74.5 15.5 6.4
--------- --------- ------- -------- --------
Gross profit . . . . . . . . . . . . . . . . 26.1 24.2 25.5 27.8 74.0
Selling, general and administrative
expenses . . . . . . . . . . . . . . . . 13.2 13.2 12.1 18.6 99.5
--------- --------- ------- -------- --------
Income from operations . . . . . . . . . . . 12.9 11.0 13.4 38.7 51.0
Net interest income (expense). . . . . . . . 0.0 (0.5) 0.9 (97.4) (193.2)
--------- --------- ------- -------- --------
Income before income taxes . . . . . . . . . 12.9 10.5 14.3 44.9 34.7
Income tax expense . . . . . . . . . . . . . 5.4 4.2 5.7 50.6 36.1
--------- --------- ------- -------- --------
Net income . . . . . . . . . . . . . . . . . 7.5% 6.3% 8.6% 41.1% 33.8%
--------- --------- ------- -------- --------
--------- --------- ------- -------- --------
FISCAL 1997 COMPARED TO FISCAL 1996
NET REVENUE. Net revenue increased from $161,037,000 to $190,791,000, or
18.5%, from fiscal 1996 to fiscal 1997. All four client sectors - Federal
government, state and local government, private and international - continued to
show net revenue increases in actual dollars. However, only the private and
international sectors increased on a percentage of net revenue basis. The
increase in net revenue was primarily the result of revenue associated with
entities acquired in fiscal 1997 (see Note 2 to Consolidated Financial
Statements) which totaled $24,641,000. Despite the general market conditions of
the environmental industry, the Company attained a 3.2% growth in its net
revenue, exclusive of revenue related to acquired entities. Gross revenue
increased from $220,099,000 to $246,767,000, or 12.1%, from fiscal 1996 to
fiscal 1997. In fiscal 1997, subcontractor costs were 22.7% of gross revenue
compared to 26.8% for fiscal 1996.
COST OF NET REVENUE. Cost of net revenue increased from $122,084,000 to
$141,019,000, or 15.5%, from fiscal 1996 to fiscal 1997. This increase was
primarily attributable to costs incurred in connection with the additional net
revenue from the acquisitions. The number of employees increased from 1,899 at
the end of fiscal 1996 to 2,262 (347 from the fiscal 1997 acquisitions) at the
end of fiscal 1997. As a percentage of net revenue, cost of net revenue
decreased from 75.8% in fiscal 1996 to 73.9% in fiscal 1997. Gross profit
increased from $38,953,000 to $49,772,000, or 27.8%, from fiscal 1996 to fiscal
1997 primarily due to efficiencies in operations, acquisitions and higher profit
margins realized in the acquired businesses in the telecommunication service
industry.
4
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased from
$21,218,000 to $25,173,000, or 18.6%, from fiscal 1996 to fiscal 1997. However,
as a percentage of net revenue, SG&A expenses remained at 13.2% for fiscal 1997.
NET INTEREST INCOME/EXPENSE. Net interest expense decreased from $776,000
in fiscal 1996 to $20,000 in fiscal 1997, or 97.4%, due to the reduction of the
average outstanding borrowings from 1996 to 1997.
INCOME TAX EXPENSE. Income tax expense increased from $6,854,000 to
$10,323,000, or 50.6%, from fiscal 1996 to fiscal 1997. The Company's effective
tax rate increased from 40.4% in 1996 to 42.0% in 1997 primarily due to the
non-deductibility for tax purposes of certain goodwill amortization amounts.
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. Net revenue, exclusive of revenue
related to acquired entities, decreased from $86,004,000 to $83,359,000, or
3.1%. Net revenue, exclusive of revenue related to acquired entities, for
Federal government contracts decreased $4,399,000 due to the budget impasse and
resulting Federal government shutdown experiences in 1996. The Company
attempted to minimize the financial impact of the decrease in Federal government
revenue by shifting its employees to private and other public sector contracts
and by key acquisitions. Due to the infrequency of budget impasses, the Company
does not expect this trend to continue. However, since the Federal government
is the Company's largest client, limitations on government spending can have a
significant impact on the Company's ability to generate net revenue. The
Company is attempting to mitigate this impact by pursuing a strategic objective
of balancing its revenue mix between Federal and private sector programs and
thereby increasing the amount of business driven by economics rather than
regulatory requirements. Net revenue from acquired entities totaled
$77,678,000. All four client sectors - Federal government, state and local
government, private and international - continued to show net revenue increases
in actual dollars. 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 Tetra Tech EM Inc. (EMI [formerly known as PRC Environmental
Management, Inc.]) 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, associated goodwill amortization and to the Company's continuing
efforts to identify and secure new contracts by increasing its business
development expenditures.
5
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.
INFLATION
Management believes the Company's operations have not been and, in the
foreseeable future, are not expected to be materially adversely affected by
inflation or changing prices.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital as of September 28, 1997 was $42,539,000, an
increase of $9,800,000 from September 29, 1996. Cash and cash equivalents as of
September 28, 1997 totaled $12,262,000. In fiscal 1997, the Company augmented
cash generated from operations with borrowings under a $25,000,000 credit
facility, while in fiscal 1996, the Company financed its operations through cash
generated from operations. In fiscal 1997, the Company generated $1,144,000 from
operating activities and used $3,834,000 for investing activities ($1,237,000 of
which related to business acquisitions). In fiscal 1996, the Company generated
$21,124,000 in cash from operating activities and used $8,755,000 for investing
activities ($6,441,000 of which related to business acquisitions). The decrease
in cash from operating activities in fiscal 1997 resulted primarily from an
increase in receivables and the terms of the Whalen & Company, Inc. (WAC)
acquisition in which substantially no receivables were acquired, resulting in a
lag in generating cash to fund the business' operations. The Company targets as
an ongoing effort to increase its efficiencies in the timing of billings and the
collection of receivables.
The Company has a credit agreement (as amended, the "Credit Agreement")
with a bank which, as of December 15, 1997, provides the Company with a
revolving credit facility (the "Facility") of $45,000,000. The Company
renegotiated the Facility during fiscal 1997 in order to accommodate the WAC and
future acquisitions. 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 0.75% to 1.25%. Borrowings under the
Facility are secured by the Company's accounts receivable and the stock of five
of the Company's subsidiaries. The Credit Agreement contains various covenants
including, but not limited to, restrictions related to tangible net worth, net
income, additional indebtedness, asset sales, mergers and acquisitions, creation
of liens, and dividends on capital stock (other than stock dividends). The
Facility matures on December 15, 2000 or earlier at the discretion of the
Company upon payment in full of loans and other obligations. Throughout fiscal
1997, maximum borrowings under the Facility were $13,000,000. At September 28,
1997 borrowings totaled $8,000,000 under the Facility and standby letters of
credit totaled $955,000.
Capital expenditures during fiscal years 1997, 1996 and 1995 were
approximately $2,640,000, $2,385,000 and $1,453,000, respectively. The
expenditures were primarily for computer equipment, leasehold improvements and
office expansion.
6
The Company continuously evaluates the marketplace for strategic
acquisition opportunities. Once an opportunity is identified, the Company
examines the effect an acquisition may have on the business environment, as well
as on the Company's results of operations. The Company proceeds with an
acquisition if it determines 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 immediate accretive results. The
Company's strategy is to position itself to address existing and emerging
markets. The Company views acquisitions as a key component of its growth
strategy, and intends to use both cash and its securities, as it deems
appropriate, to fund such acquisitions.
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 1998.
The Company is currently assessing its computer systems and business
processes to ensure that its computer systems will be capable of processing
periods for the year 2000 and beyond as well as ensure that its business
processes will be able to support current and anticipated growth projections.
The Company does not anticipate the costs associated with ensuring these
capabilities will have a material adverse impact on the Company's financial
position or results of operations.
7
INDEPENDENT AUDITORS' REPORT
Tetra Tech, Inc.:
We have audited the accompanying consolidated balance sheets of Tetra Tech,
Inc. and its subsidiaries as of September 28, 1997 and September 29, 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended September 28, 1997. 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 28, 1997 and September 29, 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended September 28, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
November 7, 1997 (except for Note 5, as to which the date is
December 15, 1997)
8
TETRA TECH, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS Sept. 28, Sept. 29,
1997 1996
------------- ------------
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 12,262,000 $ 6,129,000
Accounts receivable - net. . . . . . . . . . . . . . . . . . . . . . . . 30,089,000 22,306,000
Unbilled receivables - net . . . . . . . . . . . . . . . . . . . . . . . 35,145,000 25,201,000
Prepaid and other current assets . . . . . . . . . . . . . . . . . . . . 2,522,000 1,939,000
Deferred income taxes - net. . . . . . . . . . . . . . . . . . . . . . . 867,000 2,358,000
-------------- -------------
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . 80,885,000 57,933,000
-------------- -------------
Property and Equipment:
Equipment, furniture and fixtures. . . . . . . . . . . . . . . . . . . . 16,838,000 13,072,000
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . 1,177,000 733,000
-------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,015,000 13,805,000
Accumulated depreciation and amortization. . . . . . . . . . . . . . . . (9,592,000) (6,790,000)
-------------- -------------
Property and Equipment - Net . . . . . . . . . . . . . . . . . . . . . . . 8,423,000 7,015,000
-------------- -------------
Intangible Assets - Net. . . . . . . . . . . . . . . . . . . . . . . . . . 69,439,000 22,047,000
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766,000 1,468,000
-------------- -------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 159,513,000 $ 88,463,000
-------------- -------------
-------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,621,000 $ 13,423,000
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 10,981,000 7,311,000
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 6,386,000 3,356,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 1,358,000 1,104,000
Current portion of long-term obligations . . . . . . . . . . . . . . . . 8,000,000 --
-------------- -------------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . 38,346,000 25,194,000
-------------- -------------
Commitments and Contingencies (Notes 8 and 10) . . . . . . . . . . . . . .
Redeemable Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . 13,526,000 --
-------------- -------------
Stockholders' Equity:
Preferred stock - authorized 2,000,000 shares of $.01 par value;
issued and outstanding 1,231,840 and 0 shares at September 28,
1997 and September 29, 1996, respectively . . . . . . . . . . . . . . -- --
Common stock - authorized 30,000,000 shares of $.01 par value;
issued and outstanding 20,714,254 shares at September 28,1997,
and 17,658,572 shares at September 29, 1996 . . . . . . . . . . . . . 207,000 176,000
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 63,502,000 33,417,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,932,000 29,676,000
-------------- -------------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . 107,641,000 63,269,000
-------------- -------------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . . . . $ 159,513,000 $ 88,463,000
-------------- -------------
-------------- -------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Years Ended
------------------------------------------------
Sept. 28, Sept. 29, Oct. 1,
1997 1996 1995
-------------- -------------- --------------
Revenue:
Gross revenue. . . . . . . . . . . . . . . . . . . . $ 246,767,000 $ 220,099,000 $ 120,034,000
Subcontractor costs. . . . . . . . . . . . . . . . . 55,976,000 59,062,000 32,160,000
-------------- -------------- --------------
Net Revenue. . . . . . . . . . . . . . . . . . . . . . 190,791,000 161,037,000 87,874,000
Cost of Net Revenue. . . . . . . . . . . . . . . . . . 141,019,000 122,084,000 65,484,000
-------------- -------------- --------------
Gross Profit . . . . . . . . . . . . . . . . . . . . . 49,772,000 38,953,000 22,390,000
Selling, General and Administrative Expenses . . . . . 25,173,000 21,218,000 10,634,000
-------------- -------------- --------------
Income From Operations . . . . . . . . . . . . . . . . 24,599,000 17,735,000 11,756,000
Interest Expense . . . . . . . . . . . . . . . . . . . 320,000 1,076,000 90,000
Interest Income. . . . . . . . . . . . . . . . . . . . 300,000 300,000 923,000
-------------- -------------- --------------
Income Before Income Taxes . . . . . . . . . . . . . . 24,579,000 16,959,000 12,589,000
Income Tax Expense . . . . . . . . . . . . . . . . . . 10,323,000 6,854,000 5,036,000
-------------- -------------- --------------
Net Income . . . . . . . . . . . . . . . . . . . . . . $ 14,256,000 $ 10,105,000 $ 7,553,000
-------------- -------------- --------------
-------------- -------------- --------------
Net Income Per Common and Common Equivalent Share. . . $ 0.72 $ 0.56 $ 0.45
-------------- -------------- --------------
-------------- -------------- --------------
Weighted Average Shares Outstanding. . . . . . . . . . 19,725,226 18,064,520 16,916,922
-------------- -------------- --------------
-------------- -------------- --------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
10
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED SEPTEMBER 28, 1997, SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
Common Stock
---------------------- Additional
Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
-------------------------------------------------------------------------------------
BALANCE, OCTOBER 2, 1994
as previously reported. . . . . . . 13,140,044 $ 132,000 $ 21,574,000 $ 12,018,000 $ (217,000) $ 33,507,000
Five-for-four common stock
split (see Note 7). . . . . . . . 3,285,011 33,000 (33,000)
-------------------------------------------------------------------------------------
BALANCE, OCTOBER 2, 1994 . . . . . . 16,425,055 165,000 21,541,000 12,018,000 (217,000) 33,507,000
Net income . . . . . . . . . . . . 7,553,000 7,553,000
Payment for fractional shares. . . (244) (3,000) (3,000)
Stock options exercised. . . . . . 137,370 1,000 628,000 629,000
Treasury stock retired . . . . . . (217,000) 217,000 --
Stock purchased and retired. . . . (18,045) (1,000) (189,000) (190,000)
-------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 1995 . . . . . . 16,544,136 165,000 21,760,000 19,571,000 -- 41,496,000
Net income . . . . . . . . . . . . 10,105,000 10,105,000
Payment for fractional shares. . . (211) (3,000) (3,000)
Shares issued in acquisition. . . 987,795 10,000 10,303,000 10,313,000
Stock options exercised. . . . . . 127,032 1,000 683,000 684,000
Tax benefit for disqualifying
dispositions of stock options . . 674,000 674,000
-------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 29, 1996. . . . . 17,658,752 176,000 33,417,000 29,676,000 -- 63,269,000
Net income . . . . . . . . . . . . 14,256,000 14,256,000
Shares issued in acquisitions . . 2,751,464 28,000 27,022,000 27,050,000
Stock options exercised. . . . . . 180,759 2,000 1,308,000 1,310,000
Shares issued in Employee Stock
Purchase Plan. . . . . . . . . . 123,279 1,000 1,281,000 1,282,000
Tax benefit for disqualifying
dispositions of stock options. . 474,000 474,000
-------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28, 1997. . . . . 20,714,254 $ 207,000 $ 63,502,000 $ 43,932,000 $ -- $ 107,641,000
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
11
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
Sept. 28, Sept. 29, Oct. 1,
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,256,000 $ 10,105,000 $ 7,553,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . 4,514,000 3,613,000 1,894,000
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 1,490,000 (519,000) (278,000)
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable . . . . . . . . . . . . . . . . . . . . (3,776,000) 18,043,000 4,335,000
Unbilled receivables. . . . . . . . . . . . . . . . . . . . (8,037,000) (5,916,000) (1,581,000)
Prepaid and other current assets. . . . . . . . . . . . . . 1,823,000 246,000 (226,000)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . (3,551,000) (4,080,000) 446,000
Accrued compensation. . . . . . . . . . . . . . . . . . . . (3,909,000) (1,431,000) 1,165,000
Other current liabilities . . . . . . . . . . . . . . . . . (1,412,000) (192,000) 716,000
Income taxes payable. . . . . . . . . . . . . . . . . . . . (254,000) 1,255,000 (446,000)
------------- ------------- -------------
Net Cash Provided By Operating Activities. . . . . . . . 1,144,000 21,124,000 13,578,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for short-term investments. . . . . . . . . . . . . . . . . -- -- (3,003,000)
Proceeds from short-term investments . . . . . . . . . . . . . . . . -- -- 3,173,000
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (2,640,000) (2,385,000) (1,453,000)
Proceeds from sale of property and equipment . . . . . . . . . . . . 44,000 71,000 16,000
Payment for business acquisitions, net of cash acquired. . . . . . . (1,237,000) (6,441,000) (35,462,000)
------------- ------------- -------------
Net Cash Used In Investing Activities. . . . . . . . . . (3,833,000) (8,755,000) (36,729,000)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations. . . . . . . . . . . . . . . . . . (6,797,000) (25,048,000) (2,045,000)
Proceeds from issuance of long-term obligations. . . . . . . . . . . 13,000,000 5,003,000 22,000,000
Payments on obligations under capital leases . . . . . . . . . . . . -- (6,000) --
Proceeds from issuance of common stock . . . . . . . . . . . . . . . 2,619,000 681,000 626,000
Payments to acquire common stock . . . . . . . . . . . . . . . . . . -- -- (190,000)
------------- ------------- -------------
Net Cash Provided By (Used In) Financing Activities. . . 8,822,000 (19,370,000) 20,391,000
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . 6,133,000 (7,001,000) (2,760,000)
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . 6,129,000 13,130,000 15,890,000
------------- ------------- -------------
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . $ 12,262,000 $ 6,129,000 $ 13,130,000
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 309,000 $ 1,149,000 $ 18,000
------------- ------------- -------------
------------- ------------- -------------
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,407,000 $ 6,123,000 $ 5,879,000
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
In fiscal 1997, the Company purchased all of the capital stock of
IWA Engineers, FLO Engineering, Inc., SCM Consultants, Inc.,
Whalen & Company, Inc., Whalen Service Corps Inc. and
CommSite Development Corporation. In conjunction with these
acquisitions, liabilities were assumed as follows:
Fair value of assets acquired. . . . . . . . . . . . . . . . . $ 66,386,000
Cash paid. . . . . . . . . . . . . . . . . . . . . . . . . . . (8,811,000)
Purchase price payable . . . . . . . . . . . . . . . . . . . . (729,000)
Issuance of common and preferred stock . . . . . . . . . . . . (40,577,000)
Other acquisition costs. . . . . . . . . . . . . . . . . . . . (2,111,000)
-------------
Liabilities assumed. . . . . . . . . . . . . . . . . . . $ 14,158,000
-------------
-------------
12
Fiscal Years Ended
-----------------------------------------------
Sept. 28, Sept. 29, Oct. 1,
1997 1996 1995
------------- ------------- -------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES (CONT.):
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
Tetra Tech EM Inc. (EMI [formerly known as PRC
Environmental Management, Inc.]) In conjunction with this
acquisition, liabilities were assumed as follows:
Fair value of assets acquired. . . . . . . . . . . . . . . . . $ 47,377,000
Cash paid. . . . . . . . . . . . . . . . . . . . . . . . . . . (40,000,000)
Other acquisition costs. . . . . . . . . . . . . . . . . . . . (600,000)
-------------
Liabilities assumed . . . . . . . . . . . . . . . . . . . . $ 6,777,000
-------------
-------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
13
TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED SEPTEMBER 28, 1997,
SEPTEMBER 29, 1996 AND OCTOBER 1, 1995
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Tetra Tech, Inc. (the "Company") provides comprehensive
environmental engineering and telecommunications support services including
research and development, engineering and design, construction management, and
operation and maintenance.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries, HSI
GeoTrans, Inc. (HSG [formed through the merger of GeoTrans, Inc. and
Hydro-Search, Inc.]), Simons, Li & Associates, Inc. (SLA), Tetra Tech EM Inc.
(EMI [formerly known as PRC Environmental Management, Inc.]), KCM, Inc. (KCM),
Tetra Tech Technical Services, Inc. (TtTS), IWA Engineers (IWA), FLO
Engineering, Inc. (FLO), SCM Consultants, Inc. (SCM), Whalen & Company, Inc.
(WAC) and CommSite Development Corporation (CDC). 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
1997, 1996 and 1995 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 52%, 62% and 55% of net contract revenue for the
years ended September 28, 1997, September 29, 1996 and October 1, 1995,
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.
14
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 28, 1997 and September 29, 1996 consists principally of
goodwill resulting from business acquisitions which is being amortized over
periods ranging from 15 to 30 years. The accumulated amortization of intangible
assets as of September 28, 1997 and September 29, 1996 were $3,522,000 and
$1,953,000, respectively.
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). The Company also includes the weighted average number of shares
of redeemable preferred stock as a common stock equivalent as the outstanding
redeemable preferred stock has voting and dividend rights substantially similar
to those of common.
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 41.6% 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
15
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 Financial Accounting Standards Board (FASB) issued SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which was 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 Accounting Principles Board (APB) Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company has continued to apply APB Opinion No. 25 to
its stock-based compensation awards to employees and has disclosed the required
pro forma effect on net income and earnings per share upon adoption of SFAS No.
123 (see Note 7. STOCKHOLDERS' EQUITY).
In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE, which
the Company will adopt in fiscal 1998. The Statement replaces the presentation
of primary EPS with a presentation of basic EPS, which excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. The Statement also
requires the dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. The
Company does not anticipate that the effect of adoption of SFAS No. 128 will
have a material effect on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME.
The Statement is effective for fiscal years beginning after December 15, 1997.
The Statement establishes standards for reporting and display of comprehensive
income and its components in a company's financial statements. The Company will
adopt this Statement in fiscal 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. This Statement is effective for fiscal
years beginning after December 15, 1997. This Statement establishes standards
for disclosure about operating segments, products and services, geographic areas
and major customers, as well as descriptive information on how the operating
segments were determined. The Company will adopt this Statement in fiscal 1999.
2. MERGERS AND ACQUISITIONS
On July 11, 1997, the Company acquired 100% of the capital stock of
CommSite Development Corporation (CDC), a wireless telecommunications site
development service firm. The purchase has been valued at approximately
$5,702,000 consisting of cash and 318,079 shares of Company common stock, as
adjusted based on CDC's Net Asset Value on July 11, 1997 as described in the
related purchase agreement.
16
On June 11, 1997, the Company acquired 100% of the capital stock of Whalen
& Company, Inc. and Whalen Service Corps Inc. (collectively, WAC). WAC, a
wireless telecommunications firm, provides a full range of wireless
telecommunications site development services for PCS, cellular, ESMR,
air-to-ground, microwave, paging, fiber optic and switching centers technology.
The purchase has been valued at approximately $41,738,000 consisting of cash and
2,100,000 and 1,231,840 shares of Company common and preferred stock,
respectively. The common and preferred stock (see Note 6. REDEEMABLE PREFERRED
STOCK) was issued in a private placement and had a combined value of
$31,972,000. The Company's stock was valued based upon the extended restriction
period and economic factors specific to the Company's circumstances which
resulted in a fair valuation approximately 28% below the then prevailing market
price. On the business day prior to the merger, WAC distributed to its
stockholders (i) cash in the amount of $4,138,000 and (ii) accounts receivable
having a net value of $18,456,000.
On March 20, 1997, the Company acquired 100% of the capital stock of SCM
Consultants, Inc. (SCM), a consulting and engineering firm, providing design of
irrigation, water and wastewater systems, as well as facility and infrastructure
engineering services, to state and local government, private and industrial
customers. The purchase was valued at approximately $2,431,000, consisting of
cash and 197,572 shares of Company common stock, as adjusted based upon SCM's
Net Asset Value on March 30, 1997 as described in the related purchase
agreement.
On December 18, 1996, the Company acquired 100% of the capital stock of FLO
Engineering, Inc. (FLO), a consulting and engineering firm specializing in water
resource engineering involving hydraulic engineering and hydrographic data
collection. The purchase was valued at approximately $724,000, consisting of
cash and 40,138 shares of Company common stock, as adjusted based upon FLO's Net
Asset Value on December 29, 1996 as described in the related purchase agreement.
On December 11, 1996, the Company acquired 100% of the capital stock of IWA
Engineers (IWA), an architecture and engineering firm providing a wide range of
planning, engineering, and design capabilities in water, wastewater, and
facility design, and serving state and local government and private customers.
The purchase was valued at approximately $1,632,000, consisting of cash and
95,675 shares of Company common stock, as adjusted based upon IWA's Net Asset
Value on December 29, 1996 as described in the related purchase agreement.
On November 7, 1995, the Company acquired 100% of the capital stock of KCM,
Inc. (KCM), an engineering services firm specializing in areas of water quality,
water and wastewater systems, surface water management, fisheries and
facilities. The purchase was valued at approximately $13,373,000 consisting of
cash and 987,795 shares of Company common stock issued in a private placement.
The Company's stock was valued based upon the extended restriction period and
economic factors specific to the Company's circumstances which resulted in a
fair valuation approximately 26% below the then prevailing market price.
On September 15, 1995, the Company acquired 100% of the capital stock of
Tetra Tech EM Inc. (EMI [formerly known as PRC Environmental Management, Inc.]).
EMI provides a full range of environmental consulting and engineering services.
The purchase was valued at approximately $40,600,000 consisting of cash.
On January 1, 1997, the Company merged its wholly owned subsidiary,
Hydro-Search, Inc. into another of its wholly owned subsidiaries, GeoTrans, Inc.
The name of the combined entity was simultaneously changed to HSI GeoTrans, Inc.
The Company believes that this combination provides synergy and an expansion of
geographical presence and capabilities.
17
All of the acquisitions above have been accounted for as purchases and
accordingly, the purchase prices of the businesses acquired have been allocated
to the assets and liabilities acquired based upon their fair market values. The
excess of the purchase cost of the acquisitions over the fair value of the net
assets acquired was recorded as goodwill and is included in Intangible Assets -
Net in the accompanying balance sheets. The final determination of such excess
amount is subject to a final determination of the value of the consideration
paid and the net assets acquired as various studies and valuations are not yet
complete. The results of operations of each of the companies acquired have been
included in the Company's financial statements from their respective acquisition
effective dates as set forth in the related purchase agreements.
The effect of unaudited pro forma operating results of the SCM, FLO and IWA
acquisitions, had they been acquired on October 2, 1995, is not material.
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired CDC, WAC and KCM on October 2,
1995:
Fiscal Years Ended
----------------------------------
Sept. 28, 1997 Sept. 29, 1996
---------------- ----------------
(in thousands, except per share data)
Gross revenue $ 290,803 $ 282,758
Income before income taxes 31,147 33,019
Net income 18,974 19,906
Net income per share $ 0.86 $ 0.90
Weighted average shares outstanding 22,162 22,141
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at September 28, 1997 and
September 29, 1996:
1997 1996
---- ----
Billed accounts receivable. . . . . . . . . . . . . . . . . . . . . . $ 31,435,000 $ 23,338,000
------------- -------------
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 . . . . . . . . . . . . . . . 31,626,000 25,067,000
Costs and fee retention billable upon audit of total
contract costs. . . . . . . . . . . . . . . . . . . . . . . . . 13,326,000 10,203,000
------------- -------------
Total unbilled accounts receivable. . . . . . . . . . . . . . . . . . 44,952,000 35,270,000
------------- -------------
Allowance for uncollectible accounts:
Allowance for doubtful accounts. . . . . . . . . . . . . . . . . . (1,346,000) (1,032,000)
Allowance for disallowed costs . . . . . . . . . . . . . . . . . . (9,807,000) (10,069,000)
------------- -------------
Total allowance for uncollectible accounts. . . . . . . . . . . . . . (11,153,000) (11,101,000)
------------- -------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 65,234,000 $ 47,507,000
------------- -------------
------------- -------------
18
The accounts receivable valuation allowance includes amounts to provide for
doubtful accounts and for the potential disallowance of billed and unbilled
costs. The Company's contracts with the Federal government are subject to audit
by the government, primarily the Defense Contract Audit Agency (DCAA), which
reviews the Company's overhead rates, operating systems and cost proposals.
During the course of its audit, the DCAA may disallow costs if it determines
that the Company improperly accounted for such costs in a manner inconsistent
with Cost Accounting Standards. Historically, the Company has not had any
material cost disallowances by the DCAA as a result of audit, however, there can
be no assurance that DCAA audits will not result in material cost disallowances
in the future. In addition, audits for the accounts receivable related to EMI
contracts for periods prior to the acquisition had not been finalized at the
beginning of fiscal year 1997. As of October 1997, audits and negotiations for
years 1987 through 1992 have been completed and cost disallowances as a result
of audits totaled approximately $672,000. Negotiations for the 1993 audit are
currently underway. Audits for the years 1994 and 1995 have yet to be
completed. In the event it is determined that the Company is entitled to
payments, collectibility of such payments cannot be assured as each agency must
obtain separate funding approval. Allowances to provide for doubtful accounts
have been determined through reviews of specific amounts determined to be
uncollectible, plus a general allowance for other amounts for which some
potential loss has been determined to be probable based on current events and
circumstances. Given the above, management believes that the resolution of
these matters will not have a material adverse effect on the Company's financial
position or results of operations.
The Company has approximately $6,146,000 under retainage provisions of
contracts. As of September 28, 1997, accounts receivable includes approximately
$8,726,000 that may not be realized within one year.
4. INCOME TAXES
The provision for income taxes for the years ended September 28, 1997,
September 29, 1996 and October 1, 1995 consisted of the following:
Sept. 28, Sept. 29, Oct. 1,
1997 1996 1995
------------ ------------ ------------
Current:
Federal . . . . . . . $ 9,220,000 $ 5,849,000 $ 4,185,000
State . . . . . . . . 2,291,000 1,462,000 1,129,000
Deferred . . . . . . . . (1,188,000) (457,000) (278,000)
------------ ------------ ------------
Total provision. . . . . $ 10,323,000 $ 6,854,000 $ 5,036,000
------------ ------------ ------------
------------ ------------ ------------
Temporary differences comprising the net deferred income tax asset shown on
the consolidated balance sheets were as follows:
Sept. 28, Sept. 29,
1997 1996
------------ ------------
Allowance for doubtful accounts. . . . . $ 2,872,000 $ 4,458,000
Cash to accrual. . . . . . . . . . . . . (2,600,000) (2,265,000)
Accrued vacation . . . . . . . . . . . . 641,000 606,000
Prepaid expense. . . . . . . . . . . . . (119,000) (584,000)
Depreciation . . . . . . . . . . . . . . (422,000) (399,000)
Other. . . . . . . . . . . . . . . . . . 495,000 542,000
------------ ------------
Net deferred income tax asset. . . . . . $ 867,000 $ 2,358,000
------------ ------------
------------ ------------
19
Total tax expense was different than the amount computed by applying the
federal statutory rate as follows:
Sept. 28, 1997 Sept. 29, 1996 Oct. 1, 1995
--------------------- --------------------- ---------------------
Amount % Amount % Amount %
------------ ----- ------------ ----- ------------ -----
Tax at federal statutory rate. . . . . . . . $ 8,603,000 35.0% $ 5,936,000 35.0% $ 4,406,000 35.0%
State taxes, net of federal benefit. . . . . 1,348,000 5.5 933,000 5.5 692,000 5.5
Goodwill . . . . . . . . . . . . . . . . . . 528,000 2.1 384,000 2.3 77,000 0.6
Other. . . . . . . . . . . . . . . . . . . . (156,000) (0.6) (399,000) (2.4) (139,000) (1.1)
------------ ----- ------------ ----- ------------ -----
Total provision. . . . . . . . . . . . . . . $ 10,323,000 42.0% $ 6,854,000 40.4% $ 5,036,000 40.0%
------------ ----- ------------ ----- ------------ -----
------------ ----- ------------ ----- ------------ -----
5. LONG-TERM OBLIGATIONS
The Company has a credit agreement (as amended, the "Credit Agreement")
with a bank to support its working capital and acquisition needs. At September
28, 1997, the Credit Agreement provided a revolving credit facility of
$25,000,000. In December 1997, the Company amended the Credit Agreement to
increase its facility to $45,000,000 in order to accommodate future
acquisitions.
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 0.75% to 1.25%. The weighted average interest
rate on outstanding borrowings at September 28, 1997 was 6.399%.
Borrowings under the Credit Agreement are secured by the Company's accounts
receivable and the stock of five of the Company's subsidiaries.
The Credit Agreement contains various covenants including, but not limited
to, restrictions related to tangible net worth, net income, additional
indebtedness, asset sales, mergers and acquisitions, creation of liens, and
dividends on capital stock (other than stock dividends).
The Credit Agreement matures on December 15, 2000 or earlier at the
discretion of the Company upon payment in full of loans and other obligations.
As of September 28, 1997, outstanding borrowings totaled $8,000,000 and standby
letters of credit totaled $955,000.
6. REEDEMABLE PREFERRED STOCK
In connection with the WAC acquisition, the Company issued 1,231,840 shares
of Series A Preferred Stock to the former stockholders of WAC. The issuance was
made by a private placement in reliance on the exemption from the registration
provisions of the Securities Act of 1933, as amended (the "Act"), provided for
in Section 4(2) of the Act. The preferred stock carried dividend and voting
rights substantially identical to those of common stock and was converted to
common stock on October 28, 1997, following the stockholder authorization of
additional common shares. Holders of the preferred stock, had the shares not
been converted by December 10, 1997, had the right to put the preferred stock to
the Company for cash at the average closing price of the Company's common stock
on the five days ending one day prior to the exercise of the put.
20
7. STOCKHOLDERS' EQUITY
On October 28, 1997, a Special Meeting of the Stockholders (the "Special
Meeting") was held. During the Special Meeting, the stockholders approved a
proposal to amend the Company's Certificate of Incorporation to increase the
number of authorized shares of common stock, $.01 par value per share, from
20,000,000 to 30,000,000. Immediately following this increase, all of the
issued and outstanding redeemable preferred stock was converted into common
stock. On October 29, 1997, 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 December 1, 1997 to the stockholders of record on November
14, 1997. All agreements concerning stock options and other commitments payable
in shares of the Company's common stock are affected by the five-for-four split.
All references to number of shares (except shares authorized), stock options,
share prices and per share information in the consolidated financial statements
have been adjusted to reflect the stock split on a retroactive basis.
Pursuant to the Company's 1989 Stock Option Plan, key employees may be
granted options to purchase an aggregate of 762,939 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 352,006 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 an aggregate of 3,687,500 shares of the
Company's common stock at prices not less than the market value on the date of
grant. From such date of grant, these options become exercisable after one
year, are fully vested no later than five years after grant and terminate no
later than ten years after grant.
Pursuant to the Company's 1992 Non-employee Director Plan, non-employee
directors may be granted options to purchase an aggregate of 91,551 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, an aggregate of 703,125 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.
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.
21
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 28, 1997, option activity was as
follows:
Number of Weighted Average
Options Exercise Price
--------- ----------------
Balance, October 2, 1994 . . . . . . . . 1,054,325 $ 6.07
Granted . . . . . . . . . . . . . . . 434,712 9.29
Exercised . . . . . . . . . . . . . . (137,370) 4.48
Cancelled . . . . . . . . . . . . . . (99,451) 6.94
--------- -------
Balance, October 1, 1995 . . . . . . . . 1,252,216 7.28
Granted . . . . . . . . . . . . . . . 515,734 14.19
Exercised . . . . . . . . . . . . . . (127,033) 5.38
Cancelled . . . . . . . . . . . . . . (65,521) 8.89
--------- -------
Balance, September 29, 1996. . . . . . . 1,575,396 9.63
Granted . . . . . . . . . . . . . . . 610,154 15.70
Exercised . . . . . . . . . . . . . . (180,759) 7.25
Cancelled . . . . . . . . . . . . . . (134,091) 12.02
--------- -------
Outstanding at September 28, 1997. . . . 1,870,700 $ 11.66
--------- -------
--------- -------
Exercisable at September 28, 1997. . . . 717,569 $ 8.54
--------- -------
--------- -------
22
The following table summarizes information concerning currently outstanding
and exercisable options:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
$0.86 - $1.47 51,518 3.51 $ 1.37 51,518 $ 1.37
$3.93 - $6.34 121,293 5.17 5.42 120,530 5.41
$6.67 - $10.37 634,064 6.76 8.12 376,335 8.03
$11.10 - $16.66 1,011,575 8.93 14.85 169,186 14.08
$17.20 - $19.40 52,250 9.71 17.68 -- --
--------- ---- ------ ------- ------
1,870,700 7.82 $11.66 717,569 $ 8.54
--------- ---- ------ ------- ------
--------- ---- ------ ------- ------
The Company applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its employee stock
option plans. Accordingly, no compensation expense has been recognized for its
stock-based compensation plans. Pro forma net income and net income per share
had the Company accounted for stock options issued to employees in accordance
with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, are as follows:
Fiscal Years Ended
---------------------------------------
September 28, 1997 September 29, 1996
------------------ ------------------
(in thousands, except per share data)
Net income-as reported . . . . . . . $ 14,256 $ 10,105
Net income-pro forma . . . . . . . . 13,059 9,598
Net income per share-as reported . . $ 0.72 $ 0.56
Net income per share-pro forma . . . 0.66 0.53
The pro forma effects of applying SFAS No. 123 may not be representative of
the effects on reported net income and net income per share for future years
since options vest over several years and additional awards are made each year.
The fair value of the Company's stock options used to compute pro forma net
income and pro forma earnings per share disclosures is the estimated value using
the Black-Scholes option-pricing model. The weighted average fair values per
share of options granted in 1997 and 1996 are $5.16 and $4.56, respectively.
The following assumptions were used in completing the model:
Fiscal Years Ended
---------------------------------------
September 28, 1997 September 29, 1996
------------------ ------------------
Dividend yield . . . . . . . . . . . 0.0% 0.0%
Expected volatility. . . . . . . . . 40.5% 39.1%
Risk-free rate of return, annual . . 6.4% 6.4%
Expected life. . . . . . . . . . . . 2.76 yrs. 2.76 yrs.
23
8. LEASES
The Company leases land, buildings and equipment under various operating
leases. Rent expense under all operating leases was approximately $10,204,000,
$9,462,000 and $5,332,000 for the years ended September 28, 1997, September 29,
1996 and October 1, 1995, respectively. Amounts payable under noncancelable
operating lease commitments are as follows during the fiscal years ending in:
1998 . . . . . . . . . . . . . . . . . . $ 8,285,000
1999 . . . . . . . . . . . . . . . . . . 6,944,000
2000 . . . . . . . . . . . . . . . . . . 5,166,000
2001 . . . . . . . . . . . . . . . . . . 4,120,000
2002 . . . . . . . . . . . . . . . . . . 2,962,000
Thereafter . . . . . . . . . . . . . . . 3,236,000
------------
Total. . . . . . . . . . . . . . . . . . $30,713,000
------------
------------
9. RETIREMENT PLANS
The Company and its subsidiaries have established defined contribution
plans and 401(k) plans. Generally, employees are eligible to participate in the
defined contribution plans upon completion of one year of service and in the
401(k) plans upon commencement of employment. For the years ended September 28,
1997, September 29, 1996 and October 1, 1995 contributions relating to the plans
were approximately $3,536,000, $4,002,000 and $1,971,000, respectively.
10. CONTINGENCIES
The Company is subject to certain claims and lawsuits typically filed
against the engineering and consulting professions, primarily alleging
professional errors or omissions. The Company carries professional liability
insurance, subject to certain deductibles and policy limits against such claims.
Management is of the opinion that the resolution of these claims will not have a
material adverse effect on the Company's financial statements.
11. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
In the opinion of management, the following unaudited quarterly data for
the years ended September 28, 1997 and September 29, 1996 reflect all
adjustments necessary for a fair statement of
24
the results of operations. All such adjustments are of a normal recurring
nature. (In thousands, except per share data)
First Second Third Fourth
Fiscal 1997 Quarter Quarter Quarter Quarter
- ----------- ------- ------- ------- -------
Gross revenue. . . . . . . . . . . . . . . $54,938 $55,545 $60,922 $75,362
Net revenue. . . . . . . . . . . . . . . . 40,423 43,914 48,621 57,833
Gross profit . . . . . . . . . . . . . . . 9,372 10,547 12,961 16,892
Income from operations . . . . . . . . . . 4,393 4,892 6,207 9,107
Net income . . . . . . . . . . . . . . . . 2,596 2,872 3,644 5,144
Net income per share . . . . . . . . . . . $ 0.14 $ 0.16 $ 0.19 $ 0.22
Weighted average shares outstanding . . . 18,369 18,300 19,339 22,925
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 . . . . . . . . . . . $ 0.11 $ 0.13 $ 0.14 $ 0.18
Weighted average shares outstanding . . . 17,689 18,130 18,206 18,251
25
SECURITIES INFORMATION
Tetra Tech's common stock is traded on the Nasdaq Stock Market under the
symbol WATR. There were 636 stockholders of record as of December 9, 1997.
Tetra Tech has not paid any cash dividends since its inception and does not
intend to pay any cash dividends on its common stock in the foreseeable future.
The high and low sales prices for the common stock for the last two fiscal
years, as reported by the National Association of Securities Dealers, Inc., are
set forth in the following tables. The prices have been adjusted to reflect the
effect, on a retroactive basis, of a five-for-four stock split, effected in the
form of a 25% stock dividend, in December 1997.
FISCAL 1997 HIGH LOW
----------- ---- ---
First Quarter $20.40 $14.90
Second Quarter 16.60 9.80
Third Quarter 18.50 11.10
Fourth Quarter 22.60 16.80
FISCAL 1996 HIGH LOW
----------- ---- ---
First Quarter $15.20 $13.12
Second Quarter 15.20 12.48
Third Quarter 17.92 12.64
Fourth Quarter 19.60 13.80
26