SELECTED CONSOLIDATED FINANCIAL DATA
Fiscal Year Ended
-----------------------------------------------------------------------
Oct. 4,(2) Sept. 28,(3) Sept. 29,(4) Oct. 1,(5) Oct. 2,(6)
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
(in thousands, except per share data)
STATEMENTS OF INCOME DATA
Gross revenue.......................... $ 382,934 $ 246,767 $ 220,099 $ 120,034 $ 96,472
Subcontractor costs.................... 85,337 55,976 59,062 32,160 28,653
---------- ---------- ---------- ---------- ---------
Net revenue............................ 297,597 190,791 161,037 87,874 67,819
Cost of net revenue.................... 223,871 141,019 122,084 65,484 51,069
---------- ---------- ---------- ---------- ---------
Gross profit........................... 73,726 49,772 38,953 22,390 16,750
Selling, general and administrative
expenses............................ 33,913 25,173 21,218 10,634 7,589
---------- ---------- ---------- ---------- ---------
Income from operations................. 39,813 24,599 17,735 11,756 9,161
Net interest income (expense).......... (1,910) (20) (776) 833 354
---------- ---------- ---------- ---------- ---------
Income before minority interest and
income tax expense.................. 37,903 24,579 16,959 12,589 9,515
Minority interest...................... 1,397 -- -- -- --
---------- ---------- ---------- ---------- ---------
Income before income tax expense....... 36,506 24,579 16,959 12,589 9,515
Income tax expense..................... 15,920 10,323 6,854 5,036 3,806
---------- ---------- ---------- ---------- ---------
Net income............................. $ 20,586 $ 14,256 $ 10,105 $ 7,553 $ 5,709
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Basic earnings per share (1)........... $ 0.74 $ 0.61 $ 0.46 $ 0.37 $ 0.28
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Diluted earnings per share (1)......... $ 0.71 $ 0.58 $ 0.45 $ 0.36 $ 0.27
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Weighted average common shares
outstanding: (1)
Basic............................. 27,970 23,371 21,851 20,585 20,464
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Diluted........................... 29,191 24,656 22,581 21,146 20,811
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Oct. 4, Sept. 28, Sept. 29, Oct. 1, Oct. 2,
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ---------
(in thousands)
BALANCE SHEET DATA
Working capital........................ $ 77,049 $ 42,539 $ 32,739 $ 39,872 $ 24,833
Total assets........................... 266,610 159,513 88,463 92,930 51,606
Long-term obligations, excluding
current portion..................... 33,546 -- -- 19,045 --
Stockholders' equity................... 167,781 107,641 63,269 41,496 33,507
- -----
(Continued)
(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 SEPTEMBER 1998.
(2) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITIONS OF TETRA
TECH NUS, INC. (ACQUIRED DECEMBER 31, 1997), WHALEN/SENTREX LLC (FORMED
MARCH 2, 1998), C.D.C. ENGINEERING, INC. (ACQUIRED MARCH 26, 1998),
MCNAMEE, PORTER & SEELEY, INC. (ACQUIRED JULY 8, 1998) AND THE SENTREX
GROUP OF COMPANIES (ACQUIRED SEPTEMBER 22, 1998) FROM THE DATES SET FORTH
IN THE RELATED PURCHASE AGREEMENTS..
(3) WE HAVE INCLUDED 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.
(4) WE HAVE INCLUDED THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF KCM,
INC. (ACQUIRED NOVEMBER 7, 1995) FROM THE DATE SET FORTH IN THE RELATED
PURCHASE AGREEMENT.
(5) WE HAVE INCLUDED 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.
(6) WE HAVE INCLUDED 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.
(Concluded)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED BELOW, THE MATTERS
DISCUSSED IN THIS SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER
OF RISKS AND UNCERTAINTIES. OUR ACTUAL LIQUIDITY NEEDS, CAPITAL RESOURCES AND
OPERATING RESULTS MAY DIFFER MATERIALLY FROM THE DISCUSSION SET FORTH BELOW IN
THESE FORWARD-LOOKING STATEMENTS. FOR ADDITIONAL INFORMATION, REFER TO THE NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS.
OVERVIEW
Tetra Tech, Inc. is a leading provider of specialized management consulting
and technical services in three principal business areas: resource management,
infrastructure and communications. As a specialized management consultant, we
assist our clients in defining problems and developing innovative and
cost-effective solutions. Our management consulting services are complemented by
our technical services. These technical services, which implement solutions,
include research and development, applied science, engineering and architectural
design, construction management, and operations and maintenance. Our clients
include a diverse base of public and private organizations located in the United
States and internationally.
Since our initial public offering in December 1991, we increased the size
and scope of our business and have expanded our service offerings through a
series of strategic acquisitions and internal growth. From fiscal 1991 through
fiscal 1998, we generated a net revenue compounded annual growth rate of
approximately 34.2% and achieved a net income compounded annual growth rate of
approximately 36.4%.
We derive our gross revenues 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 our gross revenue. Because subcontractor
services can change significantly from project to project, we believe net
revenue, which is gross revenue less the cost of subcontractor services, is a
more appropriate measure of our performance.
Our cost of net revenue includes professional compensation and certain
direct and indirect overhead costs such as rents, utilities and travel.
Professional compensation represents the majority of these costs. Our selling,
general and administrative (SG&A) expenses are comprised primarily of our
corporate headquarters' costs related to the executive offices, corporate
accounting, information technology, marketing, and bid and proposal costs. These
costs are generally unrelated to specific client projects. In addition, we
include amortization of certain intangible assets resulting from acquisitions in
SG&A expenses.
We provide services to a diverse base of Federal, state and local
government agencies, and private and international clients. The following table
presents, for the periods indicated, the approximate percentage of our net
revenue attributable to these client sectors:
Percentage of Net Revenue
-----------------------------------
Client Fiscal 1998 Fiscal 1997 Fiscal 1996
------ ----------- ----------- -----------
Federal government................. 48.7% 52.3% 61.7%
State and local government......... 12.7 14.8 16.6
Private............................ 35.4 29.2 20.1
International...................... 3.2 3.7 1.6
----------- ----------- -----------
Total.............................. 100.0% 100.0% 100.0%
----------- ----------- -----------
----------- ----------- -----------
RECENT ACQUISITIONS
As a part of our growth strategy, we expect to pursue complementary
acquisitions to expand our geographical reach and the breadth and depth of our
service offerings. During fiscal 1998, we purchased ten companies in the
following five separate transactions:
- TETRA TECH NUS, INC.- In December 1997, we acquired, through our
wholly-owned subsidiary Tetra Tech NUS, Inc. (NUS), the assets of certain
environmental services businesses of Brown & Root, Inc. and Halliburton
Corporation. The purchase was valued at approximately $25.2 million. NUS is a
nationwide firm providing consulting, engineering and design services for the
environmental remediation of contaminated air, water and soil conditions.
- WHALEN/SENTREX LLC- In March 1998, our wholly-owned subsidiary Whalen
Service Corps Inc. agreed to participate in a partnership with Sentrex Cen-Comm
and ANTEC Corporation. The partnership purchased certain assets from ANTEC
Corporation for a price of approximately $0.6 million. The partnership,
Whalen/Sentrex LLC, a Colorado-based firm, provides nationwide design,
engineering, information management and construction services to support
advanced communication system upgrades to the broadband information transport
industries.
- C.D.C. ENGINEERING, INC.- In March 1998, we acquired C.D.C. Engineering,
Inc. (CDE). The purchase was valued at approximately $1.5 million. CDE, a
California-based consulting and engineering firm, specializes in civil
engineering, transportation engineering, structural engineering and land
surveying.
- MCNAMEE, PORTER & SEELEY, INC.- In July 1998, we acquired McNamee, Porter
& Seeley, Inc. (MPS). The purchase was valued at approximately $14.2 million.
MPS, a Michigan-based firm, provides engineering services throughout the Midwest
with expertise in the areas of water, industrial wastewater and process
controls.
- SENTREX GROUP OF COMPANIES- In September 1998, we acquired, through our
wholly-owned subsidiary, Tetra Tech Canada Ltd., six Canadian corporations that
are collectively referred to as the Sentrex Group of Companies (SGOC). The
purchase was valued at approximately $19.2 million. SGOC provides engineering
and technical services to the cable television, telephony and data networking
industries. As a result of the SGOC acquisition, we now own 100% of
Whalen/Sentrex LLC.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operating information as a percentage of net revenue:
Percentage Relationship to Net Revenue
--------------------------------------
Fiscal Year Ended
--------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
------- --------- --------
Net revenue............................. 100.0% 100.0% 100.0%
Cost of net revenue..................... 75.2 73.9 75.8
------- --------- --------
Gross profit............................ 24.8 26.1 24.2
Selling, general and administrative
expenses............................. 11.4 13.2 13.2
------- --------- --------
Income from operations.................. 13.4 12.9 11.0
Net interest income (expense)........... (0.7) -- (0.5)
------- --------- --------
Income before minority interest and
income tax expense................... 12.7 12.9 10.5
Minority interest....................... (0.5) -- --
------- --------- --------
Income before income tax expense........ 12.2 12.9 10.5
Income tax expense...................... 5.3 5.4 4.2
------- --------- --------
Net income.............................. 6.9% 7.5% 6.3%
------- --------- --------
------- --------- --------
FISCAL 1998 COMPARED TO FISCAL 1997
NET REVENUE. Net revenue increased $106.8 million, or 56.0%, to $297.6
million in fiscal 1998 from $190.8 million in fiscal 1997. All four client
sectors continued to show net revenue increases in actual dollars. These
increases were attributable to increases in our existing Federal government
contracts, the introduction of new lines of service in our communications
business and to companies acquired in fiscal 1998. As a percentage of net
revenue, increases were realized in the private sector. Net revenue from the
companies acquired in fiscal 1998 totaled $72.0 million. Excluding the net
revenue from these companies, we realized 18.2% growth in our net revenue. Gross
revenue increased $136.2 million, or 55.2%, to $382.9 million in fiscal 1998
from $246.8 million in fiscal 1997. In fiscal 1998, subcontractor costs
comprised 22.3% of gross revenue compared to 22.7% for fiscal 1997.
COST OF NET REVENUE. Cost of net revenue increased $82.9 million, or 58.8%,
to $223.9 million in fiscal 1998 from $141.0 million in fiscal 1997. As a
percentage of net revenue, cost of net revenue increased from 73.9% in fiscal
1997 to 75.2% in fiscal 1998. This increase was primarily attributable to higher
costs of Federal government contracts, as well as costs incurred in connection
with the additional net revenue from the acquired companies. Professional
compensation, the largest component of our cost of net revenue, rose as the
number of our employees increased by 1,400, or 61.9%, to 3,662 in fiscal 1998
from 2,262 in fiscal 1997. Excluding the employees provided from acquired
companies, our number of employees increased by 265, or 11.7%. Gross profit
increased $24.0 million, or 48.1%, to $73.7 million in fiscal 1998 from $49.8
million in fiscal 1997. However, as a percentage of net revenue, gross profit
decreased from 26.1% in fiscal 1997 to 24.8% in fiscal 1998, primarily due to a
change in the relative mix of our Federal government contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $8.7
million, or 34.7%, to $33.9 million in fiscal 1998 from $25.2 million in fiscal
1997. This increase was primarily attributable to additional headquarters' costs
associated with centralizing corporate functions as well as additional
amortization expense relating to acquired companies. As a percentage of net
revenue, SG&A
expenses decreased from 13.2% in fiscal 1997 to 11.4% in fiscal 1998 due to
operating efficiencies. The amortization expenses related to acquisitions
increased $1.4 million, or 89.1%, to $3.0 million in fiscal 1998 from $1.6
million in fiscal 1997.
NET INTEREST EXPENSE. Net interest expense increased from less than $0.1
million to $1.9 million from fiscal 1997 to fiscal 1998. This increase was
primarily attributable to the financing and working capital needs of certain
acquisitions.
INCOME TAX EXPENSE. Income tax expense increased $5.6 million, or 54.2%, to
$15.9 million in fiscal 1998 from $10.3 million in fiscal 1997. This increase
was due to higher income before income taxes and an increase in our effective
tax rate from 42.0% in fiscal 1997 to 43.6% in fiscal 1998. This increase was
primarily attributable to amortization amounts which were not tax deductible.
FISCAL 1997 COMPARED TO FISCAL 1996
NET REVENUE. Net revenue increased $29.8 million, or 18.5%, to $190.8
million in fiscal 1997 from $161.0 million in fiscal 1996. This increase in net
revenue was primarily attributable to revenue associated with companies acquired
in fiscal 1997 which totaled $24.6 million. Despite the weakened condition of
the environmental industry, which was impacted by the decrease in Federal
government activity, we attained a 3.2% growth in our net revenue, excluding
revenue related to acquired companies. Gross revenue increased $26.7 million, or
12.1%, to $246.8 million in fiscal 1997 from $220.1 million in fiscal 1996. In
fiscal 1997, subcontractor costs were 22.7% of gross revenue, compared to 26.8%
for fiscal 1996. This decrease was due to the nature of the projects undertaken.
COST OF NET REVENUE. Cost of net revenue increased $18.9 million, or 15.5%,
to $141.0 million in fiscal 1997 from $122.1 million in fiscal 1996. This
increase was primarily attributable to costs incurred in connection with the
additional net revenue from the acquired companies. As a percentage of net
revenue, cost of net revenue decreased from 75.8% in fiscal 1996 to 73.9% in
fiscal 1997. Professional compensation, the largest component of our cost of net
revenue, rose as the number of employees increased by 363, or 19.1%, to 2,262 in
fiscal 1997 from 1,899 in fiscal 1996. Excluding the employees provided from
acquired companies, our number of employees remained relatively flat. Gross
profit increased $10.8 million, or 27.8%, to $49.8 million in fiscal 1997 from
$39.0 million in fiscal 1996, primarily due to efficiencies in operations,
acquisitions and higher profit margins realized in the acquired businesses in
the communications industry.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $4.0
million, or 18.6%, to $25.2 million in fiscal 1997 from $21.2 million in fiscal
1996. However, as a percentage of net revenue, SG&A expenses remained flat at
13.2% for fiscal 1997. The amortization of intangible assets relating to
acquisitions increased $0.4 million, or 29.8%, to $1.6 million in fiscal 1997
from $1.2 million in fiscal 1996.
NET INTEREST EXPENSE. Net interest expense decreased $0.8 million to less
than $0.1 million in fiscal 1997 due to the reduction of the average outstanding
borrowings from fiscal 1996 to fiscal 1997.
INCOME TAX EXPENSE. Income tax expense increased $3.4 million, or 50.6%, to
$10.3 million in fiscal 1997 from $6.9 million in fiscal 1996. Our effective tax
rate increased from 40.4% in fiscal 1996 to 42.0% in fiscal 1997. This increase
was primarily attributable to amortization amounts which were not tax
deductible.
UNAUDITED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly operating
results for each of our last three fiscal years ended September 29, 1996,
September 28, 1997 and October 4, 1998. This data is also expressed as a
percentage of net revenue for the respective quarters. The information has been
derived from unaudited consolidated financial statements that, in our opinion,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such quarterly information. The operating
results for any quarter are not necessarily indicative of the results to be
expected for any future period.
Fiscal 1996 Quarter Ended Fiscal 1997 Quarter Ended
-------------------------------------- --------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sep. 29, Dec. 29, Mar. 30, Jun. 29, Sep. 28,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Net revenue $ 38,023 $ 40,076 $ 40,314 $ 42,624 $ 40,423 $ 43,914 $ 48,621 $ 57,833
Cost of net revenue 29,483 30,676 30,479 31,446 31,051 33,367 35,660 40,941
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 8,540 9,400 9,835 11,178 9,372 10,547 12,961 16,892
Selling, general and
administrative expenses 4,810 5,281 5,329 5,798 4,979 5,655 6,754 7,785
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 3,730 4,119 4,506 5,380 4,393 4,892 6,207 9,107
Net interest income (expense) (348) (291) (131) (6) 49 31 4 (104)
-------- -------- -------- -------- -------- -------- -------- --------
Income before minority interest
and income tax expense 3,382 3,828 4,375 5,374 4,442 4,923 6,211 9,003
Minority interest -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
tax expense 3,382 3,828 4,375 5,374 4,442 4,923 6,211 9,003
Income tax expense 1,353 1,531 1,750 2,220 1,846 2,051 2,567 3,859
-------- -------- -------- -------- -------- -------- -------- --------
Net income $ 2,029 $ 2,297 $ 2,625 $ 3,154 $ 2,596 $ 2,872 $ 3,644 $ 5,144
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Fiscal 1998 Quarter Ended
--------------------------------------
Dec. 28, Mar. 29, Jun. 28, Oct. 4,
1997 1998 1998 1998
-------- -------- -------- --------
(in thousands)
Net revenue $ 53,664 $ 71,806 $ 75,149 $ 96,978
Cost of net revenue 40,339 54,786 54,405 74,341
-------- -------- -------- --------
Gross profit 13,325 17,020 20,744 22,637
Selling, general and
administrative expenses 6,146 8,148 9,333 10,286
-------- -------- -------- --------
Income from operations 7,179 8,872 11,411 12,351
Net interest income (expense) (73) (596) (510) (731)
-------- -------- -------- --------
Income before minority interest
and income tax expense 7,106 8,276 10,901 11,620
Minority interest -- 203 1,194 --
-------- -------- -------- --------
Income before income
tax expense 7,106 8,073 9,707 11,620
Income tax expense 3,055 3,552 4,214 5,099
-------- -------- -------- --------
Net income $ 4,051 $ 4,521 $ 5,493 $ 6,521
-------- -------- -------- --------
-------- -------- -------- --------
Fiscal 1996 Quarter Ended Fiscal 1997 Quarter Ended
-------------------------------------- --------------------------------------
Dec. 31, Mar. 31, Jun. 30, Sep. 29, Dec. 29, Mar. 30, Jun. 29, Sep. 28,
1995 1996 1996 1996 1996 1997 1997 1997
-------- -------- -------- -------- -------- -------- -------- --------
Net revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 77.5 76.5 75.6 73.8 76.8 76.0 73.3 70.8
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 22.5 23.5 24.4 26.2 23.2 24.0 26.7 29.2
Selling, general and
administrative expenses 12.7 13.2 13.2 13.6 12.3 12.9 13.9 13.5
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations 9.8 10.3 11.2 12.6 10.9 11.1 12.8 15.7
Net interest income (expense) (0.9) (0.7) (0.3) -- 0.1 0.1 -- (0.2)
-------- -------- -------- -------- -------- -------- -------- --------
Income before minority interest
and income tax expense 8.9 9.6 10.9 12.6 11.0 11.2 12.8 15.6
Minority interest -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
tax expense 8.9 9.6 10.9 12.6 11.0 11.2 12.8 15.6
Income tax expense 3.6 3.8 4.3 5.2 4.6 4.7 5.3 6.7
-------- -------- -------- -------- -------- -------- -------- --------
Net income 5.3% 5.7% 6.5% 7.4% 6.4% 6.5% 7.5% 8.9%
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
Fiscal 1998 Quarter Ended
--------------------------------------
Dec. 28, Mar. 29, Jun. 28, Oct. 4,
1997 1998 1998 1998
-------- -------- -------- --------
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of net revenue 75.2 76.3 72.4 76.7
-------- -------- -------- --------
Gross profit 24.8 23.7 27.6 23.3
Selling, general and
administrative expenses 11.5 11.3 12.4 10.6
-------- -------- -------- --------
Income from operations 13.4 12.4 15.2 12.7
Net interest income (expense) (0.1) (0.8) (0.7) (0.8)
-------- -------- -------- --------
Income before minority interest
and income tax expense 13.2 11.5 14.5 12.0
Minority interest -- 0.3 1.6 --
-------- -------- -------- --------
Income before income
tax expense 13.2 11.2 12.9 12.0
Income tax expense 5.7 4.9 5.6 5.3
-------- -------- -------- --------
Net income 7.5% 6.3% 7.3% 6.7%
-------- -------- -------- --------
-------- -------- -------- --------
Our revenues and operating results fluctuate from quarter to quarter as a
result of a number of factors, such as: (1) the seasonality of the spending
cycle of our public sector clients, notably the Federal government; (2) employee
hiring and utilization rates; (3) the number and significance of client
engagements commenced and completed during a quarter; (4) delays incurred in
connection with an engagement; (5) the ability of clients to terminate
engagements without penalties; (6) the size and scope
of engagements; (7) the timing and size of the return on investment capital; and
(8) general economic and political conditions. Variations in any of these
factors can cause significant variations in operating results from quarter to
quarter and could result in losses.
LIQUIDITY AND CAPITAL RESOURCES
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 1999.
As of October 4, 1998, our working capital was $77.0 million, an
increase of $34.5 million from $42.5 million on September 28, 1997, of which
cash and cash equivalents totaled $4.9 million. In fiscal 1998, we augmented
cash used in operations with borrowings under our credit facility. In fiscal
1998, $6.6 million was used in operating activities and $41.3 million was
used in investing activities, of which $37.8 million was related to business
acquisitions. In fiscal 1997, we generated $1.1 million from operating
activities and used $3.8 million in investing activities, of which $1.2
million was related to business acquisitions. The decreases in cash provided
from operating activities in fiscal 1998 and fiscal 1997 primarily resulted
from the payment of liabilities assumed in connection with the fiscal 1998
acquisitions of approximately $6.4 million, as well as the acquisitions of
Whalen & Company, Inc. in fiscal 1997 and McNamee, Porter & Seeley, Inc. in
fiscal 1998. In these acquisitions we agreed that we would not acquire the
accounts receivable. As a result, we experienced a lag in cash flow to fund
the business' operations. As an ongoing effort, we attempt to increase our
efficiencies in the timing of billings and the collection of receivables. Our
capital expenditures during fiscal years 1998, 1997, and 1996 were
approximately $3.5 million, $2.6 million and $2.4 million, respectively. The
expenditures were primarily for computer equipment, leasehold improvements
and office expansion.
We have a credit agreement with a bank (the "Credit Agreement") which, as
of October 4, 1998, provided us with a revolving credit facility (the
"Facility") of $70.0 million. The Credit Agreement provides for mandatory
reductions of $5.0 million on December 15, 1998 and December 15, 1999. We
amended the Credit Agreement during fiscal 1998 in order to accommodate the
fiscal 1998 acquisitions, as well as to position ourselves to pursue future
acquisitions. The Facility matures on December 15, 2000 or earlier at our
discretion upon payment in full of loans and other obligations. Throughout
fiscal 1998, maximum borrowings under the Facility were $49.0 million. At
October 4, 1998, borrowings and standby letters of credit totaled $47.0 million
and $2.2 million, respectively.
We continuously evaluate the marketplace for strategic acquisition
opportunities. Once an opportunity is identified, we examine the effect an
acquisition may have on the business environment, as well as on our results of
operations. We proceed with an acquisition if we determine that the acquisition
is anticipated to have an accretive effect on future operations. 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, we
do not expect to be materially adversely affected by inflation or changing
prices.
RECENTLY ISSUED FINANCIAL STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, EARNINGS PER SHARE,
which we adopted in fiscal year 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 companies 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. EPS has
been retroactively restated to reflect the requirements of SFAS No. 128.
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 (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. The Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. We will adopt this Statement
in fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. The Statement is effective for fiscal
years beginning after December 15, 1997. The Statement establishes standards for
the way that public business enterprises report information about operating
segments as well as related disclosures about products and services, geographic
areas, and major clients. The Statement also requires that a public business
report descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. The Statement need
not be applied to interim financial statements in the initial year of its
application. We have not completed our analysis of the effect of SFAS No. 131 on
our financial statements. We will adopt this Statement in fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES AND
HEDGING ACTIVITIES. The Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Statement requires companies to
recognize all derivative instruments on their balance sheet as either assets or
liabilities measured at fair value. The Statement also specifies a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. We will adopt this Statement in fiscal year 2001.
MARKET RISKS
We currently utilize no material derivative financial instruments which expose
us to significant market risk. We are exposed to cash flow risk due to interest
rate fluctuations with respect to our long-term debt. At our option, we borrow
on our Facility (a) at a base rate (the greater of the federal funds rate plus
0.50% or the bank's reference rate) or (b) at a eurodollar rate plus a margin
which ranges from 0.75% to 1.25%. Borrowings at the base rate have no designated
term and may be repaid without penalty anytime prior to the Facility's maturity
date. Borrowings at a eurodollar rate have a term no less than 30 days and no
greater than 90 days. Typically, at the end of such term, such borrowings may be
rolled over at our discretion into either a borrowing at the base rate or a
borrowing at a eurodollar rate with similar terms, not to exceed the maturity
date of the Facility. The Facility matures on December 15, 2000 or earlier at
our discretion upon payment in full of loans and other obligations. Accordingly,
we classify total outstanding debt between current liabilities and long-term
debt based on anticipated payments within and beyond one year's period of time.
We presently anticipate repaying our long-term debt in the amounts of
$14,065,000, $15,546,000 and $18,000,000 in fiscal 1999, 2000 and 2001,
respectively. Assuming we pay our long-term debt in such amounts ratably
throughout the year, and our average interest rate on our long-term debt
increases or decreases by one percentage point, our interest expense would
increase or decrease by $406,000, $258,000 and $90,000 in fiscal 1999, 2000 and
2001, respectively. However, there can be no assurance that the Company will, or
will be able to, repay its long-term debt in the manner described. For example,
we could incur additional debt under this credit facility or our operating
results could be worse than we expect.
YEAR 2000
We are working to resolve the potential impact of the year 2000 on our
business operations and the ability of our computerized information systems to
accurately process information that may be date-sensitive. Any of our programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures.
We utilize a number of computer programs across our entire operation. The
primary information technology (IT) systems we utilize are (1) the accounting
and financial systems which include general ledger, accounts payable, accounts
receivable, billing and collection, fixed assets, job cost accounting and
payroll, and (2) human resource information management systems. We do not
believe we have a material amount of non-IT systems on which we rely.
We have established both a year 2000 review committee and a year 2000
action team. The purpose of the review committee is to develop and communicate
our year 2000 plan to achieve our year 2000 compliance mission. The purpose of
the action team is to identify, remediate and implement plans to resolve our
year 2000 related issues. Through the review committee and the action team, we
are in the process of completing our full assessment of all issues relating to
the year 2000. We have developed questionnaires regarding year 2000 readiness to
be used internally and externally. We have completed our internal assessment and
we are in the process of assessing the year 2000 issues of our clients and
vendors. Based on the information collected to date, we do not believe that the
cost of addressing our year 2000 issues will have a material adverse impact on
our financial position. We plan to devote all resources required to resolve any
significant year 2000 issues in a timely manner.
STATE OF READINESS
We began our risk assessment in 1995. Since that time we have procured and
implemented certain accounting and financial reporting systems as well as
contract administration and billing systems that have been certified as year
2000 compliant by our vendors. Currently, approximately 72% of our gross revenue
is recognized on these year 2000 compliant systems. We have successfully
converted 7 of our 18 operating units to these year 2000 compliant systems. We
are planning to convert four additional operating units by July 1999. The
operating units that will not be converted to the systems currently in place are
in the process of upgrading their existing systems to a year 2000 compliant
version or will procure and implement a year 2000 compliant software. In all
cases, we believe that our financial and accounting systems will be year 2000
compliant in a timely manner and will not be materially impacted by the year
2000.
We are currently installing a year 2000 compliant human resource
information management system. Ten operating units including our corporate units
will be supported by this system. The
anticipated completion date is April 1999. We plan to convert the remaining
operating units following April 1999. In all cases, we believe that our human
resource management information systems will be year 2000 compliant in a timely
manner and will not be materially impacted by the year 2000.
We have expended or obligated approximately $2.6 million on the procurement
of these systems, the conversion of data from legacy systems to these systems,
and on the implementation and testing of these systems.
We have extensive business with the Federal government. Should the Federal
government, specifically the Department of Defense, experience significant
business interruptions relating to non-year 2000 compliance, we could be
materially impacted. To the extent that other third parties upon which we rely,
such as banking institutions, clients and vendors, are unable to address their
year 2000 issues in a timely manner, we could be materially impacted. We believe
that the worst case scenario relating to the year 2000 would be an extensive
period of time in which the Federal government and other third parties could not
process payments promptly.
RISKS
We believe the risks associated with non-year 2000 compliance include: (1)
our inability to invoice and process payments, (2) our inability to produce
accurate and timely financials, (3) the impact on our cash flow and working
capital needs, (4) the impact on our profitability, and (5) our liability to
third parties for not meeting contracted deliverables.
CONTINGENCY PLANS
We currently do not have formal contingency plans for the failure of our
financial and accounting systems. We have substantial experience in the
conversion process from multiple legacy systems to our current year 2000
certified systems. We have an experienced and dedicated staff to perform the
functions identified and are reasonably confident that the projected conversions
will be accomplished as projected.
We currently do not have formal contingency plans for the failure of our
human resource information management system. Our implementation strategy is to
install the system as simply as possible, with little customization. Our vendor
supports our implementation strategy and has agreed to a financial penalty if
the implementation is not achieved within three months, or by April 1999. If the
implementation is not achieved by April 1999, we believe there will still be
sufficient time to meet the year 2000 deadline.
We maintain, as a matter of policy and practice, mitigation plans in the
event of systems failure which includes regular backup of historical
information.
INDEPENDENT AUDITORS' REPORT
Tetra Tech, Inc.:
We have audited the accompanying consolidated balance sheets of Tetra Tech,
Inc. and its subsidiaries as of October 4, 1998 and September 28, 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended October 4, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Tetra Tech, Inc. and its
subsidiaries as of October 4, 1998 and September 28, 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended October 4, 1998 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
November 13, 1998
TETRA TECH, INC.
CONSOLIDATED BALANCE SHEETS
Oct. 4, Sept. 28,
1998 1997
---------------- ----------------
ASSETS
Current Assets:
Cash and cash equivalents..................................... $ 4,889,000 $ 12,262,000
Accounts receivable - net..................................... 68,834,000 30,089,000
Unbilled receivables - net.................................... 59,888,000 35,145,000
Prepaid and other current assets.............................. 4,955,000 2,522,000
Deferred income taxes......................................... 3,766,000 867,000
--------------- --------------
Total Current Assets....................................... 142,332,000 80,885,000
--------------- --------------
Property and Equipment:
Equipment, furniture and fixtures............................. 25,616,000 16,838,000
Leasehold improvements........................................ 1,348,000 1,177,000
--------------- --------------
Total...................................................... 26,964,000 18,015,000
Accumulated depreciation and amortization..................... (13,219,000) (9,592,000)
--------------- --------------
Property and Equipment - Net...................................... 13,745,000 8,423,000
--------------- --------------
Intangible Assets - Net........................................... 108,638,000 69,439,000
Other Assets...................................................... 1,895,000 766,000
--------------- --------------
Total Assets...................................................... $ 266,610,000 $ 159,513,000
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................................. $ 24,027,000 $ 11,621,000
Accrued compensation.......................................... 15,614,000 10,981,000
Other current liabilities..................................... 8,283,000 6,386,000
Income taxes payable.......................................... 3,294,000 1,358,000
Current portion of long-term obligations...................... 14,065,000 8,000,000
--------------- --------------
Total Current Liabilities.................................. 65,283,000 38,346,000
--------------- --------------
Long-term Obligations............................................. 33,546,000 --
--------------- --------------
Commitments and Contingencies (Notes 9 and 11)
Redeemable Preferred Stock........................................ -- 13,526,000
--------------- --------------
Stockholders' Equity:
Preferred stock - authorized, 2,000,000 shares of $.01 par value;
issued and outstanding 0 at October 4, 1998 and 1,231,840 at
September 28, 1997.......................................... -- --
Exchangeable stock of a subsidiary............................ 15,411,000 --
Common stock - authorized, 50,000,000 shares of $.01 par
value; issued and outstanding 28,630,600 at October 4, 1998
and 25,892,818 shares at September 28, 1997................. 287,000 259,000
Additional paid-in capital.................................... 87,565,000 63,450,000
Retained earnings............................................. 64,518,000 43,932,000
--------------- --------------
Total Stockholders' Equity........................................ 167,781,000 107,641,000
--------------- --------------
Total Liabilities and Stockholders' Equity........................ $ 266,610,000 $ 159,513,000
--------------- --------------
--------------- --------------
See accompanying Notes to Consolidated Financial Statements.
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
--------------------------------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
------------------ ------------------ ------------------
Revenue:
Gross revenue................................. $ 382,934,000 $ 246,767,000 $ 220,099,000
Subcontractor costs........................... 85,337,000 55,976,000 59,062,000
---------------- ---------------- --------------
Net Revenue........................................ 297,597,000 190,791,000 161,037,000
Cost of Net Revenue................................ 223,871,000 141,019,000 122,084,000
---------------- ---------------- --------------
Gross Profit....................................... 73,726,000 49,772,000 38,953,000
Selling, General and Administrative Expenses....... 33,913,000 25,173,000 21,218,000
---------------- ---------------- --------------
Income From Operations............................. 39,813,000 24,599,000 17,735,000
Interest Expense................................... 2,329,000 320,000 1,076,000
Interest Income.................................... 419,000 300,000 300,000
---------------- ---------------- --------------
Income Before Minority Interest and Income
Tax Expense..................................... 37,903,000 24,579,000 16,959,000
Minority Interest.................................. 1,397,000 -- --
---------------- ---------------- --------------
Income Before Income Tax Expense................... 36,506,000 24,579,000 16,959,000
Income Tax Expense................................. 15,920,000 10,323,000 6,854,000
---------------- ---------------- --------------
Net Income......................................... $ 20,586,000 $ 14,256,000 $ 10,105,000
---------------- ---------------- --------------
---------------- ---------------- --------------
Basic Earnings Per Share........................... $ 0.74 $ 0.61 $ 0.46
---------------- ---------------- --------------
---------------- ---------------- --------------
Diluted Earnings Per Share......................... $ 0.71 $ 0.58 $ 0.45
---------------- ---------------- --------------
---------------- ---------------- --------------
Weighted Average Common Shares Outstanding:
Basic........................................ 27,970,000 23,371,000 21,851,000
---------------- ---------------- --------------
---------------- ---------------- --------------
Diluted...................................... 29,191,000 24,656,000 22,581,000
---------------- ---------------- --------------
---------------- ---------------- --------------
See accompanying Notes to Consolidated Financial Statements.
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FISCAL YEARS ENDED SEPTEMBER 29, 1996, SEPTEMBER 28, 1997 AND OCTOBER 4, 1998
EXCHANGEABLE STOCK COMMON STOCK ADDITIONAL
------------------------- ------------------- PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS TOTAL
----------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 1995
as previously reported.............. -- $ -- 16,544,136 $ 165,000 $ 21,760,000 $ 19,571,000 $ 41,496,000
Five-for-four common stock
split (see Note 7)............. 4,136,034 42,000 (42,000)
----------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 1995 -- -- 20,680,170 207,000 21,718,000 19,571,000 41,496,000
Net income....................... 10,105,000 10,105,000
Payment for fractional shares.... (264) (3,000) (3,000)
Shares issued in acquisition.... 1,234,744 12,000 10,301,000 10,313,000
Stock options exercised.......... 158,790 2,000 682,000 684,000
Tax benefit for disqualifying
dispositions of stock options.. 674,000 674,000
----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 29, 1996 -- -- 22,073,440 221,000 33,372,000 29,676,000 63,269,000
Net income....................... 14,256,000 14,256,000
Shares issued in acquisitions.... 3,439,330 34,000 27,016,000 27,050,000
Stock options exercised.......... 225,949 2,000 1,308,000 1,310,000
Shares issued in Employee Stock
Purchase Plan.................. 154,099 2,000 1,280,000 1,282,000
Tax benefit for disqualifying
dispositions of stock options.. 474,000 474,000
----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 28, 1997 -- -- 25,892,818 259,000 63,450,000 43,932,000 107,641,000
Net income....................... 20,586,000 20,586,000
Shares issued in acquisitions.... 345,948 4,000 5,520,000 5,524,000
Stock options exercised.......... 352,265 4,000 2,613,000 2,617,000
Payment for fractional shares.... (726) (7,000) (7,000)
Shares issued in Employee Stock
Purchase Plan.................. 115,545 1,000 1,505,000 1,506,000
Preferred shares converted to
common stock................... 1,924,750 19,000 13,507,000 13,526,000
Exchangeable shares of a subsidiary
issued in acquisitions......... 920,354 15,411,000 15,411,000
Tax benefit for disqualifying
dispositions of stock options. 977,000 977,000
----------------------------------------------------------------------------------------
BALANCE, OCTOBER 4, 1998 920,354 $15,411,000 28,630,600 $ 287,000 $ 87,565,000 $ 64,518,000 $167,781,000
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
TETRA TECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
------------------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
---------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 20,586,000 $ 14,256,000 $ 10,105,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization............................ 6,595,000 4,514,000 3,613,000
Deferred income taxes.................................... (2,899,000) 1,490,000 (519,000)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable...................................... (23,561,000) (3,776,000) 18,043,000
Unbilled receivables..................................... (11,537,000) (8,037,000) (5,916,000)
Prepaid and other current assets......................... (1,375,000) 1,823,000 246,000
Accounts payable......................................... 10,203,000 (3,551,000) (4,080,000)
Accrued compensation..................................... (32,000) (3,909,000) (1,431,000)
Other current liabilities................................ (6,548,000) (1,412,000) (192,000)
Income taxes payable..................................... 1,948,000 (254,000) 1,255,000
------------ ------------ ------------
Net Cash (Used In) Provided By Operating Activities.. (6,620,000) 1,144,000 21,124,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................... (3,511,000) (2,640,000) (2,385,000)
Proceeds from sale of property and equipment.................. -- 44,000 71,000
Payments for business acquisitions, net of cash acquired...... (37,778,000) (1,237,000) (6,441,000)
------------ ------------ ------------
Net Cash Used In Investing Activities................ (41,289,000) (3,833,000) (8,755,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations............................. (39,580,000) (6,797,000) (25,048,000)
Proceeds from issuance of long-term obligations............... 76,000,000 13,000,000 5,003,000
Payments on obligations under capital leases.................. -- -- (6,000)
Proceeds from issuance of common stock........................ 4,116,000 2,619,000 681,000
------------ ------------ ------------
Net Cash Provided By (Used In) Financing Activities.. 40,536,000 8,822,000 (19,370,000)
------------ ------------ ------------
Net (Decrease) Increase in Cash and Cash Equivalents............. (7,373,000) 6,133,000 (7,001,000)
Cash and Cash Equivalents at Beginning of Year................... 12,262,000 6,129,000 13,130,000
------------ ------------ ------------
Cash and Cash Equivalents at End of Year......................... $ 4,889,000 $ 12,262,000 $ 6,129,000
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................... $ 2,129,000 $ 309,000 $ 1,149,000
------------ ------------ ------------
------------ ------------ ------------
Income taxes............................................... $ 17,195,000 $ 9,407,000 $ 6,123,000
------------ ------------ ------------
------------ ------------ ------------
(Continued)
Fiscal Year Ended
------------------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
---------------- --------------- ------------
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
In fiscal 1998, the Company purchased all of the capital stock of C.D.C.
Engineering, Inc., McNamee, Porter & Seeley, Inc. and the Sentrex
Group of Companies. The Company also purchased certain assets of
Brown & Root, Inc. and Halliburton Corporation. In conjunction with
these acquisitions, liabilities were assumed as follows:
Fair value of assets acquired.......................................... $ 79,639,000
Cash paid.............................................................. (37,778,000)
Issuance of common and exchangeable stock.............................. (20,935,000)
Other acquisition costs................................................ (985,000)
------------
Liabilities assumed................................................ $ 19,941,000
------------
------------
In fiscal 1997, the Company purchased all of the capital stock of IWA
Engineers, FLO Engineering, Inc., SCM Consultants, Inc., Whalen &
Company, Inc., Whalen Service Corps Inc. and CommSite Development
Corporation. In conjunction with these acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired........................................... $ 66,386,000
Cash paid.............................................................. (8,811,000)
Purchase price payable................................................. (729,000)
Issuance of common and preferred stock................................. (40,577,000)
Other acquisition costs................................................ (2,111,000)
------------
Liabilities assumed................................................ $ 14,158,000
------------
------------
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
------------
------------
(Concluded)
See accompanying Notes to Consolidated Financial Statements.
TETRA TECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED OCTOBER 4, 1998,
SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS - Tetra Tech, Inc. (the "Company") provides specialized management
consulting and technical services in three principal business areas: resource
management, infrastructure and communications. The Company's management
consulting services are complemented by its technical services. These technical
services, which implement solutions, include research and development, applied
science, engineering and architectural design, construction management, and
operations and maintenance.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
FISCAL YEAR - The Company reports results of operations based on 52- or
53-week periods ending near September 30. Fiscal year 1998 contained 53 weeks.
Fiscal years 1997 and 1996 contained 52 weeks.
CONTRACT REVENUE AND COSTS - In the course of providing its services, the
Company routinely subcontracts for services. These costs are passed through to
clients and, in accordance with industry practice, are included in the Company's
gross revenue. Because subcontractor services can change significantly from
project to project, changes in gross revenue may not be indicative of business
trends. Accordingly, the Company also reports net revenue, which is gross
revenue less the cost of subcontractor services. Contract 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
revenue 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.
Selling, general and administrative costs are expensed in the period
incurred.
Contract revenue under Federal government contracts and subcontracts
accounted for approximately 48.7%, 52.3% and 61.7%, of net contract revenue for
the years ended October 4, 1998, September 28, 1997 and September 29, 1996,
respectively.
CASH AND CASH EQUIVALENTS - Cash equivalents include all investments with
initial maturities of 90 days or less.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost and
are depreciated over their estimated useful lives using the straight-line
method. Expenditures for maintenance and repairs are expensed as incurred.
Generally, estimated useful lives range from three to ten years for
equipment, furniture and fixtures. Leasehold improvements are amortized on a
straight-line basis over the shorter of their estimated useful lives or the
remaining terms of the leases.
LONG-LIVED ASSETS - The Company reviews the recoverability of long-lived
assets to determine if there has been any impairment. This assessment is
performed based on the estimated undiscounted cash flows compared with the
carrying value of the assets. If the future cash flows (undiscounted and
without interest charges) are less than the carrying value, a writedown would
be recorded to reduce the related asset to its estimated fair value.
Long-lived assets as of October 4, 1998 and September 28, 1997 consist
principally of goodwill resulting from business acquisitions which is being
amortized over periods ranging from 15 to 30 years. The accumulated
amortization of intangible assets as of October 4, 1998 and September 28,
1997 was $6,490,000 and $3,522,000, respectively.
INCOME TAXES - The Company files a consolidated federal income tax return
and combined California franchise tax reports, as well as other returns which
are required in the states in which the Company does business, which include the
Company and its subsidiaries. Income taxes are recognized for (a) the amount of
taxes payable or refundable for the current period, and (b) deferred income tax
assets and liabilities for the future tax consequences of events that have been
recognized in the Company's financial statements or income tax returns. The
effects of income taxes are measured based on enacted tax laws and rates.
EARNINGS PER SHARE - Due to the Company's complex capital structure, the
Company presents both basic and diluted Earnings Per Share (EPS). Basic EPS
excludes dilution and is computed by dividing the income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed by dividing 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 of
shares of exchangeable stock of a subsidiary, the weighted average number of
shares of redeemable preferred stock and the weighted average dilutive effects
of outstanding stock options. The exchangeable stock of a subsidiary is
non-voting and is exchangeable share for share for the Company's common stock.
The redeemable preferred stock has voting and dividend rights substantially
similar to those of common. The redeemable preferred stock outstanding at
September 28, 1997 was converted to common stock during the fiscal year ended
October 4, 1998. Basic and diluted EPS reflect, on a retroactive basis, a
5-for-4 stock split effected in the form of a 25% stock dividend, wherein one
additional share of stock was issued on September 15, 1998 for each four shares
outstanding as of the record date of July 27, 1998.
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 quality financial institutions and, by policy, limits the amount of
investment exposure to any one financial institution. As of October 4, 1998,
approximately 44% of accounts receivable was due from various agencies of the
Federal government. The remaining accounts receivable are generally diversified
due to the large number of organizations comprising the
Company's customer base and their geographic dispersion. The Company performs
ongoing credit evaluations of its clients and maintains an allowance for
potential credit losses.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial Acounting
Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS)
No. 128, EARNINGS PER SHARE, which the Company adopted in fiscal year 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 companies 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. EPS has been retroactively restated to reflect
the requirements of SFAS No. 128.
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 (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company will adopt this
Statement in fiscal year 1999.
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED Information. The Statement is effective for fiscal
years beginning after December 15, 1997. The Statement establishes standards for
the way that public business enterprises report information about operating
segments as well as related disclosures about products and services, geographic
areas, and major clients. The Statement also requires that a public business
report descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period. The Statement need
not be applied to interim financial statements in the initial year of its
application. The Company has not yet completed its analysis of the effect of
SFAS No. 131 on its financial statements. The Company will adopt this Statement
in fiscal year 1999.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES AND
HEDGING ACTIVITIES. The Statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. The Statement requires companies to
recognize all derivative instruments on their balance sheet as either assets or
liabilities measured at fair value. The Statement also specifies a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. The Company does not anticipate that the adoption
of SFAS No. 133 will have a material effect on the Company's financial
statements. The Company will adopt this Statement in fiscal year 2001.
2. MERGERS AND ACQUISITIONS
On September 22, 1998, the Company acquired, through its wholly-owned
subsidiary Tetra Tech Canada Ltd. (TtC), 100% of the capital stock of 1056584
Ontario Limited, 1056585 Ontario Limited, Venture Cable Limited, Cen-Comm
Communications, Inc., Sentrex Electronics Inc. and LAL Corp., collectively, the
Sentrex Group of Companies (SGOC), providers of engineering and technical
services to the cable television, telephony and data networking industries. The
purchase has been valued at approximately $19,227,000 consisting of cash and
920,354 shares of TtC exchangeable stock. The TtC exchangeable stock is
exchangeable, share for share, for Company common stock as described in the
related purchase agreement.
On July 8, 1998, the Company acquired 100% of the capital stock of McNamee,
Porter & Seeley, Inc. (MPS), a provider of engineering services with expertise
in the areas of water, industrial wastewater and process controls. The purchase
was valued at approximately $14,247,000 consisting of cash and 274,888 shares of
Company common stock. Simultaneously with the acquisition, MPS distributed to
its former stockholders accounts receivable having a net value of $8,040,000.
On March 26, 1998, the Company acquired 100% of the capital stock of C.D.C.
Engineering, Inc. (CDE), a consulting and engineering firm specializing in civil
engineering, transportation engineering, structural engineering and land
surveying. The purchase has been valued at approximately $1,502,000, consisting
of cash and 71,060 shares of Company common stock.
On March 2, 1998, Whalen Service Corps Inc. (WSC) agreed to participate in
a partnership with Sentrex Cen-Comm and ANTEC Corporation to provide design,
engineering, information management and construction services to support
advanced communication system upgrades to the broadband information transport
industries. The agreement required the purchase of certain assets of TANCO LLC
from ANTEC Corporation for a price in cash of approximately $623,000. WSC
initially held a 51% majority interest in Whalen/Sentrex LLC, a California
limited liability company while LAL Corp. held the remaining 49% minority
interest. Upon completion of the SGOC acquisition, the Company beneficially owns
100% of Whalen/Sentrex LLC.
On December 31, 1997, the Company acquired, through its wholly-owned
subsidiary Tetra Tech NUS, Inc., the assets of certain environmental services
businesses of Brown & Root, Inc. and Halliburton Corporation, both of which are
subsidiaries of Halliburton Company (collectively, NUS). NUS provides
consulting, engineering and design services for the environmental remediation of
contaminated air, water and soil conditions. The purchase price has been valued
at approximately $25,217,000, as adjusted, and consisted of cash.
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 397,598 shares of Company common stock, as
adjusted based on CDC's Net Asset Value on July 11, 1997 as described in the
related purchase agreement.
On 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
4,549,750 shares of Company common stock. Initially, the Company issued
1,231,840 shares of redeemable preferred stock. The shares of redeemable
preferred stock were subsequently converted into common stock prior to the stock
split which occurred on December 1, 1997. The common and preferred stock were
issued in a private placement and had a combined value of
$31,972,000. On the business day prior to the merger, WAC distributed to its
stockholders (i) cash in the amount of $4,138,000 and (ii) accounts receivable
having a net value of $18,456,000.
On 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
clients. The purchase was valued at approximately $2,431,000, consisting of cash
and 246,965 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 50,172 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 clients. The
purchase was valued at approximately $1,632,000, consisting of cash and 119,593
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 1,234,744 shares of Company common stock issued in a private placement.
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 Company values stock exchanged in
acquisitions based on extended restriction periods and economic factors specific
to the Company's circumstances. During fiscal 1998, stock exchanged in
acquisitions was discounted by 15%. During fiscal 1997, the discount on stock
exchanged in acquisitions ranged from 16% to 28%. During fiscal 1996, stock
exchanged in the acquisition was discounted by 26%. 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 SGOC, CDE, SCM,
FLO and IWA acquisitions, had they been acquired on September 30, 1996, is not
material.
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired MPS, NUS, CDC and WAC on
September 30, 1996:
Fiscal Year Ended
-----------------------------------------------------------
Oct. 4, 1998 Sept. 28, 1997
-----------------------------------------------------------
Gross revenue $ 429,591,000 $ 420,294,000
Income before income tax expense 37,958,000 33,637,000
Net income 21,446,000 19,510,000
Basic earnings per share $ 0.76 $ 0.72
Diluted earnings per share 0.73 0.69
Weighted average shares common outstanding:
Basic 28,176,000 26,977,000
Diluted 29,397,000 28,262,000
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at October 4, 1998 and
September 28, 1997:
Oct. 4, 1998 Sept. 28, 1997
--------------- ---------------
Billed accounts receivable............................... $ 71,745,000 $ 31,435,000
--------------- ---------------
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................ 58,384,000 31,626,000
Costs and fee retention billable upon audit of total
contract costs .................................. 11,278,000 13,326,000
--------------- ---------------
Total unbilled accounts receivable ...................... 69,662,000 44,952,000
--------------- ---------------
Allowance for uncollectible accounts:
Allowance for doubtful accounts..................... (2,911,000) (1,346,000)
Allowance for disallowed costs ..................... (9,774,000) (9,807,000)
--------------- ---------------
Total allowance for uncollectible accounts.............. (12,685,000) (11,153,000)
--------------- ---------------
Total ................................................... $ 128,722,000 $ 65,234,000
--------------- ---------------
--------------- ---------------
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. On September 15, 1995, the Company acquired Tetra Tech EM Inc.
(EMI). EMI likewise contracts with the Federal government. At the time of
acquisition, audits had not been performed for years beyond 1986. As of
September 1998, audits and negotiations relating to the EMI contracts for years
1987 through 1995 had been completed, and cost disallowances as a result of
audits totaled approximately $2,900,000. It has been determined by the Federal
government that for these periods the Company is entitled to payments,
however, the 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.
As of October 4, 1998, the Company has approximately $5,200,000 under
retainage provisions of contracts and approximately $2,166,000 of accounts
receivable which may not be realized within one year.
4. INCOME TAXES
Income tax expense for the years ended October 4, 1998, September 28, 1997
and September 29, 1996 consisted of the following:
Fiscal Year Ended
-------------------------------------------------------
Oct. 4, Sept. 28, Sept. 29,
1998 1997 1996
------------- ------------- -------------
Current:
Federal............................ $ 15,284,000 $ 9,220,000 $ 5,849,000
State.............................. 3,535,000 2,291,000 1,462,000
Deferred ............................. (2,899,000) (1,188,000) (457,000)
------------- ------------- -------------
Total income tax expense.............. $ 15,920,000 $ 10,323,000 $ 6,854,000
------------- ------------- -------------
------------- ------------- -------------
Temporary differences comprising the net deferred income tax asset shown on
the consolidated balance sheets were as follows:
Oct. 4, Sept. 28,
1998 1997
------------- -------------
Allowance for doubtful accounts............................. $ 3,662,000 $ 2,513,000
Cash to accrual............................................. (1,250,000) (2,275,000)
Accrued vacation............................................ 1,247,000 495,000
State taxes................................................. 1,038,000 (21,000)
Prepaid expense............................................. (632,000) (104,000)
Depreciation................................................ (299,000) (369,000)
Other....................................................... -- 628,000
------------- -------------
Net deferred income tax asset............................... $ 3,766,000 $ 867,000
------------- -------------
------------- -------------
Total income tax expense was different than the amount computed by applying
the federal statutory rate as follows:
Fiscal Year Ended
--------------------------------------------------------------------------
Oct. 4, 1998 Sept. 28, 1997 Sept. 29, 1996
------------------------ ------------------------- -----------------------
Amount % Amount % Amount %
------------- ------ ------------- ------- ------------ ------
Tax at federal statutory rate.......... $ 12,777,000 35.0% $ 8,603,000 35.0% $ 5,936,000 35.0%
State taxes, net of federal benefit.... 1,898,000 5.2 1,348,000 5.5 933,000 5.5
Goodwill............................... 990,000 2.7 528,000 2.1 384,000 2.3
Other.................................. 255,000 0.7 (156,000) (0.6) (399,000) (2.4)
------------- ------ ------------- ------- ------------ ------
Total income tax expense............... $ 15,920,000 43.6% $10,323,000 42.0% $6,854,000 40.4%
------------- ------ ------------- ------- ------------ ------
------------- ------ ------------- ------- ------------ ------
5. LONG-TERM OBLIGATIONS
The Company has a credit agreement (as amended, the "Credit Agreement")
with a bank to support its working capital and acquisition needs. At October 4,
1998, the Credit Agreement provided a revolving credit facility of $70,000,000.
The Credit Agreement provides for mandatory reductions of $5,000,000 on December
15, 1998 and December 15, 1999.
Interest on borrowings under the Credit Agreement is payable at the
Company's option (a) at a base rate (the greater of the federal funds rate plus
0.50% or the bank's reference rate) as defined in the Credit Agreement or (b) at
a eurodollar rate plus a margin which ranges from 0.75% to 1.25%. The weighted
average interest rate on outstanding borrowings at October 4, 1998 was 6.34375%.
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 October 4, 1998, outstanding borrowings totaled $47,000,000 and standby
letters of credit totaled $2,207,000.
6. EXCHANGEABLE STOCK OF A SUBSIDIARY
In connection with the SGOC acquisition, the Company issued 920,354 shares
of exchangeable stock of its subsidiary Tetra Tech Canada Ltd. (the
"Exchangeable Shares"), a corporation existing under the laws of the Province of
Ontario, Canada. The Exchangeable Shares are non-voting but carry exchange
rights whereas a holder of Exchangeable Shares shall be entitled, at any time
after five months from the date of issue of the Exchangeable Shares, to require
the Company to redeem all or any part of the Exchangeable Shares for an amount
per share equal to (a) the current market price of a share of the Company's
common stock, which shall be satisfied in full by the Company causing to be
delivered to such holder one share of the Company's common stock for each
Exchangeable Share presented and surrendered, plus (b) a dividend amount, if
any. The Exchangeable Shares cannot be put back to the Company for cash.
7. STOCKHOLDERS' EQUITY
On September 14, 1998, 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
30,000,000 to 50,000,000. On September 15, 1998, the Company paid a
five-for-four split of the Company's common stock, effected in the form of a 25%
stock dividend, payable on September 15, 1998 to the stockholders of record on
July 27, 1998. 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 953,672 shares of the Company's
common stock at prices ranging from 85% to 100% of the market value on the date
of grant. All options granted to date by the Company have been at 100% of the
market value as determined by the Board of Directors at the date of grant. These
options become exercisable beginning one year from date of grant, become fully
vested in four years and terminate ten years from the date of grant.
The Company also has a 1992 Incentive Stock Plan under which key employees
may be granted options to purchase an aggregate of 4,609,375 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 114,438 shares of
the Company's common stock at prices not less than the market value on the date
of grant. These options vest and become exercisable when, and only if, the
optionee continues to serve as a director until the Annual Meeting following the
year in which the options were granted.
The Company also has an Employee Stock Purchase Plan (the "Purchase Plan")
which provides for the granting of Purchase Rights to purchase common stock to
regular full and part-time employees or officers of the Company and its
subsidiaries. Under the Purchase Plan, shares of common stock will be issued
upon exercise of the Purchase Rights. Under the Purchase Plan, an aggregate of
878,906 shares may be issued pursuant to the exercise of Purchase Rights. The
maximum amount that an employee can contribute during a Purchase Right Period is
$4,000, and the minimum contribution per payroll period is $25.
Under the Purchase Plan, the exercise price of a Purchase Right will be the
lesser of 100% of the fair market value of such shares on the first day of the
Purchase Right Period or 85% of the fair market value on the last day of the
Purchase Right Period. For this purpose, the fair market value of the stock is
its closing price as reported on the Nasdaq Stock Market on the day in question.
During the three years in the period ended October 4, 1998, option activity
was as follows:
Number Weighted Average
of Options Exercise Price
-------------- -----------------
Balance, October 1, 1995........................ 1,565,270 $ 5.82
Granted.................................... 644,667 11.36
Exercised.................................. (158,791) 4.30
Cancelled.................................. (81,901) 7.11
------------ ------------
Balance, September 29, 1996..................... 1,969,245 7.70
Granted.................................... 762,692 12.56
Exercised.................................. (225,948) 5.80
Cancelled.................................. (167,614) 9.62
------------ ------------
Balance, September 28, 1997..................... 2,338,375 9.33
Granted.................................... 569,566 16.89
Exercised.................................. (352,265) 7.43
Cancelled.................................. (187,206) 12.61
------------ ------------
Outstanding at October 4, 1998.................. 2,368,470 $ 11.17
------------ ------------
------------ ------------
Exercisable at October 4, 1998.................. 1,086,166 $ 8.04
------------ ------------
------------ ------------
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
------------------ ----------- --------------- ------------ ----------- ----------
$0.69 - $1.18 47,711 2.47 $ 1.08 47,711 $ 1.08
$3.14 - $6.96 431,888 5.13 5.57 419,678 5.53
$7.01 - $12.32 921,779 7.14 10.11 525,724 9.78
$12.80 - $15.70 660,917 8.79 13.95 93,053 13.08
$16.00 - $20.88 306,175 9.49 17.85 -- --
------------ ----------- ---------- ----------- ----------
2,368,470 7.44 $ 11.17 1,086,166 $ 8.04
------------ ----------- ---------- ----------- ----------
------------ ----------- ---------- ----------- ----------
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 Year Ended
--------------------------------------------------------------
Oct. 4, 1998 Sept. 28, 1997 Sept. 29, 1996
------------------- ------------------- ------------------
Net income-as reported.............................. $ 20,586,000 $ 14,256,000 $ 10,105,000
Net income-pro forma................................ 18,980,000 13,059,000 9,598,000
Basic earnings per share-as reported................ $ 0.74 $ 0.61 $ 0.46
Diluted earnings per share-as reported.............. 0.71 0.58 0.45
Basic earnings per share-pro forma.................. 0.68 0.56 0.44
Diluted earnings per share-pro forma................ 0.65 0.53 0.43
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 fiscal 1998, 1997 and 1996 are $5.79, $4.13 and
$3.65, respectively. The following assumptions were used in completing the
model:
Fiscal Year Ended
--------------------------------------------------------------
Oct. 4, 1998 Sept. 28, 1997 Sept. 29, 1996
------------------- ------------------- ------------------
Dividend yield...................................... 0.0% 0.0% 0.0%
Expected volatility................................. 42.5% 40.5% 39.1%
Risk-free rate of return, annual.................... 6.4% 6.4% 6.4%
Expected life....................................... 3.11 yrs. 2.76 yrs. 2.76 yrs.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earning
per share:
Fiscal Year Ended
-------------------------------------------------
Oct. 4, 1998 Sept 28, 1997 Sept. 29, 1996
--------------- --------------- ---------------
Numerator--
Net income: $ 20,586,000 $ 14,256,000 $ 10,105,000
--------------- --------------- ---------------
Denominator:
Denominator for basic earnings per share--
weighted-average shares 27,970,000 23,371,000 21,851,000
Effect of dilutive securities:
Stock options 1,040,000 709,000 730,000
Redeemable preferred stock 151,000 576,000 --
Exchangeable stock of a subsidiary 30,000 -- --
-------------- -------------- --------------
Dilutive potential common shares 1,221,000 1,285,000 730,000
Denominator for diluted earnings per share--
adjusted weighted-average shares and
assumed conversions 29,191,000 24,656,000 22,581,000
-------------- -------------- --------------
-------------- -------------- --------------
Basic earnings per share $ 0.74 $ 0.61 $ 0.46
-------------- -------------- --------------
-------------- -------------- --------------
Diluted earnings per share $ 0.71 $ 0.58 $ 0.45
-------------- -------------- --------------
-------------- -------------- --------------
9. LEASES
The Company leases land, buildings and equipment under various
operating leases. Rent expense under all operating leases was approximately
$13,458,000, $10,204,000 and $9,462,000 for the fiscal years ended October 4,
1998, September 28, 1997 and September 29, 1996, respectively. Amounts
payable under noncancelable operating lease commitments are as follows during
the fiscal years ending in:
1999....................................................................... $ 14,838,000
2000....................................................................... 11,979,000
2001....................................................................... 9,569,000
2002....................................................................... 5,697,000
2003....................................................................... 3,903,000
Thereafter................................................................. 4,036,000
--------------
Total...................................................................... $ 50,022,000
--------------
--------------
10. RETIREMENT PLANS
The Company and its subsidiaries have established defined contribution
plans and 401(k) plans. Generally, employees are eligible to participate in the
defined contribution plans upon completion of one year of service and in the
401(k) plans upon commencement of employment. For the fiscal years ended October
4, 1998, September 28, 1997 and September 29, 1996 employer contributions
relating to the plans were approximately $3,952,000, $3,536,000 and $4,002,000,
respectively.
11. CONTINGENCIES
The Company is subject to certain claims and lawsuits typically filed
against the engineering and consulting professions, primarily alleging
professional errors or omissions. The Company carries professional liability
insurance, subject to certain deductibles and policy limits against such claims.
Management is of the opinion that the resolution of these claims will not have a
material adverse effect on the Company's financial position.
12. QUARTERLY FINANCIAL INFORMATION - UNAUDITED
In the opinion of management, the following unaudited quarterly data for
the years ended October 4, 1998 and September 28, 1997 reflect all
adjustments necessary for a fair statement of the results of operations. All
such adjustments are of a normal recurring nature. (In thousands, except per
share data)
First Second Third Fourth
Fiscal Year 1998 Quarter Quarter Quarter Quarter
- ---------------- ------- ------- ------- -------
Gross revenue................................ $ 66,438 $ 92,727 $ 98,231 $ 125,538
Net revenue.................................. 53,664 71,806 75,149 96,978
Gross profit................................. 13,325 17,020 20,744 22,637
Income from operations....................... 7,179 8,872 11,411 12,351
Net income................................... 4,051 4,521 5,493 6,521
Basic earnings per share..................... $ 0.15 $ 0.16 $ 0.20 $ 0.23
Diluted earnings per share .................. 0.14 0.16 0.19 0.22
Weighted average common shares
outstanding:
Basic................................... 27,217 27,905 28,147 28,567
Diluted................................. 28,834 28,956 29,201 29,719
First Second Third Fourth
Fiscal Year 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
Basic earnings per share..................... $ 0.12 $ 0.13 $ 0.16 $ 0.20
Diluted earnings per share .................. 0.11 0.13 0.15 0.18
Weighted average common shares
outstanding:
Basic................................... 22,110 22,306 23,178 25,811
Diluted................................. 22,951 22,865 24,065 28,656
SECURITIES INFORMATION
Tetra Tech's common stock is traded on the Nasdaq Stock Market under the
symbol WATR. There were 891 stockholders of record as of December 9, 1998. 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 September 1998.
FISCAL YEAR 1998 HIGH LOW
---------------- ---- ---
First Quarter $17.76 $14.90
Second Quarter 19.20 15.20
Third Quarter 20.20 15.60
Fourth Quarter 23.00 15.40
FISCAL YEAR 1997 HIGH LOW
---------------- ---- ---
First Quarter $16.32 $11.92
Second Quarter 13.28 7.84
Third Quarter 14.80 8.88
Fourth Quarter 18.08 13.44