SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(MARK ONE)
/X/ Annual report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended October 4, 1998.
/ / Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________
to__________.
Commission file number 0-19655
TETRA TECH, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 95-4148514
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
670 N. Rosemead Blvd.
Pasadena, California 91107
(Address of registrant's principal executive offices) (Zip Code)
(Registrant's telephone number, including area code:) (626) 351-4664
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
None None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant on December 18, 1998 was $577,495,874.
The number of shares of Common Stock, $.01 par value, outstanding (the only
class of common stock of the registrant outstanding) was 28,666,131 on December
18, 1998.
Portions of registrant's Annual Report to Stockholders for the fiscal year ended
October 4, 1998 are incorporated by reference in Part II of this report.
Portions of registrant's Proxy Statement for our 1999 Annual Meeting of
Stockholders are incorporated by reference in Part III of this report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The undersigned Registrant hereby amends the following items of its
Annual Report on Form 10-K for the fiscal year ended October 4, 1998, as
set forth below:
PART I
ITEM 1. BUSINESS.
Tetra Tech, Inc. is a leading provider of specialized management
consulting and technical services in three principal business areas: resource
management, infrastructure and communications. As a specialized management
consultant, we assist our clients in defining problems and developing
innovative and cost-effective solutions. Our management consulting services
are complemented by our technical services. These technical services, which
implement solutions, include research and development, applied science,
engineering and architectural design, construction management, and operations
and maintenance. Our clients include a diverse base of public and private
organizations located in the United States and internationally.
Since our initial public offering in December 1991, we have increased
the size and scope of our business and have expanded our service offerings
through a series of strategic acquisitions and internal growth. As of the end
of our last fiscal year, we had more than 3,600 employees worldwide, 3,500 of
whom are located in North America in more than 100 locations. In addition, we
have established a presence in Asia, South America and Europe. 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%.
INDUSTRY OVERVIEW
Due to increased competition, changing regulatory environments and rapid
technological advancement, many organizations face new and complex challenges.
Increasingly, these organizations are turning to professional services firms to
assist them with addressing these challenges. Since each industry presents its
own unique set of challenges, organizations often seek professional service
firms with industry-specific expertise to analyze their problems and develop
appropriate solutions. These solutions are then implemented by firms possessing
the required engineering and technical service capabilities. Each of the
following three business areas faces its own unique set of problems:
RESOURCE MANAGEMENT. The world's natural resources, including water, air
and soil, are interdependent, creating a delicate balance. Factors such as
agricultural and residential development, commercial construction and
industrialization often upset this balance. Public concern over environmental
issues, especially water quality and availability, has been a driving force
behind numerous laws and regulations that are designed to prevent environmental
degradation and mandate restorative measures. To comply with environmental laws
and regulations, respond to public pressure and attain operating efficiencies,
public and private organizations are increasing their focus on resource
management. Two areas particularly affected by these trends are water management
and waste management.
- Water Management. Insufficient water supplies, concern over the
cost, quality and availability of water and the need in many parts of the
world to replace aging infrastructure used to capture, safeguard and
distribute water are critical social and economic concerns. According to
the U.S. Environmental Protection Agency (EPA), contamination of
groundwater and surface water resulting from agricultural, residential,
commercial and industrial development is one of the most serious
environmental problems facing the United States. To alleviate these social
and economic concerns, public and private organizations seek water
management advice. According to the ENVIRONMENTAL BUSINESS JOURNAL, the
size of the consulting, engineering services and wastewater treatment
segments of the water management industry totaled more than $30 billion in
1997.
- Waste Management. In the past, many waste disposal practices
caused significant environmental damage. Since the 1970s, more stringent
controls on municipal and industrial waste have been established by
governments around the world to protect the environment. Recently, the
Federal government has committed approximately $15 billion to various
environmental initiatives in an attempt to curb pollution, accelerate
toxic waste cleanups and
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combat other forms of pollution. Organizations seek waste management
advice to comply with complex and evolving environmental regulations, to
minimize the economic impact of waste generation and disposal, and to
realize significant costs savings through increased operating
efficiencies.
INFRASTRUCTURE. Continued population and economic growth places
significant strain on an overburdened infrastructure, thereby requiring
additional development. This development includes water and wastewater treatment
plants, roads, pipelines, communication and power networks, and educational,
recreational and correctional facilities. Additionally, as existing facilities
age, they require upgrading or replacement. Further, the trend toward
privatization of infrastructure is causing public and private organizations that
develop and maintain these facilities to evaluate their cost structures and
establish more efficient systems. These factors drive the need for development
and planning services that are often provided by consulting firms. According to
the ENGINEERING NEWS-RECORD, the market opportunity in the United States for
technical services in infrastructure development including water and wastewater,
transportation, hazardous waste, and educational, recreational and correctional
facilities, ranges from $15 to $20 billion.
COMMUNICATIONS. Technological change and government deregulation have
spurred sweeping changes in the communications industry. Local and long-distance
telephone companies, cable operators and wireless service providers are
penetrating each other's markets and trying to establish a foothold in new
markets created by new technologies. For example, traditional cable operators
are installing advanced capabilities such as digital cable, cable modem, cable
telephony and other high-speed data transmission services. At the same time,
various service providers are consolidating in order to offer their subscribers
a comprehensive set of services and to maintain dominance in their markets. As
these trends continue, network service providers will increasingly turn to
professional service firms for advice and assistance in planning, deploying and
maintaining their communications networks.
Organizations within each of the above business areas face unique
problems but often lack the internal resources and experience necessary to
identify issues and evaluate possible solutions. As a result, many of these
organizations rely on advice from outside management consultants. Most
consulting companies provide limited front-end problem assessment and solution
design and require clients to engage other engineering and technical services
companies to implement recommended solutions. A significant opportunity exists
for consulting companies that not only develop, but also implement, solutions.
These professional service firms are often in the best position to help clients
respond to the challenges they face.
THE TETRA TECH SOLUTION
Tetra Tech provides the specialized management consulting services that
assist clients in identifying industry-specific problems and defining
appropriate solutions. We also provide the technical services required to
implement these solutions. We believe that we are a leader in this market and
that the following factors distinguish us from our competitors:
UNDERSTANDING CLIENT NEEDS. The ability to identify client needs is
essential to strategic planning and execution. Even before the proposal process
begins, we assist our clients by helping them define their business objectives
and strategies and identify issues that are critical to their success. We strive
to develop numerous contacts at various levels within our clients' organizations
to help us identify the key issues from a variety of perspectives. We believe
that our long history and exposure to a broad client base increase our awareness
of the issues being confronted by organizations and thereby help us identify and
solve our clients' problems.
CAPITALIZING ON OUR EXTENSIVE TECHNICAL EXPERIENCE. Since our inception
in 1966, we have provided innovative consulting and engineering services,
historically focusing on cost-effective solutions to water resource management
and environmental problems. We have been successful in leveraging this
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foundation of scientific and engineering capabilities into other areas,
including infrastructure and communications. Our services are provided by a wide
range of professionals including: archaeologists, biologists, chemical
engineers, chemists, civil engineers, computer scientists, economists,
electrical engineers, environmental engineers, environmental scientists,
geologists, hydrogeologists, mechanical engineers, oceanographers and
toxicologists. Because of the experience that we have gained from thousands of
completed projects, we often are able to apply proven solutions to client
problems without the time-consuming process of developing new approaches.
OFFERING A FULL RANGE OF SERVICES. Our depth of consulting and technical
skills allows us to respond to client needs at every phase of a project,
including initial planning, research and development, applied science,
engineering and architectural design, and construction management. Once a
particular project is completed, we are able to offer our clients additional
value-added services such as operations and maintenance. Our expertise across
industries and our broad service offerings enable us to be a single source
provider to our clients.
PROVIDING BROAD GEOGRAPHIC COVERAGE AND LOCAL EXPERTISE. We believe that
proximity to our clients is instrumental to understanding their needs and
delivering comprehensive services. We have significantly broadened our
geographic presence in recent years through strategic acquisitions and internal
growth. Our historical geographic base was primarily in the western portion of
the United States. However, we currently have operations in more than 40 states.
We have also increased our international presence, and we now have operations in
Canada, Taiwan, the Philippines, Argentina, Chile, Brazil and the Czech
Republic.
COMPANY STRATEGY
Our objective is to become the leading provider of specialized management
consulting and technical services in our chosen business areas. To achieve this
objective, we plan to continue the following primary strategies that we believe
have been integral to our success:
IDENTIFY AND EXPAND INTO NEW BUSINESS AREAS. We use our management
consulting services and certain of our technical services as an entry point to
evaluate and to enter new business areas. After our consulting practice is
established in a new business area, we can expand our operations by offering
additional technical services. For example, based on our provision of site
acquisition services to communications industry participants, we identified
infrastructure services within the communications industry as an appropriate
area into which we could expand our operations.
EXPAND SERVICE OFFERINGS AND GEOGRAPHIC PRESENCE THROUGH
ACQUISITIONS. We believe that acquisition opportunities exist that will allow
us to continue our growth in selected business areas, broaden our service
offerings and extend our geographic presence. We intend to make acquisitions
that will enable us to consolidate our position in certain key business areas,
such as communications, or further strengthen our position in our more
established service offerings. We believe that our reputation and public company
status make us an attractive partner and provide us with an advantage in
pursuing acquisitions.
FOCUS ON GOVERNMENT PROJECTS. We intend to continue marketing to
government organizations and bidding for government projects to stay on the
leading edge of policy development. This experience helps us identify market
opportunities and enhances our ability to serve other public and private
clients. Additionally, government contracts provide more predictable revenues
than private sector contracts.
MANAGE INTERNAL FINANCIAL CONTROLS. We take a disciplined approach to
monitoring, managing and improving our return on investment in each of our
business areas through the prompt billing and collection of accounts
receivables, the negotiation of favorable contract terms and the management of
our contract performance to prevent cost overruns. We believe that this approach
to managing our
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financial affairs enables us to improve our cash position and thereby fund
acquisitions and internal growth.
LEVERAGE EXISTING CLIENT BASE. Some of our clients engage us to provide
limited services. We believe that we can increase our revenue by selling
additional services to our existing client base. For example, we may be able to
secure an operations and maintenance contract after working with a client on the
design and construction phases of a facility. In addition, we believe that our
ability to offer a full spectrum of services will allow us to grow our business
and compete more effectively for larger projects.
SERVICES
We provide our clients with comprehensive management consulting and
technical services that focus on our clients' industry-specific needs. We offer
these services individually or as part of our full service approach to problem
solving. We are currently performing services under 1,000 active contracts,
ranging from small site investigations to large, complex infrastructure
projects. Our service offerings include:
- MANAGEMENT CONSULTING to assist clients in identifying and addressing
operational and competitive problems they face within their industries;
- RESEARCH AND DEVELOPMENT to formulate solutions to complex problems and
develop advanced computer simulation techniques for modeling problems,
ranging from microscopic to global;
- APPLIED SCIENCE to assess all aspects of problems and develop practical
and cost-effective solutions through the application of new technology
and data interpretation;
- ENGINEERING AND ARCHITECTURAL DESIGN to provide services from concept
development and initial planning and design through project completion;
- CONSTRUCTION MANAGEMENT to provide experienced and specialized
construction managers to assist clients in minimizing the risk of cost
overruns, delays and contractual conflicts; and
- OPERATIONS AND MAINTENANCE to allow clients to outsource routine
functions, permitting them to streamline contractor relationships and
reduce operating costs.
BUSINESS AREAS
We provide our services in the following three principal business areas:
resource management, infrastructure and communications.
RESOURCE MANAGEMENT
One of our major concentrations is water resource management, where we
have a leadership position in understanding the interrelationships of water
quality and human activities. We support high priority government programs for
water quality improvement, environmental restoration, productive reuse of
defense facilities and strategic environmental resource planning. We provide
comprehensive services, including management consulting, research and
development, applied science, engineering and architectural design, construction
management, and operations and maintenance. Our service offerings in the
resource management business area are focused on the following project areas:
SURFACE WATER PROJECTS: Public concern with the quality of rivers, lakes
and streams as well as coastal and marine waters and the ensuing
legislative and regulatory response is driving demand for our services.
Over the past 32 years, we have developed a specialized set of technical
skills that positions us to compete effectively for surface water and
watershed management projects. We provide water resource services to
government clients such as the
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EPA, the Department of Defense (DOD) and the Department of Energy (DOE),
and to a broad base of private sector clients including those in the
chemical, pharmaceutical, utility, aerospace and petroleum industries. We
also provide surface water services to state and local agencies,
particularly in the area of watershed management.
GROUNDWATER PROJECTS: Groundwater is the source of drinking water for
approximately 50% of the U.S. population and accounts for approximately
25% of all water consumed for residential, industrial and agricultural
purposes. Our activities in the groundwater field are diverse and
typically include projects such as investigating and identifying sources
of chemical contamination, examining the extent of contamination,
analyzing the speed and direction of contamination migration, and
designing and evaluating remedial alternatives. In addition, we conduct
monitoring studies to assess the effectiveness of groundwater treatment
and extraction wells.
WASTE MANAGEMENT PROJECTS: We currently provide a wide range of
engineering and consulting services for hazardous waste contamination and
remediation projects, from initial site assessment through design and
implementation phases of remedial solutions. In addition, we perform risk
assessments to determine the probability of adverse health effects that
may result from exposure to toxic substances. We also provide waste
minimization and pollution prevention services, and evaluate the
effectiveness of innovative technologies and novel solutions to
environmental problems.
NUCLEAR ENVIRONMENTAL PROJECTS: The DOE's nuclear weapons plants and
research laboratories face a wide variety of environmental challenges
including groundwater and surface water contamination, hazardous waste
management and environmental compliance. Our services include
environmental impact analyses and documentation, environmental audits and
risk assessments, regulatory compliance support, groundwater
characterization, remedial investigation/feasibility studies, and project
management and oversight. Our environmental analyses provide the DOE with
information it requires in order to make decisions regarding the storage
or disposition of surplus materials from dismantled nuclear weapon
components.
REGULATORY COMPLIANCE PROJECTS: Our regulatory compliance services include
advising our clients on the full spectrum of regulatory requirements under
the Resource Conservation and Recovery Act, the Clean Water Act, the Clean
Air Act, the National Environmental Policy Act and other environmental
laws. Although we provide services to both public and private clients, our
current emphasis is on providing regulatory compliance services to the
Army, Navy and Air Force.
INFRASTRUCTURE
In the infrastructure area, we focus on the development of water resource
projects, institutional facilities, commercial, recreational and leisure
facilities and transportation projects. These facilities are an essential part
of everyday life and also sustain economic activity and the quality of life. Our
engineers, architects and planners work in partnership with our clients to
provide adequate infrastructure development within their financial constraints.
We assist clients with infrastructure projects by providing management
consulting, engineering and architectural design, construction management, and
operations and maintenance. Our service offerings in the infrastructure business
area are focused on the following project areas:
WATER RESOURCE PROJECTS: Our technical services are applied to all aspects
of water quantity and quality management ranging from stormwater
management through drainage and flood control projects to major water and
wastewater treatment plants. Our experience includes planning, design and
construction services for drinking water projects, the design of water
treatment facilities and reservoirs, and the design of distribution
systems including pipelines and pump
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stations. Our capabilities are also applied to specialized technical
challenges associated with the design and construction of fisheries and
hatcheries worldwide.
INSTITUTIONAL FACILITIES PROJECTS: We provide architectural engineering
and construction services for projects including site planning for land
development, complete architectural design, interior design,
civil/structural engineering and mechanical/electrical engineering of
multi-story facilities. We have completed engineering and construction
projects for a wide range of clients with specialized needs such as
security systems, clean rooms, laboratories and emergency preparedness
facilities.
COMMERCIAL, RECREATIONAL AND LEISURE FACILITIES PROJECTS: We specialize in
the planning and design of water-related entertainment and leisure
facilities from theme park attractions to large marine aquariums. Our
projects also include hotels, parks, visitor centers and marinas. We have
designed complex aquatic life support systems and provided structural,
civil and mechanical engineering and design of interpretive exhibits for a
series of large aquarium projects worldwide.
TRANSPORTATION PROJECTS: We provide architectural, engineering and
construction services for transportation projects to improve public safety
and mobility. Our projects include roadway improvements, commuter railway
stations and expansion of airports. We have also completed numerous
transportation projects including bridges, major highways, and repair,
replacement and upgrading of older transportation facilities.
COMMUNICATIONS
In the communications area, we focus on the delivery of technical
solutions necessary to build and manage communications infrastructure projects.
Our capabilities support a wide range of technologies including broadband and
wireless communications. Our communications clients seek management consulting,
applied science, engineering and architectural design, and construction
management services. Our service offerings in the communications business area
are focused on the following project areas:
NETWORK FEASIBILITY PROJECTS: We apply our technical services to all
aspects of assessing the feasibility of network systems development,
expansion and upgrades for our clients. Our experience includes
feasibility and remote site selection studies, cost-benefit modeling and
market assessments. We also assist network service providers with
technical requirements definition, sensitivity/risk analysis and key
economic projections.
NETWORK PLANNING PROJECTS: We specialize in network planning, including
short- and long-term network configuration and development planning. We
develop outside plant designs, civil engineering and regulatory compliance
assessment and support efforts. In addition, our projects have included
employment analysis, staffing, logistics, planning, and materials
provisioning and management.
NETWORK ENGINEERING PROJECTS: We provide a full range of onsite and
offsite premises engineering and support services for projects ranging
from developing computer aided design workprints to field surveys. Our
experience includes digital evaluation and terrain modeling, right-of-way
permitting and site acquisition for wireless and broadband networks. In
addition, we have performed outside and inside plant design projects for
twisted pair, coaxial fiber optic and copper cable networks, and wireless
networks.
NETWORK DEVELOPMENT PROJECTS: We have performed both inside and outside
plant projects for major network service providers in both the broadband
and wireless sectors. Our construction projects include urban and long
haul underground cable installation. We have also applied our capabilities
to wireless cell site construction and aerial cable placement.
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The following table presents brief examples of specific projects in our
three primary business areas:
BUSINESS AREA REPRESENTATIVE PROJECTS
- --------------------------- --------------------------------------------------------
Resource Management - Currently conducting a remedial design/remedial action
for contaminated groundwater at a Superfund site in
Hendersonville, North Carolina for a private
corporation.
- Currently providing program management and technical
support for the Comprehensive Long-term Environmental
Action Navy (CLEAN) program under several ten-year
contracts. Activities include installation,
restoration, base realignment and closure, and
underground storage tank programs.
- Currently serving as prime contractor for
environmental operations and maintenance services at
Vandenberg Air Force Base in California. Also
providing operations and maintenance services for a
wastewater treatment plant and a hazardous waste
collection plant, and air monitoring and other
services.
Infrastructure - Completed the development and analysis of alternative
flood control measures for the Los Angeles River.
- Currently providing design and program management for
Taiwan's National Museum of Marine Biology/Aquarium.
Responsible for civil, structural and mechanical
engineering and for aquatic life support systems.
Designed water, wastewater and parking facilities.
- Selected by Texas Parks and Wildlife Department as the
prime contractor to plan and develop a new,
state-of-the-art, marine fish hatchery and visitor
center at Lake Jackson, Texas. Provided design and
construction administration, and engineering and
bioengineering for all life support systems.
Communications - Provided site acquisition, obtained entitlements,
supervised construction and installation of equipment,
and provided program management services for a
Canadian corporation.
- Supported the initiative to enhance Emergency 911
services and to improve the dispatch of emergency
services to Henrico County near Richmond, Virginia.
Assisted in the buildout of the Emergency 911
communications network through installation of
antennas, coaxial cables, microwave dishes and
elliptical waveguides.
- Currently redesigning and reconstructing 25% of Tele-
Communications Inc.'s U.S. cable TV networks under a
turnkey contract.
CLIENTS
We have developed a diverse client base of hundreds of clients both in
the public and private sectors. During fiscal 1998, the DOD, EPA and DOE
accounted for 26.2%, 17.1% and 3.5%, respectively, of our net revenue.
Although agencies of the Federal government are among our most significant
clients, we often support multiple programs within a single Federal agency.
Our private sector clients include companies in the chemical, mining,
pharmaceutical, aerospace, automotive, petroleum, communications and utility
industries. No private sector client accounted for more than 10% of our net
revenue in fiscal 1998.
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The following table presents a list of representative clients in our
three primary business areas:
REPRESENTATIVE CLIENTS
- --------------------- -------------------------------------------------------------------------------------------
BUSINESS AREA FEDERAL GOVERNMENT STATE, COUNTY AND LOCAL PRIVATE
- --------------------- ----------------------------- ----------------------------- -----------------------------
RESOURCE MANAGEMENT U.S. Environmental Protection California Department of Lockheed Martin Corporation;
Agency; U.S. Air Force; U.S. Health Services; Washington Merck & Co.; General Electric
Navy; U.S. Army; U.S. Coast Department of Ecology; Prince Company; Westwood Squibb
Guard; U.S. Forest Service Georges County, Maryland; Pharmaceuticals, Inc.
Clarmont County, Ohio; City
of San Jose, California
INFRASTRUCTURE U.S. Army Corps of Engineers; City of Tucson, Arizona; City Universal Studios, Inc.;
U.S. Bureau of Reclamation; of Breckenridge, Colorado; Boeing Corporation; E.I.
U.S. Air Force; Federal Washington Department of DuPont de Nemours and
Emergency Management Agency Transportation; City of Company; Ford Motor Company
Detroit, Michigan; City of
Portland, Oregon; Texas Parks
and Wildlife Department; King
County, Washington; Delaware
Department of Transportation;
Delaware Department of
Corrections
COMMUNICATIONS Henrico County, Virginia AT&T Wireless Services;
Nextel Communications, Inc.;
AirTouch Communications,
Inc.; Motorola, Inc.; Sprint
Communications Company; TCI
CONTRACTS
We enter into 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 contracts. In fiscal 1998,
27.3%, 30.6% and 42.1% of our net revenue was derived from fixed-price,
fixed-rate time and materials, and cost-reimbursement plus fixed fee and award
fee contracts, respectively. Under a fixed-price contract, the client agrees to
pay a specified price for our performance of the entire contract. Fixed-price
contracts carry certain inherent risks, including risks of losses from
underestimating costs, delays in project completion, problems with new
technologies and economic and other changes that may occur over the contract
period. Consequently, the profitability of fixed-price contracts may vary
substantially. The amount of the fee received for a cost-reimbursement and award
fee contract partially depends upon the government's discretionary periodic
assessment of our performance on that contract. Our various clients determine
which type of contract we enter into for a particular engagement.
Some contracts made with the Federal government are subject to annual
approval of funding. Federal government agencies may impose spending
restrictions that limit the continued funding of our existing contracts with the
Federal government and may limit our ability to obtain additional contracts.
These limitations, if significant, could have a material adverse effect on us.
To date, spending limitations have not had a significant effect on us. All
contracts made with the Federal government may be terminated by the government
at any time, with or without cause.
Federal government agencies have formal policies against continuing or
awarding contracts that would create actual or potential conflicts of interest
with other activities of a contractor. These policies may prevent us in certain
cases from bidding for or performing contracts resulting from or relating to
certain work we have performed for the government. In addition, services
performed for a private client may create conflicts of interest that preclude or
limit our ability to obtain work for another private organization. We attempt to
identify actual or potential conflicts of interest and to minimize the
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possibility that such conflicts would affect our work under current contracts or
our ability to compete for future contracts. We have, on occasion, declined to
bid on a project because of an existing potential conflict of interest. However,
we have not experienced disqualification during a bidding or award negotiation
process by any government or private client as a result of a conflict of
interest.
Our contracts with the Federal government are subject to audit by the
government, primarily by the Defense Contract Audit Agency (DCAA). The DCAA
generally seeks to (1) identify and evaluate all activities which either
contribute to, or have an impact on, proposed or incurred costs of government
contracts; (2) evaluate the contractor's policies, procedures, controls and
performance; and (3) prevent or avoid wasteful, careless and inefficient
production or service. To accomplish this, the DCAA examines our internal
control systems, management policies and financial capability, evaluates the
accuracy, reliability and reasonableness of our cost representations and
records, and assesses compliance by us with Cost Accounting Standards and
defective-pricing clauses found within the Federal Acquisition Regulations. The
DCAA also performs the annual review of our overhead rates and assists in the
establishment of our final rates. This review focuses on the allowability of
cost items and the allowability and applicability of Cost Accounting Standards.
The DCAA also audits cost-based contracts, including the close-out of those
contracts.
The DCAA also reviews all types of proposals, including those of award,
administration, modification and repricing. Factors considered are our cost
accounting system, estimating methods and procedures, and specific proposal
requirements. Operational audits are also performed by the DCAA. A review of our
operations at every major organizational level that has a significant effect on
the performance of future government contracts is also conducted during the
proposal review period.
During the course of its audit, the DCAA may disallow costs if it
determines that we improperly accounted for such costs in a manner inconsistent
with Cost Accounting Standards. Under a government contract, only those costs
that are reasonable, allocable and allowable are recoverable. A disallowance of
costs by the DCAA could have a material adverse effect on us.
In September 1995, we acquired PRC Environmental Management, Inc. (EMI).
The Defense Contract Audit Agency (DCAA) recently completed an audit of EMI for
the fiscal years 1987 through 1995. As a result of the completed audit and our
negotiations with the DCAA, the DCAA disallowed approximately $2.9 million in
costs. Because we were aware of these issues prior to completing the
acquisition, we established a sufficient reserve and, consequently, the
disallowance did not have a material adverse effect on our business.
Due to the severity of the legal remedies available to the government,
including the required payment of damages and/or penalties, criminal and civil
sanctions, and debarment, we maintain controls to avoid the occurrence of fraud
and other unlawful activity. In addition, we maintain preventative audit
programs to ensure appropriate control systems and mitigate control weaknesses.
We provide our services under contracts, purchase orders or retainer
letters. Our policy provides that, where possible, all contracts will be in
writing. We bill all of our clients periodically based on costs incurred, on
either an hourly-fee basis or on a percentage of completion basis, as the
project progresses. Generally, our contracts do not require that we provide
performance bonds. A performance bond, issued by a surety company, guarantees
the contractor's performance under the contract. If the contractor defaults
under the contract, the surety will, in its discretion, step in to finish the
job or pay the client the amount of the bond. If the contractor does not have a
performance bond and defaults in the performance of a contract, the contractor
is responsible for all damages resulting from the breach of contract. These
damages include the cost of completion, together with possible consequential
damages such as lost profits. To date, we have not incurred material damages
beyond the coverage of any performance bond.
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Most of our agreements permit termination by the clients upon payment of
fees and expenses through the date of the termination.
MARKETING
We utilize both a centralized corporate marketing department and local
marketing groups within each of our operating units. Our corporate marketing
department assists management in establishing our business plan, our target
markets and an overall marketing strategy. The corporate marketing department
also identifies and tracks the development of large Federal programs, positions
us for new business areas, selects appropriate partners, if any, for new
projects and assists in the bid process for new projects. We market throughout
the organizations we target, focusing primarily on senior representatives in
government organizations and senior management in private companies. In
addition, the corporate marketing department supports marketing activities
firm-wide by coordinating corporate promotional and professional activities,
including appearances at trade shows, direct mailings, telemarketing and public
and media relations.
We also perform marketing activities through our local offices. We
believe that these offices have a greater understanding of local environmental
issues, laws and regulations and, therefore, can better target their marketing
activities. These marketing activities are coordinated by full time marketing
staff located in certain of our offices. These activities include meetings with
potential clients and state, county and municipal regulators, presentations to
civic and professional organizations and seminars on current regulatory topics.
COMPETITION
The market for our services is highly competitive. We compete with many
other firms, ranging from small local firms to large national firms that may
have greater financial and marketing resources. We perform a broad spectrum of
engineering and consulting services across the resource management,
infrastructure and communications business areas. Services within these business
areas are provided to a client base which includes Federal agencies, such as the
DOD, the DOE, the Department of the Interior, the EPA and the U.S. Postal
Service, state and local agencies, and the private sector. Our competition
varies and is a function of the business areas in which, and client sectors for
which, we perform our services. The range of competitors for any one procurement
can vary from 10 to 100 firms, depending upon the relative value of the project,
the financial terms and risks associated with the work, and any restrictions
placed upon competition by the client. Historically, clients have chosen among
competing firms based primarily on the quality and timeliness of the firm's
service. However, we believe that price has become an increasingly important
competitive factor. We believe that if this trend continues it could have a
material adverse effect on our operating margins and profitability.
We believe that our principal competitors include, in alphabetical order,
Black & Veatch LLP; Brown & Caldwell; Castle Tower Corporation; Camp, Dresser &
McKee; CH2M Hill Companies Ltd., Dames & Moore Group; EA Engineering, Science &
Technology, Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT Group
Inc.; Mastec, Inc.; Montgomery Watson; OSP Consultants, Inc.; Roy F. Weston,
Inc.; and URS Greiner Corporation.
BACKLOG
At October 4, 1998, our gross revenue backlog was approximately $405.0
million, compared to $217.5 million at September 28, 1997. We include in gross
revenue backlog only those contracts for which funding has been provided and
work authorizations have been received. We estimate that approximately $329.6
million of the gross revenue backlog at October 4, 1998 will be recognized
during fiscal 1999. No assurance can be given that all amounts included in
backlog will ultimately be realized, even if evidenced by written contracts. For
example, certain of our contracts with the Federal
11
government and other clients are terminable at will. If any of these clients
terminate their contracts prior to completion, we would not recognize revenue.
ENVIRONMENTAL LEGISLATION
Our clients have become subject to an increasing number of frequently
overlapping Federal, state and local laws concerned with the protection of the
environment, as well as regulations promulgated by administrative agencies
pursuant to these laws. We provide services with respect to Federal
environmental laws, and regulations including: the Clean Water Act; the Resource
Conservation and Recovery Act; CERCLA; the National Environmental Policy Act;
the Safe Drinking Water Act; and other laws.
POTENTIAL LIABILITY AND INSURANCE
Our business activities could expose us to potential liability under
various environmental laws such as CERCLA. In addition, we occasionally
contractually assume liability under indemnification agreements. We cannot
predict the magnitude of such potential liabilities.
We currently maintain comprehensive general liability, umbrella and
professional liability insurance policies. These policies are "claims made"
policies. This means that only claims made during the term of the policy are
covered. If we terminate our policies and do not obtain retroactive coverage, we
would be uninsured for claims made after termination even if based on events or
acts that occurred during the term of the policy.
We obtain insurance coverage through a broker who is experienced in the
engineering field. The broker, together with our Risk Manager, periodically
review the adequacy of our insurance programs. However, because there are
various exclusions and retentions under our insurance policies, there can be no
assurance that all potential liabilities will be covered by our insurance.
Further, in the event we expand our services into new markets, we may not be
able to obtain insurance coverage for such activities or, if insurance is
obtained, the dollar amount of any liabilities incurred could exceed our
insurance coverage.
We evaluate the risk associated with uninsured claims. If we determine
that an uninsured claim has potential liability, we establish an appropriate
reserve. A reserve is not established if we determine that the claim has no
merit. Our historic levels of insurance coverage and reserves have been
adequate. However, a partially or completely uninsured claim, if successful and
of significant magnitude, could have a material adverse effect on our business.
EMPLOYEES
At October 4, 1998, we had 3,662 total employees or 3,077 full-time
equivalent employees. Of the 3,662 total employees, 2,144 are professionals. Our
professional staff includes archaeologists, biologists, chemical engineers,
chemists, civil engineers, computer scientists, economists, electrical
engineers, environmental engineers, environmental scientists, geologists,
hydrogeologists, mechanical engineers, oceanographers, toxicologists and project
managers. Our ability to retain and expand our staff of qualified professionals
will be an important factor in determining our future growth and success. Three
employees of one of our subsidiaries will be represented by a labor
organization. Management considers its relations with our employees to be good.
In addition, we supplement our consultants on certain engagements with
independent contractors. We believe that the practice of retaining independent
contractors on a per engagement basis provides us with significant flexibility
in adjusting professional personnel levels in response to changes in demand for
our services.
12
RISK FACTORS
SOME OF THE INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY,"
"WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "CONTINUE" OR
SIMILAR WORDS. YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY
BECAUSE THEY: (1) DISCUSS OUR FUTURE EXPECTATIONS; (2) CONTAIN PROJECTIONS OF
OUR FUTURE OPERATING RESULTS OR OF OUR FUTURE FINANCIAL CONDITION; OR (3)
STATE OTHER "FORWARD-LOOKING" INFORMATION. WE BELIEVE IT IS IMPORTANT TO
COMMUNICATE OUR EXPECTATIONS TO OUR INVESTORS. THERE MAY BE EVENTS IN THE
FUTURE, HOWEVER, THAT WE ARE NOT ACCURATELY ABLE TO PREDICT OR OVER WHICH WE
HAVE NO CONTROL. THE RISK FACTORS LISTED IN THIS SECTION, AS WELL AS ANY
CAUTIONARY LANGUAGE IN THIS ANNUAL REPORT ON FORM 10-K, PROVIDE EXAMPLES OF
RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE EXPECTATIONS WE DESCRIBE IN OUR FORWARD-LOOKING
STATEMENTS. YOU SHOULD BE AWARE THAT THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS AND THAT UPON THE OCCURRENCE OF ANY OF THESE
EVENTS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.
RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
A significant part of our growth strategy is to acquire other companies
that complement our lines of business or that broaden our geographic presence.
During fiscal 1998, we purchased ten companies in five separate transactions. We
expect to continue to acquire companies as an element of our growth strategy.
Acquisitions involve certain risks that could cause our actual growth or
operating results to differ from our expectations or the expectations of
security analysts. For example:
- We may not be able to identify suitable acquisition candidates or to
acquire additional companies on favorable terms;
- We compete with others to acquire companies. We believe that this
competition will increase and may result in decreased availability or
increased price for suitable acquisition candidates;
- We may not be able to obtain the necessary financing, on favorable terms
or at all, to finance any of our potential acquisitions;
- We may ultimately fail to consummate an acquisition even if we announce
that we plan to acquire a company;
- We may fail to successfully integrate or manage these acquired companies
due to differences in business backgrounds or corporate cultures;
- These acquired companies may not perform as we expect;
- We may find it difficult to provide a consistent quality of service
across our geographically diverse operations; and
- If we fail to successfully integrate any acquired company, our
reputation could be damaged. This could make it more difficult to market
our services or to acquire additional companies in the future.
In addition, our acquisition strategy may divert management's attention away
from our primary service offerings, result in the loss of key clients or
personnel and expose us to unanticipated liabilities.
13
Finally, acquired companies that derive a significant portion of their
revenues from the Federal government and that do not follow the same cost
accounting policies and billing procedures as we do may be subject to larger
cost disallowances for greater periods than we are. If we fail to determine the
existence of unallowable costs and establish appropriate reserves in advance of
an acquisition we may be exposed to material unanticipated liabilities, which
could have a material adverse effect on our business.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
Our quarterly revenues, expenses and operating results may fluctuate
significantly because of a number of factors, including:
- The seasonality of the spending cycle of our public sector clients,
notably the Federal government;
- Employee hiring and utilization rates;
- The number and significance of client engagements commenced and
completed during a quarter;
- Delays incurred in connection with an engagement;
- The ability of our clients to terminate engagements without penalties;
- The size and scope of engagements;
- The timing and size of the return on investment capital; and
- General economic and political conditions.
Variations in any of these factors could cause significant fluctuations in our
operating results from quarter to quarter and could result in net losses.
POTENTIAL VOLATILITY OF OUR STOCK PRICE
The trading price of our common stock has fluctuated widely. In addition,
in recent years the stock market has experienced extreme price and volume
fluctuations. The overall market and the price of our common stock may continue
to fluctuate greatly. The trading price of our common stock may be significantly
affected by various factors, including:
- Quarter to quarter variations in our operating results;
- Changes in environmental legislation;
- Changes in investors' and analysts' perception of the business risks and
conditions of our business;
- Broader market fluctuations; and
- General economic or political conditions.
MANAGEMENT OF GROWTH
We are growing rapidly. Our growth presents numerous managerial,
administrative, operational and other challenges. Our ability to manage the
growth of our operations will require us to continue to improve our operational,
financial and human resource management information systems and our other
internal systems and controls. In addition, our growth will increase our need to
attract, develop, motivate and retain both our management and professional
employees. The inability of our
14
management to manage our growth effectively or the inability of our employees to
achieve anticipated performance or utilization levels, could have a material
adverse effect on our business.
RELIANCE ON KEY PERSONNEL AND QUALIFIED PROFESSIONALS
We depend upon the efforts and skills of our executive officers, senior
managers and consultants. With limited exceptions, we do not have employment
agreements with any of these individuals. The loss of the services of any of
these key personnel could adversely affect our business. Although we have
obtained non-compete agreements from the principal stockholders of each of the
companies we have acquired, we generally do not have non-compete or employment
agreements with key employees who were not equity holders of these companies. We
do not maintain key-man life insurance policies on any of our executive officers
or senior managers.
Our future growth and success depends on our ability to attract and
retain qualified scientists and engineers. The market for these professionals is
competitive and we may not be able to attract and retain such professionals.
DEPENDENCE UPON EXISTING LAWS AND REGULATIONS
A significant amount of our resource management business is generated
either directly or indirectly as a result of existing Federal and state
governmental laws, regulations and programs. Any changes in these laws or
regulations that reduce funding or affect the sponsorship of these programs
could reduce the demand for our services and could have a material adverse
effect on our business.
CONCENTRATION OF REVENUES
Agencies of the Federal government are among our most significant
clients. During fiscal 1998, approximately 46.8% of our net revenue was derived
from three federal agencies as follows: 26.2% of our net revenue was derived
from the Department of Defense (DOD), 17.1% from the Environmental Protection
Agency (EPA), and 3.5% from the Department of Energy (DOE). Some of our
contracts with Federal government agencies require annual funding approval and
may be terminated at their discretion. A reduction in spending by Federal
government agencies could limit the continued funding of our existing contracts
with them and could limit our ability to obtain additional contracts. These
limitations, if significant, could have a material adverse effect on our
business.
Additionally the failure of clients to pay significant amounts due us for
our services could adversely affect our business. For example, we recently
received notification from a federal government agency that we are entitled to
payments in excess of our billings. However, the agency involved must obtain
specific funding approval for amounts owed to us and there can be no assurance
this funding approval will be obtained.
RISKS ASSOCIATED WITH GOVERNMENTAL AUDITS
Our contracts with the Federal government and other governmental agencies
are subject to audit. Most of these audits are conducted by the Defense Contract
Audit Agency (DCAA), which reviews our overhead rates, operating systems and
cost proposals. The DCAA may disallow costs if it determines that we accounted
for these costs incorrectly or in a manner inconsistent with Cost Accounting
Standards. A disallowance of costs by the DCAA, or other governmental auditors,
could have a material adverse effect on our business.
In September 1995, we acquired PRC Environmental Management, Inc. (EMI).
EMI also contracts with Federal government agencies and such contracts are also
subject to the same governmental audits. The DCAA has completed audits of EMI's
contracts for the fiscal years 1987
15
through 1995. As a result of these audits and our negotiations with the DCAA,
the DCAA disallowed approximately $2.9 million in costs.
FIXED PRICE CONTRACTS
We enter into various contracts with our clients, including fixed-price
contracts. In fiscal 1998, approximately 27.3% of our net revenue was derived
from fixed-price contracts. Fixed-price contracts protect clients and expose us
to a number of risks. These risks include underestimation of costs, problems
with new technologies, unforeseen costs or difficulties, delays beyond our
control and economic and other changes that may occur during the contract
period. If we incur losses under fixed-price contracts it could have a material
adverse effect on our business.
DEPENDENCE ON SUBCONTRACTORS
Under some of our contracts, we depend on the efforts and skills of
subcontractors for the performance of certain tasks. Our reliance on
subcontractors varies from project to project. In fiscal 1998, subcontractor
costs comprised 22.3% of our gross revenue. The absence of qualified
subcontractors with whom we have a satisfactory relationship could adversely
affect the quality of our service and our ability to perform under some of our
contracts.
SIGNIFICANT COMPETITION
We provide specialized management consulting and technical services to a
broad range of public and private sector clients. The market for our services is
highly competitive and we compete with many other firms. These firms range from
small regional firms to large national firms which have greater financial and
marketing resources than we do.
We focus primarily on the resource management, infrastructure and
communications business areas. We provide services to our clients which include
Federal, state and local agencies, and organizations in the private sector.
We compete for projects and engagements with a number of competitors
which can vary from 10 to 100 firms. Historically, clients have chosen among
competing firms based on the quality and timeliness of the firm's service. We
believe, however, that price has become an increasingly important factor.
We believe that our principal competitors include, in alphabetical order,
Black & Veatch LLP; Brown & Caldwell; Castle Tower Corporation; Camp, Dresser &
McKee; CH2M Hill Companies Ltd.; Dames & Moore Group; EA Engineering, Science &
Technology, Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT Group
Inc.; Mastec, Inc.; Montgomery Watson; OSP Consultants, Inc.; Roy F. Weston,
Inc.; and URS Greiner Corporation.
POTENTIAL LIABILITY AND INSURANCE
Our services involve significant risks of professional and other
liabilities which may substantially exceed the fees we derive from our services.
Our business activities could expose us to potential liability under various
environmental laws such as the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA). In addition, we sometimes
contractually assume liability under indemnification agreements. We cannot
predict the magnitude of such potential liabilities.
We currently maintain comprehensive general liability, umbrella and
professional liability insurance policies. We believe that our insurance
policies are adequate for our business operations. These policies are "claims
made" policies. Thus, only claims made during the term of the policy are
covered. If we terminate our policies and do not obtain retroactive coverage, we
would be uninsured for claims made after termination even if these claims are
based on events or acts that occurred during
16
the term of the policy. Our insurance may not protect us against liability
because our policies typically have various exclusions and retentions. In
addition, if we expand into new markets, we may not be able to obtain insurance
coverage for such activities or, if insurance is obtained, the dollar amount of
any liabilities incurred could exceed our insurance coverage. A partially or
completely uninsured claim, if successful and of significant magnitude, could
have a material adverse affect on our business.
CONFLICTS OF INTEREST
Many of our clients are concerned about potential or actual conflicts of
interest in retaining management consultants. Federal government agencies have
formal policies against continuing or awarding contracts that would create
actual or potential conflicts of interest with other activities of a contractor.
These policies, among other things, may prevent us from bidding for or
performing contracts resulting from or relating to certain work we have
performed for the government. In addition, services performed for a private
client may create a conflict of interest that precludes or limits our ability to
obtain work from other public or private organizations. We have, on occasion,
declined to bid on projects because of these conflicts of interest issues.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
In fiscal 1998, approximately 3.2% of our net revenue was derived from
the international marketplace. Some contracts with our international clients are
denominated in foreign currencies. As such, these contracts contain inherent
risks including foreign currency exchange risk and the risk associated with
expatriating funds from foreign countries. If our international revenue
increases, our exposure to foreign currency fluctuations will also increase. We
have entered into forward exchange contracts to address foreign currency
fluctuations.
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 systems we utilize are the accounting and
financial and human resource information management systems. 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 believe that our financial and accounting
and 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 may
fail, however, in updating our various systems to be year 2000 compliant in a
timely manner.
We have extensive business with the Federal government. Should the
Federal government, especially the Department of Defense (DOD), experience
significant business interruptions relating to non-year 2000 compliance, our
business could be materially impacted. To the extent that other third parties
which we rely upon, such as banking institutions, clients and vendors, are
unable to address their year 2000 issues in a timely manner, our business 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, in addition to our
financial institutions not being able to supply us with our working capital
needs.
17
Additional risks associated with non-year 2000 compliance include:
- Our inability to invoice and process payments;
- Our inability to produce accurate and timely financials;
- The impact on our profitability; and
- Our potential liability to third parties for not meeting contracted
deliverables.
IMPACT OF ANTI-TAKEOVER PROVISIONS ON OUR STOCK PRICE
Our certificate of incorporation and by-laws and the Delaware General
Corporation Law include provisions that may be deemed to have anti-takeover
effects. These anti-takeover effects could delay or prevent a takeover attempt
that you or our other stockholders might consider in your or their best
interests.
In addition, our board of directors is authorized to issue, without
obtaining stockholder approval, up to 2,000,000 shares of preferred stock and to
determine the price, rights, preferences and privileges of such shares without
any further stockholder action. The existence of this "blank-check" preferred
stock could make more difficult or discourage an attempt to obtain control of us
by means of a tender offer, merger, proxy contest or otherwise.
In the future, we may adopt other measures that may have the effect of
delaying, deferring or preventing an unsolicited takeover, even if such a change
in control were at a premium price or favored by a majority of unaffiliated
stockholders. Certain of these measures may be adopted without any further vote
or action by the stockholders.
18
ITEM 2. PROPERTIES.
Our corporate headquarters facilities are located in Pasadena, California.
These facilities contain approximately 25,000 square feet of office space, and
are subject to leases which expire beyond the year 2001. We lease office space
in approximately 112 locations in the United States. We also rent some
additional office space on a month-to-month basis.
We believe that our existing facilities are adequate to meet current
requirements and that suitable additional or substitute space will be available
as needed to accommodate any expansion of operations.
19
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
OVERVIEW
Tetra Tech, Inc. is a leading provider of specialized management
consulting and technical services in three principal business areas: resource
management, infrastructure and communications. As a specialized management
consultant, we assist our clients in defining problems and developing innovative
and cost-effective solutions. Our management consulting services are
complemented by our technical services. These technical services, which
implement solutions, include research and development, applied science,
engineering and architectural design, construction management, and operations
and maintenance. Our clients include a diverse base of public and private
organizations located in the United States and internationally.
Since our initial public offering in December 1991, we have increased the
size and scope of our business and have expanded our service offerings through a
series of strategic acquisitions and internal growth. 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.
20
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 1996 FISCAL 1997 FISCAL 1998
- --------------------------------------------- ----------- ----------- -----------
Federal government........................... 61.7% 52.3% 48.7%
State and local government................... 16.6 14.8 12.7
Private...................................... 20.1 29.2 35.4
International................................ 1.6 3.7 3.2
----- ----- -----
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
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.
21
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
-------------------------------------
SEPT. 29, SEPT. 28, OCT. 4,
1996 1997 1998
----------- ----------- -----------
Net revenue......................................... 100.0% 100.0% 100.0%
Cost of net revenue................................. 75.8 73.9 75.2
----- ----- -----
Gross profit........................................ 24.2 26.1 24.8
Selling, general and administrative expenses........ 13.2 13.2 11.4
----- ----- -----
Income from operations.............................. 11.0 12.9 13.4
Net interest income (expense)....................... (0.5) -- (0.7)
----- ----- -----
Income before minority interest and income tax
expense........................................... 10.5 12.9 12.7
Minority interest................................... -- -- (0.5)
----- ----- -----
Income before income tax expense.................... 10.5 12.9 12.2
Income tax expense.................................. 4.2 5.4 5.3
----- ----- -----
Net income.......................................... 6.3% 7.5% 6.9%
----- ----- -----
----- ----- -----
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
22
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. The 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
23
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,
1995 1996 1996 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(In thousands)
Net revenue.................... $ 38,023 $ 40,076 $ 40,314 $ 42,624 $ 40,423 $ 43,914 $ 48,621
Cost of net revenue............ 29,483 30,676 30,479 31,446 31,051 33,367 35,660
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit................... 8,540 9,400 9,835 11,178 9,372 10,547 12,961
Selling, general and
administrative expenses..... 4,810 5,281 5,329 5,798 4,979 5,655 6,754
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income from operations......... 3,730 4,119 4,506 5,380 4,393 4,892 6,207
Net interest income
(expense)................... (348) (291) (131) (6) 49 31 4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before minority interest
and income tax expense...... 3,382 3,828 4,375 5,374 4,442 4,923 6,211
Minority interest.............. -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income tax
expense..................... 3,382 3,828 4,375 5,374 4,442 4,923 6,211
Income tax expense............. 1,353 1,531 1,750 2,220 1,846 2,051 2,567
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income..................... $ 2,029 $ 2,297 $ 2,625 $ 3,154 $ 2,596 $ 2,872 $ 3,644
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
FISCAL 1998 QUARTER ENDED
------------------------------------------------
SEP. 28, DEC. 28, MAR. 29, JUN. 28, OCT. 4,
1997 1997 1998 1998 1998
----------- ----------- ----------- ----------- ---------
Net revenue.................... $ 57,833 $ 53,664 $ 71,806 $ 75,149 $ 96,978
Cost of net revenue............ 40,941 40,339 54,786 54,405 74,341
----------- ----------- ----------- ----------- ---------
Gross profit................... 16,892 13,325 17,020 20,744 22,637
Selling, general and
administrative expenses..... 7,785 6,146 8,148 9,333 10,286
----------- ----------- ----------- ----------- ---------
Income from operations......... 9,107 7,179 8,872 11,411 12,351
Net interest income
(expense)................... (104) (73) (596) (510) (731)
----------- ----------- ----------- ----------- ---------
Income before minority interest
and income tax expense...... 9,003 7,106 8,276 10,901 11,620
Minority interest.............. -- -- 203 1,194 --
----------- ----------- ----------- ----------- ---------
Income before income tax
expense..................... 9,003 7,106 8,073 9,707 11,620
Income tax expense............. 3,859 3,055 3,552 4,214 5,099
----------- ----------- ----------- ----------- ---------
Net income..................... $ 5,144 $ 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,
1995 1996 1996 1996 1996 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net revenue.................... 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
----- ----- ----- ----- ----- ----- -----
Gross profit................... 22.5 23.5 24.4 26.2 23.2 24.0 26.7
Selling, general and
administrative expenses..... 12.7 13.2 13.2 13.6 12.3 12.9 13.9
----- ----- ----- ----- ----- ----- -----
Income from operations......... 9.8 10.3 11.2 12.6 10.9 11.1 12.8
Net interest income
(expense)................... (0.9) (0.7) (0.3) -- 0.1 0.1 --
----- ----- ----- ----- ----- ----- -----
Income before minority interest
and income tax expense...... 8.9 9.6 10.9 12.6 11.0 11.2 12.8
Minority interest.............. -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Income before income tax
expense..................... 8.9 9.6 10.9 12.6 11.0 11.2 12.8
Income tax expense............. 3.6 3.8 4.3 5.2 4.6 4.7 5.3
----- ----- ----- ----- ----- ----- -----
Net income..................... 5.3% 5.7% 6.5% 7.4% 6.4% 6.5% 7.5%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
FISCAL 1998 QUARTER ENDED
--------------------------------------------------
SEP. 28, DEC. 28, MAR. 29, JUN. 28, OCT. 4,
1997 1997 1998 1998 1998
----------- ----------- ----------- ----------- -----------
Net revenue.................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenue............ 70.8 75.2 76.3 72.4 76.7
----- ----- ----- ----- -----
Gross profit................... 29.2 24.8 23.7 27.6 23.3
Selling, general and
administrative expenses..... 13.5 11.5 11.3 12.4 10.6
----- ----- ----- ----- -----
Income from operations......... 15.7 13.4 12.4 15.2 12.7
Net interest income
(expense)................... (0.2) (0.1) (0.8) (0.7) (0.8)
----- ----- ----- ----- -----
Income before minority interest
and income tax expense...... 15.6 13.2 11.5 14.5 12.0
Minority interest.............. -- -- 0.3 1.6 --
----- ----- ----- ----- -----
Income before income tax
expense..................... 15.6 13.2 11.2 12.9 12.0
Income tax expense............. 6.7 5.7 4.9 5.6 5.3
----- ----- ----- ----- -----
Net income..................... 8.9% 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.
24
LIQUIDITY AND CAPITAL RESOURCES
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 from operating activities in fiscal 1998 and
fiscal 1997 primarily resulted from the payment of liabilities assumed in
connection with 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 1996, 1997, and 1998 were
approximately $2.4 million, $2.6 million and $3.5 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 expect that internally generated funds, our existing cash balances,
proceeds from this offering and availability under the Credit Agreement will be
sufficient to meet our capital requirements through the end of fiscal 1999.
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.
25
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. 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. Without giving effect to the use of the proceeds we
receive from the sale of our common stock in this offering, 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 we will, or will be able to, repay our
long-term debt in the manner described. For example, we could incur additional
debt under the 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.
26
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 seven 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 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 interuptions 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.
27
RISKS
We believe the risks associated with non-year 2000 compliance include:
- Our inability to invoice and process payments;
- Our inability to produce accurate and timely financials;
- The impact on our cash flow and working capital needs;
- The impact on our profitability; and
- Our potential 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 include regular backup of historical information.
28
PART III
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash compensation that we paid or
accrued to the Chief Executive Officer and to each of the four additional most
highly compensated executive officers for each of the fiscal years in the
three-year period ended October 4, 1998:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------------------ --------------------------------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING
NAME AND SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS
PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($) ($)
- ---------------------------------- --------- --------- --------- --------------- --------------- ---------------
Li-San Hwang ..................... 1998 185,000 85,000 601(2) -- 12,500
Chairman, Chief Executive 1997 185,000 80,000 1,087 -- 7,813
Officer and President 1996 185,000 80,000 1,975 -- 9,766
Thomas D. Brisbin ................ 1998 150,000 95,000(4) 3,600(5) -- 3,750
Executive Vice President, Chief 1997 150,000 50,000 -- -- --
Operating Officer 1996 150,000 -- -- -- 83,985
James M. Jaska ................... 1998 120,000 60,000 4,950(7) -- 2,500
Vice President, Chief Financial 1997 110,000 50,000 5,400 -- 18,750
Officer and Treasurer 1996 110,000 27,000 5,400 -- 3,906
William R. Brownlie .............. 1998 117,000 35,000 5,400(9) -- 3,125
Senior Vice President 1997 115,000 30,000 5,400 -- 3,125
1996 114,000 25,000 5,400 -- 4,883
Charles R. Faust ................. 1998 120,000 25,000 5,400(11) -- 5,000
Vice President 1997 120,000 -- 5,400 -- 5,469
1996 115,000 15,000 5,400 -- 2,930
PAYOUTS
-------------
LTIP ALL OTHER
NAME AND PAYOUTS COMPENSATION
PRINCIPAL POSITION ($) ($)
- ---------------------------------- ------------- ---------------
Li-San Hwang ..................... -- 10,266(3)
Chairman, Chief Executive -- 10,317
Officer and President -- 10,746
Thomas D. Brisbin ................ -- 9,079(6)
Executive Vice President, Chief -- 34,058
Operating Officer -- 9,337
James M. Jaska ................... -- 7,060(8)
Vice President, Chief Financial -- 5,826
Officer and Treasurer -- 6,378
William R. Brownlie .............. -- 6,890(10)
Senior Vice President -- 6,043
-- 6,668
Charles R. Faust ................. -- 9,405(12)
Vice President -- 8,637
-- 8,758
- ---------
(1) No named executive officer received other annual compensation in excess
of the lesser of $50,000 or 10% of such officer's compensation in fiscal
1998.
(2) Comprised of $601 in automobile allowances.
(3) Comprised of $7,850 of contributions to our Retirement Plan and $2,416
benefits and premiums we paid to Dr. Hwang pursuant to the Executive
Medical Reimbursement Plan.
(4) Includes $50,000 of bonus paid in fiscal 1998 relating to bonus earned
in fiscal 1996.
(5) Comprised of $3,600 in automobile allowances.
(6) Comprised of $9,079 of contributions to our Retirement Plan.
29
(7) Comprised of $4,950 in automobile allowances.
(8) Comprised of $7,060 of contributions to our Retirement Plan.
(9) Comprised of $5,400 in automobile allowances.
(10) Comprised of $6,890 of contributions to our Retirement Plan.
(11) Comprised of $5,400 in automobile allowances.
(12) Comprised of $7,155 of HSI GeoTrans' contributions to HSI GeoTrans'
Retirement Plan and $2,250 in life insurance premiums we paid on behalf
of Dr. Faust.
The following table sets forth information concerning options granted to
each of the named executive officers during fiscal 1998:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
------------------------------------------------------------ STOCK PRICE
NUMBER OF % OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS/SARS EXERCISE OPTION TERM
UNDERLYING GRANTED TO OR BASE --------------------
OPTIONS/SARS EMPLOYEES IN PRICE EXPIRATION 5% 10%
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) DATE ($)(2) ($)(2)
- ---------------------------------- --------------- --------------- ------------- ----------- --------- ---------
Li-San Hwang...................... 12,500 2.19 16.00 12/18/07 125,779 318,748
Thomas D. Brisbin................. 3,750 0.66 16.00 12/18/07 37,734 95,625
James M. Jaska.................... 2,500 0.44 16.00 12/18/07 25,156 63,750
William R. Brownlie............... 3,125 0.55 16.00 12/18/07 31,445 79,687
Charles R. Faust.................. 5,000 0.88 16.00 12/18/07 50,312 127,499
- ---------
(1) All options are incentive stock options and were granted under our 1992
Incentive Stock Plan. Such options vest over four year periods at an
annual rate of 25% beginning on the first anniversary of the date of
grant.
(2) Potential realizable value is determined by multiplying the exercise or
base price per share by the stated annual appreciation rate compounded
annually for the term of the option (10 years), subtracting the exercise
or base price per share from the product, and multiplying the remainder
by the number of options granted. Actual gains, if any, on stock option
exercises and common stock holdings are dependent on the future
performance of the common stock and overall stock market conditions.
There can be no assurance that the amounts reflected in this table will
be achieved.
30
The following table sets forth information concerning the aggregate
number of options exercised during fiscal 1998 by each of the named executive
officers:
OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/ IN-THE-MONEY OPTIONS/
SARS AT FY-END SARS AT FY-END
SHARES VALUE --------------------------- -----------------------------
ACQUIRED ON REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME EXERCISE (#) ($) (#) ($)(1)
- -------------------------- ------------- ----------- --------------------------- -----------------------------
Li-San Hwang.............. -- -- 15,991/26,296 186,413/196,120
Thomas D. Brisbin......... -- -- 45,898/41,837 439,703/383,023
James M. Jaska............ 12,500 147,095 6,639/18,517 64,814/172,691
William R. Brownlie....... -- -- 35,649/10,963 523,135/99,029
Charles R. Faust.......... -- -- 16,048/12,400 221,581/96,411
- ---------
(1) Value is determined by subtracting the exercise price from the fair
market value of $20.84 per share (the closing price for our common stock
as reported by the Nasdaq National Market as of October 2, 1998) and
multiplying the remainder by the number of underlying shares of common
stock.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TETRA TECH, INC.
Date: February 2, 1999 By: /s/ Li-San Hwang
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Li-San Hwang, Chairman of the Board of
Directors, President and Chief Executive
Officer
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