UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 29, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________ to_________ Commission File Number 0-19655 TETRA TECH, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 95-4148514 ------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) number) 670 N. ROSEMEAD BOULEVARD, PASADENA, CALIFORNIA 91107 ----------------------------------------------------- (Address of principal executive offices) (626) 351-4664 ---------------------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of July 27, 1997, the total number of outstanding shares of the Registrant's common stock was 16,548,271. -1-
TETRA TECH, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Cash Flows 5 Notes to the Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Risk Factors 14 PART II. OTHER INFORMATION Item 2. Changes in Securities 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 21 -2-
PART I. FINANCIAL INFORMATION ITEM 1. - ------- Tetra Tech, Inc. Condensed Consolidated Balance Sheets <TABLE> $ in thousands, except share data June 29, September 29, 1997 1996 ----------- -------------- (Unaudited) ASSETS <S> <C> <C> CURRENT ASSETS: Cash and cash equivalents.......................................... $ 12,793 $ 6,129 Accounts receivable - net.......................................... 25,433 22,306 Unbilled receivables - net........................................ 33,769 25,201 Prepaid and other current assets................................... 6,353 1,939 Deferred income taxes.............................................. 2,358 2,358 -------- ------- Total Current Assets............................................. 80,706 57,933 PROPERTY AND EQUIPMENT: Leasehold improvements............................................. 990 733 Equipment, furniture and fixtures.................................. 16,201 13,072 -------- ------- Total............................................................ 17,191 13,805 Accumulated depreciation and amortization.......................... (8,770) (6,790) -------- ------- PROPERTY AND EQUIPMENT - NET......................................... 8,421 7,015 INTANGIBLE ASSETS - NET.............................................. 63,935 22,047 OTHER ASSETS......................................................... 1,301 1,468 -------- ------- TOTAL ASSETS......................................................... $154,363 $88,463 -------- ------- -------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable................................................... $ 11,329 $13,423 Accrued compensation............................................... 10,892 7,311 Other current liabilities.......................................... 6,250 3,356 Payable to stockholder............................................. 5,479 0 Current portion of long-term obligations........................... 8,000 0 Income taxes payable............................................... 1,339 1,104 -------- ------- Total Current Liabilities........................................ 43,289 25,194 STOCKHOLDERS' EQUITY: Preferred stock - authorized, 2,000,000 shares of $.01 par value; issued and outstanding 1,231,840 and 0 shares at June 29, 1997 and September 29, 1996, respectively.............................. 12 0 Common stock - authorized, 20,000,000 shares of $.01 par value; issued and outstanding 16,264,251 and 14,127,002 shares at June 29, 1997 and September 29, 1996, respectively................ 163 141 Additional paid-in capital......................................... 72,112 33,452 Retained earnings.................................................. 38,787 29,676 -------- ------- TOTAL STOCKHOLDERS' EQUITY........................................... 111,074 63,269 -------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $154,363 $88,463 -------- ------- -------- ------- </TABLE> See accompanying notes to the condensed consolidated financial statements. -3-
Tech, Inc. Condensed Consolidated Statements of Income (Unaudited) <TABLE> <CAPTION> $ in thousands, except share data Three Months Ended Nine Months Ended ---------------------- ----------------------- June 29, June 30, June 29, June 30, 1997 1996 1997 1996 -------- -------- -------- -------- <S> <C> <C> <C> <C> Gross Revenue.......................................... $60,922 $54,152 $171,406 $162,243 Subcontractor costs................................. 12,301 13,838 38,447 43,830 ------- ------- -------- -------- Net Revenue............................................ 48,621 40,314 132,959 118,413 Cost of Net Revenue.................................... 35,660 30,479 100,077 90,638 ------- ------- -------- -------- Gross Profit........................................... 12,961 9,835 32,882 27,775 Selling, General and Administrative Expenses........... 6,754 5,329 17,390 15,420 ------- ------- -------- -------- Income From Operations................................. 6,207 4,506 15,492 12,355 Interest Expense....................................... 84 203 127 1,023 Interest Income........................................ (88) (72) (210) (253) ------- ------- -------- -------- Income Before Income Taxes............................. 6,211 4,375 15,575 11,585 Income Tax Expense..................................... 2,567 1,750 6,464 4,634 ------- ------- -------- -------- Net Income............................................. $3,644 $2,625 $9,111 $6,951 ------- ------- -------- -------- ------- ------- -------- -------- Net Income Per Common Share............................ $0.24 $0.18 $0.61 $0.48 ------- ------- -------- -------- ------- ------- -------- -------- Shares Used in Per Share Calculations.................. 15,432 14,565 14,918 14,405 ------- ------- -------- -------- ------- ------- -------- -------- </TABLE> See accompanying notes to the condensed consolidated financial statements. -4-
Tetra Tech, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> $ in thousands Nine Months Ended ----------------------- June 29, June 30, 1997 1996 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income..................................................................... $ 9,111 $ 6,951 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and Amortization.............................................. 2,929 2,731 Other...................................................................... (71) (2) Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable........................................................ 10 15,157 Unbilled receivables....................................................... (8,849) 224 Prepaid and other assets................................................... (305) (519) Accounts payable........................................................... (2,844) (7,618) Accrued compensation....................................................... (3,976) (1,467) Other current liabilities.................................................. (1,214) 525 Income taxes payable....................................................... 174 410 ------- ------- Net Cash (Used In) Provided By Operating Activities...................... (5,035) 16,392 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................................................... (1,832) (1,751) Proceeds from sale of property and equipment................................... 44 45 Payments for business acquisitions, net of cash acquired....................... (1,124) (6,748) ------- ------- Net Cash Used In Investing Activities.................................... (2,912) (8,454) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt..................................................... (1,842) (19,003) Proceeds from issuance of long-term debt....................................... 8,000 5,145 Proceeds from payable to stockholder........................................... 5,479 0 Payments on obligations under capital leases................................... 0 (6) Net proceeds from issuance of common stock..................................... 2,974 542 ------- ------- Net Cash Provided By (Used In) Financing Activities...................... 14,611 (13,322) ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,664 (5,384) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................... 6,129 13,130 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD..................................... $12,793 $7,746 ------- ------- ------- ------- (Continued) </TABLE> -5-
Tetra Tech, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> $ in thousands Nine Months Ended ----------------------- June 29, June 30, 1997 1996 -------- -------- <S> <C> <C> SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest.................................................................... $ 83 $ 1,077 Income taxes................................................................ $ 9,513 $ 4,225 SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES: In November 1995, the Company purchased all of the capital stock of KCM, Inc. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of assets acquired............................................ $ 20,393 Cash paid................................................................ (2,645) Issuance of common stock................................................. (10,313) Other acquisition costs.................................................. (415) -------- Liabilities assumed.................................................... $ 7,020 -------- -------- In December 1996, the Company purchased all of the capital stock of IWA Engineers. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of assets acquired............................................ $ 2,956 Cash paid................................................................ (310) Issuance of common stock................................................. (1,056) Other acquisition costs.................................................. (70) ------- Liabilities assumed.................................................... $ 1,520 ------- ------- In December 1996, the Company purchased all of the capital stock of FLO Engineering, Inc. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of assets acquired............................................ $ 892 Cash paid................................................................ (139) Issuance of common stock................................................. (459) Other acquisition costs.................................................. (70) ------- Liabilities assumed.................................................... $ 224 ------- ------- In March 1997, the Company purchased all of the capital stock of SCM Consultants, Inc. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of assets acquired............................................ $ 2,859 Cash paid................................................................ (311) Issuance of common stock................................................. (1,830) Other acquisition costs.................................................. (70) ------- Liabilities assumed.................................................... $ 648 ------- ------- </TABLE> (Continued) -6-
Tetra Tech, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> $ in thousands Nine Months Ended ----------------------- June 29, June 30, 1997 1996 -------- -------- <S> <C> <C> In June 1997, the Company purchased all of the capital stock of Whalen & Company, Inc. and Whalen Service Corps Inc. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of assets acquired............................................ $ 53,282 Cash paid................................................................ (8,051) Issuance of common and preferred stock................................... (33,304) Other acquisition costs.................................................. (1,925) -------- Liabilities assumed.................................................... $ 10,002 -------- -------- (Concluded) </TABLE> See accompanying notes to the condensed consolidated financial statements. -7-
TETRA TECH, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION --------------------- The accompanying condensed consolidated balance sheets as of June 29, 1997, the condensed consolidated statements of income for the three-month and nine-month periods ended June 29, 1997 and June 30, 1996 and the condensed consolidated statements of cash flows for the nine-month periods ended June 29, 1997 and June 30, 1996 are unaudited, and in the opinion of management include all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1996. The results of operations for the three and nine months ended June 29, 1997 are not necessarily indicative of the results to be expected for the fiscal year ending September 28, 1997. The computation of net income per common share is based upon the weighted average number of shares outstanding, including the effects of common stock equivalents (common stock options and Series A Preferred Stock). 2. CASH AND CASH EQUIVALENTS ------------------------- The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash totaled $8,705,000 and cash equivalents totaled $4,088,000 at June 29, 1997. 3. ACQUISITIONS ------------ On June 11, 1997, the Company acquired 100% of the capital stock of Whalen & Company, Inc. and Whalen Service Corps Inc. (collectively, "WAC"). WAC, a wireless telecommunications firm, provides a full range of wireless telecommunications site development services for PCS, cellular, ESMR, air-to-ground, microwave, paging, fiber optic and switching centers technology. The acquisition was accounted for as a purchase. The purchase has been valued at approximately $43,070,000 consisting of cash and Company common and preferred stock. The common and preferred stock was issued in a private placement and had a combined value of $33,304,000. The preferred stock carries dividend and voting rights substantially identical to those of common stock and will be converted to common stock on a share for share basis immediately upon the authorization of additional common shares. Holders of the preferred stock may put the preferred stock to the Company for cash at the average closing price of the Company's common stock on the five days ending one day prior to the exercise of the put if the preferred stock is not converted to common stock by December 10, 1997. The Company's stock was valued based upon the extended restriction period and economic factors specific to the Company's circumstances which resulted in a fair valuation approximately 28% below the then prevailing market price. On the business day prior to the merger, WAC distributed to its stockholders (i) cash in the amount of $4,138,000 and (ii) accounts receivable having a net value of $18,455,000. -8-
On March 20, 1997, the Company acquired 100% of the capital stock of SCM Consultants, Inc. ("SCM"), a consulting and engineering firm, providing design of irrigation, water and wastewater systems, as well as facility and infrastructure engineering services, to State and local government, private and industrial customers. The acquisition was accounted for as a purchase. The purchase was valued at approximately $2,211,000, consisting of cash and Company common stock, as adjusted based upon SCM's Net Asset Value on March 30, 1997 as described in the related purchase agreement. On December 18, 1996, the Company acquired 100% of the capital stock of FLO Engineering, Inc. ("FLO"), a consulting and engineering firm specializing in water resource engineering involving hydraulic engineering and hydrographic data collection. The acquisition was accounted for as a purchase. The purchase was valued at approximately $668,000, consisting of cash and Company common stock, as adjusted based upon FLO's Net Asset Value on December 29, 1996 as described in the related purchase agreement. On December 11, 1996, the Company acquired 100% of the capital stock of IWA Engineers ("IWA"), an architecture and engineering firm providing a wide range of planning, engineering, and design capabilities in water, wastewater, and facility design, and serving State and local government and private customers. The acquisition was accounted for as a purchase. The purchase was valued at approximately $1,436,000, consisting of cash and Company common stock, as adjusted based upon IWA's Net Asset Value on December 29, 1996 as described in the related purchase agreement. On November 7, 1995, the Company acquired 100% of the capital stock of KCM, Inc. ("KCM"), an engineering services firm specializing in areas of water quality, water and wastewater systems, surface water management, fisheries and facilities. The acquisition was accounted for as a purchase. The purchase was valued at approximately $13,373,000 consisting of cash and Company common stock issued in a private placement. The Company's stock was valued based upon the extended restriction period and economic factors specific to the Company's circumstances which resulted in a fair valuation approximately 26% below the then prevailing market price. The results of operations from each of the acquired entities have been included in the Company's condensed consolidated financial statements from the effective dates of the acquisitions. The purchase price of the acquisitions in excess of the fair value of the net assets acquired is being amortized over a period of 30 years and is included under the caption "INTANGIBLE ASSETS-NET" in the accompanying condensed consolidated balance sheets. The final determination of such excess amount is subject to a final determination of the value of the consideration paid and the net assets acquired. -9-
The effect of unaudited pro forma operating results of the SCM, FLO and IWA transactions, had they been acquired on October 2, 1995, is not material. The effect of unaudited pro forma operating results assuming that the Company had acquired KCM and WAC on October 2, 1995 is presented in Note 6. PRO FORMA OPERATING RESULTS. 4. ACCOUNTS RECEIVABLE ------------------- The Accounts Receivable valuation allowance includes amounts to provide for doubtful accounts and for the potential disallowance of billed and unbilled costs. The allowance for doubtful accounts as of June 29, 1997 and September 29, 1996 was $1,178,000 and $1,062,000, respectively. The allowance for disallowed costs as of June 29, 1997 and September 29, 1996 was $9,943,000 and $10,039,000, respectively. Disallowance of billed and unbilled costs is primarily associated with contracts with the U.S. government which contain clauses that subject contractors to several levels of audit. Management believes that resolution of these matters will not have a material adverse impact on the Company's financial position or results of operations. 5. SUBSEQUENT EVENT ---------------- On July 11, 1997, the Company acquired 100% of the capital stock of CommSite Development Corporation ("CDC"), a wireless telecommunications site development service firm. The purchase price of $5,700,000 consisted of Company common stock and is subject to a purchase price adjustment as described in the related purchase agreement. The acquisition will be accounted for as a purchase. The effect of unaudited pro forma operating results, had CDC been acquired on October 2, 1995, is presented in Note 6. Pro Forma Operating Results. 6. PRO FORMA OPERATING RESULTS --------------------------- The following table presents summarized unaudited pro forma operating results assuming that the Company had acquired KCM, WAC and CDC (the historical information for WAC and CDC is unaudited) on October 2, 1995: <TABLE> <CAPTION> PRO FORMA NINE MONTHS ENDED --------------------------- JUNE 29, 1997 JUNE 30, 1996 ------------- ------------- ($ in thousands, except per share data) <S> <C> <C> Gross revenue $219,040 $203,155 Income from operations 27,411 21,434 Net income 15,780 12,244 Net income per share 0.87 0.69 Weighted average shares outstanding 18,038 17,696 </TABLE> -10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table presents the percentage relationship of selected items in the Company's condensed consolidated statements of income to net revenue, and the percentage increase or (decrease) in the dollar amount of such items: <TABLE> <CAPTION> % RELATIONSHIP TO NET REVENUE % RELATIONSHIP TO NET REVENUE ----------------------------- ----------------------------- QUARTER ENDED PERIOD TO NINE MONTHS ENDED PERIOD TO ------------- PERIOD ----------------- PERIOD JUN. 29, 1997 JUN. 30, 1996 CHANGE JUN. 29, 1997 JUN. 30, 1996 CHANGE ------------- ------------- --------- ------------- ------------- ---------- <S> <C> <C> <C> <C> <C> <C> Net revenue 100.0% 100.0% 20.6% 100.0% 100.0% 12.3% Cost of net revenue 73.3 75.6 17.0 75.3 76.5 10.4 ----- ----- ------ ----- ----- ------ Gross profit 26.7 24.4 31.8 24.7 23.5 18.4 Selling, general and administrative expenses 13.9 13.2 26.7 13.1 13.0 12.8 ----- ----- ------ ----- ----- ------ Income from operations 12.8 11.2 37.8 11.7 10.5 25.4 Net interest (expense) income 0.0 (0.3) (103.1) 0.1 (0.7) (110.9) ----- ----- ------ ----- ----- ------ Income before income taxes 12.8 10.9 42.0 11.7 9.8 34.4 Income tax expense 5.3 4.4 46.7 4.9 3.9 39.5 ----- ----- ------ ----- ----- ------ Net income 7.5% 6.5% 38.8% 6.9% 5.9% 31.1% ----- ----- ------ ----- ----- ------ ----- ----- ------ ----- ----- ------ </TABLE> Gross revenue increased by 12.5% to $60,922,000 for the three months ended June 29, 1997 compared to $54,152,000 for the comparable prior year period. For the nine months ended June 29, 1997, gross revenue increased by 5.6% to $171,406,000 from $162,243,000 in the prior year. Net revenue increased by 20.6% to $48,621,000 for the quarter from $40,314,000 a year ago. For the nine months ended June 29, 1997, net revenue increased by 12.3% to $132,959,000 from $118,413,000 last year. The percentage of the Company's net revenue attributable to the Federal government, State and local government, commercial, and international clients was affected by the acquisitions of IWA Engineers, FLO Engineering, Inc., SCM Consultants, Inc. and WAC (the "Acquisitions"). The Acquisitions benefit the Company's strategic objective of further balancing the Company's revenue mix between Federal and private sector programs and will increase the amount of the Company's business driven by economics rather than regulatory requirements in both domestic and international arenas. The following table presents the percentage of net revenue for each client sector: <TABLE> <CAPTION> Percentage of Net Revenue ------------------------------------------------------------------------------------ Quarter Ended Nine Months Ended -------------------------------------- ------------------------------------ Client Sector June 29, 1997 June 30, 1996 June 29, 1997 June 30, 1996 - ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Federal government 50 60 55 62 State & local government 14 17 15 16 Commercial 34 22 27 20 International 2 1 3 2 </TABLE> -11-
For the quarter ended June 29, 1997, the Acquisitions contributed $6,650,000 in net revenue growth, of which $5,576,000 was in the commercial sector. For the nine months ended June 29, 1997, the Acquisitions contributed $10,495,000 in net revenue growth, of which $7,917,000 was in the commercial sector. Actual dollar volume growth was experienced not only in the commercial sector, but also in the State and local government and international sectors for both the three and nine months ended June 29, 1997. Cost of net revenue increased 17.0% to $35,660,000 for the three months ended June 29, 1997 compared to $30,479,000 for the comparable prior year period. For the nine months ended June 29, 1997, cost of net revenue increased 10.4% to $100,077,000 from $90,638,000 in the prior year. As a percentage of net revenue, cost of net revenue decreased in the quarter and nine months from 75.6% and 76.5% last year to 73.3% and 75.3% this year, respectively. This decrease was due substantially to the Company's emphasis on strong project management techniques as well as cost containment efforts. Selling, general and administrative ("SG&A") expenses, inclusive of amortization, increased 26.7% to $6,754,000 for the three months ended June 29, 1997 compared to $5,329,000 for the comparable prior year period. For the quarter ended June 29, 1997, this increase was due to the amortization of the goodwill associated with the WAC acquisition ($106,000), and the addition of SG&A expenses of WAC ($1,103,000). For the nine months ended June 29, 1997, SG&A increased 12.8% to $17,390,000 from $15,420,000 in the prior year, primarily due to goodwill amortization and SG&A expenses from the Acquisitions of $152,000 and $2,343,000, respectively. As a percentage of net revenue, SG&A expenses increased to 13.9% for the quarter ended June 29, 1997 from 13.2% for the comparable period last year, and for the nine months ended June 29, 1997, SG&A expenses increased to 13.1% from 13.0% last year. For the quarter ended June 29, 1997, net interest income of $4,000 was recognized compared to net interest expense of $131,000 in the quarter ended June 30, 1996. For the nine months ended June 29, 1997, net interest income of $84,000 was recognized compared to net interest expense of $770,000 in the prior year. The reduction of interest expense and increase in interest incomes are related to the repayment of borrowings on the Company's revolving credit facility. Income tax expense increased to $2,567,000 and $6,464,000 for the quarter and nine months ended June 29, 1997, respectively, from $1,750,000 and $4,634,000 for the comparable prior year period due to higher income before income taxes and the non-deductibility for income tax purposes of amortization of goodwill associated with the Acquisitions. The Company estimates that its fiscal 1997 effective tax rate could reach 42.0% compared to 40.4% for fiscal 1996, primarily due to the non-deductibility of goodwill amortization for income tax purposes. LIQUIDITY AND CAPITAL RESOURCES As of June 29, 1997, the Company's cash and cash equivalents totaled $12,793,000, of which $5,479,000 was payable to the WAC stockholders pursuant to the purchase agreement. In addition, the Company has a credit agreement (the "Credit Agreement") with a bank which provides for a revolving credit facility of $25,000,000. This facility was amended and increased -12-
in June 1997 from $15,000,000. The increase accommodates operational needs that may be required in connection with the WAC merger. Under the facility, the Company may also request standby letters of credit up to the aggregate sum of $10,000,000 outstanding at any one time. As of June 29, 1997, outstanding borrowings totaled $8,000,000 and outstanding letters of credit totaled $995,000. In the nine months ended June 29, 1997, cash used in operating activities was $5,035,000. The decrease compared to the nine months ended June 30, 1996 is primarily attributable to increases in unbilled accounts receivable of $8,849,000, of which $3,938,000 is related to WAC, and a bonus distribution of approximately $5,000,000 to WAC employees, as agreed upon prior to the merger agreement. The Company has targeted, as an ongoing practice, to reduce the timing of invoicing and the collecting of receivables. For the nine months ended June 29, 1997, cash used in investing activities was $2,912,000. The decrease of $5,542,000 was primarily due to the decrease in the distribution of cash for business acquisitions. For the nine months ended June 29, 1997, cash provided by financing activities was $14,611,000 and resulted primarily from the proceeds of the issuance of long-term debt, the proceeds from the amounts due to WAC stockholders and the proceeds from the issuance of Company common stock under the Employee Stock Purchase Plan. The Company continuously evaluates the marketplace for strategic acquisition opportunities. Once an opportunity is identified, the Company examines the effect an acquisition may have on the business environment, as well as on the Company's results of operations. The Company proceeds with an acquisition only if it determines that the acquisition is anticipated to have an accretive effect on future operations. The Company's strategy is to position itself to address existing and emerging markets. The Company views acquisitions as a key component of its growth strategy, and intends to use both cash and its securities, as it deems appropriate, to fund such acquisitions. The Company expects that existing cash balances, internally generated funds, and its credit facility will be sufficient to meet the Company's capital requirements through the end of fiscal 1997. ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE, which the Company will adopt in its annual financial statements for the year ended October 4, 1998. The Statement prohibits adoption during the fiscal 1997 and 1998 interim periods. The Statement replaces the presentation of primary EPS with a presentation of basic EPS, which excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The Statement also requires the dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. -13-
Diluted EPS is computed similarly to fully diluted EPS pursuant to Accounting Principles Board Opinion No. 15. The Company has determined that the effect of adoption of SFAS No. 128 would not have a material effect on the Company's financial statements for the three months and the nine months ended June 29, 1997. RISK FACTORS STATEMENTS IN THIS REPORT THAT ARE FORWARD-LOOKING ARE BASED ON CURRENT EXPECTATIONS, AND ACTUAL RESULTS MAY DIFFER MATERIALLY. FORWARD-LOOKING STATEMENTS INVOLVE NUMEROUS RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY, INCLUDING, BUT NOT LIMITED TO, THE POSSIBILITIES THAT THE DEMAND FOR THE COMPANY'S SERVICES MAY DECLINE AS A RESULT OF POSSIBLE CHANGES IN GENERAL AND INDUSTRY SPECIFIC ECONOMIC CONDITIONS AND THE EFFECTS OF COMPETITIVE SERVICES AND PRICING; ONE OR MORE CURRENT OR FUTURE CLAIMS MADE AGAINST THE COMPANY MAY RESULT IN SUBSTANTIAL LIABILITIES; AND SUCH OTHER RISKS AND UNCERTAINTIES AS ARE DESCRIBED IN THIS REPORT ON FORM 10-Q AND OTHER DOCUMENTS FILED BY THE COMPANY FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION. POTENTIAL LIABILITY AND INSURANCE. Because of the type of projects in which the Company is or may be involved, the Company's current and anticipated future services may involve risks of potential liability under Superfund, common law or contractual indemnification agreements. These projects, and the associated risks, range in both size and complexity. The risk factors include, but are not limited to, location; site characteristics; past, present and future uses; and political, legal and economic environments. Such factors make it difficult to assess accurately both the areas and magnitude of potential risks. The Company maintains comprehensive general liability insurance in the amount of $1,000,000. This amount, together with $9,000,000 coverage under umbrella policies, provides total general liability coverage of $10,000,000. The Company's professional liability insurance ("E&O") policy, which includes pollution coverage, for 1997 provides $10,000,000 in coverage, with a $100,000 self-insured retention. The Company procures insurance coverage through a broker who is experienced in the engineering field. The broker, together with the Company's Risk Manager, reviews the Company's risk/insurance programs with those of the Company's competitors and clients. This review, combined with historical experience, claims history and contractual requirements, allow the Company to determine the adequate amount of insurance. However, because there are various exclusions and retentions under the Company's insurance policies, there can be no assurance that all liabilities that may be incurred by the Company are subject to insurance coverage. In addition, the E&O policy is a "claims made" policy which only covers claims made during the term of the policy. If a policy terminates and retroactive coverage is not obtained, a claim subsequently made, even a claim based on events or acts which occurred during the term of the policy, would not be covered by the policy. In the event the Company expands its services into new markets, no assurance can be given that the Company will be able to obtain insurance coverage for such -14-
activities or, if insurance is obtained, that the dollar amount of any liabilities incurred in connection with the performance of such services will not exceed policy limits. The Company evaluates and determines the risk associated with an uninsured claim. In the event the Company determines that an uninsured claim has potential liability, the Company establishes an appropriate reserve. The Company does not establish a reserve if it determines that the claim has no merit. The Company's historical levels of insurance coverage and reserves have been shown to be adequate. However, a partially or completely uninsured claim, if successful and of significant magnitude, could have a material adverse effect on the Company. SIGNIFICANT COMPETITION. The market for the Company's services is highly competitive. The Company competes with many other firms, ranging from small local firms to large national firms having greater financial and marketing resources than the Company. Competition is likely to increase as the industries in which the Company competes further mature; as more companies enter the market and expand the range of services which they offer; and as the Company and its competitors move into new geographic markets. Historically, competition has been based primarily on the quality and timeliness of service. However, as the industry continues to mature, the Company believes that price will become an increasingly important competitive factor. CONTRACTS. The Company's contracts with Federal and State governments and some of its other client contacts are subject to termination at the discretion of the client. Some contracts made with the Federal government are subject to annual approval of funding and audits of the Company's rates. Limitations imposed on spending by Federal government agencies may limit the continued funding of the Company's existing contracts with the Federal government and may limit the Company's ability to obtain additional contracts. These limitations, if significant, could have a material adverse effect on the Company. All of the Company's contracts with the Federal government are subject to audit by the government, primarily by the Defense Contract Audit Agency (the "DCAA"), which reviews the Company's overhead rates, operating systems and cost proposals. During the course of its audit, the DCAA may disallow costs if it determines that the Company improperly accounted for such costs in a manner inconsistent with Cost Accounting Standards. A disallowance of costs by the DCAA could have a material adverse effect on the Company. The Company's government contracts are also subject to renegotiation of profits in the event of a change in the contractual scope of work to be performed. The Company enters into various types of contracts with its clients, which include fixed-price contracts. In fiscal 1996, 17.1% of the Company's net revenue was derived from fixed-price contracts. Under a fixed-price contract, the customer agrees to pay a specified price for the Company's performance of the entire contract. Fixed-price contracts carry certain inherent risks, including risks of losses from underestimating costs, problems with new technologies and economic and other changes that may occur over the contract period. Losses under fixed-price contracts could have a material adverse effect on the Company. -15-
CONFLICTS OF INTEREST. Many of the Company's clients are concerned about potential or actual conflicts of interest in retaining environmental consultants and engineers. For example, 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 the Company in certain cases from bidding for or performing contracts resulting from or relating to certain work the Company has performed for the government. In addition, services performed for a private client may create a conflict of interest which precludes or limits the Company's ability to obtain work from another private entity. The Company has, on occasion, declined to bid on a project because of an actual or potential conflict of interest. However, the Company has not experienced disqualification during a bidding or award negotiation process by any government or private client as a result of a conflict of interest. POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the Company's common stock may be significantly affected by factors such as quarter-to-quarter variations in the Company's results of operations, changes in environmental legislation and changes in investors' perception of the business risks and conditions in the environmental services business. In addition, market fluctuations, as well as general economic or political conditions, may adversely affect the market price of the Company's common stock, regardless of the Company's actual performance. QUALIFIED PROFESSIONALS. The Company's ability to attract and retain qualified scientists and engineers is an important factor in determining the Company's future growth and success. The market for environmental professionals is competitive and there can be no assurance that the Company will continue to be successful in its efforts to attract and retain such professionals. -16-
PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES - ------ --------------------- On June 11, 1997, the Company acquired 100% of the capital stock of Whalen & Company, Inc., a Delaware corporation, and Whalen Service Corps Inc., a Delaware corporation (collectively, the "Whalen Companies"), through the merger of the Whalen Companies with and into the Company (the "Whalen Merger"). In connection with the Whalen Merger, the Company issued an aggregate of 1,680,000 shares of its common stock, $.01 par value ("Common Stock"), and 1,231,840 shares of its Series A Preferred Stock, $.01 par value ("Series A Stock"), to the former stockholders of the Whalen Companies. For purposes of the Whalen Merger, each share of Common Stock and Series A Stock was valued at $15.25. The issuance of Common Stock and Series A Stock were made by private placement in reliance on the exemption from the registration provisions of the Securities Act of 1933, as amended (the "Act"), provided for in Section 4(2) of the Act. On June 30, 1997, the Company issued an aggregate of 12,665 shares of Common Stock to certain former shareholders of SCM Consultants, Inc., a Washington corporation ("SCM"). Such shares were issued in connection with an adjustment to the purchase price the Company paid for 100% of the capital stock of SCM on March 20, 1997, in accordance with the terms of the related purchase agreement. For purposes of the purchase price adjustment, each share of Common Stock was valued at $15.4375. The issuances of Common Stock were made by private placement in reliance on the exemption from the registration provisions of the Act provided for in Section 4(2) of the Act. On July 11, 1997, the Company acquired 100% of the capital stock of CommSite Development Corporation, a California corporation ("CDC"), through the merger of the Company's wholly-owned subsidiary with and into CDC (the "CDC Merger"). In connection with the CDC Merger, the Company issued an aggregate of 254,463 shares of Common Stock to the former shareholders of CDC of which is subject to a purchase price adjustment. For purposes of the CDC Merger, each share of Common Stock was valued at $22.40. The issuances of Common Stock were made by private placement in reliance on the exemption from the registration provisions of the Act provided for in Section 4(2) of the Act. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------ -------------------------------- (a) EXHIBITS -------- 3.1 Restated Certificate of Incorporation of the Company, as amended to date (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1995). -17-
3.2 Bylaws of the Company, as amended to date (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, No. 33-43723). 3.3 Certificate of Amendment of Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1997). 3.4 Certificate of Designation of Series A Preferred Stock (incorporated herein by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K for the event of June 11, 1997). 10.1 Credit Agreement dated as of September 15, 1995 between the Company and Bank of America Illinois, as amended by the First Amendment to Credit Agreement dated as of November 27, 1995 (incorporated herein by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1995). 10.2 Second Amendment dated as of June 20, 1997 to the Credit Agreement dated as of September 15, 1995 between the Company and Bank of America Illinois. 10.3 Security Agreement dated as of September 15, 1995 among the Company, GeoTrans, Inc., Simons Li & Associates, Inc., Hydro-Search, Inc., PRC Environmental Management, Inc. and Bank of America Illinois (incorporated herein by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1995). 10.4 Pledge Agreement dated as of September 15, 1995 between the Company and Bank of America Illinois (incorporated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1995). 10.5 Guaranty dated as of September 15, 1995, executed by the Company in favor of Bank of America Illinois (incorporated herein by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1995). *10.6 Architect-Engineer Contract No. N62474-88-R-5086 dated as of June 6, 1989 between PRC Environmental Management, Inc. (a subsidiary of the Company) and the Western Division, Naval Facilities Engineering Command (incorporated herein by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K/A (Amendment No. 1) for the fiscal year ended September 29, 1996). -18-
10.7 1989 Stock Option Plan dated as of February 1, 1989 (incorporated herein by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1, No. 33-43723). 10.8 Form of Incentive Stock Option Agreement executed by the Company and certain individuals in connection with the Company's 1989 Stock Option Plan (incorporated herein by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1, No. 33-43723). 10.9 Executive Medical Reimbursement Plan (incorporated herein by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, No. 33-43723). 10.10 1992 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1993). 10.11 Form of Incentive Stock Option Agreement used by the Company in connection with the Company's 1992 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1993). 10.12 1992 Stock Option Plan for Nonemployee Directors (incorporated herein by reference to Exhibit 10.20 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1993). 10.13 Form of Nonqualified Stock Option Agreement used by the Company in connection with the Company's 1992 Stock Option Plan for Nonemployee Directors (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the fiscal year ended October 3, 1993). 10.14 1994 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the fiscal year ended October 2, 1994). 10.15 Form of Stock Purchase Agreement used by the Company in connection with the Company's 1994 Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended October 2, 1994). 10.16 Employment Agreement dated as of June 11, 1997 between the Company and Daniel A. Whalen. 10.17 Registration Rights Agreement dated as of June 11, 1997 among the Company and the parties listed on Schedule A attached thereto. -19-
11 Computation of Net Income Per Common Share. 27 Financial Data Schedule. _______________ * Certain portions of this Exhibit were omitted from the copies filed as part of the Annual Report on Form 10-K/A (Amendment No. 1). Complete copies of this Exhibit were filed separately, together with an application to obtain confidential treatment with respect thereto. (b) REPORTS ON FORM 8-K ------------------- 1. Current Report on Form 8-K for the event of June 11, 1997, filed with the Securities and Exchange Commission on June 23, 1997, which relates to the Company's acquisition of the Whalen Companies. 2. Current Report on Form 8-K/A (Amendment No. 1) for the event of June 11, 1997, filed with the Securities and Exchange Commission on June 24, 1997, which relates to the Company's acquisition of the Whalen Companies. -20-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 13, 1997 TETRA TECH, INC. By: /S/ LI-SAN HWANG ----------------------------------------- Li-San Hwang Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) By: /S/ JAMES M. JASKA ------------------------------------------ James M. Jaska Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) -21-