-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WGSFq/TaF7C5fIDPqU71dOMZlKvYCcjplZARb7EVeS44R5LvwvRyDSpDqpUcVPp3 3Q/lzJ1creUnoNhz5PyX1w== 0000831641-99-000003.txt : 19990520 0000831641-99-000003.hdr.sgml : 19990520 ACCESSION NUMBER: 0000831641-99-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990404 FILED AS OF DATE: 19990519 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TETRA TECH INC CENTRAL INDEX KEY: 0000831641 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 954148514 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19655 FILM NUMBER: 99630408 BUSINESS ADDRESS: STREET 1: 670 N ROSEMEAD BOULEVARD CITY: PASEDENA STATE: CA ZIP: 91107-2190 BUSINESS PHONE: 6263514664 MAIL ADDRESS: STREET 1: 670 N ROSEMEAD BLVD CITY: PASADENA STATE: CA ZIP: 91107 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended APRIL 4, 1999 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 May 7, 1999, the total number of outstanding shares of the Registrant's common stock was 30,103,440. TETRA TECH, INC. INDEX
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Risk Factors 18 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 25 Item 4. Submission of matters to a Vote of Security Holders 25 Item 6. Exhibits and Reports on Form 8-K 25 Signatures 30
-2- PART I. FINANCIAL INFORMATION ITEM 1. Tetra Tech, Inc. Condensed Consolidated Balance Sheets
In thousands, except share data April 4, October 4, 1999 1998 ------------- ------------- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 12,072 $ 4,889 Accounts receivable - net 54,633 68,834 Unbilled receivables - net 67,137 59,888 Prepaid and other current assets 5,135 4,955 Deferred income taxes 3,766 3,766 ---------- ---------- Total Current Assets 142,743 142,332 ---------- ---------- PROPERTY AND EQUIPMENT: Leasehold improvements 2,007 1,348 Equipment, furniture and fixtures 27,956 25,616 ---------- ---------- Total 29,963 26,964 Accumulated depreciation and amortization (15,641) (13,219) ---------- ---------- PROPERTY AND EQUIPMENT - NET 14,322 13,745 ---------- ---------- INTANGIBLE ASSETS - NET 112,081 108,638 LOAN TO UNCONSOLIDATED AFFILIATE 3,000 -- OTHER ASSETS 2,636 1,895 ---------- ---------- TOTAL ASSETS $ 274,782 $ 266,610 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 18,747 $ 24,027 Accrued compensation 13,652 15,614 Other current liabilities 9,574 8,283 Current portion of long-term obligations 25,077 14,065 Income taxes payable 1,909 3,294 ---------- ---------- Total Current Liabilities 68,959 65,283 ---------- ---------- LONG-TERM OBLIGATIONS 315 33,546 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - authorized, 2,000,000 shares of $.01 par value;issued and outstanding 0 shares at April 4, 1999 and October 4, 1998, respectively -- -- Exchangeable stock of a subsidiary 13,569 15,411 Common stock - authorized, 50,000,000 shares of $.01 par value; issued and outstanding 30,062,528 and 28,630,600 shares at April 4, 1999 and October 4, 1998, respectively 301 287 Additional paid-in capital 116,010 87,565 Cumulative translation gain (loss) (778) -- Retained earnings 76,406 64,518 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY 205,508 167,781 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 274,782 $ 266,610 ---------- ---------- ---------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements. -3- Tetra Tech, Inc. Condensed Consolidated Statements of Income (Unaudited)
In thousands, except per Three Months Ended Six Months Ended share data --------------------- --------------------- April 4, March 29, April 4, March 29, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Gross Revenue $128,083 $ 92,727 $242,056 $159,165 Subcontractor costs 31,128 20,921 55,856 33,695 ---------- ---------- ---------- ---------- Net Revenue 96,955 71,806 186,200 125,470 Cost of Net Revenue 74,402 54,786 144,589 95,125 ---------- ---------- ---------- ---------- Gross Profit 22,553 17,020 41,611 30,345 Selling, General and Administrative Expenses 9,646 7,465 17,522 12,969 Amortization of Intangibles 1,038 683 2,033 1,325 ---------- ---------- ---------- ---------- Income from Operations 11,869 8,872 22,056 16,051 Interest Expense 656 671 1,494 809 Interest Income (124) (75) (263) (140) ---------- ---------- ---------- ---------- Income Before Income Tax Expense and Minority Interest 11,337 8,276 20,825 15,382 Income to Minority Interest -- 203 -- 203 ---------- ---------- ---------- ---------- Income Before Income Tax Expense 11,337 8,073 20,825 15,179 Income Tax Expense 4,875 3,552 8,936 6,608 ---------- ---------- ---------- ---------- Net Income $ 6,462 $ 4,521 $ 11,889 $ 8,571 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Basic Earnings Per Share $ 0.22 $ 0.16 $ 0.41 $ 0.31 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted Earnings Per Share $ 0.21 $ 0.16 $ 0.38 $ 0.30 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Weighted Average Common Shares Outstanding: Basic 29,435 27,905 29,045 27,561 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted 31,411 28,956 31,061 28,895 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements. -4- Tetra Tech, Inc. Condensed Consolidated Statements of Cash Flow (Unaudited)
In thousands Six Months Ended ------------------------ April 4, March 29, 1999 1998 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,889 $ 8,571 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,456 3,220 Undistributed earnings to minority interest -- 203 Other (542) (662) Changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable 18,071 (8,724) Unbilled receivables (7,148) (4,862) Prepaid and other assets (672) (4,028) Accounts payable (5,305) 3,806 Accrued compensation (2,473) (702) Other current liabilities 927 23 Income taxes payable (2,638) (3,859) ---------- ---------- Net Cash Provided By (Used In) Operating Activities 16,565 (7,014) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,355) (1,061) Payments for business acquisitions, net of cash acquired (4,033) (25,640) Payments on loans to unconsolidated affiliate (3,000) -- ---------- ---------- Net Cash Used In Investing Activities (9,388) (26,701) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt (29,219) (15,002) Proceeds from issuance of long-term debt 7,000 42,000 Net proceeds from issuance of common stock 23,003 914 ---------- ---------- Net Cash (Used In) Provided By Financing Activities 784 27,912 ---------- ---------- EFFECT OF RATE CHANGES ON CASH (778) -- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,183 (5,803) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,889 12,262 ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,072 $ 6,459 ---------- ---------- ---------- ---------- SUPPLIMENTAL CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 1,347 $ 574 Income taxes $ 10,321 $ 10,080
(Continued) -5- Tetra Tech, Inc. Condensed Consolidated Statements of Cash Flow (Unaudited)
In thousands Six Months Ended ------------------------ April 4, March 29, 1999 1998 ---------- ---------- SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES: In February 1999, the Company purchased all of the capital stock of McCulley, Frick & Gilman, Inc. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 10,086 Cash paid (4,250) Issuance of common stock (3,613) Other acquisition costs (70) ---------- Liabilities assumed $ 2,153 ---------- ---------- In December 1997, the Company, through its wholly-owned subsidiary Tetra Tech NUS, Inc., purchased the assets of certain environmental services businesses of Brown & Root, Inc. and Halliburton NUS Corporation, both of which were subsidiaries of Halliburton Company. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 27,794 Cash paid (24,872) Other acquisition costs (325) ---------- Liabilities assumed $ 2,597 ---------- ---------- In March 1998, the Company, through its wholly-owned subsidiary Whalen Service Corps Inc., purchased certain assets of TANCO LLC, dba Integration Technologies from ANTEC Corporation. This purchase was related to a limited liability company agreement between Whalen Service Corps Inc. and Sentrex Cen-Comm. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 1,572 Cash paid (623) ---------- Liabilities assumed $ 949 ---------- ---------- In March 1998, the Company purchased all of the capital stock of C.D.C. Engineering, Inc. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of assets acquired $ 2,299 Cash paid (323) Issuance of common stock (1,294) Other acquisition costs (70) ---------- Liabilities assumed $ 612 ---------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements. (Concluded) -6- TETRA TECH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated balance sheet as of April 4, 1999, the condensed consolidated statements of income for the three-month and six- month periods ended April 4, 1999 and March 29, 1998 and the condensed consolidated statements of cash flows for the six months ended April 4, 1999 and March 29, 1998 are unaudited, and in the opinion of management include all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 4, 1998. The results of operations for the three and six months ended April 4, 1999 are not necessarily indicative of the results to be expected for the fiscal year ending October 3, 1999. 2. EARNINGS PER SHARE Due to the Company's complex capital structure, the Company presents both basic and diluted Earnings Per Share (EPS). Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding and dilutive potential common shares. The Company includes as potential common shares the weighted average number shares of exchangeable stock of a subsidiary and the weighted average dilutive effects of outstanding stock options. The exchangeable stock of a subsidiary is non-voting and is exchangeable, share for share, for the Company's common stock. Basic and diluted EPS reflect, on a retroactive basis, a 5-for-4 stock split effected in the form of a 25.0% stock dividend, wherein one additional share of stock was issued on September 15, 1998 for each four shares outstanding as of the record date of July 27, 1998. 3. CURRENT ASSETS The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents totaled $12.1 million and $4.9 million at April 4, 1999 and October 4, 1998, respectively. 4. MERGERS AND ACQUISITIONS On December 31, 1997, the Company acquired, through its wholly-owned subsidiary Tetra Tech NUS, Inc., the assets of certain environmental services businesses of Brown & -7- Root, Inc. and Halliburton Corporation, both of which are subsidiaries of Halliburton Company (collectively, NUS). NUS provides consulting, engineering and design services for the environmental remediation of contaminated air, water and soil conditions. The purchase price was valued at approximately $25.2 million, as adjusted, and consisted of cash. On March 2, 1998, Whalen Service Corps Inc. (WSC) agreed to participate in a partnership with Sentrex Cen-Comm and ANTEC Corporation to provide design, engineering, information management and construction services to support advanced communication system upgrades to the broadband information transport industries. The agreement required the purchase of certain assets of TANCO LLC from ANTEC Corporation for a price in cash of approximately $0.6 million. WSC initially held a 51.0% majority interest in Whalen/Sentrex LLC, a California limited liability company, while LAL Corp. held the remaining 49.0% minority interest. On March 26, 1998, the Company acquired 100.0% of the capital stock of C.D.C. Engineering, Inc. (CDE), a consulting and engineering firm specializing in civil engineering, transportation engineering, structural engineering and land surveying. The purchase has been valued at approximately $1.5 million, consisting of cash and 71,060 shares of Company common stock. On July 8, 1998, the Company acquired 100.0% of the capital stock of McNamee, Porter & Seeley, Inc. (MPS), a provider of engineering services with expertise in the areas of water, industrial wastewater and process controls. The purchase was valued at approximately $14.2 million, consisting of cash and 274,888 shares of Company common stock. Simultaneously with the acquisition, MPS distributed to its former shareholders accounts receivable having a net value of $8.0 million. On September 22, 1998, the Company acquired, through its subsidiary Tetra Tech Canada Ltd. (TtC), 100.0% of the capital stock of 1056584 Ontario Limited, 1056585 Ontario Limited, Venture Cable Limited, Cen-Comm Communications, Inc., Sentrex Electronics Inc. and LAL Corp. (collectively, the Sentrex Group of Companies (SGOC)), providers of engineering and technical services to the cable television, telephony and data networking industries. The purchase has been valued at approximately $19.2 million, consisting of cash and 920,354 shares of TtC exchangeable stock. The TtC exchangeable stock is exchangeable, share for share, for Company common stock as described in the related purchase agreement. Upon completion of the SGOC acquisition, the Company beneficially owns 100.0% of Whalen/Sentrex LLC. On February 26, 1999, the Company acquired 100.0% of the capital stock of McCulley, Frick & Gilman, Inc. (MFG), a provider of professional environmental science and consulting services to private-sector clients. The purchase was valued at approximately $7.9 million, consisting of cash and 185,192 shares of Company common stock, and is subject to a purchase price and purchase allocation adjustment based on the final determination of MFG's net asset value as of February 26, 1999. -8- All of the acquisitions above have been accounted for as purchases and, accordingly, the purchase prices of the businesses acquired have been allocated to the assets and liabilities acquired based upon their fair values. The excess of the purchase cost of the acquisitions over the fair value of the net assets acquired was recorded as goodwill and is included in Intangible Assets - Net in the accompanying balance sheets. The Company values stock exchanged in acquisitions based on extended restriction periods and economic factors specific to the Company's circumstances. During fiscal 1998 and 1999, stock exchanged in acquisitions was discounted by 15.0%. The results of operations of each of the companies acquired have been included in the Company's financial statements from their respective acquisition effective dates as set forth in the related purchase agreements. The effect of unaudited pro forma operating results of the MFG, SGOC and CDE transactions, had they been acquired on September 29, 1997, is not material. Pro forma operating results assuming the Company had acquired MPS and NUS on September 29, 1997 is presented in Note 6. UNAUDITED PRO FORMA OPERATING RESULTS. 5. ACCOUNTS RECEIVABLE Accounts receivable are presented net of a valuation allowance to provide for doubtful accounts and for the potential disallowance of billed and unbilled costs. The allowance for doubtful accounts as of April 4, 1999 and October 4, 1998 was $2.4 million and $2.9 million, respectively. The allowance for disallowed costs as of both April 4, 1999 and October 4, 1998 was $9.8 million. Disallowance of billed and unbilled costs is primarily associated with contracts with the Federal government which contain clauses that subject contractors to several levels of audit. The Company establishes reserves on those contract receivables, especially those acquired in acquisitions, where collectibility is not assured. Management believes that resolution of these matters will not have a material adverse impact on the Company's financial position or results of operations. 6. UNAUDTED PRO FORMA OPERATING RESULTS The table below presents summarized unaudited pro forma operating results assuming that the Company had acquired MPS and NUS on September 29, 1997. These amounts are based on historical results and assumptions and estimates in which the Company believes to be reasonable. The pro forma results do not reflect anticipated cost savings and do not necessarily represent results which would have occurred if the MPS and NUS acquisitions had actually taken place on September 29, 1997.
Pro Forma Six Months Ended -------------------------- March 29, 1998 -------------- Gross revenue $ 196,897,000 Income from operations 17,071,000 Net income 8,835,000 Basic earnings per share 0.32 Diluted earnings per share 0.30 -9- Weighted average shares outstanding: Basic 27,698,000 Diluted 29,032,000
7. SUBSEQUENT EVENTS On April 19, 1999, the Company's board of directors approved a 5-for-4 stock split, to be effected in the form of a 25.0% stock dividend, wherein one additional share of stock will be issued for each four shares outstanding. The record date for the stock split is May 14, 1999, and the distribution date is June 15, 1999. On a pro forma basis, the following table presents basic and diluted earnings per share for the periods presented giving effect to this stock split:
Three Months Ended Six Months Ended --------------------- --------------------- April 4, March 29, April 4, March 29, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Basic earnings per share $0.18 $0.13 $0.33 $0.25 Diluted earnings per share $0.16 $0.12 $0.31 $0.24
8. COMPREHENSIVE INCOME Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non owner sources. These sources include net income and other revenues, expenses, gains and losses incurred. The Company includes as other comprehensive income translation gains and losses from subsidiaries with functional currencies different than that of the Company. For the three and six months ended April 4, 1999, the Company incurred net translation losses of $0.8 million. The Company incurred no translation gains or losses for the three and six months ended March 29, 1998. 9. LOAN TO UNCONSOLIDATED AFFILIATE During the six months ended April 4, 1999, the Company loaned to TANCO LLC, a 50% owned affiliate, $3.0 million for working capital needs. 10. SECONDARY OFFERING OF COMMON STOCK In February 1998, the Company, along with certain selling stockholders, offered 3,175,000 shares of its Common Stock through a public offering. The Company offered 1,000,000 shares and received $22.0 million in net proceeds from the offering of these shares. These proceeds were used for the partial repayment of outstanding indebtedness under the Company's revolving credit facility. -10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED BELOW, THE MATTERS DISCUSSED IN THIS SECTION ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. OUR ACTUAL LIQUIDITY NEEDS, CAPITAL RECOURCES AND OPERATING RESULTS MAY DIFFER MATERIALLY FROM THE DISCUSSION SET FORTH BELOW IN THESE FORWARD-LOOKING STATEMENTS. FOR ADDITIONAL INFORMATION, REFER TO THE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS FILING. OVERVIEW Tetra Tech, Inc. is a leading provider of specialized management consulting and technical services in three principal business areas: resource management, infrastructure and communications. As a specialized management consultant, we assist our clients in defining problems and developing innovative and cost-effective solutions. Our management consulting services are complemented by our technical services. These technical services, which implement solutions, include research and development, applied science, engineering and architectural design, construction management, and operations and maintenance. Our clients include a diverse base of public and private organizations located in the United States and internationally. Since our initial public offering in December 1991, we have increased the size and scope of our business and have expanded our service offerings through a series of strategic acquisitions and internal growth. We derive our 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 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 -11- costs are generally unrelated to specific client projects. In addition, we include amortization of certain intangible assets resulting from acquisitions in SG&A expenses. We provide our 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 net revenue attributable to these client sectors:
Percentage of Net Revenue -------------------------------------------- Three Months Ended Six Months Ended --------------------- --------------------- April 4, March 29, April 4, March 29, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- CLIENT SECTOR Federal government 41.9% 51.3% 41.7% 48.8% State & local government 14.3 11.8 14.5 12.5 Commercial 39.4 34.7 39.0 36.4 International 4.4 2.2 4.8 2.3
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 the second quarter of fiscal 1999, we made the following acquisition: McCulley, Frick & Gilman, Inc. -- In February 1999, we acquired McCulley, Frick & Gilman, Inc. (MFG). The purchase was valued at approximately $7.9 million. MFG, a Colorado-based consulting and engineering firm, provides professional environmental science and consulting services to private-sector clients throughout the United States. RESULTS OF OPERATIONS The following table presents the percentage relationship of selected items to net revenue in our condensed consolidated statements of income:
% Relationship to Net Revenue -------------------------------------------- Three Months Ended Six Months Ended --------------------- --------------------- April 4, March 29, April 4, March 29, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Net revenue 100.0% 100.0% 100.0% 100.0% Cost of net revenue 76.7 76.3 77.7 75.8 ---------- ---------- ---------- ---------- Gross profit 23.3 23.7 22.3 24.2 Selling, general and administrative expenses 11.1 11.3 10.5 11.4 ---------- ---------- ---------- ---------- Income from operations 12.2 12.4 11.8 12.8 Net interest (expense) income (0.5) (0.9) (0.6) (0.5) ---------- ---------- ---------- ---------- Income before income taxes and minority interest 11.7 11.5 11.2 12.3 Income to minority interest -- (0.3) -- (0.2) ---------- ---------- ---------- ---------- Income before income taxes 11.7 11.2 11.2 12.1 Income tax expense 5.0 4.9 4.8 5.3 ---------- ---------- ---------- ---------- Net income 6.7% 6.3% 6.4% 6.8% ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
-12- NET REVENUE. Net revenue increased $25.1 million, or 35.0%, to $97.0 million for the three months ended April 4, 1999 from $71.8 million for the comparable period last year. For the six months ended April 4, 1999, net revenue increased $60.7 million, or 48.4%, to $186.2 million from $125.4 million for the comparable period last year. All sectors continued to show net revenue increases in actual dollars. As a percentage of net revenue, decreases were realized in the Federal government sector due to growth in the revenue from private sector clients and revenue contributed by the fourth quarter fiscal 1998 acquisitions. These acquisitions provided increases in our revenue from state and local governments and generated international revenue. For the three months ended April 4, 1999, net revenue provided by companies acquired in the past year totaled $14.8 million. Excluding this net revenue, we realized 14.5% growth in our net revenue. For the six months ended April 4, 1999, net revenue provided by companies acquired in the past year totaled $25.7 million. Excluding this net revenue, we realized 28.0% growth in our net revenue. Gross revenue increased $35.4 million, or 38.1%, to $128.1 million for the three months ended April 4, 1999 from $92.7 million for the comparable period last year. For the six months ended April 4, 1999, gross revenue increased $82.9 million, or 52.1%, to $242.1 million from $159.2 million for the comparable period last year. COST OF NET REVENUE. Cost of net revenue increased $19.6 million, or 35.8%, to $74.4 million for the three months ended April 4, 1999 from $54.8 million for the comparable period last year. As a percentage of net revenue, cost of net revenue for the three months ended April 4, 1999 was 76.7% compared to 76.3% for the comparable period last year. For the six months ended April 4, 1999, cost of net revenue increased $49.5 million, or 52.0%, to $144.6 million from $95.1 million for the comparable period last year. As a percentage of net revenue, cost of net revenue for the six months ended April 4, 1999 was 77.7% compared to 75.8 % for the comparable period last year. These increases were primarily due to the volume increases in cost-reimbursable type work in our resource management business area. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses increased $2.5 million, or 31.1%, to $10.7 million for the three months ended April 4, 1999 from $8.1 million for the comparable period last year. As a percent of net revenue, SG&A expenses decreased to 11.1% for the three months ended April 4, 1999 from 11.3% for the comparable period last year. For the six months ended April 4, 1999, SG&A expenses increased $5.3 million, or 36.8%, to $19.6 million from $14.3 million for the comparable period last year. As a percentage of net revenue, SG&A expenses decreased to 10.5% for the six months ended April 4, 1999 from 11.4% for the comparable period last year. Amortization expense relating to acquisitions remained relatively flat at 1.1% of net revenue for both the three months and six months ended April 4, 1999. As our net revenue has increased, we have not commensurately increased our headquarters' costs. Additionally, we have realized cost reductions by centralizing certain corporate functions. NET INTEREST EXPENSE. Net interest expense decreased 10.7% to less than $0.6 million for the three months ended April 4, 1999. This decrease was primarily attributable to the collection of receivables and the receipt of approximately $22.2 million in net proceeds from our secondary offering of common stock in February, 1999. For the six months ended April 4, 1999, net interest expense increased $0.6 million, or 84.0%, to $1.2 million from $0.6 -13- million for the comparable period last year. This increase was primarily attributable to borrowings on our line of credit to facilitate acquisitions. INCOME TAX EXPENSE. Income tax expense increased $1.3 million, or 37.2%, to $4.9 million for the three months ended April 4, 1999 from $3.6 million for the comparable period last year. For the six months ended April 4, 1999, income tax expense increased $2.3 million, or 35.2%, to $8.9 million from $6.6 million for the comparable period last year. Our effective tax rate varies as we acquire companies. Certain amortization expenses relating to acquisitions are not tax deductible. Our current effective tax rate is 43.0% compared to 43.6% in fiscal 1998. LIQUIDITY AND CAPITAL RESOURCES As of April 4, 1999, our working capital was $73.8 million, a decrease $3.2 million from October 4, 1998, of which cash and cash equivalents totaled $12.1 million. In addition, we have a credit agreement (the "Credit Agreement") with a bank which provides for a revolving credit facility (the "Facility") of $65.0 million. Under our Credit Agreement, we may also request standby letters of credit up to the aggregate sum of $20.0 million outstanding at any given time. Our Credit Agreement provides for a mandatory reduction of $5.0 million on December 15, 1999. Our Facility matures on December 15, 2000 or earlier at our discretion upon payment in full of loans and other obligations. As of April 4, 1999, borrowings and standby letters of credit totaled $25.0 million and $1.4 million, respectively. In the six months ended April 4, 1999, we generated $15.8 million from operating activities compared to the usage of $7.0 million for the comparable period last year. This increase was primarily attributable to our efforts to increase our efficiency in the timing of our billings and the collection of our receivables. In the six months ended April 4, 1999, cash used in investing activities was $6.4 million compared to $26.7 million for the comparable period last year. This decrease primarily was the result of fewer business acquisitions. In the six months ended April 4, 1999, cash used in financing activities was $2.2 million compared to cash generation of $27.9 million for the comparable period last year. During the six months ended April 4, 1999, cash generated from operating activities and the proceeds of our secondary offering allowed us to reduce the outstanding borrowings on our Facility. We expect that internally generated funds, our existing cash balances and availability under the Credit Agreement will be sufficient to meet our capital requirements through the end of fiscal 1999. However, we may seek to expand our borrowing capabilities to accommodate acquisition opportunities. We continuously evaluate the marketplace for strategic opportunities. Once an opportunity is identified, we examine the effect an acquisition may have on the business environment, as well as on our results of operations. We proceed with an acquisition if we determine that the acquisition is anticipated to have an accretive effect on future operations. However, as successful integration and implementation are essential to achieve favorable results, no assurances can be given that all acquisitions will provide accretive results. Our strategy is to position ourselves to address existing and emerging markets. We view -14- acquisitions as a key component of our growth strategy, and we intend to use both cash and our securities, as we deem appropriate, to fund such acquisitions. We believe our operations have not been and, in the foreseeable future, do not expect to be materially adversely affected by inflation or changing prices. 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 upon payment in full of loans and other obligations. Accordingly, we classify total outstanding debt between current liabilities and long-term debt based on anticipated payments within and beyond one year's period of time. We currently anticipate repaying all of our $25.0 outstanding indebtedness under the Facility by the end of this fiscal year. However there can be no assurance that we will, or will be able to, repay our long-term debt in the manner described. We could incur additional debt under the Facility or our operating results could be worse than currently anticipated. YEAR 2000 We are working to resolve the potential impact of the year 2000 (Y2K) 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 Y2K 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 upon which we rely. We have established both a Y2K review committee and a Y2K action team. The purpose of the review committee is to develop and communicate our Y2K plan to achieve our Y2K compliance mission. The purpose of the action team is to identify, remediate and implement plans to resolve Y2K 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 Y2K. We have developed questionnaires regarding Y2K readiness to be used internally and externally. We have completed our internal assessment and are in the process of assessing the Y2K issues of our clients and vendors. We rely on certain software vendors who are the makers of Y2K compliance statements as they apply to our specific software. Our references to the Y2K compliance status -15- of these systems are republications of their statements. Based on the information collected to date, we do not believe that the cost of addressing our Y2K issues will have a material adverse impact on our financial position. We plan to devote all resources required to resolve any significant Y2K 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 Y2K compliant by our vendors. Currently, 11 of our 14 operating units are accounted for, or 85.3% of our gross revenue is recognized on, these Y2K compliant systems. We are in the process of converting an additional operating unit and plan to either convert the two remaining units or upgrade them to a Y2K compliant version of their existing applications. In all cases, we believe that our financial and accounting systems will be Y2K compliant in a timely manner and will not be materially impacted by Y2K. We have installed a Y2K compliant human resource information management system. We have converted six of our operating units to date. We are currently in the process of converting our non-Y2K compliant units by July 1999 In all cases, we believe that our human resource management information systems will be Y2K compliant in a timely manner and will not be materially impacted by the Y2K. We have expended or obligated approximately $2.6 million on the procurement of these systems, the conversion of data from legacy systems to these systems, and on the implementation and testing of these systems. We have extensive business with the Federal government. Should the Federal government, specifically the Department of Defense, experience significant business interruptions relating to non-Y2K 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 Y2K issues in a timely manner, we could be materially impacted. We believe the worst case scenario relating to Y2K would be an extensive period of time in which the Federal government and other third parties could not process payments promptly. RISKS We believe the risks associated with non-Y2K 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. -16- 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 vendor certified Y2K 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 has been to install the system as simply as possible, with little customization. Our vendor supports this implementation strategy and has agreed to a financial penalty if the implementation is not achieved within three months. If conversion is not achieved by August 1999, we believe there will still be sufficient time to meet the Y2K 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. -17- RISK FACTORS SOME OF THE INFORMATION IN THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" and "CONTINUE" OR SIMILAR WORDS. YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY BECAUSE THEY: (1) DISCUSS OUR FUTURE EXPECTATIONS; (2) CONTAIN PROJECTIONS OF OUR FUTURE OPERATING RESULTS OR OF OUR FUTURE FINANCIAL CONDITION; OR (3) STATE OTHER "FORWARD-LOOKING" INFORMATION. WE BELIEVE IT IS IMPORTANT TO COMMUNICATE OUR EXPECTATIONS TO OUR INVESTORS. THERE MAY BE EVENTS IN THE FUTURE, HOWEVER, THAT WE ARE NOT ACCURATELY ABLE TO PREDICT OR OVER WHICH WE HAVE NO CONTROL. THE RISK FACTORS LISTED IN THIS SECTION, AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS QUARTERLY REPORT ON FORM 10-Q, PROVIDE EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTATIONS DESCRIBED IN FORWARD-LOOKING STATEMENTS. THE OCCURRENCE OF ANY OF THE EVENTS DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS. UPON THE OCCURRENCE OF ANY OF THESE EVENTS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE. 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. During the six months ended April 4, 1999, we purchased one company. We expect to continue to acquire companies as an element of our growth strategy. Acquisitions involve certain risks that could cause our actual growth or operating results to differ from our expectations or the expectations of security analysts. For example: - We may not be able to identify suitable acquisition candidates or to acquire additional companies on favorable terms; - We compete with others to acquire companies. Competition may increase and may result in decreased availability 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 potential acquisitions; - We may ultimately fail to consummate an acquisition even if announced 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. -18- In addition, our acquisition strategy may divert management's attention away from our primary service offerings, result in the loss of key clients or personnel and expose us to unanticipated liabilities. Finally, acquired companies that derive a significant portion of their revenues from the Federal government and that do not follow the same cost accounting policies and billing procedures as we do may be subject to larger cost disallowances for greater periods than we typically encounter. If we fail to determine the existence of unallowable costs and establish appropriate reserves in advance of an acquisition we may be exposed to material unanticipated liabilities, which could have a material adverse effect on our business. 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 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 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. -19- 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 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 certain principals and stockholders of companies we have acquired, we generally do not have non-compete or employment agreements with key employees who were not once equity shareholders 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 the six months ended April 4, 1999, approximately 41.7% of our net revenue was derived from federal agencies, of which 27.2% was derived from the Department of Defense (DOD), 16.2% from the Environmental Protection Agency (EPA), and 2.7% from the Department of Energy (DOE). Some contracts with Federal government agencies require annual funding approval and may be terminated at their discretion. A reduction in spending by Federal government agencies could limit the continued funding of 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. -20- RISKS ASSOCIATED WITH GOVERNMENTAL AUDITS 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 through 1996. As a result of these audits and negotiations with the DCAA, the DCAA disallowed approximately $3.1 million in costs. CONTRACTS We contract with Federal and state governments as well as with the private sector. These contracts are often subject to termination at the discretion of the client. Additionally, we enter into various types of contracts with our clients, including fixed-price contracts. In the six months ended April 4, 1999, approximately 31.4% 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. Losses under fixed-price contracts or termination of contracts at the discretion of the client 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. Reliance on subcontractors varies from project to project. In the six months ended April 4, 1999, subcontractor costs comprised 23.1% of our gross revenue. The absence of qualified subcontractors with whom we have a satisfactory relationship could adversely affect the quality of our service and our ability to perform under some of our contracts. 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 -21- compete with many other firms. These firms range from small regional firms to large national firms which may have greater financial and marketing resources than ours. We focus primarily on the resource management, infrastructure and communications business areas. We provide services to our clients which include Federal, state and local agencies, and organizations in the private sector. We compete for projects and engagements with a number of competitors which can vary from 10 to 100 firms. Historically, clients have chosen among competing firms based on the quality and timeliness of the firm's service. We believe, however, that price has become an increasingly important factor. We believe that our principal competitors include, in alphabetical order, Black & Veatch LLP; Brown & Caldwell; Castle Tower Corporation; 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. Professional liability policies are "claims made" policies; thus, only claims made during the term of the policy are covered. Should we terminate our professional liability policy and not obtain retroactive coverage, we would be uninsured for claims made after termination even if these claims are based on events or acts that occurred during the term of the policy. Additionally, our insurance policies may not protect us against potential liability due to various exclusions and retentions. Should we expand into new markets, we may not be able to obtain insurance coverage for such activities or, if insurance is obtained, the dollar amount of any liabilities incurred could exceed our insurance coverage. Partially or completely uninsured claims, if successful and of significant magnitude, could have a material adverse affect on our business. 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 -22- 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 the six months ended April 4, 1999, approximately 4.8% 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 (Y2K) on its business operations and the ability of its computerized information systems to accurately process information that may be date-sensitive. Any of its programs that recognize a date using "00" as the year 1900 rather than the Y2K 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 Y2K compliant by our vendors. Currently, 11 of our 14 operating units are accounted for, or 85.3% of our gross revenue is recognized on, these Y2K compliant systems. We are in the process of converting an additional operating unit and plan to either convert the two remaining units or upgrade them to a Y2K compliant version of their existing applications. In all cases, we believe that our financial and accounting systems will be Y2K compliant in a timely manner and will not be materially impacted by Y2K. We have extensive business with the Federal government. Should the Federal government, especially the Department of Defense, experience significant business interruptions relating to non-Y2K 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 Y2K issues in a timely manner, we could be materially impacted. We believe that the worst case scenario relating to Y2K would be an extensive period of time in which the Federal government and other third parties could not process payments promptly, in addition to the Company's financial institutions not being able to supply the Company with its working capital needs. -23- Additional risks associated with non-Y2K 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. 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 our stockholders might consider in their best interests. In addition, our board of directors is authorized to issue, without obtaining stockholder approval, up to 2.0 million 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. -24- PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On February 26, 1999, we acquired 100.0% of the capital stock of McCulley, Frick & Gilman, Inc., a Texas corporation (MFG), through stock purchases from the former shareholders of MFG (the "Stock Purchase"). In connection with the Stock Purchase, we issued an aggregate of 185,192 shares of our common stock, $.01 par value ("Common Stock"), to the former shareholders of MFG. For purposes of the Stock Purchase, each share of Common Stock was valued at $22.95. The issuances of Common 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On February 17, 1999, we held our annual meeting of stockholders for the sole purpose of re-electing the following five directors to our Board of Directors: Li-San Hwang, Daniel A. Whalen, J. Christopher Lewis, Patrick C. Haden and James J. Shelton. The votes cast in the election were as follows:
BROKER DIRECTOR FOR WITHHOLD AUTHORITY ABSTENTIONS NON-VOTES - -------- ---------- ------------------ ----------- --------- Li-San Hwang 25,065,507 202,647 0 0 Daniel A. Whalen 24,925,742 342,412 0 0 J. Christopher Lewis 25,066,169 201,985 0 0 Patrick C. Haden 25,027,163 240,991 0 0 James J. Shelton 25,064,415 203,739 0 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. 3.1 Restated Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1995). 3.2 Bylaws of the Company as amended to date (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1, No. 33-43723). -25- 3.3 Certificate of Amendment of Certificate of Incorporation of the Company (incorporated herein by reference to Exhibit 3.4 to the Company's Annual Report on Form 10-K for the fiscal year ended October 4, 1998). 10.1 Credit Agreement dated as of 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 (incorporated herein by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 1997). 10.3 Third Amendment dated as of December 15, 1997 to the Credit Agreement dated as of September 15, 1995 between the Company and Bank of America National Trust and Savings Association (incorporated herein by reference to Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 1997). 10.4 Fourth Amendment dated as of January 30, 1997 to the Credit Agreement dated as of September 15, 1995 between the Company and Bank of America National Trust and Savings Association (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 28, 1997). 10.5 Fifth Amendment dated as of July 6, 1998 to the Credit Agreement dated as of September 15, 1995 between the Company and Bank of America National Trust and Savings Association (incorporated herein by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended). 10.6 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). -26- 10.7 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). 10.8 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). 10.9 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). 10.10 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). 10.11 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). 10.12 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). 10.13 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). 10.14 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). 10.15 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). -27- 10.16 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). 10.17 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). 10.18 Employment Agreement dated as of June 11, 1997 between the Company and Daniel A. Whalen (incorporated herein by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 1997). 10.19 Registration Rights Agreement dated as of June 11, 1997 among the Company and the parties listed on Schedule A attached thereto (incorporated herein by reference to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 29, 1997). 10.20 Registration Rights Agreement dated as of July 11, 1997 among the Company and the parties listed on Schedule A attached thereto (incorporated herein by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 1997). 10.21 Registration Rights Agreement dated as of March 26, 1998 among the Company and the parties listed on Schedule A attached thereto (incorporated herein by reference to Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 29, 1998). 10.22 Registration Rights Agreement dated as of July 9, 1998 among the Company and the parties listed on Schedule A attached thereto (incorporated herein by reference to Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 28, 1998). 10.23 Registration Rights Agreement dated as of September 22, 1998 among the Company and the parties listed on Schedule A attached thereto (incorporated herein by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the fiscal year ended October 4, 1998). -28- 10.24 Registration Rights Agreement dated as of February 26, 1999 among the Company and the parties listed on Schedule A attached hereto. 11 Computation of Net Income Per Common Share. 27 Financial Data Schedule. (b) REPORTS ON FORM 8-K. None -29- 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: May 19, 1999 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) -30- EX-10.24 2 EXHIBIT 10.24 Exhibit 10.24 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is entered into as of February 26, 1999 by and among Tetra Tech, Inc., a Delaware corporation ("Tetra Tech"), and the parties listed on SCHEDULE A attached hereto (each, a "Holder" and collectively, the "Holders"). R E C I T A L S A. Tetra Tech and the Holders are parties to an Agreement and Plan of Reorganization of even date (the "Reorganization Agreement"), pursuant to which McCulley, Frick & Gilman, Inc., a Texas corporation ("MFG"), will merge into MFG Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Tetra Tech. B. Pursuant to the Reorganization Agreement, the shareholders of MFG will receive shares of the common stock, $.01 par value, of Tetra Tech ("Tetra Tech Common Stock"); and C. This Agreement is the Registration Rights Agreement referred to in SECTION 6.2 of the Reorganization Agreement and, pursuant thereto, must be entered into by the parties in connection with the consummation of the transactions contemplated by the Reorganization Agreement. A G R E E M E N T NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended from time to time. "FORM S-3" shall mean such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by Tetra Tech with the SEC. "PROSPECTUS" shall mean the prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by the Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such Prospectus. "REGISTER", "REGISTERED" and "REGISTRATION" shall mean and refer to a registration effected by preparing and filing a Registration Statement and taking all other actions that are necessary or appropriate in connection therewith, and the declaration or ordering of effectiveness of such Registration Statement by the SEC. "REGISTRATION EXPENSES" shall have the meaning set forth in SECTION 4. "REGISTRABLE SECURITIES" shall mean the shares of Tetra Tech Common Stock (i) issued pursuant to the Reorganization Agreement, and (ii) issued as a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in (i) above; PROVIDED, HOWEVER, that Registrable Securities shall not include any shares of Tetra Tech Common Stock that have previously been registered or sold to the public or have been sold pursuant to Rule 144 (or similar successor Rule). "REGISTRATION STATEMENT" shall mean any registration statement of Tetra Tech in compliance with the Securities Act that covers Registrable Securities pursuant to the provisions of this Agreement, including, without limitation, the Prospectus, all amendments and supplements to such Registration Statement, including all post-effective amendments, all exhibits and all material incorporated by reference in such Registration Statement. "RULE 144" shall mean Rule 144 promulgated under the Securities Act or any similar successor rule, as the same shall be in effect from time to time. "RULE 144A" shall mean Rule 144A promulgated under the Securities Act or any similar successor rule, as the same shall be in effect from time to time. "RULE 415" shall mean Rule 415 promulgated under the Securities Act, or any similar successor rule, as the same shall be in effect from time to time. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended from time to time. "SEC" shall mean the Securities and Exchange Commission. "UNDERWRITTEN OFFERING" shall mean a registration in which securities of Tetra Tech are sold to an underwriter or through an underwriter as agent for reoffering to the public. 2. REGISTRATION. (a) Tetra Tech shall file a Registration Statement on Form S-3, providing for the sale by the Holders, pursuant to Rule 415, and/or any similar rule that may be adopted by the SEC, of the Registrable Securities. Tetra Tech shall use commercially reasonable efforts to cause such Registration Statement to become effective on or before August 26, 1999, and to keep such Registration Statement continuously effective for a period ending on the date on such all Holders are eligible to sell Registrable Securities under Rule 144 (or similar successor rule) without any volume limitation. If, at the time Tetra Tech is required to file a Registration Statement pursuant to this SECTION 2(a), Tetra Tech is not eligible to file a Registration Statement on Form S-3 to register resales by stockholders, Tetra Tech shall initially file a Registration Statement on Form S-1 and shall comply with the provisions of the immediately preceding sentence. Upon becoming eligible to use the Registration Statement on Form S-3 to register resales by stockholders (whether pursuant to a ruling or waiver from the SEC or otherwise), Tetra Tech shall promptly file a Registration Statement on Form S-3 or convert the existing Registration Statement to Form S-3 relating to the offer and sale of Registrable Securities by the Holders from time to time. Thereafter, Tetra Tech shall use commercially reasonable efforts to cause such new or amended Registration Statement to be declared effective by the SEC as promptly as practicable. (b) No Holder shall have the right to register securities under this Agreement unless such Holder provides and/or confirms in writing prior to or after the filing of the Registration Statement such information (including, without limitation, information as to the number of Registrable Securities that such Holder has sold pursuant to any such Registration Statement from time to time) as Tetra Tech reasonably requests in connection with such Registration Statement. (c) Notwithstanding the foregoing, for a period not to exceed 90 days, Tetra Tech shall not be obligated to prepare and file the Registration Statement required hereunder if Tetra Tech, in its good faith judgment, reasonably believes that the filing of such Registration Statement would require the disclosure of material non-public information regarding Tetra Tech and, accordingly, that the filing thereof, at the time requested, or the offering of Tetra Tech Common Stock pursuant thereto, would materially and adversely affect (i) a pending or scheduled public offering or private placement of securities of Tetra Tech, (ii) an acquisition, merger, consolidation or similar transaction by or of Tetra Tech, (iii) preexisting and continuing negotiations, discussions or pending proposals with respect to any of the foregoing transactions, or (iv) the financial condition of Tetra Tech in view of the disclosure of any pending or threatened litigation, claim, assessment or governmental investigation which might be required thereby. In the event that Tetra Tech, in good faith, reasonably believes that such conditions are continuing after such 90-day period, it may, with the consent of the Holders of a majority of the Registrable Securities subject (or to be subject) to the Registration Statement, which consent shall not be unreasonably withheld, extend such 90-day period for an additional 30 days. Any further delay shall require the consent of the Holders of all such shares. 3. REGISTRATION PROCEDURES. In connection with Tetra Tech's registration obligations pursuant to SECTION 2 hereof, Tetra Tech will use commercially reasonable efforts to effect such registration to permit the sale of the Registrable Securities covered thereby in accordance with the intended method or methods of disposition thereof, and pursuant thereto Tetra Tech will as expeditiously as possible: (a) prepare and file with the SEC a Registration Statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such Registration Statement to become effective; PROVIDED that, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, Tetra Tech will furnish to the Holders of the Registrable Securities covered by such Registration Statement and their counsel, copies of all such documents proposed to be filed at least ten days prior thereto, and Tetra Tech will not file any such Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which any such Holder shall reasonably object within such ten day period; PROVIDED, FURTHER, that Tetra Tech will not name or otherwise provide any information with respect to any Holder in any Registration Statement or Prospectus without the express written consent of such Holder, unless required to do so by the Securities Act and the rules and regulations thereunder; (b) prepare and file with the SEC such amendments, post-effective amendments and supplements to the Registration Statement and the Prospectus as may be necessary to comply with the provisions of the Securities Act and the rules and regulations thereunder with respect to the disposition of all securities covered by such Registration Statement; (c) notify the selling Holders (i) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (iii) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (iv) of the receipt by Tetra Tech of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (v) of the happening of any event which makes any statement made in the Registration Statement, the Prospectus or any document incorporated therein by reference untrue or which requires the making of any changes in the Registration Statement, the Prospectus or any document incorporated therein by reference in order to make the statements therein not misleading in light of the circumstances then existing; (d) make every commercially reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; (e) deliver to each selling Holder, without charge, such reasonable number of conformed copies of the Registration Statement (and any post-effective amendment thereto) and such number of copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto (and any documents incorporated by reference therein) as such Holder may reasonably request. Tetra Tech consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders in connection with the offer and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (f) prior to any offering of Registrable Securities covered by a Registration Statement, register or qualify or cooperate with the selling Holders in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such selling Holder reasonably requests, and use commercially reasonable efforts to keep each such registration or qualification effective, including through new filings, or amendments or renewals, during the period such Registration Statement is required to be kept effective pursuant to the terms of this Agreement; and do any and all other acts or things necessary or advisable to enable the disposition in all such jurisdictions reasonably requested by the Holders of the Registrable Securities covered by such Registration Statement, PROVIDED that under no circumstances shall Tetra Tech be required in connection therewith or as a condition thereof to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (g) cooperate with the selling Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, free of any and all restrictive legends, such certificates to be in such denominations and registered in such names as the Holders may request; (h) upon the occurrence of any event contemplated by SECTION 3(c)(v) above, prepare a supplement or post-effective amendment to the Registration Statement or the Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (i) make generally available to the holders of Tetra Tech's outstanding securities earnings statements satisfying the provisions of Section 11(a) of the Securities Act, no later than 60 days after the end of any 12 month period (or 90 days, if such period is a fiscal year) beginning with the first month of Tetra Tech's first fiscal quarter commencing after the effective date of the Registration Statement, which statements shall cover said 12 month period; (j) provide and cause to be maintained a transfer agent and registrar for all Registrable Securities covered by each Registration Statement from and after a date not later than the effective date of such Registration Statement; (k) use its best efforts to cause all Registrable Securities covered by each Registration Statement to be listed, subject to notice of issuance, prior to the date of the first sale of such Registrable Securities pursuant to such Registration Statement, on each securities exchange on which the Tetra Tech Common Stock is then listed, and admitted to trading on the Nasdaq Stock Market, if the Tetra Tech Common Stock is then admitted to trading on the Nasdaq Stock Market; and (l) enter into such agreements and take such other actions as a majority of the Holders shall reasonably request in order to expedite or facilitate the disposition of such Registrable Securities. Each Holder agrees that, upon receipt of any notice from Tetra Tech of the happening of any event of the kind described in SECTION 3(c)(v) hereof, such Holder will forthwith discontinue disposition of Registrable Securities under the Prospectus related to the applicable Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by SECTION 3(h) hereof, or until it is advised in writing by Tetra Tech that the use of the Prospectus may be resumed. It shall be a condition precedent to the obligations of Tetra Tech to take any action pursuant to this SECTION 3 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to Tetra Tech such information regarding itself and the Registrable Securities held by it as shall be required by the Securities Act to effect the registration of such Holder's Registrable Securities. 4. REGISTRATION EXPENSES. All expenses incident to any registration to be effected hereunder and incident to Tetra Tech's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, National Association of Securities Dealers, Inc., stock exchange and qualification fees, fees and disbursements of Tetra Tech's counsel and of independent certified public accountants of Tetra Tech (including the expenses of any special audit required by or incident to such performance), the fees and disbursements of one counsel and one accountant representing the Holders in such offering, expenses of the underwriters that are customarily requested in similar circumstances by such underwriters (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities, which will be borne by the Holders), all such expenses being herein called "Registration Expenses," will be borne by Tetra Tech. Tetra Tech will also pay its internal expenses, the expense of any annual audit and the fees and expenses of any person retained by Tetra Tech. 5. INDEMNIFICATION. (a) INDEMNIFICATION BY TETRA TECH. Tetra Tech agrees to indemnify and hold harmless each Holder of Registrable Securities, its officers, directors, partners and employees and each person who controls such Holder (within the meaning of Section 15 of the Securities Act) from and against any and all losses, claims, damages and liabilities (including any investigation, legal or other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted) (collectively, "Damages") to which such Holder may become subject under the Securities Act, the Exchange Act or other federal or state securities law or regulation, at common law or otherwise, insofar as such Damages arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, Prospectus or preliminary prospectus or any amendment or supplement thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading and (iii) any violation or alleged violation by Tetra Tech of the Securities Act, the Exchange Act or any state securities or blue sky laws in connection with the Registration Statement, Prospectus or preliminary prospectus or any amendment or supplement thereto, provided that Tetra Tech will not be liable to any Holder to the extent that such Damages arise from or are based upon any untrue statement or omission (x) based upon written information furnished to Tetra Tech by such Holder expressly for the inclusion in such Registration Statement, (y) made in any preliminary prospectus if such Holder failed to deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale by such Holder to the party asserting the claim underlying such Damages and such Prospectus would have corrected such untrue statement or omission and (z) made in any Prospectus if such untrue statement or omission was corrected in an amendment or supplement to such Prospectus and such Holder failed to deliver such amendment or supplement prior to or concurrently with the sale of Registrable Securities to the party asserting the claim underlying such Damages. (b) INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. Each Holder of Registrable Securities whose Registrable Securities are sold under a Prospectus which is a part of a Registration Statement agrees to indemnify and hold harmless Tetra Tech, its directors and each officer who signed such Registration Statement and each person who controls Tetra Tech (within the meaning of Section 15 of the Securities Act), and each other Holder of Registrable Securities whose Registrable Securities are sold under the Prospectus which is a part of such Registration Statement (and such Holder's officers, directors and employees and each person who controls such Holder within the meaning of Section 15 of the Securities Act), under the same circumstances as the foregoing indemnity from Tetra Tech to each Holder of Registrable Securities to the extent that such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement of a material fact or omission of a material fact that was made in the Prospectus, the Registration Statement, or any amendment or supplement thereto, in reliance upon and in conformity with information relating to such Holder furnished in writing to Tetra Tech by such Holder expressly for use therein, PROVIDED that in no event shall the aggregate liability of any selling Holder of Registrable Securities exceed the amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. Tetra Tech and the selling Holders shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as customarily furnished by such persons in similar circumstances. (c) CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any person entitled to indemnification hereunder will (i) give prompt notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party; PROVIDED, HOWEVER, that any person entitled to indemnification hereunder shall have the right to employ separate counsel and to participate in the defense of such claim, but the fees and expenses of such counsel shall be at the expense of such person and not of the indemnifying party unless (A) the indemnifying party has agreed to pay such fees or expenses, (B) the indemnifying party shall have failed to assume the defense of such claim and employ counsel reasonably satisfactory to such person or (C) in the reasonable judgment of such person and the indemnifying party, based upon advice of their respective counsel, a conflict of interest may exist between such person and the indemnifying party with respect to such claims (in which case, if the person notifies the indemnifying party in writing that such person elects to employ separate counsel at the expense of the indemnifying party, the indemnifying party shall not have the right to assume the defense of such claim on behalf of such person). If such defense is not assumed by the indemnifying party, the indemnifying party will not be subject to any liability for any settlement made without its consent (but such consent will not be unreasonably withheld). No indemnified party will be required to consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by all claimants or plaintiffs to such indemnified party of a release from all liability in respect to such claim or litigation. Any indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim. As used in this SECTION 5(c), the terms "indemnifying party", "indemnified party" and other terms of similar import are intended to include only Tetra Tech (and its officers, directors and control persons as set forth above) on the one hand, and the Holders (and their officers, directors, partners, employees, attorneys and control persons as set forth above) on the other hand, as applicable. (d) CONTRIBUTION. If for any reason the foregoing indemnity is unavailable, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative fault of the indemnifying party and the indemnified party in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether the untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by such indemnifying party or by such indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The parties acknowledge and agree that it would not be just and equitable if contribution pursuant to this SECTION 5(d) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in this SECTION 5(d). Notwithstanding the foregoing, no Holder shall be required to contribute any amount in excess of the amount such Holder would have been required to pay to an indemnified party if the indemnity under SECTION 5(b) hereof was available. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The obligation of any person to contribute pursuant to this SECTION 5(d) shall be several and not joint. (e) TIMING OF PAYMENTS. An indemnifying party shall make payments of all amounts required to be made pursuant to the foregoing provisions of this SECTION 5 to or for the account of the indemnified party from time to time promptly upon receipt of bills or invoices relating thereto or when otherwise due or payable. (f) SURVIVAL. The indemnity and contribution agreements contained in this SECTION 5 shall remain in full force and effect, regardless of any investigation made by or on behalf of Tetra Tech, a participating Holder, its officers, directors, partners, attorneys, agents or any person, if any, who controls Tetra Tech or such Holder as aforesaid, and shall survive the transfer of such Registrable Securities by such Holder. 6. PREPARATION; REASONABLE INVESTIGATION. In connection with the preparation and filing of a Registration Statement pursuant to the terms of this Agreement: (a) Tetra Tech shall, with respect to a Registration Statement filed pursuant to SECTION 2, give the Holders of such Registrable Securities so registered, their underwriters, if any, and their respective counsel and accountants the opportunity to participate in the preparation of such Registration Statement (other than reports and proxy statements incorporated therein by reference and properly filed with the SEC) and each Prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto; and (b) Tetra Tech shall give the Holders of such Registrable Securities so registered, their underwriters, if any, and their respective counsel and accountants such reasonable access to its books and records and such opportunities to discuss the business of Tetra Tech with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such Holders or such underwriters, to conduct a reasonable investigation within the meaning of Section 11(b)(3) of the Securities Act. 7. RULE 144. Tetra Tech covenants that it will use commercially reasonable efforts to file, on a timely basis, the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder, and it will take such further action as any Holder may reasonably request (including, without limitation, compliance with the current public information requirements of Rule 144(c) and Rule 144A), all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the conditions provided by Rule 144, Rule 144A or any similar rule or regulation hereafter adopted by the SEC. Upon the request of any Holder, Tetra Tech will promptly deliver to such Holder a written statement verifying that it has complied with such information and requirements. 8. SPECIFIC PERFORMANCE. Each Holder, in addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. Tetra Tech agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate. 9. NOTICES. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, sent by facsimile or delivered personally by hand or nationally recognized courier addressed (a) if to a Holder, as indicated on the list of Holders attached hereto as SCHEDULE A, or at such other address as such Holder or permitted assignee shall have furnished to Tetra Tech in writing, with a copy to Steven A. Werner, c/o McCulley, Frick & Gilman, Inc., 4900 Pearl East Circle, Suite 300W, Boulder, Colorado 80301 or (b) if to Tetra Tech, at such address or facsimile number as Tetra Tech shall have furnished to each Holder in writing. All such notices and other written communications shall be effective on the date of mailing, facsimile transfer or delivery. 10. SUCCESSORS AND ASSIGNS: ASSIGNMENT OF RIGHTS. The rights and benefits of a Holder hereunder may not be assigned to a transferee or assignee without the consent of Tetra Tech; PRIVIDED, HOWEVER, that, no later than the 10th day prior to the filing of the Registration Statement under SECTION 2 hereof, the rights and benefits of a Holder hereunder may be transferred in connection with a transfer or assignment of any Registrable Securities held by such Holder (i) by gift to immediate family members of such Holder, or trusts or other entities for the sole benefit thereof, or (ii) by gift to any entity in which such Holder, his or her immediate family members, or trusts or other entities for the sole benefit thereof beneficially own all of the voting securities; PROVIDED, HOWEVER, that in each case, the transferee executes an instrument pursuant to which the transferee agrees to be bound by the terms and conditions hereof as a Holder, and such other documents as Tetra Tech or its counsel may reasonably require, after which, such transferee shall be deemed a "Holder" hereunder. Any transfer of Registrable Securities, and rights hereunder, shall be subject to compliance with applicable securities laws and the restrictions contained in the Investment Letter executed by each Holder pursuant to the Reorganization Agreement. 11. SEVERABILITY. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. 12. ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement, the Reorganization Agreement and the other agreements contemplated thereby constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and thereof. Without limiting the foregoing, the rights of the Holders to registration pursuant to the terms of this Agreement shall be subject to the limitations on resale contained in the Investment Letter (as defined in the Reorganization Agreement). Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by Tetra Tech and the holders of at least 51% of the Registrable Securities and any such amendment, waiver, discharge or termination shall be binding upon all the parties hereto, but in no event shall the obligation of any party hereto be materially increased, except upon the written consent of such party. 13. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be original, and all of which together shall constitute one instrument. 14. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware without giving effect to principles of conflicts of laws thereof. 15. NO THIRD PARTY BENEFICIARIES. The covenants and agreements set forth herein are for the sole and exclusive benefit of the parties hereto and their respective successors and assigns and such covenants and agreements shall not be construed as conferring, and are not intended to confer, any rights or benefits upon any other persons. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. TETRA TECH, INC. By: /s/ Li-San Hwang --------------------------------- Li-San Hwang Chairman, Chief Executive Officer and President /s/ Zenas F. Bliss ------------------------- Zenas F. Bliss /s/ Antonio J. Chavez ------------------------- Antonio J. Chavez /s/ Bence V. Close ------------------------- Bence V. Close /s/ Edward P. Conti ------------------------- Edward P. Conti /s/ Douglas R. Frick ------------------------- Douglas R. Frick /s/ Jeffrey A. Gilman ------------------------- Jeffrey A. Gilman /s/ Craig A. Hamilton ------------------------- Craig A. Hamilton /s/ Brian G. Hansen ------------------------- Brian G. Hansen /s/ Eric B. Hansen ------------------------- Eric B. Hansen /s/ Bryan L. McCulley ------------------------- Bryan L. McCulley /s/ Eric F. Pastor ------------------------- Eric F. Pastor /s/ Kenneth J. Richmond ------------------------- Kenneth J. Richmond /s/ Richard G. Steffel ------------------------- Richard G. Steffel /s/ Steven A. Werner ------------------------- Steven A. Werner /s/ Kirk D. Winges ------------------------- Kirk D. Winges SCHEDULE A ---------- SCHEDULE OF HOLDERS
Number of Shares of Tetra Tech Commons Stock Issued Pursuant Holder's Name/Address/Facsimile No. To the Reorganization Agreement ------------------------------------- ------------------------------------- Zenas F. Bliss 1,658 shares 7 Meadow Brook Road Dover, MA 02030 Antonio J. Chavez 1,658 shares 2736 White Pines Drive Coeur d'Alene, ID 83814 Bence V. Close 3,315 shares 366 Hunters Ridge Drive Longmont, CO 80504 Edward P. Conti 3,315 shares 50 Lakeside Drive Corte Madera, CA 94925 Douglas R. Frick 31,071 shares 7125 44th Avenue, SW Seattle, WA 93136 Jeffrey A. Gilman 41,428 shares 753 Old Jonas Hill Road Lafayette, CA 94549 Craig A. Hamilton 1,658 shares 2981 Goloen Eagle Circle Lafayette, CO 80026 Brian G. Hansen 3,315 shares 9485 Old Mill Trail Missoula, MT 59802 Eric B. Hansen 1,658 shares 5133 Bercot Road Freeland, WA 98249 Bryan L. McCulley 41,428 shares 3817 Silver Plume Circle Boulder, CO 80303 Eric F. Pastor 8,286 shares 1508 Hardouin Avenue Austin, TX 78703 Kenneth J. Richmond 1,658 shares 13601 Kenwanda Drive Snohomish, WA 98290 Richard G. Steffel 1,658 shares 7545 Jones Avenue NW Seattle, WA 98117 Steven A. Werner 41,428 shares 217 Sentinal Rock Lane Boulder, CO 80302 Kirk D. Winges 1,658 shares 18031 NE 99th Court Redmond, WA 98052
EX-11 3 EXHIBIT 11 Exhibit 11 Tetra Tech, Inc. Computation of Net Income Per Common Share (Unaudited)
Three Months Ended Six Months Ended ------------------------- ------------------------- April 4, March 29, April 4, March 29, 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Basic: Common stock outstanding, beginning of period 28,684,117 27,840,926 26,630,600 25,892,818 Stock options exercised 83,226 131,266 136,590 154,943 Stock purchase plan issuance -- -- 153 -- Issuance of common stock 1,295,185 77,008 1,295,185 2,001,757 Payment of fractional shares -- -- -- (318) ------------ ------------ ------------ ------------ Common stock outstanding, end of period 30,062,528 28,049,200 30,062,528 28,049,200 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Weighted average common stock outstanding during the period 29,435,000 27,905,000 29,045,000 27,561,000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income as reported in condensed consolidated financial statements $ 6,462,000 $ 4,521,000 $11,889,000 $ 8,571,000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Basic Earnings Per Share $ 0.22 $ 0.16 $ 0.41 $ 0.31 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Diluted: Weighted average common stock outstanding during the period 29,435,000 27,905,000 29,045,000 27,561,000 Potential common shares under the treasury stock method assuming the exercise of options and warrants and the conversion of preferred stock and exchangeable stock of a subsidiary 1,976,000 1,051,000 2,016,000 1,334,000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Total 31,411,000 28,956,000 31,061,000 28,895,000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income as reported in condensed consolidated financial statements $ 6,462,000 $ 4,521,000 $11,889,000 $ 8,571,000 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Diluted Earnings Per Share $ 0.21 $ 0.16 $ 0.38 $ 0.30 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ See accompanying Notes to Condensed Consolidated Financial Statements.
EX-27 4 EXHIBIT 27
5 1,000 6-MOS OCT-03-1999 APR-04-1999 12,072 0 133,982 12,212 0 142,743 29,963 15,641 274,782 68,959 0 0 0 301 205,207 274,782 128,083 128,083 105,530 105,530 0 0 656 11,337 4,875 6,462 0 0 0 6,462 0.22 0.21
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