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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 3, 1999.
/ / 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 incorporation or organization) (I.R.S. Employer Identification No.)
670 N. ROSEMEAD BLVD.
PASADENA, CALIFORNIA 91107
(Address of registrant's principal executive offices) (Zip Code)
(Registrant's telephone number, including area code:) (626) 351-4664
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class) (Name of each exchange on which registered)
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant on December 10, 1999 was $480,698,570.
The number of shares of Common Stock, $.01 par value, outstanding (the only
class of common stock of the registrant outstanding) was 38,461,322 on December
10, 1999.
Portions of registrant's Annual Report to Stockholders for the fiscal year ended
October 3, 1999 are incorporated by reference in Part II of this report.
Portions of registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders are incorporated by reference in Part III of this report.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
PART I
ITEM 1. BUSINESS.
Tetra Tech, Inc. is a leading provider of specialized management
consulting and technical services in three principal business areas: resource
management, infrastructure and communications. As a specialized management
consultant, we assist our clients in defining problems and developing innovative
and cost-effective solutions. Our management consulting services are
complemented by our technical services. These technical services, which
implement solutions, include research and development, applied science,
engineering and architectural design, construction management, and operations
and maintenance. Our clients include a diverse base of public and private
organizations located in the United States and internationally.
Since our initial public offering in December 1991, we have increased
the size and scope of our business and have expanded our service offerings
through a series of strategic acquisitions and internal growth. As of the end of
our last fiscal year, we had more than 5,000 employees worldwide, primarily
located in North America in more than 150 locations. In addition, we have
established a presence in Asia, South America and Europe. From fiscal 1991
through fiscal 1999, we generated a net revenue compounded annual growth rate of
approximately 34.9%, and achieved a net income compounded annual growth rate of
approximately 37.0%.
INDUSTRY OVERVIEW
Due to increased competition, changing regulatory environments and
rapid technological advancement, many organizations face new and complex
challenges. Increasingly, these organizations are turning to professional
services firms to assist them with addressing these challenges. Since each
industry presents its own unique set of challenges, organizations often seek
professional service firms with industry-specific expertise to analyze their
problems and develop appropriate solutions. These solutions are then implemented
by firms possessing the required engineering and technical service capabilities.
Each of the following three business areas faces its own unique set of problems:
RESOURCE MANAGEMENT. The world's natural resources, including water,
air and soil, are interdependent, creating a delicate balance. Factors such as
agricultural and residential development, commercial construction and
industrialization often upset this balance. Public concern over environmental
issues, especially water quality and availability, has been a driving force
behind numerous laws and regulations that are designed to prevent environmental
degradation and mandate restorative measures. To comply with environmental laws
and regulations, respond to public pressure and attain operating efficiencies,
public and private organizations are increasing their focus on resource
management. Two areas particularly affected by these trends are water management
and waste management.
- WATER MANAGEMENT. Insufficient water supplies, concern over
the cost, quality and availability of water and the need in
many parts of the world to replace aging infrastructure used
to capture, safeguard and distribute water are critical social
and economic concerns. According to the U.S. Environmental
Protection Agency (EPA), contamination of groundwater and
surface water resulting from agricultural, residential,
commercial and industrial development is one of the most
serious environmental problems facing the United States. To
alleviate these social and economic concerns, public and
private organizations seek water management advice. According
to the ENVIRONMENTAL BUSINESS JOURNAL, the size of the
consulting, engineering services and wastewater treatment
segments of the water management industry totaled more than
$31 billion in 1998.
- WASTE MANAGEMENT. In the past, many waste disposal practices
caused significant environmental damage. Since the 1970s, more
stringent controls on municipal and industrial waste have been
established by governments around the world to protect the
environment. Recently, the Federal government has committed
approximately $15 billion to various environmental initiatives
in an attempt to curb pollution, accelerate toxic waste
cleanups and combat other forms of pollution. Organizations
seek waste management advice to comply with complex and
evolving environmental regulations, to minimize the economic
impact of waste generation and disposal, and to realize
significant cost savings through increased operating
efficiencies.
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INFRASTRUCTURE. Continued population and economic growth place
significant strain on an overburdened infrastructure, thereby requiring
additional development. This development includes water and wastewater treatment
plants, roads, pipelines, communication and power networks, and educational,
recreational and correctional facilities. Additionally, as existing facilities
age, they require upgrading or replacement. Further, the trend toward
privatization of infrastructure is causing public and private organizations that
develop and maintain these facilities to evaluate their cost structures and
establish more efficient systems. These factors drive the need for development
and planning services that are often provided by consulting firms. According to
the ENGINEERING NEWS-RECORD, the market opportunity in the United States for
technical services in infrastructure development including water and wastewater,
transportation, hazardous waste, and educational, recreational and correctional
facilities, ranges from $15 to $20 billion.
COMMUNICATIONS. Technological change and government deregulation have
spurred sweeping changes in the communications industry. Local and long-distance
telephone companies, cable operators and wireless service providers are
penetrating each other's markets and trying to establish a foothold in new
markets created by new technologies. For example, traditional cable operators
are installing advanced capabilities such as digital cable, cable modem, cable
telephony and other high-speed data transmission services at the same time as
wireless communications providers are seeking access to the Internet. At the
same time, various service providers are consolidating in order to offer their
subscribers a comprehensive set of services and to maintain dominance in their
markets. As these trends continue, network service providers will increasingly
turn to professional service firms for advice and assistance in planning,
deploying and maintaining their communications networks.
Organizations within each of the above business areas face unique
problems but often lack the internal resources and experience necessary to
identify issues and evaluate possible solutions. As a result, many of these
organizations rely on advice from outside management consultants. Most
consulting companies provide limited front-end problem assessment and solution
design and require clients to engage other engineering and technical services
companies to implement recommended solutions. A significant opportunity exists
for consulting companies that not only develop, but also implement, solutions.
These professional service firms are often in the best position to help clients
respond to the challenges they face.
THE TETRA TECH SOLUTION
Tetra Tech provides the specialized management consulting services that
assist clients in identifying industry-specific problems and defining
appropriate solutions. We also provide the technical services required to
implement these solutions. We believe that we are a leader in this market and
that the following factors distinguish us from our competitors:
UNDERSTANDING CLIENT NEEDS. The ability to identify client needs is
essential to strategic planning and execution. Even before the proposal process
begins, we assist our clients by helping them define their business objectives
and strategies and identify issues that are critical to their success. We strive
to develop numerous contacts at various levels within our clients' organizations
to help us identify the key issues from a variety of perspectives. We believe
that our long history and exposure to a broad client base increase our awareness
of the issues being confronted by organizations and thereby help us identify and
solve our clients' problems.
CAPITALIZING ON OUR EXTENSIVE TECHNICAL EXPERIENCE. Since our inception
in 1966, we have provided innovative consulting and engineering services,
historically focusing on cost-effective solutions to water resource management
and environmental problems. We have been successful in leveraging this
foundation of scientific and engineering capabilities into other areas,
including infrastructure and communications. Our services are provided by a wide
range of professionals including: archaeologists, biologists, chemical
engineers, chemists, civil engineers, computer scientists, economists,
electrical engineers, environmental engineers, environmental scientists,
geologists, hydrogeologists, mechanical engineers, oceanographers and
toxicologists. Because of the experience that we have gained from thousands of
completed projects, we often are able to apply proven solutions to client
problems without the time-consuming process of developing new approaches.
OFFERING A FULL RANGE OF SERVICES. Our depth of consulting and
technical skills allows us to respond to client needs at every phase of a
project, including initial planning, research and development, applied science,
engineering and architectural design, and construction management. Once a
particular project is completed, we are able to offer our clients additional
value-added services such as operations and maintenance. Our expertise across
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industries and our broad service offerings enable us to be a single source
provider to our clients.
PROVIDING BROAD GEOGRAPHIC COVERAGE AND LOCAL EXPERTISE. We believe
that proximity to our clients is instrumental to understanding their needs and
delivering comprehensive services. We have significantly broadened our
geographic presence in recent years through strategic acquisitions and internal
growth. Our historical geographic base was primarily in the western portion of
the United States. However, we currently have operations in more than 40 states.
We have also increased our international presence, and we now have operations in
Canada, Taiwan, the Philippines, Argentina, Chile, Brazil and the Czech
Republic.
COMPANY STRATEGY
Our objective is to become the leading provider of specialized
management consulting and technical services in our chosen business areas. To
achieve this objective, we plan to continue the following primary strategies
that we believe have been integral to our success:
IDENTIFY AND EXPAND INTO NEW BUSINESS AREAS. We use our management
consulting services and certain of our technical services as an entry point to
evaluate and to enter new business areas. After our consulting practice is
established in a new business area, we can expand our operations by offering
additional technical services. For example, based on our provision of site
acquisition services to communications industry participants, we identified
infrastructure services within the communications industry as an appropriate
area into which we could expand our operations.
EXPAND SERVICE OFFERINGS AND GEOGRAPHIC PRESENCE THROUGH ACQUISITIONS.
We believe that acquisition opportunities exist that will allow us to continue
our growth in selected business areas, broaden our service offerings and extend
our geographic presence. We intend to make acquisitions that will enable us to
consolidate our position in certain key business areas, such as communications,
or further strengthen our position in our more established service offerings. We
believe that our reputation and public company status make us an attractive
partner and provide us with an advantage in pursuing acquisitions.
FOCUS ON GOVERNMENT PROJECTS. We intend to continue marketing to
government organizations and bidding for government projects to stay on the
leading edge of policy development. This experience helps us identify market
opportunities and enhances our ability to serve other public and private
clients. Additionally, government contracts provide more predictable revenues
than private sector contracts.
MANAGE INTERNAL FINANCIAL CONTROLS. We take a disciplined approach to
monitoring, managing and improving our return on investment in each of our
business areas through the prompt billing and collection of accounts
receivables, the negotiation of favorable contract terms and the management of
our contract performance to prevent cost overruns. We believe that this approach
to managing our financial affairs enables us to improve our cash position and
thereby fund acquisitions and internal growth.
LEVERAGE EXISTING CLIENT BASE. Some of our clients engage us to provide
limited services. We believe that we can increase our revenue by selling
additional services to our existing client base. For example, we may be able to
secure an operations and maintenance contract after working with a client on the
design and construction phases of a facility. In addition, we believe that our
ability to offer a full spectrum of services will allow us to grow our business
and compete more effectively for larger projects.
SERVICES
We provide our clients with comprehensive management consulting and
technical services that focus on our clients' industry-specific needs. We offer
these services individually or as part of our full service approach to problem
solving. We are currently performing services under contracts ranging from small
site investigations to large, complex infrastructure projects. Our service
offerings include:
- MANAGEMENT CONSULTING to assist clients in identifying and
addressing operational and competitive problems they face
within their industries;
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- RESEARCH AND DEVELOPMENT to formulate solutions to complex
problems and develop advanced computer simulation techniques
for modeling problems, ranging from microscopic to global;
- APPLIED SCIENCE to assess all aspects of problems and develop
practical and cost-effective solutions through the application
of new technology and data interpretation;
- ENGINEERING AND ARCHITECTURAL DESIGN to provide services from
concept development and initial planning and design through
project completion;
- CONTRACT MANAGEMENT to provide experienced and specialized
construction managers to assist clients in minimizing the risk
of cost overruns, delays and contractual conflicts; and
- OPERATIONS AND MAINTENANCE to allow clients to outsource
routine functions, permitting them to streamline contractor
relationships and reduce operating costs.
BUSINESS AREAS
We provide our services in the following three principal business
areas: resource management, infrastructure and communications.
RESOURCE MANAGEMENT
One of our major concentrations is water resource management, where we
have a leadership position in understanding the interrelationships of water
quality and human activities. We support high priority government programs for
water quality improvement, environmental restoration, productive reuse of
defense facilities and strategic environmental resource planning. We provide
comprehensive services, including management consulting, research and
development, applied science, engineering and architectural design, construction
management, and operations and maintenance. Our service offerings in the
resource management business area are focused on the following project areas:
SURFACE WATER PROJECTS: Public concern with the quality of rivers,
lakes and streams as well as coastal and marine waters and the ensuing
legislative and regulatory response is driving demand for our services.
Over the past 33 years, we have developed a specialized set of
technical skills that positions us to compete effectively for surface
water and watershed management projects. We provide water resource
services to government clients such as the EPA, the Department of
Defense (DOD) and the Department of Energy (DOE), and to a broad base
of private sector clients including those in the chemical,
pharmaceutical, utility, aerospace and petroleum industries. We also
provide surface water services to state and local agencies,
particularly in the area of watershed management.
GROUNDWATER PROJECTS: Groundwater is the source of drinking water for
approximately 50% of the U.S. population and accounts for approximately
25% of all water consumed for residential, industrial and agricultural
purposes. Our activities in the groundwater field are diverse and
typically include projects such as investigating and identifying
sources of chemical contamination, examining the extent of
contamination, analyzing the speed and direction of contamination
migration, and designing and evaluating remedial alternatives. In
addition, we conduct monitoring studies to assess the effectiveness of
groundwater treatment and extraction wells.
WASTE MANAGEMENT PROJECTS: We currently provide a wide range of
engineering and consulting services for hazardous waste contamination
and remediation projects, from initial site assessment through design
and implementation phases of remedial solutions. In addition, we
perform risk assessments to determine the probability of adverse health
effects that may result from exposure to toxic substances. We also
provide waste minimization and pollution prevention services, and
evaluate the effectiveness of innovative technologies and novel
solutions to environmental problems.
NUCLEAR ENVIRONMENTAL PROJECTS: The DOE's nuclear weapons plants and
research laboratories face a wide variety of environmental challenges
including groundwater and surface water contamination, hazardous waste
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management and environmental compliance. Our services include
environmental impact analyses and documentation, environmental audits
and risk assessments, regulatory compliance support, groundwater
characterization, remedial investigation/feasibility studies, and
project management and oversight. Our environmental analyses provide
the DOE with information it requires in order to make decisions
regarding the storage or disposition of surplus materials from
dismantled nuclear weapon components.
REGULATORY COMPLIANCE PROJECTS: Our regulatory compliance services
include advising our clients on the full spectrum of regulatory
requirements under the Resource Conservation and Recovery Act, the
Clean Water Act, the Clean Air Act, the National Environmental Policy
Act and other environmental laws. Although we provide services to both
public and private clients, our current emphasis is on providing
regulatory compliance services to the Army, Navy and Air Force.
INFRASTRUCTURE
In the infrastructure area, we focus on the development of water
resource projects, institutional facilities, commercial, recreational and
leisure facilities and transportation projects. These facilities are an
essential part of everyday life and also sustain economic activity and the
quality of life. Our engineers, architects and planners work in partnership with
our clients to provide adequate infrastructure development within their
financial constraints. We assist clients with infrastructure projects by
providing management consulting, engineering and architectural design,
construction management, and operations and maintenance. Our service offerings
in the infrastructure business area are focused on the following project areas:
WATER RESOURCE PROJECTS: Our technical services are applied to all
aspects of water quantity and quality management ranging from
stormwater management through drainage and flood control projects to
major water and wastewater treatment plants. Our experience includes
planning, design and construction services for drinking water projects,
the design of water treatment facilities and reservoirs, and the design
of distribution systems including pipelines and pump stations. Our
capabilities are also applied to specialized technical challenges
associated with the design and construction of fisheries and hatcheries
worldwide.
INSTITUTIONAL FACILITIES PROJECTS: We provide architectural engineering
and construction services for projects including site planning for land
development, complete architectural design, interior design,
civil/structural engineering and mechanical/electrical engineering of
educational, healthcare and research facilities. We have completed
engineering and construction projects for a wide range of clients with
specialized needs such as security systems, training and audiovisual
facilities, clean rooms, laboratories and emergency preparedness
facilities.
COMMERCIAL, RECREATIONAL AND LEISURE FACILITIES PROJECTS: We specialize
in the planning and design of water-related entertainment and leisure
facilities from theme park attractions to large marine aquariums. Our
projects also include high-rise office buildings, museums, hotels,
parks, visitor centers and marinas. We have designed complex aquatic
life support systems and provided structural, civil and mechanical
engineering and design of interpretive exhibits for a series of large
aquarium projects worldwide.
TRANSPORTATION PROJECTS: We provide architectural, engineering and
construction services for transportation projects to improve public
safety and mobility. Our projects include roadway improvements,
commuter railway stations and expansion of airports. We have also
completed numerous transportation projects including bridges, major
highways, and repair, replacement and upgrading of older transportation
facilities.
COMMUNICATIONS
In the communications area, we focus on the delivery of technical
solutions necessary to build and manage communications infrastructure projects.
Our capabilities support a wide range of technologies for rapid information
transport including broadband and wireless communications. Our communications
clients seek management consulting, applied science, engineering and
architectural design, and construction management services. Our service
offerings in the communications business area are focused on the following
project areas:
NETWORK FEASIBILITY PROJECTS: We apply our technical services to all
aspects of assessing the feasibility of network systems development,
expansion and upgrades for our clients. Our experience includes
feasibility
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and remote site selection studies, cost-benefit modeling and market
assessments. We also assist network service providers with technical
requirements definition, sensitivity/risk analysis and key economic
projections.
NETWORK PLANNING PROJECT: We specialize in network planning, including
short- and long-term network configuration and development planning. We
develop outside plant designs, civil engineering and regulatory
compliance assessment and support efforts. In addition, our projects
have included employment analysis, staffing, logistics, planning, and
materials provisioning and management.
NETWORK ENGINEERING PROJECTS: We provide a full range of onsite and
offsite premises engineering and support services for projects ranging
from developing computer aided design workprints to field surveys. Our
experience includes digital evaluation and terrain modeling,
right-of-way permitting and site acquisition for wireless and broadband
networks. In addition, we have performed outside and inside plant
design projects for twisted pair, coaxial fiber optic and copper cable
networks, and wireless networks.
NETWORK DEVELOPMENT PROJECTS: We have performed both inside and outside
plant projects for major network service providers in both the
broadband and wireless sectors. Our construction projects include urban
and long-haul underground cable installation. We have also applied our
capabilities to wireless cell site construction and aerial cable
placement.
The following table presents brief examples of specific projects in our
three primary business areas:
BUSINESS AREA REPRESENTATIVE PROJECTS
------------- ----------------------------------------------------------------
Resource Management - Currently conducting a remedial design/remedial
action for a Superfund site in Port Comfort, Texas for a
private corporation.
- Currently providing program management and technical support
for the Comprehensive Long-term Environmental Action Navy
(CLEAN) program under several ten-year contracts. Activities
include installation, restoration, base realignment
and closure, and underground storage tank programs.
- Currently serving as prime contractor for environmental
operations and maintenance services at Vandenberg Air Force
Base in California. Also providing operations and
maintenance services for a wastewater treatment plant and a
hazardous waste collection plant, and air monitoring and
other services.
- Currently providing environmental remediation and
operations and maintenance (O&M) services at Tinker Air
Force Base in Oklahoma, and at Wright-Patterson Air Force
Base in Ohio. O&M services include groundwater treatment
systems, product recovery systems and landfill caps.
Remediation projects have included installation of
groundwater monitoring wells, excavation and disposal of
contaminated soils, and installation of soil and
groundwater treatment systems.
- Currently serving as prime contractor for environmental and
natural resource planning at U.S. Navy facilities in four
western states. Conducted air emissions modeling, noise impact
studies and biological resource surveys.
Infrastructure - Completed the development and analysis of alternative flood
control measures for the Los Angeles River.
- Provided design and program management for Taiwan's National
Museum of Marine Biology/Aquarium. Responsible
for civil, structural and mechanical
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engineering and for aquatic life support systems. Designed
water, wastewater and parking facilities.
- Currently providing mechanical, electrical, plumbing and fire
protection engineering for Columbus Centre, a mixed-use
project in New York City.
- Currently providing project management for upgrading
residuals management facilities at four drinking water treatment
plants in the Detroit, Michigan area that are among the largest
such plants in the U.S.
- Provided design for sections of a major six-lane toll road in
Southern California that includes new bridges, a tunnel
and numerous large regional drainage facilities.
Communications - Provided site acquisition, obtained entitlements, supervised
construction and installation of equipment, and provided
program management services for a Canadian corporation.
- Supported the initiative to enhance Emergency 911 services
and to improve the dispatch of emergency services to Henrico
County near Richmond, Virginia. Assisted in the buildout of the
Emergency 911 communications network through installation of
antennas, coaxial cables, microwave dishes and elliptical
waveguides.
- Providing services to install over 730 miles of cable to
provide telephony and expanded channel capacity to
approximately 135,000 homes in the Seattle, Washington area.
- Providing turnkey services including site selection and
optimization, architectural and engineering design, site
construction, and electronics installation and optimization
for cell site development in the Los Angeles area for a major
cellular communications carrier.
- Providing site acquisition through construction permitting
services for approximately 400 sites for a wireless
communications firm in several Tennessee and Kentucky markets.
CLIENTS
We have developed a diverse client base of hundreds of clients both in
the public and private sectors. During fiscal 1999, the DOD, EPA and DOE
accounted for approximately 21.9%, 11.6% and 3.3%, respectively, of our net
revenue. Although agencies of the Federal government are among our most
significant clients, we often support multiple programs within a single Federal
agency. Our private sector clients include companies in the chemical, mining,
pharmaceutical, aerospace, automotive, petroleum, communications and utility
industries. No private sector client accounted for more than 10% of our net
revenue in fiscal 1999.
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The following table presents a list of representative clients in our
three primary business areas:
REPRESENTATIVE CLIENTS
- ------------------------------ --------------------------- --------------------------- ----------------------------
BUSINESS AREA FEDERAL GOVERNMENT STATE, COUNTY AND LOCAL PRIVATE
- ------------------------------ --------------------------- --------------------------- ----------------------------
RESOURCE MANAGEMENT U.S. Environmental California Department of Lockheed Martin
Protection Agency; U.S. Health Services; Corporation; Merck & Co.;
Air Force; U.S. Navy; U.S. Washington Department of General Electric Company;
Army; U.S. Coast Guard; Ecology; Prince Georges Westwood Squibb
U.S. Forest Service County, Maryland; Clarmont Pharmaceuticals, Inc.;
County, Ohio; City of San Hewlett-Packard Corporation
Jose, California
INFRASTRUCTURE U.S. Army Corps of City of Tucson, Arizona; Universal Studios, Inc.;
Engineers; U.S. Bureau of City of Breckenridge, Boeing Corporation; E.I.
Reclamation; U.S. Air Colorado; Washington DuPont de Nemours and
Force; Federal Emergency Department of Company; Ford Motor
Management Agency Transportation; City of Company; Chrysler
Detroit, Michigan; City of Corporation; Disney
Portland, Oregon; Texas Imagineering
Parks and Wildlife
Department; King County,
Washington; Delaware
Department of
Transportation; Delaware
Department of Corrections
COMMUNICATIONS Henrico County, Virginia AT&T Wireless Services;
AT&T Broadband and
Internet Services; Nextel
Communications, Inc.;
Airtouch Communications,
Inc.; Motorola, Inc.;
Sprint Communications
Company; GTE Corporation;
Lucent Technologies, Inc.;
Ericsson
CONTRACTS
We enter into various types of contracts with our clients, including
fixed-price, fixed-rate time and materials, cost-reimbursement plus fixed fee
and cost-reimbursement plus fixed and award fee contracts. In fiscal 1999,
34.6%, 31.3% and 34.1% of our net revenue was derived from fixed-price,
fixed-rate time and materials, and cost-reimbursement plus fixed fee and award
fee contracts, respectively. Under a fixed-price contract, the client agrees to
pay a specified price for our performance of the entire contract. Fixed-price
contracts carry certain inherent risks, including risks of losses from
underestimating costs, delays in project completion, problems with new
technologies and economic and other changes that may occur over the contract
period. Consequently, the profitability of fixed-price contracts may vary
substantially. The amount of the fee received for a cost-reimbursement and award
fee contract partially depends upon the government's discretionary periodic
assessment of our performance on that contract. Our various clients determine
which type of contract we enter into for a particular engagement.
Some contracts made with the Federal government are subject to annual
approval of funding. Federal government agencies may impose spending
restrictions that limit the continued funding of our existing contracts with the
Federal government and may limit our ability to obtain additional contracts.
These limitations, if significant, could have a material adverse effect on us.
To date, spending limitations have not had a significant effect on us. All
contracts made with the Federal government may be terminated by the government
at any time, with or without cause.
Federal government agencies have formal policies against continuing or
awarding contracts that would create actual or potential conflicts of interest
with other activities of a contractor. These policies may prevent us in certain
cases from bidding for or performing contracts resulting from or relating to
certain work we have performed for the government. In addition, services
performed for a private client may create conflicts of interest that preclude or
limit our ability to obtain work for another private organization. We attempt to
identify actual or potential conflicts of interest and to minimize the
possibility that such conflicts would affect our work under current contracts or
our ability to compete for future contracts. We have, on occasion, declined to
bid on a project because of an existing potential conflict of interest. However,
we have not experienced disqualification during a bidding or award negotiation
process by any government or private client as a result of a conflict of
interest.
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Our contracts with the Federal government are subject to audit by the
government, primarily by the Defense Contract Audit Agency (DCAA). The DCAA
generally seeks to (1) identify and evaluate all activities which either
contribute to, or have an impact on, proposed or incurred costs of government
contracts; (2) evaluate the contractor's policies, procedures, controls and
performance; and (3) prevent or avoid wasteful, careless and inefficient
production or service. To accomplish this, the DCAA examines our internal
control systems, management policies and financial capability, evaluates the
accuracy, reliability and reasonableness of our cost representations and
records, and assesses compliance by us with Cost Accounting Standards and
Defective-pricing clauses found within the Federal Acquisition Regulations. The
DCAA also performs the annual review of our overhead rates and assists in the
establishment of our final rates. This review focuses on the allowability of
cost items and the allowability and applicability of Cost Accounting Standards.
The DCAA also audits cost-based contracts, including the close-out of those
contracts.
The DCAA also reviews all types of proposals, including those of award,
administration, modification and repricing. Factors considered are our cost
accounting system, estimating methods and procedures, and specific proposal
requirements. Operational audits are also performed by the DCAA. A review of our
operations at every major organizational level that has a significant effect on
the performance of future government contracts is also conducted during the
proposal review period.
During the course of its audit, the DCAA may disallow costs if it
determines that we improperly accounted for such costs in a manner inconsistent
with Cost Accounting Standards. Under a government contract, only those costs
that are reasonable, allocable and allowable are recoverable. A disallowance of
costs by the DCAA could have a material adverse effect on us.
In September 1995, we acquired PRC Environmental Management, Inc.
(EMI). The DCAA recently completed audits of EMI for the fiscal years 1987
through 1995. As a result of these audits and our negotiations with the
DCAA, the DCAA disallowed approximately $4.4 million in costs. Because we were
aware of these issues prior to completing the acquisition, we established a
sufficient reserve and, consequently, the disallowance did not have a material
adverse effect on our business.
Due to the severity of the legal remedies available to the government,
including the required payment of damages and/or penalties, criminal and civil
sanctions, and debarment, we maintain controls to avoid the occurrence of fraud
and other unlawful activity. In addition, we maintain preventative audit
programs to ensure appropriate control systems and mitigate control weaknesses.
We provide our services under contracts, purchase orders or retainer
letters. Our policy provides that, where possible, all contracts will be in
writing. We bill all of our clients periodically based on costs incurred, on
either an hourly-fee basis or on a percentage of completion basis, as the
project progresses. Generally, our contracts do not require that we provide
performance bonds. A performance bond, issued by a surety company, guarantees
the contractor's performance under the contract. If the contractor defaults
under the contract, the surety will, in its discretion, step in to finish the
job or pay the client the amount of the bond. If the contractor does not have a
performance bond and defaults in the performance of a contract, the contractor
is responsible for all damages resulting from the breach of contract. These
damages include the cost of completion, together with possible consequential
damages such as lost profits. To date, we have not incurred material damages
beyond the coverage of any performance bond.
Most of our agreements permit termination without cause by the clients
upon payment of fees and expenses through the date of the termination.
MARKETING
We utilize both a centralized corporate marketing department and local
marketing groups within each of our operating units. Our corporate marketing
department assists management in establishing our business plan, our target
markets and an overall marketing strategy. The corporate marketing department
also identifies and tracks the development of large Federal programs, positions
us for new business areas, selects appropriate partners, if any, for new
projects and assists in the bid process for new projects. We market throughout
the organizations we target, focusing primarily on senior representatives in
government organizations and senior management in private companies. In
addition, the corporate marketing department supports marketing activities
firm-wide by coordinating corporate
10
promotional and professional activities, including appearances at trade shows,
direct mailings, telemarketing and public and media relations.
We also perform marketing activities through our local offices. We
believe that these offices have a greater understanding of local environmental
issues, laws and regulations and, therefore, can better target their marketing
activities. These marketing activities are coordinated by full time marketing
staff located in certain of our offices. These activities include meetings with
potential clients and state, county and municipal regulators, presentations to
civic and professional organizations and seminars on current regulatory topics.
COMPETITION
The market for our services is highly competitive. We compete with many
other firms, ranging from small local firms to large national firms that may
have greater financial and marketing resources. We perform a broad spectrum of
engineering and consulting services across the resource management,
infrastructure and communications business areas. Services within these business
areas are provided to a client base which includes Federal agencies, such as the
DOD, the DOE, the Department of the Interior, the EPA and the U.S. Postal
Service, state and local agencies, and the private sector. Our competition
varies and is a function of the business areas in which, and client sectors for
which, we perform our services. The range of competitors for any one procurement
can vary from 10 to 100 firms, depending upon the relative value of the project,
the financial terms and risks associated with the work, and any restrictions
placed upon competition by the client. Historically, clients have chosen among
competing firms based primarily on the quality and timeliness of the firm's
service. However, we believe that price has become an increasingly important
competitive factor. We believe that if this trend continues it could have a
material adverse effect on our operating margins and profitability.
We believe that our principal competitors include, in alphabetical
order, Black & Veatch LLP; Brown & Caldwell; Castle Tower Corporation; Camp,
Dresser & McKee; CH2M Hill Companies Ltd., EA Engineering, Science & Technology,
Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT Group, Inc.; Mastec,
Inc.; Montgomery Watson; Quanta Service, Inc.; Roy F. Weston, Inc.; Wireless
Facilities, Inc.; and URS Corporation.
BACKLOG
At October 3, 1999, our gross revenue backlog was approximately $602.4
million, compared to $405.0 million at October 4, 1998. We include in gross
revenue backlog only those contracts for which funding has been provided and
work authorizations have been received. We estimate that approximately $467.1
million of the gross revenue backlog at October 3, 1999 will be recognized
during fiscal 2000. No assurance can be given that all amounts included in
backlog will ultimately be realized, even if evidenced by written contracts.
For example, certain of our contracts with the Federal government and other
clients are terminable at will. If any of these clients terminate their
contracts prior to completion, we may not be able to recognize that revenue.
ENVIRONMENTAL LEGISLATION
Our clients have become subject to an increasing number of
frequently overlapping Federal, state and local laws concerned with the
protection of the environment, as well as regulations promulgated by
administrative agencies pursuant to these laws. We provide services with
respect to Federal environmental laws, and regulations including: the Clean
Water Act; the Resource Conservation and Recovery Act; the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA); the
National Environmental Policy Act; the Safe Drinking Water Act; and other
laws.
POTENTIAL LIABILITY AND INSURANCE
Our business activities could expose us to potential liability under
various environmental laws such as CERCLA. In addition, we occasionally
contractually assume liability under indemnification agreements. We cannot
predict the magnitude of such potential liabilities.
We currently maintain comprehensive general liability, umbrella and
professional liability insurance policies. The professional liability policies
are "claims made" policies. This means that only claims made during the term of
the policy are covered. If we terminate our professional liability policies and
do not obtain retroactive coverage, we
11
would be uninsured for claims made after termination even if based on events or
acts that occurred during the term of the policy.
We obtain insurance coverage through a broker who is experienced in
the engineering field. The broker, together with our Risk Manager, periodically
review the adequacy of our insurance programs. However, because there are
various exclusions and retentions under our insurance policies, there can be no
assurance that all potential liabilities will be covered by our insurance.
Further, in the event we expand our services into new markets, we may not be
able to obtain insurance coverage for such activities or, if insurance is
obtained, the dollar amount of any liabilities incurred could exceed our
insurance coverage.
We evaluate the risk associated with uninsured claims. If we determine
that an uninsured claim has potential liability, we establish an appropriate
reserve. A reserve is not established if we determine that the claim has no
merit. Our historic levels of insurance coverage and reserves have been
adequate. However, a partially or completely uninsured claim, if successful and
of significant magnitude, could have a material adverse effect on our business.
EMPLOYEES
At October 3, 1999, we had approximately 5,443 total employees or
approximately 4,953 full-time equivalent employees. Our professional staff
includes archaeologists, biologists, chemical engineers, chemists, civil
engineers, computer scientists, economists, electrical engineers, environmental
engineers, environmental scientists, geologists, hydrogeologists, mechanical
engineers, oceanographers, toxicologists and project managers. Our ability to
retain and expand our staff of qualified professionals will be an important
factor in determining our future growth and success. We currently have 206
employees represented by four labor organizations. Management considers its
relations with our employees to be good.
In addition, we supplement our consultants on certain engagements with
independent contractors. We believe that the practice of retaining independent
contractors on a per engagement basis provides us with significant flexibility
in adjusting professional personnel levels in response to changes in demand for
our services.
12
RISK FACTORS
SOME OF THE INFORMATION IN THIS ANNUAL REPORT ON FORM 10-K CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES.
YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY,"
"WILL," "EXPECT," "ANTICIPATE," "BELIEVE," "ESTIMATE" AND "CONTINUE" OR
SIMILAR WORDS. YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY
BECAUSE THEY: (1) DISCUSS OUR FUTURE EXPECTATIONS; (2) CONTAIN PROJECTIONS OF
OUR FUTURE OPERATING RESULTS OR OF OUR FUTURE FINANCIAL CONDITION; OR (3)
STATE OTHER "FORWARD-LOOKING" INFORMATION. WE BELIEVE IT IS IMPORTANT TO
COMMUNICATE OUR EXPECTATIONS TO OUR INVESTORS. THERE MAY BE EVENTS IN THE
FUTURE, HOWEVER, THAT WE ARE NOT ACCURATELY ABLE TO PREDICT OR OVER WHICH WE
HAVE NO CONTROL. THE RISK FACTORS LISTED IN THIS SECTION, AS WELL AS ANY
CAUTIONARY LANGUAGE IN THIS ANNUAL REPORT ON FORM 10-K, PROVIDE EXAMPLES OF
RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE OUR ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE EXPECTATIONS WE DESCRIBE IN OUR FORWARD-LOOKING
STATEMENTS. YOU SHOULD BE AWARE THAT THE OCCURRENCE OF ANY OF THE EVENTS
DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM
10-K COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND THAT UPON THE OCCURRENCE OF ANY OF
THESE EVENTS, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY THAT COULD ADVERSELY
IMPACT OUR BUSINESS AND OPERATING RESULTS
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 1999, we purchased 11 companies in nine separate
transactions. We expect to continue to acquire companies as an element of our
growth strategy. Acquisitions involve certain risks that could cause our actual
growth or operating results to differ from our expectations or the expectations
of security analysts. For example:
- We may not be able to identify suitable acquisition candidates
or to acquire additional companies on favorable terms;
- We compete with others to acquire companies. We believe that
this competition will increase and may result in decreased
availability or increased price for suitable acquisition
candidates;
- We may not be able to obtain the necessary financing, on
favorable terms or at all, to finance any of our potential
acquisitions;
- We may ultimately fail to consummate an acquisition even if we
announce that we plan to acquire a company;
- We may fail to successfully integrate or manage these acquired
companies due to differences in business backgrounds or
corporate cultures;
- These acquired companies may not perform as we expect;
- We may find it difficult to provide a consistent quality of
service across our geographically diverse operations; and
- If we fail to successfully integrate any acquired company, our
reputation could be damaged. This could make it more difficult
to market our services or to acquire additional companies in
the future.
In addition, our acquisition strategy may divert management's attention away
from our primary service offerings, result in the loss of key clients or
personnel and expose us to unanticipated liabilities.
Finally, acquired companies that derive a significant portion of
their revenues from the Federal government and that do not follow the same
cost accounting policies and billing procedures as we do may be subject to
larger cost disallowances for greater periods than we are. If we fail to
determine the existence of unallowable costs and establish appropriate
reserves in advance of an acquisition, we may be exposed to material
unanticipated liabilities, which could have a material adverse effect on our
business.
13
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH COULD HAVE A
NEGATIVE EFFECT ON THE PRICE OF OUR COMMON STOCK
Our quarterly revenues, expenses and operating results may fluctuate
significantly because of a number of factors, including:
- The seasonality of the spending cycle of our public sector
clients, notably the Federal government;
- Employee hiring and utilization rates;
- The number and significance of client engagements commenced
and completed during a quarter;
- Delays incurred in connection with an engagement;
- The ability of our clients to terminate engagements without
penalties;
- The size and scope of engagements;
- The timing of expenses incurred for corporate initiatives;
- 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.
THE VALUE OF OUR COMMON STOCK COULD CONTINUE TO BE VOLATILE
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.
IF WE ARE NOT ABLE TO SUCCESSFULLY MANAGE OUR GROWTH STRATEGY, OUR BUSINESS AND
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED
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.
14
THE LOSS OF KEY PERSONNEL OR OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED
PERSONNEL COULD SIGNIFICANTLY DISRUPT OUR BUSINESS
We depend upon the efforts and skills of our executive officers,
senior managers and consultants. With limited exceptions, we do not have
employment agreements with any of these individuals. The loss of the services
of any of these key personnel could adversely affect our business. Although we
have obtained non-compete agreements from the principal stockholders of each of
the companies we have acquired, we generally do not have non-compete or
employment agreements with key employees who were not equity holders of these
companies. We do not maintain key-man life insurance policies on any of our
executive officers or senior managers.
Our future growth and success depends on our ability to attract and
retain qualified scientists and engineers. The market for these professionals
is competitive and we may not be able to attract and retain such professionals.
CHANGES IN EXISTING LAWS AND REGULATIONS COULD REDUCE THE DEMAND FOR OUR
SERVICES
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.
OUR REVENUES FROM AGENCIES OF THE FEDERAL GOVERNMENT ARE CONCENTRATED, AND A
REDUCTION IN SPENDING BY THESE AGENCIES COULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS
Agencies of the Federal government are among our most significant
clients. During fiscal 1999, approximately 36.8% of our net revenue was derived
from three federal agencies as follows: 21.9% of our net revenue was derived
from the Department of Defense (DOD), 11.6% from the Environmental Protection
Agency (EPA), and 3.3% from the Department of Energy (DOE). Some of our
contracts with Federal government agencies require annual funding approval and
may be terminated at their discretion. A reduction in spending by Federal
government agencies could limit the continued funding of our existing contracts
with them and could limit our ability to obtain additional contracts. These
limitations, if significant, could have a material adverse effect on our
business.
Additionally the failure of clients to pay significant amounts due us
for our services could adversely affect our business. For example, we recently
received notification from a federal government agency that we are entitled to
payments in excess of our billings. However, the agency involved must obtain
specific funding approval for amounts owed to us and there can be no assurance
this funding approval will be obtained.
OUR CONTRACTS WITH GOVERNMENTAL AGENCIES ARE SUBJECT TO AUDIT, WHICH COULD
RESULT IN THE DISALLOWANCE OF CERTAIN COSTS
Our contracts with the Federal government and other governmental
agencies are subject to audit. Most of these audits are conducted by the
Defense Contract Audit Agency (DCAA), which reviews our overhead rates,
operating systems and cost proposals. The DCAA may disallow costs if it
determines that we accounted for these costs incorrectly or in a manner
inconsistent with Cost Accounting Standards. A disallowance of costs by the
DCAA, or other governmental auditors, could have a material adverse effect on
our business.
In September 1995, we acquired PRC Environmental Management, Inc.
(EMI). EMI also contracts with Federal government agencies and such contracts
are also subject to the same governmental audits. The DCAA has completed audits
of EMI's contracts for the fiscal years 1987 through 1995. As a result of these
audits and our negotiations with the DCAA, the DCAA disallowed approximately
$4.4 million in costs.
OUR BUSINESS AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED BY LOSSES
UNDER FIXED-PRICE CONTRACTS OR TERMINATION OF CONTRACTS AT THE CLIENT'S
DISCRETION
We contract with Federal and state governments as well as with the
commercial sector. These contracts are often subject to termination at the
discretion of the client with or without cause. Additionally, we enter into
various contracts with our clients, including fixed-price contracts. In
fiscal 1999, approximately 34.6% 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,
15
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.
In fiscal 1999, we had a contract change with Tele-Communications,
Inc. involving three turnkey contracts. This change was due in part to
Tele-Communications, Inc.'s change in strategy from the use of turnkey
contracts to the use of direct service contracts in the upgrading of its
network systems.
OUR INABILITY TO FIND QUALIFIED SUBCONTRACTORS COULD ADVERSELY AFFECT THE
QUALITY OF OUR SERVICE AND OUR ABILITY TO PERFORM UNDER CERTAIN CONTRACTS
Under some of our contracts, we depend on the efforts and skills of
subcontractors for the performance of certain tasks. Our reliance on
subcontractors varies from project to project. In fiscal 1999, subcontractor
costs comprised 23.7% 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.
OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY
We provide specialized management consulting and technical services to
a broad range of public and private sector clients. The market for our services
is highly competitive and we compete with many other firms. These firms range
from small regional firms to large national firms which have greater financial
and marketing resources than we do.
We focus primarily on the resource management, infrastructure and
communications business areas. We provide services to our clients which include
Federal, state and local agencies, and organizations in the private sector.
We compete for projects and engagements with a number of competitors
which can vary from 10 to 100 firms. Historically, clients have chosen among
competing firms based on the quality and timeliness of the firm's service. We
believe, however, that price has become an increasingly important factor.
We believe that our principal competitors include, in alphabetical
order, Black & Veatch LLP; Brown & Caldwell; Castle Tower Corporation; Camp,
Dresser & McKee; CH2M Hill Companies Ltd.; EA Engineering, Science &
Technology, Inc.; Earth Tech, Inc.; ICF Kaiser International, Inc.; IT Group,
Inc.; Mastec, Inc.; Montgomery Watson; Quanta Services; Roy F. Weston, Inc.;
Wireless Facilities, Inc.; and URS Corporation.
OUR SERVICES EXPOSE US TO SIGNIFICANT RISKS OF LIABILITY AND OUR INSURANCE
POLICIES MAY NOT PROVIDE ADEQUATE COVERAGE
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. The professional liability
policies are "claims made" policies. Thus, only claims made during the term of
the policy are covered. If we terminate our professional liability policies and
do not obtain retroactive coverage, we would be uninsured for claims made after
termination even if these claims are based on events or acts that occurred
during the term of the policy. Our insurance may not protect us against
liability because our policies typically have various exclusions and
retentions. In addition, if we expand into new markets, we may not be able to
obtain insurance coverage for such activities or, if insurance is obtained, the
dollar amount of any liabilities incurred could exceed our insurance coverage.
A partially or completely uninsured claim, if successful and of significant
magnitude, could have a material adverse affect on our business.
WE MAY BE PRECLUDED FROM PROVIDING CERTAIN SERVICES DUE TO CONFLICT OF INTEREST
ISSUES
Many of our clients are concerned about potential or actual conflicts
of interest in retaining management consultants. Federal government agencies
have formal policies against continuing or awarding contracts that would create
actual or potential conflicts of interest with other activities of a
contractor. These policies, among other things, may prevent us from bidding for
or performing contracts resulting from or relating to certain work we have
performed for the government. In addition, services performed for a private
client may create a conflict of interest that precludes
16
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.
OUR INTERNATIONAL OPERATIONS EXPOSE US TO RISKS SUCH AS FOREIGN CURRENCY
FLUCTUATIONS
In fiscal 1999, approximately 3.3% 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.
WE COULD EXPERIENCE BUSINESS INTERRUPTIONS RELATING TO THE YEAR 2000
We have worked 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 year 2000 could result in errors or system failures.
We utilize a number of computer programs across our entire
operation. The primary information technology systems we utilize are the
accounting and financial and human resource information management systems.
We began our risk assessment in 1995. Since that time we have procured and
implemented certain accounting and financial reporting systems as well as
contract administration and billing systems that have been certified as Y2K
compliant by our vendors. We believe that our financial and accounting and
human resource management information systems are now Y2K compliant and will
not be materially impacted by the year 2000.
We have extensive business with the Federal government. Should the
Federal government, especially the DOD, experience significant business
interruptions relating to non-Y2K compliance, our business could be
materially impacted. To the extent that other third parties which we rely
upon, such as banking institutions, clients and vendors, are unable to
address their Y2K issues in a timely manner, our business could be materially
impacted. We believe that the worst case scenario relating to the 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 our
financial institutions not being able to supply us with our working capital
needs.
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.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY MAKE IT DIFFICULT FOR A
THIRD PARTY TO ACQUIRE OUR COMPANY AND COULD DEPRESS THE PRICE OF OUR COMMON
STOCK
Our certificate of incorporation and by-laws and the Delaware General
Corporation Law include provisions that may be deemed to have anti-takeover
effects. These anti-takeover effects could delay or prevent a takeover attempt
that you or our other stockholders might consider in your or their best
interests.
In addition, our board of directors is authorized to issue, without
obtaining stockholder approval, up to 2,000,000 shares of preferred stock and to
determine the price, rights, preferences and privileges of such shares without
any further stockholder action. The existence of this "blank-check" preferred
stock could make more difficult or discourage an attempt to obtain control of us
by means of a tender offer, merger, proxy contest or otherwise.
17
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.
ITEM 2. PROPERTIES.
Our corporate headquarters facilities are located in Pasadena,
California. These facilities contain approximately 1.2 million square feet of
office space, and are subject to leases which expire beyond the year 2001. We
lease office space in approximately 189 locations in the United States. We also
rent some additional office space on a month-to-month basis.
We believe that our existing facilities are adequate to meet current
requirements and that suitable additional or substitute space will be available
as needed to accommodate any expansion of operations and for additional offices.
ITEM 3. LEGAL PROCEEDINGS.
We are subject to certain claims and lawsuits typically filed against
the engineering and consulting professions, primarily alleging professional
errors or omissions. We carry professional liability insurance, subject to
certain deductibles and policy limits against such claims. Management is of the
opinion that the resolution of these claims will not have a material effect on
our financial position or results of operations. See "Item 1. Business -
Potential Liability and Insurance."
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
18
PART II
The information required by Items 5 through 8 of this report is set
forth on pages 17 through 41 of our Annual Report to Stockholders for the
fiscal year ended October 3, 1999. Such information is incorporated in this
report and made a part hereof by reference. Item 9 is not applicable.
PART III
The information required by Items 10 through 13 of this report is set
forth in the sections entitled "Security Ownership of Principal Stockholders,
Directors and Executive Officers," "Election of Directors," and "Executive
Officers, Compensation and Other Information" in our Proxy Statement for our
2000 Annual Meeting of Stockholders. Such information is incorporated in this
report and made a part hereof by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES.
The Financial Statements filed as part of this
report are listed in the accompanying index at
page 19.
3. 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).
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
19
Savings Association (incorporated herein by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended June 28, 1998).
10.6 Sixth Amendment dated as of July 21, 1999 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 10.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended July 4, 1999).
10.7 Seventh Amendment dated as of December 24, 1999 to the
Credit Agreement dated as of September 15, 1995 between the
Company and Bank of America National Trust and Savings
Association.
10.8 Security Agreement dated as of September 15, 1995 among the
Company, GeoTrans, Inc., Simons Li & Associates, Inc.,
Hydro-Search, Inc., PRC Environmental Management, Inc. and
Bank of America Illinois (incorporated herein by reference to
Exhibit 10.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended October 1, 1995).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
10.15 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).
10.16 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).
10.17 Form of Nonqualified Stock Option Agreement used by the
Company in connection with the Company's 1992 Stock Option
Plan for Nonemployee Directors (incorporated herein by
reference to Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the fiscal year ended October 3, 1993).
10.18 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).
10.19 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
20
Exhibit 10.23 to the Company's Annual Report on Form 10-K for
the fiscal year ended October 2, 1994).
10.20 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).
10.21 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).
10.22 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).
10.23 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).
10.24 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).
10.25 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).
10.26 Registration Rights Agreement dated as of February 26, 1999
among the Company and the parties listed on Schedule A
attached thereto (incorporated herein by reference to Exhibit
10.24 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 4, 1999).
10.27 Registration Rights Agreement dated as of May 7, 1999 among
the Company and the parties listed on Schedule A attached
thereto (incorporated herein by reference to Exhibit 10.26 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 4, 1999).
10.28 Registration Rights Agreement dated as of May 21, 1999 among
the Company and the parties listed on Schedule A attached
thereto (incorporated herein by reference to Exhibit 10.27 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 4, 1999).
10.29 Registration Rights Agreement dated as of June 18, 1999 among
the Company and the parties listed on Schedule A attached
thereto (incorporated herein by reference to Exhibit 10.28 to
the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended July 4, 1999).
10.30 Registration Rights Agreement dated as of September 3, 1999
among the Company and the parties listed on Schedule A
attached thereto.
21
13 Annual Report to Stockholders for the fiscal year ended
October 3, 1999, portions of which are incorporated by
reference in this report as set forth in Part II hereof. With
the exception of these portions, such Annual Report is not
deemed filed as part of this report.
21 Subsidiaries of the Company.
23 Independent Auditors' Consent.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TETRA TECH, INC.
Date: December 30, 1999 By: /s/ Li-San Hwang
----------------------------------------
Li-San Hwang, Chairman of the Board of
Directors, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ------ ----
Chairman of the Board of Directors,
/s/ Li-San Hwang President and Chief Executive officer
- ----------------------------------------------- (Principal Executive Officer) December 30, 1999
Li-San Hwang
Vice President, Chief Financial Officer
/s/ James M. Jaska and Treasurer (Principal Financial and
- ----------------------------------------------- Accounting Officer) December 30, 1999
James M. Jaska
/s/ Daniel A. Whalen
- ----------------------------------------------- Director December 30, 1999
Daniel A. Whalen
/s/ J. Christopher Lewis
- ----------------------------------------------- Director December 30, 1999
J. Christopher Lewis
/s/ Patrick C. Haden
- ----------------------------------------------- Director December 30, 1999
Patrick C. Haden
/s/ James J. Shelton
- ----------------------------------------------- Director December 30, 1999
James J. Shelton
23
INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements, together with the Notes
thereto and report thereon of Deloitte & Touche LLP dated November 16, 1999
(except for Note 5, as to which the date is December 24, 1999), appearing on
pages 25 through 41 of the accompanying 1999 Annual Report to Stockholders,
are incorporated by reference in this Annual Report on Form 10-K. With the
exception of the aforementioned information and Part II information set forth
on pages 17 through 24, the 1999 Annual Report to Stockholders is not to be
deemed filed as part of this report.
FINANCIAL STATEMENTS SCHEDULES
Page No.
--------
Report of Independent Accountants on Financial Statement
Schedules...................................................... 25
Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts and
Reserves....................................................... 26
24
INDEPENDENT AUDITORS' REPORT
Tetra Tech, Inc.:
We have audited the consolidated financial statements of Tetra Tech, Inc. and
its subsidiaries as of October 3, 1999 and October 4, 1998, and for each of
the three years in the period ended October 3, 1999, and have issued our
report thereon dated November 16, 1999 (except for Note 5, as to which the
date is December 24, 1999); such financial statements and report are included
in your 1999 Annual Report to Stockholders and are incorporated herein by
reference. Our audits also included the financial statement schedule of Tetra
Tech, Inc. and its subsidiaries, listed in Item 14. This financial statement
schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
DELOITTE & TOUCHE LLP
Los Angeles, California
November 16, 1999 (except for Note 5, as to which the date is December 24, 1999)
25
TETRA TECH, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE FISCAL YEARS ENDED
SEPTEMBER 28, 1997, OCTOBER 4, 1998 AND OCTOBER 3, 1999
BALANCE AT ADDITIONS CHARGES TO DEDUCTIONS
BEGINNING OF THROUGH COSTS AND NET OF BALANCE AT
PERIOD ACQUISITIONS EARNINGS RECOVERIES END OF PERIOD
------------ ------------ ---------- ---------- -------------
Fiscal year ended September 28, 1997
Allowance for loss on accounts
receivable........................... $ 11,101,000 $ 228,000 $ (56,000) $ (120,000) $ 11,153,000
Fiscal year ended October 4, 1998
Allowance for loss on accounts
receivable........................... $ 11,153,000 $ 3,187,000 $ (334,000) $ (1,321,000) $ 12,685,000
Fiscal year ended October 3, 1999
Allowance for loss on accounts
receivable........................... $ 12,685,000 $ 747,000 $ (667,000) $ (4,236,000) $ 8,529,000
26