===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002
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 1-9947
TRC COMPANIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-0853807
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5 WATERSIDE CROSSING
WINDSOR, CONNECTICUT 06095
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 298-9692
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ---------------------------- -----------------------
COMMON STOCK, $.10 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 [ ].
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. (X)
The aggregate market value of the registrant's common stock held by
non-affiliates on September 24, 2002 was approximately $197,100,000.
On September 24, 2002, there were 12,652,184 shares of Common Stock of
the registrant outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held November 22, 2002 are incorporated by
reference into Part III of this Report.
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TRC COMPANIES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED JUNE 30, 2002
PART I
PAGE
----
ITEM 1. BUSINESS 3
General 6
Customers 6
Marketing and Sales 6
Backlog 6
Employees 7
Competition 7
Government Contracts 7
Regulatory Matters 7
Patents, Trademarks and Licenses 7
Environmental and Other Considerations 7
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 8
ITEM 6. SELECTED FINANCIAL DATA 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 32
ITEM 11. EXECUTIVE COMPENSATION 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS 33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K 33
SIGNATURES 35
CERTIFICATIONS 36
2
PART I
ITEM 1. BUSINESS
TRC Companies, Inc. is a customer-focused company that creates and implements
sophisticated and innovative solutions to the challenges facing America's
environmental, energy and infrastructure markets. The Company is a leading
provider of technical, financial, risk management and construction services
to industry and government customers across the country. Traditionally, the
Company's work was focused primarily on providing conventional technical
services to commercial and government customers. In early 1998, new Company
management initiated a growth plan focused on two key areas. First, while
maintaining the traditional business, the Company planned to increase growth
in economically driven markets. Secondly, it would provide higher value,
"problem solving" services and elevate purchasing decisions in customer
organizations from middle to senior management. This approach has resulted in
a superior revenue and growth rate trend and has allowed the Company to
continuously transform its services to suit the evolving needs of its
customers. The Company currently provides services to the following areas:
ENVIRONMENTAL - The Company provides engineering, scientific and technical
environmental services to customers through a national network of 72 offices.
These services have been one of the Company's historic core strengths and serve
as the foundation for the Company's higher growth Exit Strategy(R) program.
Environmental services provided by the Company include pollution control, waste
management, auditing and assessment, permitting and compliance, design and
engineering and natural and cultural resource management. The Company has
particular expertise in air quality, emissions control and monitoring; in
licensing new and expanded facilities; and in investigating and cleaning up
environmentally impaired sites. While these services are generally required by
the Company's customers for compliance with federal, state and local
environmental laws, the Company is experiencing an increase in its business due
to (i) the rehabilitation of older business processes to increase efficiency and
productivity, (ii) mergers and acquisitions and the identification,
quantification and resolution of environmental liabilities associated with past
practices, and (iii) the redevelopment of former industrial properties to meet
changing urban demographic patterns. The Company believes these economically
motivated projects, as well as enforcement of environmental laws and regulations
will continue to provide opportunities to expand and grow its traditional
environmental business.
The Company's services in the environmental market generate large amounts of
useful data that require customized information management systems. To meet this
need, the Company assists its customers by analyzing their data management
requirements and creating software and hardware solutions for cost-effective
information management systems.
In 1996, the Company developed an exclusive, innovative method for its customers
to outsource their environmental remediation activities to the Company. The
Company's Exit Strategy program provides its customers with a cost-effective
alternative to managing their non-core environmental remediation activities.
This is especially attractive to customers in the following situations:
o MERGERS, ACQUISITIONS AND DIVESTITURES - In typical transactions,
neither buyer nor seller wishes to be responsible for existing
environmental conditions of transferred assets. The Company solves this
dilemma by identifying and quantifying the risk and then entering into
a contract with both buyer and seller to complete the remediation.
o DISCONTINUED OPERATIONS - When the Company's customers close facilities
or purchase redundant facilities as part of a business transaction,
they are faced with the environmental legacy of the property. By
outsourcing the management of these responsibilities to the Company,
our customers can re-allocate resources more effectively to on-going
business operations.
o MULTI-PARTY SUPERFUND SITES - By law, the cleanup of abandoned,
environmentally impaired sites is the responsibility of those
businesses that sent waste materials to the site during its period of
operation. The typically inefficient and lengthy process of negotiating
and managing these cleanups drives up the
3
legal and administrative cost burden for the responsible parties. By
taking sole responsibility for the site, the Company essentially
eliminates the additional cost and expedites the schedule for cleanup.
o BROWNFIELDS REAL ESTATE DEVELOPMENT - The redevelopment of commercially
viable but environmentally contaminated property is commonly referred
to as "brownfields" redevelopment. The Company has, on occasion,
purchased contaminated property from its customers and is in the
process of cleaning up these properties to increase their market value
for eventual sale or redevelopment. The Company does not actively
pursue these sites on its own but generally seeks a real estate
development partner with experience in the local or regional real
estate market.
Regardless of the type of Exit Strategy project undertaken, the Company
completes a thorough due diligence process to understand and quantify the
environmental condition of the property. The Company then designs a specific
risk management plan to address the known and unknown risks. This plan includes
insurance to adequately protect the Company and its customers from future risks.
In most cases, the Company's insurer on these projects is the American
International Group (AIG).
The Company is recognized as a leader in the Exit Strategy market, and expects
the market for these projects will continue to grow. The Company has an
experienced team of technical and management personnel to continue to develop
these opportunities.
ENERGY / POWER - The Company has traditionally provided a variety of technical
services to energy and electrical power customers through offices across the
country. In 1998, the Company determined that changes in the energy industry
would create substantial new demand for high quality, responsive services. Since
that time, the Company has established a leadership position in supporting the
licensing of large electric generating facilities and re-powering older plants
in areas of the country with the highest demand for additional power.
The Company has substantially expanded its energy and power services to meet the
growing demand and need for reliable energy. As discussed below, during this
period, the Company has established a national capability for permitting,
engineering and construction management services for the natural gas and
electric transmission and distribution markets.
The proven long-term supplies of natural gas resulting from enhanced recovery
technologies and new reservoir development is enabling industry to expand its
use of this cleaner fuel source. This increased demand is in turn fostering
expansion of the country's gas pipeline transmission system. The Company has one
of the leading practices supporting this infrastructure expansion. The Company
is also assisting customers who are developing a new generation of liquid
natural gas (LNG) facilities that are expected to provide needed flexibility to
meet peak demand cycles.
The electric transmission system serving the country has aged and is in need of
upgrade over the coming years. The federal government initiative to balance
power supply and demand more effectively through the multi-state regional
transmission organizations is also creating a need for permitting and
engineering services to upgrade the transmission and distribution grid. The
Company's power delivery engineering and environmental groups are assisting the
operators of the transmission grid in upgrading system capabilities to meet
increases in demand, improve reliability, and integrate new sources of electric
generation. These services are currently being developed on a national basis
through a combination of key hires and small, strategically focused
acquisitions.
Recognizing that the needs of users in high load demand areas cannot be met
solely by new major generating plants or capital upgrades to the transmission
grid, the Company has also expanded services into development and oversight of
distributed generation projects and energy capacity management consulting. The
Company is currently co-developing a number of distributed generation facilities
located at host commercial office and manufacturing operations. In addition to
maintaining a going-forward equity ownership position, the Company provides
licensing, engineering and development management services for the facilities.
This contribution of "turn-key" services is aimed toward solving special
customer problems, allowing the Company to expand its ability to provide higher
value services.
4
Most recently, the Company's financial transaction management group is becoming
active in assisting customers interested in purchasing or selling energy assets.
These transactions are becoming increasingly more frequent because of the
benefits of having securitized assets and the need for capital in segments of
the energy industry. The Company's services for these transactions include
identifying available assets for transfer as well as site-related due diligence
and environmental compliance services. Again, these evolving activities
continually allow the Company to increase the overall value of its services.
INFRASTRUCTURE - The Company's infrastructure development markets are primarily
targeted at: (1) the expanding need for capacity in geographic areas where the
population is growing rapidly; and, (2) rehabilitative improvements of
overburdened and deteriorating infrastructure systems. Investing in
infrastructure projects continues to be a primary focus of government and
industry due to these drivers. The Company's infrastructure market focus areas
include:
o TRANSPORTATION - Planning, design and construction management of road,
bridge, rail, port and transit projects for public customers.
o LAND DEVELOPMENT - Planning, design and construction management of
development projects for municipal and private customers.
o WATER/WASTEWATER TREATMENT - Planning, design and construction
management for potable water and wastewater treatment facilities.
o BUILDING SYSTEMS - Building automation systems design, central plant
design, construction management and commissioning, facility energy
management program implementation
o SECURITY - Vulnerability assessment, engineering and structural
improvements for public and private infrastructure facilities; design
and implementation of security and surveillance systems.
o INFORMATION MANAGEMENT - Technology strategy and planning, systems
design and implementation for public and private sector customers.
Currently, much of the Company's infrastructure work is accomplished through
conventional contracting. There is an increasing trend for customers to prefer
design/build or privatization (outsourcing) contracts, and the Company is
pursuing value-added contracting approaches. The Company's objective is to
combine its technical, financial, and risk management capabilities as a suite of
higher-margin, value-added services that enable the Company to capture larger
projects with the potential for greater profitability.
At this time, it is not practicable to report net service revenue by the
environmental, energy/power and infrastructure areas.
5
CUSTOMERS
The Company's customers include companies in the chemical, automotive,
petroleum, construction, transportation, mining, waste management and other
industries, financial institutions, public utilities, and local, state and
federal government agencies. Many of the Company's commercial customers are
major multinational corporations. The following customers are representative of
the Company's customers:
AES Enterprises Kinder Morgan State Departments of
ASARCO Lockheed Martin Corporation Transportation
BNSF New York City - California
BP/Amoco - School Construction Authority - New Jersey
Cisco Systems - Department of Parks - New York
City of Frisco, Texas - Department of Transportation - Pennsylvania
Connecticut Resources Recovery - Department of Transportation - South Carolina
Authority Pfizer - Virginia
Consolidated Edison PG & E National Energy Group - West Virginia
Conoco Phillips Sentex Corporation - Texas
Duke Energy Sentex Corporation U. S. Government
El Paso Energy Sun Oil - DOD
Exxon/Mobil The Irvine Company - EPA
Express Pipeline The Trump Organization - FAA
General Electric Unocal
General Motors Waste Management
Hanson PLC
For fiscal 2002, 2001 and 2000, agencies of the federal government (principally
the U.S. Environmental Protection Agency and the U. S. Department of Defense)
accounted for 5%, 7% and 9%, respectively, of the Company's net service revenue.
No customer represented 10% or more of the Company's net service revenue in any
of those years.
MARKETING AND SALES
The Company believes that it attracts customers primarily on the basis of its
reputation for providing value-added and cost-effective solutions to customer
needs and its ability to respond to meet customer schedules. The marketing
activities for the Company's services are generally conducted by senior
professional staff members and executives (seller-doers) who are recognized
experts in our business areas and regularly meet with existing and potential
customers to obtain new business. These activities are typically conducted
through the Company's network of regional resource centers for local customers
and by market program leaders for national customers. In addition, corporate and
subsidiary marketing departments coordinate representation at trade shows,
prepare sales literature and develop and place advertising.
BACKLOG
At June 30, 2002, the Company's net contract backlog (excluding the estimated
costs of pass-through charges) was approximately $215 million, as compared to
approximately $160 million at June 30, 2001. The Company expects that
approximately 60% of this backlog will be completed in fiscal 2003. In addition
to this net contract backlog, the Company holds open order contracts from
various customers and government agencies. As work under these contracts is
authorized and funded, the Company includes this portion in its net contract
backlog. While most contracts contain cancellation provisions, the Company is
unaware of any material work included in backlog which will be canceled or
delayed.
EMPLOYEES
As of June 30, 2002, the Company had approximately 2,000 full and part-time
employees. Approximately 85% of these employees are primarily engaged in
performing environmental, power and infrastructure engineering and consulting,
financial, risk management, construction management and information management
services for
6
customers. Many of these employees have master's degrees or their equivalent and
a number have Ph.D. degrees. The Company's professional staff includes program
managers, professional engineers and scientists, construction specialists,
computer programmers, systems analysts, attorneys and others with degrees and
experience that enables the Company to provide a diverse range of services. The
balance of the Company's employees are engaged primarily in executive,
administrative and support activities. None of the Company's employees are
represented by a union. The Company considers its relations with its employees
to be very good.
COMPETITION
The markets for many of the Company's services are highly competitive. There are
numerous professional architectural, engineering and consulting firms and other
organizations which offer many of the services offered by the Company. The
Company is subject to direct competition with respect to the services it
provides from many other firms, ranging from small local firms to large national
firms having substantially greater financial, management and marketing resources
than the Company. Competitive factors include reputation, performance, price,
geographic location and availability of technically skilled personnel.
However, the majority of the Company's work is repeat orders from long-term
customers because the Company focuses on market areas where it can be a leading
provider due to staff skills, reputation, financial strength and/or geographic
presence. For example, the Company believes that it is one of the top two or
three providers of permitting services for the large energy business. Further,
the Company believes that it is the market leader in providing complete
outsourcing of site remediation services through its Exit Strategy program.
GOVERNMENT CONTRACTS
The Company has contracts with agencies of the U.S. Government which are subject
to examination and renegotiation. Contracts and other records of the Company
have been examined through June 30, 1998. The Company believes that adjustments
resulting from such examination or renegotiation proceedings, if any, will not
have a material impact on the Company's operating results, financial condition
or cash flows.
REGULATORY MATTERS
The Company's businesses are subject to various rules and regulations at the
federal, state and local government levels. The Company believes that it is in
compliance with these rules and regulations. The Company has the appropriate
licenses to bid and perform work in the locations in which it operates. The
Company has not experienced any significant limitations on its business as a
result of regulatory, bonding or insurance requirements. The Company does not
believe any changes in law or changes in industry practice would limit bidding
on future projects.
PATENTS, TRADEMARKS AND LICENSES
The Company has a number of trademarks, service marks, copyrights and licenses,
none of which are considered material to the Company's business as a whole.
ENVIRONMENTAL AND OTHER CONSIDERATIONS
The Company does not believe that its compliance with federal, state and local
laws and regulations relating to the protection of the environment will have any
material effect on capital expenditures, earnings or competitive position.
ITEM 2. PROPERTIES
The Company provides its services through a network of 72 offices located
nationwide. The Company leases approximately 502,000 square feet of office and
commercial space to support these operations. These leased properties are
adequately maintained and are suitable and adequate for the business activities
conducted therein. In connection with the performance of certain Exit Strategy
projects, affiliates of the Company have taken title to sites on which those
activities are being performed.
7
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not a party to any pending legal
proceedings in which an adverse decision, in the opinion of the Company, would
have a material adverse effect upon the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under the
symbol "TRR". The following table sets forth the high and low per share
prices for the common stock for the fiscal years ended June 30, 2002 and 2001
as reported on the New York Sock Exchange. The prices have been adjusted to
reflect, on a retroactive basis, the three for two stock split completed in
March 2002.
Fiscal 2002 Fiscal 2001
-------------- --------------
High Low High Low
------ ------ ------ ------
First Quarter $31.10 $19.47 $11.83 $ 7.09
Second Quarter 37.33 24.09 12.92 9.92
Third Quarter 33.50 21.47 22.26 12.33
Fourth Quarter 28.75 19.20 37.66 17.27
On September 24, 2002, there were approximately 5,100 holders of the Company's
common stock, of which 331 were shareholders of record.
To date the Company has not paid any cash dividends on its common stock. The
payment of dividends in the future will be subject to the financial condition,
capital requirements and earnings of the Company. However, future earnings are
expected to be used for expansion of the Company's operations, and cash
dividends are not likely for the foreseeable future.
8
ITEM 6. SELECTED FINANCIAL DATA
The following table provides summarized information with respect to the
operations of the Company.
(in thousands, except per share data)
STATEMENTS OF OPERATIONS, YEARS ENDED JUNE 30, 2002 2001 2000 1999 1998 (1)
- ----------------------------------------------------------------------------------------------------------------------
GROSS REVENUE $269,524 $181,473 $117,131 $ 78,223 $ 72,570
Less subcontractor costs and direct charges 89,449 57,271 32,323 20,890 19,861
------------- ------------- ------------ ------------ ------------
NET SERVICE REVENUE 180,075 124,202 84,808 57,333 52,709
------------- ------------- ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of services 145,263 100,587 70,619 48,073 45,120
General and administrative expenses 5,151 3,909 2,991 2,462 2,451
Depreciation and amortization 3,457 3,771 2,917 2,468 2,702
------------- ------------- ------------ ------------ ------------
153,871 108,267 76,527 53,003 50,273
------------- ------------- ------------ ------------ ------------
INCOME FROM OPERATIONS 26,204 15,935 8,281 4,330 2,436
Interest expense 1,136 1,541 1,024 507 725
------------- ------------- ------------ ------------ ------------
INCOME BEFORE TAXES 25,068 14,394 7,257 3,823 1,711
Federal and state income tax provision 9,588 5,409 2,613 1,376 650
------------- ------------- ------------ ------------ ------------
NET INCOME 15,480 8,985 4,644 2,447 1,061
Dividend and accretion charges
on preferred stock 377 - - - -
------------- ------------- ------------ ------------ ------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 15,103 $ 8,985 $ 4,644 $ 2,447 $ 1,061
============= ============= ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 1.26 $ 0.83 $ 0.45 $ 0.24 $ 0.11
Diluted 1.14 0.75 0.43 0.24 0.11
============= ============= ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,025 10,854 10,268 10,173 10,073
Diluted 13,571 11,934 10,785 10,259 10,089
============= ============= ============ ============ ============
CASH DIVIDENDS DECLARED PER COMMON SHARE None None None None None
============= ============= ============ ============ ============
BALANCE SHEETS AT JUNE 30,
Total assets $205,857 $127,672 $ 94,208 $ 66,072 $ 61,604
------------- ------------- ------------ ------------ ------------
Debt 24,353 15,005 21,300 7,900 7,500
------------- ------------- ------------ ------------ ------------
Redeemable preferred stock 14,603 - - - -
------------- ------------- ------------ ------------ ------------
Shareholders' equity 116,949 69,975 54,448 46,988 44,455
============= ============= ============ ============ ============
(1)Includes results of the Company's instrumentation business that was sold in
July 1998. The sale resulted in a gain that was not material.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis contains statements that are
forward-looking. These statements are based upon current expectations and
assumptions that are subject to risks and uncertainties. Actual results could
differ materially due to a number of factors. See the discussion in
"Forward-Looking Statements" below.
CRITICAL ACCOUNTING POLICIES
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America. These
principles require the use of estimates and assumptions that affect amounts
reported and disclosed in the financial statements and related notes. Actual
results could differ from these estimates and assumptions. Management uses its
best judgment in the assumptions used to value these estimates, which are based
on current facts and circumstances, prior experience and other assumptions that
are believed to be reasonable. The Company's accounting policies are described
in Note 1 of the Notes to Consolidated Financial Statements contained in Item 8
of this Annual Report on Form 10-K. Management believes the following critical
accounting policies reflect the more significant judgments and estimates used in
preparation of the Company's consolidated financial statements and are the
policies which are most critical in the portrayal of the Company's financial
position and results of operations:
9
Long-Term Contracts: Revenue on long-term fixed price contracts is recognized
using the efforts expended percentage-of-completion method of accounting.
This method of revenue recognition requires the Company to prepare estimates
of costs to complete for contracts in progress. In making such estimates,
judgments are required to evaluate contingencies, such as potential variances
in schedule and labor and other contract costs, liability claims, contract
disputes or achievement of contractual performance standards. Changes in
total estimated contract costs and losses, if any, are recognized in the
period they are determined.
Allowance for doubtful accounts: Allowances for doubtful accounts are
maintained for estimated losses resulting from the inability of customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Income taxes: At June 30, 2002, the Company had approximately $2.6 million of
deferred income tax benefits. The realization of a portion of these benefits
is dependent on the Company's estimates of future taxable income and its tax
planning strategies. Management believes that sufficient taxable income will
be earned in the future to realize deferred income tax benefits, accordingly,
no valuation allowance has been provided. Additionally, the realization of
these deferred income tax benefits can be impacted by changes to tax codes,
statutory tax rates and future taxable income levels.
Business Acquisitions: Assets and liabilities acquired in business combinations
are recorded at their estimated fair values at the acquisition date. At June 30,
2002, the Company had approximately $81.4 million of goodwill, representing the
cost of acquisitions in excess of fair values assigned to the underlying net
assets of acquired companies. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, goodwill and intangible assets deemed to
have indefinite lives are not amortized, but are subject to annual impairment
testing. The assessment of goodwill involves the estimation of the fair value of
the Company's "reporting unit," as defined by SFAS 142. Management completed
this assessment during the second quarter of fiscal 2002 based on the best
information available as of the date of assessment and determined that no
impairment existed. There can be no assurance that future events will not result
in impairments of goodwill or other assets.
RESULTS OF OPERATIONS
The Company derives its revenue from fees for providing engineering and
consulting services. The types of contracts with our customers and the
approximate percentage of net service revenue for the year ended June 30, 2002
from each contract type are as follows:
o Time and material 51%
o Fixed price or lump sum 31%
o Cost-type with various fee arrangements 18%
In the course of providing its services, the Company routinely subcontracts
drilling, laboratory analyses, construction equipment and other services. These
costs are passed directly through to customers and, in accordance with industry
practice, are included in gross revenue. Because subcontractor costs and direct
charges can vary significantly from project to project, the Company considers
net service revenue (NSR), which is gross revenue less subcontractor costs and
direct charges, as its primary measure of revenue growth.
10
The following table presents the percentage relationships of items in the
consolidated statements of operations to net service revenue:
Years ended June 30, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------
NET SERVICE REVENUE 100.0% 100.0% 100.0%
------------- ------------- ------------
OPERATING COSTS AND EXPENSES:
Cost of services 80.7 81.0 83.3
General and administrative expenses 2.8 3.2 3.5
Depreciation and amortization 1.9 3.0 3.4
------------- ------------- ------------
INCOME FROM OPERATIONS 14.6 12.8 9.8
Interest expense 0.7 1.2 1.2
------------- ------------- ------------
INCOME BEFORE TAXES 13.9 11.6 8.6
Federal and state income tax provision 5.3 4.4 3.1
------------- ------------- ------------
NET INCOME 8.6 7.2 5.5
Dividends and accretion charges
on preferred stock 0.2 - -
------------- ------------- ------------
NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS 8.4% 7.2% 5.5%
============= ============= ============
2002 COMPARED TO 2001
The revenue growth trend established in fiscal 1998 has continued for the fifth
consecutive year. Gross revenue increased $88.1 million, or 48.5%, to an all
time high of $269.5 million in fiscal 2002, from $181.5 million in fiscal 2001.
Net service revenue increased $55.9 million, or 45%, to an all time high of
$180.1 million in fiscal 2002, from $124.2 million in fiscal 2001. These
increases were due to a combination of internal growth arising out of increased
demand for the Company's services and the additional revenue from acquisitions
made in fiscal 2002 and 2001.
NSR from acquired companies is considered part of acquisition growth during the
twelve months following the date acquired. Approximately 83% of the NSR growth
for fiscal 2002 was from acquisitions, while as discussed below, operating
income growth for fiscal 2002 was greater from organic (existing business)
activities. These characteristics are due to:
o The relatively larger size of the two recently acquired companies,
compared to the Company's historically smaller size acquisitions.
o The seasonality of the largest acquisition (SITE-Blauvelt), which added
significant NSR with relatively small operating income during the
winter period.
o Increased margins provided by the Company's organic business
activities.
Management's goal continues to be to provide a reasonable balance between
organic and acquisition growth over a several year period. For example,
operating income growth over the last three years has averaged 51% and 49%,
respectively, between organic and acquisition activities.
Cost of services increased 44.4% in fiscal 2002 due to the increase in net
service revenue.
General and administrative expenses (G&A) increased approximately 31.8% in
fiscal 2002 primarily from additional costs necessary to support the Company's
internal and acquisition growth. However, as a percentage of NSR, G&A expenses
decreased from 3.2% in fiscal 2001 to 2.8% in fiscal 2002. This decrease is due
to the Company's ability to generate and manage the increased revenue without
adding a proportional amount of overhead, resulting in higher margins for all
services performed.
Depreciation and amortization expense decreased approximately 8.3% in fiscal
2002. This decrease was primarily due to the Company's early adoption of SFAS
142, "Goodwill and Other Intangible Assets" on July 1, 2001. In accordance
with SFAS 142, the Company no longer amortizes
11
goodwill. The decrease associated with the adoption of SFAS 142, was, however,
partially offset by an increase in depreciation expense primarily associated
with acquisitions completed in fiscal 2002 and 2001.
Income from operations increased approximately 64.4% to $26.2 million in fiscal
2002, from $15.9 million in fiscal 2001. Additionally, the Company's operating
income margin increased to 14.6% from 12.8% during the same period.
Approximately 54% of the fiscal 2002 operating income growth increase was from
organic activities. The remaining 46% of operating income growth was from
acquisitions completed during the past twelve months. The favorable organic
growth percentages reflect the Company's successful efforts to obtain higher
margin revenue for its services. The improvement in operating income performance
was primarily due to:
o The Company's focus toward higher margin, economically driven markets;
o The growth in revenue, without comparable increases in overhead; and
o The favorable impact resulting from the adoption of SFAS 142.
Interest expense decreased by approximately 26.3% in fiscal 2002 primarily due
to lower average interest rates throughout the year. The Company's percentage of
debt to capitalization ratio of 16% continues to remain relatively low,
reflecting management's conservative debt philosophy.
The provision for federal and state income taxes reflects an effective rate of
38.3% in fiscal 2002 compared to an effective rate of 37.6% in fiscal 2001. This
increase was primarily due to an increase in the federal income tax rate bracket
as a result of the Company's income growth. The Company believes that there will
be sufficient taxable income in future periods to enable utilization of
available deferred income tax benefits.
2001 COMPARED TO 2000
The revenue growth trend established in fiscal 1998 continued for the fourth
consecutive year. Gross revenue increased $64.3 million, or 55%, to $181.5
million in fiscal 2001, from $117.1 million in fiscal 2000. Net service revenue
increased $39.4 million, or 47%, to $124.2 million in fiscal 2001, from $84.8
million in fiscal 2000. These increases were due to a combination of internal
growth arising out of increased revenue from the Company's services including,
as expected, revenue from the Exit Strategy and power markets, and the
additional revenue from acquisitions made in fiscal 2001 and 2000. Internal
growth provided approximately 60% of the increase in net service revenue in
fiscal 2001, and the net service revenue from acquisitions represented
approximately 40% of the increase. Net service revenue from acquired companies
is considered part of acquisition growth during the first twelve months from the
date acquired.
As a percentage of net service revenue, cost of services decreased to 81% in
fiscal 2001, from 83.3% in fiscal 2000. This decrease contributed directly to an
increase in income from operations as a percentage of net service revenue
(operating margin), which increased from 9.8% last year to 12.8%. The increase
in cost of services of approximately 42% in fiscal 2001 was primarily due to
additional operating costs incurred to support the increase in net service
revenue and additional operating costs associated with the businesses acquired
in fiscal 2001 and 2000.
As a percentage of net service revenue, general and administrative expenses
decreased from 3.5% in fiscal 2000, to 3.2% in fiscal 2001. This is a result of
controlling overhead at a growth rate below that of revenue, and also
contributes directly to an increase in income from operations as a percentage of
net service revenue. The increase in general and administrative expenses of
approximately 31% in fiscal 2001 was primarily from additional costs necessary
to support the Company's internal and acquisition growth.
The decrease in depreciation and amortization expense as a percentage of net
service revenue in fiscal 2001, as compared to fiscal 2000, also contributed to
a higher operating margin. The increase in depreciation and amortization expense
of approximately 29% in fiscal 2001, as compared to fiscal 2000, was primarily
due to the additional goodwill amortization associated with businesses acquired
in fiscal 2000 and the related additional purchase price payments comprised of
cash and stock recorded in fiscal 2001 associated with those acquisitions and,
to a lesser extent, the additional depreciation expense on equipment acquired
through acquisitions.
Income from operations increased approximately 92% to $15.9 million in fiscal
2001, from $8.3 million in fiscal 2000. The continued improvement in operating
performance was primarily due to the Company's focus toward higher margin,
economically driven markets such as the Exit Strategy and power sectors and the
growth in revenue
12
without comparable increases in operating overhead. The fiscal 2001 growth in
operating income was equally balanced between internal growth and growth from
acquisitions.
Interest expense increased approximately 51% in fiscal 2001, as compared to
fiscal 2000. This increase was primarily due to higher levels of average debt
outstanding during the year to finance acquisitions completed in fiscal 2001 and
2000. The Company's percentage of debt to capitalization ratio continues to
remain low, reflecting management's conservative philosophy.
The provision for federal and state income taxes reflects an effective rate of
37.6% in fiscal 2001, compared to 36% in fiscal 2000. This increase was
primarily due to nondeductible goodwill amortization resulting from the
acquisitions completed in fiscal 2001 and 2000. The Company believes that there
will be sufficient taxable income in future periods to enable utilization of
available deferred income tax benefits.
IMPACT OF INFLATION
The Company's operations have not been materially affected by inflation or
changing prices because of the short-term nature of many of its contracts and
the fact that most contracts of a longer term are subject to adjustment or have
been priced to cover anticipated increases in labor and other costs.
LIQUIDITY AND CAPITAL RESOURCES
The Company primarily relies on cash from operations and financing activities,
including borrowings based upon the strength of its balance sheet, to fund
operations. As discussed below, the cash generated from operations, the cash on
hand at June 30, 2002 and available borrowings under the credit facility will be
sufficient to meet the Company's cash requirements for currently anticipated
activities. The Company's liquidity is assessed in terms of its overall ability
to generate cash to fund its operating and investing activities and to reduce
debt. Of particular importance in the management of liquidity are cash flows
generated from operating activities, acquisitions, capital expenditure levels
and an adequate bank line of credit.
Cash flows from operating activities were approximately $6.3 million in
fiscal 2002, compared to $19.8 million last year. The decrease in
year-to-year operating cash flows was primarily the result of changes in
billings in advance of revenue earned, which fluctuate primarily depending on
the number of new Exit Strategy contracts entered into during each year.
Billings in advance of revenue earned primarily represents amounts collected
in accordance with contractual terms in advance of when the work is performed
on Exit Strategy contracts. These prepayments provide the Company with an
advance source of cash for one to several years. During years when the amount
of prepayments from new Exit Strategy contracts exceeds the amount of revenue
recognized as work is performed on the contracts, billings in advance of
revenue earned will increase and thereby provide operating cash flow. For
instance, during fiscal 2001, the increase in billings in advance of revenue
earned contributed $7.6 million towards the total cash provided by operating
activities. However, during years when the amount of revenue recognized from
work performed exceeds the amount of prepayments from new Exit Strategy
contracts, billings in advance of revenue earned will decrease and reduce
operating cash flow. During fiscal 2002, the decrease in billings in advance
of revenue earned reduced operating cash flow by $4.2 million.
Operating cash flows are also increased by non-cash charges for depreciation and
amortization ($3.5 million for the year ended June 30, 2002), and typically
decreased by accounts receivable associated with the Company's revenue growth
($8.4 million for the year ended June 30, 2002). Also, over time, operating cash
flows can be either increased or decreased by changes in the long-term insurance
receivable. For the year ended June 30, 2002, operating cash flows decreased by
the $1.6 million increase in the long-term insurance receivable. Overall
accounts receivable and long-term receivable characteristics for the Company are
discussed in the following paragraphs.
Accounts receivable include both: (1) billed receivables associated with
invoices submitted for work previously completed and (2) unbilled receivables
(work in progress). The unbilled receivables are primarily related to work
performed in the last month of the fiscal year. The magnitude of the accounts
receivable for a professional services company is typically evaluated as days
sales outstanding (DSO), which is calculated by dividing both current and
long-term receivables by the most recent six month average of daily gross
revenue, adjusted to include gross revenue from acquired entities to the
extent it is not already included in the Company's gross revenue. At June 30,
2002, the Company's DSO was approximately 116 days. DSO would have been 106
days at June 30,
13
2002 if the SITE acquisition was excluded from the calculation. This compares
favorably to DSO of 112 days at June 30, 2001. Management's long-term goal is to
reduce DSO to 100-105 days.
Funding and risk management for Exit Strategy projects is generally provided by
a finite risk cost cap insurance policy issued by the Company's insurer,
American International Group (AIG). The policy provides protection against
potential increases in the cost of the projects. The Company generally receives
the contract price as a prepayment from its customer and a substantial portion
of that prepayment is deposited with AIG pursuant to the policy. AIG then pays
the Company from the deposited funds as work is performed. The long-term
insurance receivable is associated with amounts held by AIG for work performed
but which are currently not yet payable under the terms of the policy. These
amounts will be paid as the Company completes certain project milestones (e.g.,
completion of capital improvements). The effect on periodic operating cash flows
will vary depending upon the mix of work performed but not yet payable and
amounts reimbursed to the Company by AIG.
As a result of these factors, some periods will have a high operating cash flow
to net income relationship. In others, this relationship will be lower. Over
longer periods the effect should tend to be normalized with an overall positive
operating cash flow trend.
Investing activities used cash of approximately $23.3 million during the year
ended June 30, 2002, primarily consisting of $16.9 million for acquisitions and
additional purchase price payments and approximately $4.6 million in capital
expenditures for additional information technology and other equipment to
support business growth.
Financing activities provided cash of approximately $17.7 million during the
year ended June 30, 2002 to support operating and investing activities. The
private placement of a new class of preferred stock in December, 2001, provided
$14.6 million (net of issuance costs) and the remaining $3.1 million was
primarily provided by net borrowings from the Company's credit facility and
proceeds from the exercise of stock options and warrants. The Company has no
off-balance sheet financing arrangements.
In March 2002, the Company entered into a new banking arrangement with Wachovia
Bank, N.A. that provides a revolving credit facility of up to $40 million to
support various short-term operating and investing activities. The initial
availability under the facility was $32 million. In September 2002, the
agreement was amended to increase the aggregate amount available to $40 million.
Borrowings under the agreement bear interest at the bank's base rate or the
Eurodollar rate plus or minus applicable margins and are due and payable in
March 2005 when the agreement expires. Borrowings under the agreement are
collateralized by accounts receivable. The agreement contains various covenants
including, but not limited to, restrictions related to net worth, EBITDA,
leverage, asset sales, mergers and acquisitions, creation of liens and dividends
on common stock (other than stock dividends). At June 30, 2002, outstanding
borrowings pursuant to the agreement were $23 million, at an average interest
rate of 3.3%.
We expect that the cash generated from operations, the cash on hand at June 30,
2002 and available borrowings under the revolving credit facility will be
sufficient to meet the Company's cash requirements for currently anticipated
activities. If in the future the Company pursues acquisitions in which the
potential cash consideration approaches or exceeds the availability of current
sources, the Company would either increase its lending facility or pursue
additional financing.
NEW ACCOUNTING GUIDANCE
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. Under
SFAS No. 143, the Company will report, as appropriate, all legal obligations
associated with the retirement of long-lived assets that result from
acquisition, construction, development, and the normal operation of
long-lived assets. The standard is effective July 1, 2002 for the Company.
The impact of adoption is not expected to have a material impact on the
Company's financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses accounting and reporting
for the impairment or disposal of long-lived assets. This statement supersedes
SFAS No. 121, but retains the fundamental provisions of SFAS No. 121 as well as
sets new criteria for asset classifications and establishes a broader definition
with respect to presentation of
14
discontinued operations. The standard is effective July 1, 2002 for the Company.
The impact of adoption is not expected to have a material impact on the
Company's financial statements.
In April 2002, the FASB issued SFAS No. 145, "Recission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002". The purpose of this standard is to rescind previously issued
SFAS Nos. 4, 44 and 64, and to amend SFAS No. 13. SFAS Nos. 4 and 64 relates to
reporting gains and losses from extinguishment of debt, SFAS No. 44 concerns
accounting of intangible assets of motor carriers, and SFAS No. 13, "Accounting
for Leases" was amended to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. The provisions related to SFAS No. 13 are effective
for transactions occurring after May 15, 2002, and the remaining provisions of
the standard are effective for fiscal years beginning after May 15, 2002. The
standard is effective July 1, 2002 for the Company. The impact of adoption is
not expected to have a material impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This standard addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The provisions
of this standard are effective for exit or disposal activities that are
initiated after December 31, 2002. The impact of adoption is not expected to
have a material impact on the Company's financial statements.
FORWARD-LOOKING STATEMENTS
Certain statements in this report may be forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. You can identify these statements by
forward-looking words such as "may," "expects," "plans," "anticipates,"
"believes," estimates," or other words of similar import. You should consider
statements that contain these words carefully because they discuss our future
expectations, contain projections of our future results of operations or of our
financial condition, or state other "forward-looking" information. We believe
that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or control and that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties, and actual results may differ materially from those discussed as
a result of various factors, including, but not limited to, the availability and
adequacy of insurance, including remediation cost cap insurance, the uncertainty
of our operational and growth strategies, our ability to appropriately select
and manage our acquisitions, continued regulatory enforcement, funding for
and/or possible renegotiation of government projects, the level of demand for
the Company's services, product acceptance, our ability to properly design and
build remediation systems at environmental clean-up sites, our ability to
complete projects in our backlog in a timely manner, industry-wide competitive
factors, the ability to continue to attract and retain highly skilled and
qualified personnel, and political, economic, or other conditions. Furthermore,
market trends are subject to changes, which could adversely affect future
results. Your special attention is drawn to the sections of the Company's other
filings with the Securities and Exchange Commission relating to forward-looking
statements. The Company does not undertake to update the results discussed
herein as a result of changes in risks or operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to borrowings under the Company's revolving credit agreement. These
borrowings bear interest at variable rates and the fair value of this
indebtedness is not significantly affected by changes in market interest rates.
An effective increase or decrease of 10% in the current effective interest rate
under the revolving credit facility would not have a material effect on the
Company's operating results, financial condition or cash flows.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS:
Report of Independent Accountants 16
Consolidated Statements of Operations for the years ended June 30, 2002, 2001 and 2000 17
Consolidated Balance Sheets at June 30, 2002 and 2001 18
Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000 19
Consolidated Statements of Changes in Stockholders' Equity for the years ended
June 30, 2002, 2001 and 2000 20
Notes to Consolidated Financial Statements 21
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts for the years ended June
30, 2002, 2001 and 2000 31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of TRC Companies, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of TRC Companies, Inc. and its subsidiaries at June 30, 2002 and
2001, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Notes 4 and 5, effective July 1, 2001, the Company adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets".
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
August 26, 2002
16
CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE DATA
Years ended June 30, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------
GROSS REVENUE $269,524 $181,473 $117,131
Less subcontractor costs and direct charges 89,449 57,271 32,323
---------------- --------------- -----------------
NET SERVICE REVENUE 180,075 124,202 84,808
---------------- --------------- -----------------
OPERATING COSTS AND EXPENSES:
Cost of services 145,263 100,587 70,619
General and administrative expenses 5,151 3,909 2,991
Depreciation and amortization 3,457 3,771 2,917
---------------- --------------- -----------------
153,871 108,267 76,527
---------------- --------------- -----------------
INCOME FROM OPERATIONS 26,204 15,935 8,281
Interest expense 1,136 1,541 1,024
---------------- --------------- -----------------
INCOME BEFORE TAXES 25,068 14,394 7,257
Federal and state income tax provision 9,588 5,409 2,613
---------------- --------------- -----------------
NET INCOME 15,480 8,985 4,644
Dividends and accretion charges
on preferred stock 377 - -
---------------- --------------- -----------------
NET INCOME AVAILABLE TO
COMMON SHAREHOLDERS $ 15,103 $ 8,985 $ 4,644
================ =============== =================
EARNINGS PER COMMON SHARE:
Basic $ 1.26 $ 0.83 $ 0.45
Diluted 1.14 0.75 0.43
================ =============== =================
AVERAGE COMMON SHARES OUTSTANDING:
Basic 12,025 10,854 10,268
Diluted 13,571 11,935 10,785
================ =============== =================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
17
CONSOLIDATED BALANCE SHEETS
IN THOUSANDS, EXCEPT PER SHARE DATA
As of June 30, 2002 2001
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 1,615 $ 851
Accounts receivable, less allowance for doubtful accounts 90,895 61,090
Insurance recoverable - environmental remediation 478 4,055
Deferred income tax benefits 2,630 1,882
Prepaid expenses and other current assets 2,100 1,353
-------------- --------------
97,718 69,231
-------------- --------------
PROPERTY AND EQUIPMENT:
Furniture and equipment 32,542 26,041
Leasehold improvements 3,958 2,872
-------------- --------------
36,500 28,913
Less accumulated depreciation and amortization 21,938 19,075
-------------- --------------
14,562 9,838
-------------- --------------
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $8,031 81,434 38,943
-------------- --------------
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES 5,918 5,134
-------------- --------------
LONG-TERM INSURANCE RECEIVABLE 3,627 2,046
-------------- --------------
LONG-TERM INSURANCE RECOVERABLE - ENVIRONMENTAL REMEDIATION 1,262 2,011
-------------- --------------
OTHER ASSETS 1,336 469
-------------- --------------
$205,857 $127,672
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of debt $ 465 $ 368
Accounts payable 13,480 7,821
Accrued compensation and benefits 9,560 7,734
Income taxes payable 4,389 3,647
Billings in advance of revenue earned 6,576 10,752
Environmental remediation liability 374 5,635
Other accrued liabilities 4,998 1,266
-------------- --------------
39,842 37,223
-------------- --------------
NON-CURRENT LIABILITIES:
Long-term debt 23,888 14,637
Deferred income taxes 9,313 3,826
Long-term environmental remediation liabilty 1,262 2,011
-------------- --------------
34,463 20,474
-------------- --------------
MANDATORILY REDEEMABLE PREFERRED STOCK 14,603 -
-------------- --------------
COMMITMENTS AND CONTINGENCIES (NOTES 9 AND 11)
SHAREHOLDERS' EQUITY:
Capital stock:
Preferred, $.10 par value; 500,000 shares authorized, 15,000 issued - -
Common, $.10 par value; 30,000,000 shares authorized,
13,497,806 and 12,122,967 shares issued at June 30, 2002 and
2001, respectively 1,350 1,212
Additional paid-in capital 79,487 47,608
Note receivable (146) -
Retained earnings 39,155 24,052
-------------- --------------
119,846 72,872
Less treasury stock, at cost 2,897 2,897
-------------- --------------
116,949 69,975
-------------- --------------
$205,857 $127,672
============== ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
Years ended June 30, 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,480 $ 8,985 $ 4,644
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,457 3,771 2,917
Change in deferred taxes and other non-cash items (214) 898 119
Changes in assets and liabilities, net of effects from
acquisitions:
Accounts receivable (8,425) (7,527) (13,015)
Long-term insurance receivable (1,581) (1,906) (140)
Billings in advance of revenue earned (4,189) 7,553 2,135
Insurance recoverable (current and long-term) 4,326 4,153 -
Prepaid expenses and other current assets 139 (198) (92)
Accounts payable 3,134 956 1,933
Accrued compensation and benefits (816) 2,853 365
Environmental remediation liability (current and long-term) (6,010) (2,573) -
Income taxes payable 1,881 3,335 160
Other accrued liabilities (899) (530) (391)
------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 6,283 19,770 (1,365)
------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (4,624) (5,440) (3,323)
Acquisition of businesses, net of cash acquired (16,860) (5,038) (8,156)
Investments in and advances to unconsolidated affiliates (1,683) (4,454) (796)
Proceeds from sale of equipment - 26 252
Decrease in other assets, net (145) 96 42
------------- ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (23,312) (14,810) (11,981)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of preferred stock, net of issuance costs 14,547 - -
Net borrowings (repayments) under prior credit facility
and other long-term obligations (21,323) (7,582) 13,400
Net borrowings under new credit facility 23,000 - -
Proceeds from exercise of stock options and warrants 1,578 1,907 144
Cash payment in lieu of fractional shares on stock split (9) - -
------------- ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 17,793 (5,675) 13,544
------------- ------------ ------------
INCREASE (DECREASE) IN CASH 764 (715) 198
Cash, beginning of year 851 1,566 1,368
------------- ------------ ------------
CASH, END OF YEAR $ 1,615 $ 851 $ 1,566
============= ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,236 $ 1,582 $ 1,238
Income taxes (net of refunds) 7,788 1,690 2,156
============= ============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
IN THOUSANDS, EXCEPT SHARE DATA
<Table>
<Caption>
Common stock issued Treasury Stock
------------------------ ------------------------
Additional
Years ended June 30, 2002, 2001 and Number paid-in Note Retained Number
2000 of shares Amount capital receivable earnings of shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCES, JUNE 30, 1999 11,141,769 1,114 38,348 -- 10,423 942,980 (2,897)
Issuance of common stock and warrants
in connection with businesses
acquired 333,000 33 2,600 -- -- -- --
Exercise of stock options and warrants
(including tax benefits) 36,725 4 179 -- -- -- --
Net income -- -- -- -- 4,644 -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
BALANCES, JUNE 30, 2000 11,511,494 1,151 41,127 -- 15,067 942,980 (2,897)
Issuance of common stock and warrants
in connection with businesses
acquired 143,868 14 2,272 -- -- -- --
Exercise of stock options and warrants
(including tax benefits) 467,606 47 4,209 -- -- -- --
Net income -- -- -- -- 8,985 -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
BALANCES, JUNE 30, 2001 12,122,967 1,212 47,608 -- 24,052 942,980 (2,897)
Issuance of common stock and warrants
in connection with businesses
acquired 992,096 99 27,768 -- -- -- --
Exercise of stock options and warrants
(including tax benefits) 366,100 37 3,722 (146) -- -- --
Dividends and accretion charges
on preferred stock 14,266 2 320 -- (377) -- --
Directors' deferred compensation 2,746 -- 78 -- -- -- --
Cash payment in lieu of fractional
shares on stock split (369) -- (9) -- -- -- --
Net income -- -- -- -- 15,480 -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
BALANCES, JUNE 30, 2002 13,497,806 $ 1,350 $ 79,487 $ (146) $ 39,155 942,980 $ (2,897)
=========== =========== =========== =========== =========== =========== ==========
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<Page>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IN THOUSANDS, EXCEPT SHARE DATA
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
A. The consolidated financial statements include the Company and its
wholly-owned subsidiaries, after elimination of intercompany accounts and
transactions. Investments in affiliates in which the Company has the ability to
exercise significant influence, but not control, are accounted for by the equity
method. Investments in affiliates in which the Company does not have the ability
to exercise significant influence are accounted for by the cost method. Certain
financial statement items have been reclassified to conform to the current
year's presentation.
B. The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could differ
from those estimates.
C. The Company recognizes contract revenue in accordance with American
Institute of Certified Public Accountants Statement of Position (SOP) 81-1,
"Accounting for Performance of Construction-Type and Certain Production-Type
Contracts". The Company records revenue on its cost-type and time and material
contracts based upon direct labor costs and other direct contract costs
incurred. Revenue from fixed price contracts is recorded using the efforts
expended percentage-of-completion method of accounting. Contract costs include
direct labor costs, subcontractor costs and other direct costs. Indirect costs
are expensed as incurred. Certain Exit Strategy contracts are segmented into two
profit centers: (1) remediation and (2) operation, maintenance and monitoring
(OM&M) pursuant to SOP 81-1. Costs and revenue on long-term contracts are
subject to revision throughout the lives of the contracts and any required
adjustments are made in the period in which the revisions become known. Losses
on contracts are recorded in the period in which they are identified.
On contracts where billings are in advance of revenue earned, the excess is
presented on the balance sheet as a current liability.
D. Leasehold improvements are amortized over the shorter of the lives of
the various leases or the useful lives of the improvements.
E. Property and equipment are recorded at cost, including costs to bring
the equipment into operation. Major improvements and betterments to existing
equipment are capitalized. Maintenance and repairs are charged to expense as
incurred. The Company provides for depreciation of property and equipment
utilizing the straight-line method using estimated useful lives of 3 to 10
years. Accelerated methods are used for income tax purposes.
F. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivatives and Hedging Activities", as amended,
effective July 1, 2001. Since the Company does not have any derivative
instruments, the adoption of this statement did not impact the Company's
consolidated operating results, financial condition or cash flows.
21
<Page>
G. Earnings per share is computed in accordance with the provisions of SFAS
No. 128, "Earnings per Share". Basic earnings per share is based upon income
available to common shareholders divided by the weighted average common shares
outstanding during the year. Diluted earnings per share reflects the potential
dilutive effect of outstanding stock options and warrants and the conversion of
the preferred stock. For purposes of computing diluted earnings per share the
Company uses the treasury stock method. Additionally, when computing dilution
related to the preferred stock, conversion is assumed as of the beginning of the
period. The following table sets forth the computations of basic and diluted
earnings per share:
<Table>
<Caption>
Years ended June 30, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------
Diluted Basic Diluted Basic Diluted Basic
Net income $15,480 $15,480 $ 8,985 $ 8,985 $ 4,644 $ 4,644
Dividends and accretion
charges on preferred stock -- 377 -- -- -- --
------- ------- ------- ------- ------- -------
Net income available to common shareholders $15,480 $15,103 $ 8,985 $ 8,985 $ 4,644 $ 4,644
======= ======= ======= ======= ======= =======
Weighted average common shares outstanding 12,025 12,025 10,854 10,854 10,268 10,268
Potential common shares:
Stock options and warrants 1,237 -- 1,081 -- 517 --
Convertible preferred stock 309 -- -- -- -- --
------- ------- ------- ------- ------- -------
Total potential common shares 13,571 12,025 11,935 10,854 10,785 10,268
======= ======= ======= ======= ======= =======
Earnings per share $ 1.14 $ 1.26 $ 0.75 $ 0.83 $ 0.43 $ 0.45
======= ======= ======= ======= ======= =======
</Table>
H. The Company has 401(k) savings plans covering substantially all
employees. The Company's contributions to the plans were approximately $1,872,
$1,203 and $816 in fiscal 2002, 2001 and 2000, respectively. The Company does
not provide post-employment or other post-retirement benefits.
I. Cash, accounts receivable, accounts payable, accrued liabilities and the
Company's subordinated notes as reflected in the financial statements
approximate their fair values because of the short-term maturity of those
instruments. The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The carrying amount
of the Company's note payable pursuant to its revolving credit agreement at June
30, 2002, approximates fair value as the interest rate on this instrument
changes with market interest rates.
J. Financial instruments which subject the Company to credit risk consist
primarily of cash, accounts receivable and unbilled costs. The Company performs
on-going credit evaluations of its customers and maintains an allowance for
potential credit losses.
K. The Company uses the liability method in accounting for income taxes.
Deferred income tax assets and liabilities are computed for differences between
the financial statement and tax bases of assets and liabilities that will result
in taxable or deductible amounts in the future based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period plus or minus the change in deferred tax assets
and liabilities during the period.
22
<Page>
NOTE 2. BUSINESS ACTIVITIES
The Company conducts its activities under one business segment which
involves providing engineering and consulting services primarily in the areas
of infrastructure improvements and expansions, environmental management and
power development and conservation. As of June 30, 2002, it was not
practicable to report net service revenue by these areas. The Company's
services and products are provided to commercial organizations and government
agencies primarily in the United States of America market.
NOTE 3. ACCOUNTS RECEIVABLE AND LONG-TERM INSURANCE RECEIVABLE
The current portion of accounts receivable at June 30, 2002 and 2001 is
comprised of the following:
<Table>
<Caption>
June 30, 2002 2001
- -------------------------------------------------------------
Amounts billed $57,429 $35,758
Unbilled costs 36,292 27,677
Retainage 3,025 1,939
------- -------
96,746 65,374
Less allowance for doubtful accounts 5,851 4,284
------- -------
$90,895 $61,090
======= =======
</Table>
Unbilled costs represent billable amounts recognized as revenue primarily
in the last month of the fiscal year. Management expects that substantially all
unbilled costs will be billed and collected in the subsequent year. Retainage
represents amounts billed but not paid by the customer which, pursuant to the
contract, are due at completion.
The long-term insurance receivable at June 30, 2002 and 2001 of $3,627 and
$2,046, respectively, relates to unbilled costs on Exit Strategy contracts and
represent amounts held by the insurance company until completion of certain
project milestones.
Net service revenue from contracts with agencies of the U.S. Government
amounted to approximately $9,652, $8,758 and $7,728 in fiscal 2002, 2001 and
2000, respectively.
NOTE 4. ACQUISITIONS
On July 1, 2001, the Company adopted SFAS No. 141, "Business Combinations."
SFAS No. 141 applies to all business combinations initiated after June 30, 2001.
This Statement eliminates the pooling-of-interests method of accounting and
further clarifies the criteria for recognition of intangible assets separately
from goodwill. The purchase method of accounting was used for acquisitions in
all years presented.
In fiscal 2002, acquisitions totaled $37,358 (before additional purchase
price payments) resulting in additions to goodwill of $31,475 and other
intangible assets of $775 (see Note 5). Additionally, in accordance with the
terms of these agreements, the Company recorded additional purchase price
payments of approximately $576, with the payments resulting in additional
goodwill. The two largest fiscal 2002 acquisitions were SITE-Blauvelt (SITE)
and E/PRO Engineering and Environmental Consulting LLC (E/PRO), which are
discussed below.
In October 2001, the Company completed the acquisition of SITE. SITE is
a transportation infrastructure firm headquartered in Mt. Laurel, New Jersey
with offices in a number of other states. The purchase price of $23,963
(before additional purchase price payments) consisted of approximately
914,000 shares of the Company's common stock resulting in goodwill and other
intangible assets of $21,052 and $583, respectively. The significant assets
and liabilities acquired were accounts receivable of $16,669, debt of $5,663
and deferred income tax liabilities of $5,944. The Company may make
additional payments if certain financial goals are achieved in each of the
one-year periods ending June 30, 2004.
In December 2001, the Company completed the acquisition of E/PRO. E/PRO
is a leading engineering firm in the design, construction and management of
power infrastructure facilities in the Northeast. The purchase price
consisted of cash of $7,007 (net of cash
23
<Page>
acquired). Additionally, in accordance with the terms of the agreement the
Company recorded an additional purchase price payment of approximately $533 in
fiscal 2002, with the incremental payment resulting in additional goodwill. The
Company may make additional payments if certain financial objectives are
achieved in each of the one-year periods ending December 31, 2005.
In fiscal 2001, acquisitions totaled $4,965 (before additional purchase
price payments) resulting in additions to goodwill of $2,821. Additionally,
in accordance with the terms of the agreements the Company recorded
additional purchase price payments of approximately $2,461 in fiscal 2002,
with these payments resulting in additional goodwill. The Company also
recorded an adjustment to purchase price allocation in fiscal 2002 for an
acquisition completed in fiscal 2001 resulting in additional goodwill of
$189. The largest fiscal 2001 acquisition was Engineered Automation Systems,
Inc. (EASI), which is discussed below.
In June 2001, the Company acquired 100% of the outstanding stock of
EASI, an energy, security and infrastructure firm headquartered in Tustin,
California. The purchase price of $2,303 consisted of cash of $1,493 (net of
cash acquired) and 18,036 shares of the Company's common stock. Additionally,
in accordance with the terms of the agreement the Company recorded an
additional purchase price payment of approximately $1,558 in fiscal 2002,
with the payment resulting in additional goodwill. The Company may make
additional payments if certain financial objectives are achieved in each of
the one-year periods ending June 30, 2005.
In fiscal 2000, acquisitions totaled $9,814 (before additional purchase
price payments) resulting in additions to goodwill of $6,743. Additionally, in
accordance with the terms of these agreements the Company recorded additional
purchase price payments of approximately $7,327 in fiscal 2002 and $2,954 in
fiscal 2001, with these payments resulting in additional goodwill. The two
largest fiscal 2000 acquisitions were Hunter Associates and Lowney Associates,
which are discussed below.
In January 2000, the Company acquired 100% of the outstanding stock and
partnership interests of Hunter Associates, a civil engineering firm
headquartered in Dallas, Texas. The initial purchase price of $3,107 consisted
of cash of $2,775 (net of cash acquired), 37,500 shares of the Company's common
stock and a five-year warrant to purchase 30,000 shares of the Company's common
stock at $5.21 per share. Additionally, in accordance with the terms of the
agreement the Company recorded additional purchase price payments of
approximately $2,867 in fiscal 2002 and $977 in fiscal 2001, with these payments
resulting in additional goodwill. The Company may make additional payments if
certain financial objectives are achieved in the one-year period ending December
31, 2002.
In May 2000, the Company acquired 100% of the outstanding stock of Lowney
Associates, a geotechnical and environmental services firm headquartered in
Mountain View, California. The initial purchase price of $5,566 consisted of
cash of $3,478 (net of cash acquired) and 247,500 shares of the Company's common
stock. Additionally, in accordance with the terms of the agreement the Company
recorded additional purchase price of approximately $4,461 in fiscal 2002 and
$1,931 in fiscal 2001, with these payments resulting in additional goodwill. The
Company may make additional payments if certain financial objectives are
achieved in the one-year period ending March 31, 2003.
The Company also recorded additional purchase price payments during fiscal
2002 related to acquisitions completed prior to fiscal 2000 of approximately
$463, with these payments resulting in additional goodwill. At June 30, 2002
and 2001, the Company had liabilities for additional purchase price payments
of $2,751 and $402, respectively. These amounts are included in other accrued
liabilities.
24
<Page>
The following table provides unaudited pro forma results of operations for
the years ended June 30, 2002 and 2001 as if current and prior year acquisitions
had been acquired at the beginning of the earliest fiscal year presented. The
pro forma results include adjustments for increased interest expense on
acquisition borrowings, amortization of intangible assets (excluding goodwill
and indefinite-lived intangible assets) and related income tax effects.
However, pro forma results do not include any anticipated cost savings or other
effects of planned integration. Accordingly, such amounts are not necessarily
indicative of the results that would have occurred if the acquisition had closed
on the dates indicated, or that may result in the future.
<Table>
<Caption>
Years ended June 30, (unaudited) 2002 2001
- -------------------------------------------------------------------
Net service revenue $199,162 $184,540
-------- --------
Net income 16,452 11,496
-------- --------
Earnings per share - diluted $ 1.19 $ 0.89
======== ========
</Table>
NOTE 5. GOODWILL AND INTANGIBLE ASSETS
On July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 eliminates the amortization of goodwill and
indefinite-lived intangible assets and requires an annual review for impairment.
Identifiable intangible assets with determinable useful lives will continue to
be amortized. Beginning July 1, 2001, the Company ceased amortizing goodwill and
indefinite-lived intangible assets. At that time, management performed a two
step impairment test of existing goodwill and concluded there was no goodwill
impairment. For purposes of the impairment test, the Company considers itself a
single reporting unit, as defined by SFAS No. 142.
The change in the net carrying amount of goodwill for the year ended June
30, 2002 is as follows:
<Table>
Goodwill, beginning of year $38,943
Current year acquisitions 31,475
Additional purchase price payments - 2002 acquisitions 576
Additional purchase price payments - prior year acquisitions 10,251
Other purchase price adjustments 189
-------
Goodwill, end of year $81,434
=======
</Table>
The carrying value of identifiable intangible assets at June 30, 2002
and 2001 was $721 and $200, of which $295 and $200 is subject to
amortization. These amounts are included in other assets. The amortization of
intangible assets for the years ended June 30, 2002, 2001 and 2000 was $254,
$33 and $33, respectively. Estimated amortization of intangible assets over
the next five fiscal years is as follows: 2003 - $224; 2004 - $17; 2005 -
$17; 2006 - $17 and 2007 - $17.
25
<Page>
The following table provides pro forma disclosure of net income and
earnings per share for the years ended June 30, 2001 and 2000, as if goodwill
had not been amortized.
<Table>
<Caption>
Years ended June 30, 2002 2001 2000
- ------------------------------------------------------------------------------------------
NET INCOME:
Reported net income $15,480 $8,985 $4,644
Add back: goodwill amortization (net of taxes) -- 948 740
------- ------ ------
Adjusted net income $15,480 $9,933 $5,384
======= ====== ======
EARNINGS PER SHARE - BASIC:
Reported basic earnings per share $ 1.26 $ 0.83 $ 0.45
Add back: goodwill amortization (net of taxes) -- 0.08 0.07
------- ------ ------
Adjusted basic earnings per share $ 1.26 $ 0.91 $ 0.52
======= ====== ======
EARNINGS PER SHARE - DILUTED:
Reported diluted earnings per share $ 1.14 $ 0.75 $ 0.43
Add back: goodwill amortization (net of taxes) -- 0.08 0.07
------- ------ ------
Adjusted diluted earnings per share $ 1.14 $ 0.83 $ 0.50
======= ======= ======
</Table>
NOTE 6. DEBT
Debt at June 30, 2002 and 2001 is comprised of the following:
<Table>
<Caption>
June 30, 2002 2001
- -------------------------------------------------------------------------
Note payable - revolving credit agreement $23,000 $14,000
4 1/4% - 7 3/4% subordinated notes 637 1,005
Capital leases and other 716 --
------- -------
24,353 15,005
Less current maturities 465 368
------- --------
Long-term debt $23,888 $14,637
======= =======
</Table>
In March 2002, the Company entered into a new banking arrangement with
Wachovia Bank, N.A. that provides a revolving credit facility of up to $40,000
to support various short-term operating and investing activities. The initial
availability under the facility was $32,000. In September 2002, the agreement
was amended to increase the aggregate amount available to $40,000. Borrowings
under the agreement are collateralized by accounts receivable and are due and
payable in March 2005 when the agreement expires. Borrowings under the agreement
bear interest at the bank's base rate or the Eurodollar rate plus or minus
applicable margins. The agreement contains various covenants including, but not
limited to, restrictions related to net worth, EBITDA, leverage, asset sales,
mergers and acquisitions, creation of liens and dividends on common stock (other
than stock dividends). The weighted average interest rate on outstanding
borrowings at June 30, 2002 was 3.3%. The Company also pays a commitment fee of
1/4% on the unused portion of the agreement.
At June 30, 2001, the Company had a $25,000 revolving credit agreement with
Fleet National Bank of which $14,000 was outstanding. Borrowings under the
agreement were collateralized by accounts receivable and bore interest at the
bank's base rate or the Eurodollar rate plus applicable margins. The Company
also paid a commitment fee of 1/4% of the unused portion of the agreement. In
March 2002, this agreement was replaced by a new agreement with Wachovia Bank,
N.A.
Maturities of the subordinated notes during each of the fiscal years ending
June 30, 2003 and 2004 are $368 and $269, respectively.
26
<Page>
NOTE 7. REDEEMABLE PREFERRED STOCK
On December 19, 2001 the Company completed a private placement of $15,000
of a newly designated class of Preferred Stock with Fletcher International,
Ltd., an affiliate of Fletcher Asset Management, Inc. ("Fletcher") of New York
City. The Preferred Stock is convertible into the Company's common stock at a
conversion price of $36.72 per share. The Company also granted Fletcher the
right, commencing on December 15, 2002 and ending on December 14, 2003, to
purchase up to $10,000 of one or more additional series of Preferred Stock under
similar terms and conditions. The Preferred Stock issued to Fletcher has a
five-year term with a 4% annual dividend, which is payable at the Company's
option in either cash or common stock. The Company will have the right to redeem
the Preferred Stock for cash once the price of its common stock reaches certain
predetermined levels. Following 48 months of issuance, the Preferred Stock is
redeemable by Fletcher in common stock. On the five-year expiration date, any
shares of Preferred Stock still outstanding are to be mandatorily redeemed, at
the Company's option, in either cash or shares of common stock. The Preferred
Stock was recorded net of issuance costs of $453.
NOTE 8. FEDERAL AND STATE INCOME TAXES
The federal and state income tax provision for fiscal 2002, 2001 and 2000
consists of the following:
<Table>
<Caption>
Years ended June 30, 2002 2001 2000
- -------------------------------------------------------------
Current:
Federal $ 9,067 $ 4,484 $ 2,359
State 1,598 609 226
Deferred:
Federal (826) 302 24
State (251) 14 4
------- ------- -------
$ 9,588 $ 5,409 $ 2,613
======= ======= =======
</Table>
Deferred income taxes represent the tax effect of transactions that are
reported in different periods for financial and tax reporting purposes.
Temporary differences and carryforwards that give rise to a significant portion
of deferred income tax benefits (liabilities) are as follows:
<Table>
<Caption>
June 30, 2002 2001
- ------------------------------------------------------------------------
Current deferred income tax benefits:
Doubtful accounts and other accruals $ 1,906 $ 1,426
Vacation pay accrual 699 450
Other, net 25 6
------- -------
$ 2,630 $ 1,882
======= =======
Long-term deferred income tax liabilities:
Depreciation and amortization $(5,847) $(2,693)
Change to accrual tax accounting method (4,075) (1,717)
Loss carryforwards from acquisitions 529 509
Other, net 80 75
------- -------
$(9,313) $(3,826)
======= =======
</Table>
27
<Page>
A reconciliation of the U. S. federal statutory income tax rate to the
Company's consolidated effective income tax rate follows:
<Table>
<Caption>
Years ended June 30, 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------
U.S. federal statutory income tax rate 35.0% 34.0% 34.0%
State income taxes (net of federal benefit) 3.1 2.9 2.1
Other, net 0.2 0.7 (0.1)
---- ---- ----
Effective income tax rate 38.3% 37.6% 36.0%
==== ==== ====
</Table>
At June 30, 2002, the Company had approximately $1,511 of operating loss
carryforwards available to reduce future federal taxable income. These loss
carryforwards relate to certain acquisitions and expire in fiscal years 2008
through 2021. Although utilization of these carryforwards is subject to certain
limitations, the Company believes that all of the carryforwards will be utilized
prior to their expiration.
NOTE 9. LEASE COMMITMENTS
The Company had commitments at June 30, 2002 under noncancelable operating
leases for office facilities and equipment. Rental payments, net of sublease
receipts, charged to operations in fiscal 2002, 2001 and 2000 were approximately
$8,092, $5,900 and $4,887, respectively. Certain leases for office facilities
require payments for expenses under escalation clauses.
Minimum operating lease obligations payable in future fiscal years are as
follows:
<Table>
<Caption>
Years ending June 30,
- ---------------------------------------------------------------------------------------------------------------------
2003 $ 8,052
2004 7,064
2005 5,576
2006 4,761
2007 2,863
2008 and thereafter 6,064
--------
$34,380
=======
</Table>
NOTE 10. STOCK OPTIONS
The Company's non-qualified stock option plan for employees and
directors, as amended, authorizes the granting of options, including
performance-based options, with exercise prices at no less than the fair
market value of the common stock on the date such options are granted. The
option term is fixed by the Board of Directors at the time of grant, but
cannot exceed ten years. Generally, options have a vesting provision whereby
one-third vest upon issuance, one-third vest after one-year and the remaining
one-third vest after two-years. No accounting recognition is given to stock
options until they are exercised, at which time the proceeds are credited to
the capital accounts. The Company receives a tax benefit upon exercise of
these options in an amount equal to the difference between the option price
and the fair market value of the common stock on the exercise date. Tax
benefits related to the exercise of stock options are credited to additional
paid-in capital when realized.
28
<Page>
A summary of stock option activity for fiscal 2002, 2001 and 2000 follows:
<Table>
<Caption>
Years ended June 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Options Price Options Price Options Price
---------- --------- ---------- ---------- --------- ---------
Outstanding options, beginning of year 2,043,136 $ 5.74 2,002,482 $ 4.02 1,329,345 $3.14
Granted 685,425 24.78 546,975 10.75 727,026 5.63
Exercised (223,601) 5.57 (444,956) 4.07 (33,424) 3.89
Canceled (31,334) 11.72 (61,365) 6.25 (20,465) 4.24
---------- ------ --------- ------ ---------- -----
Outstanding options, end of year 2,473,626 $10.96 2,043,136 $ 5.74 2,002,482 $4.02
========== ====== ========= ====== ========= =====
Options exercisable at end of year 1,820,587 $ 7.57 1,543,376 $ 4.65 1,331,811 $3.35
========== ====== ========= ====== ========= =====
Options available for future grants 253,271 907,362 267,972
========== ========= =========
</Table>
The following table summarizes information about outstanding stock options
by various price ranges at June 30, 2002:
<Table>
<Caption>
Options Outstanding Options Exercisable
-------------------------------- ---------------------
Weighted Average Weighted
Average Term Average
Exercise price Shares Price (Years) Shares Price
- -----------------------------------------------------------------------------------------
$ 2.75 - 4.00 793,451 $ 2.94 6.1 793,451 $ 2.94
4.17 - 6.92 367,832 4.74 7.2 315,107 4.38
7.17 - 11.33 527,494 8.28 8.1 416,663 8.12
12.33 - 21.19 358,549 19.28 9.2 156,866 18.28
24.86 - 33.94 426,300 27.55 9.2 138,500 27.63
--------- ------ --------- ------
2,473,626 $10.96 1,820,587 $ 7.57
========= ====== ========= ======
</Table>
Grants in fiscal 2000 include 212,001 options granted to certain senior
managers in exchange for a reduction in cash compensation to the grantees over a
one-year period, with the individuals receiving one option for every $2.50 of
salary reduction.
The Company applies the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations
to account for stock options issued. Accordingly, no compensation cost has been
recognized in the Company's consolidated statements of operations for stock
options issued. Had compensation costs for stock options issued been determined
based on the fair value at the grant date for awards under SFAS No. 123,
"Accounting for Stock-Based Compensation", pro forma net income and earnings per
share for the years ended June 30, 2002, 2001 and 2000 would have been as
follows:
<Table>
<Caption>
Years ended June 30, 2002 2001 2000
- -------------------------------------------------------------------
Net income, as reported $15,480 $8,985 $4,644
Net income, pro forma 11,828 7,363 3,507
Earnings per share, as reported:
Basic $ 1.26 $ 0.83 $ 0.45
Diluted 1.14 0.75 0.43
Earnings per share, pro forma:
Basic $ 0.98 $ 0.68 $ 0.34
Diluted 0.87 0.62 0.33
</Table>
29
<Page>
In arriving at the pro forma amounts, the fair value of each option was
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions:
<Table>
<Caption>
Years ended June 30, 2002 2001 2000
- ------------------------------------------------------------------------------
Risk-free interest rate 4.1% 5.8% 6.4%
Expected life 5 years 5 years 7.5 years
Expected volatility 45% 45% 47%
Expected dividend yield None None None
</Table>
The weighted average fair value of options granted during fiscal 2002, 2001
and 2000 was $11.15, $5.07 and $3.37, respectively.
NOTE 11. CONTINGENCIES
The Company has entered into several long-term contracts under its Exit
Strategy program under which the Company is obligated to complete the
remediation of environmental conditions at a site for a fixed price. The
Company assumes the risk for remediation costs for pre-existing site
environmental conditions and believes that through in-depth technical
analysis, comprehensive cost estimation and creative remedial approaches it
is able to execute pricing strategies which protect the Company's return on
these projects. As additional protection, the Company obtains a finite risk
cost cap insurance policy from leading insurance companies with a minimum A.
M. Best rating of A- Excellent (primarily American International Group) which
provides coverage for cost increases arising from unknown or changed
conditions up to a specified maximum amount significantly in excess of the
estimated cost of remediation. Upon signing of the contract, the Company
receives the fixed price contract amount of which a substantial portion is
deposited in a restricted account held by the insurance company. The
insurance company then pays the Company from the deposited funds as work is
performed. The Company believes that it is adequately protected from risks on
these projects and that adverse developments, if any, will not have a
material impact on the Company's consolidated operating results, financial
condition or cash flows.
One Exit Strategy contract entered into by the Company also involved the
Company entering into a consent decree with government authorities and assuming
the obligation for the settling responsible parties' environmental remediation
liability for the site. The Company's expected remediation cost is fully funded
by the contract price received and is fully insured by a finite risk cost cap
insurance policy for amounts significantly in excess of the estimated cost of
remediation. Accordingly, the Company has recorded the environmental remediation
liability for the site with offsetting recoverables from the insurance company.
The Company's contracts with the U.S. Government are subject to examination
and renegotiation. Contracts and other records of the Company have been examined
through June 30, 1998. The Company believes that adjustments resulting from such
examination or renegotiation proceedings, if any, will not have a material
impact on the Company's operating results, financial condition or cash flows.
30
<Page>
NOTE 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
In the opinion of management, the following unaudited quarterly financial
information for the fiscal years ended June 30, 2002 and 2001, reflect all
adjustments necessary for a fair statement of results of operations. All such
adjustments are of a normal recurring nature.
<Table>
<Caption>
First Second Third Fourth
Fiscal 2002(1) Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------
Gross revenue $57,557 $65,533 $72,193 $74,241 $269,524
Net service revenue 36,478 44,652 48,860 50,085 180,075
Income from operations 5,518 5,302 6,963 8,421 26,204
Income before taxes 5,230 4,973 6,700 8,165 25,068
Net income 3,230 3,071 4,138 5,041 15,480
Earnings per share(2):
Basic $ 0.29 $ 0.25 $ 0.32 $ 0.39 1.26
Diluted 0.26 0.23 0.29 0.36 1.14
</Table>
<Table>
<Caption>
First Second Third Fourth
Fiscal 2001 Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------------------------------------------
Gross revenue $ 36,887 $ 44,642 $ 47,305 $ 52,639 $181,473
Net service revenue 26,703 29,134 32,062 36,303 124,202
Income from operations 3,277 3,684 4,125 4,849 15,935
Income before taxes 2,792 3,275 3,782 4,545 14,394
Net income 1,759 2,063 2,345 2,818 8,985
Earnings per share(2):
Basic $ 0.17 $ 0.19 $ 0.21 $ 0.25 $ 0.83
Diluted 0.15 0.17 0.19 0.23 0.75
</Table>
(1) The first, second and third quarter results for fiscal 2002 have been
adjusted. The Company had previously been recognizing 60% of the start-up
losses of an energy services business joint venture. However, it was
determined that since the Company had funded all of the joint venture's
losses it should recognize 100% of the losses. In addition, it was also
determined, that due to a customer's inability to pay, revenue recognized,
principally in the second quarter, with respect to environmental work for a
newly formed customer, should be reversed. The impact of the adjustment for
the first quarter was to decrease income before taxes by $212, net income by
$130 and diluted earnings per share by $.01. The impact of adjustments for
the second quarter was to decrease gross and net service revenue by $1,392,
income before taxes by $1,240, net income by $766 and diluted earnings per
share by $.05. The impact of the adjustments for the third quarter was to
decrease gross and net service revenue by $43, income before taxes by $117,
net income by $72 and diluted earnings per share by $.01. The Company has
filed amended Form 10-Qs reporting such adjustments.
(2) Quarterly results may not agree to the total for the year due to rounding.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JUNE 30, 2002, 2001 AND 2000
(in thousands)
<Table>
<Caption>
Additions
------------------------
Balance at Charged to Charged to Balance at
beginning costs and other end of
Year Description of period expenses accounts(1) Deductions(2) period
- -------- ------------------------------- ----------- ---------- ----------- --------------- ----------
2002 Allowance for doubtful accounts $ 4,284 $ 2,137 $ 1,188 $(1,758) $ 5,851
------- ------- ------- ------- -------
2001 Allowance for doubtful accounts $ 3,205 $ 2,312 $ 231 $(1,464) $ 4,284
------- ------- ------- ------- -------
2000 Allowance for doubtful accounts $ 2,546 $ 2,934 $ 223 $(2,498) $ 3,205
------- ------- ------- ------- -------
</Table>
(1) Allowances from acquired businesses.
(2) Uncollectible accounts written off, net of recoveries.
31
<Page>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
The following table presents the name and age of each of the Company's executive
officers, their present positions with the Company and date of appointment
thereto, and other positions held during the past five years, including
positions held with other companies and with subsidiaries of the Company:
<Table>
<Caption>
Present Position and Other Positions Held
NAME AND AGE DATE OF APPOINTMENT DURING LAST FIVE YEARS
------------ ------------------- ----------------------
Richard D. Ellison 63 Chairman, President and Chief
Executive Officer (March 1997)
John H. Claussen 53 Senior Vice President, TRC Companies,
Inc. (August 1992)
Martin H. Dodd 49 Vice President, General Counsel and
Secretary (February 1997)
Glenn E. Harkness 54 Senior Vice President, TRC
Environmental Corporation
(September 1997)
John W. Hohener 47 Senior Vice President and Chief Vice President and Chief Financial
Financial Officer (May 2002) Officer, Entridia Corporation, Inc.;
Vice President and Chief Financial
Officer, Smartflex Systems, Inc.
Miro Knezevic 53 Senior Vice President, TRC Companies, Executive Vice President, TRC
Inc. (August 1998) Environmental Solutions, Inc.
Michael C. Salmon 47 Senior Vice President, TRC Companies, Senior Vice President, TRC
Inc. (June 2000) Environmental Solutions, Inc.
</Table>
Information required by this item is contained under the caption "Election of
Directors" in the Company's Proxy Statement for its 2002 Annual Meeting of
Shareholders to be held November 22, 2002, and such information is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is contained under the caption "Executive
Compensation" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held November 22, 2002, and such information is incorporated
herein by reference.
32
<Page>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is contained under the caption "Principal
Stockholders" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held November 22, 2002, and such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is contained under the caption "Certain
Transactions" in the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held November 22, 2002, and such information is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS OF THE REGISTRANT
See Consolidated Financial Statements under Item 8 on pages 16 through 31
of this Report.
(A) (2) FINANCIAL STATEMENT SCHEDULE
See Schedule II - Valuation and Qualifying Accounts under Item 8 on page 31
of this Report.
All other schedules are omitted because they are not applicable, not required or
the information required is included in the financial statements or notes
thereto.
(B) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of fiscal 2002.
(C) EXHIBITS
3.1 Restated Certificate of Incorporation, dated November 18, 1994,
incorporated by reference from the Company's Form 10-K for the
fiscal year ended June 30, 1995.
3.2 Bylaws of the Company, as amended, incorporated by reference from
the Company's Form S-1 as filed on April 16, 1986, Registration
No. 33-4896.
3.3 Certificate of Rights and Preferences of Series A-1 Cumulative
Convertible Preferred Stock filed with the Secretary of the State
of Delaware, incorporated by reference from the Company's Form 8-K
filed on December 26, 2001.
*10.1 Restated Stock Option Plan, dated May 6, 1998, incorporated by
reference from the Company's Form 10-K for the year ended June 30,
1998.
*10.2.1 Termination Policy for Members of TRC Key Person Group, as adopted
on December 1, 1998, incorporated by reference from the Company's
Form 10-K for the fiscal year ended June 30, 1999.
*10.2.2 TRC Key Person Bonus Plan for Fiscal Years 1999 - 2005, as amended
on January 25, 2002.
10.3 Revolving Credit Agreement by and among TRC Companies, Inc. and
its subsidiaries and Wachovia Bank, N.A. (formerly First Union
National Bank), dated March 20, 2002, incorporated by reference
from the Company's Form 10-Q for the quarterly period ended March
31, 2002.
33
<Page>
10.3.1 Amendments dated August 30, 2002 and September 16, 2002 to
Revolving Credit Agreement by and among TRC Companies, Inc. and
its subsidiaries and Wachovia Bank, N.A.
10.5 Agreement and Plan of Merger and Reorganization, dated as of
October 9, 2001, by and among (1) TRC Companies, Inc., a Delaware
corporation (the "Parent"); (2) TRC Infrastructure, Inc., a New
York corporation; TRC Infrastructure Inc., a New Jersey
corporation; and TRC Infrastructure Inc., a Virginia corporation;
(3) SITE-Blauvelt Engineers, Inc., a New York corporation; Site
Construction Services, Inc., a New Jersey corporation; and
SITE-Blauvelt Engineers, Inc., a Virginia corporation; and (4)
Joseph C. Mendel, F. Walter Riebenack, John J. Calzolano and John
W. Gildea, incorporated by reference from the Company's Form 8-K
filed on October 26, 2001.
10.6 Agreement, dated as of December 14, 2001, by and between TRC
Companies Inc. and Fletcher International, Ltd., related to the
sale of the Company's Series A-1 Cumulative Convertible Preferred
Stock, incorporated by reference from the Company's Form 8-K filed
on December 26, 2001.
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* This exhibit is a management contract or compensatory plan required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c).
34
<Page>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TRC COMPANIES, INC.
Dated: September 30, 2002 By: /S/RICHARD D. ELLISON
---------------------------------------
Richard D. Ellison, Ph.D., P.E.
Chairman, President and Chief Executive Officer
(Principle 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 Company
and in the capacities and on the dates indicated.
/S/ RICHARD D. ELLISON Chairman, President and
- ---------------------------- Chief Executive Officer September 30, 2002
Richard D. Ellison
/S/ EDWARD G. JEPSEN Director September 30, 2002
- ---------------------------
Edward G. Jepsen
/S/ EDWARD W. LARGE Director September 30, 2002
- ---------------------------
Edward W. Large
/S/JOHN M. F. MACDONALD Director September 30, 2002
- ---------------------------
John M. F. MacDonald
/S/ J. JEFFREY MCNEALEY Director September 30, 2002
- ---------------------------
J. Jeffrey McNealey
/S/ JOHN W. HOHENER Senior Vice President September 30, 2002
- --------------------------- and Chief Financial
John W. Hohener Officer (Principle
Financial Officer)
35
<Page>
CERTIFICATIONS
I, Richard D. Ellison, certify that:
1. I have reviewed this annual report on Form 10-K of TRC Companies, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 30, 2002
/s/ RICHARD D. ELLISON
- -----------------------------
Richard D. Ellison
Chief Executive Officer
I, John W. Hohener, certify that:
1. I have reviewed this annual report on Form 10-K of TRC Companies, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
Date: September 30, 2002
/s/ JOHN W. HOHENER
- -----------------------------
John W. Hohener
Chief Financial Officer
36
<Page>
TRC COMPANIES, INC.
Form 10-K Exhibit Index
Fiscal Year Ended June 30, 2002
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- ------ ----------- -----------
10.2.2 TRC Key Person Bonus Plan for Fiscal Years 1999 - 2005, as
amended on January 25, 2002 38
10.3.1 Amendments dated August 30, 2002 and September 16, 2002
to Revolving Credit Agreement by and among TRC Companies, Inc.
and its subsidiaries and Wachovia Bank, N.A. 41
21 Subsidiaries of the Registrant 57
23 Consent of Independent Accountants 58
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 59
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 60
37