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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2002

OR

For the transition period from                              to                             

Commission File Number 0-19655

TETRA TECH, INC.
(Exact name of registrant as specified in its charter)

(626) 351-4664
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        As of August 12, 2002, the total number of outstanding shares of the Registrant's common stock was 53,272,930.

TETRA TECH, INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1.

Tetra Tech, Inc.
Condensed Consolidated Balance Sheets

See accompanying Notes to Condensed Consolidated Financial Statements.

3

Tetra Tech, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

4

Tetra Tech, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

(Continued)

5

(Continued)

6

(Continued)

7

See accompanying Notes to Condensed Consolidated Financial Statements.

(Concluded)

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TETRA TECH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

        The accompanying condensed consolidated balance sheet as of June 30, 2002, the condensed consolidated statements of operations for the three-month and nine-month periods ended June 30, 2002 and July 1, 2001 and the condensed consolidated statements of cash flows for the nine months ended June 30, 2002 and July 1, 2001 are unaudited and, in the opinion of management, include all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the periods presented.

        The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2001.

        The results of operations for the three and nine months ended June 30, 2002 are not necessarily indicative of the results to be expected for the fiscal year ending September 29, 2002.

        All share and per share amounts reflect, on a retroactive basis, the 5-for-4 stock split effected in the form of a 25% stock dividend, wherein one additional share of stock was issued on December 17, 2001 for each four shares outstanding as of the record date of November 28, 2001.

2.    Accounting Pronouncements

        In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, which supersedes Accounting Principles Board (APB) Opinion No. 16, Business Combinations. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations for combinations initiated after June 30, 2001. The statement also changes the criteria to recognize intangible assets apart from goodwill. The provisions of this statement are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001.

        In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which supersedes APB Opinion No. 17, Intangible Assets. Under SFAS No. 142, goodwill and other indefinite-lived intangible assets are no longer amortized but are reviewed, at a minimum, annually for impairment. Separable intangible assets that have finite lives will continue to be amortized over their useful lives. For the nine months ended June 30, 2002, goodwill amortization expense was $8.0 million. The amortization provisions of this statement are effective for goodwill and intangible assets acquired after June 30, 2001. The remaining provisions of this statement are effective for fiscal years beginning after December 15, 2001. The adoption of this statement will result in the Company's discontinuation of amortization of its goodwill; however, the Company will be required to test its goodwill for impairment under SFAS No. 142 in the first six months of fiscal 2003. The Company is currently analyzing the impact of this statement and will adopt this statement in fiscal 2003.

        In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. SFAS No. 144 addresses financial accounting and reporting requirements for the impairment or disposal of long-lived assets. This statement also expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. The provisions of this statement are effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, although early adoption is permitted. The Company is currently analyzing the impact of this statement and will adopt this statement in fiscal 2003.

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3.    Earnings Per Share

        Basic Earnings Per Share (EPS) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed by dividing net income by the weighted average number of common shares outstanding and dilutive potential common shares. The Company includes as potential common shares the weighted average number shares of exchangeable stock of a subsidiary and the weighted average dilutive effects of outstanding stock options. The exchangeable stock of a subsidiary is non-voting and is exchangeable on a one to one basis, as adjusted for stock splits and stock dividends subsequent to the original issuance, for the Company's common stock. The following table sets forth the computation of basic and diluted EPS:

        For the three and nine months ended June 30, 2002, 2.5 million and 1.9 million options, respectively, were excluded from the calculation of potential common shares because the exercise price of the excluded options exceeded the average market price for the respective periods.

4.    Cash and Cash Equivalents

        The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Cash and cash equivalents totaled $22.7 million and $16.2 million at June 30, 2002 and September 30, 2001, respectively.

5.    Mergers and Acquisitions

        On December 21, 2000, the Company acquired 100% of the capital stock of Rocky Mountain Consultants, Inc. (RMC), a provider of water-related engineering and facility development services to state and local governments and private clients primarily in the western and midwestern United States. The purchase was valued at approximately $15.2 million and consisted of cash and 370,833 shares of Company common stock.

        On March 2, 2001, the Company acquired 100% of the capital stock of Wahco Construction, Inc. (WCI), a provider of network and field services to the utility and communications industries primarily in the northwestern region of the United States. The purchase was valued at approximately $1.4 million and consisted of cash and 64,977 shares of Company common stock.

        On March 30, 2001, the Company acquired 100% of the capital stock of Williams, Hatfield & Stoner, Inc. (WHS), a provider of civil engineering, planning and environmental services primarily in

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the southeastern region of the United States. The purchase was valued at approximately $9.1 million and consisted of cash and 181,173 shares of Company common stock. Simultaneously with the acquisition, WHS distributed to its former shareholders accounts receivable valued at approximately $3.8 million.

        On May 21, 2001, the Company acquired 100% of the capital stock of Vertex Engineering Services, Inc. (VES), a provider of environmental engineering, consulting and surety and insurance construction management services throughout the United States. The purchase was valued at approximately $10.0 million and consisted of cash and 386,437 shares of Company common stock.

        On May 25, 2001, the Company acquired 100% of the capital stock of Maxim Technologies, Inc. (MTI), a provider of environmental and engineering consulting services throughout the United States. The purchase was valued at approximately $13.7 million and consisted of cash and 296,995 shares of Company common stock.

        On June 1, 2001, the Company acquired certain assets of Commonwealth Technology, Inc. (CTI), a provider of environmental and infrastructure engineering and consulting services primarily in the southeastern region of the United States. The purchase was valued at approximately $3.7 million and consisted of cash and 103,715 shares of Company common stock.

        On June 27, 2001, the Company acquired 100% of the capital stock of The Design Exchange Architects, Inc. (DXA), a provider of architectural, planning and interior design services primarily in the eastern region of the United States. The purchase was valued at approximately $1.3 million and consisted of cash and is subject to a purchase price and purchase allocation adjustment based upon the final determination of DXA's net asset value as of June 27, 2001.

        On June 29, 2001, the Company acquired 100% of the capital stock of Western Utility Contractors, Inc. and Western Utility Cable, Inc. (collectively, WUC), providers of engineering, design and construction services primarily in the midwestern region of the United States. The purchase was valued at approximately $16.0 million and consisted of cash and is subject to a purchase price and purchase allocation adjustment based upon the final determination of WUC's net asset value as of June 29, 2001.

        On September 26, 2001, the Company acquired through its wholly-owned subsidiary, MFG, Inc., certain assets of Shepherd Miller, Inc. (SMI), a provider of environmental and engineering consulting services to the mining industry throughout the United States. The purchase was valued at approximately $2.5 million and consisted of cash and 53,005 shares of Company common stock and is subject to a purchase price and purchase allocation adjustment based upon the final determination of SMI's net asset value as of September 26, 2001.

        On September 26, 2001, the Company acquired 100% of the capital stock of Sciences International, Inc. (SII), a provider of health and environmental risk assessment services to private industries, governments and law firms throughout the United States. The purchase was valued at approximately $5.1 million and consisted of cash and 137,508 shares of Company common stock and is subject to a purchase price and purchase allocation adjustment based upon the final determination of SII's net asset value as of September 26, 2001.

        On March 25, 2002, the Company acquired through its wholly-owned subsidiary, The Thomas Group of Companies, Inc., 100% of the capital stock of Thomas Associates Architects, Engineers, Landscape Architects P.C. and America's Schoolhouse Consulting Services, Inc. (collectively, TGI), a provider of architectural, engineering and planning services for educational buildings and school systems primarily in the eastern region of the United States. The purchase was valued at approximately $20.1 million and consisted of cash and 392,126 shares of Company common stock and is subject to a purchase price and purchase allocation adjustment based upon the final determination of TGI's net asset value as of March 25, 2002.

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        On March 29, 2002, the Company acquired 100% of the capital stock of Hartman & Associates, Inc. (HAI), a provider of engineering, construction and consulting services in the southeastern region of the United States. The purchase was valued at approximately $10.8 million and consisted of cash and is subject to a purchase price and purchase allocation adjustment based upon the final determination of HAI's net asset value as of March 29, 2002.

        On June 29, 2002, the Company acquired 100% of the capital stock of Ardaman & Associates, Inc. (AAI), a provider of geotechnical, geophysical and hydrogeological consulting and engineering services in the southeastern region of the United States. The purchase was valued at approximately $21.9 million and consisted of cash and is subject to a purchase price and purchase allocation adjustment based upon the final determination of AAI's net asset value as of June 29, 2002.

        All of the acquisitions above have been accounted for as purchases and, accordingly, the purchase prices of the businesses acquired have been allocated to the assets and liabilities acquired based upon their fair values. The excess of the purchase cost of the acquisitions over the fair value of the net assets acquired was recorded as goodwill and is included in Intangible Assets—Net in the accompanying condensed consolidated balance sheets. The results of operations of each of the acquired companies have been included in the Company's financial statements from the effective acquisition dates.

6.    Accounts Receivable

        Accounts receivable are presented net of a valuation allowance to provide for doubtful accounts and for the potential disallowance of billed and unbilled costs. The allowance for doubtful accounts as of June 30, 2002 and September 30, 2001 was $50.0 million and $45.1 million, respectively. The allowance for doubtful accounts at June 30, 2002 and September 30, 2001 includes a reserve of $38.3 million for an account debtor that has filed for Chapter 11 protection under the U.S. Bankruptcy Code. The allowance for disallowed costs as of June 30, 2002 and September 30, 2001 was $1.1 million and $0.8 million, respectively. Disallowance of billed and unbilled costs is primarily associated with contracts with the Federal government which contain clauses that subject contractors to several levels of audit. The Company establishes reserves on contract receivables where collectibility is not assured plus a general allowance for which some potential loss is determined to be probable based upon current events and circumstances. Management currently believes that resolution of these matters will not have a material adverse impact on the Company's financial position or results of operations; however, to the extent the credit quality of the Company's client base deteriorates, current reserve levels may not be sufficient to cover such losses.

7.    Unaudited Pro Forma Operating Results

        The table below presents summarized unaudited pro forma operating results assuming that the Company had acquired RMC, WHS, VES, MTI, CTI, WUC, TGI and AAI on October 2, 2000. The effect of unaudited pro forma results of WCI, DXA, SMI, SII and HAI, had they been acquired on October 2, 2000 is not material. These amounts are based on historical results and assumptions and estimates which the Company believes to be reasonable. The pro forma results do not reflect

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anticipated cost savings and do not necessarily represent results which would have occurred if these acquisitions had actually taken place on October 2, 2000.

8.    Operating Segments

        The Company's management has organized its operations into three operating segments: Resource Management, Infrastructure and Communications. The Resource Management operating segment provides specialized environmental engineering and consulting services primarily relating to water quality and water availability to both public and private organizations. The Infrastructure operating segment provides engineering services to provide additional development, as well as upgrading and replacement of existing infrastructure, to both public and private organizations. The Communications operating segment provides a comprehensive set of services including engineering, consulting and operational services to communications companies, wireless service providers and cable operators. Management has established these operating segments based upon the services provided, the different marketing strategies, and the specialized needs of the clients. The Company accounts for inter-segment sales and transfers as if the sales and transfers were to third parties; that is, by applying a negotiated fee onto the cost of the services performed. Management evaluates the performance of these operating segments based upon their respective income from operations before the effect of any acquisition related amortization.

        The following tables set forth (in thousands) summarized financial information on the Company's reportable segments:

Reportable Segments:

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Reconciliations:

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Major Clients

        The Company's net revenue attributable to the U.S. Government was approximately $42.9 million and $49.2 million for the three months ended June 30, 2002 and July 1, 2001, respectively. Net revenue attributable to the U.S. Government was approximately $138.7 million and $134.8 million for the nine months ended June 30, 2002 and July 1, 2001, respectively. Both the Resource Management and Infrastructure operating segments report revenue from the U.S. Government.

9.    Comprehensive Income

        Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. These sources include net income and other revenues, expenses, gains and losses incurred. The Company includes as other comprehensive income translation gains and losses from subsidiaries with functional currencies different than that of the Company. Comprehensive income/(loss) was approximately $8.5 million and $(3.6) million for the three months ended June 30, 2002 and July 1, 2001, respectively. For the nine months ended June 30, 2002 and July 1, 2001, comprehensive income was $25.1 million and $16.0 million, respectively. For the three and nine months ended June 30, 2002, the Company realized net translation gains of $0.4 million. For the three months ended July 1, 2001, the Company incurred net translation gains of $0.2 million. For the nine months ended July 1, 2001, the Company incurred net translation losses of $0.1 million.

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Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
                 OF OPERATIONS

        Except for the historical information contained below, the matters discussed in this section are forward-looking statements that involve a number of risks and uncertainties including those described under the heading "Risk Factors." Our actual liquidity needs, capital resources and operating results may differ materially from the discussion set forth below in these forward-looking statements. For additional information, refer to the Notes to Condensed Consolidated Financial Statements.

Overview

        Tetra Tech, Inc. is a leading provider of specialized engineering and technical services in three principal business areas: resource management, infrastructure and communications. We assist our clients in defining problems and developing innovative and cost-effective solutions. Our technical services, which implement solutions, include research and development, applied science, engineering and architectural design, construction management, and operations and maintenance. Our clients include a diverse base of public and private organizations located in the United States and internationally.

        Since our initial public offering in December 1991, we have increased the size and scope of our business and have expanded our service offerings through a series of strategic acquisitions and internal growth.

        We derive our revenue from fees from professional services. Our services are billed under various types of contracts with our clients, including:

•

Fixed-price;

•

Fixed-rate time and materials;

•

Cost-reimbursement plus fixed fee; and

•

Cost-reimbursement plus fixed and award fee.

        In the course of providing our services, we routinely subcontract services. These subcontractor costs are passed through to clients and, in accordance with industry practice, are included in gross revenue. Because subcontractor services can change significantly from project to project, we believe net revenue, which is gross revenue less the cost of subcontractor services, is a more appropriate measure of our performance.

        Our cost of net revenue includes professional compensation and certain direct and indirect overhead costs such as rents, utilities and travel. Professional compensation represents the majority of these costs. Our selling, general and administrative (SG&A) expenses are comprised primarily of our corporate headquarters' costs related to our executive offices, corporate finance and accounting, information technology, marketing, and bid and proposal costs. These costs are generally unrelated to specific client projects and can vary as expenses are incurred supporting corporate activities and initiatives.

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        We provide our services to a diverse base of Federal, state and local government agencies, and commercial and international clients. The following table presents, for the periods indicated, the approximate percentage of net revenue attributable to these client sectors:

        We currently manage our business in three operating segments: Resource Management, Infrastructure and Communications. As the market and many of our customers are requesting solutions that integrate resources from these segments, we are examining a structure that reflects this business approach. The following table presents, for the periods indicated, the approximate percentage of net revenue attributable to the operating segments:

Recent Acquisitions

        As a part of our growth strategy, we expect to pursue complementary acquisitions to expand our geographical reach and the breadth and depth of our service offerings. During the third quarter of fiscal 2002, we made the following acquisition:

        Ardaman & Associates, Inc.—In June 2002, we acquired 100% of the capital stock of Ardaman & Associates, Inc. (AAI). The purchase was valued at approximately $21.9 million. AAI, a Florida-based engineering services firm, provides geotechnical, geophysical and hydrogeological consulting and engineering services primarily in the southeastern region of the United States.

Results of Operations

        The results of operations for the three and nine months ended July 1, 2001 reflect, as previously reported, a special charge to provide a reserve allowance for an account debtor that filed for Chapter 11 protection under the U.S. Bankruptcy Code. The amount of that charge, on a pre-tax basis, was $38.3 million and was included in SG&A expenses. Based upon our then current effective tax rate of 39%, the charge had an impact on our net income of $23.4 million. The results for the three and nine months ended July 1, 2001 also reflect the favorable impact on our net income of the realization of $7.0 million in tax credits relating to prior years. For comparability purposes, the following discussion of our results of operations exclude these two items. The actual results, including these two items, are as stated in the Condensed Consolidated Financial Statements and the notes thereto.

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        The following table presents the percentage relationship of selected items to net revenue in our condensed consolidated statements of income:

        Revenue.    Net revenue decreased $6.1 million, or 3.2%, to $185.4 million for the three months ended June 30, 2002 from $191.5 million for the comparable period last year. For the nine months ended June 30, 2002, net revenue increased $10.1 million, or 1.9%, to $548.4 million from $538.3 million for the comparable period last year. Net revenue in our Resource Management business area grew $11.3 million, or 14.6%, to $88.8 million in the three months ended June 30, 2002 from $77.5 million for the comparable period last year. For the nine months ended June 30, 2002, net revenue in our Resource Management business area grew $51.6 million, or 24.8%, to $259.3 million from $207.7 million for the comparable period last year. This growth was primarily attributable to growth in our water resource management business as well as revenue provided by companies acquired. In the three months ended June 30, 2002, net revenue from our Infrastructure business area grew $6.4 million, or 9.8%, to $71.3 million from $64.9 million in the comparable period last year. For the nine months ended June 30, 2002, net revenue in our Infrastructure business area grew $13.7 million, or 7.4%, to $197.6 million from $183.9 million for the comparable period last year. The limited growth resulted from reduced spending by commercial clients, including certain services required by communications clients in our Infrastructure business area, offset by revenue provided by acquired companies. Our Communications business area realized a reduction in net revenue for the three months ended June 30, 2002 of $24.0 million, or 50.2%, to $23.9 million from $47.9 million in the comparable period last year. For the nine months ended June 30, 2002, net revenue in our Communications business area was lower by $55.8 million, or 38.9%, to $87.3 million from $143.1 million for the comparable period last year. This reduction resulted from the continued decline in capital spending by information carriers. In our state and local government sector, we continued to realize net revenue increases in actual dollars and as a percentage of net revenue.

        We segregate from our total revenue, the revenue recognized by acquired companies during their first 12 months following their respective effective dates of acquisition. We refer to revenue recognized from acquired companies during such first 12 months as acquisitive revenue. We compute organic revenue by deducting acquisitive revenue from total revenue. Acquisitive revenue for the three months ended June 30, 2002 totaled $21.7 million. Excluding this net revenue, we realized negative organic growth in our net revenue of 14.5% for the three months ended June 30, 2002 from the comparable period last year.

        Gross revenue for the three months ended June 30, 2002 decreased $12.0 million, or 4.8%, to $238.2 million from $250.1 million for the comparable period last year. Our Resource Management

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business area realized gross revenue growth of $15.7 million, or 14.4%, from the comparable period last year. Gross revenue in our Infrastructure business area grew by $4.2 million, or 5.2%, from the comparable period last year. In our Communications business area, gross revenue decreased by $30.5 million, or 44.6%, from the comparable period last year. Acquisitive gross revenue for the three months ended June 30, 2002 totaled $26.5 million. Excluding this gross revenue, we realized negative organic growth in our gross revenue of 15.4% from the comparable period last year.

        Cost of Net Revenue.    Cost of net revenue increased $1.6 million, or 1.1%, to $148.6 million for the three months ended June 30, 2002 from $147.0 million for the comparable period last year. As a percentage of net revenue, cost of net revenue for the three months ended June 30, 2002 was 80.1% compared to 76.8% for the comparable period last year. For the nine months ended June 30, 2002, cost of net revenue increased $17.8 million, or 4.3%, to $431.4 million from $413.7 million for the comparable period last year. As a percentage of net revenue, cost of net revenue for the nine months ended June 30, 2002 was 78.7% compared to 76.8% for the comparable period last year. The increase in cost of net revenue in both actual dollars and as a percentage of net revenue was primarily due to the timing of our expense reductions in response to the continued volume decreases in our net revenue, particularly in our Communications business area.

        Selling, General and Administrative Expenses.    SG&A expenses excluding amortization of intangibles increased $0.8 million, or 9.5%, to $20.1 million for the three months ended June 30, 2002 from $19.3 million for the comparable period last year. As a percentage of net revenue, SG&A expenses increased to 10.9% for the three months ended June 30, 2002 from 10.1% for the comparable period last year. For the nine months ended June 30, 2002, SG&A expenses excluding amortization of intangibles increased $7.2 million, or 12.7%, to $64.0 million from $56.7 million for the comparable period last year. As a percentage of net revenue, SG&A expenses increased to 11.7% for the nine months ended June 30, 2002 from 10.5% for the comparable period last year. These increases were primarily attributable to the timing of professional consulting services fees, SG&A at operating levels, the continued automation of our corporate business systems and processes, and business development activities. Amortization expense relating to acquisitions increased to 1.4% of net revenue for the three months ended June 30, 2002, compared to 1.3% for the comparable period last year. For the nine months ended June 30, 2002, amortization expense relating to acquisitions increased to 1.5% of net revenue compared to 1.2% for the comparable period last year.

        Net Interest Expense.    Net interest expense decreased $0.1 million, or 1.9%, to $2.2 million for the three months ended June 30, 2002 from $2.3 million for the comparable period last year. For the nine months ended June 30, 2002, net interest expense decreased $0.6 million, or 8.6%, to $5.9 million from $6.5 million for the comparable period last year. These decreases were primarily attributable to lower effective interest rates and an increase in interest income on certain receivables.

        Income Tax Expense.    Income tax expense decreased $4.3 million, or 53.7%, to $3.7 million for the three months ended June 30, 2002 from $8.0 million for the comparable period last year. For the nine months ended June 30, 2002, income tax expense decreased $8.1 million, or 36.0%, to $14.3 million from $22.4 million for the comparable period last year. Our current estimated effective tax rate is 37.0% compared to 39.0% in the comparable period last year. The decrease in the rate is primarily attributable to estimated tax credits and its relationship to estimated annualized taxable income.

Liquidity and Capital Resources

        As of June 30, 2002, our working capital was $192.4 million, a decrease of $0.6 million from September 30, 2001, of which cash and cash equivalents totaled $22.7 million. In addition, we have a credit agreement (the "Credit Agreement") with various financial institutions which provides for a revolving credit facility (the "Facility") of $140.0 million. Under our Credit Agreement, we may also request standby letters of credit up to the aggregate sum of $25.0 million outstanding at any given time.

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Our Facility matures on March 17, 2005 or earlier at our discretion upon payment in full of loans and other obligations. As of June 30, 2002, borrowings and standby letters of credit on the Facility totaled $9.0 million and $3.6 million, respectively. Further, we have issued two series of senior secured notes in the aggregate amount of $110.0 million under a note purchase agreement. The Series A Notes, totaling $92.0 million, bear interest at 7.28% and are payable at $13.1 million per year commencing fiscal 2005 through fiscal 2011. The Series B Notes, totaling $18.0 million, bear interest at 7.08% and are payable at $3.6 million per year commencing fiscal 2004 through fiscal 2008. At June 30, 2002, the outstanding principal balance was $110.0 million on these notes. Under both the Credit Agreement and note purchase agreement we are required to meet certain financial ratios.

        In the nine months ended June 30, 2002, we generated $57.9 million from operating activities compared to $4.7 million in the comparable period last year. This increase was primarily attributable to increased collections of accounts receivable. In the nine months ended June 30, 2002, cash used in investing activities was $47.6 million compared to $43.0 million for the comparable period last year. This increase was primarily the result of cash used for business acquisitions. In the nine months ended June 30, 2002, cash used in financing activities was $4.3 million compared to cash provided by financing activities of $41.4 million for the comparable period last year. This decrease was attributable to lower borrowings on the Facility and repayments of debt from cash provided by operating activities.

        We expect that internally generated funds, our existing cash balances and availability under the Credit Agreement will be sufficient to meet our capital requirements through the end of fiscal 2002. However, should we pursue an acquisition or acquisitions in which potential cash consideration exceeds the then current availability of cash, we may pursue additional financing.

        In conjunction with our investment strategy, we continuously evaluate the marketplace for strategic opportunities. Once an opportunity is identified, we examine the effect an acquisition may have on the business environment, as well as on our results of operations. We proceed with an acquisition if we determine that the acquisition is anticipated to have an accretive effect on future operations. However, as successful integration and implementation are essential to achieve favorable results, no assurances can be given that all acquisitions will provide accretive results. Our strategy is to position ourselves to address existing and emerging markets. We view acquisitions as a key component of our growth strategy, and we intend to use both cash and our securities, as we deem appropriate, to fund such acquisitions.

        We believe our operations have not been and, in the foreseeable future, are not expected to be materially adversely affected by inflation or changing prices. However, current general economic conditions may impact our clients and, as such, may impact their credit-worthiness and our ability to collect cash to meet our operating needs.

Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The presentation of these financial statements require us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

        We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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        Long-Term Contracts:    Contract revenues are recognized on the percentage-of-completion method based on contract costs incurred to date compared with total estimated contract costs. This method of revenue recognition requires us 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 the cost of material and labor, 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 our 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.

Recently Issued Financial Standards

        In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations, which supersedes Accounting Principles Board (APB) Opinion No. 16, Business Combinations. SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations for combinations initiated after June 30, 2001. This statement also changes the criteria to recognize intangible assets apart from goodwill. The provisions of this statement are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001.

        In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which supersedes APB Opinion No. 17, Intangible Assets. Under SFAS No. 142, goodwill and other indefinite-lived intangible assets are no longer amortized but are reviewed, at a minimum, annually for impairment. Separable intangible assets that have finite lives will continue to be amortized over their useful lives. The amortization provisions of this statement are effective for goodwill and intangible assets acquired after June 30, 2001. The remaining provisions of this statement are effective for fiscal years beginning after December 15, 2001. The adoption of this statement will result in our discontinuation of amortization of our goodwill; however, we will be required to test our goodwill for impairment under SFAS No. 142 in the six months of fiscal 2003. We are currently analyzing the impact of this statement and will adopt this statement in fiscal 2003.

        In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. SFAS No. 144 addresses financial accounting and reporting requirements for the impairment or disposal of long-lived assets. This statement also expands the scope of a discontinued operation to include a component of an entity, and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. The provisions of this statement are effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years, although early adoption is permitted. We are currently analyzing the impact of this statement and will adopt this statement in fiscal 2003.

Market Risks

        We currently utilize no material derivative financial instruments which expose us to significant market risk. We are exposed to cash flow risk due to interest rate fluctuations with respect to our long-term obligations. At our option, we borrow on our Facility (a) at a base rate (the greater of the federal funds rate plus 0.50% or the bank's reference rate) or (b) at a eurodollar rate plus a margin which ranges from 0.75% to 1.50%. Borrowings at the base rate have no designated term and may be repaid without penalty anytime prior to the Facility's maturity date. Borrowings at a eurodollar rate have a term no less than 30 days and no greater than 90 days. Typically, at the end of such term, such

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borrowings may be rolled over at our discretion into either a borrowing at the base rate or a borrowing at a eurodollar rate with similar terms, not to exceed the maturity date of the Facility. The Facility matures on March 17, 2005 or earlier at our discretion upon payment in full of loans and other obligations. Accordingly, we classify total outstanding obligations between current liabilities and long-term obligations based on anticipated payments within and beyond one year's period of time. We currently anticipate repaying $10.8 million of our outstanding indebtedness in the next 12 months. Assuming we repay $10.8 million ratably during the next 12 months, and our average interest rate increases or decreases by 1.0%, our annual interest expense could increase or decrease by less than $0.1 million. However, there can be no assurance that we will, or will be able to, repay our debt in the prescribed manner or obtain alternate financing. We could incur additional debt under the Facility or our operating results could be worse than we expect. In addition, we have outstanding senior secured notes which bear interest at a fixed rate. The Series A Notes bear interest at 7.28% and are payable at $13.1 million per year commencing fiscal 2005 through fiscal 2011. The Series B Notes bear interest at 7.08% and are payable at $3.6 million per year commencing fiscal 2004 through fiscal 2008. If interest rates increased by 1.0%, the fair value of the senior secured notes could decrease by $5.1 million. If interest rates decreased by 1.0%, the fair value of the senior secured notes could increase by $5.5 million. We presently have no material contracts under which the currency is not denominated in U.S. dollars. Accordingly, foreign exchange rate fluctuations will not have a material impact on our financial statements.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Please refer to the information we have included under the heading "Market Risks" in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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RISK FACTORS

        Some of the information in this Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. You should read statements that contain these words carefully because they: (1) discuss our future expectations; (2) contain projections of our future operating results or of our future financial condition; or (3) state other "forward-looking" information. We believe it is important to communicate our expectations to our investors. There may be events in the future, however, that we are not accurately able to predict or over which we have no control. The risk factors listed in this section, as well as any cautionary language in this Quarterly Report on Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we described in our forward-looking statements. You should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this Quarterly Report on Form 10-Q could have a material adverse effect on our business, financial condition and results of operations and that upon the occurrence of any of these events, the trading price of our common stock could decline.

There are risks associated with our acquisition strategy that could adversely impact our business and operating results

        A significant part of our growth strategy is to acquire other companies that complement our lines of business or that broaden our geographic presence. During fiscal 2001, we purchased 11 companies in ten separate transactions. During the nine months ended June 30, 2002, we purchased four companies in three transactions. We expect to continue to acquire companies as an element of our growth strategy. Acquisitions involve certain risks that could cause our actual growth or operating results to differ from our expectations or the expectations of security analysts. For example:

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We may not be able to identify suitable acquisition candidates or to acquire additional companies on favorable terms;



•

We compete with others to acquire companies which may result in decreased availability or increased price for suitable acquisition candidates;



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We may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions;



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We may ultimately fail to consummate an acquisition even if we announce that we plan to acquire a company;



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We may not be able to retain key employees of an acquired company which could negatively impact these companies' future performance;



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We may fail to successfully integrate or manage these acquired companies due to differences in business backgrounds or corporate cultures;



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These acquired companies may not perform as we expect;



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We may find it difficult to provide a consistent quality of service across our geographically diverse operations; and



•

If we fail to successfully integrate any acquired company, our reputation could be damaged. This could make it more difficult to market our services or to acquire additional companies in the future.

In addition, our acquisition strategy may divert management's attention away from our primary service offerings, result in the loss of key clients or personnel and expose us to unanticipated liabilities.

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        Finally, acquired companies that derive a significant portion of their revenue from the Federal government and that do not follow the same cost accounting policies and billing procedures as we do may be subject to larger cost disallowances for greater periods than we typically encounter. If we fail to determine the existence of unallowable costs and establish appropriate reserves in advance of an acquisition we may be exposed to material unanticipated liabilities, which could have a material adverse effect on our business.

Our quarterly operating results may fluctuate significantly, which could have a negative effect on the price of our common stock

        Our quarterly revenues, expenses and operating results may fluctuate significantly because of a number of factors, including:

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The seasonality of the spending cycle of our public sector clients, notably the Federal government and the spending patterns of our private sector clients;



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Employee hiring and utilization rates;



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The number and significance of client engagements commenced and completed during a quarter;



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Credit-worthiness and solvency of clients;



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Delays incurred in connection with an engagement;



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The ability of clients to terminate engagements without penalties;



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The size and scope of engagements;



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The timing of expenses incurred for corporate initiatives;



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Reductions in the prices of services offered by our competitors;



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The timing and size of the return on investment capital; and



•

General economic or political conditions.

Variations in any of these factors could cause significant fluctuations in our operating results from quarter to quarter and could result in net losses.

The value of our common stock could continue to be volatile

        The trading price of our common stock has fluctuated widely. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. The overall market and the price of our common stock may continue to fluctuate greatly. The trading price of our common stock may be significantly affected by various factors, including:

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Quarter to quarter variations in our operating results;



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Changes in investors' and analysts' perception of the business risks and conditions of our business;



•

Investors' and analysts' assessment of third party reports or conclusions;



•

Changes in environmental legislation;



•

Broader market fluctuations; and



•

General economic or political conditions.

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Downturns in the financial markets could negatively impact the capital spending of our clients and adversely affect our revenue and operating results

        Recent downturns in the capital markets have impacted the spending patterns of certain clients. For example, as a result of the slowdown in telecommunications infrastructure spending, we have experienced contract delays in our Communications business area. In addition, certain of our existing and potential clients have either postponed entering into new contracts or requested price concessions. The difficult financing and economic conditions are also causing some of our clients to delay payments for services we perform, thereby increasing the average number of days our receivables are outstanding. Further, these conditions may result in the inability of some of our clients to pay us for services that we have already performed. If we are not able to reduce our costs quickly enough to respond to the revenue decline from these clients, our operating results may be adversely affected. Accordingly, these conditions affect our ability to forecast with any accuracy our future revenue and earnings from business areas that may be adversely impacted by market downturns.

If we are not able to successfully manage our growth strategy, our business and results of operations may be adversely affected

        We have grown rapidly. Our growth presents numerous managerial, administrative, operational and other challenges. Our ability to manage the growth of our operations will require us to continue to improve our operational, financial and human resource management information systems and our other internal systems and controls. In addition, our growth will increase our need to attract, develop, motivate and retain both our management and professional employees. The inability of our management to manage our growth effectively or the inability of our employees to achieve anticipated performance or utilization levels, could have a material adverse effect on our business.

Our revenue from commercial clients is significant, and the credit risks associated with certain of these clients could adversely affect our operating results

        During the nine months ended June 30, 2002, approximately 49.8% of our net revenue was derived from commercial clients. We rely upon the financial stability and credit worthiness of these clients. To the extent the credit quality of these clients deteriorates or these clients seek bankruptcy protection, our ability to collect our receivables, and ultimately our operating results, may be adversely affected.

        On July 2, 2001, our client, Metricom, Inc. ("Metricom"), filed for protection under Chapter 11 of the U.S. Bankruptcy Code. At the time of filing, we had outstanding accounts receivable with Metricom in the aggregate amount of $38.3 million. In the third quarter of fiscal 2001 we took a charge in that amount to provide a reserve for the Metricom receivable.

The consolidation of our client base could adversely impact our business

        Recently, there has been consolidation within our current and potential commercial client base, particularly in the telecommunications industry. Future consolidation activity could have the effect of reducing the number of our current or potential clients, and lead to an increase in the bargaining power of our remaining clients. This potential increase in bargaining power could create greater competitive pressures and effectively limit the rates we charge for our services. As a result, our revenue and margins could be adversely affected.

The loss of key personnel or our inability to attract and retain qualified personnel could significantly disrupt our business

        We depend upon the efforts and skills of our executive officers, senior managers and consultants. With limited exceptions, we do not have employment agreements with any of these individuals. The loss of the services of any of these key personnel could adversely affect our business. Although we have

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obtained non-compete agreements from certain principals and stockholders of companies we have acquired, we generally do not have non-compete or employment agreements with key employees who were not once equity holders of these companies. We do not maintain key-man life insurance policies on any of our executive officers or senior managers.

        Our future growth and success depends on our ability to attract and retain qualified scientists and engineers. The market for these professionals is competitive and we may not be able to attract and retain such professionals.

Changes in existing laws and regulations could reduce the demand for our services

        A significant amount of our resource management business is generated either directly or indirectly as a result of existing Federal and state governmental laws, regulations and programs. Any changes in these laws or regulations that reduce funding or affect the sponsorship of these programs could reduce the demand for our services and could have a material adverse effect on our business.

Our revenues from agencies of the Federal government are concentrated, and a reduction in spending by these agencies could adversely affect our business and operating results

        Agencies of the Federal government are among our most significant clients. During the nine months ended June 30, 2002, approximately 25.3% of our net revenue was derived from Federal agencies, of which 12.2% was derived from the Department of Defense (DOD), 9.2% from the Environmental Protection Agency (EPA), 1.5% from the Department of Energy (DOE), and 2.4% from various other Federal government agencies. Some contracts with Federal government agencies require annual funding approval and may be terminated at their discretion. A reduction in spending by Federal government agencies could limit the continued funding of our existing contracts with them and could limit our ability to obtain additional contracts. These limitations, if significant, could have a material adverse effect on our business.

Our contracts with governmental agencies are subject to audit, which could result in the disallowance of certain costs

        Contracts with the Federal government and other governmental agencies are subject to audits. Most of these audits are conducted by the Defense Contract Audit Agency (DCAA), which reviews our overhead rates, operating systems and cost proposals. The DCAA may disallow costs if it determines that we accounted for these costs incorrectly or in a manner inconsistent with Cost Accounting Standards. A disallowance of costs by the DCAA, or other governmental auditors, could have a material adverse effect on our business.

Our business and operating results could be adversely affected by losses under fixed-price contracts or termination of contracts at the client's discretion

        We contract with Federal and state governments as well as with the private sector. These contracts are often subject to termination at the discretion of the client with or without cause. Additionally, we enter into various types of contracts with our clients, including fixed-price and fixed-unit price contracts. In the nine months ended June 30, 2002, approximately 36.7% of our net revenue was derived from fixed-price contracts and fixed-unit price contracts. Fixed-price contracts protect clients and expose us to a number of risks. These risks include underestimation of costs, problems with new technologies, unforeseen costs or difficulties, delays beyond our control and economic and other changes that may occur during the contract period. Losses under fixed-price contracts or termination of contracts at the discretion of the client could have a material adverse effect on our business.

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Our backlog is subject to cancellation and unexpected adjustments, and is an uncertain indicator of future operating results

        Our gross revenue backlog as of June 30, 2002 was approximately $699.9 million. We cannot guarantee that the gross revenue projected in our backlog will be realized or, if realized, will result in profits. In addition, project cancellations or scope adjustments may occur, from time to time, with respect to contracts reflected in our backlog. For example, certain of our contracts with the Federal government and other clients are terminable at will. These types of backlog reductions could adversely affect our revenue and margins. Accordingly, our backlog as of any particular date is an uncertain indicator of our future earnings.

Our inability to find qualified subcontractors could adversely affect the quality of our service and our ability to perform under certain contracts

        Under some of our contracts, we depend on the efforts and skills of subcontractors for the performance of certain tasks. Reliance on subcontractors varies from project to project. During the nine months ended June 30, 2002, subcontractor costs comprised 23.5% of our gross revenue. The absence of qualified subcontractors with whom we have a satisfactory relationship could adversely affect the quality of our service and our ability to perform under some of our contracts.

Our industry is highly competitive and we may be unable to compete effectively

        We provide specialized management consulting and technical services to a broad range of public and private sector clients. The market for our services is highly competitive and we compete with many other firms. These firms range from small regional firms to large national firms which have greater financial and marketing resources than ours.

        We focus primarily on the resource management, infrastructure and communications business areas. We provide services to our clients which include Federal, state and local agencies, and organizations in the private sector.

        We compete for projects and engagements with a number of competitors which can vary from one to 100 firms. Historically, clients have chosen among competing firms based on the quality and timeliness of the firm's service. We believe, however, that price has become an increasingly important factor. If competitive pressures, particularly in our communications business segment, force us to make price concessions or otherwise reduce prices for our services, then our revenue and margins will decline and our results of operations would be harmed.

        We believe that our principal competitors include, in alphabetical order, AECOM Technology Corporation; Black & Veatch LLP; Brown & Caldwell; Camp Dresser & McKee Inc.; Crown Castle International; CH2M Hill Companies Ltd.; Earth Tech, Inc., a wholly-owned subsidiary of Tyco International Ltd.; Mastec, Inc.; Montgomery Watson Harza; o2wireless Solutions, Inc.; Quanta Services; Roy F. Weston, Inc.; Science Applications International Corporation; The Shaw Group; TRC Environmental Corporation; URS Corporation; and Wireless Facilities, Inc.

Our services expose us to significant risks of liability and our insurance policies may not provide adequate coverage

        Our services involve significant risks of professional and other liabilities which may substantially exceed the fees we derive from our services. Our business activities could expose us to potential liability under various environmental laws such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and other economic and political factors. In addition, we sometimes contractually assume liability under indemnification agreements. We cannot predict the magnitude of such potential liabilities.

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        We currently maintain comprehensive general liability, umbrella professional and pollution liability insurance policies. We believe that our insurance policies are adequate for our business operations. The professional and pollution liability policies are "claims made" policies. Thus, only claims made during the term of the policy are covered. Should we terminate our professional and pollution liability policies and not obtain retroactive coverage, we would be uninsured for claims made after termination even if these claims are based on events or acts that occurred during the term of the policy. Additionally, our insurance policies may not protect us against potential liability due to various exclusions and retentions. In addition, if we expand into new markets, there can be no assurance that we will be able to obtain insurance coverage for such activities or, if insurance is obtained, the dollar amount of any liabilities incurred could exceed our insurance coverage limits. Partially or completely uninsured claims, if successful and of significant magnitude, could have a material adverse affect on our business.

We may be precluded from providing certain services due to conflict of interest issues

        Many of our clients are concerned about potential or actual conflicts of interest in retaining management consultants. Federal government agencies have formal policies against continuing or awarding contracts that would create actual or potential conflicts of interest with other activities of a contractor. These policies, among other things, may prevent us from bidding for or performing contracts resulting from or relating to certain work we have performed for the government. In addition, services performed for a commercial client may create a conflict of interest that precludes or limits our ability to obtain work from other public or private organizations. We have, on occasion, declined to bid on projects because of these conflicts of interest issues.