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

FORM 10-K

Commission file number 1-9947

TRC COMPANIES, INC.
(Exact name of registrant as specified in its charter)

        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 ý    No o

        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)

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2. Yes ý    No o

        The aggregate market value of the registrant's common stock held by non-affiliates on October 10, 2003 was approximately $153,300,000.

        On October 10, 2003, there were 13,518,991 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 21, 2003 are incorporated by reference into Part III of this Report.

TRC Companies, Inc.

Index to Annual Report on Form 10-K
Fiscal Year Ended June 30, 2003

Part I

Part I

Item 1.    Business

        TRC Companies, Inc., incorporated in 1971, is a customer-focused company that creates and implements innovative solutions to the challenges facing America's environmental, energy, infrastructure and security 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 embarked on a plan 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 growth rate and has allowed the Company to continuously transform its services to suit the evolving needs of its customers. The Company currently provides services in the following areas:

        Environmental—The Company provides engineering, scientific and technical environmental services to customers through a national network of over 85 offices. These services have been one of the Company's historic core strengths and serve as the foundation for the Company's Exit Strategy® 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, acquisitions and divestitures 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. In addition, the Company has an information management group that assists its customers by analyzing their data management requirements and creating software and hardware solutions for cost-effective information management systems.

        The Company has developed a unique, 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:

•

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.



•

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 to ongoing business operations.



•

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

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operation. The typically inefficient and lengthy process of negotiating and managing these cleanups drives up the 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.

•

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. The Company's insurer on these projects is the American International Group (AIG).

        Through its Exit Strategy program, the Company is recognized as a leader in the environmental remediation outsourcing 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 from 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. In addition, the Company is providing a variety of technical services in support of large scale wind-powered electric generating projects and hydroelectric facilities.

        The Company has substantially expanded its energy and power services to meet the growing demand and need for reliable energy. As discussed below, 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 supply of natural gas 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 will provide needed capacity to meet peak demand cycles.

        As the 2003 blackouts in the upper midwest and northeast U.S. demonstrated, the electric transmission system serving the country has aged and is in need of upgrade. 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 owners of the transmission grid with upgrading system capabilities to meet increases in demand, improve reliability, and integrate new sources of electric generation.

        Recognizing that the needs of electrical 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

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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.

        The Company's financial transaction management group is 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. 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:

•

Transportation—Planning, design and construction management of road and bridge projects for public customers.



•

Land Development—Planning, design and construction management of development projects for municipal and private customers.



•

Water/Wastewater Treatment—Planning, design and construction management for potable water and wastewater treatment facilities.



•

Building Systems—Building automation systems design, central plant design, construction management and commissioning, and facility energy management program implementation.



•

Security—Vulnerability assessment, engineering and structural improvements for public and private infrastructure facilities, and design and implementation of security and surveillance systems.



•

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 revenue by the environmental, energy/power and infrastructure areas.

Customers

        The Company's customers include companies in the energy, 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

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customers are major multinational corporations. The following are representative of the Company's customers:

        For fiscal 2003, 2002 and 2001, agencies of the U. S. Government (principally the U.S. Environmental Protection Agency and the U.S. Department of Defense) accounted for 6%, 5% and 7%, 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.

        During the past three years a key element of the Company's marketing and sales activities has been to focus on the highest level managers and decision makers (e.g. CEOs, CFOs) of our customers. This approach has been successful in allowing the Company to demonstrate its special value-added services to buyers who are prepared to pay higher margins on larger projects, when the Company can assist them in accomplishing their most important objectives. This approach will be a continuing and expanding strategy to assist the Company in achieving greater growth and higher margins than the norm.

Backlog

        At June 30, 2003, the Company's net contract backlog (excluding the estimated costs of pass-through charges) was approximately $240 million, as compared to approximately $215 million at

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June 30, 2002. The Company expects that approximately 60% of this backlog will be completed in fiscal 2004. 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, 2003, the Company had approximately 2,200 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 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 represents 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 licensing 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. In general, competition is reduced when the Company can provide value-added, high-level, problem-solving services to senior management incorporating a combination of technical, risk management and financial support services.

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

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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 over 85 offices located nationwide. The Company leases approximately 675,000 square feet of office and commercial space to support these operations. In addition, a subsidiary of the Company owns a 26,000 square foot office/warehouse building in Austin, TX. These 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.

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.

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Part II

Item 5.    Market for 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, 2003 and 2002 as reported on the New York Stock Exchange.

        On October 10, 2003, there were approximately 4,000 holders of the Company's common stock, of which 302 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.

Equity Compensation Plan Information

        The following table provides information as of June 30, 2003 for compensation plans under which equity securities of the Company are authorized for issuance:

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Item 6.    Selected Financial Data

        The following table provides summarized information with respect to the operations of the Company.

(1)

See Note 2 of the Notes to Consolidated Financial Statements.

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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" on page 16.

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 2 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:

        Long-term contracts:    The Company recognizes contract revenue in accordance with American Institute of Certified Public Accountants Statement of Position 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. The Company has fixed price Exit Strategy contracts to remediate environmental conditions at contaminated sites under which the Company and its customers are protected against cost overruns by insurance policies. Revenue (and related costs) from these fixed price contracts is recognized using the efforts expended, percentage-of-completion method of accounting based on total costs incurred to date as compared to total costs estimated at completion. Contract costs include direct labor costs, subcontractor costs, other direct costs and indirect costs. Prior to fiscal 2003, the Company used the efforts-expended, percentage-of-completion method based on direct labor costs, but for contracts where subcontractor costs resulted in a more meaningful measure of progress towards completion, they were considered for inclusion in labor costs. The Company's 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.

        Allowances 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 customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

        Income taxes:    At June 30, 2003, the Company had approximately $1.8 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 recorded. 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.

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        Business acquisitions:    Assets and liabilities acquired in business combinations are recorded at their estimated fair values at the acquisition date. At June 30, 2003, the Company had approximately $102.8 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 Other Intangible Assets", 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 No. 142. Management completed this assessment during the second quarter of fiscal 2003 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, 2003 from each contract type are as follows:

        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.

        The following table presents the percentage relationships of items in the consolidated statements of income to NSR:

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2003 Compared to 2002

        The revenue growth trend established in fiscal 1998 continued for the sixth consecutive year. Gross revenue increased $46.1 million, or 17.1%, to $315.6 million in fiscal 2003, from $269.5 million in fiscal 2002. NSR increased $37.3 million, or 20.7%, to $217.3 million in fiscal 2003, from $180.1 million in fiscal 2002. The fiscal 2003 NSR growth was entirely attributable to acquisitions. Approximately 104% of NSR growth for fiscal 2003 was from acquisitions while organic (existing business) NSR decreased by 4% compared to last year. Management's goal continues to be to provide a reasonable balance between organic and acquisition growth over a several-year period.

        Income from operations decreased by $5.0 million to $21.2 million in fiscal 2003 compared to $26.2 million last year. Acquisitions provided approximately $5.1 million of operating income growth, while operating income from organic activities decreased by approximately $10.1 million compared to last year. Management's objective is to maintain a reasonable balance over time between increases in income from operations derived from organic and acquisition growth. For example, for fiscal years 2000 through 2002, income from operations increases from organic and acquisition growth were 52% and 48%, respectively. The inability to achieve this balance this year (as well as the increase in cost of services as a percentage of NSR) was due to a reduction in the utilization of the Company's staff related to three primary factors as follows:

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challenging economic conditions which affected several of the Company's operating centers. Until this fiscal year, these types of market changes were mitigated by increases in higher-margin business. The area most affected was the transportation infrastructure market where the Company relies on funding from state and local government entities;



•

the delay in new contract awards for Exit Strategy and other higher-margin programs attributable to economic conditions, general customer uncertainty regarding capital investments and unusual winter conditions; and



•

costs associated with substantial hiring and project investments the Company made in key markets which are expected to grow in spite of current economic conditions. Examples include: the planning, design and installation of electric power transmission and distribution systems and the installation of distributed generation power systems; assisting customers in the planning and design of infrastructure security systems; assisting customers in evaluating financial aspects of acquiring or divesting energy related assets; and expansion into the niche market of manufactured gas plant site remediation.

        Management has implemented actions to reduce costs, increase operational efficiencies and align capacity with the current pace of activity. As these actions yield results, and recent investments increasingly yield positive gains, management expects that a closer balance between organic and acquisition growth will again be realized.

        General and administrative expenses (G&A) increased approximately 26.0% in fiscal 2003 primarily due to additional costs necessary to support the Company's growth resulting from acquisitions as well as increased costs for audit and legal services. However, as a percentage of NSR, G&A expenses only increased to 3.0% in fiscal 2003 from 2.8% in fiscal 2002. This demonstrates 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 increased approximately 48.7% in fiscal 2003. This increase was primarily attributable to the additional depreciation expense of capital expenditures made throughout the year, the amortization expense related to identifiable intangibles from acquisitions, as well as the additional depreciation expense associated with acquisitions completed in fiscal 2003 and 2002.

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        Interest expense increased by approximately 23.2% in fiscal 2003 compared to last year primarily due to higher average borrowings outstanding against the Company's revolving credit facility to finance acquisitions. The Company's percentage of debt to capitalization ratio of 22.7% continues to remain relatively low, reflecting management's conservative debt philosophy.

        The provision for federal and state income taxes reflects an effective rate of 38.5% in fiscal 2003 compared to 38.3% in fiscal 2002. This small increase was primarily due to higher state income taxes. The Company believes that there will be sufficient taxable income in future periods to enable utilization of available deferred income tax benefits.

        The Company changed its method of accounting for fixed price contracts, effective July 1, 2002. The cumulative effect of the change decreased net income by $2,361 (net of income taxes of $1,478) or $0.17 per diluted share, which was retroactively reflected in the first quarter of fiscal 2003. Before the cumulative effect adjustment, this accounting change had the effect of increasing revenue, net income and diluted earnings per share in fiscal 2003 by $2,451, $1,507 and $0.11, respectively.

2002 Compared to 2001

        Gross revenue increased $88.1 million, or 48.5%, to $269.5 million in fiscal 2002, from $181.5 million in fiscal 2001. NSR increased $55.9 million, or 45%, to $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.

        As discussed above, 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 activities. These characteristics were due to:

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The relatively larger size of the two recently acquired companies, compared to the Company's historically smaller size acquisitions.



•

The seasonality of the largest acquisition (SITE-Blauvelt), which added significant NSR with relatively small operating income during the winter period.



•

Increased margins provided by the Company's organic business activities.

        Cost of services increased 44.4% in fiscal 2002 compared to 2001 due to the increase in NSR.

        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 was 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 No. 142 on July 1, 2001. In accordance with SFAS No. 142, the Company no longer amortizes goodwill. The decrease associated with the adoption of SFAS No. 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

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acquisitions completed during fiscal 2002. The favorable organic growth percentage reflects the Company's successful efforts to obtain higher margin revenue for its services. The improvement in operating income performance was primarily due to:

•

The Company's focus toward higher margin, economically driven markets;



•

The growth in revenue, without comparable increases in overhead; and



•

The favorable impact resulting from the adoption of SFAS No. 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 was 16%.

        The provision for federal and state income taxes reflected 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.

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. 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 increased to approximately $12.1 million in fiscal 2003, compared to $6.3 million last year. In fiscal 2003, the cash provided by operating activities was primarily generated by Net Income and the non-cash charges against income for the Cumulative Effect of the Accounting Change and charges for Depreciation and Amortization. As shown in the Consolidated Statement of Cash Flows, additional cash flow related factors included changes in: Account Receivable; Long-term Insurance Receivable; Billings in Advance of Revenue Earned; Income Taxes Payable; and several lesser items.

        As a result of the above factors, some periods have a high operating cash flow to net income relationship while in others, the relationship is much lower. Over longer time periods, the effect tends to be normalized with an overall positive operating cash flow trend. This is illustrated by the variation in operating cash flow for fiscal years 2001, 2002 and 2003.

        Cash flow from Accounts Receivable (before the effect of acquisitions) increased by $0.3 million, compared to a decrease of $8.4 million in fiscal 2002. 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. During fiscal 2003, the Company's DSO averaged 113 days. Management's long-term goal is to reduce DSO to 100-105 days.

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        Billings in Advance of Revenue Earned represents amounts collected in accordance with contractual terms before the work is performed, primarily on Exit Strategy contracts. These payments provide the Company with an advance source of cash for one to several years. During years when the amount of payments from 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. During years when the amount of revenue recognized from work performed exceeds the amount of payments from 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 from the prior year. During fiscal 2003, the decrease in operating cash flow from Billings in Advance of Revenue Earned was $1.5 million from the prior year.

        For fiscal 2003, operating cash flows increased by non-cash charges for Depreciation and Amortization of $5.1 million. Other non-cash items include Insurance Recoverable and Environmental Remediation Liability. The net non-cash impact of these two-related items for fiscal 2003 was $0.1 million. These items relate to certain Exit Strategy contracts where the Company enters into a consent decree with government authorities assuming the obligation for the settling responsible parties' environmental remediation liability for the site, which is offset by a fully funded remediation finite cost cap insurance policy, generally provided by American International Group (AIG). Each insurance policy provides protection against potential increases in the cost of a project.

        Upon signing of each contract, with a finite cost cap insurance policy, a majority of the contract price is directly deposited in a restricted account held by AIG. 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 work on the project. 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. For fiscal 2003, the Long-Term Insurance Receivable item resulted in a cash flow decrease of $1.8 million.

        Finally, operating cash flows for fiscal 2003 decreased by $3.2 million for Income Taxes Payable primarily related to the fiscal 2002 liability and by $1.2 million for Accrued Compensation and Benefits primarily related to the timing of payroll cycles.

        Cash flows used in investing activities have historically consisted of payments for acquisitions, capital expenditures for additional information technology and other equipment to support business growth and investments in unconsolidated affiliates. During fiscal 2003, the Company's cash flows used in investing activities of approximately $25.6 million primarily consisted of approximately $19.2 million for new acquisitions and additional purchase price payments on acquisitions completed in prior years, and approximately $5.5 million for capital expenditures.

        During fiscal 2003, the Company's financing activities provided cash of $17 million to primarily support investing activities. This cash was primarily provided by net borrowings from the Company's credit facility.

        The Company maintains a banking arrangement with Wachovia Bank, N.A., in syndication with two additional banks, which provides a revolving credit facility of up to $50 million to support short-term operating and investing activities. Borrowings under the agreement bear interest at Wachovia'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. At June 30, 2003 outstanding borrowings pursuant to the agreement were $41 million, at an average interest rate of 2.9%.

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        The credit facility provides for affirmative and negative covenants that restrict, among other things, the Company's ability to incur other indebtedness, dispose of assets, pay dividends on its common stock and make investments. In addition, the agreement includes certain restrictive covenants, including the minimum ratio of adjusted EBITDA to interest expense plus the current portion of long-term debt and the minimum ratio of adjusted current assets to adjusted total liabilities.

        The Company was in compliance with all relevant covenants as of June 30, 2003. The agreement was amended on June 30, 2003 to reduce the required minimum ratio of adjusted EBITDA to interest expense plus the current portion of long-term debt at June 30, 2003 and for each quarterly period thereafter through March 31, 2004. The amendment also reduces the required minimum ratio by which adjusted current assets shall exceed adjusted total liabilities for the remainder of the agreement. The Company expects that it will meet all applicable quarterly financial tests contained in the amended agreement in fiscal 2004.

        We expect that the cash generated from operations, the cash on hand at June 30, 2003 and available borrowings under the revolving credit facility will be sufficient to meet the Company's cash requirements for currently anticipated activities. If the Company pursues acquisitions or investments in the future 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.

Contractual Obligations

        The following table sets forth as of June 30, 2003 certain information concerning the Company's obligations to make future payments under contracts, such as debt and lease agreements (dollars in thousands):

Off-Balance Sheet Arrangements

        The Company has operating leases for most of its office facilities and certain equipment. Rental expenses for operating leases was approximately $11.4 million in fiscal 2003; $8.1 million in fiscal 2002; and $5.9 million in fiscal 2001. Minimum operating lease obligations payable in future years are presented above in Contractual Obligations.

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 was effective July 1, 2002 for the Company. The adoption of this standard did not have a material impact on the Company's financial statements.

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        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 standard 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 discontinued operations. The standard was effective July 1, 2002 for the Company. The adoption of this standard did not have a material impact on the Company's financial statements.

        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". 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 relate 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 was effective July 1, 2002 for the Company. The adoption of this standard did not 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 were effective for exit or disposal activities that were initiated after December 31, 2002. The adoption of this standard did not have a material impact on the Company's financial statements.

        In November 2002, the FASB issued Interpretation 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 clarifiers on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of this interpretation did not have a material impact on the Company's financial statements.

        In November 2002, the EITF reached a consensus on Issue No. 00-21, "Multiple-Deliverable Revenue Arrangements". EITF No. 00-21 addresses how to account for revenue arrangements with multiple deliverables and provides guidance relating to when such arrangements should be divided into components for revenue recognition purposes. The consensus is effective for revenue agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. The Company is currently reviewing the provisions of the EITF and assessing their impact.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123". This standard amends SFAS No. 123 to provide alternative methods of voluntarily transitioning to the fair-value based method of accounting for stock based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require disclosure of the method used to account for stock-based employee compensation and the effect of the method on reported results in both annual and interim financial statements. The Company adopted the disclosure requirements of SFAS 148 in the quarter

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ended December 31, 2002, when the standard became effective for the Company. The Company has no current intention to change its policy of accounting for stock-based compensation.

        In January 2003, the FASB issued Interpretation 46, "Consolidation of Variable Interest Entities" (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements apply to entities created before February 1, 2003 in the first interim or annual period ending after December 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. No additional disclosures were required by the Company. The adoption of this interpretation is not expected to have a material impact on the Company's financial statements.

        In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities", which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 149, which is to be applied prospectively, is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this standard is not expected to have a material impact on the Company's results of operations or financial position.

        In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) and is effective for instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently evaluating the impact that the adoption of SFAS No. 150 will have on its 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. Such statements are based on management's current estimates, expectations and projections about the factors discussed. By their nature, such forward-looking statements involve risks and uncertainties. The Company has attempted to identify such statements using words such as "may," "expects," "plans," "anticipates," "believes," estimates," or other words of similar import. The Company cautions the reader that there may be events in the future that management is not able to accurately predict or control which may cause actual results to differ materially from the expectations described in the forward-looking statements, including the following examples:

•

increase in competition by foreign and domestic competitors;



•

availability of qualified engineers and other professional staff needed to perform contracts;



•

continuation of income from core activities to finance growth;



•

availability of environmental insurance for certain Exit Strategy projects;



•

the timing of new awards and the funding of such awards;



•

the ability of the Company to meet project performance or schedule requirements;

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•

continuation of regulatory enforcement requirements for a portion of the Company's services;



•

cost overruns on fixed, maximum or unit priced contracts;



•

the outcome of pending and future litigation and government proceedings;



•

the cyclical nature of the individual markets in which the Company's customers operate;



•

the successful closing and/or subsequent integration of any merger or acquisition transaction; and,



•

the ability of the Company to raise capital in the debt or equity markets.

        The preceding list is not all-inclusive, and the Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

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.

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Item 8.    Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Financial Statements:

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Independent Auditors' Report

To the Shareholders and Board of Directors of:
TRC Companies, Inc.
Windsor, Connecticut

        We have audited the accompanying consolidated balance sheet of TRC Companies, Inc. and subsidiaries (the Company) as of June 30, 2003, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended June 30, 2003 listed in the Index at 15 (a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of TRC Companies, Inc. and subsidiaries as of June 30, 2003, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such 2003 financial statement schedule, when considered in relation to the basic 2003 consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        As discussed in Note 2 to the consolidated financial statements, the Company changed its method for measuring progress under the percentage of completion method of accounting for long-term fixed price contracts effective July 1, 2002.

/s/ Deloitte & Touche LLP
Costa Mesa, California
October 14, 2003

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Report of Independent Auditors

To the Shareholders and Board of Directors of TRC Companies, Inc.

        In our opinion, the consolidated balance sheet as of June 30, 2002, and the related consolidated statements of income, cash flows, and changes in shareholders' equity for the years ended June 30, 2002 and 2001 present fairly, in all material respects, the financial position of TRC Companies, Inc. and its subsidiaries at June 30, 2002 and the results of their operations and their cash flows for the years ended June 30, 2002 and 2001 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 for the years ended June 30, 2002 and 2001 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

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CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes to consolidated financial statements.

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CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY