Back to GetFilings.com

Table of Contents

SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

For the fiscal year ended December 31, 2003

Commission File Number 0-26561

The Keith Companies, Inc.

19 Technology Drive, Irvine, California 92618

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

          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 þ          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. þ

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

     The number of outstanding shares of the registrant’s common stock as of February 6, 2004 was 7,673,720 shares. Based on the closing sale price on the NASDAQ National Market on June 30, 2003, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $63,000,000.¹

DOCUMENTS INCORPORATED BY REFERENCE

          Part III incorporates certain information by reference from the registrant’s definitive proxy statement for the Annual Meeting of Shareholders scheduled to be held on May 18, 2004.

      ¹ For purposes of this calculation, shares owned by executive officers and directors have been deemed to be owned by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

THE KEITH COMPANIES, INC.

ANNUAL REPORT ON FORM 10-K

Table of Contents

i

Table of Contents

PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

      This Annual Report on Form 10-K contains certain forward-looking statements, including and/or concerning among others:

	•	forecasts of earnings, revenue or other financial items;
	•	anticipated growth in the real estate development and public works/infrastructure industry and the energy/industrial industry;
	•	our business strategy for expanding our presence in these industries;
	•	anticipated growth and economic expansion in the Western and Midwestern United States;
	•	anticipated trends in our financial condition and results of operations;
	•	anticipated growth in the pace and size of our acquisitions;
	•	anticipated impact of future acquisitions on the condition of our business by industry and geographic location;
	•	the long-term nature of our projects;
	•	our ability to attract and retain employees;
	•	our business strategy for integrating businesses that we acquire;
	•	our ability to sustain our growth and profitability; and
	•	our ability to distinguish ourselves from our current and future competitors.

      We generally identify forward-looking statements in this Report using words like “believe,” “expect,” “estimate,” “may,” “plan,” “should plan,” “project,” “contemplate,” “anticipate,” “predict” or similar expressions. You may find some of these statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” and elsewhere is this Report. These statements involve known and unknown risks, uncertainties and other factors, including those described in the “Risk Factors” section, that may cause our or our industry’s actual results, levels of activity, performance or achievements to differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the Securities and Exchange Commission, we do not plan to publicly update or revise any forward-looking statements after we file this Report, whether as a result of any new information, future events or otherwise.

General

      We are a full service engineering and consulting services firm providing professional services on a wide range of projects to the real estate development and public works/infrastructure industry, and to the energy/industrial industry. We benefit from a diverse public and private client base including real estate developers, residential and commercial builders, architects, cities, counties, water districts, state and federal agencies, land owners, commercial retailers, energy providers and various manufacturers. Our professional staff and project workers provide a comprehensive menu of services that are needed to effectively manage, engineer and design infrastructure and state-of-the-art facilities.

1

Table of Contents

      The following illustrates the range of services that we offer:

      From 1999 through 2003, our net revenue has grown by a compounded annual growth rate of 23% and our net income from continuing operations has grown at a compounded annual growth rate of 38%. We have accomplished this through both our acquisition strategy to diversify the scope of our services and our geographic presence and through internal growth. We have acquired eight companies since December 1, 1997 and as of March 1, 2004 operate from 14 primary divisions in 7 states: California, Nevada, Utah, Arizona, Oregon, Texas and Michigan. In addition, we also have small operating activities in Brazil.

Industries Served

      We serve the real estate development and public works/infrastructure industry, and the energy/industrial industry.

     Real Estate Development

      Residential, commercial, golf, and other recreational developers use technical consultants to provide planning and environmental services to create land use plans, write the supporting planning and environmental documents and process entitlements and permits through governmental authorities. Technical consultants also assist clients with obtaining approvals and permits from federal, state and local agencies. After projects are approved by governmental agencies, developers need surveying, mapping, and civil engineering services to survey development sites, create accurate boundary and base maps, and provide engineering designs for grading, streets, sewer and water pipelines and facilities, utilities and drainage facilities. Upon completion of the design phase, surveyors provide construction staking services to identify the precise locations of streets, utilities, pipelines, and other facilities. In culturally sensitive areas, developers may also require environmental

2

Table of Contents

      Residential development includes large-scale communities, senior citizen and retirement communities, single family homes, condominiums and apartments. Commercial development includes the development and construction of retail, office, hotel and industrial facilities. Golf and recreational facility development includes golf courses, driving ranges, parks, clubhouses, theme parks, resorts and lakes.

      There are generally two types of real estate development clients: the land developer and the builder. Some take on characteristics of both. Developers generally must look long-term, utilize longer-term investment financing and evaluate the performance of projects across multiple business cycles. The developer pursues land development rights and implements the process of designing and constructing infrastructure utility, roadway and landform grading improvements. A developer’s projects often span several years or even decades. The builder, on the other hand, generally provides an end-user product, including homes, retail stores, restaurants or clubhouses. The builder’s approach is generally based upon current and relatively short-term economic conditions. Financing for a builder’s work is often construction-oriented and anticipates short-term returns. The builder often buys property that has already been zoned, graded and otherwise improved by the land developer.

     Public Works/ Infrastructure

      Water resources, transportation, and other public works projects provide ongoing, more reliable sources of revenue for engineering firms and consultants than private real estate development activities which may decline during unfavorable economic periods. These public projects are often long-term and have historically provided more determinable and consistent revenue streams than non-publicly funded projects. In the last couple of years, the public works/infrastructure industry segment has shown a high interest in assessing the security of these facilities in addition to enhancing the quality and availability of them.

      Water Resources. Water resource services encompass the study and analysis of rainfall, water collection and distribution, use of water for cleanliness, nourishment and irrigation and the treatment and disposal of used or contaminated water. Due to the multiple demands for municipal, environmental and agricultural uses, water is a resource requiring extensive management throughout the United States. As populations continue to grow and higher standards are placed on protecting the environment without sacrificing the supply and quality of water, water districts, public agencies, agricultural users and municipalities are faced with the challenge of managing their water supplies more efficiently.

      Protecting communities from natural disasters such as floods and mudflows, cleaning natural waterways, eliminating pollution from storm runoff flowing into the ocean and protecting and enhancing natural riparian resources are among the missions of public water-managing agencies. Private developers also address these issues as part of their land development.

      Transportation. Highly experienced transportation planners, engineers, and designers provide the entire spectrum of resources necessary to effectively engineer and design state-of-the-art transportation infrastructure. Engineers develop street, major arterial and highway designs in cooperation with federal, state and local agencies to improve transportation networks. Highway and interchange projects require engineering designs for roadways and interchanges for the placement or relocation of sewer and water pipelines and utility lines and for rainfall run-off management. They also require surveying services for establishment of proper rights of way for these facilities.

      The energy/industrial industry consists of manufacturing facilities, processing facilities, power generation and distribution, and production/refining methods and systems. Power plants, machines, assembly lines, factories and refineries require mechanical, electrical and process engineering services to enable utilization of

3

Table of Contents

	•	Design or redesign of electrical, heating, ventilation and air conditioning systems;
	•	Mechanical equipment design;
	•	Equipment selection and purchasing;
	•	Design of integrated computer and monitoring device systems to control manufacturing and process equipment;
	•	Chemical/process engineering;
	•	Energy generation and usage consulting;
	•	Fire protection engineering;
	•	Material handling and process flow planning;
	•	Automation and robotics design;
	•	Construction management and installation supervision;
	•	Plant testing during construction and start-up;
	•	Plant operations and maintenance;
	•	Project management; and
	•	Computer programming.

      Projects that utilize mechanical, electrical and process engineering and consulting services include:

	•	Energy/ Power Generation and Management: power plants, natural gas/electrical systems and distribution systems;
	•	High Tech Facilities: biotechnology, pharmaceutical and laboratory facilities, computer centers, control rooms and research and development facilities;
	•	Heavy Manufacturing: automotive assembly, and pulp and paper processing;
	•	Consumer Products: beverage, household products, packaging, and food processing;
	•	Educational Facilities: school and university buildings and campuses; and
	•	Public Facilities/ Utilities: medical buildings, hospitals, and publicly owned or occupied buildings.

      We believe there is a long-term trend in the manufacturing and assembly industries toward automation and increased efficiency. As these industries grow in the future, so does their need for engineering, design and consulting services to automate and increase the efficiency of new and existing facilities.

The Keith Companies Advantage

      The engineering and consulting services industries are highly fragmented, ranging from a large number of relatively small local firms to large, multi-national firms. Management believes we are among the leading engineering and consulting services firms serving our primary industries. We believe that we can further enhance our position in the industries which we serve for the following reasons:

     Reputation

      We have a reputation for providing high quality services, which is strengthened due to the personal relationships developed between our staff and representatives of clients and agencies. We have been awarded many projects either due to our expertise in working with an agency or project type or because a particular

4

Table of Contents

	•	Three Engineer of Merit Awards from The American Society of Civil Engineering — Orange County Branch
	•	Water Quality Awards for Innovational Excellence from The Michigan Association of County Drain Commissioners
	•	Award of Excellence — Honor Award from the City of Rancho Cucamonga, California for design excellence
	•	Engineering Project Achievement Award from the Orange County Engineering Council
	•	Project Achievement Award from the American Society of Civil Engineers — Orange County Branch
	•	Outstanding Environmental Analysis Document — Large Jurisdiction Award from the Association of Environmental Professionals — Inland Empire Chapter
	•	Outstanding Environmental Analysis Document Award from the Association of Environmental Professionals
	•	Letter of Appreciation from the State of California Department of General Services
	•	Project of the Year from the Orange County Branch of the American Society of Civil Engineers

     Industry and Professional Experience

      We believe that our senior management has the proven ability to execute our business plan and capitalize on new opportunities. Since December 1, 1997, management has closed eight acquisitions, enabling us to diversify both our revenue base and our geographic scope. Acquisitions continue to be a key component of our business plan. In most of the acquisitions, we have retained the management teams of the acquired companies and provided the financial and management controls to promote sustainable growth. This enables the acquired management team to run their business as they know best. In addition, the entire management team, from project manager to senior executive manager, is particularly adept at the relationship side of the business that plays a critical role in the world of engineering and consulting services.

      We recognize that our employees are our most valuable resource for providing continuing quality service and for obtaining new work. During employee selection and as part of the acquisition criteria, we require that the personnel whom we add to our team have significant experience in the industries that we serve. We supplement this industry experience by supporting continuing education seminars, design forums and training programs.

     Full Service Approach

      We provide a full complement of engineering and consulting services. Since many consulting and engineering services firms specialize in only one or a few services, a project owner may often be required to engage several engineering and/or consulting firms during the various phases of a project. The phases range from identifying and evaluating whether to acquire land or facilities, to designing, engineering and managing the construction of the finished project. In many cases, in addition to providing services during various phases of a project, we provide monitoring and maintenance services on projects after construction is complete. We believe that clients realize significant cost and time savings and maintain consistent quality by concentrating their engineering and consulting services in as few firms as practicable.

     Cross-Marketing

      Due to our reputation within industries we serve and due to our varied technical expertise, we have frequently increased the scope of services provided to a client from an initial engagement, such as large-scale land planning, to include other services, for example mapping, surveying and end-user site design. When we

5

Table of Contents

      Because our professionals provide many preliminary services for projects, we are frequently asked to provide additional services as a project progresses. In performing the preliminary services during the initial phases of a project, we obtain background information and data relating to the project that may be inefficient and costly for another firm to compile. Consequently, we are often more knowledgeable about a project, and are able to provide additional services more efficiently. As a result, we are often engaged to perform additional engineering and consulting services as a project progresses.

     Effective Organizational Structure

      We believe that our organizational structure allows us to compete effectively with small- and mid-sized local firms as well as with large regional, national and international firms. Our organizational structure combines the efficiencies associated with centralization and the flexibility of decentralization. When appropriate, our primary administrative functions are centralized in our corporate headquarters in Irvine, California allowing us to reduce duplicative functions and personnel at our divisional offices. We believe that this centralization allows the management at our divisional offices the freedom to focus on identifying new business opportunities and overseeing the services they provide, and also allows our project managers the flexibility to focus on being responsive to client needs. Since our divisions are managed by technical professionals with excellent client relationships and industry reputations, we promote decentralization of those aspects of our business which involve technical and client relationships.

Business Strategy

      Our objective is to strengthen our position as a leading provider of engineering and consulting services while growing our geographic presence and enhancing the services we offer. To achieve this objective, we have developed a strategy with the following key elements:

	•	Maintain High Quality Service. To maintain high quality service, we focus on being responsive to customers and working diligently and responsibly to maintain schedules and budgets. As a result of our focus on quality and timely service, we believe that we have established an excellent reputation in most of the markets we serve. We intend to continue providing high quality services as we expand our geographic presence and our service offerings.
	•	Continue to Recruit and Retain Highly Qualified Personnel. We believe that recruiting and retaining skilled professionals is crucial to our success and growth. As a result, we intend to continue to recruit experienced and talented individuals who can provide quality services and innovative solutions.
	•	Enhance and Strengthen Existing Client Relationships. By maintaining strong relationships with existing clients and promoting the cross-selling of services, we believe that we can further enhance our reputation and business opportunities. By focusing our efforts in this area, we can utilize the time that we spend with our clients on active work to promote additional services to them and gain additional contract opportunities for us. We believe that our existing relationships between our clients and employees is one of our greatest business development assets.
	•	Expand Services in Public Works/ Infrastructure, and Energy/ Industrial Industries. To diminish our susceptibility to the economic cycles affecting any particular industry, we intend to continue expanding our work in public works/infrastructure and energy/industrial. Much of our expertise, including Computer Aided Drafting (“CAD”) work, certain engineering specialties and administrative functions, can provide support across industries in the event that a particular industry segment experiences economic downturns. We believe that by expanding our services into industries which follow different economic cycles, we are able to reassign talented employees to other project types and help provide stability for our core staff, management and profit levels. Our acquisitions of John M. Tettemer & Associates Ltd.; ESI, Engineering Services Incorporated; Thompson-Hysell, Inc.; Pacific Engineering

6

Table of Contents

		Corporation; Universal Energy, Inc.; and ALNM Group Inc. have enhanced our ability to expand our services, some of which follow different economic cycles.
	•	Expand Geographically. To diminish the impact of regional economic cycles and to further enhance cross-selling opportunities, we intend to continue to expand our geographic presence through acquisitions, possibly opening additional divisional offices and by marketing our services to clients with national and international needs. Our geographic growth may provide us with broader access to employee pools, work-sharing between regions and new business opportunities. We believe that our acquisitions of ESI, Engineering Services Incorporated; Thompson-Hysell; Crosby, Mead, Benton & Associates; Hook & Associates Engineering, Inc.; Pacific Engineering Corporation; Universal Energy, Inc. and ALNM Group, Inc. have enabled us to more effectively sell additional services in the entire Southwest and the Midwest.
	•	Expand and Enhance Technical Capabilities. We intend to build upon our reputation as a quality provider of engineering and consulting services as we diversify our services to meet demands of our clients, industry segments and new markets. As part of our effort to continue diversifying the scope of our services, we intend to pursue strategic partnering relationships and acquisitions.

Acquisition Strategy

      We intend to continue to pursue acquisitions that complement our business strategy and enhance our range of services, geographic presence and/or client base. We believe that strategic acquisitions will enable us to more efficiently serve the diverse technical and geographic needs of, and secure additional business from, national and international clients.

      In general, the key criteria we consider when evaluating potential acquisitions include services offered, reputation, corporate culture, price, profitability and geographic location.

      The following table sets forth information regarding our eight acquisitions since December 1, 1997:

      Consideration for the companies we have acquired has included cash, shares of our common stock, promissory notes, or a combination of these forms of consideration. The consideration is sometimes subject to

7

Table of Contents

Services Provided

      We provide a broad range of services, including civil engineering, surveying and mapping, land planning, environmental services, cultural resources services, construction management, site acquisition, water resource engineering, and other services needed by the industrial, process and manufacturing industry, including instrumentation and control systems engineering, fire protection engineering, electrical engineering, mechanical engineering, chemical process engineering, start-up and testing, and operations and maintenance.

      General civil engineering is often referred to as everything “designed from the ground down” because most of the constructed improvements involved lie on the surface of, or below the ground. Our civil engineering services include project feasibility and due diligence analysis; development cost projections; access and circulation analysis; infrastructure design and analysis; pro forma cost studies; project management; preparation of construction documents; tentative mapping; flood plain studies; sewer, water and drainage design; street and highway design; site and sub-division design; and grading design.

      Surveying and mapping services include, among other things, the establishment of boundaries for preliminary engineering, construction layout, as-built surveys and the identification of features of a parcel of land that directly affect a project’s design. It is common for our surveying and mapping teams to be “the first in and the last out” for a construction project. We provide surveying and mapping services through teams of skilled professionals that utilize sophisticated technology, including global positioning systems that utilize satellite technology to survey and navigate land, geographic information systems, and field-to-office digital and electronic data capture to produce information that serves as the foundation for a variety of planning and engineering analysis and design endeavors. We believe that we were among the first engineering and surveying consultants to utilize global positioning systems with geographic information systems to perform precise ground surveys.

      Planning services include both physical planning and policy planning. Physical planning is graphical and includes conceptual drawings, sketches and layouts of communities and identifies land uses and residential and commercial neighborhoods. The resulting plan often becomes the basis for the preparation of engineering plans. To complement a physical plan, policy planning entails the preparation of supporting text and documents that establish procedures, requirements and guidelines for visual appearance or detailed permitting approvals under which the physical plan may be implemented.

      Our planning services are designed to assist clients with maximizing the potential uses of real estate and other limited resources. We provide plans that take into account government regulations, effective and creative use of land assets, and the expectations and needs of the community.

      Our environmental services include biological studies, permit processing, environmental document preparation and mitigation monitoring. We assist clients with the complex federal, state, and local permitting process enabling them to successfully implement private and public projects. Our environmental staff offers the technical proficiency to provide one-stop preparation of environmental documents that conform to current regulatory requirements.

      Our staff is experienced with the preparation of complex and challenging environmental planning documents such as Environmental Impact Reports, Environmental Impact Statements, initial studies and

8

Table of Contents

      We perform archaeological and paleontological studies that range from site review and records analysis to a discussion of measures to protect sensitive or valuable cultural resources. Further, we conduct field sampling and testing to establish or verify findings of a site review and previously documented information to determine both the quantity and quality of culturally valuable materials for a given site. Many environmental impact analyses result in requirements to protect significant cultural resources that may exist on a property, such as native American community settings, artifacts, and burial sites.

      We have provided monitoring of construction activities on numerous projects and have also completed complex excavations in coordination with state and federal agencies and native American representatives.

      Construction management services are an efficient “bundling” of some of the other services that we provide. During construction management assignments, we direct development and construction tasks, including the preparation of cost projections, entitlement and feasibility analysis, professional consultant selection and supervision, contractor bidding and construction supervision. We provide these services in discrete components or as a comprehensive package for private development and public works clients.

      Site acquisition services include the selection of prospective properties that fit defined criteria, identifying and overcoming restrictions against the intended use of properties, negotiating agreements for the acquisition and implementing the acquisition and final use of properties. We provide site acquisition services to assist clients with obtaining the most appropriate real estate for their particular needs or to assist them in assessing the quality and reliability of existing equipment and facilities in the energy industry. For example, a property intended for the development of multi-family housing will have characteristics which vary greatly from that of a property intended for the siting of a heavy industrial facility.

      Our water resources engineering services consist of financial planning, feasibility studies, storm water management, demand forecasting, hydraulic analysis and water flow studies to develop system master plans in addition to designing conventional systems of pipes, channels and dams.

      Our professionals integrate equipment selection, maintenance requirements and spare parts inventory by designing, selecting and reviewing mechanical, piping and electrical layouts, and providing operations and maintenance, training, start-up and emergency procedures during the design of contemporary processes or the automation of outdated manufacturing processes. These services are essential to creating an efficient operating facility.

      We provide fire protection engineering services in connection with both new construction and the renovation or modification of existing facilities to assist clients in defining and providing an acceptable level of fire safety in a cost-effective manner.

9

Table of Contents

      These services include the design of electrical power systems for buildings, manufacturing plants and miscellaneous facilities; design of lighting systems; and selection of other equipment that delivers or uses electrical power. We design various types of electrical power generation systems and power distribution systems. We also provide cogeneration and backup emergency power supply designs for university campuses and multiple building commercial facilities.

      These services are required to design energy systems, heating, ventilation, air conditioning (“HVAC”) systems, plumbing systems, water distribution systems and fire protection systems for facilities and buildings. We provide engineering design for HVAC systems and boiler, chilled water, compressed air, and other building facilities. Additionally, we provide mechanical engineering expertise for production line automation and manufacturing engineering support.

      Our chemical/ process engineers design systems for a variety of manufacturing and industrial facilities and processes like food and beverage, pharmaceutical, chemical and petroleum facilities.

      As plants, whether they are power generation or wastewater treatment, are constructed they require a significant amount of testing during the construction process to insure that various functions are performing as designed and expected. This work includes testing the system processes, electrical equipment, instrument calibration, and numerous other tests to insure that the plant will function as intended when it becomes operational. It then needs to be started and monitored, and the permanent staff for the plant must be trained to operate and manage it. We provide various plant services including testing, start up, and training for power plants. In addition, we provide operations and maintenance services for water and wastewater plants and have the ability to provide the same for power plants.

Business Development and Marketing

      Our business development and marketing activities consist of identifying target markets, developing strategies for pursuing these targets and supporting marketing activities company-wide by coordinating corporate promotional and professional activities. We use a client service value-added approach to our business development and marketing efforts by employing a variety of techniques to obtain contracts with new clients, repeat business with existing clients, and to maintain a positive reputation.

      Additionally, our business development and marketing efforts assist our management and clients in assuring quality performance, client satisfaction, and new opportunities. To accomplish this, we provide our clients with referrals for project partners and financing sources, assist with legislative matters and monitor in-house performance. Finally, we identify new projects and prospective clients in each of the markets in which we are active. This is achieved through the use of many resources including: geographic information systems and aerial maps, project and contact databases, the Internet, lead tracking publications, and industry networking relationships. We pursue the companies, agencies, projects and markets that we believe have financial strength, long-term growth potential and established reputations.

      Our growing list of services provides us with the opportunity to cross-market and sell additional services to our clients. We intend to further promote our broad service capabilities and continue to take advantage of our ability to increase our revenue by cross-selling services to existing clients and thereby to increase the number of services being provided to existing clients.

      One of the keys to being successful in cross-marketing our services is to ensure that all of our managers understand the complete capabilities of our company, including our full range of services and the geographic locations and industries in which we offer and provide our services. We give presentations to our staff to

10

Table of Contents

      One of our most effective methods of developing client relationships and winning new contracts has been our Executive Land Search Program. In our “map rooms”, we have computerized geographic information systems maps, aerial maps and city and county maps. We use these maps along with corresponding database information to identify and track a multitude of existing and potential projects. We meet with existing and prospective clients and refer available projects to them.

Clients

      Our primary private sector clients consist of real estate developers, builders, major manufacturers and energy providers. Our public sector clients include water and school districts, metropolitan planning organizations, transportation authorities and local, state and federal agencies. The following is a partial list of some of our representative clients:

      No individual client accounted for more than 10% of our net revenue in 2001, 2002 or 2003.

Backlog

      Our gross revenue backlog for fixed price contracts and time and material contacts with not-to-exceed provisions as of December 31, 2003, was approximately $58 million as compared to $51 million at December 31, 2002. Our backlog represents an estimate of the remaining future gross revenue from existing signed contracts, and contracts which have been awarded with a defined scope of work and contract value and on which we have begun work with verbal client approval. We do not believe that backlog is fully indicative of the amount of potential future revenue that we may achieve due to the short-term nature of the contracts under which we generally provide our services compared to the long-term nature of the projects and since our contracts are subject to cancellations and/or scope adjustments.

11

Table of Contents

Competition

      The market for our services is highly competitive. We compete with a variety of firms ranging from small, local firms to national and international firms that are much larger than we are. We perform engineering and consulting services for a broad spectrum of markets including energy, residential, commercial, recreational, public works, industrial, process and manufacturing. We believe that our competitive advantages include our multiple industries and services, reputation, organizational structure and business strategy. We believe that the principal factors in the engineering and consulting services selection criteria include:

	•	quality of service,
	•	relevant experience,
	•	staffing capabilities,
	•	reputation,
	•	geographic presence,
	•	stability, and
	•	price.

Employees

      As of January 31, 2004, we had approximately 775 employees and project workers. Believing that our success depends significantly upon attracting and retaining talented, innovative and experienced professionals, we are comprised of highly skilled personnel with significant industry experience and strong client relationships. We employ licensed civil engineers, mechanical engineers, electrical engineers, land surveyors, landscape architects, certified planners, information technology specialists, power plant personnel, geodesists and archaeologists, among others.

      At December 31, 2003, none of our employees were a party to a collective bargaining agreement other than approximately 10% of our employees whom we employ as field surveyors in California. Our field survey employees in our Southern California offices are covered by a Master Labor Agreement between the International Union of Operating Engineers Local Union No. 12 and the Southern California Association of Civil Engineers and Land Surveyors, which expires in October 2004. Our field survey employees in our Northern California offices are covered by a Master Agreement between the Bay Counties Civil and Land Surveyors Association and Operating Engineers Local Union No. 3, which expires in March 2005.

Available Information

      We maintain a website with the address www.keithco.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge, through our website via a hyperlink to a third party service, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file that material with, or furnish such material to, the Securities and Exchange Commission.

      We occupy offices and facilities in various locations in California, Nevada, Utah, Arizona, Oregon, Texas and Michigan. Our corporate headquarters are located in Irvine, California and consist of approximately 63,000 square feet of space. Our corporate headquarters lease expires in October 2009. We believe that our existing office space is adequate to meet our current and foreseeable future requirements.

12

Table of Contents

      We are party to various legal proceedings that arise in the ordinary course of our business. Based on our experience, the nature of our current proceedings and our insurance policy coverage for such matters, the ultimate disposition of these matters should not have a material adverse effect on our financial position, liquidity or results of operations.

      No matters were submitted to a vote of security holders during the quarter ended December 31, 2003.

13

Table of Contents

PART II

      Our common stock is traded on the Nasdaq National Market under the symbol “TKCI”. The following table sets forth the low and high closing bid prices per share of our common stock for each calendar quarter indicated as reported on the Nasdaq National Market.

      We have not declared or paid any cash dividends on our capital stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, our credit agreement with our bank restricts the payment of dividends without the bank’s consent.

Recent Issuances of Unregistered Securities

      In connection with our acquisition of Crosby, Mead, Benton & Associates (“CMB”) in October 2000, the purchase agreement provided for the issuance of unregistered shares of our common stock to the former shareholders of that company, subject to certain adjustments as stated in the agreement. We issued the former shareholders of CMB 35,905 shares of our common stock with a value of $188,000 during 2001, and 32,924 shares of our common stock with a value of $253,000 during 2002. These shares were issued in transactions exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

      In connection with the acquisition of Hook Associates Engineering, Inc. (“Hook”) in January 2001, the purchase agreement provided for the issuance of unregistered shares of our common stock to the former shareholders of that company, subject to certain adjustments as stated in the agreement. We issued the former shareholders of Hook 34,188 shares of our common stock with a value of $500,000 in 2001. These shares were issued in transactions exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

      In connection with our acquisition of Universal Energy, Inc. (“UEI”) in November 2001, the former shareholders are eligible for additional consideration, which may affect the purchase price as a result of an earn-out provision. As part of this earn-out, which is based on certain profitability targets for 2002, 2003, and 2004, we may be obligated to issue additional shares of our common stock to be determined under the earn-out provision of the agreement. If issued, these shares are to be issued in three installments in May 2003, May 2004 and May 2005. In May 2003, we issued 70,907 shares of our common stock with a value of $714,000 related to the 2002 portion of the earn-out. UEI did not meet its profitability target related to 2003, and therefore, we do not expect to issue any shares in 2004 related to this. The issuance of future shares is subject to certain adjustments as stated in the agreement. These shares are expected to be issued in transactions exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

14

Table of Contents

      In connection with our acquisition of ALNM Group, Inc. (“ALNM”) in March 2002, the purchase agreement provided for the issuance of unregistered shares of our common stock to the former shareholders of that company. We issued the former shareholders of ALNM 141,856 shares of our common stock in 2002 with a value of $1,569,000 and estimate approximately 75,000 shares of our common stock or $792,000 in value of shares to be issued in 2004. The issuance of future shares is subject to certain adjustments as stated in the agreement. These shares were, and are expected to be, issued in transactions exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.

      The selected financial data includes the consolidated financial statement data for the periods presented.

      The statement of income data for the years ended December 31, 2001, 2002 and 2003, and the balance sheet data as of December 31, 2002 and 2003, have been derived from our audited consolidated financial statements which are included elsewhere in this Annual Report on Form 10-K. The statements of income data for the years ended December 31, 1999 and 2000, and the balance sheet data as of December 31, 1999, 2000 and 2001, have been derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K.

      The following information should be read in conjunction with our consolidated financial statements and the related notes and our Management’s Discussion and Analysis of Financial Condition and Results of Operations which are included elsewhere in this Annual Report on Form 10-K.

15

Table of Contents

16

Table of Contents

      You should read the following discussion and analysis together with our consolidated financial statements and related notes included elsewhere in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategies for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in this Report.

Overview

      We derive most of our revenue from professional service activities. The majority of these activities are billed under various types of contracts with our clients, including fixed price and time-and-materials contracts. Most of our time-and-material contracts have not-to-exceed provisions. For contracts with either a fixed price or a not-to-exceed provision, revenue is recognized under the percentage of completion method of accounting based on the proportion of actual direct contract costs incurred to total estimated direct contract costs. We believe that costs incurred are the best available measure of progress towards completion on these contracts. In the course of providing services, we sometimes subcontract for various services. These costs are included in billings to clients and are included in our gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, we also report net revenue, which is gross revenue less reimbursable subcontractor costs. Our revenue is generated from a large number of relatively small contracts.

      Costs of revenue include labor, non-reimbursable costs, materials and various direct and indirect overhead costs including rent, utilities and depreciation. Direct labor employees work predominantly at our offices and at the clients’ job sites. The number of direct labor employees assigned to a contract will vary according to the size, complexity, duration and demands of the project. Contract terminations, completions, scheduling delays and contract proposal activity may result in periods when direct labor employees are not fully utilized. As we continue to grow, we anticipate that we will continue to add professional and administrative staff to support our growth. These professionals are in great demand and are likely to remain a limited resource for the foreseeable future. The significant competition for employees with the skills we require creates wage pressures on professional compensation. We attempt to increase our billing rates to customers to compensate for wage increases; however, there can be a lag before wage increases can be incorporated into our existing contracts. Some expenses, primarily long-term leases, are fixed and cannot be adjusted in reaction to an economic downturn.

      Selling, general and administrative expenses primarily consist of corporate costs related to finance and accounting, information technology, business development and marketing, contract proposals, executive salaries, provisions for doubtful accounts and other indirect overhead costs.

      The accounting policies that are most important to the portrayal of our financial condition and results of operations, and require management’s most difficult, subjective or complex judgements, are considered to be our critical accounting policies. Because of the uncertainties inherent in making assumptions and estimates regarding unknown future outcomes, future events may result in significant differences between estimates and actual results. We believe that each of the assumptions and estimates are appropriate in the circumstances, and represent the most likely future outcome. The following is what we believe are the critical accounting policies most affected by management estimates and judgements.

17

Table of Contents

      Revenue and Cost Recognition Estimates on Contracts. We use estimates in recognizing revenue related to our contracts with fixed price or not-to-exceed provisions. For these contracts, revenue is recognized under the percentage of completion method of accounting based on the proportion of actual direct contract costs incurred to total estimated direct contract costs. We believe that costs incurred are the best available measure of progress towards completion on these contracts. Estimating the total estimated direct contract cost is a subjective process and requires the use of our best estimates based upon the current information known by us at that point in time. Our estimate of total direct contract cost has a direct impact on the revenue recognized by us. If our current estimate of total direct contract costs turns out to be higher than our previous estimates of total direct contract cost, then we would have over recognized revenue for that previous period. Conversely, if our current estimates of total direct contract costs turns out to be lower than our previous estimates of total direct contract costs, we would have under recognized revenue for that previous period. In both cases, a job to date adjustment would be made to true-up revenue as a change in estimate applied prospectively.

      Goodwill. We use estimates in order to determine if goodwill has been impaired. An impairment loss may be recognized if the carrying amount of a reporting unit’s net book value exceeds the estimated fair value of the reporting unit. We arrive at the estimated fair value of a reporting unit by using a variety of customary valuation methods, such as discounted cash flow analysis and multiples of net revenue and earnings before interest and taxes. These valuation methods use a variety of assumptions such as future billable employee headcount, net revenue per billable employee, operating income, cash flow, discount rates and multiples. Estimating fair value of a reporting unit is a subjective process and requires the use of our best estimates. We will perform our valuation analysis at least annually or if an event occurs or circumstances change that would indicate the carrying amount of goodwill may be impaired. If our estimates or assumptions change from those used in our current valuation, we may be required to recognize an impairment loss in future periods.

      Provision for Doubtful Accounts. We use estimates in arriving at our allowance for doubtful accounts related to our contracts and trade receivables. These estimates are based on our best assessment as to the collectibility of the related receivable balance. Each quarter, we re-evaluate our estimates to assess the adequacy of our allowance for doubtful accounts and adjust the allowance for doubtful accounts as necessary. Factors considered in arriving at our allowance for doubtful accounts, include among other things, historical and anticipated client default rates at the various aging categories of contract and trade receivables and the overall business environment/ economy. Future collections of receivables that are different from our current estimates will affect results of operations in future periods.

      Discretionary Bonus Plan. During 2003, we implemented a discretionary bonus plan. Under this bonus plan, we may award an annual cash performance bonus to our employees provided that our annual actual results exceed a pre-established annual target. We review the need for a bonus accrual on a quarterly basis by comparing our actual quarterly results and our estimated results for the remainder of the year to our annual pre-established target. Estimating our future results is a subjective process and requires the use of our best estimates based upon the current information known to us at that point in time. As a result of potential changes to our estimates, our quarterly results may be significantly affected by adjustments to the bonus accrual. In the fourth quarter of 2003, we made our final adjustment to the 2003 bonus accrual. Any annual bonus award under this plan is at the discretion of the Compensation Committee of the Board of Directors.

      To help reduce our susceptibility to economic cycles affecting the real estate development industry, we intend to expand our work in the public works/ infrastructure and the energy/ industrial industries as feasible, based upon such items as economic and market conditions. We believe that among other business initiatives, our acquisition strategy may play a significant role in contributing to this objective. The acquisitions of Pacific Engineering Corporation (“PEC”) and Universal Energy Inc. (“UEI”) during 2001, ALNM Group, Inc. (“ALNM”) in 2002 and anticipated future acquisitions, many of which may include engineering services outside of the real estate development industry, may have a significant impact on our future net revenue mix. Due to these and potential future acquisitions, we anticipate that our margins may be affected by the decreased business concentration from the real estate development industry which has historically yielded higher margins than services provided to the public works/ infrastructure and energy/ industrial industries.

18

Table of Contents

Results of Operations

      The following table sets forth supplemental consolidated operating results for each of the periods presented as a percentage of net revenue:

      The following table sets forth the Company’s consolidated statements of income for the years ended December 31, 2003 and 2002 and includes the dollar and percentage change:

19

Table of Contents

      Net Revenue. Net revenue for 2003 decreased $0.9 million, or 0.9%, to $90.7 million compared to $91.6 million for 2002. This decrease in net revenue was partially offset by $1.4 million in additional net revenue during 2003 related to the acquisition of ALNM Group, Inc. (“ALNM”), in March 2002, as compared to the same period in 2002. Excluding the net revenue from the ALNM acquisition, net revenue decreased by $2.3 million, or 2.5%. This decrease was primarily a result of a continued slowdown in our energy/ industrial industry segment due to a slowdown in the pace of construction of new power plants and/or alternative power solutions and a general decrease in capital spending in the energy/ industrial industry, coupled with the completion of a large contract in our energy/industrial segment which had significant activity during 2002, and lower net revenue from our Arizona office, which was part of the acquisition of Hook & Associates Engineering, Inc. (“Hook”) in January 2001. The decline in net revenue was partially offset by increased net revenue generated from our real estate services due to a strong California residential real estate market.

      Subcontractor costs, as a percentage of net revenue, decreased to 10.1% during 2003 as compared to 16.3% during 2002. The decrease was primarily due to a decrease in subcontractor costs related to several large contracts in 2002 in our energy/ industrial segment.

      Market uncertainties in the power generation portion of the energy industry have caused a decline in the pace of construction of new power plants and/or alternative power solutions and a general decrease in capital spending in the energy/ industrial industry. As a result, our energy/ industrial segment continued to experience a reduction in net revenue during 2003. If this market uncertainty continues, it may cause further reductions in net revenue and therefore continue to negatively impact net income from our energy/ industrial segment.

      Although we have not experienced a significant decrease in net revenue from our public works/ infrastructure industry during 2003 as compared to 2002, certain current conditions, including a weak economy in the public works/ infrastructure industry, especially in the Greater Southeast Michigan area, lead us to believe that we may experience an adverse impact to net revenue and net income related to this industry.

      Gross Profit. Gross profit for 2003 remained flat at $31.9 million compared to 2002. Excluding the additional 2003 gross profit of $0.3 million generated from the acquisition of ALNM in March 2002, gross profit decreased by $0.3 million. This decrease was mainly due to lower gross profit from our energy/ industrial segment, along with the completion of a large contract in our energy/ industrial segment which had significant activity during 2002, and $0.4 million of additional expense related to the discretionary bonus plan. These decreases were offset by strong gross profit from our real estate services. For 2003, gross profit as a percentage of net revenue increased to 35.2% as compared to 34.8% during 2002. This increase was primarily due to strong gross profit from our real estate services, which was partially offset by lower gross profit from our energy/ industrial segment.

      As noted above, due to a continuing decline in the pace of construction of new power plants and/or alternative power solutions and a general decrease in capital spending in the energy/ industrial industry, our energy/ industrial segment experienced a reduction in its gross profit during 2003. If this decline continues, it may cause our energy/ industrial segment to experience a continued reduction of gross profit and therefore also a reduction in net income.

      We have experienced a slight decrease in gross profit from our public works/ infrastructure industry during 2003 as compared to 2002. Certain current conditions, including a weak economy in the public works/ infrastructure industry, especially in the Greater Southeast Michigan area, lead us to believe we may experience a further decline in our gross profit and net income related to this industry.

      Selling, General and Administrative Expenses. During 2003, selling, general and administrative expenses (“SG&A”) increased $1.5 million, or 7.8%, to $20.6 million compared to $19.1 during 2002. The increase in SG&A during 2003 was primarily due to the increase in SG&A costs attributable to ALNM, and increases in: legal fees, proposal activities, employee placement fees for new hires, and the provision for doubtful accounts. During 2003, SG&A as a percentage of net revenue increased to 22.7% compared to 20.9% during 2002 primarily due to increases in the items discussed above.

20

Table of Contents

      Interest Income. Interest income during 2003 decreased by $105,000 as compared to 2002. This decrease in interest income resulted from lower yields earned on cash and securities, partially offset by an increase in the average balance of cash and securities as compared to 2002.

      Interest Expense. Interest expense during 2003 increased by $62,000 compared to 2002. The increase in interest expense was primarily attributable to a $130,000 reduction of interest expense during 2002 associated with an acquisition modification agreement related to Hook which resulted in the cancellation of a $1.3 million acquisition note payable.

      Other (Income) Expenses, net. Other income during 2003 decreased by $366,000 as compared to 2002. This decrease was primarily associated with a $687,000 increase in other income during 2002 resulting from purchase price adjustments in connection with the acquisitions of Crosby Mead Benton & Associates (“CMB”) and Hook. This decrease was partially offset by a net $230,000 sublease termination fee recognized by us during 2003 related to one of our facilities which we had subleased and $73,000 in other income recognized during 2003 associated with a purchase price adjustment related to the acquisition of ALNM.

      Income Taxes. The provision for income taxes during 2003 was $4.6 million compared to $5.4 million for 2002. This decrease in provision for income taxes during 2003 resulted from a lower taxable base. Our effective tax rate was 39% during 2003 and 2002.

      Discontinued Operations. We closed down the operations of three divisions during 2002. Two of these divisions were part of our operations in Colorado and Wyoming from our acquisition of Hook, and the third was our internally created Communication division located in California. In accordance with accounting principles generally accepted in the United States of America, the activities of these divisions were segregated and reported as discontinued operations during 2002.

      The following table sets forth the Company’s consolidated statements of income for the years ended December 31, 2002 and 2001 and includes the dollar and percentage change:

21

Table of Contents

      Net Revenue. The growth in net revenue for 2002 compared to 2001 is primarily attributable to acquisitions, which contributed $22.5 million in net revenue. The acquired companies mainly contributing to this net revenue growth include: PEC, UEI, and ALNM, whose operations have been included in the consolidated financial statements since October 2001, December 2001 and March 2002, respectively. Excluding the net revenue from these acquisitions, net revenue increased by $2.2 million, or 3.3%, compared to 2001. The increase in net revenue, excluding acquisitions, primarily resulted from (i) a strong Southern California residential real estate market, which continued to experience an increase in demand, and (ii) higher net revenue derived from the Company’s water resource services. These increases were partially offset by a decrease in net revenue generated by the Company’s Arizona office which is part of the Hook operations coupled with lower net revenue generated from the Company’s Orange County office resulting mainly from a continued weak commercial and industrial real estate market. Subcontractor costs, as a percentage of net revenue, increased to 16.3% during 2002 compared to 11.2% during 2001, resulting largely from an increase in subcontractor costs related to several large contracts in the energy/ industrial industry.

      Difficulties in the power generation segment of the energy industry have caused a decline in the pace of construction of new power plants and/or alternative power solutions. As a result, our energy/ industrial industry began to experience a reduction in net revenue during the fourth quarter of 2002. If the difficulties continue, they may cause further reductions in net revenue and therefore net income in our energy/ industrial industry.

      Gross Profit. The increase in gross profit was mainly attributable to acquisitions, which added gross profit of $7.2 million during 2002 compared to the prior year. Excluding the gross profit from acquisitions, gross profit increased $0.8 million or 3.4% during 2002 as compared to 2001. This increase was primarily attributable to strong gross profit resulting from continued demand for residential real estate in Southern California and higher gross profit generated from the Company’s water resource services, all of which were partially offset by lower gross profit from (i) the Hook Arizona office, (ii) one of our Northern California offices, and (iii) our UEI division, as mentioned above.

      As a percentage of net revenue, gross profit decreased to 34.8% during 2002 from 35.7% during 2001. The percentage decrease was primarily related to lower margins related to the Company’s energy/ industrial industry, the Hook Arizona office, and ALNM which mainly provides services in the public works/ infrastructure industry.

      The increase in the costs of revenue was primarily attributable to increased expenses associated with the growth in our total direct employee base, which grew from an average of 510 in 2001 to 673 in 2002. This increase is primarily a result of acquisitions.

      As noted above, due to a continuing decline in the pace of construction of new power plants, and/or alternative power solutions, our energy/ industrial industry experienced a reduction in its gross profit in the fourth quarter of 2002. If this decline continues, it may cause our energy/ industrial industry to experience a continued reduction of gross profits and therefore also a reduction in net income.

      Selling, General and Administrative Expenses. The increase in selling, general and administrative expenses was primarily related to acquisitions, an increase in corporate administrative costs, and an increase in the provision for doubtful accounts, all of which were partially offset by the elimination of goodwill amortization, as compared to 2001. Acquired companies contributed $3.9 million of additional selling, general and administrative expenses in 2002 as compared to 2001. As a percentage of net revenue, selling, general and administrative expenses decreased slightly to 20.9% during 2002 from 21.0% during 2001, mainly from the elimination of goodwill amortization which was partially offset by the increase in the provision for doubtful accounts.

      Interest Income. The decrease in interest income resulted from lower yields on cash and securities, partially offset by an increase in the average balance of cash and securities as compared to 2001.

22

Table of Contents

      Interest Expense. The decrease in interest expense was primarily attributable to a reduction of interest expense associated with the acquisition modification agreement (as discussed under the “Liquidity and Capital Resources” section) related to Hook, which resulted in the cancellation of a $1.3 million acquisition note payable and the overall reduction of debt as compared to 2001.

      Other Income (Expenses), net. The increase in other income was primarily associated with $687,000 resulting from a purchase price adjustment in connection with the acquisitions of CMB and Hook.

      Income Taxes. The increase in provision for income taxes resulted primarily from higher pre-tax income and a slightly higher effective tax rate during 2002. Our effective income tax rate was approximately 39.0% during 2002 compared to 38.8% during 2001.

      Discontinued Operations. The loss from discontinued operations is attributable to the closure of three of our divisions during 2002. Two of these divisions related to our Hook operations located in Colorado and Wyoming, and, the third was our internally created Communication division which was located in California. In accordance with accounting principles generally accepted in the United States of America, the activities of these divisions have been segregated and reported as discontinued operations during 2002 and 2001. The increase in the loss from discontinued operations was mainly due to continuing difficult market conditions and deteriorating operating results in Colorado.

Related Party

      In March 2001, we entered into change in control agreements with Aram H. Keith, our chief executive officer and chairman of the board, Eric C. Nielsen, our president and chief operating officer, and Gary C. Campanaro, our chief financial officer and secretary, and a director of our company. These agreements provide that if the executive officer’s employment with us terminates as a result of an involuntary or constructive termination (as these terms are defined in the agreements) at any time within two years following a change in control, then, in addition to other benefits, the executive officer will receive a one-time payment, equal to two times the executive officer’s highest annual level of total cash compensation (including any and all bonus amounts) paid by us to that executive officer during any one of the three consecutive calendar years (inclusive of the year of termination) immediately prior to termination. The executive officer also is entitled to receive a payment by us to offset any excise tax under the Internal Revenue Code of 1986, as amended, that has been levied against the executive officer for payments that we have made to him. In addition, any unvested options previously granted to the executive officer will immediately vest and become exercisable as of the date of termination and remain exercisable until their respective expiration dates.

      We have not entered into any material related party transactions during 2003.

Liquidity and Capital Resources

      Cash and cash equivalents combined with securities held-to-maturity totaled $28.9 million as of December 31, 2003, compared to $23.5 million as of December 31, 2002, an increase of $5.4 million. Working capital as of December 31, 2003 was $47.4 million compared to $39.6 million as of December 31, 2002, an increase of $7.8 million. Our debt to equity ratio (excluding the effect of issuable common stock) at both December 31, 2003 and December 31, 2002 was 0.00 to 1.

      Cash Flows From Operating Activities. Net cash provided by operating activities decreased $2.7 million, to $7.4 million during 2003 compared to $10.1 million during 2002. The decrease in net cash provided by operating activities during 2003 as compared to 2002 was primarily the result of lower net income, partially offset by a purchase price adjustment and changes in operating assets and liabilities, net of effects from acquisitions.

      Cash Flows From Investing Activities. Net cash used in investing activities totaled $3.6 million for 2003 compared to $1.4 million for 2002, an increase of $2.2 million. This increase in net cash used in investing activities was primarily due to a significant increase in cash used to purchase securities held-to-maturity, substantially offset by a decrease in cash used for acquisitions.

23

Table of Contents

      Cash Flows From Financing Activities. Net cash provided by financing activities increased by $789,000 to $243,000 for 2003 compared to net cash used in financing activities of $546,000 for 2002. This increase in net cash provided by financing activities resulted primarily from a decrease of principal payments on our debt and capital lease obligations during 2003.

      The Company has available a $10.0 million unsecured line of credit consisting of four components: (i) an acquisition component, (ii) an equipment and vehicle financing component, (iii) a standby letter of credit component, and (iv) a working capital component. The line provides up to a maximum of $5.0 million to finance acquisitions, up to a maximum of $3.0 million to finance equipment and vehicle purchases, up to a maximum of $1.0 million for standby letters of credit, and up to a maximum of $10.0 million less the aggregate outstanding principal balance of the acquisition, equipment and vehicle, and standby letter of credit components for working capital. The line bears interest at either a range of 0.25% below prime to prime, or a range of 1.25% to 1.75% over LIBOR depending on the Company’s ability to meet certain financial covenants. All components of the line of credit mature in June 2005. This line of credit agreement restricts the payment of dividends without the bank’s consent. As of December 31, 2003, the Company had utilized the letter of credit component of this line of credit to issue a $229,000 stand-by letter of credit. The Company did not have any outstanding balances under this line of credit agreement as of December 31, 2002.

      Our financial statements for 2003 reflect the reduction of the purchase price of ALNM which we acquired in March 2002. Under the terms of the purchase agreement, the obligation to issue $1.5 million in shares of our common stock was reduced to approximately $0.8 million.

      On occasion, we will enter into purchase agreements related to acquisitions which provide for future purchase price payments or “earn-outs” as a result of achieving certain operating results by the acquired companies. As a result of these earn-out provisions, we may be obligated to pay additional consideration in future periods. Current accounting principles require that these earn-outs be accrued on our balance sheet only at the point at which the earn-out period has elapsed and the performance targets have been met. As of December 31, 2003, we have one year remaining on an earn-out and we may be obligated to pay a maximum of $7.4 million in additional purchase price related to our acquisitions, of which 50% will be paid in cash with the remaining 50% to be paid out in our common stock. Such potential earn-outs are not currently reflected on our balance sheet as the earn-out period has not elapsed and, therefore, the achievement of the performance target is currently unknown.

      We do not hold any derivative financial instruments for trading purposes or otherwise. In addition, we presently do not enter into any hedging type activities to manage our exposure to foreign currency risk associated with our Brazilian operation. Our Brazilian operation, which provides services to our energy/ industrial segment, generated approximately $0.5 million in net revenue during 2003. Furthermore, we have not engaged in energy or commodity trading activities and do not anticipate doing so in the future, nor do we have any transactions involving unconsolidated entities, special purpose entities, or variable interest entities.

      The following summarizes our contractual obligations as of December 31, 2003, and the effect such obligations are expected to have on liquidity and cash flows in the future.

Future Cash Requirements

      We expect to fund our future liquidity needs primarily from (i) operating cash flows, (ii) existing balances of cash and cash equivalents and securities held-to-maturity, and (iii) borrowings under our $10.0 million unsecured revolving line of credit, which we have not utilized as of December 31, 2003 other than to issue a $229,000 stand-by letter of credit. We believe these sources of funds will be sufficient to provide

24

Table of Contents

      We also intend to use available liquidity to continue our acquisition strategy. We continue to examine acquisitions of complementary businesses and anticipate that our liquidity will be sufficient to provide for potential acquisitions for the next twelve months. However, the pace and size of acquisitions are difficult to predict. We may complete more or fewer acquisitions than we currently contemplate depending on the opportunities that present themselves, and our cash requirements may change accordingly.

Effect of Recent Accounting Pronouncements

      In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 requires issuers to classify as liabilities (or assets in some circumstances) three classes of freestanding financial instruments that embody obligations for the issuer. The provisions of this statement are effective for financial instruments entered into or modified after May 31, 2003 and are otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have a material effect on our financial condition, results of operations, or cash flows.

      In April 2002 and July 2002, the Financial Accounting Standard Board (“FASB”) issued Statements of Financial Accounting Standard No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”), and No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), respectively. SFAS 145 prescribes amendments to existing pronouncements on accounting for early retirements of debt. The provisions of this statement are effective for financial statements issued on or after May 15, 2002. SFAS 146 addresses issues pertaining to costs associated with exit or disposal activities initiated after December 31, 2002. The adoption of these standards did not have a material effect on the Company’s financial condition, results of operations or cash flows.

Inflation

      Although our operations can be influenced by general economic trends, we do not believe that inflation had a significant impact on our results of operations for the periods presented. Due to the short-term nature of most of our contracts, if costs of revenue increase, we will attempt to pass these increases on to our clients; however, there can be a lag before these increases in costs can be incorporated into our existing contracts.

The following discussion summarizes material risks which you should carefully consider before you decide to invest in our common stock or to maintain or increase your investment. Any of the following risks, if they actually occur, would likely harm our business. The trading price of our common stock could then decline, and you may lose all or part of the money you paid to buy our common stock.

Risk Factors — Risks Related To Our Industries

      During 2003, approximately 67% of our net revenue was rendered in connection with commercial and residential real estate development projects. Reduced demand in the real estate market would likely decrease the demand for our services. A decrease in the demand for our services could result in cash flow difficulties and potential operating losses for our company.

      The real estate market and, therefore, our business, may be impacted by a number of factors, which may include:

	•	changes in employment levels and other national and local economic conditions;
	•	changes in interest rates and in the availability, cost and terms of financing;

25

Table of Contents

	•	the impact of present or future environmental, zoning or other laws and regulations;
	•	changes in real estate tax rates and assessments and other operating expenses;
	•	changes in levels of government spending and fiscal policies; and
	•	earthquakes and other natural or manmade disasters and other factors which are beyond our control.

      The demand for our services is related to the level of government program funding that is allocated to rebuild, improve and expand the nation’s infrastructure. We believe that the success and further development of our business depends, in part, upon the continued funding of these government programs and upon our ability to participate in these government programs. We cannot assure you that governments will have the available resources to fund these programs, that these programs will continue to be funded even if governments have available financial resources or that we will continue to win government contracts.

      Some of these government contracts are subject to renewal or extensions annually, so we cannot be assured of our continued work under these contracts in the future. Unsuccessful bidders may protest or challenge the award of these contracts. In addition, government agencies can terminate these contracts at their convenience. As a result, we may incur costs in connection with the termination of these contracts and suffer a loss of business. Also, contracts with government agencies are subject to substantial regulation and an audit of actual costs incurred. Consequently, there may be a downward adjustment to our revenue if billed recoverable costs exceed actual recoverable costs.

      The demand for our services is related to the level and pace of construction of energy related solutions. We believe that the success and further development of this aspect of our business depends, in part, upon the need for and funding of these projects. High energy prices, power shortages, and pressure at state and federal levels for increased supply resulted in the increased demand for energy related solutions with an unprecedented number of new power plants, cogeneration facilities, and electrical distribution facilities announced in 2001. However, a weakening demand and softening economy combined with a decline in energy prices have caused builders of such energy related solutions to reconsider planned projects. Many have announced downsizings or cancellations of new power plants and/or alternative power solutions. The decline in the pace of construction of new power plants and/or alternative power solutions has had, and may continue to have, an adverse affect on our energy/industrial segment.

      We derive our revenue almost exclusively from services performed by our professionals. We may not be able to attract and retain the desired number of professionals over the short or long-term. There is significant competition for professionals with the skills necessary for the provision of our services from major and boutique consulting, engineering, research and other professional service firms. We believe that our existing relationships between our clients and our employees is one of our greatest business development assets. Our inability to attract and retain qualified professionals could impede our ability to secure and complete engagements, in which event, we may lose market share and our revenue and profit may decline.

      The terrorist attacks that took place in the United States on September 11, 2001, along with the United States military campaign against terrorism in Afghanistan, Iraq and elsewhere, and ongoing violence in the Middle East have created many economic and political uncertainties, some of which had and may materially

26

Table of Contents

Risk Factors — Risks Related To Our Business

      During 2003, approximately 72% of our net revenue was derived from services rendered in California. Poor economic conditions in California may significantly reduce the demand for our services and decrease our revenue and profits. From 1991 to 1996, our business was negatively impacted during the real estate market downturn in Southern California, and we experienced cash flow difficulties and substantial operating losses.

      We have grown rapidly and intend to pursue further growth, through acquisitions and otherwise, as part of our business strategy but we may not be able to manage our growth effectively and efficiently. Our inability to manage our growth effectively and efficiently could cause us to incur unforeseen costs, time delays or other negative impacts, any of which could cause a decline in our revenue and profitability. Our rapid growth has presented and will continue to present numerous administrative and operational challenges, including the management of an expanding array of engineering and consulting services, the assimilation of financial reporting systems, increased pressure on our senior management and increased demand on our systems and internal controls.

      Our growth strategy includes the strategic acquisition of companies that expand our service offerings and geographic presence, including acquisitions that may be larger than our historic acquisitions. If we are unsuccessful in implementing our acquisition strategy, we could fail to achieve the revenue and profitability growth that we currently expect. We may not be successful in implementing our acquisition strategy for a number of reasons, including the following:

	•	We may fail to consummate an acquisition even if an announcement had been made to acquire a target company;
	•	As the engineering industry consolidates, suitable acquisition candidates are expected to become more difficult to locate and may only be available at an increased price or under terms that are less favorable than in the past;
	•	We may not be able to arrange suitable financing to consummate an acquisition;
	•	We may not be successful in integrating an acquired company’s professionals, clientele and culture into ours;
	•	We may not be successful in generating the same level of operating performance that an acquired company experienced prior to the acquisition;
	•	As we expand our service offerings and geographic presence, we may not be able to maintain the current level of quality of services;
	•	We may not be able to maintain our reputation in an acquired entity’s geographic area or service offerings and as a consequence our ability to attract and retain clients in those or other areas may be negatively impacted;
	•	An acquired company may be less profitable than us resulting in reduced profit margins; and

27

Table of Contents

	•	The acquisition and subsequent integration of an acquired company may require a significant amount of management’s time, diverting their attention from our existing operations and clients, which could result in the loss of key employees or clients.

      We use estimates in order to determine if goodwill has been impaired. An impairment loss may be required to be recognized if the carrying amount of a reporting unit’s net book value exceeds the estimated fair value of the reporting unit. We arrive at the estimated fair value of a reporting unit by using a variety of customary valuation methods, such as discounted cash flow analysis and multiples of net revenue and earnings before interest and taxes. These valuation methods use a variety of assumptions such as future billable employee headcount, net revenue per billable employee, operating income, cash flow, discount rates and multiples. Estimating fair value of a reporting unit is a subjective process and requires the use of our best estimates. If our estimates or assumptions change from those used in our current valuation, we may be required to recognize an impairment loss. As of December 31, 2003, our goodwill balance, net of accumulated amortization was $23.1 million. We no longer amortize goodwill due to our adoption of SFAS No. 142 “Goodwill and Other Intangible Assets.”

      We expect to perform services under contracts that may limit our profitability. Under fixed-price contracts we perform services at a stipulated price. Under time-and-materials contracts with not-to-exceed provisions, we are reimbursed for the number of labor hours expended at an established hourly rate plus the cost of materials incurred, subject, however, to a stated maximum dollar amount for the services to be provided under the contract. In both of these types of contracts, we agree to provide our services based on our estimate of the costs a particular project will involve. Our estimates are not always accurate. Underestimation of costs for these types of contracts may cause us to incur losses or result in a project not being as profitable as we expected. We may fail to estimate costs accurately for a number of reasons, including:

	•	weakness in the management of our projects;
	•	loss of efficiency resulting from cross-utilization of office staff from various locations;
	•	changes in the costs of goods and services that may occur during the contract period;
	•	problems with new technologies; and
	•	delays beyond our control.

      Our gross revenue backlog for fixed price contracts and time-and-materials contracts with not-to-exceed provisions as of December 31, 2003 was approximately $57.9 million. We cannot assure you that the entire balance of our backlog will convert into revenue since our contracts are subject to scope adjustments and/or cancellations. These types of scope adjustments or cancellations may result in a reduction in our backlog which could adversely affect our revenue and profit.

      We do not have an employment agreement with, or maintain key man life insurance on Aram H. Keith, our chief executive officer. If we lose the services of Mr. Keith, we may be less likely to secure or complete contracts and to attract and retain additional employees. The efforts, abilities, business generation capabilities and name recognition of Mr. Keith are important to our success in those activities.

28

Table of Contents

      Our employees might leave our company and become competitors of ours. If this happens, we may lose additional employees and some of our existing clients that have formed relationships with our former employees. In addition, we may lose future clients to a former employee as a new competitor. In either event, we could lose clients and revenue, and our profitability could decline.

      Field activities are generally performed outdoors and may include surveying, archeology, plant start-up and testing, and plant operations. Certain weather conditions or acts of God (such as fire, floods, etc.) may cause postponements in the initiation and/or completion of our field activities and/or may hinder the ability of our office employees to arrive at work, which may result in a delay or elimination of revenue that otherwise would have been recognized, while certain costs will continue to be incurred. Adverse weather conditions or acts of God may also delay or eliminate our initiation and/or completion of the various phases of work relating to our other engineering services that commence concurrent with or subsequent to field activities. Any delay in completion of the field, office and/or other activities may require us to incur additional costs attributable to overtime work necessary to meet the client’s required schedule. Due to various factors, a delay in the commencement or completion of a project may also result in a cancellation of the contract. As a result, our net revenue and profitability may be adversely affected.

      We are exposed to potential liabilities to clients for errors or omissions in the services we perform. These liabilities could exceed our current insurance coverage and the fees we derive from those services. We cannot always predict the magnitude of these potential liabilities but claims could be significant. A partially or completely uninsured claim, if successful and of significant magnitude, could result in substantial losses.

      We currently maintain general liability, umbrella, professional liability, directors and officers liability, and various types of other insurance policies. Claims may be made against us which exceed the limits of these policies, in which case we would be liable to pay these claims from our assets. Our professional liability and directors and officers liability policies are “claims made” policies and only claims made during the term of the policy are covered. If we terminate our policies and do not obtain retroactive coverage, we would be uninsured for claims made after termination even if these claims are based on events or acts that occurred during the term of the policy. Our insurance policies typically have various exceptions to the claims covered and also require us to assume some costs of the claim even though a portion of the claim may be covered, resulting in potential liability to us. Further, our expansion into new services or geographic areas could result in our failure to obtain coverage for these services or areas, or the coverage being offered may be at a higher cost than our current coverage. Due to the current insurance environment, we have experienced and may continue to experience an increase in our insurance premiums. We may not be able to pass these increases on to our clients in increased billing rates.

      We often contract with outside companies to perform designated portions of the services we perform for our clients. If we are unable to engage subcontractors, our ability to perform under some of our contracts may be impeded and the quality of our service may decline. As a consequence, we may lose projects, revenue and clients. Subcontractor costs accounted for approximately 10% of our net revenue during 2003.

      International business is subject to the customary risks associated with international transactions, including political risks, local law and taxes, difficulty in enforcing contracts, the potential imposition of trade or currency exchange restrictions, tariff increases and difficulties or delays in collecting accounts receivables.

29

Table of Contents

Risk Factors — Risks Related To Ownership of Our Stock

      The following factors could cause the market price of our common stock to decrease, perhaps substantially:

	•	the failure of our quarterly operating results to meet expectations;
	•	adverse developments in the worldwide economy, the financial markets, the engineering and consulting services market, the real estate market, the public works/infrastructure market, and/or the energy/ industrial market;
	•	changes in interest rates;
	•	our failure to meet securities analysts’ expectations;
	•	changes in accounting principles;
	•	sales of common stock by existing shareholders or holders of options;
	•	announcements of key developments by our competitors;
	•	the reaction of markets and securities analysts to announcements and developments involving our company; and
	•	resolution of threatened or pending litigation.

      In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.

      Our executive officers and directors, in the aggregate, hold approximately 17% of our outstanding common stock. These shareholders, if they act together, can have significant influence over most matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions.

      Our business strategy is to expand into new markets and enhance our position in existing markets through the acquisitions of complementary businesses. In order to successfully complete targeted acquisitions or to fund our other activities, we may issue additional equity securities that could dilute your stock ownership. We may also incur additional debt if we acquire another company, and this could negatively impact our results of operations.