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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 0-26561
THE KEITH COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0203193
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
2955 RED HILL AVENUE, COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 668-7001
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001
PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares outstanding of the registrant's common stock as of
March 23, 2001 was 5,369,997 shares. Based on the closing sale price on the
Nasdaq National Market on March 27, 2001, the aggregate market value of the
registrant's common stock held by non-affiliates of the registrant was
approximately $74,161,000.(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 16, 2001.
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(1) For purposes of this calculation, shares owned by officers, directors and
10% shareholders known to the registrant have been deemed to be owned by
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
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THE KEITH COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Our Common Equity and Related Stockholder
Matters..................................................... 20
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 27
Item 8. Consolidated Financial Statements and Supplementary Data.... 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 52
PART III
Item 10. Directors and Executive Officers............................ 52
Item 11. Executive Compensation...................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 52
Item 13. Certain Relationships and Related Transactions.............. 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 52
(a) 1. Consolidated Financial Statements........................ 52
2. Financial Statement Schedules............................ 52
3. Exhibits................................................. 53
(b) Reports on Form 8-K......................................... 54
Signatures............................................................ 55
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PART I
ITEM 1. BUSINESS
GENERAL
We are a full service engineering and consulting services firm providing
professional services on a wide range of projects to both the real estate
development, public works/infrastructure and communications industry and the
industrial/energy industry.
We provide a full range of services from initial site acquisition studies
to construction management and electrical, mechanical and chemical/process
engineering services. 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 provides a comprehensive menu of services that are needed to
effectively manage, engineer and design infrastructure and state-of-the-art
facilities.
The following illustrates the range of services that we offer:
Graphic depicting: (1) the following services: civil engineering, surveying
& mapping, planning, site acquisition, environmental, archaeology, construction
management, water resources engineering, instrumentation/control systems
integration engineering, fire protection engineering, electrical engineering,
mechanical engineering and chemical/process engineering; and (2) the following
industries served: real estate development, public works/infrastructure and
communications industry and the industrial/energy industry.
From fiscal 1996 through fiscal 2000, our net revenue has grown by a
compounded annual growth rate of 42% and our net income has grown at a
compounded annual growth rate of 59%. We have accomplished this through both
internal growth and through our acquisition strategy to diversify the scope of
our services and our geographic presence. We have acquired five companies in the
past four years and now operate from 13 offices (including 15 operating
divisions) in 6 states; California, Nevada, Utah, Arizona, Colorado and Wyoming.
INDUSTRIES SERVED
We serve both the real estate development, public works/infrastructure and
communications industry and the industrial/energy industry.
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REAL ESTATE DEVELOPMENT, PUBLIC WORKS/INFRASTRUCTURE AND COMMUNICATIONS
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 and archaeology
services for planning and assistance with environmental approvals as well as
construction and post-construction phase monitoring services.
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 projects and
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
Transportation, water resources, and other public works projects provide
ongoing, more reliable sources of revenue for engineering firms and consultants
when private real estate development activities 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.
Transportation. 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 include surveying services for establishment of proper rights of way for
these facilities. Engineers develop street, major arterial and highway designs
in cooperation with federal, state and local agencies to improve transportation
networks. 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.
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 limited resource in the Western 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.
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Protecting communities from natural disasters such as flood and mudflows,
cleaning natural waterways, eliminating pollution from storm runoff flowing into
the ocean and protecting and enhancing natural riparian resources are some of
the missions of public water-managing agencies. Private developers also address
these issues as part of their land development projects.
Communications
Communications projects include the development, expansion and construction
of wireless and land-based data and communications systems. The infrastructure
for these systems includes wireless transmission base stations, switching
centers, cable systems, fiber optic networks and microwave link networks. With
the rapid growth of the communications services industry, the demand for
communications infrastructure has expanded dramatically.
Service providers and developers of communications infrastructure generally
hire outside experts to meet their design, site acquisition and lease
arrangement, land planning, civil engineering, purchasing and construction
management needs.
INDUSTRIAL/ENERGY
The industrial/energy 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 new processes and to improve efficiency and
reliability of their production effort. Comprehensive engineering services that
are required include:
- the design or redesign of electrical, heating, ventilation and air
conditioning systems;
- mechanical equipment design;
- equipment selection and purchasing;
- the 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;
- 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;
- Consumer Product Facilities: automotive assembly, household products and
packaging facilities;
- Food and Beverage Facilities: bottling/packaging facilities, material
handling facilities, process controls and food and beverage
manufacturing facilities;
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- Educational Facilities: school and university buildings and campuses;
and
- Public Facilities/Utilities: commercial and medical buildings.
We believe there is a continued trend in the manufacturing and assembly
industries toward automation and increased efficiency. As these industries grow,
so does their need for engineering, design and consulting services to automate
and increase the efficiency of new and existing facilities.
THE TKCI 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. We estimate that there are over 500 firms providing
engineering and consulting services to the industries we serve in our principal
operating areas. Management believes that in the areas in which we are located,
we are among the leading engineering and consulting services firms serving the
industries that we serve. 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 client desires to work with, and can count on, specific project
managers. In addition, we have received numerous awards for technical excellence
including:
- Award of Excellence from the California Council of Civil Engineers and
Land Surveyors;
- Certificate of Recognition from the County of San Bernardino Board of
Supervisors;
- Letter of Appreciation from the State of California Department of
General Services;
- Project of the Year from the American Society of Civil Engineers;
- Outstanding Environmental Analysis Document from the Association of
Environmental Professionals; and
- Outstanding Planning Award from the American Planning Association.
Industry and Professional Experience
We believe that our senior management has the proven ability to execute our
business plan and capitalize on new opportunities. Over the past four years,
management has successfully closed and integrated five acquisitions, enabling us
to diversify both our revenue base and our geographic scope. This is a crucial
point, as acquisitions will continue to be a key component in our business plan.
In all acquisitions to date, 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
which we add to our team have significant experience in the industries that we
serve. We supplement this industry experience by providing in-house continuing
education seminars, design forums and training programs.
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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 a parcel of land to
designing, engineering and managing the construction of the finished project. 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 our industries and our technical expertise, we
have frequently increased the scope of services provided to a client from an
initial engagement, such as land planning, to include other services, such as
mapping and surveying. When we expand into new geographic regions, we have
successfully cross-sold and intend to continue to cross-sell the services we
offer.
Because our professionals provide many of the preliminary services for
planning, civil engineering and surveying and mapping 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, as a result, are often engaged to
perform additional engineering and consulting services as the 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 Costa Mesa, 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 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 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 entire cross
section of services we provide to all clients, we believe that we can
enhance our reputation. 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
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contract opportunities for us. We believe that our existing relationships
between our clients and employees is our greatest business development
asset.
- Expand Services in Both the Public Works/Infrastructure and
Communications Industry and the Industrial/Energy Industry. To diminish
our susceptibility to the economic cycles affecting any particular
industry, we intend to continue expanding our work in the public
works/infrastructure and communications and industrial/energy industries.
Much of our technical expertise, including, CAD technicians, certain
engineering specialists and administrative support, 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.
- Expand Geographically. To diminish the impact of regional economic
cycles, we intend to continue to expand our geographic presence through
acquisitions, opening additional divisional offices and 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 Thompson-Hysell and Crosby, Mead, Benton & Associates
have enabled us to more effectively sell additional services in
California and Utah and that our acquisition of Hook & Associates
Engineering, Inc. has enabled us to broaden our service offerings in
Arizona, Colorado and Wyoming.
- 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 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. Upon the successful
completion of this offering, we may increase the pace and size of our
acquisitions.
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 five acquisitions
since late 1997.
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ACQUISITION PRIMARY
DATE COMPANY ACQUIRED MARKETS SERVED SERVICES OFFERED
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December 1997 ESI, Engineering Northern California Industrial/energy
Services Incorporated services
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August 1998 John M. Tettemer and Southern California Water resources
Associates, Ltd. engineering and services
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July 1999 Thompson-Hysell, Inc. Northern and Central Water resources and
California; Utah other engineering
services
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October 2000 Crosby, Mead, Benton & Southern California Land development design,
Associates infrastructure design
and landscape
architecture
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January 2001 Hook & Associates Arizona; Colorado; Land development,
Engineering, Inc. Wyoming transportation, and
communications services
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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 earn-out or adjustment
provisions. Additionally, in connection with these acquisitions, we have entered
into noncompetition agreements with principals or key employees of an acquired
company.
SERVICES PROVIDED
We provide a broad range of services, including civil engineering,
surveying and mapping, planning, environmental, archaeology, construction
management, site acquisition, water resources engineering, and other services
needed by the industrial/energy industry, including instrumentation/control
systems integration engineering, fire protection engineering, electrical
engineering, mechanical engineering and chemical/process engineering.
Civil Engineering Services
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; construction documents; tentative mapping;
flood plain studies; sewer, water and drainage design; street and highway
design; site and subdivision design; and grading design.
We are the master engineer of a master-planned residential resort community
located in the central valley region of California. This 30,000-acre site is
comprised of five villages, and consists of 10,000 residential units, six golf
courses, a hotel and convention center, two wineries, a swim and tennis club and
85 acres of retail and commercial development. Our responsibilities on this
project include the civil engineering design of all onsite and offsite
improvements, such as roadways, water, sewer and drainage systems and grading.
We are also providing surveying and mapping services; coordinating with the
environmental consultants; providing construction management services; and
providing bid and finance administration services. We anticipate that this
project will have a duration of more than 20 years.
Surveying and Mapping Services
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 will serve 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.
We utilized our expertise by providing surveying, mapping, charting,
imagery intelligence and photogrammetic services for an on-going multi-year,
task order contract with a United States federal agency. This includes providing
surveying and mapping services on air bases worldwide as part of a geospatial
information and imagery intelligence program. As a subconsultant to the program
manager, we assisted in developing their specifications and statement of work
for safety of navigation surveys on Department of Defense airfields. We have
also developed detailed ground survey and photogrammetric mapping plans and cost
breakdowns for the survey of multiple airfields in Washington, California and
Utah. This effort coordinates tasks to be performed by at least half a dozen
firms throughout the Western United States.
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Planning Services
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.
An example of our planning services is the preparation and processing of a
Specific Plan document for a master-planned golf course community in the County
of San Bernardino, California. This community is approximately 460 acres in size
and contains more than 500 luxury homes surrounding a full-length 18-hole golf
course. We created the land use plan and developed the supporting Specific Plan
and Environmental Impact Report documents. These documents specify uses of land
such as residential, golf and open space. They also identify environmental
concerns and how to mitigate them. Additional services for which we are
responsible on this project include environmental, civil engineering and
surveying and mapping.
Environmental Services
Our environmental services include biology, 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 environmental assessments.
Our experience includes the preparation of documents that comply with the
California Environmental Quality Act (CEQA) and the National Environmental
Policy Act. Our environmental staff has been instrumental in developing permit
strategy consensus among federal agencies such as the Army Corps of Engineers,
U.S. Fish and Wildlife, the Environmental Protection Agency and the State of
California.
Our award winning services on a recent project involved the preparation of
a master plan and Environmental Impact Report for a major sports complex, two
schools, an active park and a community center. The major issues surrounding the
project included the preservation of the habitat for the California gnatcatcher
and Quino checkerspot butterfly, potential land use impacts to the nearby Los
Alamos Historic District and securing water service. We successfully designed
and processed all of the necessary plans and received the "Outstanding Planning
Award, Planning Implementation, Small Jurisdiction" award from the American
Planning Association.
Archaeology Services
We perform archaeological studies that range from site review and records
analysis to a discussion of measures to protect sensitive or valuable
archaeological 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 archaeological
materials for a given site. Many environmental impact analyses require
protection of significant archaeological 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 archaeological excavations in coordination with
state and federal agencies and native American representatives.
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Construction Management Services
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, public works and communications clients.
One of our active construction management projects is a 650 acre master
planned, hillside golf course community with an 18-hole championship golf course
that is surrounded by approximately 200 estate residential lots and a high
quality country club facility. Our construction management efforts include the
coordination and scheduling of all construction activities at the project,
monitoring the performance of the contractors, confirming adherence to plans and
specifications and coordinating permits and approvals. We also provided
planning, civil engineering, archaeology, landscape architecture and surveying
and mapping services for this project.
Site Acquisition Services
Site acquisition services include the selection of prospective properties
that fit defined criteria, identifying and overcoming restrictions against
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. 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.
We have provided site acquisition services for wireless communications sites in
Riverside, San Bernardino, Ventura, Los Angeles and San Diego counties in
California for a national wireless services provider.
Water Resources Engineering Services
Our water resources engineering services consist of financial planning,
feasibility studies, demand forecasting, hydraulic analysis and water flow
studies to develop system master plans in addition to designing conventional
systems of pipes, channels and dams.
Examples of the water resources engineering services that we provide
include: the performance of a study in which we evaluated the anticipated amount
of rainfall water in a 23 square-mile watershed in Riverside County, California;
the development of a concept report and preliminary design for a 2,000
acre-feet, 50-foot high water quality dam, a major sediment detention basin
facility and the relocation of approximately 1.5 miles of roadway, all
incidental to the construction of the dam and related structures; and the design
of a 3.2 mgd (million gallons per day) water reclamation facility in Central
California. This facility will include a wastewater treatment facility and a
reclaimed effluent water reuse area comprised of a winter reuse water storage
pond and a spray irrigation disposal site. On this project, our primary scope of
services include performing field investigations; establishing survey controls
for topographic mapping; establishing a concept level layout for the facility;
assisting with the CEQA permit acquisition; developing the preliminary design
for the facility; preparing the technical specifications and final plans for the
civil, architectural, structural, mechanical, and heating, ventilation and air
conditioning (HVAC) system; and preparing a cost estimate and performing
inspections.
Instrumentation/Control Systems Integration Engineering Services. Our
professionals integrate equipment selection, maintenance requirements and spare
parts inventory by designing, selecting and reviewing mechanical, piping and
electrical layouts, and operating 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.
Our engineers designed control systems for major assembly lines for a large
automotive manufacturing facility. One system, the passenger Paint Line
Monitoring System, monitors equipment alarms signaling
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problems on the assembling line. This system tracks 51 separate processors
throughout multiple networks for a total of approximately 12,000 data points.
Another system that we were responsible for was the RF Automatic Vehicle
Identification system which tracks vehicle/carrier movement throughout the
painting assembly line by reading RF tags affixed to the carrier. RF tags store
vehicle information including make, model and color, which is transmitted to the
processing equipment systems to ensure that the proper operations are performed
automatically on each vehicle, such as paint color and trim detail. This
information is then automatically transmitted to the historical database on the
paint shop server.
Fire Protection Engineering Services. 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.
One of our recent fire protection services projects entailed detailed
engineering and design to upgrade and expand the fire protection and life safety
systems for a large building complex at a University of California campus in
Northern California. The primary systems included advanced fire sprinkler and
fire alarm facilities. We also provided engineering field support and
construction management services for the installation of these systems.
Electrical Engineering Services. 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 are currently engaged in the design of
peak power usage generating stations (peaker projects). These stations augment
the power grid in times of high energy usage and have the benefit of being
relatively small-scale, efficient to construct and suitable in more densely
improved areas. We are also providing cogeneration and backup emergency power
supply designs for university campuses and multiple building commercial
facilities.
For example, our electrical and mechanical engineers have been working very
closely with a major energy provider to design and build power generation
plants, called "peaker projects," in multiple states to provide power during
periods of peak demand. Our scope of services includes providing engineering,
design and field support services including site selection, surveying,
licensing, permitting and coordinating high voltage electrical connections to
the local utilities. Our engineers are also responsible for equipment
specification and procurement, emissions control, layout drawings and piping
drawings for water, wastewater and natural gas lines.
Mechanical Engineering Services. These services are required to design
energy systems, HVAC systems, plumbing systems, water distribution systems and
fire protection systems for facilities and buildings. We are currently providing
mechanical engineering and construction management services for a major
aerospace company. The project involves a large satellite testing facility
encompassing multiple buildings for which we are designing mechanical systems
and facilities, including, new boiler, chilled water, compressed air and HVAC
systems as well as large, proprietary space system equipment. Design and
construction are ongoing and we have a full staff of construction management
personnel on-site to oversee the installation and start-up of these new
mechanical systems.
Chemical/Process Engineering Services. Our chemical/process engineers
design systems for a variety of manufacturing and industrial facilities and
processes. These services are necessary for the design of chemical/processing
operations in businesses like food and beverage, pharmaceutical, chemical and
petroleum.
As an example, we designed a specialty chemical processing and drying
facility. Our scope of work entailed conceptual design, project planning,
permitting and detailed design for this facility. Our engineers designed a new
facility which improved the existing facilities by increasing the processing and
drying speeds and reducing the operational costs.
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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
maintain a positive reputation.
Additionally, our business development and marketing efforts assist our
management and clients in assuring quality performance and client satisfaction.
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 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 and lead tracking publications. 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 leverage
our broad service capabilities and continue to take advantage of our ability to
increase our revenue by cross-selling services to existing clients and to build
new client relationships.
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 formal
presentations to our staff to educate them on our full capabilities and to
encourage them to identify cross-marketing opportunities. In addition, we are in
the process of implementing a more formal cross-marketing program. We are
producing "Cross-Marketing Notebooks" which highlight all the pertinent
information on each division company-wide. These will be given to all managers
in each division as part of a formal presentation geared to facilitate easy
"lead sharing" between divisions and to maximize the effectiveness of our
cross-marketing efforts.
Our business development staff has been trained to identify and pursue
these types of opportunities. They report all such opportunities to the
corporate office where a spreadsheet report is used to track all proposals and
contracts. This cross-marketing approach has resulted in several new contracts
for our various divisions. For example, our ESI division (industrial/energy) was
awarded a contract for engineering services for multiple power plants. Through
our cross-marketing efforts, we were able to expand the contracts to include
planning, civil engineering and surveying and mapping services for the benefit
of both the client and us. Likewise, one of our business development managers in
Southern California provided a lead to our Thompson-Hysell division in Central
California which resulted in a contract for that office to provide planning and
civil engineering services for a large golf course and residential community.
One of our most effective methods of developing client relationships and
winning new contracts has been our Executive Land Search Program. We have
developed "map rooms" containing computerized geographic information systems
maps, aerial maps and city and county maps. We use these maps along with
corresponding data spreadsheets to identify and track a multitude of existing
and potential projects. We meet with existing and prospective clients and refer
available projects to them. For example, upon referring a large undeveloped
parcel of land in Southern California to a land development company that was not
an existing client, we were awarded multiple contracts to provide planning,
civil engineering and mapping and surveying services. As the project progressed,
we received multiple additional contracts from home builders who bought parcels
of land from our client. By March 15, 2001, we had received over $2,600,000 in
contract authorizations on this project.
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CLIENTS
Our primary private sector clients consist of real estate developers,
builders, communications providers, 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.
REAL ESTATE PUBLIC WORKS/INFRASTRUCTURE
----------- ---------------------------
Centex Homes City of Rancho Mirage
Del Webb Coachella Valley Water District
Pulte Home Corporation Central Utah Water Conservation District
ProLogis Orange County Transportation Authority
Shea Homes Colorado Department of Transportation
The Irvine Company Arizona Department of Transportation
Thomas & Mack Development Company Metropolitan Water District of Southern
California
INDUSTRIAL/ENERGY COMMUNICATIONS
- --------------------------------------------- ---------------------------------------------
California Energy Commission Mountain Union Telecom
Clorox Products Company Sprint PCS
Enron Energy Services Velocitel, Inc.
Ernest & Julio Gallo Whalen & Company
Kellogg U.S.A. Inc. ATI
PG&E National Energy Group Delta Group
New United Motors Manufacturing, Inc. Scientech, Inc.
(NUMMI -- GM & Toyota)
No individual client accounted for more than 10% of our net revenue in
1998, 1999 and 2000.
BACKLOG
At December 31, 2000, our gross revenue backlog was approximately $29
million as compared to $22 million at December 31, 1999. Our backlog represents
an estimate of the remaining future gross revenues 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 oral client approval. We
do not believe that backlog is indicative of the amount of future revenues that
we may achieve because of the short-term nature of the contracts under which we
generally provide our services compared to the long-term nature of the projects.
COMPETITION
The market for our services is highly competitive. We compete with a
variety of firms ranging from small, local firms to national firms. We perform
engineering and consulting services for a broad spectrum of markets including
energy, residential, commercial, recreational, public works, communications and
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.
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EMPLOYEES
We have approximately 650 employees, of which over 525 are technicians and
technical professionals. 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, geodesists and doctoral
archaeologists.
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. The agreement applies to civil engineering and
land surveying work, including global positioning system surveys, and covers our
employees in Imperial, Inyo, Kern, Los Angeles, Mono, Orange, Riverside, San
Bernardino, San Diego, San Luis Obispo, Santa Barbara and Ventura counties. 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. Our other employees are not
represented by any labor union and we have never experienced a work stoppage
from union actions. We believe that our relationship with our employees is good.
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RISK FACTORS
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.
RISKS RELATED TO OUR INDUSTRIES
OUR BUSINESS COULD SUFFER IF THERE IS A DOWNTURN IN THE REAL ESTATE MARKET
We estimate that during 2000, 80% of our services were 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 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;
- 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.
WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING QUALIFIED PROFESSIONALS,
WHICH MAY HARM OUR REPUTATION IN THE MARKETPLACE AND RESTRICT OUR ABILITY TO
IMPLEMENT OUR BUSINESS STRATEGY
We derive our revenues 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. Our inability to attract and retain qualified professionals could
impede our ability to secure and complete engagements which would reduce our
revenues and could also limit our ability to expand our service offerings in the
future.
IF OUR EMPLOYEES LEAVE OUR COMPANY AND JOIN A COMPETITOR, WE MAY LOSE BUSINESS
Our employees might leave our company and become competitors of ours. If
this happens, we may lose 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 would lose clients
and revenues.
RISKS RELATED TO OUR BUSINESS
OUR REVENUE, INCOME AND CASH FLOW COULD DECLINE IF THERE IS A DOWNTURN IN THE
CALIFORNIA ECONOMY OR REAL ESTATE MARKET
We estimate that during 2000, 86% 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 revenues 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.
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IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE COULD INCUR UNFORESEEN
COSTS OR DELAYS AND OUR REPUTATION AND RELIABILITY IN THE MARKETPLACE COULD BE
DAMAGED
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 otherwise adversely impact our business. 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.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO FULLY
IMPLEMENT OUR ACQUISITION STRATEGY
We may need to raise additional equity or debt financing in the future to
implement our acquisition strategy (which may include an increase in the number
and/or size of acquisitions). If we are unable to raise additional equity or
debt financing, we may not be able to fully implement our acquisition strategy.
IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR ACQUISITION STRATEGY, CURRENT
EXPECTATIONS OF OUR GROWTH OR OPERATING RESULTS MAY NOT BE MET
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:
- 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 are presently available;
- We may not be able to locate 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 as 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
- 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 COULD LOSE MONEY IF WE FAIL TO ACCURATELY ESTIMATE OUR COSTS ON FIXED-PRICE
CONTRACTS OR CONTRACTS WITH NOT-TO-EXCEED PROVISIONS
In 2000, approximately 40%, 41% and 19% of our net revenue was derived from
fixed-price, time-and-materials with not-to-exceed provisions and
time-and-materials contracts, respectively.
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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, however, there is 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:
- problems with new technologies;
- delays beyond our control; and
- changes in the costs of goods and services that may occur during the
contract period.
THE LOSS OF MR. KEITH COULD ADVERSELY AFFECT OUR BUSINESS, INCLUDING OUR ABILITY
TO SECURE AND COMPLETE ENGAGEMENTS AND ATTRACT AND RETAIN EMPLOYEES
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.
OUR SERVICES MAY EXPOSE US TO PROFESSIONAL LIABILITY IN EXCESS OF OUR CURRENT
INSURANCE COVERAGE
We are exposed to potential liabilities to clients for errors or omissions
in the services we perform. Such 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 due to the large size of the
projects on which we typically provide services, claims could be millions of
dollars. A partially or completely uninsured claim, if successful and of
significant magnitude, could result in substantial losses.
We currently maintain general liability insurance, umbrella and
professional liability insurance. 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. These 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 at a higher cost than our current coverage.
IF WE ARE UNABLE TO ENGAGE QUALIFIED SUBCONTRACTORS, WE MAY LOSE PROJECTS,
REVENUES AND CLIENTS
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, revenues and clients. In 2000, subcontractor costs accounted for
approximately 8% of our net revenue.
RISKS RELATED TO OWNERSHIP OF OUR STOCK
OUR STOCK PRICE MAY DECREASE, WHICH COULD RESULT IN SIGNIFICANT LOSSES FOR
INVESTORS OR ADVERSELY AFFECT OUR BUSINESS
For a majority of the time since our initial public offering in July 1999,
our common stock has traded at a market price significantly less than the
current market price.
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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 financial markets, the real estate market,
the engineering and consulting services market and the worldwide
economy;
- 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; and
- the reaction of markets and securities analysts to announcements and
developments involving our company.
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.
INSIDERS HAVE SUBSTANTIAL CONTROL OVER US, WHICH COULD LIMIT YOUR ABILITY TO
INFLUENCE THE OUTCOME OF KEY TRANSACTIONS
Our executive officers, directors and one other significant shareholder, in
the aggregate, hold approximately 46% 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.
IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK AND/OR INCUR
ADDITIONAL DEBT TO FINANCE FUTURE ACQUISITIONS, YOUR STOCK OWNERSHIP COULD BE
DILUTED
Our business strategy is to expand into new markets and enhance our
position in existing markets through the acquisition 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 and amortize
expenses related to goodwill and other tangible assets if we acquire another
company, and this could negatively impact our results of operations.
OUR BOARD OF DIRECTORS HAS THE ABILITY TO DISCOURAGE TAKEOVER ATTEMPTS, WHICH
MAY REDUCE OR ELIMINATE YOUR ABILITY TO SELL YOUR SHARES FOR A PREMIUM IN A
CHANGE OF CONTROL TRANSACTION
Our amended and restated articles of incorporation provide us with the
ability to issue "blank check" preferred stock without consulting our
shareholders. As a result, our board of directors may frustrate a takeover
attempt by issuing shares to a friendly shareholder or acquiror, implementing a
"poison pill" or otherwise due to features of newly issued preferred stock.
SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE COULD CAUSE THE MARKET PRICE
OF OUR STOCK TO DROP, EVEN IF OUR BUSINESS IS DOING WELL
We have outstanding 5,369,997 shares of common stock. Sales of a
substantial number of shares of our common stock in the public market, or the
perception that these sales could occur, could adversely affect the market price
for our common stock. Certain shareholders hold large amounts of shares which
they are able to sell in the public market. Although some of the shares held by
these shareholders are subject to restrictions on resale under Rule 144 of the
Securities Act of 1933, as amended, or the Securities Act, or because they are
subject to lock-up agreements, as these restrictions end, significant resales of
these shares could cause the market price of our common stock to decline
regardless of the performance of our business. These sales also might make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking
statements, including among others:
- anticipated growth in the real estate development, public
works/infrastructure and communications industry and the
industrial/energy industry;
- anticipated growth and economic expansion in the Western United States;
- our business strategy for expanding our presence in these industries;
- 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; and
- our ability to distinguish ourselves from our current and future
competitors.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "could," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions. You may find these forward-looking statements under the captions
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," as well as under other captions
elsewhere in this Annual Report on Form 10-K. A number of factors could cause
results to differ materially from those anticipated by such forward-looking
statements, including those discussed under "Risk Factors" and "Business." These
forward-looking statements necessarily depend upon assumptions and estimates
that may prove to be incorrect. Although we believe that the assumptions and
estimates reflected in the forward-looking statements contained in this Annual
Report on Form 10-K are reasonable, we cannot guarantee that we will achieve our
plans, intentions or expectations. The forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause actual results
to differ in significant ways from any future results expressed or implied by
the forward-looking statements.
ITEM 2. PROPERTIES
We occupy offices and facilities in various locations in California,
Nevada, Utah, Arizona, Colorado and Wyoming. Our corporate headquarters are
located in Costa Mesa, California and consist of approximately 60,000 square
feet of space. Our corporate headquarters lease, which consists of separate
leases for the two floors that we occupy, extends until October 2003. We also
maintain offices in the California cities of Walnut Creek, Moreno Valley,
Modesto, Palm Desert, Encino, Carlsbad and Thousand Oaks. Outside of California,
we have offices in each of the following locations: Las Vegas, Nevada; Salt Lake
City, Utah; Phoenix, Arizona; Denver, Colorado; and Cheyenne, Wyoming. We
believe that our existing office space is adequate to meet our current and
foreseeable future requirements.
ITEM 3. LEGAL PROCEEDINGS
In March 2000, Clayton Engineering filed a claim against The Irvine Company
alleging that The Irvine Company failed to pay Clayton Engineering for the
removal of 30,000 cubic yards of dirt in the Peters Wash located in Irvine,
California. JMTA had provided engineering design services for The Irvine Company
in connection with this project. JMTA was a wholly-owned subsidiary of ours at
the time the claim by Clayton was filed. In January 2001, The Irvine Company
filed a claim against JMTA for indemnity. Clayton Engineering is demanding
damages in the sum of $2 million against The Irvine Company for construction
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services rendered and $10 million as a result of consequential loss of business
opportunity. Clayton Engineering has made the allegation that plans prepared by
JMTA were inaccurate as to the elevation of the bottom of the Peters Wash. The
Irvine Company has not stated that JMTA violated the standard of care, but has
filed an equitable indemnity cross-complaint against JMTA. No demand for
settlement has been made against JMTA. In December 2000, JMTA was merged into
us. We believe that the claim made against us is without merit and intend to
defend ourselves vigorously in this action.
We are also involved in other non-material legal proceedings, claims and
litigation arising in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2000.
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PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market since July
13, 1999 under the symbol "TKCI." Prior to July 13, 1999, there was no public
market for our common stock. The following table sets forth for each calendar
quarter indicated the low and high closing sale prices per share of our common
stock as reported on the Nasdaq National Market.
LOW HIGH
----- ------
YEAR ENDED DECEMBER 31, 1999
Third Quarter (beginning July 13)......................... $5.25 $ 9.00
Fourth Quarter............................................ 3.75 6.44
YEAR ENDED DECEMBER 31, 2000
First Quarter............................................. $3.88 $ 5.56
Second Quarter............................................ 3.19 4.88
Third Quarter............................................. 3.94 5.63
Fourth Quarter............................................ 4.94 8.56
At March 23, 2001, there were approximately 56 holders of record and 4,536
beneficial holders of our outstanding shares of common stock and the last
reported sale price of our common stock on the Nasdaq National Market was $22.31
per share.
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.
In connection with our acquisition of Crosby, Mead, Benton & Associates in
October 2000, we are obligated to issue to the former shareholders of that
company, $1,000,000 in unregistered shares of our common stock payable in two
installments on October 13, 2001 and October 21, 2002, subject to adjustment.
The issuance of these shares will be exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended. The former shareholders of Crosby,
Mead, Benton & Associates were provided with full access to the kind of
information that would be disclosed if we had registered these shares.
Additionally, the former shareholders represented to us that they were acquiring
the shares for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends will be affixed to the
certificates representing these shares when issued.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data includes both consolidated and combined
financial statement data for the periods presented. See Note 1 of the "Notes to
Consolidated Financial Statements" for a description of which periods reflect
consolidated or combined financial statements. All financial statement data is
referred to as consolidated.
The historical statements of income data for the years ended December 31,
1998, 1999 and 2000, and the historical balance sheet data as of December 31,
1999 and 2000, have been derived from our historical consolidated financial
statements audited by KPMG LLP, independent auditors, which consolidated
financial statements and independent auditors' report are included elsewhere in
this Annual Report on Form 10-K. The historical statements of income data for
the years ended December 31, 1996 and 1997, and the historical balance sheet
data as of December 31, 1996, 1997 and 1998, have been derived from our audited
historical consolidated financial statements which are not included in this
Annual Report on Form 10-K.
The pro forma statements of income data for the years ended December 31,
1996, 1997 and 1998 are unaudited and reflect pro forma adjustments for
provisions for federal and state income taxes at an assumed annual effective
income tax rate of approximately 42%. The pro forma statements of income data
for the years ended December 31, 1999 and 2000, represents historical amounts at
the actual annual effective income tax rates of 42.1% and 40.4%, respectively,
and are shown for comparative purposes only.
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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.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
HISTORICAL STATEMENTS OF INCOME DATA(1)
Gross revenue.......................................... $ 14,344 $ 22,585 $ 34,021 $ 43,084 $ 57,835
---------- ---------- ---------- ---------- ----------
Net revenue........................................ 12,966 18,592 29,182 39,636 53,381
Costs of revenue....................................... 9,229 11,871 19,287 26,987 34,362
---------- ---------- ---------- ---------- ----------
Gross profit....................................... 3,737 6,721 9,895 12,649 19,019
Selling, general and administrative expenses........... 4,960 4,485 5,858 8,343 10,834
---------- ---------- ---------- ---------- ----------
Income (loss) from operations...................... (1,223) 2,236 4,037 4,306 8,185
Interest expense....................................... 720 852 967 807 341
Other expenses (income), net........................... 5 83 66 16 (75)
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes and extraordinary gain..................... (1,948) 1,301 3,004 3,483 7,919
Provision (benefit) for income taxes(1)................ 3 (1,397) 1,350 1,466 3,199
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary gain............ (1,951) 2,698 1,654 2,017 4,720
Extraordinary gain on forgiveness of liability, net of
income taxes(2)...................................... 2,686 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income......................................... 735 2,698 1,654 2,017 4,720
Reversal (accretion) of redeemable securities to
redemption value, net................................ -- -- (230) 230 --
---------- ---------- ---------- ---------- ----------
Net income available to common shareholders........ $ 735 $ 2,698 $ 1,424 $ 2,247 $ 4,720
========== ========== ========== ========== ==========
Earnings per share -- diluted.......................... $ 0.25 $ 0.87 $ 0.39 $ 0.50 $ 0.89
========== ========== ========== ========== ==========
Weighted average shares outstanding -- diluted......... 2,962,963 3,104,588 3,635,474 4,515,033 5,299,679
========== ========== ========== ========== ==========
EBITDA(3).............................................. $ (934) $ 2,521 $ 4,562 $ 5,314 $ 9,787
========== ========== ========== ========== ==========
PRO FORMA STATEMENTS OF INCOME DATA:
Historical income (loss) before provision (benefit) for
income taxes and extraordinary gain.................. $ (1,948) $ 1,301 $ 3,004 $ 3,483 $ 7,919
Pro forma provision (benefit) for income taxes......... (818) 546 1,262 1,466 3,199
---------- ---------- ---------- ---------- ----------
Pro forma income (loss) before extraordinary
gain............................................. (1,130) 755 1,742 2,017 4,720
Extraordinary gain on forgiveness of liability, net of
income taxes......................................... 1,558 -- -- -- --
---------- ---------- ---------- ---------- ----------
Pro forma net income............................... 428 755 1,742 2,017 4,720
Reversal (accretion) of redeemable securities to
redemption value, net................................ -- -- (230) 230 --
---------- ---------- ---------- ---------- ----------
Pro forma net income available to common
shareholders..................................... $ 428 $ 755 $ 1,512 $ 2,247 $ 4,720
========== ========== ========== ========== ==========
Pro forma earnings per share data-diluted.............. $ 0.14 $ 0.24 $ 0.42 $ 0.50 $ 0.89
========== ========== ========== ========== ==========
Weighted average number of shares
outstanding-diluted.................................. 2,962,963 3,104,588 3,635,474 4,515,033 5,299,679
========== ========== ========== ========== ==========
AS OF DECEMBER 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit).............................. $ (3,548) $ 2,016 $ 5,180 $ 7,213 $ 7,343
Total assets........................................... 4,677 11,733 14,530 23,661 33,312
Total debt............................................. 6,597 8,087 9,667 4,835 5,745
Total shareholders' equity (deficit)................... (5,227) (1,725) (301) 12,836 18,239
- -------------------------
(1) Prior to August 1, 1998, Keith Engineering, which is included in TKCI's
consolidated financial statements, elected to be taxed as an S corporation.
(2) In 1994, we accrued $2.0 million relating to excessive lease space in one of
our facilities. In 1996, amounts owed under the lease through December 31,
1995 were forgiven, resulting in an extraordinary gain on the forgiveness of
the liability and accrued but unpaid rent of $2.7 million, net of income
taxes.
(3) EBITDA refers to income (loss) before provision (benefit) for income taxes
and extraordinary gain plus interest expense and depreciation and
amortization expense less interest income. Because all companies do not
calculate EBITDA or similarly titled financial measures in the same manner,
other companies' disclosures of EBITDA may not be comparable with EBITDA as
used here. EBITDA should not be considered as an alternative to net income
or loss (as an indicator of operating performance) or as an alternative to
cash flow (as a measure of liquidity or ability to service debt obligations)
and is not a measure of performance or financial condition under accounting
principles generally accepted in the United States of America. EBITDA is
intended to provide additional information for evaluating the ability of an
entity to meet its financial conditions.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of TKCI and its subsidiaries and the related
notes and the other financial information included elsewhere in this Annual
Report on Form 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of any number
of factors, including those set forth under "Risk Factors" and under other
captions contained elsewhere in this Annual Report on Form 10-K.
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. Revenue is recognized
on 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, in accordance with industry practice, 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 subcontractor 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 and scheduling delays
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 consist primarily of corporate
costs related to finance and accounting, information technology, business
development and marketing, contract proposal, executive salaries, provisions for
doubtful accounts, amortization of goodwill and other indirect overhead costs.
On August 1, 1998, we were reorganized so that Keith Engineering, an entity
under common control with TKCI, became a wholly-owned subsidiary of TKCI. In
August 1998, we purchased John M. Tettemer & Associates, Ltd., or JMTA, which
provides services relating to flood control and drainage engineering,
environmental permitting, and biological surveys and studies. On July 15, 1999,
we acquired substantially all of the assets and assumed substantially all of the
liabilities of Thompson-Hysell, Inc., or Thompson-Hysell. Further, in July 1999,
we completed an initial public offering of 1,500,000 shares of our common stock,
resulting in net proceeds of approximately $11,015,000. In October 2000, we
acquired Crosby, Mead, Benton & Associates which provides engineering and design
services for master planned communities in Southern California. In January 2001,
we acquired substantially all of the assets and assumed substantially all of the
liabilities of Hook & Associates Engineering, Inc., an engineering and
consulting services firm with offices located in Phoenix, Arizona, Denver,
Colorado and Cheyenne, Wyoming, providing a full range of services to clients in
an array of industries including real estate development, public
works/infrastructure and communications.
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RESULTS OF OPERATIONS
The following table sets forth supplemental consolidated operating results
for each of the periods presented as a percentage of net revenue.
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999 2000
----- ----- -----
Gross revenue............................................... 117% 109% 108%
Subcontractor costs......................................... 17 9 8
---- ---- ----
Net revenue............................................... 100 100 100
Costs of revenue............................................ 66 68 64
---- ---- ----
Gross profit.............................................. 34 32 36
Selling, general and administrative expenses................ 20 21 20
---- ---- ----
Income from operations.................................... 14 11 16
Interest expense............................................ 3 2 1
---- ---- ----
Income before provision for income taxes.................. 11 9 15
Provision for income taxes.................................. 5 4 6
---- ---- ----
Net income............................................. 6 5 9
Reversal (accretion) of redeemable securities to redemption
value, net................................................ (1) 1 --
---- ---- ----
Net income available to common shareholders............... 5% 6% 9%
==== ==== ====
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
Revenue. Net revenue for 2000 was $53.4 million compared to $39.6 million
for 1999, an increase of $13.7 million, or 35%. Net revenue growth for 2000
compared to 1999 resulted primarily from our acquisitions of Thompson-Hysell in
July 1999 and Crosby, Mead, Benton & Associates in October 2000, which
contributed $14.2 million to net revenue for 2000, compared to $6.3 million in
1999; growth in our surveying and mapping services, resulting primarily from the
strong demand for housing in California and Nevada; and from growth in our
industrial/energy segment, partially as a result of the need to design and
construct backup and new power generation systems needed by individual power
users and power providers. Subcontractor costs, as a percentage of net revenue,
declined slightly to 8% for 2000 compared to 9% for 1999, resulting largely from
a reduction in subcontractor services for several large contracts in our real
estate development, public works/infrastructure and communications segment.
Gross Profit. Gross profit for 2000 was $19.0 million compared to $12.6
million for 1999, an increase of $6.4 million, or 50%. As a percentage of net
revenue, gross profit increased to 36% for 2000 compared to 32% for 1999. The
increase in gross profit and gross profit percentage for 2000 compared to 1999,
resulted primarily from higher net revenue and profit margins generated through
our acquisition of Thompson-Hysell, improved profit margins in our
industrial/energy segment, improved utilization of our professionals and an
increased focus on contracts with higher profit margins. These gross profit
increases were partially offset by an increase in the employer matching
contribution of our 401(k) plan in 2000. In addition, gross profit margins in
1999 were negatively impacted by operating results on two large projects,
resulting in a less favorable comparison with the 2000 gross profit margin which
was not similarly impacted.
Costs of revenue for 2000 was $34.4 million compared to $27.0 million for
1999, an increase of $7.4 million, or 27%. Costs of revenue increases resulted
primarily from increased expenses associated with the growth in our total
employee base from 473 in 1999 to 540 in 2000, an increase of 67, or 14%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2000 were $10.8 million compared to $8.3 million for
1999, an increase of $2.5 million, or 30%. As a percentage of net revenue,
selling, general and administrative expenses decreased to 20% for 2000 from 21%
for 1999. The increases in selling, general and administrative expenses resulted
primarily from our acquisitions of Thompson-Hysell in July 1999 and Crosby,
Mead, Benton & Associates in October 2000, including the amortization of
goodwill; employee recruiting costs; and a full year of other costs associated
with operating as a public company. The percentage decrease was due principally
to economies of scale associated with our acquisitions, which has resulted in
lower administrative costs in comparison to revenue generated.
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26
Interest Expense. Interest expense for 2000 was $341,000 compared to
$807,000 for 1999, a decrease of $466,000, or 58%. As a percentage of net
revenue, interest expense was 1% for 2000 compared to 2% for 1999. The
percentage decrease resulted largely from the repayment of our previous line of
credit and various related party notes payable with a portion of our net
proceeds from our initial public offering in July 1999 and the repayment of
certain capital leases in 2000.
Income Taxes. The provision for income taxes for 2000 was $3.2 million
compared to $1.5 million in 1999, an increase of $1.7 million, or 118%. This
increase in income tax expense was due primarily to a higher taxable income
base, mitigated by a lower effective income tax rate. Our effective income tax
rate was approximately 40.4% for 2000 compared to 42.1% for 1999.
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Revenue. Net revenue for 1999 was $39.6 million compared to $29.2 million
for 1998, an increase of $10.5 million, or 36%. Net revenue increased by $6.2
million as a result of the acquisitions of JMTA in August 1998 and
Thompson-Hysell in July 1999. Excluding the revenue from acquisitions, our 1999
net revenue grew $4.2 million, or 15%, compared to 1998, resulting primarily
from the continued overall strengthening of the California economy.
Subcontractor costs, as a percentage of net revenue, declined to 9% for 1999
compared to 17% for 1998, resulting largely from a decrease of $1.9 million
relating to our primary telecommunications contract which came to substantial
completion in 1998.
Gross Profit. Gross profit for 1999 was $12.6 million compared to $9.9
million for 1998, an increase of $2.8 million, or 28%. Gross profit growth is
attributable to both our internal revenue increases as well as the acquisitions
of JMTA and Thompson-Hysell. As a percentage of net revenue, gross profit
decreased slightly to 32% for 1999 compared to 34% for 1998. The decline in the
gross profit percentage is attributable primarily to an increase in the
estimated direct contract costs expected to be incurred on two large projects
resulting in a reduction to the estimated percentage of completion on these
contracts and consequently a $900,000 reduction in gross profit. Excluding this
impact, gross profit as a percentage of net revenue was 34% for 1999. The gross
profit percentage was further reduced by a decline in the profitability in the
industrial, process and manufacturing operations of ESI and our increase in the
employer matching contribution of our 401(k) plan in 1999, resulting from the
continued need to attract and retain quality professionals.
Costs of revenue for 1999 was $27.0 million compared to $19.3 million for
1998, an increase of $7.7 million, or 40%. Costs of revenue increases resulted
primarily from growth in our total employee base from 356 in 1998 to 473 in
1999, an increase of 117, or 33%. Excluding our acquisition of Thompson-Hysell
in July 1999, the number of total employees increased by 17, or 5%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1999 were $8.3 million compared to $5.9 million for
1998, an increase of $2.5 million, or 42%. As a percentage of net revenue,
selling, general and administrative expenses increased to 21% for 1999 from 20%
for 1998. The percentage increase resulted primarily from the collection in 1998
of approximately $390,000 of accounts receivables written off in prior years.
Interest Expense. Interest expense for 1999 was $807,000 compared to
$967,000 for 1998, a decrease of $160,000, or 17%. As a percentage of net
revenue, interest expense was 2% for 1999 compared to 3% for 1998. The
percentage decrease resulted primarily from the repayment of our previous line
of credit, notes payable and related party notes payable totaling $7.4 million
with the net proceeds from the July 15, 1999 initial public offering.
Income Taxes. The provision for income taxes for 1999 was $1.5 million
compared to $1.4 million in 1998, an increase of $116,000, or 9%. This increase
in tax expense was due primarily to a higher taxable income base partially
offset by a higher effective tax rate in 1998 as a result of the conversion of
Keith Engineering from an S corporation to a C corporation in August 1998. Our
effective income tax rate was approximately 42% for 1999 compared to 45% for
1998. The 1998 effective income tax rate would have been approximately 42% had
Keith Engineering been a C corporation at the beginning of 1998.
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27
QUARTERLY RESULTS
The following tables set forth unaudited selected quarterly consolidated
financial data for each of our last two fiscal years ended December 31, 1999 and
2000. This data is also expressed as a percentage of net revenue for the
respective quarters. This information has been derived from our unaudited
consolidated financial statements, which, in the opinion of management, include
all adjustments necessary for a fair presentation of the quarterly information.
Consolidated results of operations for any one or more quarters are not
necessarily indicative of results for an entire year or the results to be
expected for any future period.
QUARTERLY RESULTS
---------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- --------
CONSOLIDATED STATEMENTS OF INCOME DATA:
Gross revenue........................... $9,999 $9,471 $11,397 $12,217 $13,107 $13,567 $14,541 $16,620
------ ------ ------- ------- ------- ------- ------- -------
Net revenue........................... 8,969 8,643 10,658 11,366 12,419 12,681 13,638 14,643
Costs of revenue........................ 5,914 5,786 7,350 7,937 8,382 8,307 8,448 9,225
------ ------ ------- ------- ------- ------- ------- -------
Gross profit.......................... 3,055 2,857 3,308 3,429 4,037 4,374 5,190 5,418
Selling, general and administrative
expenses.............................. 1,896 1,797 2,211 2,439 2,650 2,486 2,756 2,942
------ ------ ------- ------- ------- ------- ------- -------
Income from operations................ 1,159 1,060 1,097 990 1,387 1,888 2,434 2,476
Interest expense........................ 260 268 149 130 107 88 65 81
Other expenses (income), net............ (19) (10) 132 (87) 10 22 (111) 4
------ ------ ------- ------- ------- ------- ------- -------
Income before provision for income
taxes............................... 918 802 816 947 1,270 1,778 2,480 2,391
Provision for income taxes.............. 389 340 347 390 508 711 992 988
------ ------ ------- ------- ------- ------- ------- -------
Net income............................ 529 462 469 557 762 1,067 1,488 1,403
Reversal (accretion) of redeemable
securities to redemption value, net... (57) (57) 344 -- -- -- -- --
------ ------ ------- ------- ------- ------- ------- -------
Net income available to common
shareholders........................ $ 472 $ 405 $ 813 $ 557 $ 762 $ 1,067 $ 1,488 $ 1,403
====== ====== ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUE
---------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- --------
CONSOLIDATED STATEMENTS OF INCOME DATA:
Gross revenue........................... 111% 110% 107% 107% 106% 107% 107% 114%
---- ---- ---- ---- ---- ---- ---- ----
Net revenue........................... 100 100 100 100 100 100 100 100
Costs of revenue........................ 66 67 69 70 67 66 62 63
---- ---- ---- ---- ---- ---- ---- ----
Gross profit.......................... 34 33 31 30 33 34 38 37
Selling, general and administrative
expenses.............................. 21 21 21 21 21 20 20 20
---- ---- ---- ---- ---- ---- ---- ----
Income from operations................ 13 12 10 9 12 14 18 17
Interest expense........................ 3 3 1 1 2 -- 1 1
Other expenses (income), net............ -- -- 1 -- -- -- (1) --
---- ---- ---- ---- ---- ---- ---- ----
Income before provision for income
taxes............................... 10 9 8 8 10 14 18 16
Provision for income taxes.............. 4 4 3 3 4 6 7 6
---- ---- ---- ---- ---- ---- ---- ----
Net income............................ 6 5 5 5 6 8 11 10
Reversal (accretion) of redeemable
securities to redemption value, net... (1) -- 3 -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Net income available to common
shareholders........................ 5% 5% 8% 5% 6% 8% 11% 10%
==== ==== ==== ==== ==== ==== ==== ====
Our quarterly revenue and operating results fluctuate primarily as a result
of:
- client engagements commenced and completed during a quarter;
- seasonality;
- the number of business days in a quarter;
- the number of work days lost as a result of adverse weather conditions
or delays caused by third parties;
- employee hiring, billing and utilization rates;
- the consummation of acquisitions;
- the length of the sales cycle on new business;
25
28
- the ability of clients to terminate engagements without penalty;
- our ability to efficiently shift our employees from project to project;
- the size and scope of assignments; and
- general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our working capital needs and capital expenditure
requirements through a combination of internally generated funds, bank
borrowings, leases and the sale of our common stock.
Cash and cash equivalents as of December 31, 2000, were $1.0 million
compared to $1.6 million as of December 31, 1999. Working capital as of December
31, 2000 was $7.3 million compared to $7.2 million as of December 31, 1999, an
increase of $130,000, or 2%, resulting primarily from the growth in contracts
and trade receivables and costs and estimated earnings in excess of billings,
primarily due to our acquisition of Crosby, Mead, Benton & Associates and higher
revenue levels. This was offset by an increase in the current portion of
long-term debt and capital lease obligations as a note payable with a principal
balance of $2.4 million as of December 31, 2000 was reclassified from long-term
to short-term based on its maturity date. In addition, our line of credit was
reclassified to current based on its September 2001 maturity date. The debt to
equity ratio as of December 31, 2000 was 0.31 to 1 compared to 0.38 to 1 as of
December 31, 1999. Net cash provided by operating activities decreased $462,000
or 13%, to $3.0 million in 2000 compared to $3.5 million in 1999. The decrease
in net cash provided by operating activities was a result of an increase in
contracts and trade receivables and costs and estimated earnings in excess of
billings and the reduction of trade accounts payable and accrued liabilities,
primarily due to the paydown of employee accrued vacation and sick time
accumulated in prior years. These decreases were partially offset by higher
income before the effects of depreciation and amortization. The 2000 cash
generated from operating activities was used primarily to make principal
payments on long-term and short-term debt and capital leases, to pay off certain
capital leases, to fund capital expenditures, and to partially fund our
acquisition of Crosby, Mead, Benton & Associates in October 2000. Capital
expenditures for 2000 were $1.3 million compared to $1.2 million in 1999. The
2000 capital expenditures consisted primarily of computer equipment and upgrades
to our information systems. We expect to maintain capital expenditures in fiscal
2001 at approximately the 2000 level, before consideration for future
acquisitions, to support technology investments.
In September 1999, we entered into a new line of credit agreement with a
bank, which allows us to borrow up to an aggregate of $8.5 million. The line of
credit consists of a working capital component with a maximum outstanding
principal balance of $6.0 million, maturing on September 3, 2001, and an
equipment component with a maximum outstanding principal balance of $3.5
million, which matured on September 3, 2000. On September 3, 2000 and November
3, 2000, the line of credit was amended to extend the maturity of the equipment
component to January 3, 2001. The equipment component ultimately matured on
January 3, 2001 and we elected not to amend or extend this component. We plan on
reestablishing the equipment component when we renew the working capital
component as a result of negotiations with the bank in 2001. The working capital
component bears interest at either the prime rate or at approximately 1 3/4%
above LIBOR and the equipment component bore interest at either the prime rate
or at approximately 2% above LIBOR. At December 31, 2000, the outstanding
borrowings under the working capital component of the line of credit was $2.0
million bearing interest at 9.5%. The borrowings on the line of credit agreement
were used primarily to fund our acquisition of Crosby, Mead, Benton & Associates
and for other working capital needs.
Net proceeds of $11,015,000 from our initial public offering in July 1999
were used primarily to repay related party notes payable and accrued interest,
to repay notes payable, to repay our previous bank line of credit and to acquire
Thompson-Hysell.
In 2001, our primary expected sources of liquidity are existing cash
balances, cash generated by operations and availability under our credit
facility. Our primary cash requirements are expected to include capital
expenditures estimated to be approximately $1.5 million and scheduled reductions
of principal on outstanding indebtedness of approximately $5.4 million. Assuming
our credit facility is renewed at maturity in
26
29
September 2001, or we are able to arrange for a replacement credit facility with
a similar availability, we will have sufficient cash resources to fund our
anticipated operations and planned capital expenditures and debt reductions for
the next 12 months.
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 attempt to pass these increases to
our clients.
IMPACT OF ISSUED BUT NOT YET ADOPTED ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137
and 138, describes the accounting for derivative instruments and hedging
activities. SFAS No. 133, as amended, is effective for the first fiscal quarter
of the first fiscal year beginning after June 15, 2000. We do not believe that
the implementation of SFAS No. 133, as amended, will have an impact on our
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes primarily as a result of our line
of credit and long-term debt, which are used to maintain liquidity and to fund
capital expenditures and our expansion. Due to the relatively immaterial levels
of our current borrowings, our earnings and cash flows are not materially
impacted by changes in interest rates. Promissory notes delivered in connection
with our acquisitions have generally been at fixed rates. Our bank line of
credit is based on variable interest rates and is therefore affected by changes
in market rates. We do not enter into derivative or interest rate transactions
for speculative purposes.
The table below presents the principal amounts of debt (excluding capital
lease obligations of $634,000 and a note payable of $2,372,000), weighted
average interest rates, fair values and other items required by year of expected
maturity to evaluate the expected cash flows and sensitivity to interest rate
changes as of December 31, 2000. Dollars are expressed in thousands.
FAIR
2001 2002 2003 2004 TOTAL VALUE(1)
------ ----- ----- ----- ------ --------
Fixed rate debt(2)................... $ 551 $ 90 $ 57 $ 16 $ 714 $ 714
Average interest rate................ 8.47% 8.21% 8.22% 8.50% 8.41% 8.41%
Variable rate debt................... $2,025 -- -- -- $2,025 $2,025
Average interest rate................ 9.50% -- -- -- 9.50% 9.50%
- -------------------------
(1) The fair value of fixed rate debt and variable rate debt was determined
based on current rates offered for debt instruments with similar risks and
maturities.
(2) Fixed rate debt excludes a note payable with a carrying amount of $2,372,000
due to the nature of this financing.
As the table incorporates only those exposures that existed as of December
31, 2000, it does not consider those exposures or positions which could arise
after that date. Moreover, because firm commitments are not presented in the
table above, the information presented in the table has limited predictive
value. As a result, our ultimate realized gain or loss with respect to interest
rate fluctuations will depend on those exposures or positions that arise during
the period and interest rates.
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30
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Report................................ 29
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... 30
Consolidated Statements of Income for the years ended
December 31, 1998, 1999 and 2000.......................... 31
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1998, 1999 and 2000...... 32
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000.......................... 33
Notes to Consolidated Financial Statements.................. 34
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31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
The Keith Companies, Inc.:
We have audited the accompanying consolidated balance sheets of The Keith
Companies, Inc. and subsidiaries (Note 1) as of December 31, 1999 and 2000, and
the related consolidated statements of income, shareholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Keith
Companies, Inc. and subsidiaries as of December 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Orange County, California
February 14, 2001, except as to the second paragraph
of Note 17, which is as of March 22, 2001, and
as to the fourth paragraph of Note 9,
which is as of April 2, 2001
29
32
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,569,000 $ 1,043,000
Contracts and trade receivables, net of allowance for
doubtful accounts of $612,000 and $1,166,000 at
December 31, 1999 and 2000, respectively............... 7,176,000 12,089,000
Other receivables......................................... 86,000 211,000
Costs and estimated earnings in excess of billings........ 5,037,000 6,334,000
Prepaid expenses and other current assets................. 415,000 555,000
----------- -----------
Total current assets.............................. 14,283,000 20,232,000
Equipment and leasehold improvements, net................... 4,536,000 4,713,000
Goodwill, net of accumulated amortization of $109,000 and
$329,000 at December 31, 1999 and 2000, respectively...... 4,678,000 8,128,000
Other assets................................................ 164,000 239,000
----------- -----------
Total assets...................................... $23,661,000 $33,312,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ -- $ 2,025,000
Current portion of long-term debt and capital lease
obligations............................................ 1,292,000 3,359,000
Trade accounts payable.................................... 1,048,000 1,689,000
Accrued employee compensation............................. 2,342,000 2,467,000
Current portion of deferred tax liabilities............... 1,102,000 1,541,000
Other accrued liabilities................................. 734,000 807,000
Billings in excess of costs and estimated earnings........ 552,000 1,001,000
----------- -----------
Total current liabilities......................... 7,070,000 12,889,000
Long-term debt, line of credit and capital lease
obligations, less current portion......................... 3,543,000 361,000
Issuable common stock....................................... -- 1,000,000
Deferred tax liabilities.................................... 64,000 719,000
Accrued rent................................................ 148,000 104,000
----------- -----------
Total liabilities................................. 10,825,000 15,073,000
----------- -----------
Shareholders' equity:
Preferred stock, $0.001 par value. Authorized 5,000,000
shares; no shares issued or outstanding................ -- --
Common stock, $0.001 par value. Authorized 100,000,000
shares in 1999 and 2000; issued and outstanding
4,972,624 and 5,115,882 shares in 1999 and 2000,
respectively........................................... 5,000 5,000
Additional paid-in capital................................ 11,770,000 12,453,000
Retained earnings......................................... 1,061,000 5,781,000
----------- -----------
Total shareholders' equity........................ 12,836,000 18,239,000
----------- -----------
Commitments and contingencies (Notes 4, 7, 9, and 16)
Total liabilities and shareholders' equity........ $23,661,000 $33,312,000
=========== ===========
See accompanying notes to consolidated financial statements.
30
33
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (NOTE 1)
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
----------- ----------- -----------
Gross revenue....................................... $34,021,000 $43,084,000 $57,835,000
Subcontractor costs................................. 4,839,000 3,448,000 4,454,000
----------- ----------- -----------
Net revenue....................................... 29,182,000 39,636,000 53,381,000
Costs of revenue.................................... 19,287,000 26,987,000 34,362,000
----------- ----------- -----------
Gross profit...................................... 9,895,000 12,649,000 19,019,000
Selling, general and administrative expenses........ 5,858,000 8,343,000 10,834,000
----------- ----------- -----------
Income from operations............................ 4,037,000 4,306,000 8,185,000
Interest expense.................................... 967,000 807,000 341,000
Other expenses (income), net........................ 66,000 16,000 (75,000)
----------- ----------- -----------
Income before provision for income taxes.......... 3,004,000 3,483,000 7,919,000
Provision for income taxes.......................... 1,350,000 1,466,000 3,199,000
----------- ----------- -----------
Net income........................................ 1,654,000 2,017,000 4,720,000
Reversal (accretion) of redeemable securities to
redemption value, net............................. (230,000) 230,000 --
----------- ----------- -----------
Net income available to common shareholders....... $ 1,424,000 $ 2,247,000 $ 4,720,000
=========== =========== ===========
Earnings per share data:
Basic............................................. $ 0.41 $ 0.53 $ 0.95
=========== =========== ===========
Diluted........................................... $ 0.39 $ 0.50 $ 0.89
=========== =========== ===========
Weighted average number of shares outstanding:
Basic............................................. 3,485,634 4,211,318 4,983,692
=========== =========== ===========
Diluted........................................... 3,635,474 4,515,033 5,299,679
=========== =========== ===========
See accompanying notes to consolidated financial statements.
31
34
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (NOTE 1)
RETAINED
ADDITIONAL EARNINGS
SHARES COMMON PAID-IN (ACCUMULATED
OUTSTANDING STOCK CAPITAL DEFICIT) TOTAL
----------- ------ ----------- ------------ -----------
Balance at December 31, 1997.... 3,485,634 $3,000 $ 882,000 $(2,610,000) $(1,725,000)
Net income...................... -- -- -- 1,654,000 1,654,000
Accretion of redeemable
securities.................... -- -- (230,000) -- (230,000)
--------- ------ ----------- ----------- -----------
Balance at December 31, 1998.... 3,485,634 3,000 652,000 (956,000) (301,000)
Issuance of common stock........ 1,584,590 2,000 11,435,000 -- 11,437,000
Net income...................... -- -- -- 2,017,000 2,017,000
Repurchase of common stock...... (97,600) -- (547,000) -- (547,000)
Reversal of accretion of
redeemable securities to
redemption value, net......... -- -- 230,000 -- 230,000
--------- ------ ----------- ----------- -----------
Balance at December 31, 1999.... 4,972,624 5,000 11,770,000 1,061,000 12,836,000
Issuance of common stock........ 170,258 -- 819,000 -- 819,000
Net income...................... -- -- -- 4,720,000 4,720,000
Repurchase of common stock...... (27,000) -- (136,000) -- (136,000)
--------- ------ ----------- ----------- -----------
Balance at December 31, 2000.... 5,115,882 $5,000 $12,453,000 $ 5,781,000 $18,239,000
========= ====== =========== =========== ===========
See accompanying notes to consolidated financial statements.
32
35
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 1,654,000 $ 2,017,000 $ 4,720,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 595,000 1,037,000 1,558,000
Loss (gain) on sale of equipment...................... (29,000) 6,000 37,000
Changes in operating assets and liabilities, net of
effects from acquisitions:
Contracts and trade receivables, net............. (1,597,000) 659,000 (2,271,000)
Other receivables................................ (134,000) 197,000 (107,000)
Costs and estimated earnings in excess of
billings...................................... (423,000) (1,254,000) (1,297,000)
Prepaid expenses and other current assets........ 250,000 (337,000) 38,000
Deferred tax assets.............................. 1,224,000 270,000 --
Other assets..................................... 32,000 (29,000) (4,000)
Trade accounts payable and accrued liabilities... (1,116,000) 308,000 (540,000)
Accrued liabilities to related parties........... 69,000 (185,000) --
Billings in excess of costs and estimated
earnings...................................... (187,000) (33,000) 249,000
Deferred tax liabilities......................... 348,000 818,000 629,000
----------- ----------- -----------
Net cash provided by operating activities..... 686,000 3,474,000 3,012,000
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash expended for acquisitions.................... (77,000) (4,636,000) (1,383,000)
Additions to equipment and leasehold improvements..... (835,000) (1,225,000) (1,341,000)
Proceeds from sales of equipment...................... 126,000 12,000 3,000
----------- ----------- -----------
Net cash used in investing activities......... (786,000) (5,849,000) (2,721,000)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) from line of credit, net.......... 1,534,000 (3,730,000) 651,000
Principal payments on long-term debt and capital lease
obligations, including current portion............. (1,598,000) (1,171,000) (1,520,000)
Borrowings on notes payable to related parties........ 300,000 -- --
Payments on notes payable to related parties.......... (144,000) (2,401,000) --
Repurchase of common stock............................ -- (547,000) (136,000)
Payment of deferred offering costs.................... (122,000) (1,114,000) --
Proceeds from issuance of common stock, net........... -- 12,450,000 188,000
----------- ----------- -----------
Net cash (used in) provided by financing
activities.................................. (30,000) 3,487,000 (817,000)
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents........................................ (130,000) 1,112,000 (526,000)
Cash and cash equivalents, beginning of year.......... 587,000 457,000 1,569,000
----------- ----------- -----------
Cash and cash equivalents, end of year................ $ 457,000 $ 1,569,000 $ 1,043,000
=========== =========== ===========
See supplemental cash flow information at Note 14.
See accompanying notes to consolidated financial statements.
33
36
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(1) ORGANIZATION AND BASIS OF PRESENTATION
The Keith Companies, Inc. (formerly The Keith Companies -- Inland Empire,
Inc.) ("TKCI") was incorporated in the state of California in November 1986.
Keith Engineering, Inc. ("KEI") was incorporated in the state of California in
March 1983. In December 1997, TKCI acquired Engineering Services Incorporated,
and its wholly-owned subsidiary Engineered Systems Integrated, Inc. (which was
merged with Engineering Services Incorporated on August 1, 1998) (collectively,
"ESI"). In December 1999, ESI, a wholly owned subsidiary of TKCI, was merged
with and into TKCI. In August 1998, TKCI acquired John M. Tettemer and
Associates, Inc. ("JMTA") which was subsequently merged with and into TKCI in
December 2000. In July 1999, TKCI acquired substantially all of the assets and
assumed substantially all of the liabilities of Thompson-Hysell, Inc.
("Thompson-Hysell"). In October 2000, TKCI acquired Crosby Mead Benton &
Associates ("CMB").
TKCI and KEI have been under common management since inception. TKCI and
KEI were under common control as a result of a contemporaneous written agreement
dated July 1992 between their majority shareholders. This agreement provided for
the shareholders to vote in concert and thus the majority shareholders became a
common control group. On August 1, 1998, TKCI acquired all of the outstanding
common stock of KEI (the "Reorganization") by a contribution to capital of TKCI
by KEI's shareholders of all of the outstanding stock of KEI in exchange for the
issuance by TKCI of an equal number of shares of its stock. On November 30,
1998, KEI, a wholly owned subsidiary of TKCI, was merged with and into TKCI, and
its outstanding shares, all of which were then owned by TKCI, were cancelled as
a result of the merger. The Reorganization was accounted for as a combination of
affiliated entities under common control in a manner similar to a
pooling-of-interests. Under this method, the assets, liabilities and equity of
TKCI and KEI were carried over at their historical book values and their
operations prior to the Reorganization have been recorded on a combined
historical basis. The combination did not require any material adjustments to
conform the accounting policies of the separate entities. As a result of the
Reorganization, the accompanying financial statements include the consolidated
assets, liabilities, equity and results of operations of TKCI, KEI, ESI and JMTA
effective August 1, 1998 (see Note 2).
TKCI and its wholly-owned subsidiaries (the "Company") is a full service
engineering and consulting services firm providing professional services on a
wide range of projects pursuant to short- and long-term construction type
contracts to both the real estate development, public works/infrastructure and
communications industry and the industrial/energy industry. These services are
rendered principally in California, Nevada and Utah.
The Company provides a full range of services from initial site acquisition
studies through construction support services to clients operating in a variety
of market sectors. The Company benefits 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. The
Company's professional staff provides a comprehensive menu of services that are
needed to effectively manage, engineer and design infrastructure and
state-of-the-art facilities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
TKCI, KEI, ESI, JMTA and CMB (see Note 1). All material intercompany
transactions and balances have been eliminated in consolidation.
34
37
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
CASH AND CASH EQUIVALENTS
Cash equivalents are comprised of highly liquid debt instruments with
maturities of three months or less when purchased. The Company invests its
excess cash in a money market mutual fund, which consists of a portfolio of
short-term money market instruments. All of the Company's excess cash is with
one financial institution and, therefore, may be subject to certain
concentration of credit risks.
REVENUE AND COST RECOGNITION ON ENGINEERING CONTRACTS
The Company enters into fixed fee contracts and contracts that provide for
fees on a time-and-materials basis, most of which have not-to-exceed provisions.
Contracts typically vary in length between six months and three years. However,
many contracts are for small increments of work, which can be completed in less
than six months. Revenue is recognized on the percentage of completion method of
accounting based on the proportion of actual contract costs incurred to total
estimated contract costs. Management considers costs incurred to be the best
available measure of progress on the contracts.
In the course of providing its services, the Company sometimes subcontracts
for various services like landscape architecture, architecture, geotechnical
engineering, structural engineering, traffic engineering, and aerial
photography. These costs are included in the billings to the clients and, in
accordance with industry practice, are included in the Company's gross revenue.
Because subcontractor services can change significantly from project to project,
changes in gross revenue may not be indicative of business trends. Accordingly,
the Company also reports net revenue, which is gross revenue less subcontractor
costs.
Costs of revenue include labor, nonreimbursable subcontract costs,
materials and some direct and indirect overhead costs like rent, utilities and
depreciation. General and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which the losses are determined. Changes in job performance, job
conditions and estimated profitability, including final contract settlements,
may result in revisions to costs and income and are recognized in the period in
which the revisions are determined. Additional revenue resulting from requests
for additional work due to changes in the scope of engineering services to be
rendered, are included in revenue when realization is probable and can be
estimated with reasonable certainty.
Costs and estimated earnings in excess of billings represents revenue
recognized in excess of amounts billed on the respective uncompleted engineering
contracts. Billings in excess of costs and estimated earnings represents amounts
billed in excess of revenue recognized on the respective uncompleted contracts.
At December 31, 1999 and 2000, the Company had no significant amounts
included in contracts and trade receivables or trade accounts payable
representing amounts retained pending contract or subcontract completion.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost or, in the case of
leased assets, the lesser of the present value of future minimum lease payments
or fair value. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, or, in the case of capital leased assets,
over the lease term if shorter, as follows:
Equipment.............................................. 3 to 10 years
Leasehold improvements................................. 1 to 10 years
35
38
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
When assets are sold or otherwise retired, the related cost and accumulated
depreciation are removed from the accounts and the resulting gain or loss is
included in other expenses, net in the accompanying consolidated statements of
income.
INCOME TAXES
Prior to August 1, 1998, KEI, with the consent of its shareholders, elected
to be taxed as an S corporation under the Internal Revenue Code of 1986, as
amended. As an S corporation, corporate income or loss flowed through to the
shareholders who were responsible for including the income, deductions, losses
and credits in their individual income tax returns. Accordingly, prior to August
1, 1998, no provision for federal or state income taxes for KEI was included in
the accompanying consolidated financial statements, except for California income
taxes at the greater of $800 or the S corporation rate of 1.5% of taxable
income. As a result of the Reorganization, KEI no longer qualified to be taxed
as an S corporation and effective August 1, 1998, its operations were included
in the consolidated C corporation tax return of the Company.
The Company accounts for income taxes under the asset and liability method
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax assets
and liabilities for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 25 years. The Company assesses the
recoverability of goodwill by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
Amortization expense related to goodwill totaled $10,000, $99,000 and
$220,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
STOCK OPTIONS
The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Compensation
expense is recorded on the date of grant only if the current market price of the
underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock
Based Compensation," permits entities to recognize the fair value of all
stock-based awards on the date of grant as expense over the vesting period.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
36
39
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
STOCK SPLIT
On April 23, 1999, the board of directors authorized a 2.70-for-1 reverse
split of TKCI's common stock, effective April 26, 1999. All share amounts in the
accompanying consolidated financial statements (except for shares of authorized
common stock) have been restated to give effect to the stock split.
PAR VALUE
On June 22, 1999, TKCI established a par value for its common and preferred
stock of $0.001 per share. Prior to this date, the Company's common and
preferred stock had no par value. All amounts in the accompanying consolidated
financial statements have been restated to give effect to the $0.001 per share
par value.
EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income
available to common shareholders during the period by the weighted average
number of common shares outstanding during each period. Diluted EPS is computed
by dividing net income available to common shareholders during the period by the
weighted average number of shares that would have been outstanding assuming the
issuance of common shares for all dilutive potential common shares outstanding
during the reporting period, net of shares assumed to be repurchased using the
treasury stock method.
The following is a reconciliation of the denominator for the basic EPS
computation to the denominator of the diluted EPS computation. Net income
available to common shareholders is used in the basic and diluted EPS
calculations as the assumed impact of the redeemable securities would be
anti-dilutive.
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
Weighted average shares used for the basic EPS
computation......................................... 3,485,634 4,211,318 4,983,692
Incremental shares from the assumed exercise of
dilutive stock options and stock warrants, issuable
shares and contingently issuable shares............. 149,840 303,715 315,987
--------- --------- ---------
Weighted average shares used for the diluted EPS
computation......................................... 3,635,474 4,515,033 5,299,679
========= ========= =========
In conjunction with certain acquisitions, the Company agreed to pay
consideration consisting of shares of its common stock (see Note 4). As a
result, the Company estimated and included 55,562 and 138,219 weighted average
contingently issuable and issuable shares in its weighted average shares used
for the diluted EPS computation for the years ended December 31, 1999 and 2000,
respectively. These estimates are based upon the number of shares that are
issuable at December 31, 2000 and that would have been issuable at December 31,
1999 and through the date of issuance in 2000, weighted for the assumed period
the shares were outstanding (commencing the later of the date of acquisition or
the beginning of the fiscal year).
There were 236,296, 211,233 and 475,248 anti-dilutive weighted potential
common shares excluded from the above calculation in 1998, 1999 and 2000,
respectively.
USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS
The preparation of these consolidated financial statements, in conformity
with accounting principles generally accepted in the United States of America,
requires management to make estimates and assumptions
37
40
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the amounts of revenue and expenses reported during the periods.
Actual results may differ from the estimates and assumptions used in preparing
these consolidated financial statements.
RISKS AND UNCERTAINTIES
As of December 31, 2000, approximately 10% of the Company's work force is
covered by collective bargaining agreements that expire during 2001.
RECLASSIFICATIONS
Certain 1999 balances have been reclassified to conform to the presentation
used in 2000.
(3) INITIAL PUBLIC OFFERING OF COMMON STOCK
On July 15, 1999, the Company completed an initial public offering of
1,500,000 shares of its common stock. The offering price was $9.00 per share
resulting in proceeds of approximately $11,015,000 to TKCI, net of underwriters'
discount and offering costs. The Company's common stock is traded on the NASDAQ
National Market under the symbol "TKCI."
The Company primarily used proceeds of the initial public offering to repay
related party notes payable and accrued interest of $2,647,000, to repay notes
payable and accrued interest of $251,000, to repay the previous bank line of
credit of $4,731,000 and to acquire substantially all of the assets of and
assume substantially all of the liabilities of Thompson-Hysell.
(4) ACQUISITIONS
CROSBY, MEAD, BENTON & ASSOCIATES
On October 13, 2000, TKCI acquired all of the outstanding shares of common
stock of CMB. The purchase price was $2,455,000, consisting of cash of
$1,216,000, $239,000 of other acquisition related costs and $500,000 in shares
of common stock issuable in each of 2001 and 2002. The common stock issuable is
subject to adjustments extending up to one year from the date of acquisition
related to the book values of net assets acquired, accounts receivable, costs
and estimated earnings in excess of billings and billings in excess of costs and
estimated earnings that existed at the date of acquisition. The acquisition of
CMB was accounted for using the purchase method of accounting and, accordingly,
the accompanying consolidated financial statements include the assets,
liabilities and results of operations of CMB since the date of the acquisition.
The excess of the purchase price over the estimated fair market value of the net
identified assets acquired of $2,040,000 was recorded as goodwill and will be
amortized over a period of 25 years.
THOMPSON-HYSELL, INC.
In conjunction with its initial public offering, on July 15, 1999, the
Company acquired substantially all of the assets and assumed substantially all
of the liabilities of Thompson-Hysell. The Company paid cash in the amount of
$4,636,000, which consisted of $4,310,000 to Thompson-Hysell and $326,000 of
other acquisition related costs. In addition, contingent consideration consisted
of (i) shares of common stock with a value at the initial public offering equal
to $1,333,000, and (ii) a promissory note in the original principal amount of
$1,333,000, payable in 2001. The issuance of common stock and the principal
balance of the promissory note were contingent upon earnings for the years ended
December 31, 1998, 1999 and 2000. In October 2000, the Company issued 120,157
shares of its common stock valued at $631,000 based on the attainment of 1999
38
41
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
earnings and increased goodwill by this amount. In December 2000, the Company
increased goodwill and the principal balance on the promissory note by
$1,039,000 based on the attainment of 2000 earnings before interest and taxes,
as defined. The acquisition was accounted for using the purchase method of
accounting. Goodwill, which represents the excess of the purchase price over the
fair value of the net tangible and identifiable intangible assets acquired and
liabilities assumed, in the amount of $5,846,000 is being amortized over a
period of 25 years.
The following unaudited pro forma data presents information as if the
acquisition of Thompson-Hysell had occurred on January 1, 1998, and the
acquisition of CMB had occurred on January 1, 1999. The pro forma data is
provided for informational purposes only and is based on historical information.
The pro forma data does not necessarily reflect the actual results of operations
that would have occurred had Thompson-Hysell, CMB and TKCI comprised a single
entity during the periods presented, nor is it necessarily indicative of future
results of operations of the combined entities.
PRO FORMA FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
(UNAUDITED)
Net revenue................................... $37,648,000 $51,455,000 $58,428,000
Net income available to common shareholders... $ 2,467,000 $ 2,893,000 $ 4,764,000
Basic earnings per share...................... $ 0.71 $ 0.69 $ 0.96
JOHN M. TETTEMER & ASSOCIATES, INC.
On August 1, 1998, TKCI acquired all of the outstanding common stock of
JMTA for $740,000, which consisted of cash of $150,000; $240,000 in amortizing
notes bearing interest at 8% payable in 60 monthly payments; $250,000 in
interest only notes bearing interest at 8% payable quarterly, which were paid in
conjunction with the initial public offering; warrants to purchase 55,555 shares
of TKCI common stock, exercisable immediately at a purchase price of $4.73 per
share, expiring July 31, 2003; and $100,000 of other acquisition related costs.
The fair value of the warrants, calculated using the Black-Scholes option
pricing model assuming an estimated fair value of common stock at issue date of
$3.78 per share, a risk free interest rate of 5% and no stock dividend yield,
was immaterial and therefore excluded from the purchase price. The amortizing
notes include the principal stockholder of TKCI as co-maker. The acquisition was
accounted for using the purchase method of accounting and, accordingly, the
consolidated financial statements include the assets and liabilities and results
of operations of JMTA as of and subsequent to August 1, 1998. The excess
purchase price over the fair value of the net identified assets acquired totaled
$571,000 and has been recorded as goodwill in the accompanying consolidated
balance sheets and is being amortized over a period of 25 years. During 1999,
goodwill and the principal balance of the amortizing notes were reduced by
$60,000 to reflect an adjustment to JMTA's book value at August 1, 1998.
(5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements at December 31, 1999 and 2000 consist
of the following:
1999 2000
----------- -----------
Equipment......................................... $ 8,026,000 $ 9,361,000
Leasehold improvements............................ 430,000 438,000
Accumulated depreciation and amortization......... (3,920,000) (5,086,000)
----------- -----------
Equipment and leasehold improvements, net....... $ 4,536,000 $ 4,713,000
=========== ===========
39
42
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
At December 31, 1999 and 2000, the cost of computer equipment, vehicles and
office furniture and fixtures recorded under capital leases, net of the related
accumulated amortization, were $2,109,000 and $1,036,000, respectively.
(6) INDEBTEDNESS
LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
DECEMBER 31,
-------------------------
1999 2000
----------- -----------
Line of credit (see (a) below).............................. $ 1,300,000 $ 2,025,000
Note payable; no stated interest rate; interest imputed at
an annual rate of 10.75%; payable in monthly installments
of $12,000, including interest, repaid in September 2000
(see (b) below)........................................... 253,000 --
Notes payable; interest ranging from 0.90% to 13.22%;
payable in monthly installments ranging from $1,000 to
$26,000, including interest, through 2004 (see (b)
below).................................................... 353,000 517,000
Notes payable; bearing interest at 8%; each payable in
monthly installments of $2,000, including interest,
through August 2003....................................... 177,000 132,000
Note payable; bearing interest at 10%; interest only payable
quarterly; principal and unpaid interest due April 2001
(see (c) below)........................................... 1,333,000 2,372,000
Capital lease obligations; interest ranging from 4.98% to
19%; payable in monthly installments ranging from $1,000
to $6,000, including interest, through 2005 (see (b)
below).................................................... 1,382,000 634,000
Other....................................................... 37,000 65,000
----------- -----------
4,835,000 5,745,000
Less current portion........................................ (1,292,000) (5,384,000)
----------- -----------
$ 3,543,000 $ 361,000
=========== ===========
(a) On September 1, 1999, the Company entered into a line of credit
agreement with a bank to fund working capital needs and the acquisitions of
equipment. The line of credit has a working capital component with a maximum
outstanding principal balance of $6,000,000 which matures on September 3, 2001
and an equipment component with a maximum outstanding principal balance of
$3,500,000, which matured on September 3, 2000. On September 3, 2000 and
November 3, 2000, the line of credit was amended to extend the maturity on the
equipment component to January 3, 2001. The equipment component matured on
January 3, 2001 and the Company elected not to formally amend or extend this
component. The Company plans on reestablishing the equipment component when it
renews the working capital component during negotiations with the bank in 2001.
The working capital component bears interest at either the prime rate or
approximately one and three-quarters percent above LIBOR, and the equipment
component bore interest at either the prime rate or at approximately two percent
above LIBOR. The aggregate outstanding principal balance of working capital
advances and equipment advances can not exceed $8,500,000. Subsequent to the
maturity of the equipment component, the aggregate outstanding principal balance
can not exceed $6,000,000. The line of credit is subject to various restrictions
and contains certain financial and nonfinancial related covenants. In addition,
the line of credit is collateralized by a first-priority security interest in
all accounts receivable and other rights to payment, general intangibles and
equipment. As of December 2000, there were no outstanding borrowings on the
equipment component of the line of credit and the working capital component had
outstanding borrowings of $2,025,000 bearing interest at 9.5% (the prime rate).
40
43
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
The Board of Directors authorized the Company to repurchase its common
stock and on October 13, 1999, the Company requested and was granted a waiver
from the bank to repurchase or otherwise acquire any shares of any class of its
stock up to $700,000 through the period ending October 13, 2000. As of December
31, 2000, the Company purchased 124,600 shares of its common stock at a cost of
$683,000.
(b) The notes payable and capital lease obligations are secured by certain
assets of the Company.
(c) An unsecured promissory note was executed in conjunction with the Asset
Purchase Agreement dated April 9, 1999 between the Company and Thompson-Hysell
related to the acquisition of substantially all of the assets and the assumption
of substantially all of the liabilities of Thompson-Hysell (see Note 4). In
accordance with the terms of the note, the principal balance has been increased
by $1,039,000 based upon the attainment of performance criteria tied to December
31, 2000 earnings before interest and taxes, as defined in the note.
Future annual principal maturities of indebtedness as of December 31, 2000
are as follows:
YEARS ENDING DECEMBER 31:
2001................................................... $5,384,000
2002................................................... 264,000
2003................................................... 78,000
2004................................................... 17,000
2005................................................... 2,000
----------
$5,745,000
==========
In connection with the initial public offering in July 1999, the Company
repaid debts, including accrued interest, to related parties totaling
$2,647,000. There were no outstanding borrowings to related parties as of
December 31, 1999 and 2000.
(7) LEASES
The Company leases equipment and vehicles under capital lease agreements
that expire at various dates through 2005. The Company also has several
noncancelable operating leases, primarily for office facilities, that expire
through 2008. These leases generally contain renewal options for periods ranging
from one to five years and require the Company to pay costs, including common
area maintenance and insurance charges. Rental expense for operating leases
during 1998, 1999 and 2000 totaled $1,671,000, $2,216,000 and $2,409,000,
respectively.
41
44
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
Certain facilities have been sublet under month-to-month subleases that
provide for reimbursement of various common area maintenance charges. Rental
expense has been reduced for sublease income of $64,000, $22,000 and $11,000 for
the years ended December 31, 1998, 1999 and 2000, respectively. Future minimum
lease payments as of December 31, 2000 are as follows:
OPERATING CAPITAL
LEASES LEASES
---------- ---------
YEARS ENDING DECEMBER 31:
2001............................................. $2,779,000 $ 482,000
2002............................................. 2,209,000 183,000
2003............................................. 1,638,000 22,000
2004............................................. 699,000 3,000
2005............................................. 634,000 2,000
Thereafter....................................... 396,000 --
---------- ---------
Total future minimum lease payments................... $8,355,000 692,000
==========
Less amounts representing interest.................... (58,000)
---------
Total obligations under capital leases................ 634,000
Less current portion.................................. (437,000)
---------
Long-term capital lease obligations................... $ 197,000
=========
(8) REDEEMABLE SECURITIES AND STOCK INDEMNIFICATION RIGHTS
In connection with the acquisition of ESI in December 1997, TKCI issued to
the sellers 74,074 shares of common stock, redeemable at the discretion of any
seller at a price of $6.75 per share, if the Company did not complete an initial
public offering by October 31, 1999. This right of the sellers expired November
15, 1999. The redeemable common stock was valued at $2.70 per share on the date
of the acquisition of ESI. The difference between the redemption value of $6.75
per share and the initial valuation of $2.70 per share was accreted over the
period from the acquisition, December 30, 1997, through the date of the initial
public offering, July 15, 1999, through charges to additional paid-in capital.
In connection with the acquisition of ESI, TKCI also issued to the sellers
stock options to purchase 44,444 shares of common stock with redemption
provisions. The redemption provisions provided that in the event that the
underlying shares did not have a fair market value of at least $8.10 per share
at some time during the period between the date of the Company's initial public
offering and October 1, 2002, the holders were entitled to receive $5.40 in cash
for each unexercised vested option (or $8.10 for each share of common stock
issued upon exercise of a stock option). The $5.40 redemption value was accreted
over the period from the acquisition, December 30, 1997 through the date of the
initial public offering, July 15, 1999, through charges to additional paid-in
capital.
As a result of the Company's completion of its initial public offering at
$9.00 per share in July 1999, the redeemable securities were no longer
redeemable and, accordingly, $353,000 of accumulated accretion on redeemable
securities was reclassified to common stock and additional paid-in capital.
Subsequent to the acquisition of ESI, TKCI agreed to indemnify certain
holders of 40,000 shares of common stock issued in connection with the
acquisition of ESI against a market decline in TKCI's common stock after the
initial public offering of TKCI's common stock. The excess of the guarantee
price over the market value of the 40,000 shares of common stock of $100,000 on
November 11, 1999 was paid and is recorded as a component of other expenses in
the accompanying consolidated statement of income for the year ended December
31, 1999.
42
45
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(9) COMMON STOCK AND STOCK PLANS
The following stock options and stock warrants are authorized for issuance
at December 31, 2000:
Stock options............................................. 1,111,111
Stock warrants related to acquisitions.................... 150,000
---------
1,261,111
=========
STOCK OPTION PLANS
In 1994, KEI and TKCI each adopted stock option plans (the "Plans"). Under
the terms of the Plans, the Boards of Directors of KEI and TKCI were able to
grant stock options to officers, key employees and directors. The Plans, as
amended in 1997, authorized grants of options to purchase 555,556 shares each of
authorized but unissued common stock in TKCI and KEI. Stock options have been
granted with an exercise price equal to or greater than the stock's estimated
fair market value at the date of grant. All stock options issued in connection
with the Plans have ten-year terms that vest and become exercisable ratably each
year for a period of up to five years from the grant date.
In connection with the Reorganization, the KEI plan was terminated and
options to purchase shares of common stock of KEI outstanding at August 1, 1998
were automatically converted into options to purchase a like number of shares of
TKCI common stock, with the same exercise price, expiration date and other terms
as prior to the Reorganization (the "Plan"). On April 23, 1999, the stock option
plan was amended to increase the number of options authorized for grant to
1,111,111.
In September 2000, the Company made an offer to option holders which gave
them a one-time election to have the Company cancel their options as of
September 30, 2000 and to receive new options covering the same number of shares
at an option exercise price equal to market value on a date six months and one
day later. Prior to the expiration of the six month and one day period, the
Securities and Exchange Commission stated its position regarding the regulatory
treatment of such offers. Based on that position and consultation with legal
counsel, the Company concluded that the attempt by the Company to cancel the
options was ineffective and the participants continue to hold their original
options.
At December 31, 2000, there were options to acquire 198,034 shares
available for grant under the Plan. The following represents the estimated fair
value of options granted, as determined using the Black-Scholes option pricing
model and the assumptions used for calculation:
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999 2000
----- ----- -----
Weighted average estimated fair value per share of
common stock at grant date........................... $3.40 $5.60 $5.50
Average exercise price per option granted.............. $3.40 $5.60 $5.50
Expected volatility.................................... 0.0% 29.4% 51.5%
Risk-free interest rate................................ 5.0% 6.5% 5.0%
Option term (years).................................... 10 10 10
Stock dividend yield................................... 0.0% 0.0% 0.0%
In accounting for its Plan, the Company elected the pro forma disclosure
option under SFAS No. 123. Accordingly, no compensation cost has been recognized
for its stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for its
43
46
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
stock options under SFAS No. 123, the Company's net income would have been
adjusted to the pro forma amount indicated below:
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
Net income available to common shareholders:
As reported.................................. $1,424,000 $2,247,000 $4,720,000
Pro forma.................................... $1,371,000 $2,077,000 $4,481,000
Basic earnings per share:
As reported.................................. $ 0.41 $ 0.53 $ 0.95
Pro forma.................................... $ 0.39 $ 0.49 $ 0.90
Pro forma net income reflects only options granted after January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of five years and compensation cost for options granted prior to January
1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
NUMBER OF WEIGHTED-
SHARES AVERAGE
UNDERLYING EXERCISE
OPTIONS PRICE
---------- ---------
Balance at December 31, 1997........................ 344,074
Granted........................................... 142,593 $5.13
Forfeited......................................... (1,111) $2.70
--------
Balance at December 31, 1998........................ 485,556
Granted........................................... 317,414 $8.91
Exercised......................................... (10,523) $2.83
Forfeited......................................... (26,165) $6.95
--------
Balance at December 31, 1999........................ 766,282
Granted........................................... 178,150 $4.95
Exercised......................................... (30,095) $3.09
Forfeited......................................... (41,878) $6.69
--------
Balance at December 31, 2000........................ 872,459
========
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of December
31, 2000, were as follows:
OUTSTANDING
----------------------------------------- EXERCISABLE
NUMBER OF WEIGHTED ----------------------
SHARES AVERAGE WEIGHTED SHARES WEIGHTED
UNDERLYING REMAINING AVERAGE UNDERLYING AVERAGE
RANGE OF OPTIONS CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE
--------------- ----------- ---------------- -------- ----------- --------
$2.70.............................. 353,079 5.55 $2.70 267,357 $2.70
$3.38 to $7.44..................... 204,911 8.96 $4.99 13,714 $5.40
$8.06 to $9.90..................... 314,469 8.46 $9.00 82,739 $8.92
At December 31, 1998, 1999 and 2000, the number of shares of common stock
subject to exercisable options were 158,889, 284,806 and 363,810, respectively,
and the weighted-average exercise prices of those options were $2.70, $3.26 and
$4.22, respectively.
44
47
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
In 1998, 1999 and 2000, in connection with acquisitions, TKCI reserved for
grant options to purchase 179,630 shares of its common stock to employees of the
acquired companies under the Plan. As of December 31, 2000, options to purchase
141,248 shares of common stock reserved for grant have been granted subject to
the Plan.
STOCK WARRANTS
The Company issued stock warrants to purchase common stock in connection
with the acquisitions of Thompson-Hysell, JMTA and ESI. The terms of stock
warrants to acquire shares of common stock are as follows at December 31, 2000:
REMAINING
GRANT DATE GRANTED EXERCISED EXERCISABLE EXERCISE PRICE EXPIRATION DATE
---------- ------- --------- ----------- -------------- ---------------
August 3, 1998.................... 55,555 20,000 35,555 $4.73 July 31, 2003
September 15, 1998................ 27,778 -- 27,778 $6.75 September 18, 2001
July 15, 1999..................... 66,667 -- 66,667 $6.75 July 15, 2002
------- ------ -------
150,000 20,000 130,000
======= ====== =======
Warrants are generally granted with an exercise price equal to or greater
than the underlying stock's estimated fair market value at the date of grant,
vest immediately and may be exercised at any time until the expiration date.
During 1999, 66,667 warrants were issued with an exercise price less than the
stock's estimated fair market value at the date of grant. The $150,000
difference between the fair market value of the stock at the date of grant and
the exercise price was included as a component of the purchase price of
Thompson-Hysell (see Note 4).
COMMON STOCK
All issued and outstanding shares of KEI stock prior to the Reorganization
were exchanged into an equivalent number of shares of TKCI stock and all of the
shares of KEI stock were subsequently cancelled. The outstanding shares of TKCI
stock prior to the Reorganization remained outstanding and were not affected by
the Reorganization.
(10) EMPLOYEE BENEFIT PLANS
The Company has two defined contribution 401(k) plans, which commenced in
1980 and 1988, covering a majority of its employees. These plans are designed to
be tax deferred in accordance with the provisions of Section 401(k) of the
Internal Revenue Code. Employees may contribute from 1% to 20% of compensation
on a tax-deferred basis through a "salary reduction" arrangement. In 1998, the
Company implemented a discretionary employer matching contribution program, with
a five-year vesting schedule, whereby the Company matched 50% of the first 1% of
employee contributions for the year. Effective January 1, 1999, the Company
increased the employer contribution percentage to 50% of the first 6% of
employee contributions, not to exceed $1,500 per employee per year. Effective
January 1, 2000, the Company increased the employer contribution percentage to
100% of the first 3%, plus 50% of the next 2% of employee contributions, vesting
immediately. During 1998, 1999 and 2000, the Company incurred $55,000, $336,000
and $851,000, respectively, related to its 401(k) plans, which represented the
Company's entire obligations under the employer matching contribution program
for the years ended December 31, 1998, 1999 and 2000.
45
48
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(11) INCOME TAXES
Income tax expense (benefit) consists of the following:
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
Current:
Federal.......................................... $ (29,000) $ 260,000 $2,036,000
State............................................ (99,000) 118,000 534,000
---------- ---------- ----------
Subtotal...................................... (128,000) 378,000 2,570,000
---------- ---------- ----------
Deferred:
Federal.......................................... 1,262,000 999,000 514,000
State............................................ 216,000 89,000 115,000
---------- ---------- ----------
Subtotal...................................... 1,478,000 1,088,000 629,000
---------- ---------- ----------
Total......................................... $1,350,000 $1,466,000 $3,199,000
========== ========== ==========
A reconciliation of income tax at the federal statutory rate of 34% to the
Company's provision for income taxes is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1999 2000
---------- ---------- ----------
Computed "expected" federal income tax expense..... $1,021,000 $1,184,000 $2,692,000
State income tax expense, net of federal income tax
benefit.......................................... 77,000 167,000 451,000
Tax effect of earnings not subject to federal
income tax due to S corporation election......... (513,000) -- --
Tax effect of S to C corporation conversion........ 595,000 -- --
Change in federal deferred tax valuation
allowance........................................ 35,000 (35,000) --
Other.............................................. 135,000 150,000 56,000
---------- ---------- ----------
$1,350,000 $1,466,000 $3,199,000
========== ========== ==========
46
49
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows:
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Deferred tax assets:
Accrued liabilities and employee compensation....... $ 355,000 $ 289,000
Billings in excess of costs and estimated
earnings......................................... 216,000 392,000
Allowance for doubtful accounts..................... 203,000 617,000
Settlement obligations.............................. 99,000 --
Other............................................... 170,000 249,000
Net operating loss carryforwards.................... 271,000 --
---------- ----------
Total deferred tax assets........................ 1,314,000 1,547,000
---------- ----------
Deferred tax liabilities:
Equipment and improvements, net..................... 117,000 284,000
Section 481, change from cash to accrual............ 262,000 622,000
Costs and estimated earnings in excess of
billings......................................... 1,972,000 2,643,000
Other............................................... 129,000 258,000
---------- ----------
Total deferred tax liabilities................... 2,480,000 3,807,000
---------- ----------
Net deferred tax liabilities..................... $1,166,000 $2,260,000
========== ==========
The net change in the valuation allowance for the years ended December 31,
1998, 1999 and 2000 was an increase of $31,000, a decrease of $62,000, and no
increase or decrease, respectively. The Company considers recording a valuation
allowance in accordance with the provisions of SFAS No. 109 to reflect the
estimated amount of deferred tax assets, which may not be realized. In assessing
the realizability of deferred tax assets, management considers whether it is
more likely than not, that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment, and believes it is more likely
than not the Company will realize the benefits of its deferred tax assets.
As of December 31, 2000, the Company had no federal or state net operating
loss carryforwards available to offset future taxable income.
(12) SEGMENT AND RELATED INFORMATION
The Company evaluates performance and makes resource allocation decisions
based on the overall type of services provided to customers. For financial
reporting purposes, we have grouped our operations into two primary reportable
segments. The Real Estate Development, Public Works/Infrastructure and
Communications ("REPWIC") segment includes engineering and consulting services
for the development of both private projects, like residential communities,
commercial and industrial properties and recreational projects; public
works/infrastructure projects, such as transportation and water/sewage
facilities; and site acquisition and construction management services for
wireless telecommunications. The Industrial/Energy ("IE") segment, which
consists of the division of ESI, provides the technical expertise and management
required to design and test manufacturing facilities and processes and to
facilitate the construction of alternate electrical power systems that
supplement public power supply and large scale power consumers. The accounting
policies of the segments are the same as those described in Note 2.
47
50
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
The following tables set forth information regarding the Company's
operating segments as of and for the years ended December 31, 1998, 1999 and
2000.
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------------------
CORPORATE
REPWIC IE COSTS CONSOLIDATED
----------- ---------- ----------- ------------
Net revenue.................................. $25,330,000 $3,852,000 $ -- $29,182,000
Income from operations....................... $ 6,491,000 $ 244,000 $(2,698,000) $ 4,037,000
Identifiable assets.......................... $13,068,000 $1,462,000 $ -- $14,530,000
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------------
CORPORATE
REPWIC IE COSTS CONSOLIDATED
----------- ---------- ----------- ------------
Net revenue.................................. $36,009,000 $3,627,000 $ -- $39,636,000
Income from operations....................... $ 7,877,000 $ 172,000 $(3,743,000) $ 4,306,000
Identifiable assets.......................... $22,497,000 $1,164,000 $ -- $23,661,000
YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------
CORPORATE
REPWIC IE COSTS CONSOLIDATED
----------- ---------- ----------- ------------
Net revenue.................................. $48,939,000 $4,442,000 $ -- $53,381,000
Income from operations....................... $12,433,000 $ 733,000 $(4,981,000) $ 8,185,000
Identifiable assets.......................... $31,294,000 $2,018,000 $ -- $33,312,000
BUSINESS CONCENTRATIONS
In 1998, 1999 and 2000, the Company had no customers which represented
greater than 10% of consolidated net revenue. No customers represented greater
than 10% of net contract and trade receivables at December 31, 1999 and 2000.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments reported in the
accompanying consolidated balance sheets for cash and cash equivalents,
contracts and trade receivables, other receivables, line of credit, trade
accounts payable, accrued employee compensation, and other accrued liabilities
approximate their fair values due to the short maturity of these instruments.
At December 31, 2000, notes payable with a carrying amount of $714,000
approximate fair value, determined using estimates for similar debt instruments
(see Note 6). At December 31, 2000, the fair value of a note payable with a
carrying amount of $2,372,000 was not determinable due to the nature of this
financing (see Note 6).
48
51
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(14) SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1999 2000
---------- --------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................. $1,024,000 $ 975,000 $ 377,000
========== ========= ==========
Cash paid during the year for income taxes............. $ 144,000 $ 124,000 $2,602,000
========== ========= ==========
Noncash financing and investing activities:
Capital lease obligations recorded in connection with
equipment acquisitions.............................. $ 788,000 $ 258,000 $ --
========== ========= ==========
Purchase price adjustment to goodwill and notes
payable............................................. $ -- $ 60,000 $1,039,000
========== ========= ==========
Purchase price adjustment to equipment and leasehold
improvements and additional paid-in capital......... $ 26,000 $ 42,000 $ --
========== ========= ==========
Purchase price adjustment to goodwill, common stock and
additional paid-in-capital.......................... $ -- $ -- $ 631,000
========== ========= ==========
Accretion (reversal) of redeemable securities to
redemption value, net............................... $ 230,000 $(230,000) $ --
========== ========= ==========
Insurance financing...................................... $ 202,000 $ 174,000 $ 163,000
========== ========= ==========
The acquisition of JMTA, Thompson-Hysell and CMB resulted in the following
increases:
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1999 2000
--------- ----------- -----------
Contracts and trade receivables........................ $(309,000) $(2,253,000) $(2,642,000)
Costs and estimated earnings in excess of billings..... (201,000) -- --
Other receivables and prepaid expenses................. -- (1,000) (33,000)
Goodwill............................................... (571,000) (4,216,000) (2,000,000)
Equipment and leasehold improvements................... (56,000) (1,105,000) (214,000)
Other assets........................................... (29,000) (5,000) (71,000)
Line of credit......................................... -- -- 74,000
Billings in excess of costs and estimated earnings..... -- 150,000 200,000
Long-term debt, including current portion.............. 640,000 2,446,000 503,000
Accounts payable, accrued expenses and other
liabilities.......................................... 449,000 198,000 1,335,000
Deferred tax liabilities............................... -- -- 465,000
Issuable common stock.................................. -- -- 1,000,000
Common stock........................................... -- 150,000 --
--------- ----------- -----------
Net cash expended for acquisitions................... $ (77,000) $(4,636,000) $(1,383,000)
========= =========== ===========
49
52
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(15) VALUATION AND QUALIFYING ACCOUNTS
For the years ending December 31, 1998, 1999 and 2000, the following is
supplementary information regarding valuation and qualifying accounts:
BALANCE AT PROVISIONS FOR
BEGINNING OF DOUBTFUL BALANCE AT END
PERIOD ACCOUNTS DEDUCTIONS OF PERIOD
------------ -------------- ---------- --------------
Allowance for doubtful accounts:
1998.......................................... $348,000 $300,000 $284,000 $ 364,000
1999.......................................... $364,000 $614,000 $366,000 $ 612,000
2000.......................................... $612,000 $671,000 $117,000 $1,166,000
(16) COMMITMENTS AND CONTINGENCIES
In March 2000, Clayton Engineering filed a claim against The Irvine Company
alleging that The Irvine Company failed to pay Clayton Engineering for the
removal of 30,000 cubic yards of dirt in the Peters Wash located in Irvine,
California. JMTA had provided engineering design services for The Irvine Company
in connection with this project. JMTA was a wholly-owned subsidiary at the time
the claim by Clayton was filed. In January 2001, The Irvine Company filed a
claim against JMTA for indemnity. Clayton Engineering is demanding damages in
the sum of $2,000,000 against The Irvine Company for construction services
rendered and $10,000,000 as a result of consequential loss of business
opportunity. Clayton Engineering has made the allegation that plans prepared by
JMTA were inaccurate as to the elevation of the bottom of the Peters Wash. The
Irvine Company has not stated that JMTA violated the standard of care, but has
filed an equitable indemnity cross-complaint against JMTA. No demand for
settlement has been made against JMTA. The Company believes that the claim made
against it is without merit and intends to defend itself vigorously in this
action.
The Company is also involved in various claims and legal actions arising in
the ordinary course of business. In the opinion of management and the Company's
legal counsel, the ultimate disposition of these matters should not have a
material adverse effect on the Company's financial position, liquidity and
results of operations.
(17) SUBSEQUENT EVENTS
On January 31, 2001, HEA Acquisition, Inc., a wholly owned subsidiary of
the Company, acquired substantially all of the assets and assumed substantially
all of the liabilities of Hook & Associates Engineering, Inc. ("Hook"). The
purchase price consisted of $1,530,000 in cash at closing, the issuance of
$500,000 and $700,000 of common stock issuable in 2001 and 2002, respectively,
and a subordinated promissory note in the original principal amount of
$1,300,000. The issuance of common stock and the amount of the subordinated
promissory note are subject to certain adjustments extending up to one year from
the date of acquisition related to the book values of net assets acquired, cash,
accounts receivable, costs and estimated earnings in excess of billings and
billings in excess of costs and estimated earnings as of December 31 2000. In
addition, the Company agreed to pay cash related to the income tax effects to
the sellers. Hook is a consulting engineering firm providing a full range of
services to clients in an array of industries including communications, public
works/transportation and real estate development. Hook employs approximately 100
people and has offices in Arizona, Colorado and Wyoming.
The Company was a party to a certain agreement which contained an
antidilution provision whereby the Company was restricted from issuing
additional shares of common stock, except as may have been required for certain
circumstances. Effective March 22, 2001, this agreement was amended to delete
this antidilution provision.
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53
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(18) SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The following is unaudited supplementary financial information for 1999 and
2000:
FOR THE QUARTERS ENDED 1999
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------- ------------
Net revenue................................. $ 8,969,000 $ 8,643,000 $10,658,000 $11,366,000
Gross profit................................ $ 3,055,000 $ 2,857,000 $ 3,308,000 $ 3,429,000
Income from operations...................... $ 1,159,000 $ 1,060,000 $ 1,097,000 $ 990,000
Net income.................................. $ 529,000 $ 462,000 $ 469,000 $ 557,000
Net income available to common
shareholders.............................. $ 472,000 $ 405,000 $ 813,000 $ 557,000
Basic earnings per share.................... $ 0.14 $ 0.12 $ 0.17 $ 0.11
FOR THE QUARTERS ENDED 2000
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------- ------------
Net revenue................................. $12,419,000 $12,681,000 $13,638,000 $14,643,000
Gross profit................................ $ 4,037,000 $ 4,374,000 $ 5,190,000 $ 5,418,000
Income from operations...................... $ 1,387,000 $ 1,888,000 $ 2,434,000 $ 2,476,000
Net income and net income available to
common shareholders....................... $ 762,000 $ 1,067,000 $ 1,488,000 $ 1,403,000
Basic earnings per share.................... $ 0.15 $ 0.22 $ 0.30 $ 0.28
51
54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
We have had no disagreements on accounting or financial disclosure matters
with our independent auditors.
PART III
The information required by Items 10 through 13 of this report is set forth
in the sections entitled "Directors and Executive Officers," "Executive
Compensation," "Security Ownership of Certain Beneficial Owners and Management,"
and "Certain Relationships and Related Transactions" in our Proxy Statement for
our 2001 Annual Meeting of Shareholders. Such information is incorporated in
this Annual Report on Form 10-K and made a part hereof by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1)Consolidated Financial Statements.
The following Consolidated Financial Statements and the Independent
Auditors' Report are on pages 29 through 51 hereof.
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Income for the years ended December 31,
1998, 1999 and 2000
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1999 and 2000
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
All Financial Statement Schedules have been omitted because they are
not applicable or because the applicable disclosures have been
included in the Consolidated Financial Statements or in the Notes
thereto.
52
55
(3) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Stock Purchase Agreement dated October 13, 2000 by and among
the registrant, Crosby, Mead Benton & Associates and the
shareholders named therein.*
2.2 Asset Purchase Agreement dated January 31, 2001 among Hook &
Associates Engineering, Inc., the shareholders of Hook &
Associates Engineering, Inc., HEA Acquisition, Inc. and the
registrant (incorporated herein by this reference to Exhibit
2.1 to the registrant's current report on Form 8-K filed
with the Commission on February 15, 2001).
2.3 Certificate of Ownership of John M. Tettemer & Associates,
Ltd. by the registrant effective as of December 31, 2000.*
3.1 Amended and Restated Articles of Incorporation of the
registrant (incorporated herein by this reference to Exhibit
3.1 to the registrant's registration statement of Form S-1,
registration number 333-77273).
3.2 Amended and Restated Bylaws of the registrant (incorporated
herein by this reference to Exhibit 3.2 to the registrant's
registration statement on Form S-1, registration number
333-77273).
4.1 Specimen Stock Certificate (incorporated herein by this
reference to Exhibit 4.1 to the registrant's registration
statement on Form S-1, registration number 333-77273).
10.1 Amended and Restated 1994 Stock Incentive Plan.*
10.2 Form of Indemnification Agreement (incorporated by this
reference to Exhibit 10.2 to the registrant's registration
statement of Form S-1, registration number 333-77273).
10.3 Wells Fargo Bank Line of Credit Note dated September 1, 1999
between the registrant and Wells Fargo Bank, National
Association (incorporated herein by this reference to
Exhibit 10.35 to the registrant's quarterly report on Form
10-Q for the period ended September 30, 1999).
10.4 Wells Fargo Bank Credit Agreement dated September 1, 1999
between the registrant and Wells Fargo Bank, National
Association (incorporated herein by this reference to
Exhibit 10.36 to the registrant's quarterly report on Form
10-Q for the period ended September 30, 1999).
10.5 First Amendment to Credit Agreement dated September 3, 2000
by and between the registrant, John M. Tettemer &
Associates, Ltd and Wells Fargo Bank, National Association.*
10.6 Second Amendment to Credit Agreement dated October 2, 2000
by and between the registrant, John M. Tettemer &
Associates, Ltd and Wells Fargo Bank, National Association.*
10.7 Third Amendment to Credit Agreement dated November 3, 2000
by and between the registrant, John M. Tettemer &
Associates, Ltd and Wells Fargo Bank, National Association.*
10.8 Facility Lease dated July 29, 1999 between ASP Scripps,
L.L.C. and the registrant (incorporated herein by this
reference to Exhibit 10.37 to the registrant's quarterly
report on Form 10-Q for the period ended September 30,
1999).
10.9 Addendum to Facility Lease dated July 29, 1999 between ASP
Scripps, L.L.C. and the registrant (incorporated herein by
this reference to Exhibit 10.38 to the registrant's
quarterly report on Form 10-Q for the period ended September
30, 1999).
10.10 Sublease Agreement dated July 29, 1999 between Canon
Computer Systems, Inc. and the registrant (incorporated
herein by this reference to Exhibit 10.39 to the
registrant's quarterly report on Form 10-Q for the period
ended September 30, 1999).
10.11 Agreement of Non-Disturbance and Attornment dated July 28,
1999 between ASP Scripps, L.L.C. and the registrant
(incorporated herein by this reference to Exhibit 10.4 to
the registrant's quarterly report on Form 10-Q for the
period ended September 30, 1999).
10.12 Consent to Sublease Agreement dated July 28, 1999 between
ASP Scripps, L.L.C., Canon Computer Systems, Inc. and the
registrant (incorporated herein by this reference to Exhibit
10.41 to the registrant's quarterly report on Form 10-Q for
the period ended September 30, 1999).
10.13 Sublease Agreement dated September 26, 2000 between the
registrant and Canon Computer Systems, Inc.*
53
56
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.14 Severance Agreement between the registrant and Aram H.
Keith.*
10.15 Severance Agreement between the registrant and Eric C.
Nielsen.*
10.16 Severance Agreement between the registrant and Gary C.
Campanaro.*
21 List of Subsidiaries.*
23 Consent of Independent Auditors.*
24 Power of Attorney (included on signature page hereof).*
- ---------------
* Filed herewith.
(b) Reports on Form 8-K.
On October 27, 2000, we filed a Current Report on Form 8-K, relating to the
announcement of the acquisition of all the outstanding shares of common stock of
Crosby, Mead, Benton & Associates.
54
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, The Keith Companies, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
THE KEITH COMPANIES, INC.
By: /s/ ARAM H. KEITH
------------------------------------
Aram H. Keith
Chief Executive Officer
April 2, 2001
POWER OF ATTORNEY
We, the undersigned officers and directors of The Keith Companies, Inc., do
hereby constitute and appoint Aram H. Keith, and Gary C. Campanaro, and each of
them, our true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Annual Report on
Form 10-K, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby, ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ARAM H. KEITH Chief Executive Officer, April 2, 2001
- ----------------------------------------------------- Chairman of the Board and
Aram H. Keith Director (Principal Executive
Officer)
/s/ ERIC C. NIELSEN President and Chief Operating April 2, 2001
- ----------------------------------------------------- Officer
Eric C. Nielsen
/s/ GARY C. CAMPANARO Chief Financial Officer, April 2, 2001
- ----------------------------------------------------- Secretary and Director
Gary C. Campanaro (Principal Financial and
Accounting Officer)
/s/ WALTER W. CRUTTENDEN, III Director April 2, 2001
- -----------------------------------------------------
Walter W. Cruttenden, III
/s/ GEORGE DEUKMEJIAN Director April 2, 2001
- -----------------------------------------------------
George Deukmejian
/s/ CHRISTINE DIEMER IGER Director April 2, 2001
- -----------------------------------------------------
Christine Diemer Iger
55
58
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Stock Purchase Agreement dated October 13, 2000 by and among
the registrant, Crosby, Mead Benton & Associates and the
shareholders named therein.*
2.2 Asset Purchase Agreement dated January 31, 2001 among Hook &
Associates Engineering, Inc., the shareholders of Hook &
Associates Engineering, Inc., HEA Acquisition, Inc. and the
registrant (incorporated herein by this reference to Exhibit
2.1 to the registrant's current report on Form 8-K filed
with the Commission on February 15, 2001).
2.3 Certificate of Ownership of John M. Tettemer & Associates,
Ltd. by the registrant effective as of December 31, 2000.*
3.1 Amended and Restated Articles of Incorporation of the
registrant (incorporated herein by this reference to Exhibit
3.1 to the registrant's registration statement of Form S-1,
registration number 333-77273).
3.2 Amended and Restated Bylaws of the registrant (incorporated
herein by this reference to Exhibit 3.2 to the registrant's
registration statement on Form S-1, registration number
333-77273).
4.1 Specimen Stock Certificate (incorporated herein by this
reference to Exhibit 4.1 to the registrant's registration
statement on Form S-1, registration number 333-77273).
10.1 Amended and Restated 1994 Stock Incentive Plan.*
10.2 Form of Indemnification Agreement (incorporated by this
reference to Exhibit 10.2 to the registrant's registration
statement of Form S-1, registration number 333-77273).
10.3 Wells Fargo Bank Line of Credit Note dated September 1, 1999
between the registrant and Wells Fargo Bank, National
Association (incorporated herein by this reference to
Exhibit 10.35 to the registrant's quarterly report on Form
10-Q for the period ended September 30, 1999).
10.4 Wells Fargo Bank Credit Agreement dated September 1, 1999
between the registrant and Wells Fargo Bank, National
Association (incorporated herein by this reference to
Exhibit 10.36 to the registrant's quarterly report on Form
10-Q for the period ended September 30, 1999).
10.5 First Amendment to Credit Agreement dated September 3, 2000
by and between the registrant, John M. Tettemer &
Associates, Ltd and Wells Fargo Bank, National Association.*
10.6 Second Amendment to Credit Agreement dated October 2, 2000
by and between the registrant, John M. Tettemer &
Associates, Ltd and Wells Fargo Bank, National Association.*
10.7 Third Amendment to Credit Agreement dated November 3, 2000
by and between the registrant, John M. Tettemer &
Associates, Ltd and Wells Fargo Bank, National Association.*
10.8 Facility Lease dated July 29, 1999 between ASP Scripps,
L.L.C. and the registrant (incorporated herein by this
reference to Exhibit 10.37 to the registrant's quarterly
report on Form 10-Q for the period ended September 30,
1999).
10.9 Addendum to Facility Lease dated July 29, 1999 between ASP
Scripps, L.L.C. and the registrant (incorporated herein by
this reference to Exhibit 10.38 to the registrant's
quarterly report on Form 10-Q for the period ended September
30, 1999).
10.10 Sublease Agreement dated July 29, 1999 between Canon
Computer Systems, Inc. and the registrant (incorporated
herein by this reference to Exhibit 10.39 to the
registrant's quarterly report on Form 10-Q for the period
ended September 30, 1999).
10.11 Agreement of Non-Disturbance and Attornment dated July 28,
1999 between ASP Scripps, L.L.C. and the registrant
(incorporated herein by this reference to Exhibit 10.4 to
the registrant's quarterly report on Form 10-Q for the
period ended September 30, 1999).
10.12 Consent to Sublease Agreement dated July 28, 1999 between
ASP Scripps, L.L.C., Canon Computer Systems, Inc. and the
registrant (incorporated herein by this reference to Exhibit
10.41 to the registrant's quarterly report on Form 10-Q for
the period ended September 30, 1999).
10.13 Sublease Agreement dated September 26, 2000 between the
registrant and Canon Computer Systems, Inc.*
10.14 Severance Agreement between the registrant and Aram H.
Keith.*
10.15 Severance Agreement between the registrant and Eric C.
Nielsen.*
10.16 Severance Agreement between the registrant and Gary C.
Campanaro.*
21 List of Subsidiaries.*
23 Consent of Independent Auditors.*
24 Power of Attorney (included on signature page hereof).*
- ---------------
* Filed herewith.