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This filing is made pursuant
to Rule 424(b)(4) under
the Securities Act of
1933 in connection with
Registration No. 333-58088
2,000,000 SHARES
KEITH COMPANY LOGO
COMMON STOCK
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This is a public offering of 2,000,000 shares of our common stock. We are
offering 1,750,000 shares and the selling shareholders are offering 250,000
shares. We will not receive any of the proceeds from the sale of shares by the
selling shareholders. Our common stock is quoted on the Nasdaq National Market
under the symbol "TKCI." On May 1, 2001, the last reported sale price of our
common stock on the Nasdaq National Market was $16.60 per share.
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INVESTING IN OUR SHARES INVOLVES RISKS. PLEASE SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
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PER
SHARE TOTAL
Price to public............................................. $16.00 $32,000,000
Underwriting discounts and commissions...................... $ 0.99 $ 1,980,000
Proceeds to us.............................................. $15.01 $26,267,500
Proceeds to selling shareholders............................ $15.01 $ 3,752,500
We and the selling shareholders have granted the underwriters a 45-day
option to purchase up to an additional 300,000 shares of our common stock on the
same terms and conditions as set forth above solely to cover over-allotments, if
any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
WEDBUSH MORGAN SECURITIES INC. JANNEY MONTGOMERY SCOTT LLC
THE DATE OF THIS PROSPECTUS IS MAY 1, 2001.
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On Inside Front Cover -- Graphics consisting of photographs of projects on which
we have performed services, or representative of those on which we have
performed services.
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PROSPECTUS SUMMARY
To fully understand this offering and its consequences to you, you should read
the following summary together with the more detailed information and our
consolidated financial statements and the notes to those statements appearing
elsewhere in this prospectus.
THE KEITH COMPANIES, INC.
We are an 18 year old engineering and consulting services firm located in the
Western United States. We have achieved strong growth in both our net revenue
and net income. From fiscal 1996 through fiscal 2000, our net revenue has grown
at a compounded annual growth rate of 42% and our net income has grown at a
compounded annual growth rate of 59%. We have achieved this growth through our
own internal efforts and through acquisitions. We believe that our success is
due to a number of factors, including:
- our well-established reputation for providing timely and high quality
services to our clients;
- our experienced professional staff, established systems and seasoned
management team;
- our ability to identify, consummate and integrate acquisitions;
- our full range of services that allow us to provide our clients
comprehensive, integrated and cost-effective solutions; and
- our ability to expand and build on our client relationships due to our
reputation within our industries and our technical expertise.
We believe that the historical and projected growth in population, personal
income and employment in the geographic regions in which we operate in the
Western United States are all combining to support the continued long-term
demand for our services.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF OUR COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR, AND PURCHASE, SHARES OF OUR COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
Any trademarks or trade names referred to in this prospectus are the property of
their respective owners.
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We believe that we are well-positioned in the following industries:
- real estate development, public works/infrastructure and communications;
and
- industrial/energy.
We believe that these industries will continue to experience significant growth.
Land development and real estate engineering services, which formed the early
foundation of our company's success, continue to grow with many long-term
projects now underway. In addition, we are experiencing strong growth in
industrial engineering work and, in particular, in power/energy engineering
projects. We also continue to benefit from what we believe is an increasing
demand for public works/infrastructure projects from both the public and private
sector.
The clients we serve are primarily large, well-established firms and large
public entities, many of which seek our services for significant long-term
projects. Many have been our clients for five years or more and in some cases,
more than a decade. We remain dedicated to providing the highest quality
services and offering the most cost-effective solutions to these valued clients.
The acquisitions that we have completed and successfully integrated have
strengthened our geographic presence and the breadth of our service offerings.
We have often been able to apply our systems and years of experience to enhance
the quality of the acquired operations, which may yield increased sales and
profitability.
We have, through our acquisitions and internal growth, diversified our services
and geographic presence and we believe that we are well-positioned to take
advantage of future opportunities in the industries which we serve. We plan on
continuing to execute our successful business strategy which includes the
following:
- maintain the high quality of our services;
- continue to recruit and retain highly qualified personnel;
- expand and strengthen the geographic scope of our operations;
- strengthen our engineering service offerings;
- continue to strengthen our position in the industries we serve; and
- continue to acquire and effectively integrate new businesses which
expand our geographic presence, strengthen the diversity of our
services and enhance our position in the markets we serve.
In January 2001, we acquired Hook & Associates Engineering, Inc., our fifth
acquisition since late 1997. Our acquisitions have enabled us to expand our
service offerings to include process engineering design, mechanical,
chemical/process and electrical engineering, environmental waste processing
systems design, petrochemical design, services relating to flood control and
have expanded water resources engineering, environmental permitting, and
biological surveys and studies. In addition, we have expanded geographically
from our original base in Southern California and Nevada, into Central
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and Northern California, Utah, Arizona, Colorado and Wyoming and we intend to
continue to expand throughout the United States to better service our clients.
We employ approximately 650 professionals in 13 offices located in 6 states. Our
clients include major national and regional real estate development firms
including The Irvine Company, Centex Homes and Pulte Home Corporation. We also
serve architects, water districts, federal, state and local governments,
including Orange County Transportation Authority, Metropolitan Water District of
Southern California and Central Utah Water Conservancy District. In addition, we
serve cellular telephone service providers, universities and manufacturers of a
wide variety of products, including Clorox Products Company, New United Motors
Manufacturing, Inc. (NUMMI -- GM and Toyota) and Enron Energy Services.
RECENT DEVELOPMENTS
In January 2001, a wholly-owned subsidiary of ours acquired substantially all of
the assets and assumed substantially all of the liabilities of privately-held
Hook & Associates Engineering, Inc. Hook & Associates Engineering, Inc. is an
engineering and consulting services firm with its headquarters located in
Phoenix, Arizona and additional offices in Denver, Colorado and Cheyenne,
Wyoming. Hook & Associates Engineering, Inc. provides a full range of services
to clients in an array of industries including communications, public
works/transportation and real estate development. 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, we agreed to
pay cash related to the income tax effects to the sellers. We guaranteed the
contractual obligations of our subsidiary to Hook & Associates Engineering, Inc.
in this transaction. The acquisition expands our pool of professionals, broadens
our geographic operations into three additional western states and enhances our
expertise in the fulfillment of contracts in high growth sectors such as the
public works/infrastructure and communications industry.
CORPORATE INFORMATION
Our principal executive offices are located at 2955 Red Hill Avenue, Costa Mesa,
California 92626, and our telephone number is (714) 668-7001. Our Internet
address is http://www.keithco.com. Information contained on our web site or that
is accessible through our web site should not be considered to be part of this
prospectus.
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THE OFFERING
Common stock offered by us.... 1,750,000 shares
Common stock offered by the
selling shareholders....... 250,000 shares
Total......................... 2,000,000 shares
Common stock to be outstanding
after this offering........ 7,155,784 shares
Use of proceeds............... General corporate purposes, including working
capital, possible acquisitions and repayment of
debt. See "Use of Proceeds."
Nasdaq National Market
symbol........................ TKCI
The number of shares of common stock outstanding after this offering is based on
the 5,405,784 shares outstanding as of April 30, 2001, and excludes the
following:
- 1,600,000 shares reserved for issuance under our Amended and Restated
1994 Stock Incentive Plan. Options to purchase 775,895 shares are
outstanding under this plan.
- Shares of common stock issuable by us in the future with a market value
of $1,700,000, subject to adjustment, in connection with our
acquisitions of Crosby, Mead, Benton & Associates and Hook & Associates
Engineering, Inc.
- Up to 300,000 shares of common stock that the underwriters may purchase
from us and the selling shareholders if they exercise their
over-allotment option.
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary financial information is derived from our consolidated
financial statements. You should read this summary financial information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our "Consolidated Financial Statements" and
related notes.
YEARS ENDED DECEMBER 31,
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1998 1999 2000
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(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENTS OF INCOME DATA(1):
Net revenue....................................... $ 29,182 $ 39,636 $ 53,381
Gross profit...................................... 9,895 12,649 19,019
Income from operations............................ 4,037 4,306 8,185
Interest expense.................................. 967 807 341
Income before provision for income taxes.......... 3,004 3,483 7,919
Net income........................................ 1,654(2) 2,017 4,720
Net income available to common shareholders....... 1,424(2) 2,247 4,720
Earnings per share -- diluted..................... $ 0.39(2) $ 0.50 $ 0.89
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Weighted average shares outstanding -- diluted.... 3,635,474 4,515,033 5,299,679
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EBITDA(3)......................................... $ 4,562 $ 5,314 $ 9,787
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AS OF DECEMBER 31, 2000
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ACTUAL AS ADJUSTED
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(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 1,043 $26,727
Working capital........................................... 7,343 33,027
Total assets.............................................. 33,312 58,996
Total debt................................................ 5,745 5,745
Total shareholders' equity................................ 18,239 43,923
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(1) Prior to August 1, 1998, Keith Engineering, Inc., which is included in our
consolidated financial statements, elected to be taxed as an S corporation.
(2) The following amounts reflect pro forma adjustments for provisions for
federal and state income taxes at an assumed effective income tax rate of
42%: net income: $1,742,000; net income available to common shareholders:
$1,512,000; and earnings per share -- diluted: $0.42.
(3) EBITDA refers to income before provision for income taxes 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.
The as adjusted consolidated balance sheet data as of December 31, 2000 has been
adjusted to give effect to the sale of 1,750,000 shares of our common stock by
us at an offering price of $16.00 per share and the application of the estimated
net proceeds from this offering. In addition, the as adjusted consolidated
balance sheet data as of December 31, 2000 reflects the exercise of options to
purchase 19,000 shares of our common stock at an exercise price of $2.70 per
share and the sale of those shares by one selling shareholder in this offering.
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RISK FACTORS
The following discussion summarizes material risks which you should carefully
consider before you decide to buy our common stock. 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.
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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.
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 intend to use a portion of the proceeds of this offering to implement our
acquisition strategy (which may include an increase in the number and/or size of
acquisitions). If we are unable to consummate this offering or 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.
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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.
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.
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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.
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RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY DECREASE, WHICH COULD RESULT IN SIGNIFICANT LOSSES FOR
INVESTORS PURCHASING SHARES IN THIS OFFERING 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 offering
price per share in this offering.
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.
Our offering price may not be indicative of the price of our stock that will
prevail in the trading market. You may be unable to sell your shares of common
stock at or above the offering price, which may result in substantial losses to
you. Moreover, 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
Shareholders purchasing shares of our common stock in public markets will have
only a limited ability to influence matters requiring shareholder approval. Our
executive officers, directors and one other significant shareholder, in the
aggregate, will hold approximately 31% of our outstanding common stock after
this offering. 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.
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WE HAVE SUBSTANTIAL DISCRETION AS TO HOW TO USE THE PROCEEDS WE RECEIVE FROM
THIS OFFERING, SO WE MAY SPEND THE PROCEEDS IN WAYS THAT DO NOT IMPROVE OUR
OPERATING RESULTS OR INCREASE THE VALUE OF YOUR INVESTMENT
Our management has broad discretion as to how to spend the proceeds we receive
from this offering and may spend the proceeds in ways with which our
shareholders may not agree. We cannot guarantee that investment of the proceeds
will yield a favorable, or any, return. See "Use of Proceeds."
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 AFTER THIS OFFERING COULD
CAUSE THE MARKET PRICE OF OUR STOCK TO DROP, EVEN IF OUR BUSINESS IS DOING WELL
After this offering, we will have outstanding 7,155,784 shares of common stock.
This includes the 2,000,000 shares being sold in this offering and the 1,500,000
shares sold in our initial public offering. 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 prospectus 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
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Business," as well as under other captions elsewhere in this prospectus. 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 prospectus 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.
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USE OF PROCEEDS
We estimate the net proceeds from the sale of shares of common stock we are
offering to be approximately $25,632,500, or $27,884,000 if the underwriters
exercise their over-allotment option in full, at an offering price of $16.00 per
share and after deducting the underwriting discounts and commissions and
estimated offering expenses. We will not receive any of the proceeds from the
sale of shares of our common stock by the selling shareholders.
We intend to use the net proceeds from this offering for general corporate
purposes, including working capital. We may use a portion of the net proceeds of
this offering to repay any balance on our line of credit. The line of credit
bears interest at the prime rate of interest and matures on September 3, 2001.
During the 12 months prior to the date of this prospectus, we have used this
line of credit to fund working capital, capital acquisitions and acquisitions of
complementary businesses.
Management will have broad discretion in the application of the net proceeds
allocated to working capital and other general corporate purposes. We may use a
portion of the net proceeds of this offering to acquire other businesses. From
time to time, we evaluate potential acquisitions and expect that we will
undertake one or more acquisitions during 2001. As of the date of this
prospectus, we have no understandings, commitments or agreements relating to any
additional acquisition.
Pending these uses, we intend to invest the net proceeds of this offering in
short-term, high-grade interest-bearing securities, certificates of deposit or
direct or guaranteed obligations of the U.S. Government.
DIVIDEND POLICY
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.
13
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PRICE RANGE OF COMMON STOCK
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
YEAR ENDING DECEMBER 31, 2001
First Quarter............................................. $8.94 $25.63
At March 23, 2001, there were approximately 56 holders of record and 4,536
beneficial holders of our outstanding shares of common stock and on May 1, 2001,
the last reported sale price of our common stock on the Nasdaq National Market
was $16.60 per share.
14
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 2000 and as
adjusted to reflect our sale of 1,750,000 shares of common stock in this
offering and the application of the estimated net proceeds at an offering price
of $16.00 per share, after deducting underwriting discounts and estimated
offering expenses. In addition, the as adjusted capitalization data in the
following table reflects the exercise of options to purchase 19,000 shares of
our common stock at an exercise price of $2.70 per share and the sale of those
shares by one selling shareholder in this offering.
DECEMBER 31, 2000
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
Long-term debt and capital lease obligations, less current
portion................................................... $ 361 $ 361
Issuable common stock....................................... 1,000 1,000
Shareholders' equity:
Preferred stock, $0.001 par value per share, 5,000,000
shares authorized; no shares issued and outstanding,
actual; and no shares issued and outstanding, as
adjusted............................................... -- --
Common stock, $0.001 par value per share, 100,000,000
shares authorized; 5,115,882 shares issued and
outstanding, actual; and 6,884,882 shares issued and
outstanding, as adjusted............................... 5 7
Additional paid-in capital................................ 12,453 38,135
Retained earnings......................................... 5,781 5,781
------- -------
Total shareholders' equity........................ 18,239 43,923
------- -------
Total capitalization.............................. $19,600 $45,284
======= =======
The 5,115,882 shares listed above exclude:
- 1,600,000 shares of common stock reserved for issuance under our
Amended and Restated 1994 Stock Incentive Plan as of April 30, 2001.
Options to purchase 775,895 shares are outstanding under this plan.
- Shares of common stock issuable by us in the future with a market value
of $2,200,000, subject to adjustment. $1,000,000 of issuable common
stock relates to our acquisition of Crosby, Mead, Benton & Associates
in October 2000 and $1,200,000 of issuable common stock (of which
34,188 shares with a market value of $500,000 were issued in February
2001) relates to our acquisition of Hook & Associates Engineering, Inc.
in January 2001.
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SELECTED CONSOLIDATED 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
prospectus. 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 prospectus.
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 prospectus.
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
========== ========== ========== ========== ==========
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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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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 prospectus. 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 prospectus.
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
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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.
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
20
23
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.
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
21
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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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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
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
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%
==== ==== ==== ==== ==== ==== ==== ====
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26
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;
- 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,
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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 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.
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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.
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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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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.
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INDUSTRIES SERVED
We serve both the real estate development, public works/infrastructure and
communications industry and the industrial/energy industry.
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
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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.
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
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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;
- 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
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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 Orange County Branch of 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
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experience by providing in-house continuing education seminars, design forums
and training programs.
Full Service Approach
We provide a full complement of engineering and consulting services. Since many
consulting and engineering services firms specialize in only one or a few
services, a project owner may often be required to engage several engineering
and/or consulting firms during the various phases of a project. The phases range
from identifying and evaluating whether to acquire 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.
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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 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
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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
----------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------
July 1999 Thompson-Hysell, Inc. Northern and Central Water resources and
California; Utah other engineering
services
----------------------------------------------------------------------------------------------------
October 2000 Crosby, Mead, Benton & Southern California Land development design,
Associates infrastructure design
and landscape
architecture
----------------------------------------------------------------------------------------------------
January 2001 Hook & Associates Arizona; Colorado; Land development,
Engineering, Inc. Wyoming transportation, and
communications services
----------------------------------------------------------------------------------------------------
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,
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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 approximately 5,000 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
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and Utah. This effort coordinates tasks to be performed by at least half a dozen
firms throughout the Western United States.
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
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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.
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
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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 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.
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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
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facilities by increasing the processing and drying speeds and reducing the
operational costs.
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
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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.
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 Conservancy 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 Spectrum, L.P.
Enron Energy Services Whalen & Company
E&J Gallo Winery ATI
Kellogg Co. Delta Aviation Services, L.P.
PG&E National Energy Group Scientech, Inc.
New United Motors Manufacturing, 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
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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.
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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FACILITIES
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.
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
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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information with respect to our executive officers
and directors.
NAME AGE POSITION WITH OUR COMPANY
---- --- -------------------------
Aram H. Keith........................ 56 Chief Executive Officer and Chairman of the Board
Eric C. Nielsen...................... 41 President and Chief Operating Officer
Gary C. Campanaro.................... 40 Chief Financial Officer, Secretary and Director
Walter W. Cruttenden, III............ 50 Director(1)(2)
George Deukmejian.................... 72 Director(3)
Christine Diemer Iger................ 48 Director(1)(3)
-------------------------
(1) Member of the compensation committee.
(2) Mr. Cruttenden has been appointed to our audit committee effective as of
June 1, 2001.
(3) Member of the audit committee.
All directors hold office until the next annual meeting of shareholders or the
election and qualification of their successors. Our executive officers are
elected annually by our board of directors and serve at its discretion.
Aram H. Keith co-founded our company in March 1983 and has served as our chief
executive officer and chairman of the board since that time. Mr. Keith also
served as our president from 1983 to 1999. Mr. Keith is the president and sole
director of our subsidiaries, Crosby, Mead, Benton & Associates and Hook
Engineering, Inc. Mr. Keith has been a California licensed civil engineer since
1972. He also holds civil engineering licenses in the states of Arizona,
Colorado, Nevada and Texas. Mr. Keith received a B.S. in Civil Engineering from
California State University at Fresno.
Eric C. Nielsen has served as our president since July 1999 and as our chief
operating officer since March 2001. Prior to July 1999, Mr. Nielsen served as
the president of our Costa Mesa division since November 1994. Mr. Nielsen joined
us in November 1985 as senior designer and became a vice president, engineering
and mapping in July 1990. Mr. Nielsen received a B.S. in Civil Engineering from
California Polytechnic State University and is a registered engineer in the
states of California, Colorado and Hawaii.
Gary C. Campanaro has served as our chief financial officer since joining our
company in January 1998, as a director since July 1998, and as our secretary
since April 1999. Mr. Campanaro is also the chief financial officer and
secretary of each of our subsidiaries, Crosby, Mead, Benton & Associates and
Hook Engineering, Inc. Mr. Campanaro joined CB Commercial Real Estate Group,
Inc. (now CB Richard Ellis), a commercial real estate brokerage firm, in
November 1992 as a vice president of the financial consulting group and became
senior vice president, managing officer of the financial consulting group in
February 1995 and also began serving on the operation management board of CB
Commercial Real Estate Group Inc. Mr. Campanaro served in those positions until
he joined our company. From July 1988 to November 1992, he held various
accounting, finance and real estate positions with CKE Restaurants, Inc., an
owner and operator of a restaurant chain. Mr. Campanaro began his professional
career with KPMG LLP and is licensed by the State of California as a certified
public
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accountant and as a real estate broker. He is a member of the American Institute
of Certified Public Accountants. Mr. Campanaro received a B.S. in Accounting
from the University of Utah.
Walter W. Cruttenden, III joined our board of directors in July 1997. Mr.
Cruttenden is the chief executive officer of Cruttenden Partners, an investment
company. Mr. Cruttenden served as chairman of the board of directors and chief
executive officer of E*OFFERING Corp. from December 1998 until January 2000. In
1986, he founded Cruttenden Roth Inc. and served as the chairman of the board
and chief executive officer until November 1997 and chairman of the board until
September 1998. E*OFFERING Corp. and Cruttenden Roth Inc. are both investment
banking institutions. Mr. Cruttenden also serves on the board of directors of
Cubic Technologies, Electronic Monitoring Systems, Inc., NetChemistry,
PrisMedical Inc. and The Yogananda Foundation.
George Deukmejian joined our board of directors in July 1999. Mr. Deukmejian was
the Governor of the State of California, serving in that office from January
1983 until January 1991. Following his departure from the Governor's office, he
joined the law firm of Sidley & Austin in its Los Angeles office where he
practiced as a partner until July 1999 and where he practiced as Senior Counsel
from July 1999 until his retirement in July 2000. Prior to his election as
Governor, Mr. Deukmejian served from 1979 to 1982, as the Attorney General of
the State of California and from 1963 to 1978, served in the California State
Legislature. Mr. Deukmejian currently serves on the boards of directors of
Burlington Northern Santa Fe Corp. and Health Net, Inc. He also serves as a
Deputy Trustee of the Golden Eagle Insurance Trust in Liquidation and on the
Senior Advisory Council of the Industrial Bank of Japan's Los Angeles office.
Mr. Deukmejian received a B.A. in Sociology from Siena College and a J.D. from
St. Johns University Law School.
Christine Diemer Iger joined our board of directors in July 1999. Ms. Diemer
Iger is the current chief executive officer of the Building Industry Association
of Southern California, Orange County chapter which she joined in July 1989.
Prior to joining that organization, she was an appellate lawyer for the Attorney
General of the State of California from 1981 to 1983, and served as the director
of the California Department of Housing and Community Development from 1983 to
1989. Ms. Diemer Iger is a former board member of the Federal National Mortgage
Association (Fannie Mae) and the California Housing Finance Agency (CHFA). Ms.
Diemer Iger received a B.A. in English from California State University at San
Diego and a J.D. from Western State University, College of Law.
DIRECTOR COMPENSATION
Our nonemployee directors receive $1,500 per day for any day during which the
member has personally attended any shareholders', board and/or committee
meeting. Effective January 2001, our nonemployee directors will also receive
$20,000 per year as compensation for their services as a director of our
company. In addition, our
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nonemployee directors are reimbursed for out-of-pocket expenses incurred in
connection with attendance at shareholders', board and committee meetings.
We may also periodically award options or purchase rights to our directors under
our existing stock option plan and otherwise.
In fiscal 2000, we did not issue any options to purchase shares of our common
stock to any of our directors. In July 1999, we granted options to purchase
7,407 shares of our common stock to two of our nonemployee directors.
BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The board of directors has standing audit and compensation committees, but does
not have a nominating committee. In practice, our entire board performs the
function of a nominating committee.
The compensation committee is responsible for making recommendations to our
board concerning such executive compensation arrangements and plans as it deems
appropriate. The compensation committee is composed of Walter W. Cruttenden, III
and Christine Diemer Iger.
The audit committee is responsible for, among other things, considering and
recommending to our board of directors, the appointment of our independent
auditors, examining the results of audits and quarterly reviews, reviewing with
the auditors, the plan and scope of the audit and audit fees, reviewing internal
accounting controls, meeting periodically with our independent auditors and the
monitoring of all financial aspects of our operations. In June 1999, our board
of directors approved and adopted an audit committee charter. The audit
committee is currently composed of George Deukmejian and Christine Diemer Iger,
and effective as of June 1, 2001, Walter W. Cruttenden, III has also been
appointed to the audit committee. Messrs. Deukmejian and Cruttenden and Ms.
Diemer Iger are all independent as defined in the listing standards of the
National Association of Securities Dealers.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid or
accrued by us to our chief executive officer and to each of our other three most
highly compensated executive officers who earned more than $100,000, in salary
and bonus for all services rendered to us in all capacities during the year
ended December 31, 2000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
---------------------------------- UNDERLYING
NAME AND FISCAL ALL OTHER STOCK
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS
------------------ ------ -------- ------ ------------ ------------
Aram H. Keith.......................... 2000 $381,926(1) -- $15,115(2) --
Chief Executive Officer and 1999 $375,423(3) -- $66,573(4) 46,000
Chairman of the Board 1998 $373,419(5) -- $ 6,832(6) --
Eric C. Nielsen(7)..................... 2000 $172,551(8) $6,985(9) $39,553(10) 20,000
President and Chief Operating Officer 1999 $158,290(11) -- $15,561(12) 10,000
Gary C. Campanaro...................... 2000 $164,122(13) $5,000 $17,435(14) --
Chief Financial Officer and 1999 $146,116(15) -- $ 9,186(16) 12,500
Secretary 1998 $115,016(17) -- $ 5,171(18) 31,482
Jerry M. Brickman(19).................. 2000 $155,780(20) -- $11,157(21) --
Chief Operating Officer 1999 $147,309 -- $26,090(22) 8,000
1998 $130,403 -- $ 5,186(23) 9,259
-------------------------
(1) Consists of $373,523 in salary and $8,403 in matching contributions made by
us under our 401(k) plan.
(2) Consists of a $4,500 auto allowance, $3,688 in payout of accrued vacation
and sick time, $6,787 in membership dues paid by us on behalf of Mr. Keith
and $140 in premiums on a life insurance policy of which Mr. Keith is the
beneficiary.
(3) Consists of $373,923 in salary and $1,500 in matching contributions made by
us under our 401(k) plan.
(4) Consists of $53,957 in payout of accrued vacation and sick time, $5,443 in
reimbursement of various automobile expenses, $6,987 in membership dues
paid by us on behalf of Mr. Keith and $186 in premiums on a life insurance
policy of which Mr. Keith is the beneficiary.
(5) Consists of $371,562 in salary and $1,857 in matching contributions made by
us under our 401(k) plan.
(6) Consists of a $1,500 auto allowance, $5,146 in membership dues paid by us
on behalf of Mr. Keith and $186 in premiums on a life insurance policy of
which Mr. Keith is the beneficiary.
(7) Effective as of March 13, 2001, Mr. Nielsen was elected to serve as our
chief operating officer.
(8) Consists of $166,426 in salary and $6,125 in matching contributions made by
us under our 401(k) plan.
(9) Consists of $5,000 year-end bonus and $1,985 as a 15-year service bonus.
(10) Consists of a $12,000 auto allowance, $3,000 in membership dues paid by us
on behalf of Mr. Nielsen, $140 in premiums on a life insurance policy of
which Mr. Nielsen is the beneficiary, $1,328 for an executive medical
examination paid for by us and $23,085 in payout of accrued vacation and
sick time.
(11) Consists of $156,790 in salary and $1,500 in matching contributions made by
us under our 401(k) plan.
(12) Consists of a $12,000 auto allowance, $3,375 in membership dues paid by us
on behalf of Mr. Nielsen and $186 in premiums on a life insurance policy of
which Mr. Nielsen is the beneficiary.
(13) Consists of $158,746 in salary and $5,376 in matching contributions made by
us under our 401(k) plan.
(14) Consists of a $6,000 auto allowance, $3,000 in membership dues paid by us
on behalf of Mr. Campanaro, $140 in premiums on a life insurance policy of
which Mr. Campanaro is the beneficiary, $1,624 for an executive medical
examination paid for by us and $6,671 in payout of accrued vacation and
sick time.
(15) Consists of $144,616 in salary and $1,500 in matching contributions made by
us under our 401(k) plan.
(16) Consists of a $6,000 auto allowance, $3,000 in club membership dues paid by
us on behalf of Mr. Campanaro and $186 in premiums on a life insurance
policy of which Mr. Campanaro is the beneficiary.
(17) Consists of $114,423 in salary and $593 in matching contributions made by
us under our 401(k) plan.
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(18) Consists of a $5,000 auto allowance and $171 in premiums paid on a life
insurance policy of which Mr. Campanaro is the beneficiary.
(19) Effective as of January 5, 2001, Mr. Brickman ceased being an employee of
our company.
(20) Consists of $149,576 in salary and $6,204 in matching contributions made by
us under our 401(k) program.
(21) Consists of a $6,000 auto allowance, $140 in premiums paid on a life
insurance policy of which Mr. Brickman is the beneficiary and $5,017 in
payout of accrued vacation and sick time.
(22) Consists of a $6,000 auto allowance, $186 in premiums paid on a life
insurance policy of which Mr. Brickman is the beneficiary and $19,904 in
payout of accrued vacation and sick time.
(23) Consists of a $5,000 auto allowance and $186 in premiums paid on a life
insurance policy of which Mr. Brickman is the beneficiary.
OPTIONS GRANTED IN LAST FISCAL YEAR
The following table sets forth certain information concerning stock options
granted to the executive officers named in the summary compensation table in
this prospectus during the fiscal year ended December 31, 2000. This information
includes hypothetical potential gains from stock options granted in fiscal 2000.
These hypothetical gains are based entirely on assumed annual growth rates of 5%
and 10% in the value of our common stock price over the 10-year life of the
stock options granted in 2000. These assumed rates of growth were selected by
the Securities and Exchange Commission for illustrative purposes only and are
not intended to predict future stock prices, which will depend upon market
conditions and our future performance and prospects.
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------
NAME GRANTED(1) YEAR(2) ($/SHARE) DATE 5% 10%
---- ---------- ---------- --------- ---------- --------- ----------
Aram H. Keith....................... 0 0% -- -- -- --
Eric C. Nielsen..................... 20,000 11.2% $4.38 2010 $55,100 $139,600
Gary C. Campanaro................... 0 0% -- -- -- --
Jerry M. Brickman(4)................ 0 0% -- -- -- --
-------------------------
(1) Options vest 20% annually over five years.
(2) Based on options to purchase 178,150 shares granted to our employees during
the fiscal year ended December 31, 2000.
(3) Calculated using the potential realizable value of each grant.
(4) On January 5, 2001, Mr. Brickman ceased being an employee of our company.
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AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding stock options
exercised by the executive officers named in the summary compensation table in
this prospectus during the fiscal year ended December 31, 2000, as well as the
number of exercisable and unexercisable in-the-money stock options and their
values at fiscal year-end. An option is in-the-money if the fair market value
for the underlying securities exceeds the exercise price of the option.
NUMBER OF VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE AT DECEMBER 31, 2000 AT DECEMBER 31, 2000(1)
ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------- -------- ------------------------- -------------------------
Aram H. Keith.................... 0 0 0 $0/$0
Eric C. Nielsen.................. 0 0 32,593/24,444 $172,743/$95,953
Gary C. Campanaro................ 0 0 11,111/16,667 $ 58,888/$88,335
Jerry M. Brickman(2)............. 0 0 19,260/ 2,962 $102,078/$15,699
-------------------------
(1) Based on the last reported sale price of underlying securities ($8.00) on
December 29, 2000 (the last trading day during 2000) as reported by Nasdaq,
minus the exercise price of the options.
(2) On January 5, 2001, Mr. Brickman ceased being an employee of our company.
CHANGE IN CONTROL AGREEMENTS
In March 2001, our board of directors approved change in control agreements with
Aram H. Keith, our chief executive officer and chairman of the board, Eric C.
Nielsen, our president and chief operating officer, and Gary C. Campanaro, our
chief financial officer and secretary. These agreements provide for severance
payments to these executive officers in certain circumstances following a change
in control of our company. Specifically, the change in control agreements
provide that if the executive officer's employment with us terminates as a
result of an involuntary or constructive termination (as these terms are defined
in the agreements) at any time within two years following a change in control,
the executive officer will receive a one-time payment, equal to two times the
executive officer's highest annual level of total cash compensation (including
any and all bonus amounts) paid by us to that executive officer during any one
of the three consecutive calendar years (inclusive of the year of termination)
immediately prior to termination. The level of annual cash compensation for the
year in which a termination occurs will include any bonus amounts which the
executive officer is eligible to receive during the year of termination, whether
or not such bonus was earned by the executive officer. In addition, any unvested
options previously granted to the executive officer will immediately vest and
become exercisable as of the date of termination. Under these change in control
agreements, for a two-year period following the termination, the executive
officer is also entitled to receive continuing health coverage at a level
commensurate to the coverage provided by us to the executive officer immediately
prior to the change in control; all other benefits under welfare benefit plans,
practices, policies and programs provided or offered by us, including, medical,
dental, prescription, disability, employee life, group life, accidental death
and travel accident insurance plans and programs; fringe benefits; and a
reasonable level of outplacement services selected by the executive officer.
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Under the change in control agreements, a "change in control" means the
occurrence of any of the following events: (1) other than Aram Keith or his
family members and affiliates, a person becomes the beneficial owner of 20% or
more of the total voting power of our then outstanding voting securities, (2) a
change in the composition of our board of directors occurs within a two-year
period as a result of which fewer than a majority of the directors are directors
who were serving on our board at the beginning of such two-year period unless
the election of each director who was not a director at the beginning of such
period has been approved in advance by directors representing at least
two-thirds of the directors then on the board who were directors at the
beginning of the period, (3) the consummation of a merger or consolidation of
our company in which we do not survive as an independent public company, or (4)
our business or businesses for which the executive officer's services are
principally performed are disposed of by us under a partial or complete
liquidation of our company, a sale of assets (including stock of a subsidiary),
or otherwise.
Under these change in control agreements, the executive officer is also entitled
to receive a payment by us to offset any excise tax under the excess parachute
payment provisions of Section 4999 of the Internal Revenue Code of 1986, as
amended, or the Code, that has been levied against the executive officer for
payments that we have made to, or for the benefit of that executive officer
(whether or not such payments are made pursuant to the executive officer's
change in control agreement). The payment by us will be "grossed up" so that
after the executive officer pays all taxes (including any interest or penalties
with respect to such taxes) on the payment, the executive officer will retain an
amount of the payment equal to the excise tax imposed.
STOCK OPTION PLANS
On March 13, 2001, our board of directors adopted, subject to the approval of
our shareholders, an Amended and Restated 1994 Stock Incentive Plan. The plan is
administered by our compensation committee, which has discretion and authority,
consistent with the provisions of the plan, to determine which eligible
participants will receive options, the time when options will be granted, the
terms of options granted and the number of shares which will be issuable upon
exercise of options.
Our plan provides for the granting of "incentive stock options" within the
meaning of Section 422 of the Code, nonqualified options and rights to purchase
shares of common stock. Under the plan, options and purchase rights covering an
aggregate of 1,600,000 shares of our common stock may be granted, in each case
to officers, directors, key employees and consultants of TKCI and its
subsidiaries, except that incentive stock options may not be granted to
nonemployee directors or nonemployee consultants. The exercise price of
incentive stock options must not be less than the fair market value of a share
of common stock on the date the option is granted and must not be less than 110%
with respect to optionees who own at least 10% of our outstanding common stock.
Our compensation committee has the authority to determine the time or times at
which options granted under the plan become exercisable, provided that options
expire no later than ten years from the date of grant, or five years with
respect to incentive stock options held by optionees who own at least 10% of our
outstanding common stock.
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Options are nontransferable, other than by will and the laws of descent and
distribution, and generally may be exercised only by an employee while employed
by TKCI. The plan terminates in March 2011. As of April 30, 2001, options to
purchase 775,895 shares of common stock were outstanding under the plan.
In September 2000, we made an offer to our option holders which gave them a
one-time election to have us 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 our legal counsel, we
concluded that the attempt by us to cancel the options was ineffective and the
participants continue to hold their original options.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our amended and restated articles of incorporation provide that the liability of
our directors for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by or in the
right of our company for breach of a director's duties to us or to our
shareholders except for liability for:
- acts or omissions that involve intentional misconduct or a knowing and
culpable violation of law;
- acts or omissions that a director believes to be contrary to the best
interests of our company or our shareholders or that involve the
absence of good faith on the part of the director;
- any transaction for which a director derived an improper personal
benefit;
- acts or omission that show a reckless disregard for the director's duty
to our shareholders in circumstances in which the director was aware,
or should have been aware, in the ordinary course of performing his or
her duties, of a risk of serious injury to us or our shareholders;
- acts or omissions that constitute an unexcused pattern of inattention
that amounts to an abdication of the director's duty to us or our
shareholders; and
- engaging in transactions described in the California Corporations Code
or California case law which result in liability, or approving the same
kinds of transactions.
Our amended and restated articles of incorporation also provide that we are
authorized to provide indemnification to our officers and directors in excess of
the indemnification otherwise permitted by Section 317 of the California
Corporations Code. Our amended and restated bylaws provide for indemnification
of our officers, directors, employees, and other agents to the extent and under
the circumstances permitted by California law.
We have entered into agreements to indemnify our directors and executive
officers in addition to the indemnification provided for in our amended and
restated articles of
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incorporation and amended and restated bylaws. Among other things, these
agreements provide that we will indemnify, under appropriate circumstances, each
of our directors and executive officers for expenses, including attorneys' fees,
judgments, fines and settlement amounts incurred by that person in any action or
proceeding, including any action by or in the right of our company, on account
of services provided as a director or executive officer of us, or as a director
or executive officer of any other company or enterprise to which the person
provides services at our request.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1998, the holders of all of the outstanding shares of Keith
Engineering common stock contributed their shares to TKCI as a contribution to
capital. In consideration of this contribution, we issued to the contributing
shareholders, one share of TKCI common stock for each share of Keith Engineering
stock contributed. Aram H. Keith, through the Aram H. Keith and Margie R. Keith
Trust, acquired 738,889 shares of TKCI common stock. Floyd S. Reid, as trustee
of the Floyd S. Reid and Ruth L. Reid Family Trust dated March 30, 1990,
acquired 351,852 shares of TKCI common stock. Mr. Keith is our chief executive
officer and chairman of the board, and Mr. Reid is a former director and
executive officer of our company and remains a principal shareholder.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of April 30, 2001 and as adjusted to reflect
the sale of common stock offered in this offering, by:
- each person known by us to own beneficially more than 5% of the
outstanding shares of our common stock;
- each of our directors;
- each of the executive officers named in the summary compensation table
contained in this prospectus;
- each selling shareholder; and
- all of our directors and executive officers as a group.
Percentage of shares owned is based on 5,405,784 shares of common stock
outstanding as of April 30, 2001, and 7,155,784 shares outstanding after this
offering, assuming that the underwriters' over-allotment option is not
exercised.
Beneficial ownership is calculated based on requirements of the Securities and
Exchange Commission. All shares of our common stock subject to options currently
exercisable or exercisable within 60 days after April 30, 2001 are deemed to be
outstanding for the purpose of computing the percentage of ownership of the
person holding the options, but are not deemed to be outstanding for computing
the percentage of ownership of any other person.
Unless otherwise indicated below, each shareholder named in the table has sole
or shared voting and investment power with respect to all shares beneficially
owned, subject to applicable community property laws. The address of each of the
following shareholders is c/o The Keith Companies, Inc., 2955 Red Hill Avenue,
Costa Mesa, California 92626.
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING SHARES OWNED AFTER OFFERING
------------------------ BEING --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ ----------- --------- --------- --------- -------
Aram H. Keith.............................. 1,624,420(1) 29.9% 150,000 1,474,420 20.6%
Walter W. Cruttenden, III.................. 408,837 7.6% 60,000 348,837 4.9%
Floyd S. Reid.............................. 402,944(2) 7.5% 0 402,944 5.6%
E*Capital Corporation and related
parties.................................. 295,700(3) 5.5% 0 295,700 4.1%
Gary C. Campanaro.......................... 51,667(4) * 20,000 31,667 *
Eric C. Nielsen............................ 41,815(5) * 20,000 21,815 *
Jerry M. Brickman(6)....................... 30,371 * 0 30,371 *
George Deukmejian.......................... 8,907(7) * 0 8,907 *
Christine Diemer Iger...................... 7,407(8) * 0 7,407 *
All directors and executive officers as a
group (6 persons)........................ 2,143,053 39.1% 250,000 1,893,053 26.2%
-------------------------
* Less than 1% of our outstanding common stock.
(1) Includes 1,606,020 shares and 18,400 shares underlying options.
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(2) Amount shown does not include 56,870 shares owned by Mr. Reid's daughter and
granddaughter who reside with Mr. Reid. Mr. Reid expressly disclaims
beneficial ownership of these shares.
(3) E*Capital Corporation is the parent of Wedbush Morgan Securities, Inc.
Includes 236,600 shares owned by E*Capital Corporation, 31,600 shares owned
Edward W. Wedbush, the chairman of E*Capital Corporation and the president
of Wedbush Morgan Securities Inc. and 27,500 shares owned by WMS PS
Retirement Plan, the employee retirement plan for the employees of Wedbush
Morgan Securities Inc. Mr. Wedbush owns a majority of the outstanding shares
of E*Capital Corporation. Accordingly, Mr. Wedbush may be deemed the
beneficial owner of our shares that are owned by E*Capital Corporation.
However, beneficial ownership of our shares which are owned by E*Capital
Corporation is disclaimed by Mr. Wedbush.
(4) Includes 28,518 shares and 23,149 shares underlying options.
(5) Includes 20,000 shares and 21,815 shares underlying options.
(6) On January 5, 2001, Mr. Brickman ceased being an employee of our company.
(7) Includes 1,500 shares held by a defined benefit pension plan of which Mr.
Deukmejian is the trustee and sole participant and 7,407 shares underlying
options.
(8) Consists solely of shares underlying options.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock,
$0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par
value per share. The following description of our capital stock does not purport
to be complete and is subject to and qualified in its entirety by our amended
and restated articles of incorporation, our amended and restated bylaws and the
provisions of applicable California law.
COMMON STOCK
The holders of outstanding shares of our common stock are entitled to receive
dividends out of assets legally available therefor at times and in amounts as
the board of directors may, from time to time, determine, subordinate to any
preferences which may be granted to the holders of preferred stock and to some
restrictions on the payment of dividends contained in our credit agreement with
our bank. Holders of common stock are entitled to one vote per share on all
matters on which the holders of common stock are entitled to vote. The holders
of our common stock are entitled to cumulative voting rights with respect to the
election of directors so long as at least one shareholder has given notice at
the meeting of shareholders prior to the voting of that shareholder's desire to
cumulate votes. Under cumulative voting, each shareholder may give any one
candidate whose name is placed in nomination prior to the commencement of
voting, a number of votes equal to the number of directors to be elected,
multiplied by the number of votes to which the shareholder's shares are normally
entitled, or distribute the number of votes among as many candidates, in
whatever proportions, as the shareholder sees fit. The effect of cumulative
voting is that the holders of a majority of the outstanding shares of our common
stock may not be able to elect all of our directors. Our common stock is not
entitled to preemptive rights and may not be redeemed or converted, except as
may be provided by agreement. Upon the liquidation, dissolution or winding-up of
our company, the assets legally available for distribution to shareholders are
divided among the holders of the common stock in proportion to the number of
shares of common stock held by each of them, after the payment of all of our
debts and liabilities and the rights of any outstanding class or series of
preferred stock to have
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priority to distributed assets. All outstanding shares of our common stock are,
and the shares of common stock to be issued in this offering will be, when
issued and delivered, validly issued, fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock are subordinate to any
series of preferred stock that we may issue in the future. As of April 30, 2001,
there were 5,405,784 shares of common stock outstanding. As of March 23, 2001,
there were approximately 56 holders of record and 4,536 beneficial owners of our
common stock. Upon completion of this offering, there will be approximately
7,155,784 shares of our common stock outstanding. There are 1,600,000 shares of
common stock currently reserved for issuance under our Amended and Restated 1994
Stock Incentive Plan, which is subject to shareholder approval, of which 775,895
shares are issuable upon exercise of outstanding options.
PREFERRED STOCK
Preferred stock may be issued from time to time in one or more series, and our
board of directors, without action by the holders of our common stock, may fix
or alter the voting rights, redemption provisions, dividend rights, dividend
rates, claims to our assets superior to those of holders of our common stock,
conversion rights and any other rights, preferences, privileges and restrictions
of any wholly unissued series of preferred stock. The board of directors,
without shareholder approval, can issue shares of preferred stock with rights
that could adversely affect the rights of the holders of common stock. No shares
of preferred stock are presently outstanding, and we have no plans to issue any
preferred shares. The issuance of shares of preferred stock could adversely
affect the voting power of the holders of common stock and could have the effect
of making it more difficult for a third party to acquire, or could discourage or
delay a third party from acquiring, a majority of our outstanding stock.
TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our common stock, including shares issued
upon exercise of outstanding options, in the public market after this offering
could adversely affect the prevailing market price of our common stock.
As of April 30, 2001, we had 5,405,784 shares of common stock outstanding. Upon
completion of this offering, we will have 7,155,784 shares of common stock
outstanding. All of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
held by an affiliate of our company within the meaning of Rule 144 adopted under
the Securities Act. Sales by any affiliate would be limited by the resale
limitations of Rule 144. In connection with this offering, our executive
officers, directors and certain other shareholders, who will hold, in the
aggregate, approximately 2,760,000 outstanding shares upon completion of this
offering, have agreed not to sell or transfer any common stock for 180 days
after the date of this
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prospectus without first obtaining the written consent of Wedbush Morgan
Securities Inc.
The shares of our outstanding common stock that are not registered in this
offering or in our initial public offering will be "restricted securities"
within the meaning of Rule 144 under the Securities Act and may not be sold in
the absence of a registration under the Securities Act unless an exemption from
registration is available, including an exemption contained in Rule 144. In
general, under Rule 144 as currently in effect, any person who has beneficially
owned restricted securities, as that term is defined in Rule 144, for at least
one year is entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the then outstanding shares of our
common stock, or the average weekly trading volume in our common stock during
the four calendar weeks preceding the sale, provided that public information
about us, as required by Rule 144, is then available and the seller complies
with the manner of sale and notification requirements of the rule. A person who
is not an affiliate and has not been an affiliate within three months prior to
the sale and has, together with any previous owners who were not affiliates,
beneficially owned restricted securities for at least two years is entitled to
sell those shares under Rule 144(k) without regard to any of the volume
limitations described above.
On July 16, 1999, we filed a registration statement on Form S-8 with the
Securities and Exchange Commission to register the issuance of 1,111,111 shares
of our common stock issuable upon exercise of options granted under our Amended
and Restated 1994 Stock Incentive Plan. Upon issuance, all of these shares will
be freely tradable without restriction or further registration under the
Securities Act except to the extent purchased by one of our affiliates. On March
13, 2001, our board of directors adopted a new Amended and Restated 1994 Stock
Incentive Plan which, among other things, increases the number of shares subject
to the plan from 1,111,111 shares of common stock to 1,600,000 shares of common
stock. We will seek shareholder approval of this Amended and Restated 1994 Stock
Incentive Plan at our annual meeting of shareholders to be held in May 2001.
Assuming that we obtain shareholder approval, we intend to register the issuance
of the additional 488,889 shares of our common stock issuable upon exercise of
options granted under the new Amended and Restated 1994 Stock Incentive Plan on
a registration statement on Form S-8.
We are obligated to issue in the future, shares of unregistered common stock
with an aggregate market value of $1,700,000, subject to adjustment, in
connection with our acquisitions of Crosby, Mead, Benton & Associates and Hook &
Associates Engineering, Inc.
No predictions can be made of the effect, if any, that future sales of shares of
our common stock, and grants of options and warrants to acquire shares of our
common stock, or the availability of shares for future sale, will have on the
market price of our common stock prevailing from time to time. Sales of
substantial amounts of common stock in the public market, or the perception that
these sales could occur, could adversely affect the prevailing market prices of
our common stock.
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UNDERWRITING
Under the terms and subject to the conditions of an underwriting agreement, the
underwriters named below, acting through their representatives, Wedbush Morgan
Securities Inc. and Janney Montgomery Scott LLC, each severally has agreed to
purchase from us and the selling shareholders, the number of shares of common
stock shown opposite their names below at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. Other than the shares covered by the over-allotment option, the
underwriters are obligated to purchase and accept delivery of all of the shares
of common stock if any are purchased.
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Wedbush Morgan Securities Inc............................... 780,000
Janney Montgomery Scott LLC................................. 780,000
A.G. Edwards & Sons, Inc.................................... 50,000
C.E. Unterberg, Towbin...................................... 50,000
CIBC World Markets Corp. ................................... 50,000
UBS Warburg LLC............................................. 50,000
SG Cowen Securities Corp. .................................. 50,000
Thomas Weisel Partners LLC.................................. 50,000
Crowell, Weedon & Co. ...................................... 20,000
Friedman, Billings, Ramsey & Co., Inc. ..................... 20,000
Stifel, Nicolaus & Company Incorporated..................... 20,000
The Seidler Companies Incorporated.......................... 20,000
Tucker Anthony Incorporated................................. 20,000
Wells Fargo Van Kasper, LLC................................. 20,000
W.R. Hambrecht + Co., LLC................................... 20,000
---------
Total.................................................. 2,000,000
=========
The underwriters propose initially to offer the shares of common stock in part
directly to the public at the public offering price shown on the cover page of
this prospectus and in part to dealers, including the underwriters, at this
price less a discount not in excess of $0.56 per share. The underwriters may
allow, and these dealers may re-allow other dealers, a discount not in excess of
$0.21 per share. After this offering, the public offering price, concession and
reallowance to dealers may be reduced by the representatives. No such reduction
shall change the amount of proceeds to be received by us and the selling
shareholders as set forth on the cover page of this prospectus. The common stock
is offered by the underwriters as stated in this prospectus, subject to receipt
and acceptance by them and subject to their right to reject any order in whole
or in part.
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
Underwriting discounts and commissions payable by
us................................................ $0.99 $1,732,500 $1,881,000
Underwriting discounts and commissions payable by
the selling shareholders.......................... $0.99 $ 247,500 $ 396,000
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We estimate that expenses payable by us in connection with this offering, other
than the underwriting discounts and commissions referred to above, will be
approximately $635,000.
A prospectus in electronic format may be made available on the Internet sites or
through other online services maintained by one or more of the underwriters of
this offering, or by their affiliates. In those cases, prospective investors may
view offering terms online and, depending upon the particular underwriter,
prospective investors may be allowed to place orders online. The underwriters
may agree with us to allocate a specific number of shares for sale to online
brokerage account holders. Any such allocation for online distribution will be
made by the representatives on the same basis as other allocations.
A prospectus in electronic format is being made available on an Internet web
site maintained by E InvestmentBank, an affiliate of Wedbush Morgan Securities
Inc. The underwriters may allocate a number of shares to E InvestmentBank for
sale to online brokerage account holders. These online brokerage account holders
will have the opportunity to purchase shares using the Internet in accordance
with procedures established by E InvestmentBank.
OVER-ALLOTMENT
We and two selling shareholders, Aram H. Keith and Walter W. Cruttenden, III,
have granted the underwriters an option, exercisable within 45 days after the
date of this prospectus, to purchase up to an aggregate of 300,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions. We anticipate that one-half of the shares subject to
the over-allotment option will be sold by us and the other half will be sold by
those two selling shareholders. If the entire over-allotment option is
exercised, we anticipate Mr. Keith will sell 110,000 shares and Mr. Cruttenden
will sell 40,000 shares to cover one-half of this option. The underwriters may
exercise this option solely to cover over-allotments, if any, made in this
offering. If the underwriters exercise this option, each underwriter will
purchase shares in approximately the same proportion as indicated in the table
above. If purchased, these additional shares will be sold by the underwriters on
the same terms as those on which the shares offered hereby are being sold. We
and certain of the selling shareholders will be obligated, pursuant to the
over-allotment option, to sell shares to the underwriters to the extent the
over-allotment option is exercised.
INDEMNITY
In the underwriting agreement, we and the selling shareholders have agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act and liabilities arising from breaches or
representations and warranties contained in the underwriting agreement.
SALES TO DISCRETIONARY ACCOUNTS
The underwriters have informed us that they do not intend to confirm sales to
accounts over which they exercise discretionary authority.
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FUTURE SALES
We have agreed, along with our executive officers, directors and certain
existing shareholders, not to offer, pledge, sell, hedge or otherwise transfer
or dispose of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock for
a period of 180 days from the date of this prospectus.
Transfers or dispositions can be made sooner, however, with the prior written
consent of Wedbush Morgan Securities Inc. Their consent may be given at any time
without public notice. In making such a determination, Wedbush Morgan Securities
Inc. would consider prevailing market factors and conditions at the time of
receipt of a request for release from the 180-day restriction period.
Specifically, Wedbush Morgan Securities Inc. would consider in evaluating such a
request, factors such as average trading volume, recent price trends and the
need for additional public float in the market for our common stock.
OFFERS IN OTHER JURISDICTIONS
Neither we nor the underwriters have taken any action that would permit a public
offering of the shares of common stock offered by this prospectus in any
jurisdiction where action for that purpose is required, other than the United
States. The shares of common stock offered by this prospectus may not be offered
or sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisements related to the offer and sale of these shares of
common stock be distributed or published, in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of these jurisdictions. This prospectus is not an offer to sell or a
solicitation of an offer to buy any shares of common stock offered hereby in any
jurisdiction in which such an offer or solicitation is unlawful.
STABILIZATION
In connection with this offering, the underwriters purchase and sell shares of
common stock in the open market in connection with transactions intended to
stabilize the price of the common stock. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales in accordance with Regulation M under the Securities Exchange Act of
1934, as amended.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The representatives may impose a penalty bid on underwriters. This means that to
the extent the representatives purchase in the open market shares of our common
stock sold in this offering to reduce the underwriters' short position or to
stabilize the price of our common stock, they have the option to reduce the
aggregate selling concession paid or payable to each syndicate member by the
amount of the selling concession attributable to the portion of the repurchased
shares sold in the offering by the syndicate member while such short covering or
stabilizing activities are ongoing. To reduce the likelihood of
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the imposition of a penalty bid, underwriters, in determining how to allocate
shares in the offering, may take into consideration the history of investors who
have quickly sold their shares in prior offerings. The imposition of a penalty
bid may discourage the immediate resale of shares sold in this offering.
These activities may stabilize, maintain or otherwise affect the market price of
the common stock. As a result, the price of the common stock may be higher than
the price that otherwise might exist in the open market. The underwriters are
not required to engage in these activities and may discontinue any of these
activities at any time.
SYNDICATE SHORT SALES
In connection with the offering, the underwriters may make short sales of the
issuer's shares and may purchase the issuer's shares on the open market to cover
positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase in
the offering. The lead underwriter may, in its sole discretion, establish a
syndicate short position. There is no contractual limit on the size of the
syndicate short position. The underwriters will deliver a prospectus in
connection with these short sales. Purchasers of shares sold short by the
underwriters are entitled to the same remedies under the federal securities laws
as any other purchaser of shares covered by the registration statement of which
this prospectus forms a part.
"Covered" short sales are sales made in an amount not greater than the
underwriters' over-allotment option to purchase additional shares in this
offering. The underwriters may close out any covered short position by either
exercising their over-allotment option or purchasing shares in the open market.
In determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through the over-allotment option.
"Naked" short sales are sales in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing shares in the
open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
Similar to other purchase transactions, the underwriters' purchases to cover the
syndicate short sales may have the effect of raising or maintaining the market
price of our stock or preventing or retarding a decline in the market price of
our stock. As a result, the price of the our stock may be higher than the price
that might otherwise exist in the open market.
PASSIVE MARKET MAKING
In connection with this offering and before the commencement of offers or sales
of the common stock, certain underwriters who are qualified market makers on the
Nasdaq National Market may engage in passive market making transactions in the
common stock on the Nasdaq National Market in accordance with Rule 103 of
Regulation M
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under the Securities Exchange Act of 1934, as amended, during the business day
prior to the pricing of the offering. Passive market makers must comply with
applicable volume and price limitations and must be identified as such. In
general, a passive market maker must display its bid at a price not in excess of
the highest independent bid for such security; if all independent bids are
lowered below the passive market maker's bid, however, the bid must then be
lowered when certain purchase limits are exceeded.
LEGAL MATTERS
The validity of the shares of common stock offered by us will be passed upon for
us by Rutan & Tucker, LLP, Costa Mesa, California which has acted as our counsel
in connection with this offering. Certain matters will be passed upon for the
underwriters by Akin, Gump, Strauss, Hauer & Feld, LLP, Los Angeles.
EXPERTS
The consolidated financial statements of The Keith Companies, Inc. and
subsidiaries as of December 31, 1999 and 2000, and for each of the years in the
three-year period ended December 31, 2000, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act, and the
rules and regulations enacted under its authority, with respect to the common
stock offered in this prospectus. This prospectus, which constitutes a part of
the registration statement, does not contain all of the information set forth in
the registration statement and its exhibits and schedules. Statements contained
in this prospectus as to the contents of any contract or other document referred
to in this prospectus are not necessarily complete, and in each instance,
reference is made to the full text of the contract or other document which is
filed as an exhibit to the registration statement. Each statement concerning a
contract or document which is filed as an exhibit should be read along with the
entire contract or document. For further information regarding us and the common
stock offered in this prospectus, reference is made to this registration
statement and its exhibits and schedules. The registration statement, including
its exhibits and schedules, may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at 7
World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center,
50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these
documents may be obtained from the Commission at its principal office in
Washington, D.C. upon the payment of the charges prescribed by the Commission.
The Commission maintains a web site that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the Commission. The Commission's address on the World Wide Web is
http://www.sec.gov.
62
65
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-3
Consolidated Statements of Income for the years ended
December 31, 1998, 1999 and 2000.......................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1998, 1999 and 2000...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
66
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
F-2
67
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.
F-3
68
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.
F-4
69
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.
F-5
70
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.
F-6
71
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.
F-7
72
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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.
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.
F-8
73
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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
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
F-9
74
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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.
F-10
75
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
F-11
76
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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 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.
F-12
77
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(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
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,
F-13
78
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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
=========== ===========
F-14
79
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
F-15
80
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
$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).
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
F-16
81
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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.
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
F-17
82
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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.
(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
F-18
83
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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
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
F-19
84
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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.
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
F-20
85
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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
F-21
86
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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.
(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
========== ========== ==========
F-22
87
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
F-23
88
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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.
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.
F-24
89
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 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).
(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
========== ========= ==========
F-25
90
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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)
========= =========== ===========
(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
F-26
91
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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.
F-27
92
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
F-28
93
On Inside Back Cover -- Graphics consisting of photographs of projects on which
we have performed services, or representative of those on which we have
performed services.
94
2,000,000 SHARES
KEITH COMPANY LOGO
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.............. 1
Risk Factors.................... 6
Special Note Regarding Forward-
Looking Statements........... 12
Use of Proceeds................. 13
Dividend Policy................. 13
Price Range of Common Stock..... 14
Capitalization.................. 15
Selected Consolidated Financial
Data......................... 16
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................... 19
PAGE
----
Quantitative and Qualitative
Disclosures About Market
Risk......................... 27
Business........................ 28
Management...................... 45
Principal and Selling
Shareholders................. 54
Description of Capital Stock.... 55
Shares Eligible for Future
Sale......................... 56
Underwriting.................... 58
Legal Matters................... 62
Experts......................... 62
Where You Can Find More
Information.................. 62
Index to Consolidated Financial
Statements................... F-1
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT
FROM THAT CONTAINED IN THIS PROSPECTUS. WE ARE NOT, AND THE UNDERWRITERS ARE
NOT, MAKING AN OFFER TO SELL THESE SECURITIES, OR SOLICITING ANY OFFER TO BUY
THESE SECURITIES, IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS, OR ANY SALE OF OUR COMMON STOCK, IS ACCURATE ONLY ON THE DATE OF
THIS PROSPECTUS.
WEDBUSH MORGAN SECURITIES INC. JANNEY MONTGOMERY SCOTT LLC
MAY 1, 2001