<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission File Number 0-19655
THE KEITH COMPANIES, INC.
----------------
(Exact name of registrant as specified in its charter)
California 33-0203193
--------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2955 REDHILL AVENUE, COSTA MESA, CALIFORNIA 92626
--------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (714) 540-0800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X*
- ------- -------
The number of shares outstanding of the registrant's common stock on
July 31, 1999 was 5,059,708
*This is the registrant's first periodic report filed after its initial public
offering.
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Pro Forma Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Qualitative and Quantitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1999 1998
------------ --------------
<S> <C> <C>
Current assets:
Cash $ 74,000 $ 457,000
Contracts and trade receivables, net of allowance for doubtful accounts of
$365,000 and $364,000 at June 30, 1999 and December 31, 1998,
respectively 5,606,000 5,582,000
Costs and estimated earnings in excess of billings 4,632,000 3,783,000
Prepaid expenses and other current assets 566,000 534,000
Deferred offering costs 1,134,000 291,000
Deferred tax assets - 270,000
------------ --------------
Total current assets 12,012,000 10,917,000
Equipment and improvements, net 2,979,000 2,862,000
Goodwill, net of accumulated amortization of $21,000 and $10,000 at June 30,
1999 and December 31, 1998, respectively 550,000 621,000
Other assets 287,000 130,000
------------ --------------
Total assets $ 15,828,000 $ 14,530,000
============ ==============
Liabilities and Stockholders' equity (Deficit)
Current liabilities:
Short-term borrowings $ 4,731,000 $ -
Current portion of long-term debt and capital lease obligations 1,374,000 1,488,000
Trade accounts payable 698,000 1,221,000
Accrued employee compensation 2,252,000 1,720,000
Accrued liabilities to related parties 234,000 185,000
Other accrued liabilities 1,303,000 688,000
Deferred tax liabilities 313,000 -
Billings in excess of costs and estimated earnings 374,000 435,000
------------ --------------
Total current liabilities 11,279,000 5,737,000
Long-term debt and capital lease obligations, less current portion 753,000 5,778,000
Notes payable to related parties 2,401,000 2,401,000
Other liabilities 275,000 485,000
Redeemable securities 544,000 430,000
------------ --------------
Stockholders' equity (deficit):
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 at June 30,
1999 and December 31, 1998; issued and outstanding 3,485,634 shares at
June 30, 1999 and December 31, 1998 3,000 3,000
Additional paid-in capital 538,000 652,000
Retained earnings (accumulated deficit) 35,000 (956,000)
------------ --------------
Total stockholders' equity (deficit) 576,000 (301,000)
------------ --------------
Commitments and contingencies (Notes 1, 3 and 5)
Total liabilities and stockholders' equity (deficit) $ 15,828,000 $ 14,530,000
============ ==============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------- -----------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Gross revenue $ 9,471,000 $ 8,399,000 $ 19,470,000 $ 15,520,000
Subcontractor costs 828,000 1,348,000 1,857,000 2,507,000
---------------- ---------------- ---------------- ----------------
Net revenue 8,643,000 7,051,000 17,613,000 13,013,000
Cost of revenue 5,786,000 4,613,000 11,701,000 8,693,000
---------------- ---------------- ---------------- ----------------
Gross profit 2,857,000 2,438,000 5,912,000 4,320,000
Selling, general and administrative expenses 1,797,000 1,131,000 3,693,000 2,601,000
---------------- ---------------- ---------------- ----------------
Income from operations 1,060,000 1,307,000 2,219,000 1,719,000
Interest expense 268,000 244,000 529,000 465,000
Other income, net (10,000) (18,000) (30,000) (11,000)
---------------- ---------------- ---------------- ----------------
Income before provision for income taxes 802,000 1,081,000 1,720,000 1,265,000
Provision for income taxes 340,000 485,000 729,000 568,000
---------------- ---------------- ---------------- ----------------
Net income 462,000 596,000 991,000 697,000
Accretion of redeemable securities to redemption value (57,000) (57,000) (114,000) (114,000)
---------------- ---------------- ---------------- ----------------
Net income available to common stockholders $ 405,000 $ 539,000 $ 877,000 $ 583,000
================ ================ ================ ================
Earnings per share:
Basic $ 0.12 $ 0.15 $ 0.25 $ 0.17
================ ================ ================ ================
Diluted $ 0.11 $ 0.15 $ 0.23 $ 0.16
================ ================ ================ ================
Weighted average number of shares outstanding:
Basic 3,485,634 3,485,634 3,485,634 3,485,634
================ ================ ================ ================
Diluted 3,750,627 3,659,875 3,750,613 3,601,442
================ ================ ================ ================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Pro Forma Consolidated Statements of Income (Note 4)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ ------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
----------------- ----------------- ----------------- -----------------
(Pro Forma) (Actual) (Pro Forma) (Actual)
<S> <C> <C> <C> <C>
Gross revenue $ 12,284,000 $ 8,399,000 $ 24,585,000 $ 15,520,000
Subcontractor costs 974,000 1,348,000 2,080,000 2,507,000
----------------- ----------------- ----------------- -----------------
Net revenue 11,310,000 7,051,000 22,505,000 13,013,000
Cost of revenue 7,332,000 4,613,000 14,364,000 8,693,000
----------------- ----------------- ----------------- -----------------
Gross profit 3,978,000 2,438,000 8,141,000 4,320,000
Selling, general and administrative expenses 2,465,000 1,131,000 4,911,000 2,601,000
----------------- ----------------- ----------------- -----------------
Income from operations 1,513,000 1,307,000 3,230,000 1,719,000
Interest expense 180,000 244,000 348,000 465,000
Other expenses (income), net 30,000 (18,000) 5,000 (11,000)
----------------- ----------------- ----------------- -----------------
Income before provision for income taxes 1,303,000 1,081,000 2,877,000 1,265,000
Provision for income taxes 554,000 485,000 1,215,000 568,000
----------------- ----------------- ----------------- -----------------
Net income 749,000 596,000 1,662,000 697,000
Accretion of redeemable securities to redemption value - (57,000) - (114,000)
----------------- ----------------- ----------------- -----------------
Net income available to common stockholders $ 749,000 $ 539,000 $ 1,662,000 $ 583,000
================= ================= ================= =================
Earnings per share:
Basic $ 0.15 $ 0.15 $ 0.33 $ 0.17
================= ================= ================= =================
Diluted $ 0.14 $ 0.15 $ 0.31 $ 0.16
================= ================= ================= =================
Weighted average number of shares outstanding:
Basic 5,059,708 3,485,634 5,059,708 3,485,634
================= ================= ================= =================
Diluted 5,375,645 3,659,875 5,375,637 3,601,442
================= ================= ================= =================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Note 1)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------------------
June 30, June 30,
1999 1998
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 991,000 $ 697,000
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 381,000 246,000
Changes in operating assets and liabilities:
Contracts and trade receivables (24,000) (142,000)
Other receivables 54,000 (183,000)
Receivables from related parties - 15,000
Costs and estimated earnings in excess of billings and billings in (910,000) (957,000)
excess of costs and estimated earnings, net
Prepaid expenses (86,000) 214,000
Deferred tax assets and liabilities, net 375,000 609,000
Other long-term assets (157,000) (4,000)
Trade accounts payable and accrued liabilities 109,000 (480,000)
Accrued liabilities to related parties 49,000 (48,000)
------------------- -------------------
Net cash provided by (used in) operating activities 782,000 (33,000)
------------------- -------------------
Cash flows from investing activities:
Additions to equipment and improvements (417,000) (392,000)
Proceeds from sales of equipment 2,000 2,000
Net cash used in investing activities (415,000) (390,000)
------------------- -------------------
Cash flows from financing activities:
Proceeds from line of credit, net 204,000 774,000
Principal payments on long-term and short-term debt and capital leases (624,000) (1,123,000)
Borrowings on notes payable to related parties - 300,000
Payment of deferred offering costs (330,000) (90,000)
------------------- -------------------
Net cash used in financing activities (750,000) (139,000)
------------------- -------------------
Net decrease in cash (383,000) (562,000)
Cash, beginning of period 457,000 587,000
------------------- -------------------
Cash, end of period $ 74,000 $ 25,000
=================== ===================
</TABLE>
See supplemental cash flow information at Note 9
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of The Keith Companies, Inc., and its wholly owned subsidiaries
("TKCI" or the "Company"). On August 1, 1998, TKCI acquired all of the
outstanding common stock of Keith Engineering, Inc. ("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. Prior to the Reorganization, TKCI
and KEI were under common management and 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.
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 condensed consolidated financial
statements include the consolidated assets, liabilities, equity and results
of operations of TKCI, and its wholly owned subsidiaries, and KEI effective
August 1, 1998.
On July 15, 1999, TKCI 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 $11,790,000 to the Company, net of
underwriters' discount and offering costs.
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, Inc. ("Thompson-Hysell"). The
Company paid cash in the amount of $3,333,000. In addition, contingent
consideration consisted of a promissory note in the original principal
amount of $1,333,000 payable in 2001 and shares of common stock with a
value equal to $1,333,000, which may be issuable in 2000 if various
conditions are met. TKCI may also be obligated or entitled to pay or
receive cash related to financial targets being met, related to the assets
acquired and liabilities assumed, and pay cash related to the income tax
effects to the sellers of Thompson-Hysell. As of June 30, 1999, the Company
has incurred approximately $135,000, consisting primarily of legal and
accounting costs, related to the acquisition of Thompson-Hysell. These
acquisition costs have been deferred and included in the accompanying June
30, 1999 condensed consolidated balance sheet in other assets.
The accompanying condensed consolidated balance sheet as of June 30, 1999
and the consolidated statements of income and cash flows for the six months
ended June 30, 1999 and 1998, are unaudited and in the opinion of
management include all adjustments necessary to present fairly the
information set forth therein, which consist solely of normal recurring
adjustments. The results of operations for these interim periods are not
necessarily indicative of results for the full year. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission and declared effective on July 12, 1999.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company. All material intercompany transactions and
balances have been eliminated in consolidation.
Income Taxes
Prior to August 1, 1998, KEI, with the consent of its stockholders, 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 flows through to the
stockholders who are responsible for including the income, deductions,
losses and credits in their individual income tax returns. The Company's
effective tax rate of approximately 45% for the period ended June 30, 1998
reflects the anticipated conversion of KEI from an S corporation to a C
corporation in August 1998.
6
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Deferred Offering Costs
In anticipation of its initial public offering, the Company deferred the
related costs incurred and included them in the accompanying condensed
consolidated balance sheets as deferred offering costs. The Company
completed its initial public offering on July 15, 1999, at which time these
costs were netted against the offering proceeds.
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 condensed 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 condensed
consolidated financial statements have been restated to give effect to the
$0.001 per share par value.
Use of Estimates
The preparation of these condensed consolidated financial statements, in
conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities and the amounts of revenue and expenses reported during the
periods. Actual results may differ from the estimates and assumptions used
in preparing these condensed consolidated financial statements.
3. Acquisitions
On August 1, 1998, TKCI acquired all of the outstanding common stock of
John M. Tettemer & Associates, Inc. ("JMTA"). The purchase price was
$700,000, consisting of cash, amortizing and interest only notes payable
and warrants to purchase 55,556 shares of TKCI common stock, exercisable
immediately at a purchase price of $4.73 per share. The acquisition was
accounted for using the purchase method of accounting.
On December 30, 1997, TKCI acquired all of the outstanding common stock of
ESI, Engineering Services, Inc., and its wholly-owned subsidiary Engineered
Systems Integrated, Inc. ("ESI"). The purchase price was $200,000,
consisting of 74,074 shares of TKCI common stock, which are subject to
certain repurchase provisions (see Note 5). The acquisition was accounted
for using the purchase method of accounting.
4. Pro Forma Consolidated Statements of Income
The accompanying pro forma consolidated statements of income for the three
and six months ended June 30, 1999 are presented as if the initial public
offering of 1,500,000 shares of common stock, at the offering price of
$9.00 per share; the acquisition of substantially all of the assets and the
assumption of substantially all of the liabilities of Thompson-Hysell; and
the repayment of certain debt, capital lease obligations and notes payable
to related parties with the net proceeds of the offering had all occurred
on January 1, 1999. Furthermore, the pro forma consolidated statements of
income are presented as if Thompson-Hysell had been taxed as a C
corporation for the periods presented. The pro forma tax provision for
Thompson-Hysell has been calculated assuming a 42% effective tax rate.
7
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
4. Pro Forma Consolidated Statements of Income (continued)
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
(Unaudited)
Historical Pro Forma Adjustments
---------------------------- ----------------------------
Thompson-
TKCI Hysell Acquisition Offering Pro Forma
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue $ 8,643,000 $ 2,667,000 $ - $ - $11,310,000
----------- ----------- ----------- ----------- -----------
Gross Profit 2,857,000 1,121,000 - - 3,978,000
Selling, general and administrative
expenses 1,797,000 592,000 32,000 (a) 44,000 (b) 2,465,000
----------- ----------- ----------- ----------- -----------
Income from operations 1,060,000 529,000 (32,000) (44,000) 1,513,000
Interest expense 268,000 37,000 34,000 (a) (159,000) (c) 180,000
Other expense (income), net (10,000) 28,000 12,000 (a) - 30,000
----------- ----------- ----------- ----------- -----------
Income before provision for income taxes 802,000 464,000 (78,000) 115,000 1,303,000
Provision for income taxes 340,000 - 214,000 (a) - 554,000
----------- ----------- ----------- ----------- -----------
Net income 462,000 464,000 (292,000) 115,000 749,000
Accretion of redeemable securities to
redemption value (57,000) - - 57,000 (d) -
----------- ----------- ----------- ----------- -----------
Net income available to common
stockholders $ 405,000 $ 464,000 $ (292,000) $ 172,000 $ 749,000
=========== ========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
(Unaudited)
Historical Pro Forma Adjustments
---------------------------- ----------------------------
Thompson-
TKCI Hysell Acquisition Offering Pro Forma
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue $17,613,000 $ 4,892,000 $ - $ - $22,505,000
----------- ----------- ----------- ----------- -----------
Gross Profit 5,912,000 2,229,000 - - 8,141,000
Selling, general and administrative
expenses 3,693,000 1,065,000 65,000 (a) 88,000 (b) 4,911,000
----------- ----------- ----------- ----------- -----------
Income from operations 2,219,000 1,164,000 (65,000) (88,000) 3,230,000
Interest expense 529,000 69,000 67,000 (a) (317,000) (c) 348,000
Other expense (income), net (30,000) 10,000 25,000 (a) - 5,000
----------- ----------- ----------- ----------- -----------
Income before provision for income taxes 1,720,000 1,085,000 (157,000) 229,000 (d) 2,877,000
Provision for income taxes 729,000 - 486,000 (a) - 1,215,000
----------- ----------- ----------- ----------- -----------
Net income 991,000 1,085,000 (643,000) 229,000 1,662,000
Accretion of redeemable securities to
redemption value (114,000) - - 114,000 (d) -
----------- ----------- ----------- ----------- -----------
Net income available to common
stockholders $ 877,000 $ 1,085,000 $ (643,000) $ 343,000 $ 1,662,000
=========== =========== =========== =========== ===========
</TABLE>
8
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
4. Pro Forma Consolidated Statements of Income (continued)
The pro forma adjustments to the Pro Forma Consolidated Statements of
Income for the three and six months ended June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
------------- -------------
<S> <C> <C>
(a) Acquisition of substantially all of the assets and
the assumption of certain of the liabilities of
Thompson-Hysell:
Amortization of goodwill $ 32,000 $ 65,000
Interest expense related to long-term debt $ 34,000 $ 67,000
Decrease in other income related to excluded
interest and investment income $ 12,000 $ 25,000
Income tax effect assuming a 42% effective
income tax rate for Thompson-Hysell $ 214,000 $ 486,000
(b) Increase in selling, general and administrative
expenses for the incremental costs of operating as
a public company $ 44,000 $ 88,000
(c) Decrease in interest expense resulting from the
repayment of short-term borrowings, long-term
debt, capital lease obligations and notes payable
to related parties with the net proceeds from the
offering $ (159,000) $ (317,000)
(d) Reversal of the accretion of redeemable securities
to redemption value based upon the closing of the
initial public offering of common stock at a price
of $9.00 per share (see Note 5) $ 57,000 $ 114,000
</TABLE>
The pro forma adjustments are based upon currently available information
and upon certain assumptions that we believe are reasonable. There can be
no assurances that the actual effect will not differ significantly from the
pro forma adjustments reflected in the accompanying pro forma condensed
consolidated statements of income. The pro forma data does not purport to
represent the results of operations for the three and six month periods
ended June 30, 1999, that would actually have occurred had the initial
public offering; the acquisition of substantially all of the assets and the
assumption of certain of the liabilities of Thompson-Hysell; and the
repayment of certain financial obligations with the net proceeds of the
offering had all occurred on January 1, 1999, or to project our financial
position or results of operations for any future period.
5. Redeemable Securities
In connection with the acquisition of ESI, TKCI issued to the seller's
74,074 shares of common stock which contain redemption provisions. These
redemption provisions allow any of the sellers, at their discretion, to
redeem the common shares, for a stated price per share, if the Company does
not complete an initial public offering by October 31, 1999. In connection
with the acquisition of ESI, the Company also issued to the sellers options
to purchase 44,444 shares of common stock containing redemption provisions
which provide that in the event that the underlying shares do 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 are entitled to receive, at their discretion,
a stated amount for all unexercised vested options. The difference between
the redemption values and the initial values of the common stock and
options to purchase common stock is accreted over the respective period
through charges to common stock.
As a result of the Company's completion of its initial public offering at
$9.00 per share on July 15, 1999, the securities are no longer redeemable
and, accordingly, the accumulated accretion and redeemable securities will
be reclassified to common stock and additional paid-in capital.
9
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
6. Per Share Data
Basic EPS is computed by dividing earnings available to common stockholders
during the period by the weighted average number of common shares
outstanding during each period. Diluted EPS is computed by dividing
earnings available to common stockholders 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 stockholders is used in the basic and diluted EPS
calculations as the assumed impact of the redeemable securities would be
anti-dilutive.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ -------------------------------------
June 30, June 30,
1999 June 30, June 30, 1999 June 30, June 30,
(Pro Forma) 1999 1998 (Pro Forma) 1999 1998
------------ ---------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares used for the basic EPS
computation (deemed outstanding the entire period) 5,059,708 3,485,634 3,485,634 5,059,708 3,485,634 3,485,634
Incremental shares from the assumed exercise of
dilutive stock options and stock warrants 315,937 264,993 174,241 315,929 264,979 115,808
----------- --------- --------- ----------- ----------- ----------
Weighted average shares used for the diluted
EPS computation 5,375,645 3,750,627 3,659,875 5,375,637 3,750,613 3,601,442
=========== ========= ========= ========== =========== ==========
</TABLE>
Weighted average shares used in computing the pro forma basic and diluted
weighted average shares outstanding for the three and six months ended June
30, 1999 assumes a fair value of $9.00 per share for the periods presented
and excludes the common stock that may or may not be issued to the
shareholders of Thompson-Hysell.
Anti-dilutive shares excluded from the above historical calculations were
2,192 and 1,102 for the three and six months ended June 30, 1999 and 4,435
for the six months ended June 30, 1998. There were no anti-dilutive shares
excluded from the above calculations for the historical three months ended
June 30, 1998 or for the pro forma three and six months ended June 30,
1999.
7. Indebtedness
The Company maintains a line of credit agreement with a bank, which allows
us to borrow up to $5,500,000, not to exceed 80% of our eligible accounts
receivable, as defined in the agreement. On March 5, 1999, the bank amended
the agreement to, among other things, amend some of the financial related
covenants effective December 31, 1998, adjust the interest rate to the
bank's prime rate plus a variable margin tied to financial covenants and
extend the maturity on the line to March 1, 2000. As of June 30, 1999, the
Company was in default of certain of the amended financial related
covenants. On August 20, 1999, the bank waived compliance related to these
covenants as of June 30, 1999. The outstanding borrowings on June 30, 1999,
were $4,731,000 and had an interest rate of 10.5%. On July 15, 1999, a
portion of the net proceeds from the Company's initial public offering was
used to pay-off the outstanding line of credit balance. The Company
anticipates borrowing on its line of credit as appropriate in the future.
8. 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 and Wireless
Telecommunications ("REPWWT") segment includes engineering, consulting and
technical services for the development of both private projects, like
residential communities, commercial and industrial properties and
recreational projects; public works projects, like transportation and
water/sewage facilities; and site acquisition and construction management
services for wireless telecommunications. The Industrial Engineering ("IE")
segment, which consists of ESI, provides the technical expertise and
management required to design and test manufacturing facilities and
processes.
10
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
8. Segment and Related Information (continued)
The following tables set forth certain information regarding the Company's
operating segments for the three and six months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
-----------------------------------------------------------------------------------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
------------------ ------------------ -------------------- --------------
<S> <C> <C> <C> <C>
Net revenue $ 7,776,000 $ 867,000 $ - $ 8,643,000
Income (loss) from operations $ 1,639,000 $ 8,000 $ (587,000) $ 1,060,000
Identifiable assets $14,068,000 $1,760,000 $ - $15,828,000
Three Months Ended June 30, 1998
-----------------------------------------------------------------------------------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
------------------ ------------------ -------------------- --------------
Net revenue $ 6,115,000 $ 936,000 $ - $ 7,051,000
Income (loss) from operations $ 1,680,000 $ 117,000 $ (490,000) $ 1,307,000
Identifiable assets $10,409,000 $1,716,000 $ - $12,125,000
Six Months Ended June 30, 1999
-----------------------------------------------------------------------------------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
------------------ ------------------ -------------------- --------------
Net revenue $15,770,000 $1,843,000 $ - $17,613,000
Income (loss) from operations $ 3,403,000 $ 40,000 $(1,224,000) $ 2,219,000
Six Months Ended June 30, 1998
-----------------------------------------------------------------------------------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
Net revenue ------------------ ------------------ -------------------- --------------
Income (loss) from operations $11,189,000 $1,824,000 $ - $13,013,000
$ 2,566,000 $ 137,000 $ (984,000) $ 1,719,000
</TABLE>
9. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------
1999 1998
--------------------- ----------------------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $472,000 $688,000
===================== ======================
Cash paid for income taxes $ 2,000 $ 2,000
===================== ======================
Noncash financing and investing activities:
Capital lease obligations recorded in connection with equipment $ 72,000 $273,000
acquisitions
===================== ======================
Purchase price adjustment $ 60,000 $ -
===================== ======================
Accretion of redeemable securities $114,000 $114,000
===================== ======================
Accrued deferred offering costs $513,000 $ -
===================== ======================
</TABLE>
11
<PAGE>
Item 2. 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 included
elsewhere in Part I- Item I of this Form 10-Q and in the Form S-1 filed by the
Company. 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" included in Form S-1
filed by the Company. In this Management's Discussion and Analysis of Financial
Condition and Results of Operations section, references to "TKCI", "we", "our"
and "us" mean TKCI and its subsidiaries and references to KEI means Keith
Engineering.
Overview
The following discussion includes the operations of TKCI and our wholly-owned
subsidiaries, including KEI. TKCI and KEI have been under common management and
ownership since the inception of TKCI in 1986. 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 was reorganized, so that KEI
became a wholly-owned subsidiary of TKCI. This 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 were carried over at their historical book values and the operations of
TKCI and KEI 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. On November 30, 1998, KEI was merged with and into TKCI.
In December 1997, TKCI purchased ESI and its wholly-owned subsidiary ESII,
Engineered Systems Integration, Inc., which was subsequently merged into ESI.
In August 1998, TKCI purchased John M. Tettemer and Associates.
On July 15, 1999, TKCI completed an initial public offering of 1.5 million
shares of its common stock. The offering price was $9.00 per share resulting in
proceeds of approximately $11.8 million to the Company, net of underwriters'
discount and unpaid offering costs.
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, Inc. ("Thompson-Hysell"). The Company paid cash
in the amount of $3.3 million. In addition, contingent consideration consisted
of a promissory note in the original principal amount of $1.3 million payable in
2001 and shares of common stock with a value equal to $1.3 million which may be
issuable in 2000 if various conditions are met. TKCI may also be obligated or
entitled to pay or receive cash related to financial targets being met, related
to the assets acquired and liabilities assumed, and pay cash related to the
income tax effects to the sellers of Thompson-Hysell. As of June 30, 1999, the
Company has incurred approximately $135,000 consisting primarily of legal and
accounting costs, related to the acquisition of Thompson-Hysell. These
acquisition costs have been deferred and included in the accompanying June 30,
1999 condensed consolidated balance sheet in other assets.
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 fee and time and material 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 the 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 subcontractor costs. Our revenue is generated from a
large number of relatively small contracts.
For the periods presented, a substantial portion of our net revenue was derived
from services rendered in connection with commercial and residential real estate
development projects. The real estate market has historically experienced
pronounced business cycles. Our consolidated results of operations can be
adversely impacted by downturns in the real estate market. Based upon the
number of building permits issued, the last peak of the business cycle in the
southern California real estate market was in 1989 and the last trough was in
1996. A majority of our net revenue for the periods presented, was derived from
services rendered in southern California. Consequently, adverse economic
conditions affecting the southern California economy could also have an adverse
effect on our consolidated results of operations. We anticipate that as we
consummate acquisitions in the future, the concentration of revenue from both
real estate development and southern California will decline.
12
<PAGE>
Costs of revenue include labor, non-reimbursable subcontract costs, materials
and various direct and indirect overhead costs including rent, utilities and
depreciation. Selling, general, and administrative expenses consist primarily of
corporate costs related to finance and accounting, information technology,
contract proposal, executive salaries, provisions for doubtful accounts and
other indirect overhead costs.
Results of Operations
The following table sets forth unaudited historical consolidated operating
results for each of the periods presented as a percentage of net revenue.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross revenue 110% 119% 111% 119%
Subcontractor costs 10% 19% 11% 19%
--- --- --- ---
Net revenue 100% 100% 100% 100%
Costs of revenue 67% 65% 66% 67%
--- --- --- ---
Gross profit 33% 35% 34% 33%
Selling, general and administrative expenses 21% 16% 21% 20%
--- --- --- ---
Income from operations 12% 19% 13% 13%
Interest expense 3% 3% 3% 4%
--- --- --- ---
Income before provision for income taxes 9% 15% 10% 10%
Provision for income taxes 4% 7% 4% 4%
--- --- --- ---
Net income 5% 8% 6% 5%
=== === === ===
</TABLE>
Three and Six Months Ended June 30, 1999 and June 30, 1998
Revenue. Net revenue for the six months ended June 30, 1999 was $17.6 million
compared to $13.0 million for the six months ended June 30, 1998, an increase of
$4.6 million, or 35%. Net revenue for the three months ended June 30, 1999 was
$8.6 million compared to $7.1 million for the three months ended June 30, 1998,
an increase of $1.6 million, or 23%. Net revenue increased by $1.1 million and
$559,000 for the six and three months ended June 30, 1999, respectively, as a
result of the acquisition of John M. Tettemer & Associates in August 1998.
Excluding the revenue from the acquisition, our net revenue grew $3.5 million,
or 27%, and $1 million, or 15% for the six and three months ended June 30, 1999,
respectively, compared to the six and three months ended June 30, 1998. The
remaining net revenue growth resulted primarily from the overall continued
strengthening of the California and Nevada economies. Subcontractor costs, as a
percentage of net revenue, declined to 11% and 10% for the six and three months
ended June 30, 1999, respectively, as compared to 19% for the six and three
months ended June 30, 1998. The percentage decline in subcontractor costs
resulted primarily from a decrease in services for our primary wireless
telecommunications contract, which was substantially completed by the end of
1998.
Gross Profit. Gross profit for the six months ended June 30, 1999 was $5.9
million compared to $4.3 million for the six months ended June 30, 1998, an
increase of $1.6 million, or 37%. Gross profit for the three months ended June
30, 1999 was $2.9 million compared to $2.4 million for the three months ended
June 30, 1998, an increase of $419,000, or 17%. Included in the June 30, 1998
net revenue and gross profit is a cash collection of $150,000 related to costs
incurred in a previous period that were not recognized as revenue at that time
due to the Company's uncertainty as to the ability to obtain a change order to
increase the contract value to cover these costs incurred. During the second
quarter of 1998, the Company obtained the change order and collected the
$150,000. The gross profit growth is attributable to both our internal revenue
increases as well as the acquisition of John M. Tettemer & Associates. As a
percentage of net revenue, gross profit increased to 34% for the six months
ended June 30, 1999 compared to 33% for the six months ended June 30, 1998. As a
percentage of net revenue, gross profit decreased to 33% for the three months
ended June 30, 1999 compared to 35% for the three months ended June 30, 1998.
Excluding the $150,000 item in 1998, as a percentage of net revenue, gross
profit increased 2% for the six month period ended June 30, 1999 and remained
the same for the three month period ended June 30, 1999, compared to the
previous year periods. The increase in gross profit as a percentage of net
revenue, adjusted for the $150,000 item in 1998, for the six months ended June
30, 1999 resulted primarily from a reduction in facility costs as a percentage
of net revenue, partially offset by a decline in the industrial engineering
operations of ESI, as a percentage of net revenue.
13
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 1999 were $3.7 million
as compared to $2.6 million for the six months ended June 30, 1998, an increase
of $1.1 million, or 42%. Selling, general and administrative expenses for the
three months ended June 30, 1999 were $1.8 million as compared to $1.1 million
for the three months ended June 30, 1998, an increase of $666,000, or 59%. As a
percentage of net revenue, selling, general and administrative expenses
increased to 21% for the six months ended June 30, 1999 from 20% for the six
months ended June 30, 1998, while for the three month period ended June 30,
1999, selling, general and administrative expenses increased to 21% from 16% for
the previous year period. Included in the June 30, 1998 periods is a credit to
bad debt expense included in selling, general and administrative expense
resulting from the cash collection of $390,000 related to a receivable written-
off in a prior period. Excluding the $390,000 collection in 1998, selling,
general and administrative expenses, as a percentage of net revenue, declined 2%
for the six month and 1% for the three month periods ended June 30, 1999,
compared to the previous year periods. The percentage decreases, excluding the
1998 cash collection, continued to be driven from holding the growth in our
corporate labor costs below our revenue increases.
Income Taxes. The provision for income taxes for the six months ended June 30,
1999 was $729,000 compared to $568,000 for the six months ended June 30, 1998.
For the three months ended June 30, 1999, the provision for income taxes was
$340,000 compared to $485,000 for the three months ended June 30, 1998. Our
effective income tax rate was approximately 42% for the six and three months
ended June 30, 1999 compared to an effective tax rate of 45% for the six and
three months ended June 30, 1998. Our effective income tax rate of 45% for the
periods ended June 30, 1998 was primarily due to the anticipated conversion of
KEI from an S corporation to a C corporation in August 1998.
Liquidity and Capital Resources
We have financed our working capital needs and capital expenditure requirements
through a combination of internally generated funds, bank borrowings, and
leases.
Working capital as of June 30, 1999 was $733,000 compared to $5.2 million as of
December 31, 1998, a decrease of $4.4 million, or 86%. The decline in working
capital resulted primarily from the Company's line of credit, which is due on
March 1, 2000, being classified as a short-term liability as of June 30, 1999
compared to a long-term liability at December 31, 1998. Excluding the
reclassification of the line of credit from long-term to short-term, working
capital increased to $5.5 million as of June 30, 1999. Cash generated from
operating activities increased $815,000 to $782,000 for the six months ended
June 30, 1999, compared to cash used in operating activities of $33,000 for the
six months ended June 30, 1998. The significant growth in operating cash flow
resulted primarily from higher income from operations and the timing of
repayment of trade accounts payable and accrued liabilities. The growth in cash
generated from operating activities was used primarily to fund capital
expenditures of $417,000 for the six months ended June 30, 1999 compared to
$392,000 for the six months ended June 30, 1998, to make principal payments on
long-term and short-term debt and capital leases and to finance the Company's
initial public offering costs. Capital expenditures consisted primarily of
computer equipment and upgrades to our information systems.
We maintain a line of credit agreement with a bank, which allows us to borrow up
to $5.5 million, not to exceed 80% of our eligible accounts receivable, as
defined in the agreement. On March 5, 1999, the bank amended the agreement to,
among other things, amend some of the financial related covenants effective
December 31, 1998, adjust the interest rate to the bank's prime rate plus a
variable margin tied to financial covenants and extend the maturity on the line
to March 1, 2000. As of June 30, 1999, the Company was in default of certain of
the amended financial related covenants. On August 20, 1999, the bank waived
compliance related to these covenants as of June 30, 1999. The outstanding
borrowings on June 30, 1999, were $4.7 million and had an interest rate of
10.5%. On July 15, 1999, a portion of the net proceeds from the Company's
initial public offering was used to pay off the outstanding line of credit
balance. The Company anticipates borrowing on its line of credit as appropriate
in the future.
The Company had no borrowings from related parties for the six months ended June
30, 1999 compared to $300,000 for the six months ended June 30, 1998. The
reduction in cash received from related parties resulted primarily from our
increase in cash generated from operating activities and availability under our
line of credit. As a result of the proceeds received from the Company's initial
public offering on July 15, 1999, all related party debt was repaid subsequent
to June 30, 1999.
We believe existing cash balances, internally generated funds, and availability
under credit facilities together with the proceeds of the offering will be
sufficient to fund our anticipated internal operating needs for the next twelve
months.
14
<PAGE>
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.
Year 2000
We are currently in the final phase of identifying and evaluating the potential
impacts of the Year 2000 on information systems and embedded systems. A Year
2000 Mitigation Committee comprised of senior management and functional managers
is evaluating the following issues:
. State of readiness
. Costs to address Year 2000 issues
. Risk assessment
. Contingency plan
The following is a description of the process we have established and which we
intend to follow to minimize our Year 2000 risk exposure:
State of readiness. Our information technology and non-information technology
systems can be divided into support/administrative and operational/production
systems. The significant systems used to perform our support and administrative
functions as well as our engineering work and the operating systems upon which
these systems function are detailed in the table below. We have surveyed the
system suppliers and have received from each supplier either written assurance
or vendor documentation in the form of information published on a website
stating that these systems are Year 2000 compliant, Year 2000 compliant with
minor issues or that a Year 2000 compliance update will be available by the end
of the third quarter of 1999 as indicated below.
<TABLE>
<CAPTION>
Operating System
System Name Description (if applicable) Year 2000 Status
----------- ----------- --------------- ----------------
<S> <C> <C> <C>
Harper & Shuman CFMS/RD Compliant
V5.0 (Server) Accounting and Project Cost software Open VMS V7.1-1H1 Assurance received
Windows 95,
Windows 98,
Harper & Shuman CFMS/RD Client component that allows access to Windows NT 4.0 Compliant
V5.0 (Server) server data Workstation SP4 Assurance received
Compaq-DEC Open VMS Alpha operating system that supports Compliant
V7.1-1H1 CFMS/RD software N/A Assurance received
Windows 95,
Windows 98,
Engineering CAD design software Windows NT 4.0 Compliant
Autodesk AutoCAD R14 being run on Windows operating system Workstation SP4 Assurance received
Windows 95,
Office suite includes word processing, Windows 98,
spreadsheet, database, presentation Windows NT 4.0 Compliant
Microsoft Office 97 SR-2 components Workstation SP4 Assurance received
Compliant
Paychex Preview 6.0 Payroll software DOS (Windows 95) Assurance received
ProBusiness HRMS Windows 95 Compliant
Powersource II V1.0 Human Resources software Assurance received
Windows 95,
Windows 98,
Engineering CAD design software Windows NT 4.0 Compliant
MicroStation 95 V5.05.01.65 being run on Windows operating system Workstation SP4 Assurance received
Server operating system for storing
Microsoft Windows NT Server engineering drawings and Compliant
4.0 SPA administrative documents N/A Assurance received
Microsoft Windows NT Operating system running on Compliant
Workstation 4.0 SP4 workstations and laptops N/A Assurance received
Operating system running on Compliant
Microsoft Windows 95 workstations and laptops N/A Assurance received
Microsoft Windows 98 Operating system running on N/A Compliant
</TABLE>
15
<PAGE>
<TABLE>
<S> <C> <C> <C>
workstations and laptops Assurance received
Microsoft Exchange Server 5.5 E-mail server application running on Compliant
SP2 Windows operating system Windows NT 4.0 SP4 Assurance received
Nortel Meridian SL1 Compliant
(Corporate) Telephone switch N/A Assurance received
Nortel Meridian Mail R5.0 Compliant
(Corporate) Voicemail messaging system N/A Assurance received
Toshiba Perception II (Moreno Compliant
Valley Location) Telephone system N/A Assurance received
AVT PhoneXpress (Moreno Not Compliant
Valley Location) Voice mail system N/A (see below)
Toshiba Strata DK-424 (Las Compliant
Vegas Location) Telephone system N/A Assurance received
AVT CallXpress3 (Las Vegas Compliant
Location) Voicemail messaging system N/A Assurance received
N/A no feature within this
product is pertinent to Y2K
Trillium Panther 2064 per telephone vendor,
(Thompson-Hysell) Telephone system N/A O'Leary Telephone & Data
Pacific Bell Voice Mail Compliant
(Thompson-Hysell) Voice message boxes N/A Assurance received
Nortel Norstar Plus Model II Integrated telephone and voice mail Compliant
DR5.1 (John M. Tettemer) system N/A Assurance received
Compliant
Toshiba Strata DK424 (ESI) Telephone system N/A Assurance received
Compliant
AVT PhoneXpress (ESI) Voice message system N/A Assurance received
Toshiba Strata DK96 (Palm Compliant
Desert Location) Voice message system N/A Assurance received
</TABLE>
We are currently in the process of asking the vendors of embedded systems to
provide us with written assurance of Year 2000 compliance. In addition, where
cost effective and appropriate, we intend to perform internal tests on all
mission critical systems and on our operational production systems to validate
Year 2000 compliance.
Cost to address Year 2000 issues. The only costs we have incurred in connection
with addressing the Year 2000 issues are administrative expenses resulting from
the efforts of our Mitigation Committee and time spent in attempting to identify
and resolve Year 2000 issues in contacting our vendors and subconsultants to
ensure compliance. These costs are included in selling, general and
administrative expense in the consolidated statements of income. All costs
related to Year 2000 issues are paid from cash flows from operations.
We anticipate a cost of $25,000 to $50,000 to upgrade our telephone voice
message system to ensure Year 2000 compliance. This expenditure will be
recorded as selling, general and administrative expense as incurred. Our
Mitigation Committee has determined that the primary computer systems that we
use are Year 2000 compliant and therefore we do not anticipate any additional
costs related to the Year 2000 date change that will be material to our
business, financial condition or results of operations.
Risk assessment. Based on the findings of our Mitigation Committee, we believe
that the impact of Year 2000 issues on our internal operations will be minimal.
In order to minimize any adverse effect caused by the Year 2000 date change, our
operational personnel transfer their work to back-up tapes on a daily basis and
store these tapes in an offsite facility. We have not deferred any information
technology projects due to Year 2000 issues.
We have had difficulty estimating the impact of Year 2000 non-compliance by
outside parties with whom we transact business. We are currently in the process
of surveying our vendors and subconsultants to ascertain their Year 2000
readiness. Because we have not yet completed this survey, we are not in a
position at this time to accurately ascertain the degree of compliance by
vendors and subconsultants with whom we conduct business. However, based on the
responses received to date, we believe that all critical third parties will be
prepared for the Year 2000 date change by December 31, 1999. Although not all of
the vendors and subconsultants from whom we have received responses are Year
2000 compliant at this time, we have received assurances that these third
parties will be prepared for the Year 2000 date change by the end of 1999.
We have also engaged in discussions with other significant third parties, such
as our bank and payroll service, and have received written assurances regarding
Year 2000 compliance from such service providers. Although our client base is
diverse, with no one client making up more than 10% of our gross revenue, we
have had discussions with our major clients
16
<PAGE>
regarding their readiness for the Year 2000 date change and, for those who have
not already given us written assurance, we expect to receive it by the end of
third quarter of 1999.
Contingency plan. Because we have not completed our testing and assessment
procedures, we have not developed any plans for likely scenarios involving Year
2000 failures. By the end of third quarter of 1999, where cost effective and
appropriate, we intend to perform internal tests on all mission critical systems
and on our operational production systems to validate Year 2000 compliance. If,
when testing and assessment is complete, it appears reasonably likely that such
a failure may occur, management intends to develop appropriate plans to deal
with such contingencies. If we are unsuccessful in developing or implementing a
plan to correct possible Year 2000 failures, or if we fail properly to
anticipate a Year 2000 failure either in our information technology (software)
or non-information technology (microcontrollers in equipment), we may experience
disruptions in operations. Our projection of the most serious disruptions which
could occur include:
. the loss of approximately two months' net revenues, an amount of
approximately $7,500,000, if our accounting systems fail and we are
unable to utilize backup information. We would, however, expect
eventually to be able to recover a significant portion of this revenue
by recreating time and cost entries from hard copies of such data.
. the loss of engineering and project data if we are unable to utilize
backup information, resulting in the need to re-input printed data. This
effort could increase operating costs and reduce margins in the first
two quarters of 2000 and might cause the loss of some projects if we are
unable to fulfill our time commitments.
. the loss of the services of subcontractors who are experiencing
disruptions due to Year 2000 risks, resulting in the loss of contracts
because of failure to meet deadlines.
. the loss of net revenues if any of the accounting systems of our clients
experience a Year 2000 failure.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate changes primarily as a result of our line of
credit, long-term debt, capital leases and notes payable to related parties,
which are used to maintain liquidity and to fund capital expenditures and our
expansion. Our interest rate risk management objectives are to limit the impact
of interest rate changes on earnings and cash flows and to lower our overall
borrowing costs. To achieve our objectives, we have borrowed at fixed rates and
may enter into derivative financial instruments to mitigate our interest rate
risk on variable rate debt. We do not enter into derivative or interest rate
transactions for speculative purposes.
The table below presents the principal amounts, 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. Dollars are
expressed in thousands.
<TABLE>
1999 2000 2001 2002 2003 Total Fair Value/(1)/
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt (2) $ 286 $2,445 $ 48 $ 52 $ 37 $2,868 $2,868
Average interest rate 8.00% 10.00% 8.00% 8.00% 8.00% 9.67% 9.67%
Variable rate debt -- $4,731 -- -- -- $4,731 $4,731
Average interest rate -- 10.50% -- -- -- 10.50% 10.50%
</TABLE>
_________________
/(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 notes payable with an aggregate principal amount
of $434,000 as there is no established market for these notes.
As the table incorporates only those exposures that existed as of June 30, 1999,
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.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 13, 1999, a complaint was filed in the Stanislaus County, California
Superior Court against Thompson-Hysell, Inc. ("Thompson-Hysell"), four
shareholders of Thompson-Hysell (the "Defendant Shareholders"), Thompson-Hysell
Liquidation Corporation, Thompson-Hysell Engineers, Inc. and us. This complaint
was filed by Phillip Kirk Delamare and his wife Catherine A. Delamare who are
shareholders of a corporation named Thompson-Hysell Engineers, Inc. ("T-H
Engineers"), in which the Defendant Shareholders were majority shareholders and
directors. The complaint alleges, among other things, that Thompson-Hysell was
an alter ego of T-H Engineers and as such, when we acquired substantially all of
the assets and assumed substantially all of the liabilities of Thompson-Hysell
(the "Acquisition"), the plaintiffs were fraudulently deprived of any benefit
derived from their ownership interest in the shares of T-H Engineers. The
complaint further alleges that the Defendant Shareholders breached their
fiduciary duties as directors and majority shareholders of T-H Engineers and
that they conspired with Thompson-Hysell and us to defraud T-H Engineers of its
assets and to exclude plaintiffs from any benefit derived from the Acquisition.
The plaintiffs in this action are seeking injunctive relief and general monetary
damages in an unspecified amount, special damages in the amount of $600,000,
interest, costs and punitive and exemplary damages. We believe that the claim
made against us is completely without merit and intend to vigorously defend
ourselves in this action.
Item 2. Changes In Securities and Use of Proceeds
(a) On April 23, 1999, in an action by unanimous written consent, our
shareholders approved (1) our Amended and Restated Bylaws, which among other
things, eliminated the right of cumulative voting upon our becoming a listed
corporation within the meaning of Section 301.5 of the California Corporations
Code; and (2) an amendment to our 1994 Stock Incentive Plan which increased the
number of shares subject to the Plan to 3,000,000 shares.
On April 29, 1999, we filed a Certificate of Amendment to our Articles of
Incorporation with the California Secretary of State to effect a reverse stock
split converting each issued and outstanding 2.7 shares of common stock into one
share of common stock.
On June 22, 1999, we filed Amended and Restated Articles of Incorporation with
the California Secretary of State to provide our common and preferred stock with
a par value of $0.001 per share.
(c) In June 1999, we issued options to purchase an aggregate of 66,500 shares
of our common stock to certain directors and executive officers under our
Amended and Restated 1994 Stock Incentive Plan. These options have an exercise
price of $9 per share, vest in five annual installments commencing on June 4,
2000 and are exercisable until June 4, 2009. The issuance of these securities
was exempt from registration under Rule 701 promulgated under the Securities Act
of 1933, as amended.
(d) On July 12, 1999, our Registration Statement on Form S-1 (333-77273)
pertaining to our initial public offering of 1,500,000 shares of our common
stock, par value $0.001 per share, was declared effective by the Securities and
Exchange Commission. The managing underwriters in the offering were Wedbush
Morgan Securities.
The offering commenced on July 12, 1999 and closed on July 15, 1999. The
initial public offering price was $9 per share for an aggregate initial public
offering price of $13,500,000.
Of the $13,500,000 in gross proceeds raised in connection with the offering, (i)
$1,080,000 was paid to the managing underwriter in connection with underwriting
discounts and expenses and (ii) approximately $747,000 was paid by us in
connection with expenses, including legal, accounting, printing, filing and
other fees, in connection with the offering. Of the remaining net proceeds, we
have paid cash of $3,333,000 in connection with the acquisition of substantially
all of assets and assumption of substantially all of the liabilities of
Thompson-Hysell; paid off the outstanding line of credit balance of $4,731,000;
and repaid debts to related parties of $1,407,000 to Aram Keith, our Chief
Executive Officer and Chairman of the Board, $703,000 to Walter Cruttenden III,
one of our directors, $165,000 to Floyd Reid, a former director and executive
officer, and an aggregate of $372,000 to various other related parties. There
were no other direct or indirect payments to any of our officers or directors,
their associates, ten-percent shareholders or any other affiliate of ours. We
are currently investing the remaining net proceeds from the offering for future
use as additional working capital and/or to repay other debt. Our investments
are currently in a government cash fund which invests substantially all of its
assets in high-quality obligations of the U.S. Government, its agencies and
instrumentalities and in repurchase agreements backed by these obligations.
18
<PAGE>
Item 4. Submission of Matters to A Vote of Security Holders
During the period covered by this report, we circulated the following
actions by written consent of the shareholders:
1. An action by unanimous written consent dated April 23, 1999
representing 3,559,708 shares of common stock issued and outstanding as of
that date. Pursuant to the written consent, the shareholders approved the
proposals more fully described below:
(a) Amendment and restatement of our Articles of Incorporation
effecting a reverse stock split converting each 2.7 shares of
outstanding common stock into one share of common stock.
(b) Amendment and restatement of our Bylaws.
(c) Election of the following directors constituting all of our
directors at such time:
Aram H. Keith
Gary C. Campanaro
Walter W. Cruttenden, III
(d) Election of the following directors to become effective upon the
consummation of our proposed initial public offering:
George Deukmejian
Christine Diemer Iger
(e) Amendment of our Stock Incentive Plan.
2. An action by majority written consent dated June 15, 1999 representing
2,086,386 shares out of a total of 3,559,708 issued and outstanding shares
of common stock. Pursuant to the written consent, the shareholders approved
the amendment and restatement of our Articles of Incorporation to provide a
par value for our common and preferred stock of $0.001 per share.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
___________________
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 26, 1999 THE KEITH COMPANIES, INC. AND SUBSIDIARIES
By: /s/ Aram H. Keith
------------------------------
Aram H. Keith
Chairman of the Board of Directors
and Chief Executive Officer
By: /s/ Gary C. Campanaro
------------------------------
Gary C. Campanaro
Chief Financial Officer and Secretary
20
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<PAGE>
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<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 74,000 457,000
<SECURITIES> 0 0
<RECEIVABLES> 5,606,000 5,582,000
<ALLOWANCES> (365,000) (364,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,012,000 10,917,000
<PP&E> 2,979,000 2,862,000
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 15,828,000 14,530,000
<CURRENT-LIABILITIES> 11,279,000 5,737,000
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0 0
0 0
<COMMON> 541,000 655,000
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 15,828,000 14,530,000
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<TOTAL-REVENUES> 17,613,000 13,013,000
<CGS> 11,701,000 8,693,000
<TOTAL-COSTS> 11,701,000 8,693,000
<OTHER-EXPENSES> 3,693,000 2,601,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 529,000 465,000
<INCOME-PRETAX> 1,720,000 1,265,000
<INCOME-TAX> 729,000 568,000
<INCOME-CONTINUING> 991,000 697,000
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