<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
Commission File Number 0-26561
THE KEITH COMPANIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
California 33-0203193
--------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 [X] No [_]
The number of shares outstanding of the registrant's common stock as of October
31, 2000 was 5,200,707.
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARY
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Condensed Consolidated Statements of Cash Flows 4
Notes to the Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE KEITH COMPANIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,241,000 $ 1,569,000
Contracts and trade receivables, net of allowance for doubtful accounts of
$1,102,000 and $612,000 at September 30, 2000 and December 31, 1999,
respectively 8,819,000 7,176,000
Costs and estimated earnings in excess of billings 6,193,000 5,037,000
Prepaid expenses and other current assets 417,000 501,000
----------- -----------
Total current assets 16,670,000 14,283,000
Equipment and leasehold improvements, net 4,625,000 4,536,000
Goodwill, net of accumulated amortization of $253,000 and $109,000 at September 30,
2000 and December 31, 1999, respectively 5,165,000 4,678,000
Other assets 154,000 164,000
----------- -----------
Total assets $26,614,000 $23,661,000
=========== ===========
Liabilities And Shareholders' Equity
Current liabilities:
Issuable common stock $ 631,000 $ --
Current portion of long-term debt and capital lease obligations 2,003,000 1,292,000
Trade accounts payable 1,592,000 1,048,000
Current portion of deferred tax liabilities 1,102,000 1,102,000
Billings in excess of costs and estimated earnings 804,000 552,000
Other accrued liabilities 3,812,000 3,076,000
----------- -----------
Total current liabilities 9,944,000 7,070,000
Long-term debt and capital lease obligations, less current portion 429,000 3,543,000
Other liabilities 196,000 212,000
----------- -----------
Total liabilities 10,569,000 10,825,000
----------- -----------
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 at September
30, 2000 and December 31, 1999; issued and outstanding 5,080,544 and
5,070,224 shares at September 30, 2000 and December 31, 1999,
respectively, including shares held in treasury 5,000 5,000
Additional paid-in capital 12,345,000 12,317,000
Retained earnings 4,378,000 1,061,000
----------- -----------
16,728,000 13,383,000
Less treasury stock, at cost of 124,600 and 97,600 shares at September 30,
2000 and December 31, 1999, respectively 683,000 547,000
----------- -----------
Total shareholders' equity 16,045,000 12,836,000
----------- ----------
Total liabilities and shareholders' equity $26,614,000 $23,661,000
=========== ===========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Gross revenue $ 14,541,000 $ 11,397,000 $ 41,215,000 $ 30,867,000
Subcontractor costs 903,000 739,000 2,477,000 2,596,000
------------ ------------ ------------ ------------
Net revenue 13,638,000 10,658,000 38,738,000 28,271,000
Costs of revenue 8,448,000 7,350,000 25,137,000 19,051,000
------------ ------------ ------------ ------------
Gross profit 5,190,000 3,308,000 13,601,000 9,220,000
Selling, general and administrative expenses 2,756,000 2,211,000 7,892,000 5,904,000
------------ ------------ ------------ ------------
Income from operations 2,434,000 1,097,000 5,709,000 3,316,000
Interest expense 65,000 149,000 260,000 678,000
Other (income) expense, net (111,000) 132,000 (79,000) 102,000
------------ ------------ ------------ ------------
Income before provision for income taxes 2,480,000 816,000 5,528,000 2,536,000
Provision for income taxes 992,000 347,000 2,211,000 1,076,000
------------ ------------ ------------ ------------
Net income 1,488,000 469,000 3,317,000 1,460,000
Reversal of redeemable securities to redemption value, net -- 344,000 -- 230,000
------------ ------------ ------------ ------------
Net income available to common shareholders $ 1,488,000 $ 813,000 $ 3,317,000 $ 1,690,000
============ ============ ============ ============
Earnings per share data:
Basic $ 0.30 $ 0.17 $ 0.67 $ 0.43
============ ============ ============ ============
Diluted $ 0.29 $ 0.16 $ 0.63 $ 0.40
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic 4,954,639 4,807,300 4,956,827 3,931,030
============ ============ ============ ============
Diluted 5,220,775 5,063,349 5,224,293 4,213,751
============ ============ ============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------
September 30, September 30,
2000 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,317,000 $ 1,460,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,119,000 652,000
Changes in operating assets and liabilities, net of effects from
acquisitions:
Contracts and trade receivables, net (1,643,000) 564,000
Costs and estimated earnings in excess of billings (1,156,000) (1,945,000)
Prepaid expenses and other current assets 112,000 95,000
Deferred tax assets -- 375,000
Other assets 10,000 (30,000)
Trade accounts payable and accrued liabilities 1,280,000 989,000
Billings in excess of costs and estimated earnings 252,000 (19,000)
Other liabilities (16,000) 3,000
Accrued liabilities to related parties -- (185,000)
------------ ------------
Net cash provided by operating activities 3,275,000 1,959,000
------------ ------------
Cash flows from investing activities:
Net cash expended in connection with acquisitions -- (3,659,000)
Additions to equipment and leasehold improvements, net (1,064,000) (840,000)
------------ ------------
Net cash used in investing activities (1,064,000) (4,499,000)
------------ ------------
Cash flows from financing activities:
Payments on line of credit, net (1,300,000) (4,527,000)
Principal payments on long-term debt and capital lease obligations,
including current portion (1,131,000) (989,000)
Payments on notes payable to related parties -- (2,401,000)
Purchase of common stock for treasury (136,000) --
Proceeds from issuance of common stock, net 28,000 12,447,000
Payment of deferred offering costs -- (1,101,000)
------------ ------------
Net cash (used in) provided by financing activities (2,539,000) 3,429,000
------------ ------------
Net (decrease) increase in cash and cash equivalents (328,000) 889,000
Cash and cash equivalents, beginning of period 1,569,000 457,000
------------ ------------
Cash and cash equivalents, end of period $ 1,241,000 $ 1,346,000
============ ============
</TABLE>
See supplemental cash flow information at Note 6
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated balance sheet as of September 30,
2000, the consolidated statements of income for the three and nine months
ended September 30, 2000 and 1999, and the condensed consolidated
statements of cash flows for the nine months ended September 30, 2000 and
1999, 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 Annual Report on Form 10-K of The Keith
Companies, Inc. ("TKCI" and together with its subsidiary, the "Company")
for the fiscal year ended December 31, 1999 as certain disclosures which
would substantially duplicate those contained in such audited financial
statements have been omitted from this report.
2. Treasury Stock Purchased
During the nine months ended September 30, 2000, the Company acquired
27,000 shares of its common stock at a cost of $136,000. There were no such
purchases during the nine months ended September 30, 1999. As of September
30, 2000, the Company has acquired 124,600 shares of its common stock at a
cost of $683,000.
3. Per Share Data
Basic EPS is computed by dividing earnings 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
earnings 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares used for the basic EPS
computation (deemed outstanding the entire period) 4,954,639 4,807,300 4,956,827 3,931,030
Incremental shares from the assumed exercise of
dilutive stock options and stock warrants 145,979 256,049 147,309 282,721
Issuable common stock 120,157 -- 120,157 --
--------- --------- --------- ---------
Weighted average shares used for the diluted EPS
computation 5,220,775 5,063,349 5,224,293 4,213,751
========= ========= ========= =========
</TABLE>
In conjunction with the acquisition of substantially all of the assets
and the assumption of substantially all of the liabilities of
Thompson-Hysell, Inc. ("Thompson-Hysell") in July 1999, the Company
agreed to pay contingent consideration consisting of shares of its
common stock based on certain 1999 financial targets being met. During
the three months ended September 30, 2000, this contingent
consideration was finalized, therefore, the Company included 120,157
issuable shares in its weighted average shares used for the diluted EPS
computation. On October 31, 2000, the Company issued the 120,157 shares
of its common stock.
Anti-dilutive weighted potential common shares excluded from the above
calculations were 657,773 and 641,624 for the three and nine months
ended September 30, 2000, respectively and 336,902 and 147,115 for the
three and nine months ended September 30, 1999, respectively. On
September 30, 2000, 304,267 anti-dilutive potential
5
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
common shares were cancelled. On April 2, 2001, approximately the same
number of potential common shares will be granted to employees with an
option price equal to the fair market value at that date.
4. Indebtedness
On September 1, 1999, the Company entered into a new line of credit
agreement with a bank to fund working capital needs and acquisitions of
equipment. As of September 30, 2000, there were no outstanding borrowings
on the working capital component or equipment component of the line of
credit.
5. 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
Telecommunications ("REPWT") segment includes engineering and consulting
services for the development of both private projects, like residential
communities, commercial and industrial properties and recreational
projects; and public works projects, such as transportation and
water/sewage facilities; and site acquisition and construction management
services for wireless telecommunications. The Industrial, Process and
Manufacturing ("IPM") segment provides the technical expertise and
management required to design and test manufacturing facilities and
processes and to facilitate the construction of alternative electrical
power systems that supplement public power supply and large scale power
consumers.
The following tables set forth certain information regarding the Company's
operating segments for the three and nine months ended September 30, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Ended September 30, 2000
---------------------------------------------------------------------------------------
Corporate
REPWT IPM Costs Consolidated
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $12,576,000 $ 1,062,000 $ -- $13,638,000
Income (loss) from operations $ 3,546,000 $ 139,000 $(1,251,000) $ 2,434,000
Identifiable assets $24,891,000 $ 1,723,000 $ -- $26,614,000
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30, 1999
---------------------------------------------------------------------------------------
Corporate
REPWT IPM Costs Consolidated
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $ 9,715,000 $ 943,000 $ -- $10,658,000
Income (loss) from operations $ 1,809,000 $ 135,000 $ (847,000) $ 1,097,000
Identifiable assets $22,827,000 $ 1,340,000 $ -- $24,167,000
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
---------------------------------------------------------------------------------------
Corporate
REPWT IPM Costs Consolidated
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $35,443,000 $ 3,295,000 $ -- $38,738,000
Income (loss) from operations $ 8,869,000 $ 483,000 $(3,643,000) $ 5,709,000
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
---------------------------------------------------------------------------------------
Corporate
REPWT IPM Costs Consolidated
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $25,485,000 $ 2,786,000 -- $28,271,000
Income (loss) from operations $ 5,682,000 $ 175,000 $(2,541,000) $ 3,316,000
</TABLE>
6
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
6. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
2000 1999
------------ ---------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid for interest $ 299,000 $ 856,000
============ =========
Cash paid for income taxes $ 2,306,000 $ 124,000
============ =========
Noncash financing and investing activities:
Capital lease obligations recorded in connection with
equipment acquisitions $ -- $ 258,000
============ =========
Purchase price adjustment $ 631,000 $ 60,000
============ =========
Accretion of redeemable securities $ -- $(230,000)
============ =========
Insurance financing $ 28,000 $ --
============ =========
Accrued deferred offering costs $ -- $(291,000)
============ =========
</TABLE>
In September 2000, the Company finalized certain of the contingent
consideration associated with the acquisition of substantially all of the
assets and the assumption of substantially all of the liabilities of
Thompson-Hysell. A purchase price adjustment of $631,000 was recorded to
goodwill and current liabilities to account for the 120,157 shares of
issuable common stock (see note 3). On October 31, 2000, the Company issued
the 120,157 shares of its common stock, resulting in the reclassification
of the issuable common stock out of current liabilities and into common
stock and additional paid-in capital subsequent to September 30, 2000.
7. Subsequent Event
On October 13, 2000, TKCI acquired all of the outstanding common stock of
Crosby Mead Benton & Associates ("CMB"). The purchase price was
approximately $2.2 million, consisting of cash of $1.2 million and common
stock of $1.0 million, which is subject to adjustment based on various
items related to the CMB September 30, 2000 balance sheet, as stipulated in
the purchase agreement. The common stock is issuable in two increments of
$500,000 on October 13, 2001 and 2002. The acquisition was accounted for
using the purchase method of accounting. CMB is an engineering firm
specializing in land development design, infrastructure design and
landscape architecture. CMB is mainly located in the Los Angeles and San
Diego counties and employs approximately 65 people.
7
<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 condensed
consolidated financial statements of TKCI and its subsidiary and the related
notes included elsewhere in this Form 10-Q and the Annual Report on Form 10-K
for the fiscal year ended December 31, 1999 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" and elsewhere in the Annual
Report on Form 10-K 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 subsidiary.
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 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 in southern California may decline.
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,
business development and marketing, contract proposal, executive salaries,
amortization of goodwill, provisions for doubtful accounts and other indirect
overhead costs.
8
<PAGE>
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 Nine Months
Ended Ended
September 30, September 30,
------------- ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross revenue 107% 107% 106% 109%
Subcontractor costs 7% 7% 6% 9%
---- ---- ---- ----
Net revenue 100% 100% 100% 100%
Costs of revenue 62% 69% 65% 67%
---- ---- ---- ----
Gross profit 38% 31% 35% 33%
Selling, general and administrative expenses 20% 21% 20% 21%
---- ---- ---- ----
Income from operations 18% 10% 15% 12%
Interest expense 1% 1% -- 3%
Other (income) expense, net (1%) 1% -- --
---- ---- ---- ----
Income before provision for income taxes 18% 8% 15% 9%
Provision for income taxes 7% 3% 6% 4%
---- ---- ---- ----
Net income 11% 5% 9% 5%
Reversal of redeemable securities to redemption
value, net -- 3% -- 1%
---- ---- ---- ----
Net income available to common shareholders 11% 8% 9% 6%
==== ==== ==== ====
</TABLE>
Three and Nine Months Ended September 30, 2000 and September 30, 1999
Revenue. Net revenue for the three months ended September 30, 2000 was $13.6
million compared to $10.7 million for the three months ended September 30, 1999,
an increase of $3.0 million, or 28%. Net revenue for the nine months ended
September 30, 2000 was $38.7 million compared to $28.3 million for the nine
months ended September 30, 1999, an increase of $10.5 million, or 37%. Net
revenue growth for the three and nine months ended September 30, 2000 resulted
primarily from the acquisition of Thompson-Hysell in July 1999, which
contributed an additional $7.1 million to revenue for the nine months ended
September 30, 2000 compared to 1999; growth in the Company's surveying and
mapping services, resulting primarily from the strong demand for housing in
California and Nevada; and changes to the estimated direct contract costs
expected to be incurred on several large projects in the third quarter of 2000
and the third quarter of 1999. These changes in estimated direct contract costs
resulted in changes to the estimated percentage of completion on these projects
and consequently an approximate $200,000 increase in net revenue for the three
and nine months ended September 30, 2000 and an approximate $600,000 reduction
in net revenue for the three and nine months ended September 30, 1999. Excluding
the 2000 and 1999 net revenue adjustments, net revenue grew $2.2 million, or 19%
for the three months ended September 30, 2000 and $9.7 million, or 33% for the
nine months ended September 30, 2000. Subcontractor costs, as a percentage of
net revenue, remained flat at 7% for the three months ended September 30, 2000
compared to the previous year period and declined to 6% for the nine months
ended September 30, 2000 compared to 9% for the nine months ended September 30,
1999. The percentage decline in subcontractor costs for the nine months ended,
resulted primarily from a significant reduction in subcontract services for a
large contract in our industrial, process and manufacturing segment.
Gross Profit. Gross profit for the three months ended September 30, 2000 was
$5.2 million compared to $3.3 million for the three months ended September 30,
1999, an increase of $1.9 million, or 57%. Gross profit for the nine months
ended September 30, 2000 was $13.6 million compared to $9.2 million for the nine
months ended September 30, 1999, an increase of $4.4 million, or 48%. As a
percentage of net revenue, gross profit increased to 38% for the three months
ended September 30, 2000 compared to 31% for the three months ended September
30, 1999. For the nine months ended September 30, 2000, gross profit, as a
percentage of net revenue, increased to 35% compared to 33% for the nine months
ended September 30, 1999. The increase in gross profit and gross profit
percentage for the three and nine months ended September 30, 2000, resulted
primarily from higher net revenue and profit margins generated through our
acquisition of Thompson-Hysell, improved utilization of our professionals, an
increased focus on contracts with higher profit margins, and the 2000 and 1999
net revenue adjustments. Higher profit margins in our industrial, process and
manufacturing segment also contributed to the increase in the gross profit
percentage for the nine months ended September 30, 2000. These gross profit
increases were partially offset
9
<PAGE>
by an increase in the employer matching contribution of our 401(K) plan in 2000.
Excluding the 2000 and 1999 net revenue adjustments, the gross profit percentage
increased to 37% for the three months ended September 30, 2000 compared to 35%
for the prior year three months ended and increased to 35% for the nine months
ended September 30, 2000 compared to 34% for the prior year nine months ended.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended September 30, 2000 were $2.8
million compared to $2.2 million for the three months ended September 30, 1999,
an increase of $545,000, or 25%. Selling, general and administrative expenses
for the nine months ended September 30, 2000 were $7.9 million compared to $5.9
million for the nine months ended September 30, 1999, an increase of $2.0
million or 34%. The increases in selling, general and administrative expenses
resulted primarily from our acquisition of Thompson-Hysell, including the
amortization of goodwill; employee recruiting costs; and other costs associated
with operating as a public company. As a percentage of net revenue, selling,
general and administrative expenses decreased to 20% for the three and nine
months ended September 30, 2000 from 21% for the three and nine months ended
September 30, 1999. The percentage decreases were due principally to economies
of scale associated with our acquisition of Thompson-Hysell, which has resulted
in lower administrative costs in comparison to revenue generated, and the 2000
and 1999 net revenue adjustments.
Interest Expense. Interest expense for the three months ended September 30,
2000 was $65,000 compared to $149,000 for the three months ended September 30,
1999, a decrease of $84,000, or 56%. Interest expense for the nine months ended
September 30, 2000 was $260,000 compared to $678,000 for the nine months ended
September 30, 1999, a decrease of $418,000, or 62%. The lower interest expense
resulted largely from repayment of our previous line of credit and various
related party notes payable with a portion of the net proceeds from our initial
public offering in July 1999. In addition, certain capital leases were repaid
during the three months ended September 30, 2000.
Other (Income) Expense, net. Other (income) expense, net for the three months
ended September 30, 2000 was income of $111,000 compared to expense of $132,000
for the three months ended September 30, 1999, a decrease of $243,000 or 184%.
Other (income) expense, net for the nine months ended September 30, 2000 was
income of $79,000 compared to expense of $102,000 for the nine months ended
September 30, 1999, a decrease of $181,000 or 177%. The decrease related
primarily to $130,000 of expense recorded during the previous year period for a
guaranty of our common stock price against a market decline in connection with
the acquisition of ESI combined with the collection during the third quarter of
2000, of accounts receivable previously written off.
Income Taxes. For the three months ended September 30, 2000, the provision for
income taxes was $992,000 compared to $347,000 for the three months ended
September 30, 1999. The provision for income taxes for the nine months ended
September 30, 2000 was $2.2 million compared to $1.1 million for the nine months
ended September 30, 1999. The increase in income tax expense was due primarily
to a higher taxable income base, mitigated by a lower effective income tax rate.
Liquidity and Capital Resources
We have financed our working capital needs and capital expenditure requirements
primarily through a combination of internally generated funds, bank borrowings
and the initial public offering of our common stock.
Working capital as of September 30, 2000 was $7.4 million, excluding the
issuable common stock liability, compared to $7.2 million as of December 31,
1999, a slight increase of $144,000 or 2%. The growth resulted primarily from an
increase in contract and trade receivables and costs and estimated earnings in
excess of billings partially offset by an increase in the current portion of
long-term debt and capital lease obligations as a certain note was reclassified
from long-term based on its maturity date. The debt to equity ratio as of
September 30, 2000 was 0.15 to 1 compared to 0.38 to 1 as of December 31, 1999,
an improvement of 61%. Net cash provided by operating activities increased $1.3
million to $3.3 million for the nine months ended September 30, 2000, compared
to $2.0 million for the nine months ended September 30, 1999. The growth in
operating cash flow resulted primarily from higher income before the effects of
depreciation and amortization. The growth in cash generated from operating
activities was used primarily to payoff our line of credit, make principal
payments on long-term and short-term debt and capital leases, payoff certain
capital leases, fund capital expenditures and to purchase 27,000 treasury shares
at a cost of $136,000.
Our line of credit agreement has a working capital component with a maximum
outstanding principal balance of $6,000,000 and an equipment component with a
maximum outstanding principal balance of $3,500,000. The aggregate outstanding
principal balance of working capital advances and equipment advances may not
exceed $8,500,000. As of September 30, 2000, there were no outstanding
borrowings on the working capital component or equipment component of the line
of credit. On September 3, 2000 and November 3, 2000, the line of credit was
amended to ultimately extend the maturity on the equipment component to January
3, 2001.
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<PAGE>
We believe existing cash balances, internally generated funds, and availability
under credit facilities will be sufficient to fund our anticipated internal
operating needs for the next twelve 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 onto our clients.
Impact of the Year 2000 Issue
To date, we have not experienced any significant disruptions to our financial or
operating activities caused by failure of our computerized systems resulting
from Year 2000 issues. We do not expect Year 2000 issues to have a material
adverse effect on our operations or financial results in 2000.
In addition, we have no information that indicates a significant vendor or
service provider may be unable to sell goods or provide services to us or that
any significant customer may be unable to purchase from us because of Year 2000
issues. Further, we have not received any notifications from lenders or
regulatory agencies to which we are subject indicating that (1) a lender
considers or may consider us to be in violation of a loan agreement; or (2)
significant regulatory action is being or may be taken against us as a result of
Year 2000 issues.
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 and long-term debt, which are used to maintain liquidity and to fund
capital expenditures and our expansion. To help limit the impact of interest
rate changes on earnings and cash flows, we have borrowed at fixed rates where
possible. 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.
The table below presents the principal amounts of debt (excluding capital lease
obligations of $742,000), 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 September 30, 2000.
<TABLE>
<CAPTION>
Fair
2000 2001 2002 2003 2004 Total Value (1)
---- ---- ---- ---- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt $ 36,000 $ 1,491,000 $ 90,000 $ 58,000 $ 15,000 $ 1,690,000 $ 1,690,000
Weighted average interest rate 8.4% 9.9% 8.2% 8.2% 8.5% 9.7% 9.7%
Variable rate debt -- -- -- -- -- -- --
Weighted average interest rate -- -- -- -- -- -- --
</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.
As the table incorporates only those exposures that existed as of September 30,
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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<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, four shareholders of Thompson-Hysell
(the "Defendant Shareholders"), Thompson-Hysell Liquidation Corporation,
Thompson-Hysell Engineers, Inc. ("T-H Engineers") and us. This complaint was
filed by Phillip Kirk Delamare and his wife Catherine A. Delamare who are
shareholders of T-H Engineers, along with the Defendant Shareholders who are
majority shareholders and directors. The complaint alleges, among other things,
that Thompson-Hysell is or 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 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. Our position from the
inception of this litigation has been that the complaint against us was
completely without merit. Consequently, we brought a motion before the Court
asking that we be dismissed from the action. In response to this motion, on
October 27, 2000, the Court ruled that we were entitled to a dismissal with
prejudice. A formal order is pending. With the dismissal, our involvement as a
party is over, subject to the plaintiffs' right to appeal. We remain confident
that even in the event of an appeal, we will be exonerated from any wrongdoing.
To date, all of our costs and expenses associated with this defense have been,
and management believes will continue to be, covered by certain indemnification
agreements between the Defendant Shareholders and us.
Item 2. Changes In Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits
Number Description
------ -----------
10.15 First Amendment to Wells Fargo Bank Credit Agreement dated
September 3, 2000 between The Keith Companies, Inc.,
John M. Tettemer & Associates, LTD and Wells Fargo Bank,
National Association.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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: November 10, 2000 THE KEITH COMPANIES, INC.
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
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