<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 June 30, 2000
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 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 July 31,
2000 was 5,078,450.
<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. Qualitative and Quantitative 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 14
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE KEITH COMPANIES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 736,000 $ 1,569,000
Contracts and trade receivables,
net of allowance for doubtful
accounts of $921,000 and $612,000
at June 30, 2000 and December 31, 1999,
respectively 8,914,000 7,176,000
Costs and estimated earnings in excess
of billings 5,683,000 5,037,000
Prepaid expenses and other current assets 552,000 501,000
------------ --------------
Total current assets 15,885,000 14,283,000
Equipment and leasehold improvements, net 4,372,000 4,536,000
Goodwill, net of accumulated amortization
of $205,000 and $109,000 at June 30,
2000 and December 31, 1999, respectively 4,582,000 4,678,000
Other assets 160,000 164,000
------------ --------------
Total assets $24,999,000 $23,661,000
============ ==============
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of long-term debt
and capital lease obligations $ 961,000 $ 1,292,000
Trade accounts payable 1,333,000 1,048,000
Accrued employee compensation 2,713,000 2,342,000
Current portion of deferred tax liabilities 1,102,000 1,102,000
Other accrued liabilities 1,297,000 734,000
Billings in excess of costs and estimated
earnings 747,000 552,000
------------ --------------
Total current liabilities 8,153,000 7,070,000
Long-term debt and capital lease obligations,
less current portion 2,094,000 3,543,000
Other liabilities 201,000 212,000
------------ --------------
Total liabilities 10,448,000 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 June 30,
2000 and December 31, 1999; issued and
outstanding 5,078,450 and 5,070,224
shares at June 30, 2000 and December 31,
1999, respectively, including shares held
in treasury 5,000 5,000
Additional paid-in capital 12,339,000 12,317,000
Retained earnings 2,890,000 1,061,000
------------ --------------
15,234,000 13,383,000
Less treasury stock, at cost of 124,600 and
97,600 shares at June 30, 2000
and December 31, 1999, respectively 683,000 547,000
------------ --------------
Total shareholders' equity 14,551,000 12,836,000
------------ --------------
Commitments and contingencies (Note 3)
Total liabilities and shareholders'
equity $24,999,000 $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 Six Months Ended
------------------------------- ---------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Gross revenue $13,567,000 $9,471,000 $26,674,000 $19,470,000
Subcontractor costs 886,000 828,000 1,574,000 1,857,000
------------- ------------ -------------- ------------
Net revenue 12,681,000 8,643,000 25,100,000 17,613,000
Costs of revenue 8,307,000 5,786,000 16,689,000 11,701,000
------------- ------------ -------------- ------------
Gross profit 4,374,000 2,857,000 8,411,000 5,912,000
Selling, general and administrative
expenses 2,486,000 1,797,000 5,136,000 3,693,000
------------- ------------ -------------- ------------
Income from operations 1,888,000 1,060,000 3,275,000 2,219,000
Interest expense 88,000 268,000 195,000 529,000
Other expense (income), net 22,000 (10,000) 32,000 (30,000)
------------- ------------ -------------- ------------
Income before provision for
income taxes 1,778,000 802,000 3,048,000 1,720,000
Provision for income taxes 711,000 340,000 1,219,000 729,000
------------- ------------ -------------- ------------
Net income 1,067,000 462,000 1,829,000 991,000
Accretion of redeemable securities
to redemption value - (57,000) - (114,000)
------------- ------------ -------------- ------------
Net income available to common
shareholders $ 1,067,000 $ 405,000 $ 1,829,000 $ 877,000
============= ============ ============== ============
Earnings per share data:
Basic $ 0.22 $ 0.12 $ 0.37 $ 0.25
============= ============ ============== ============
Diluted $ 0.20 $ 0.11 $ 0.35 $ 0.23
============= ============ ============== ============
Weighted average number of shares
outstanding:
Basic 4,956,942 3,485,634 4,958,025 3,485,634
============= ============ ============== ============
Diluted 5,238,537 3,750,627 5,254,864 3,750,613
============= ============ ============== ============
</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>
Six Months Ended
--------------------------
June 30, June 30,
2000 1999
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,829,000 $ 991,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 740,000 381,000
Changes in operating assets and liabilities:
Contracts and trade receivables (1,738,000) (24,000)
Costs and estimated earnings in excess of
billings (646,000) (849,000)
Prepaid expenses and other current assets 12,000 (32,000)
Deferred tax assets - 375,000
Other assets 4,000 (157,000)
Trade accounts payable and accrued
liabilities 1,219,000 111,000
Billings in excess of costs and
estimated earnings 195,000 (61,000)
Other liabilities (11,000) (2,000)
Accrued liabilities to related parties - 49,000
----------- ---------
Net cash provided by operating activities 1,604,000 782,000
----------- ---------
Cash flows from investing activities -
additions to equipment and leasehold
improvements (480,000) (415,000)
----------- ---------
Cash flows from financing activities:
(Payments on) proceeds from line of
credit, net (1,125,000) 204,000
Principal payments on long-term debt
and capital lease obligations,
including current portion (718,000) (624,000)
Purchase of common stock for treasury (136,000) -
Proceeds from issuance of common stock 22,000 -
Payment of deferred offering costs - (330,000)
----------- ---------
Net cash used in financing activities (1,957,000) (750,000)
----------- ---------
Net decrease in cash and cash equivalents (833,000) (383,000)
Cash and cash equivalents, beginning of period 1,569,000 457,000
----------- ---------
Cash and cash equivalents, end of period $ 736,000 $ 74,000
=========== =========
</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 June 30, 2000,
the consolidated statements of income for the three and six months ended
June 30, 2000 and 1999, and the condensed consolidated statements of cash
flows for the six months ended June 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 six months ended June 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 six months ended June 30, 1999. As of June 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 Six Months Ended
--------------------- --------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares used
for the basic EPS
computation (deemed
outstanding the entire
period) 4,956,942 3,485,634 4,958,025 3,485,634
Incremental shares from the
assumed exercise of dilutive
stock options and stock
warrants 133,595 264,993 148,839 264,979
Contingently issuable shares 148,000 - 148,000 -
--------- --------- --------- ---------
Weighted average shares used
for the diluted EPS
computation 5,238,537 3,750,627 5,254,864 3,750,613
========= ========= ========= =========
</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, which may be
issuable in 2000 based on certain 1999 financial targets being met. As of
June 30, 2000, the contingent consideration to be issued has not been
finalized, therefore, the Company estimated and included 148,000
contingently issuable shares in its weighted average shares used for the
diluted EPS computation.
Anti-dilutive potential common shares excluded from the above calculations
were 663,736 and 633,461 for the three and six months ended June 30, 2000,
respectively and 2,192 and 1,102 for the three and six months ended June
30, 1999, respectively.
5
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
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 June 30, 2000, there were no outstanding borrowings on the
equipment component of the line of credit and the working capital component
had outstanding borrowings of $175,000 bearing interest at prime (9.5%).
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.
The following tables set forth certain information regarding the Company's
operating segments for the three and six months ended June 30, 2000 and
1999:
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
-----------------------------------------------------------------------------------------------------------
Corporate
REPWT IPM Costs Consolidated
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $11,585,000 $1,096,000 $ - $12,681,000
Income (loss) from operations $ 2,945,000 $ 132,000 $(1,189,000) $ 1,888,000
Identifiable assets $23,714,000 $1,285,000 $ - $24,999,000
<CAPTION>
Three Months Ended June 30, 1999
-----------------------------------------------------------------------------------------------------------
Corporate
REPWT IPM Costs Consolidated
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $ 7,776,000 $ 867,000 $ - $ 8,643,000
Income (loss) from operations $ 1,899,000 $ 8,000 $ (847,000) $ 1,060,000
Identifiable assets $14,068,000 $1,760,000 $ - $15,828,000
<CAPTION>
Six Months Ended June 30, 2000
-----------------------------------------------------------------------------------------------------------
Corporate
REPWT IPM Costs Consolidated
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $22,866,000 $2,234,000 $ - $25,100,000
Income (loss) from operations $ 5,322,000 $ 343,000 $(2,390,000) $ 3,275,000
<CAPTION>
Six Months Ended June 30, 1999
-----------------------------------------------------------------------------------------------------------
Corporate
REPWT IPM Costs Consolidated
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue $15,770,000 $1,843,000 $ - $17,613,000
Income (loss) from operations $ 3,873,000 $ 40,000 $(1,694,000) $ 2,219,000
</TABLE>
6
<PAGE>
THE KEITH COMPANIES, INC. AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
6. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
<S> <C> <C>
2000 1999
----------- -----------
Supplemental disclosure of cash flow
information:
Cash paid for interest $234,000 $472,000
=========== ===========
Cash paid for income taxes $455,000 $ 2,000
=========== ===========
Noncash financing and investing activities:
Capital lease obligations recorded in
connection with equipment acquisitions $ - $ 72,000
=========== ===========
Purchase price adjustment $ - $ 60,000
=========== ===========
Accretion of redeemable securities $ - $114,000
=========== ===========
Insurance financing $ 63,000 $ -
=========== ===========
Accrued deferred offering costs $ - $513,000
=========== ===========
</TABLE>
7. Subsequent Events
On July 27, 2000, TKCI signed a non-binding letter of intent to acquire a
company based in southern California with approximately 65 employees. The
company's services include land development design, infrastructure design,
and landscape architecture. TKCI anticipates closing the acquisition in the
fourth quarter of 2000.
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
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. In July 1999,
we acquired substantially all of the assets and assumed substantially all of the
liabilities of Thompson-Hysell.
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 Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross revenue 107% 110% 106% 111%
Subcontractor costs 7% 10% 6% 11%
---- ---- ---- ----
Net revenue 100% 100% 100% 100%
Costs of revenue 66% 67% 66% 66%
---- ---- ---- ----
Gross profit 34% 33% 34% 34%
Selling, general and administrative expenses 20% 21% 20% 21%
---- ---- ---- ----
Income from operations 14% 12% 14% 13%
Interest expense - 3% 2% 3%
---- ---- ---- ----
Income before provision for income taxes 14% 9% 12% 10%
Provision for income taxes 6% 4% 5% 4%
---- ---- ---- ----
Net income 8% 5% 7% 6%
Accretion of redeemable securities to
redemption value - - - (1%)
---- ---- ---- ----
Net income available to common shareholders 8% 5% 7% 5%
==== ===== ==== ====
</TABLE>
Three and Six Months Ended June 30, 2000 and June 30, 1999
Revenue. Net revenue for the three months ended June 30, 2000 was $12.7 million
compared to $8.6 million for the three months ended June 30, 1999, an increase
of $4.0 million, or 47%. Net revenue for the six months ended June 30, 2000 was
$25.1 million compared to $17.6 million for the six months ended June 30, 1999,
an increase of $7.5 million, or 43%. Net revenue increased by $3.1 million and
$5.8 million for the three and six months ended June 30, 2000, respectively, as
a result of our acquisition of Thompson-Hysell in July 1999. Excluding the
revenue as a result of the acquisition, our net revenue grew $937,000 or 11%,
and $1.7 million or 10% for the three and six months ended June 30, 2000,
respectively, compared to the three and six months ended June 30, 1999. The net
revenue growth resulted primarily from the continued demand for housing in
California and Nevada, and water resource and industrial, process and
manufacturing projects in California. Subcontractor costs, as a percentage of
net revenue, declined to 7% and 6% for three and six months ended June 30, 2000,
respectively, compared to 10% and 11% for the three and six months ended June
30, 1999. The percentage decline in subcontractor costs 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 June 30, 2000 was $4.4
million compared to $2.9 million for the three months ended June 30, 1999, an
increase of $1.5 million, or 53%. Gross profit for the six months ended June
30, 2000 was $8.4 million compared to $5.9 million for the six months ended June
30, 1999, an increase of $2.5 million, or 42%. The gross profit growth is
attributable to both our acquisition of Thompson-Hysell and certain other
revenue increases. As a percentage of net revenue, gross profit increased to
34% for the three months ended June 30, 2000 compared to 33% for the three
months ended June 30, 1999. For the six months ended June 30, 2000, gross
profit, as a percentage of net revenue, remained at 34% compared to the six
months ended June 30, 1999. During the three and six months ended June 30,
2000, the gross profit percentage increased as a result of higher profit margins
generated through our acquisition of Thompson-Hysell and higher profit margins
in our industrial, process and manufacturing segment, partially offset by an
increase in the employer matching contribution of our 401(K) plan in 2000. In
addition, the six months ended June 30, 2000 was negatively impacted by lower
margins on two large projects discussed in our previous quarterly filing.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2000 were $2.5
million compared to $1.8 million for the three months ended June 30, 1999, an
increase of $689,000, or 38%. Selling, general and administrative expenses for
the six months ended June 30, 2000 were $5.1 million compared to $3.7 million
for the six months ended June 30, 1999, an increase of $1.4 million or 39%. The
increases in selling, general and administrative expenses resulted primarily
from our acquisition of Thompson-Hysell, including the amortization of
9
<PAGE>
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 six months ended June
30, 2000 from 21% for the three and six months ended June 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.
Interest Expense. Interest expense for the three months ended June 30, 2000 was
$88,000 compared to $268,000 for the three months ended June 30, 1999, a
decrease of $180,000, or 67%. Interest expense for the six months ended June
30, 2000 was $195,000 compared to $529,000 for the six months ended June 30,
1999, a decrease of $334,000, or 63%. 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.
Income Taxes. For the three months ended June 30, 2000, the provision for
income taxes was $711,000 compared to $340,000 for the three months ended June
30, 1999. The provision for income taxes for the six months ended June 30, 2000
was $1.2 million compared to $729,000 for the six months ended June 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 and bank
borrowings.
Working capital as of June 30, 2000 was $7.7 million compared to $7.2 million as
of December 31, 1999, an increase of $519,000 or 7%, primarily due to an
increase in contract and trade receivables, offset by an increase in income tax
payable, which is included in other accrued liabilities. The debt to equity
ratio as of June 30, 2000 was 0.21 to 1 compared to 0.38 to 1 as of December 31,
1999, an improvement of 45%. Net cash provided by operating activities
increased $822,000 to $1.6 million for the six months ended June 30, 2000,
compared to $782,000 for the six months ended June 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 substantially payoff our line of credit, make
principal payments on long-term and short-term debt and 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 June 30, 2000, there were no outstanding borrowings on
the equipment component of the line of credit and the working capital component
had outstanding borrowings of $175,000 bearing interest at prime (9.5%).
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.
10
<PAGE>
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 $953,000), 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 June 30, 2000.
<TABLE>
Fair
2000 2001 2002 2003 2004 Total Value(/1/)
-------- ---------- -------- ------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate debt (/2/) $138,000 $1,473,000 $110,000 $70,000 $15,000 $1,806,000 $1,806,000
Average interest rate 8.1% 9.8% 8.3% 8.3% 8.5% 9.5% 9.5%
Variable rate debt - $ 175,000 - - - $ 175,000 $ 175,000
Average interest rate - 9.5% - - - 9.5% 9.5%
</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 $121,000 as there is no established market for these notes.
As the table incorporates only those exposures that existed as of June 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.
11
<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. 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 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. The trial, which was previously set to occur on April 17, 2000, was
continued until July 17, 2000. A motion to have TKCI dismissed as defendants in
this litigation was sustained with leave to amend. In light of this ruling, the
July 17, 2000 trial date was vacated and the plaintiff is expected to file a
first amended complaint at which point a new trial date will be set. 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
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On May 15, 2000, at the annual meeting of the shareholders of the
Company, the shareholders were asked to vote on the election of a new
board of directors for the next year or until their successors are
elected. The result of said voting is as follows:
Individual For Withheld
-------------------------- ----------------- -----------------
Aram H. Keith 4,134,581 26,757
Gary C. Campanaro 4,134,581 26,757
Walter W. Cruttenden, III 4,134,581 26,757
George Deukmejian 4,134,211 27,127
Christine Diemer Iger 4,134,581 26,757
In addition, the shareholders were asked to ratify the appointment of
KPMG LLP as our independent auditors for fiscal 2000 and to transact
such other business as may properly come before the meeting or any
adjournments and postponements thereof. The results of the ratification
of the appointment of KPMG LLP as our independent auditors for fiscal
2000 were: for 4,115,712; against 24,552; and abstain 21,074.
No other matters were submitted to a vote of the shareholders during
the period covered by this report.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits
12
<PAGE>
Number Description
------ -----------
27 Financial Data Schedule
(b) Reports on Form 8-K
None
13
<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 11, 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
14
