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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, 2002
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 incorporation or organization)	(I.R.S. Employer Identification No.)

19 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (949) 923-6000

2955 RED HILL AVENUE, COSTA MESA, CALIFORNIA 92626

(Former address of principal executive offices)

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 outstanding shares of the registrant’s common stock as of October 28, 2002 was 7,495,998.

Table of Contents

THE KEITH COMPANIES, INC. AND SUBSIDIARIES

INDEX

			PAGE NO.
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets	2
		Consolidated Statements of Income	3
		Consolidated Statements of Cash Flows	4
		Notes to the Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	21
	Item 4.	Controls and Procedures	22
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	23
	Item 2.	Changes in Securities and Use of Proceeds	23
	Item 3.	Defaults Upon Senior Securities	23
	Item 4.	Submission of Matters to a Vote of Security Holders	23
	Item 5.	Other Information	23
	Item 6.	Exhibits and Reports on Form 8-K	24
	Signatures		25
	Certifications		26

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Table of Contents

PART I. FINANCIAL INFORMATION

THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

		September 30,			December 31,
		2002			2001
Assets		(Unaudited)
Current assets:
Cash and cash equivalents	$	15,691,000		$	12,212,000
Securities held-to-maturity		5,527,000			11,521,000
Contracts and trade receivables, net of allowance for doubtful accounts of $1,573,000 and $951,000 at September 30, 2002 and December 31, 2001, respectively		20,187,000			18,618,000
Costs and estimated earnings in excess of billings		12,115,000			8,270,000
Prepaid expenses and other current assets		1,062,000			1,458,000
Total current assets		54,582,000			52,079,000
Equipment and leasehold improvements, net		4,851,000			4,921,000
Goodwill, net of accumulated amortization of $761,000 at September 30, 2002 and December 31, 2001		21,954,000			14,252,000
Other assets		344,000			240,000
Total assets	$	81,731,000		$	71,492,000
Liabilities and Shareholders’ Equity
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	61,000		$	459,000
Trade accounts payable		2,609,000			2,376,000
Accrued employee compensation		4,370,000			3,091,000
Current portion of deferred tax liabilities		3,676,000			2,028,000
Other accrued liabilities		4,775,000			2,961,000
Billings in excess of costs and estimated earnings		1,256,000			2,383,000
Total current liabilities		16,747,000			13,298,000
Long-term debt and capital lease obligations, less current portion		26,000			1,453,000
Issuable common stock		3,467,000			1,512,000
Deferred tax liabilities		1,092,000			1,271,000
Accrued rent		252,000			225,000
Total liabilities		21,584,000			17,759,000
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, 2002 and December 31, 2001; issued and outstanding 7,354,139 and 7,309,684 shares at September 30, 2002 and December 31, 2001, respectively		7,000			7,000
Additional paid-in capital		42,402,000			42,096,000
Retained earnings		17,738,000			11,630,000
Total shareholders’ equity		60,147,000			53,733,000
Total liabilities and shareholders’ equity	$	81,731,000		$	71,492,000

See accompanying notes to the consolidated financial statements.

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THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)

	For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2002				2001			2002				2001
Gross revenue	$	28,342,000			$	18,685,000		$	83,173,000			$	56,626,000
Subcontractor costs		3,328,000				1,212,000			12,706,000				4,814,000
Net revenue		25,014,000				17,473,000			70,467,000				51,812,000
Costs of revenue		16,037,000				11,232,000			46,387,000				33,485,000
Gross profit		8,977,000				6,241,000			24,080,000				18,327,000
Selling, general and administrative expenses		5,270,000				3,614,000			15,044,000				10,674,000
Income from operations		3,707,000				2,627,000			9,036,000				7,653,000
Interest income		87,000				227,000			304,000				378,000
Interest expense (income), net		(114,000	)			28,000			(48,000	)			237,000
Other expenses (income), net		(668,000	)			12,000			(625,000	)			44,000
Income before provision for income taxes		4,576,000				2,814,000			10,013,000				7,750,000
Provision for income taxes		1,785,000				1,126,000			3,905,000				3,100,000
Net income	$	2,791,000			$	1,688,000		$	6,108,000			$	4,650,000
Earnings per share data:
Basic	$	0.38			$	0.23		$	0.83			$	0.73
Diluted	$	0.35			$	0.22		$	0.78			$	0.67
Weighted average number of shares outstanding:
Basic		7,346,326				7,318,645			7,326,887				6,368,648
Diluted		7,936,546				7,778,457			7,871,862				6,892,988

See accompanying notes to the consolidated financial statements.

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THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)

	For the Nine Months Ended September 30,
	2002				2001
Cash flows from operating activities:
Net income	$	6,108,000			$	4,650,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,702,000				1,708,000
Loss on sale/impairment of equipment		139,000				17,000
Reduction in purchase price of acquired companies		(769,000	)			—
Tax benefit from exercise of stock options		73,000				600,000
Changes in operating assets and liabilities, net of effects from acquisitions:
Contracts and trade receivables, net		1,952,000				168,000
Costs and estimated earnings in excess of billings		(3,265,000	)			(2,486,000	)
Prepaid expenses and other assets		389,000				(165,000	)
Trade accounts payable and accrued liabilities		1,967,000				674,000
Billings in excess of costs and estimated earnings		(1,058,000	)			74,000
Net cash provided by operating activities		7,238,000				5,240,000
Cash flows from investing activities:
Net cash expended for acquisition		(7,987,000	)			(3,465,000	)
Additions to equipment and leasehold improvements		(1,354,000	)			(1,379,000	)
Proceeds from (purchase of) securities held-to-maturity		5,994,000				(12,556,000	)
Proceeds from sales of equipment		129,000				20,000
Net cash used in investing activities		(3,218,000	)			(17,380,000	)
Cash flows from financing activities:
Payments on line of credit, net		—				(2,294,000	)
Principal payments on long-term debt and capital lease obligations, including current portion		(688,000	)			(3,399,000	)
Repurchase of common stock		—				(433,000	)
Proceeds from exercise of stock options		147,000				583,000
Net proceeds from stock offering		—				27,935,000
Net cash (used in) provided by financing activities		(541,000	)			22,392,000
Net increase in cash and cash equivalents		3,479,000				10,252,000
Cash and cash equivalents, beginning of period		12,212,000				1,043,000
Cash and cash equivalents, end of period	$	15,691,000			$	11,295,000
See supplemental cash flow information at Note 7.

See accompanying notes to the consolidated financial statements.

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THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)

1.	Basis of Presentation
	The accompanying consolidated balance sheet as of September 30, 2002, and the consolidated statements of income for the three and nine months ended September 30, 2002 and 2001, and the consolidated statements of cash flows for the nine months ended September 30, 2002 and 2001, are unaudited and in the opinion of management include all material adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. All significant intercompany transactions have been eliminated and certain reclassifications have been made to prior periods’ consolidated financial statements to conform to the current period presentation. The results of operations for these interim periods are not necessarily indicative of results for the full year. The 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. (together with its subsidiaries, the “Company” or “TKCI”) for the year ended December 31, 2001 as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report.
2.	Per Share Data
	Basic earnings per share (“EPS”) is computed by dividing net income during the period by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing net income during the period by the weighted average number of shares that would have been outstanding assuming the issuance of dilutive potential common shares as if outstanding during the reporting period, net of shares assumed to be repurchased using the treasury stock method. In conjunction with certain acquisitions, the Company agreed to pay consideration consisting of shares of its common stock. As a result, the Company estimated and included 356,901 and 291,373 weighted average contingently issuable shares in its diluted EPS computation for the three and nine months ended September 30, 2002, respectively, and 167,196 and 160,512 weighted average contingently issuable shares for the three and nine months ended September 30, 2001, respectively.
	The following is a reconciliation of the denominator for the basic EPS computation to the denominator of the diluted EPS computation:

	For the Three Months				For the Nine Months Ended
	Ended September 30,				September 30,
	2002		2001		2002		2001
Weighted average shares used for the basic EPS computation	7,346,326		7,318,645		7,326,887		6,368,648
Incremental shares from the assumed exercise of dilutive stock options and stock warrants and contingently issuable shares	590,220		459,812		544,975		524,340
Weighted average shares used for the diluted EPS computation	7,936,546		7,778,457		7,871,862		6,892,988

There were 174,468 and 129,548 anti-dilutive weighted potential common shares excluded from the above calculations for the three and nine months ended September 30, 2002, respectively, and 113,310 and 11,156 for the three and nine months ended September 30, 2001, respectively.

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THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)

3.	Adoption of New Accounting Pronouncement
	Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142. Under the new standard, goodwill is no longer amortized. Therefore, no goodwill amortization expense was incurred during the nine months ended September 30, 2002. Beginning January 1, 2002, goodwill is required to be tested for impairment on an annual basis, and is required to be tested for impairment between annual tests if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The table below shows the as adjusted effect on net income, basic earnings per share and diluted earnings per share had SFAS No. 142, which eliminated goodwill amortization, been applied in 2001:

	Three Months Ended							Nine Months Ended
	September 30,							September 30,
		2002			2001			2002			2001
Net income:
Reported net income	$	2,791,000		$	1,688,000		$	6,108,000		$	4,650,000
Add back: Goodwill amortization (net of income taxes)		—			63,000			—			192,000
Adjusted net income	$	2,791,000		$	1,751,000		$	6,108,000		$	4,842,000
Basic earnings per share:
Reported basic earnings per share	$	0.38		$	0.23		$	0.83		$	0.73
Add back: Goodwill amortization (net of income taxes)		—			0.01			—			0.03
Adjusted basic earnings per share	$	0.38		$	0.24		$	0.83		$	0.76