SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
Commission File Number 0-26561
THE KEITH COMPANIES, INC.
| California | 33-0203193 | |
|
|
||
| (State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
| incorporation or organization) |
19 TECHNOLOGY DRIVE, IRVINE, CALIFORNIA 92618
Registrant’s telephone number, including area code: (949) 923-6001
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of outstanding shares of the registrant’s common stock as of May 8, 2003 was 7,611,310.
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 | 9 | ||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 21 | ||||
| Item 4. | Controls and Procedures | 23 | ||||
| PART II. | OTHER INFORMATION | |||||
| Item 1. | Legal Proceedings | 24 | ||||
| Item 2. | Changes in Securities and Use of Proceeds | 24 | ||||
| Item 3. | Defaults Upon Senior Securities | 24 | ||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 24 | ||||
| Item 5. | Other Information | 24 | ||||
| Item 6. | Exhibits and Reports on Form 8-K | 24 | ||||
| Signatures | 25 | |||||
| Certifications | 26 | |||||
1
PART I. FINANCIAL INFORMATION
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
| March 31, | December 31, | |||||||||
| 2003 | 2002 | |||||||||
| (Unaudited) | ||||||||||
Assets |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 17,763,000 | $ | 20,333,000 | ||||||
Securities held-to-maturity |
6,456,000 | 3,164,000 | ||||||||
Contracts and trade receivables, net of allowance
for doubtful accounts of $1,275,000 and $1,123,000
at March 31, 2003 and December 31, 2002,
respectively |
16,295,000 | 18,771,000 | ||||||||
Costs and estimated earnings in excess of billings |
11,405,000 | 10,392,000 | ||||||||
Prepaid expenses and other current assets |
2,347,000 | 1,367,000 | ||||||||
Total current assets |
54,266,000 | 54,027,000 | ||||||||
Equipment and leasehold improvements, net |
4,690,000 | 4,831,000 | ||||||||
Goodwill, net of accumulated amortization of $761,000 at
March 31, 2003 and December 31, 2002 |
23,141,000 | 23,056,000 | ||||||||
Other assets |
216,000 | 312,000 | ||||||||
Total assets |
$ | 82,313,000 | $ | 82,226,000 | ||||||
Liabilities and Shareholders’ Equity |
||||||||||
Current liabilities: |
||||||||||
Current portion of capital lease obligations |
$ | 9,000 | $ | 52,000 | ||||||
Trade accounts payable |
1,526,000 | 1,818,000 | ||||||||
Accrued employee compensation |
3,918,000 | 3,722,000 | ||||||||
Current portion of deferred tax liabilities |
3,065,000 | 3,065,000 | ||||||||
Other accrued liabilities |
3,282,000 | 4,484,000 | ||||||||
Billings in excess of costs and estimated earnings |
1,157,000 | 1,273,000 | ||||||||
Total current liabilities |
12,957,000 | 14,414,000 | ||||||||
Capital lease obligations, less current portion |
8,000 | 18,000 | ||||||||
Issuable common stock |
2,215,000 | 2,215,000 | ||||||||
Deferred tax liabilities |
1,675,000 | 1,675,000 | ||||||||
Accrued rent |
421,000 | 292,000 | ||||||||
Total liabilities |
17,276,000 | 18,614,000 | ||||||||
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; issued and outstanding
7,518,585 and 7,514,140 shares at March 31, 2003
and December 31, 2002, respectively |
8,000 | 8,000 | ||||||||
Additional paid-in capital |
44,193,000 | 44,166,000 | ||||||||
Retained earnings |
20,836,000 | 19,438,000 | ||||||||
Total shareholders’ equity |
65,037,000 | 63,612,000 | ||||||||
Total liabilities and shareholders’ equity |
$ | 82,313,000 | $ | 82,226,000 | ||||||
See accompanying notes to the consolidated financial statements.
2
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
| For the Three Months Ended | |||||||||
| March 31, | |||||||||
| 2003 | 2002 | ||||||||
Gross revenue |
$ | 24,651,000 | $ | 25,267,000 | |||||
Subcontractor costs |
2,305,000 | 4,464,000 | |||||||
Net revenue |
22,346,000 | 20,803,000 | |||||||
Costs of revenue |
14,942,000 | 13,692,000 | |||||||
Gross profit |
7,404,000 | 7,111,000 | |||||||
Selling, general and administrative expenses |
5,387,000 | 4,646,000 | |||||||
Income from operations |
2,017,000 | 2,465,000 | |||||||
Interest income |
69,000 | 124,000 | |||||||
Interest expense |
6,000 | 36,000 | |||||||
Other (income) expenses, net |
(212,000 | ) | 20,000 | ||||||
Income before provision for income taxes
and discontinued operations |
2,292,000 | 2,533,000 | |||||||
Provision for income taxes |
894,000 | 989,000 | |||||||
Income from continuing operations |
1,398,000 | 1,544,000 | |||||||
Loss from discontinued operations, net of income taxes |
— | 105,000 | |||||||
Net income |
$ | 1,398,000 | $ | 1,439,000 | |||||
Earnings per share from continuing operations: |
|||||||||
Basic |
$ | 0.18 | $ | 0.21 | |||||
Diluted |
$ | 0.18 | $ | 0.20 | |||||
Earnings (loss) per share from discontinued
operations, net of income taxes: |
|||||||||
Basic |
$ | — | $ | (0.01 | ) | ||||
Diluted |
$ | — | $ | (0.01 | ) | ||||
Earnings per share: |
|||||||||
Basic |
$ | 0.18 | $ | 0.20 | |||||
Diluted |
$ | 0.18 | $ | 0.19 | |||||
Weighted average number of shares outstanding: |
|||||||||
Basic |
7,588,601 | 7,310,790 | |||||||
Diluted |
7,948,933 | 7,755,839 | |||||||
See accompanying notes to the consolidated financial statements.
3
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
| For the Three Months Ended | ||||||||||||
| March 31, | ||||||||||||
| 2003 | 2002 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 1,398,000 | $ | 1,439,000 | ||||||||
Adjustments to reconcile net income to net cash provided by
operating activities: |
||||||||||||
Depreciation and amortization |
593,000 | 539,000 | ||||||||||
Loss on sale of equipment |
16,000 | 10,000 | ||||||||||
Changes in operating assets and liabilities, net of
effects from acquisition in 2002: |
||||||||||||
Contracts and trade receivables, net |
2,476,000 | 3,725,000 | ||||||||||
Costs and estimated earnings in excess of billings |
(1,060,000 | ) | (1,389,000 | ) | ||||||||
Prepaid expenses and other assets |
(926,000 | ) | (263,000 | ) | ||||||||
Trade accounts payable and accrued liabilities |
(1,166,000 | ) | 496,000 | |||||||||
Billings in excess of costs and estimated earnings |
(116,000 | ) | (176,000 | ) | ||||||||
Net cash provided by operating activities |
1,215,000 | 4,381,000 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Net cash expended for acquisition |
— | (7,297,000 | ) | |||||||||
Additions to equipment and leasehold improvements |
(498,000 | ) | (349,000 | ) | ||||||||
Proceeds from (purchase of) securities held-to-maturity |
(3,292,000 | ) | 3,289,000 | |||||||||
Proceeds from sales of equipment |
31,000 | 61,000 | ||||||||||
Net cash used in investing activities |
(3,759,000 | ) | (4,296,000 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Principal payments on long-term debt and capital lease
obligations, including current portion |
(53,000 | ) | (137,000 | ) | ||||||||
Proceeds from exercise of stock options |
27,000 | 12,000 | ||||||||||
Net cash used in financing activities |
(26,000 | ) | (125,000 | ) | ||||||||
Net decrease in cash and cash equivalents |
(2,570,000 | ) | (40,000 | ) | ||||||||
Cash and cash equivalents, beginning of period |
20,333,000 | 12,212,000 | ||||||||||
Cash and cash equivalents, end of period |
$ | 17,763,000 | $ | 12,172,000 | ||||||||
See supplemental cash flow information at Note 8.
See accompanying notes to the consolidated financial statements.
4
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
| 1. | Basis of Presentation | |
| The accompanying consolidated balance sheet as of March 31, 2003, and the consolidated statements of income and cash flows for the three months ended March 31, 2003 and 2002, 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. 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, 2002 as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report. | ||
| 2. | Accounting for Stock Options | |
| The Company accounts for its stock options in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company has not recorded any compensation expense related to the granting of options during the three months ended March 31, 2003 and 2002. Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock Based Compensation,” permits entities to recognize the fair value of all stock-based awards on the date of grant as an expense over the vesting period. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25; however, SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure,” requires pro forma net income disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and to provide the pro forma disclosure specified by SFAS No. 148. | ||
| Had the Company determined compensation cost based on the fair value (using the Black-Scholes method) at the grant date for its stock options under SFAS No. 123, the Company’s net income would have been adjusted to the pro forma amounts indicated below: |
| For the Three Months | |||||||||
| Ended March 31, | |||||||||
| 2003 | 2002 | ||||||||
Net income: |
|||||||||
As reported |
$ | 1,398,000 | $ | 1,439,000 | |||||
Pro forma |
$ | 1,290,000 | $ | 1,337,000 | |||||
Basic earnings per share: |
|||||||||
As reported |
$ | 0.18 | $ | 0.20 | |||||
Pro forma |
$ | 0.17 | $ | 0.18 | |||||
Diluted earnings per share: |
|||||||||
As reported |
$ | 0.18 | $ | 0.19 | |||||
Pro forma |
$ | 0.16 | $ | 0.17 | |||||
| 3. | 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 each 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. |
5
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
| 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 | ||||||||
| Ended March 31, | ||||||||
| 2003 | 2002 | |||||||
Weighted average shares used for the basic EPS
computation |
7,588,601 | 7,310,790 | ||||||
Incremental shares from the assumed exercise of
dilutive stock options and contingently
issuable shares |
360,332 | 445,049 | ||||||
Weighted average shares used for the diluted
EPS computation |
7,948,933 | 7,755,839 | ||||||
| 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 142,816 and 211,176 weighted average contingently issuable shares in its weighted average shares used for the diluted EPS computation for the three months ended March 31, 2003 and 2002, respectively. | ||
| There were 170,184 and 111,900 anti-dilutive weighted stock options excluded from the above calculations for the three months ended March 31, 2003 and 2002, respectively. | ||
| 4. | 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, the Company has grouped its operations into two primary reportable segments: Real Estate Development and Public Works/Infrastructure (“REPWI”) and Industrial/Energy (“IE”). The REPWI segment primarily provides engineering and consulting services for the development of both private projects (such as residential communities, commercial and industrial properties and recreational projects) and public works/infrastructure projects (such as transportation and water/sewage facilities). The IE segment provides the technical expertise and management required to design and test manufacturing facilities and processes and to facilitate the construction, through design, testing and start-up support of primary and alternate electrical power systems for power generators and large scale power consumers. | ||
| The following tables set forth certain information regarding the Company’s reportable segments for the three months ended March 31, 2003 and 2002: |
For the Three Months Ended March 31, 2003
| Corporate | ||||||||||||||||
| REPWI | IE | Costs | Consolidated | |||||||||||||
Net revenue |
$ | 18,581,000 | $ | 3,765,000 | $ | — | $ | 22,346,000 | ||||||||
Income from operations |
$ | 3,886,000 | $ | 269,000 | $ | (2,138,000 | ) | $ | 2,017,000 | |||||||
Identifiable assets |
$ | 72,402,000 | $ | 9,911,000 | $ | — | $ | 82,313,000 | ||||||||
For the Three Months Ended March 31, 2002
| Corporate | ||||||||||||||||
| REPWI | IE | Costs | Consolidated | |||||||||||||
Net revenue |
$ | 15,082,000 | $ | 5,721,000 | $ | — | $ | 20,803,000 | ||||||||
Income from operations |
$ | 2,970,000 | $ | 1,528,000 | $ | (2,033,000 | ) | $ | 2,465,000 | |||||||
Loss from
discontinued
operations |
$ | (174,000 | ) | $ | — | $ | — | $ | (174,000 | ) | ||||||
Identifiable assets |
$ | 68,989,000 | $ | 9,973,000 | $ | — | $ | 78,962,000 | ||||||||
6
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
| 5. | Goodwill | |
| The changes in the carrying amount of goodwill as reported by each reportable segment for the three months ended March 31, 2003 are as follows: |
| REPWI | IE | Total | ||||||||||
Balance as of January 1, 2003 |
$ | 18,191,000 | $ | 4,865,000 | $ | 23,056,000 | ||||||
Purchase price adjustments |
88,000 | (3,000 | ) | 85,000 | ||||||||
Balance as of March 31, 2003 |
$ | 18,279,000 | $ | 4,862,000 | $ | 23,141,000 | ||||||
| 6. | Discontinued Operations | |
| During 2002, the Company closed three of its divisions. Two of these divisions were part of the Company’s acquisition of Hook & Associates, Inc. and were located in Colorado and Wyoming. The third closure was the Company’s internally developed Communication division, which was located in California. The closures were primarily due to lower than expected operating results and difficult market conditions. In accordance with generally accepted accounting principles, the balances and activities of these divisions were segregated and reported as discontinued operations during 2002. | ||
| 7. | Indebtedness | |
| The Company has available a $10.0 million unsecured line of credit consisting of three components: (i) an acquisition component, (ii) an equipment and vehicle financing component, and (iii) a working capital component. The line provides up to a maximum of $5.0 million to finance acquisitions, up to a maximum of $3.0 million to finance equipment and vehicle purchases and up to a maximum of $10.0 million less the aggregate outstanding principal balance of the acquisition, and equipment and vehicle components for working capital. The line bears interest at either a range of 0.25% below prime to prime, or a range of 1.25% to 1.75% over LIBOR depending on the Company’s ability to meet certain financial covenants. The equipment and vehicle financing component of the line of credit matures in September 2003, and the acquisition and working capital |