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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
Commission File Number 0-19655
THE KEITH COMPANIES, INC.
(Exact name of registrant as specified in its charter)
California 33-0203193
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2955 REDHILL AVENUE, COSTA MESA, CALIFORNIA 92626
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (714) 540-0800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The number of shares outstanding of the registrant's common stock as of
February 29, 2000 was 5,070,973 shares. The aggregate market value of the
registrant's common stock held by non-affiliates of the registrant on February
29, 2000 was approximately $11,683,000.(/1/)
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the
part of the Form 10-K into which the document is incorporated; (1) any annual
report to security holders; (2) any proxy or information statement; and (3)
any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act
of 1933. Part III incorporates certain information by reference from the
registrant's definitive proxy statement for the Annual Meeting of Shareholders
scheduled to be held on May 15, 2000.
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(1) For purposes of this report, in addition to those shareholders which fall
within the definition of "affiliate" under Rule 405 of the Securities Act,
as amended, holders of ten percent or more of the registrant's common
stock are deemed to be affiliates.
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THE KEITH COMPANIES, INC.
Annual Report on Form 10-K
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Table of Contents
Page
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PART I
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 17
Item 3. Legal Proceedings...................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders.................................... 17
PART II
Item 5. Market for Our Common Equity and Related Stockholder Matters........................... 18
Item 6. Selected Financial Data................................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................. 27
Item 8. Consolidated Financial Statements and Supplementary Data............................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 53
PART III
Item 10. Directors and Executive Officers....................................................... 53
Item 11. Executive Compensation................................................................. 53
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... 53
Item 13. Certain Relationships and Related Transactions......................................... 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 53
(a) 1. Consolidated Financial Statements................................................... 53
2. Financial Statement Schedules....................................................... 53
3. Exhibits............................................................................ 54
(b) Reports on Form 8-K.................................................................... 55
Signatures...................................................................................... 56
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PART I
ITEM 1. BUSINESS
Introduction
The Keith Companies, Inc. or TKCI, together with its wholly-owned
subsidiaries, provides high-quality, full-service engineering and consulting
services to the real estate development, public works and telecommunications
industries. We also specialize in mechanical, electrical, and process
engineering services that improve the efficiency of production in
manufacturing and industrial facilities.
We provide a full range of services from initial site acquisition studies
through construction support services to clients operating in a variety of
market sectors. We benefit from a diverse public and private client base
including real estate developers, residential and commercial builders,
architects, cities, counties, water districts, state and federal agencies,
land owners, commercial retailers, energy providers and various manufacturers.
Our professional staff provides a comprehensive menu of professional services
that are needed to effectively manage, engineer and design state-of-the-art
facilities.
We were incorporated in 1983 under the name Keith Engineering. The Keith
Companies--Inland Empire, Inc. was formed during November 1986, and the two
companies were merged in November 1998 with TKCI as the survivor.
. In December 1997, in a strategic move to expand our menu of services, we
acquired Engineering Services, Inc. ("ESI") and Engineered Systems
Integration, Inc. ("ESII"), both of which are located in Walnut Creek,
California. These two companies added additional engineering specialties
and a series of industrial services to our service offerings.
. In August 1998, we acquired John M. Tettemer and Associates, Ltd.
("JMTA"), located in Costa Mesa, California, to expand, refine and
further specialize our water resources services.
. During July 1999, we acquired substantially all of the assets and
assumed substantially all of the liabilities of Thompson-Hysell, Inc.
("Thompson-Hysell"), adding offices in Modesto, California and
Taylorsville, Utah, to diversify our geographic presence, expand our
client base and further enhance our water resources services.
We currently operate from seven offices in three states including
California, Nevada, and Utah with the experience and ability to provide
services both nationally and internationally.
The TKCI Advantage
Reputation
Our reputation for providing high quality services has been a source of
numerous project assignments. We believe our reputation is strengthened due to
the personal relationships developed between our staff and representatives of
clients and agencies. We have been awarded many projects either due to our
expertise in working with an agency or project type or because a particular
client desires to work with, and can count on, specific project managers. In
addition, we have received numerous awards for technical excellence including
the Project of the Year Award of Excellence in the award category of
Engineering Land Development for the "Dana Point Townhomes" project from the
California Council of Civil Engineers and Land Surveyors; a Certificate of
Recognition for the design of the "Grand Avenue and Chino Hills Parkway"
awarded by the County of San Bernardino, California Board of Supervisors; and
a Letter of Appreciation from the Department of General Services of the State
of California for contributing to the "Telecommunications Leasing Program" and
for our assistance in formulating telecommunications real estate objectives
and strategies.
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Industry and Professional Experience
We recognize that our employees are our most valuable resource for
providing continuing quality service and for obtaining new work. During
employee selection and as part of the acquisition criteria we require that the
personnel which we add to our team have significant experience in the
industries that we serve. We supplement this industry experience by providing
in-house continuing education seminars, design forums, and training programs.
Full Service Approach
We provide civil engineering, surveying and mapping, planning,
environmental, archaeological, construction management, site acquisition,
water resources engineering, instrumentation and control systems engineering,
fire protection engineering, electrical and mechanical engineering, and
chemical process engineering services. Since many consulting and engineering
services firms specialize in only one or a few services, a project owner may
often be required to engage several engineering and/or consulting firms during
the various phases of a project. The phases range from identifying and
evaluating whether to acquire a parcel of land to designing, engineering, and
managing the construction of the finished project. We believe that clients
realize significant cost and time savings and maintain consistent quality by
utilizing a single firm for as many services as possible.
Cross-Marketing
Due to our reputation within the industry and our technical expertise, we
have frequently increased the scope of services provided to a client from an
initial engagement, such as land planning, to include other services, such as
mapping and surveying. When we expand into new geographic regions, we have
successfully cross-sold and intend to continue to cross-sell services offered.
Because our professionals provide many of the preliminary services for
planning, civil engineering, and surveying and mapping projects, we are
frequently asked to provide additional services as a project progresses. In
performing the preliminary services during the initial phases, we obtain
background information and data relating to the project that may be
inefficient and costly for another firm to compile. Consequently, we are often
more knowledgeable about a project, and, as a result, are often engaged to
perform the additional engineering and consulting services as the project
progresses.
Effective Organizational Structure
We believe that our organizational structure allows us to compete
effectively with small and mid-sized local firms as well as with large
regional and national firms. The organizational structure combines the
efficiencies associated with centralization and the flexibility of
decentralization. Our administrative functions are centralized in our
corporate headquarters in Costa Mesa, California allowing us to eliminate
duplicative functions and personnel at our divisional offices. We believe this
centralization allows the management at the divisional offices the freedom to
focus on identifying new business opportunities and overseeing the services
provided, and allows the flexibility for managers to maintain focus on being
responsive to client needs. The centralization of administrative functions
also helps us to effectively integrate with acquired companies.
Business Strategy
Our objective is to strengthen our position as a leading provider of
engineering and consulting services while growing our geographical presence
and expanding the services we offer. To achieve this objective, we have
developed a strategy with the following key elements:
. Maintain High Quality of Service. To maintain high quality service, we
focus on being responsive to customers and working diligently and
responsibly to maintain schedules and budgets. As a result of our focus
on quality and timely service, we believe that we have established an
excellent reputation in the markets we serve. We intend to continue
providing high quality services as we expand our geographic presence and
our service offerings.
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. Continue to Recruit and Retain Highly Qualified Personnel. We believe
that recruiting and retaining skilled professionals is crucial to our
success and growth. As a result, we intend to continue to recruit
experienced and talented individuals who can provide quality services
and innovative solutions.
. Expand Geographically. To diminish the impact of regional economic
cycles, we intend to continue to expand our geographic presence through
acquisitions, opening additional divisional offices and marketing our
services to clients with national and international needs. Our
geographic growth may provide us with broader access to employee pools,
work sharing between regions, and new business opportunities. We believe
that the acquisition of Thompson-Hysell has enabled us to more
effectively sell additional services in both central and northern
California and Utah. We intend to continue to increase our service
offerings outside the areas of California, Nevada and Utah.
. Expand Technical Capabilities. We intend to build upon our reputation as
a quality provider of real estate related engineering and consulting
services as we diversify our services to meet demands of our clients and
new markets. As part of our effort to continue diversifying the scope of
our services, we intend to pursue strategic partnering relationships and
acquisitions.
. Continue to Effectively Integrate Acquisitions. We intend to continue
pursuing acquisitions that expand our range of services, geographic
presence, and/or client base and that result in increased operating
efficiencies. We believe that strategic acquisitions will enable us to
more efficiently serve the diverse technical and geographic needs of,
and secure additional business from, national and international clients.
Industries Served
The industries we serve are real estate development, public works,
telecommunications and industrial, process and manufacturing. The engineering
and consulting services industries are highly fragmented, ranging from a large
number of relatively small local firms to large, multi-national firms. We
estimate that there are over 500 firms providing engineering and consulting
services to the industries we serve in our principal operating areas. We
believe that we have successfully penetrated the regional residential real
estate industry to capture a significant share of the market and have
established ourselves as a leader in these markets. Our reputation for
providing high quality services has been a source of continued repeat business
and new relationships. We believe our reputation is strengthened due to the
personal relationships developed between the staff and client and agency
representatives. We believe we have been awarded many contracts either due to
our expertise with working with particular agencies or market sectors or
because an individual client desires to work with, and can count on our
technical staff.
Real Estate Development, Public Works and Telecommunications
Real Estate Development
Residential, commercial, golf, and other recreational developers use
technical consultants to provide planning and environmental services to create
land use plans, write the supporting planning and environmental documents and
process entitlements and permits through governmental authorities. Technical
consultants also assist clients with obtaining approvals and permits from
federal, state and local agencies. After projects are approved by governmental
agencies, developers need surveying, mapping, and civil engineering services
to survey development sites, create accurate boundary and base maps, and
provide engineering designs for grading, streets, sewer pipelines and
facilities, water pipelines and facilities, utilities, and drainage
facilities. Upon completion of the design phase, surveyors provide
construction staking services to identify the precise locations of streets,
utilities, pipelines, and other facilities. In culturally sensitive areas,
developers may also require environmental and archaeological services for
planning and assistance with environmental approvals as well as construction
and post-construction phase monitoring services.
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Residential. The residential development industry consists of large-scale
communities, senior citizen and retirement communities, single family homes
and multi-family homes, such as condominiums and apartments.
Commercial. The commercial development industry includes the development
and construction of retail, office, hotel, and industrial facilities. We work
hand-in-hand with developers and builders to combine office, industrial and
retail centers and their amenities into vibrant, functional and attractive
business venues.
Golf and Other Recreational Facilities. Golf and recreational facility
development includes golf courses, driving ranges, parks, clubhouses, theme
parks, resorts, and lakes.
Public Works
Transportation, water resources, and other public works projects provide
ongoing, more reliable sources of revenue for engineering firms and
consultants when private development activities decline during unfavorable
economic periods. These public projects are often long-term and ongoing, and
have historically provided more determinable and consistent revenue streams.
Transportation. Highway and interchange projects require engineering
designs for roadways and interchanges, for the placement or relocation of
sewer lines, water pipelines and utility lines and for rainfall run-off
management. They also include surveying services for establishment of proper
rights of way for these facilities. Our engineers have developed street, major
arterial, and highway designs in cooperation with federal, state, and local
agencies to improve transportation networks. We have provided services for
transportation improvements to public agencies and many private sector
clients. We offer experienced staff support services for transportation
planning, studies and reports, surveying and mapping, and right-of-way
engineering; and prepare plans and specifications for new and widened
alignments, pavement sections, and traffic control. Highly experienced
transportation planners, engineers, and designers provide the entire spectrum
of resources necessary to effectively engineer and design state-of-the-art
transportation facilities.
Water Resources. Due to the multiple demands for municipal, environmental,
and agricultural uses, water is a limited resource in the western United
States. As populations continue to grow and higher standards are placed on
protecting the environment without sacrificing the supply of water, water
districts, public agencies, agricultural users, and municipalities are faced
with the challenge of managing their water supplies more efficiently.
Protecting the communities from natural disasters such as flood and
mudflows, cleaning natural waterways, eliminating pollution from storm runoff
flowing into the ocean, and protecting and enhancing natural riparian
resources are some of the missions of public agencies. Private developers also
address these issues as part of their land development projects.
We have developed highly specialized skills in a number of technical areas
that make us unique in the water resources industry. Our professional staff
continues to direct our efforts toward the optimum use of water: water supply,
water conveyance/water storage, irrigation, drainage, and flood control. We
provide planning, engineering, design and construction management services for
most types of water resource facilities.
Telecommunications
With the rapid growth of Internet and personal communication services, the
demand for telecommunications infrastructure has expanded dramatically.
Telecommunications projects that we can support include the development,
expansion and construction of wireless and land based data and communications
systems. The infrastructure for these systems includes wireless transmission
base stations, switching centers, cable systems, fiber optic networks and
microwave link networks.
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Service providers and developers of telecommunications infrastructure
generally hire outside experts to meet their design, site acquisition and
lease arrangement, land planning, civil engineering, purchasing and
construction management needs.
Industrial, Process and Manufacturing
Modern machines, assembly lines, factories and refineries require
mechanical, electrical and process engineering services to enable utilization
of new processes and to improve efficiency and reliability. Comprehensive
engineering services include: (a) the design or redesign of electrical,
heating, ventilation and air conditioning systems; (b) mechanical equipment
design; (c) equipment selection and purchasing; (d) the design of integrated
computer and monitoring device systems to control manufacturing and process
equipment; (e) chemical process engineering; (f) energy usage consulting; (g)
fire protection engineering; (h) material handling and process flow planning;
(i) automation and robotics design; (j) construction management and
installation supervision; (k) project management; and (l) computer
programming.
Projects that utilize mechanical, electrical and process engineering and
consulting services include:
. High Tech Facilities: biotechnology, pharmaceutical and laboratory
facilities, computer centers, control rooms, research and development
facilities
. Consumer Product Facilities: automotive assembly, household products and
packaging facilities
. Food and Beverage Facilities: bottling/packaging facilities, material
handling facilities, process controls, food and beverage manufacturing
facilities
. Educational Facilities: school and university buildings and campuses
. Public Facilities/Utilities/Energy/Power: commercial and medical
buildings, power plants and natural gas/ electrical systems
We believe there is a continued trend in the manufacturing and assembly
industries toward automation and increased efficiency. As these industries
grow, so does their need for engineering and design services to automate and
increase efficiency of new and existing facilities.
Services Provided
We provide a broad range of services, including civil engineering,
surveying and mapping, planning, environmental, archaeological, construction
management, site acquisition, water resource engineering, and other services
needed by the industrial, process and manufacturing industry, including
instrumentation and control systems engineering, fire protection engineering,
electrical engineering, mechanical engineering, and chemical process
engineering.
Civil Engineering Services
General civil engineering is often referred to as everything "designed from
the ground down" because it is related to many things that play a vital part
in everyday life. Our civil engineering services include:
. project feasibility and due diligence analysis
. development cost projections
. access and circulation analysis
. infrastructure design and analysis
. pro forma cost studies
. project management
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. construction documents
. tentative mapping
. flood plain studies
. sewer, water and drainage design
. street and highway design
. site and subdivision design
. grading design
Surveying and Mapping Services
From establishing boundaries for preliminary engineering through
construction layout and as-built surveys, it is common for our surveying and
mapping teams to be "the first in and the last out" for a construction
project. We provide surveying and mapping services through teams of skilled
professionals that utilize sophisticated technology, including global
positioning systems that utilize satellite technology to survey and navigate
land, geographic information systems, and field-to-office digital and
electronic data capture to produce information that will serve as the
foundation for a variety of planning and engineering analysis and design
endeavors. Our surveying and mapping services also include the identification
of features of a parcel of land that directly affect a project's design. We
were among the first engineering and surveying consultants to utilize global
positioning systems with geographic information systems to perform precise
ground surveys.
We utilized our expertise with the use of ground and global positioning
systems to plot the aftermath of the Mt. Pinatubo eruption in the Philippines
for a long-term lava flow management project. We provided site topographic and
boundary surveys for approximately 450 proposed cellular telecommunication
sites. Using these surveys, we designed and generated construction documents
and developed legal descriptions that were used in lease contract documents.
Government agencies and landowners have also utilized our surveying and
mapping services to develop the basic elements of their geographic information
systems databases.
Planning Services
Planning services include both physical planning and policy planning.
Physical planning is graphical and includes conceptual drawings, sketches and
layouts of communities and identifies land uses and residential and commercial
neighborhoods. The resulting plan often becomes the basis for the preparation
of engineering plans. To complement a physical plan, policy planning entails
the preparation of supporting text and documents that establish procedures,
requirements, and guidelines for visual appearance or detailed permitting
approvals under which the physical plan may be implemented.
Our planning services are designed to assist clients with maximizing the
potential uses of real estate and other limited resources. We provide plans
that take into account government regulations, effective and creative use of
land assets, and the expectations and needs of the community.
An example of our planning services is our past involvement with the design
of a major flood control dam for a 10,000-acre project located in Los Angeles
County that controlled the yearly flooding of the city of Palmdale,
California, a downstream municipality. Our solution allowed plans for concrete
channelization of the waterway to be abandoned, significantly reducing the
cost of infrastructure for the flood control facilities. This resolved the
concerns of the local water agencies and environmentalists that were concerned
with groundwater recharge and replenishment. It also provided the inducement
for the city to annex and entitle the project.
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Environmental Services
Our environmental staff offers the technical proficiency to provide one-
stop preparation of environmental documents that conform to current regulatory
requirements. Our environmental services include biology, permit processing,
environmental document preparation, and mitigation monitoring. We assist
clients with the complex federal, state, and local permitting process enabling
them to successfully implement private and public projects.
Our staff is experienced with the preparation of complex and challenging
environmental planning documents such as Environmental Impact Reports,
Environmental Impact Statements, initial studies, and environmental
assessments. Our experience includes the preparation of documents that comply
with the California Environmental Quality Act (CEQA) and the National
Environmental Policy Act (NEPA). Our environmental staff has been instrumental
in developing permit strategy consensus among federal agencies such as the
Army Corps of Engineers, U.S. Fish and Wildlife, the Environmental Protection
Agency, and the State of California.
Archaeological Services
Many environmental impact analyses require protection of significant
archaeological resources that may exist on a property, such as native peoples'
community settings, artifacts, and burial sites. We perform studies that range
from site review and records analysis to a discussion of measures to protect
sensitive or valuable archaeological resources. Further, we conduct field
sampling and testing to establish or verify findings of the site review stage,
and record information to determine both the quantity and quality of
archaeological materials for a given site.
Our archaeological staff provided services for the excavation of a fossil
whale bed and for several mammoths over the past several years. During the
course of the whale excavation, we found rare samples of Baleen whales, which
were subsequently donated for further academic study.
Construction Management Services
Construction management services are an efficient "bundling" of some of the
other services that we provide. During construction management assignments, we
direct development and construction tasks, including the preparation of cost
projections, entitlement and feasibility analysis, professional consultant
selection and supervision, contractor bidding and construction supervision. We
provide these services in discrete components or as a comprehensive package
for private development, public works and telecommunications clients.
Site Acquisition Services
We provide site acquisition services to assist clients with obtaining the
most appropriate real estate for their particular needs. For example, a
property intended for the development of multi-family housing will have
characteristics which vary greatly from that of a property intended for the
siting of a heavy industrial facility. We provided site acquisition services
for over 450 wireless communications sites in Riverside, San Bernardino,
Ventura, Los Angeles and San Diego counties for a national wireless services
provider.
Water Resources Engineering Services
Our water resources engineers frequently assist clients with financial
planning, feasibility studies, demand forecasting, hydraulic analysis, and
water flow studies to develop system master plans in addition to designing
conventional systems of pipes, channels and dams.
Examples of the water resources engineering services that we provide
include: (a) the performance of a study in which we evaluated the anticipated
amount of rainfall water in a 23 square-mile watershed in Riverside County,
California; and (b) the development of a concept report and preliminary design
for a 2,000 acre-feet,
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50-foot high water quality dam, a major sediment detention basin facility and
the relocation of approximately 1.5 miles of roadway, all incidental to the
construction of the dam and related structures.
Industrial, Process and Manufacturing Services
In addition to the engineering and consulting services described above, we
also provide the following industrial, process and manufacturing services:
Instrumentation and Control Systems Integration Engineering Services. Our
professionals integrate equipment selection, maintenance requirements and
spare parts inventory by designing, selecting and reviewing mechanical, piping
and electrical layouts, and operating maintenance, training, start-up and
emergency procedures during the design of contemporary processes or the
automation of outdated manufacturing processes. These services are essential
to creating an efficient operating facility.
Fire Protection Engineering Services. We provide fire protection
engineering services in connection with both new construction and the
renovation/modification of existing facilities to assist clients in defining
and providing an acceptable level of fire safety in a cost-effective manner.
Electrical Engineering Services. These services include design of
electrical power systems for buildings, manufacturing plants and miscellaneous
facilities; design of lighting systems; and selection of other equipment that
delivers or uses electrical power.
Mechanical Engineering Services. These services are required to design
energy systems, HVAC systems, plumbing systems, water distribution systems,
and fire protection systems for facilities and buildings.
Chemical Process Engineering Services. Our chemical and process engineers
design systems for a variety of manufacturing and industrial facilities and
processes. These services are necessary for the design of chemical processing
operations in businesses like food and beverage, pharmaceutical, chemical and
petroleum.
Business Development and Marketing
We use a client service approach to our business development and marketing
efforts employing a variety of techniques to obtain contracts with new
clients, repeat business with existing clients, and maintain a positive
reputation. Our business development and marketing activities consist of
identifying target markets, developing strategies for pursuing these targets,
and supporting marketing activities company-wide by coordinating corporate
promotional and professional activities.
Additionally, our business development and marketing efforts assist
management and clients to assure quality performance and client satisfaction.
To accomplish this effort, we provide our clients with referrals for project
partners and financing sources, assist with legislative matters, and monitor
in-house performance and many other non-technical support functions. Finally,
we identify new projects and clients in each of the markets in which we are
active. This is achieved through the use of many resources including:
geographic information systems and aerial maps, project and contact databases,
the Internet, and lead tracking publications. We pursue the companies,
agencies, projects and markets that have financial strength, long-term growth
potential and an established reputation.
Clients
We provide service to clients in the real estate development, public works,
telecommunications, and industrial, process and manufacturing industries. Our
primary private sector clients consist of real estate developers, builders,
telecommunications providers, major manufacturers and energy providers. Our
public sector clients include water and school districts, metropolitan
planning organizations, transportation authorities, and local, state and
federal agencies.
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No individual client accounted for more than 10% of our net revenue in 1999
or 1998. The Irvine Company accounted for 11% of our net revenue in 1997.
Backlog
Our backlog represents (a) an estimate of the remaining future gross
revenues from existing signed contracts and (b) contracts which have been
awarded with a defined scope of work and contract value and on which we have
begun work with verbal client approval. The backlog estimates do not include
projected revenues from those projects for which we have provided services and
anticipate additional services to be requested.
Because our professionals provide many of the preliminary services like
planning, civil engineering and surveying and mapping, we are frequently
called upon to expand our scope of services as the project progresses. In
performing the preliminary services during the initial phases, we obtain
background information and data that may be inefficient and costly for another
firm to compile. As a result, we are often chosen to perform additional
engineering and consulting services that clients require as the project
progresses.
At December 31, 1999, our gross revenue backlog was approximately $22
million. No assurance can be given that we will receive all of the gross
revenues associated with the backlog, even if evidenced by written contracts.
Competition
The market for our services is highly competitive. We compete with a
variety of firms ranging from small local firms to national firms. We perform
engineering and consulting services for a broad spectrum of markets including
residential, commercial, recreational, public works, telecommunications and
industrial, process and manufacturing. The range of competitors can vary from
one to 50 firms depending upon contract value, geographic location and client
restrictions. We believe that the principal factors in the engineering and
consulting services selection criteria include, in order of importance:
. quality of service
. relevant experience
. staffing capabilities
. reputation
. geographic presence
. stability
. price
Employees
At December 31, 1999, we had approximately 470 employees. Believing that
our success depends significantly upon attracting and retaining talented,
innovative, and experienced professionals, we are comprised of highly skilled
personnel with significant industry experience and strong client
relationships. We employ licensed civil engineers, mechanical engineers,
electrical engineers, land surveyors, landscape architects, certified
planners, information technology specialists, biologists, archaeologists and
geodesists.
Certain of our field survey employees are covered by a Master Labor
Agreement between the International Union of Operating Engineers and the
Southern California and Bay Counties Associations of Civil Engineers and Land
Surveyors. The agreement applies to civil engineering and land surveying work,
including global positioning system surveys. Our other employees are not
represented by any labor union and we have never experienced a work stoppage
from union actions. We believe that our relationship with our employees is
good.
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RISK FACTORS
This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the United States Securities Act of 1933,
as amended, and Section 21E of the United States Securities Exchange Act of
1934, as amended, that are based on the reasonable expectations and beliefs of
our management, as well as assumptions made by and information currently
available to our management. Such forward-looking statements are subject to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. When used in this filing, the words "anticipate," "believe," "estimate,"
"expect," "intend," "plan" and similar expressions as they relate to us are
intended to identify forward-looking statements. These forward-looking
statements are based on our current expectations and are affected by a number
of risks and uncertainties. In addition to the risks described elsewhere in
this "Risk Factors" discussion, important factors to consider in evaluating
such forward-looking statements include the shortage of reliable market data
regarding the engineering and consulting services industry, changes in
external competitive market factors or in our internal budgeting process that
might impact trends in our results of operations, unanticipated working
capital or other cash requirements, changes in our business strategy or an
inability to execute our strategy due to unanticipated changes in the
engineering and consulting services industry, and various other factors that
may prevent us from competing successfully in the marketplace. Additional
risks and uncertainties may also adversely impact our business operations. If
any of the following risks actually occur, our business, financial condition
or results of operations would likely suffer. The following risk factors
should be reviewed in addition to the other information contained in this
Annual Report on Form 10-K.
Our operations and financial condition may be materially adversely affected by
a downturn in the real estate market, which is highly cyclical in nature
A downturn in the real estate market, which is highly cyclical in nature,
may cause us to experience cash flow difficulties and to sustain substantial
operating losses. We estimate that during 1999, 80% of our services were
rendered in connection with commercial and residential real estate development
projects.
Our business, financial condition and results of operations may also be
adversely affected by conditions that impact the real estate market in
general, including, among other things: changes in national economic
conditions, changes in local market conditions due to changes in general or
local economic conditions and neighborhood characteristics; changes in
interest rates and in the availability, cost and terms of financing; the
impact of present or future environmental legislation and compliance with
environmental laws and other regulatory requirements; changes in growth in
employment; changes in real estate tax rates and assessments and other
operating expenses; adverse changes in governmental rules and fiscal policies;
adverse changes in zoning and other land use laws; and earthquakes and other
natural disasters, which can cause uninsured losses, and other factors which
are beyond our control.
Our business may be materially adversely affected by changes in the local
economy in southern California
Adverse economic and other conditions affecting the southern California
real estate market or local economy, may have a material adverse effect on our
business, financial condition and results of operations. We estimate that
during 1999, 69% of our net revenue was derived from services rendered in
southern California. From 1991 to 1996, our operations and financial condition
were materially adversely impacted during the real estate market downturn in
southern California, and we experienced cash flow difficulties and substantial
operating losses.
Qualified professionals are in high demand, may be difficult for us to attract
and retain, and may become competitors of ours in the future
If we are unable to recruit and retain a significant number of quality
professionals, our ability to generate revenue may decrease and our gross
revenues could decline or may not grow as rapidly as we expect. We derive
12
our revenues almost exclusively from services performed by our professionals.
Qualified professionals are in great demand and are likely to remain a limited
resource for the foreseeable future. There is significant competition for
employees with the requisite skills from major and boutique consulting,
engineering, research and other professional service firms. We may not be able
to attract and retain a substantial majority of our existing or future
professionals for the long term. The loss of the services of, or the failure
to recruit, a significant number of professionals could adversely affect our
ability to secure and complete engagements and could have an adverse effect on
our business, financial condition and results of operations. In addition,
former employees might compete with us with respect to ongoing or potential
future projects.
The loss of any of the significant clients on whom we rely could adversely
affect our operating results
We derive a significant portion of our revenue and profits from a
relatively limited number of clients. For example, net revenue from our five
most significant clients accounted for approximately 19% of our total net
revenue for the year ended December 31, 1999. There can be no assurance that
any of our most significant clients will continue to engage us for additional
projects or will do so at the same revenue levels. In addition, the level of
our services required by a significant client may diminish over the life of
its relationship with us, and we may not be successful in establishing
relationships with new clients as this occurs.
The types of contracts under which we perform services impose risks to our
business
A majority of the contracts under which we perform our services require us
to bear unforeseen risks which could materially and adversely impact our
business, financial condition and results of operations.
In fiscal 1999, approximately 44%, 41% and 15% of our net revenue was
derived from fixed-price, time-and-materials with "not to exceed" provisions
and time-and-materials contracts, respectively.
Fixed-price contracts and time-and-materials contracts with "not to exceed"
provisions protect clients but expose us to a greater number of risks than
time-and-materials contracts. These risks include underestimation of costs,
problems with new technologies, unforeseen costs or difficulties, delays
beyond our control, and economic and other changes that may occur during the
contract period.
Under fixed price contracts, we perform services under a contract at a
stipulated price. Under time-and-materials contracts, we are reimbursed for
the number of labor hours expended at an established hourly rate negotiated in
the contract, plus the cost of materials incurred. Under time-and-materials
with "not to exceed" provision contracts, we are reimbursed similar to time-
and-materials contracts; however, there is a stated maximum dollar amount for
the services to be provided under the contract.
The market price of our stock may fluctuate
The market price of our common stock has been, and is likely to be, highly
volatile and subject to wide fluctuations due to various factors, many of
which may be beyond our control. We believe that quarterly variations in
operating results, volatility in the general economy, changes in financial
estimates and recommendations by securities analysts and changes in
environmental legislation, may cause the market price of our stock to
fluctuate substantially. In addition, there have been large price and volume
fluctuations in the stock market in recent years.
A number of factors contribute to the quarterly variations which we
experience, including client engagements commenced and completed during a
quarter, seasonality, the number of business days in a quarter, the number of
work days lost as a result of adverse weather conditions or delays caused by
third parties, employee hiring, billing and utilization rates, the
consummation of acquisitions, the length of the sales cycle on new business,
the ability of clients to terminate engagements without penalty, our ability
to efficiently shift our employees from project to project, the size and scope
of assignments, and general economic conditions.
13
In addition, because a portion of our expenses are relatively fixed,
significant variations in revenues or the number of days in a quarter can
cause fluctuations in operating results from quarter to quarter and could
result in losses.
We may not be able to maintain or accelerate our current growth, effectively
manage our expanding operations or achieve planned growth on a timely or
profitable basis
We have grown rapidly and intend to pursue further growth as part of our
business strategy. Our rapid growth has presented and will continue to present
numerous operational challenges, including the management of an expanding
array of engineering and consulting services, the assimilation of financial
reporting systems, increased pressure on our senior management and increased
demand on our systems and internal controls. Our inability to manage growth
effectively and efficiently could materially and adversely affect our
business, financial condition and results of operations.
If we need to sell or issue additional shares of common stock and/or incur
additional debt to finance future acquisitions, stock ownership could be
diluted
Our business strategy is to expand into new markets and enhance our
position in existing markets through the acquisition of complementary
businesses. In order to successfully complete targeted acquisitions or to fund
our other activities, it may be necessary for us to issue additional equity
securities that could dilute stock ownership. We may also incur additional
debt and amortize expenses related to goodwill and other tangible assets if we
acquire another company, and this could negatively impact our results of
operations.
Certain shareholders have significant control over TKCI
The concentration of ownership of our stock may have the effect of delaying
or preventing a change in control of us and may adversely affect voting or
other rights of other holders of our common stock. As of December 31, 1999,
our directors and executive officers and their respective affiliates
beneficially owned 2,202,587 shares of common stock, or approximately 43.4% of
our outstanding common stock. Of these shares, 1,638,520 shares, or
approximately 32.3% of our outstanding common stock, was owned by Aram H.
Keith as of that date. Walter W. Cruttenden, III, one of our directors, owned
461,935 shares or approximately 9.1% of our outstanding common stock as of
that date.
If we issue shares of preferred stock, the rights of holders of common stock
will be subordinate to the rights of holders of preferred stock
The rights of the holders of our common stock will be subordinate to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of the preferred stock could
have the effect of making it more difficult for a third party to acquire a
majority of our outstanding voting stock. Our board of directors has the
authority to issue up to 5,000,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any vote or action by the shareholders.
The repurchase of our common stock could negatively impact our stock price and
shareholders' equity
The repurchase of our common stock could result in a decrease in the amount
of shares available in the market causing our stock price to fluctuate. In
addition, a decrease in our stock price from the amount we paid to acquire our
common stock could have a negative impact on our shareholders' equity.
14
A large number of shares of our common stock are eligible for future sale and,
if sold, these shares may create excess supply in the market causing our stock
price to decline
The possibility that a large number of shares of our common stock may be
sold could create excess supply in the market, causing a drop in the market
price of our common stock and could impair our ability to raise capital
through the sale of equity securities. As of December 31, 1999, 5,070,224
shares of our common stock and options to purchase 766,282 shares of our
common stock granted under our Amended and Restated 1994 Stock Incentive Plan
were outstanding. All of the shares of common stock underlying the options
outstanding or issuable under our Amended and Restated 1994 Stock Incentive
Plan have been registered on a registration statement on Form S-8. We may also
issue no less than 37,037 shares of our common stock to the former
shareholders of ESI and grant options to purchase up to 37,037 shares of our
common stock to the employees of ESI, including the former shareholders of
ESI, if ESI meets earnings targets and other conditions. We may also issue
more or less than 148,148 shares of common stock in April 2000 to former
employees of Thompson-Hysell who are now employees of ours. The shares of
common stock that may be issued in connection with our acquisition of
Thompson-Hysell will be restricted securities but will include the right to
have these shares registered for resale under the Securities Act of 1933. This
amount may be adjusted upward or downward depending on whether Thompson-Hysell
meets earnings goals. We have also issued warrants to acquire 150,000 shares
of TKCI common stock in connection with acquisitions.
If we are unable to successfully implement our acquisition strategy, current
expectations of our growth or operating results may not be met
If we are unable to successfully implement our acquisition strategy,
current expectations of our growth or operating results may not be met.
Our growth strategy includes the strategic acquisition of companies that
expand our service offerings and geographic presence. This acquisition
strategy involves risks that could result in our failure to achieve the
revenue and profitability growth that we currently expect. These risks include
the following:
. As the engineering industry consolidates, suitable acquisition
candidates are expected to be more difficult to locate and may only be
available at an increased price or under less favorable terms.
. We may not be able to locate suitable financing, or obtain financing
under suitable terms to consummate the acquisition.
. We may not be successful in integrating the acquired company's
professionals and culture into ours.
. We may not be successful in generating the same level of operating
performance as the acquired company experienced prior to acquisition.
. As we expand our service offerings and geographic presence, we may not
be able to maintain the current level of quality of services.
. We maintain a strong reputation in the services we currently perform and
markets we serve. If we are not able to maintain this reputation in the
acquired entities geographic area or service offerings, our reputation
may be damaged.
. The acquired company may be less profitable than us resulting in reduced
profit margins.
. The acquisition and subsequent integration of the acquired company may
require a significant amount of management's time diverting their
attention from existing operations and clients, which could result in
additional exposure to us due to the loss of key employees or clients.
Increased competition in the industries we serve may adversely affect our
business
The market for engineering and consulting services is highly competitive
and is based primarily on quality of service, relative experience, staffing
capabilities, reputation, geographic presence, stability and price. These
15
factors of competition are likely to increase in the future. Many of our
competitors have more personnel and greater financial, technical and marketing
resources than us. These competitors include many larger consulting firms like
TetraTech Inc. and URS Corporation. We can offer no assurance that we will be
able to compete successfully in the future with these or other competitors.
The loss of Mr. Keith or any of our other key professionals could adversely
affect our business, including our ability to secure and complete engagements
and attract and retain employees
We do not have an employment agreement with, or maintain key man life
insurance on Aram H. Keith. Our success is highly dependent upon the efforts,
abilities, business generation capabilities and project execution of our
officers, especially those of Mr. Keith, our Chief Executive Officer. If we
lose the services of Mr. Keith or any other key employee we may be less likely
to secure or complete contracts and to attract and retain additional
employees.
Our services may expose us to liability in excess of our current insurance
coverage
We are exposed to certain risks resulting from the services we perform that
could exceed our current insurance coverage and the fees we derive from those
services. Due to the uncertain nature of these risks, we cannot predict the
magnitude of any potential liability.
We currently maintain general liability, umbrella and professional
liability insurance. Claims may be made against us which exceed the limits of
these policies, in which case we would be liable to pay these claims from our
assets. These policies are "claims made" policies. Thus, only claims made
during the term of the policy are covered. If we terminate our policies and do
not obtain retroactive coverage, we would be uninsured for claims made after
termination even if these claims are based on events or acts that occurred
during the term of the policy. Our insurance policies typically have various
exceptions to the claims covered and also require us to assume some costs of
the claim even though a portion of the claim may be covered, resulting in
potential liability to us. Further, the expansion into new services or
geographic areas could result in our failure to obtain coverage for these
services or areas, or the coverage being offered at a higher cost than our
current coverage. A partially or completely uninsured claim, if successful and
of significant magnitude, could have a material adverse effect on our
business, financial condition and results of operations.
The quality of our service and our ability to perform under some of our
contracts would be adversely affected if qualified subcontractors are
unavailable for us to engage
In certain cases, we contract with outside companies to perform designated
portions of the services we perform for our clients. The continued
availability and quality of these subcontractors could significantly effect
our ultimate ability to maintain the quality and level of service offerings.
In 1999, subcontractor costs comprised approximately 9% of our net revenue.
16
ITEM 2. PROPERTIES
We occupy offices and facilities in various locations in California, Nevada
and Utah. Our corporate headquarters are located in Costa Mesa, California and
consist of approximately 49,000 square feet of space. Our corporate
headquarters lease, which consists of separate leases for the two floors
occupied, extends until September 2001 and October 2003, respectively. We also
maintain offices in the California cities of Walnut Creek, Moreno Valley,
Modesto and Palm Desert; one office in Las Vegas, Nevada; and one office in
Taylorsville, Utah.
We believe that our existing office space is adequate to meet our current
and foreseeable future requirements.
ITEM 3. 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 has been set for April 17, 2000 in Stanislaus County Superior Court with
a mandatory settlement conference on April 4, 2000. We believe that the claim
made against us is completely without merit and intend to vigorously defend
ourselves in this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
17
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the NASDAQ National Market under the
symbol "TKCI" since the closing of our initial public offering on July 15,
1999. The following table sets forth the high and low closing prices of our
common stock for the quarters indicated, since the closing of our initial
public offering on July 15, 1999.
High Low
---- ---
Year Ended December 31, 1999:
Fourth Quarter.......................................... $6 7/16 $3 3/4
Third Quarter........................................... $9 $5 1/4
At February 4, 2000, there were approximately 1,100 shareholders of record
of our common stock.
We have never paid any dividends with respect to our common stock. Any
future payment of dividends will be at the discretion of our board of
directors and will depend on our financial condition and capital requirements,
as well as other factors that the board of directors deems relevant. In
addition, we are required to obtain written consent from our bank prior to
declaring or paying dividends. It is currently anticipated that we will retain
future earnings, if any, to finance the operation and growth of our business.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data includes both consolidated and combined
financial statement data for the periods presented. See Note 1 of the Notes to
Consolidated Financial Statements for a description of which periods reflect
consolidated or combined financial statements. All financial statement data is
referred to as consolidated.
The Historical Statements of Income Data for the years ended December 31,
1999, 1998 and 1997, and the Historical Balance Sheet Data as of December 31,
1999 and 1998, have been derived from our historical consolidated financial
statements audited by KPMG LLP, independent auditors, which consolidated
financial statements and auditors' report are included elsewhere in this
annual report. The Historical Statements of Income Data for the years ended
December 31, 1996 and 1995, and the Historical Balance Sheet Data as of
December 31, 1997 and 1996, have been derived from our audited historical
consolidated financial statements which are not included in this annual
report. The Historical Balance Sheet Data as of December 31, 1995, has been
derived from our unaudited consolidated financial statements which are not
included in this annual report and which, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations and financial
position as of the dates and for the period presented.
The Pro Forma Statements of Income Data for the years ended December 31,
1998 and 1997 are unaudited and reflect pro forma adjustments for provisions
for federal and state income taxes at an assumed annual effective income tax
rate of approximately 42%. The Pro Forma Statement of Income Data for the year
ended December 31, 1999, represents historical amounts at the actual annual
effective income tax rate of 42%, and are shown for comparative purposes only.
18
The following information should be read in conjunction with our
Consolidated Financial Statements and the related notes contained in this
report and in our quarterly reports filed with the Commission and our
Management's Discussion and Analysis of Financial Condition and Results of
Operations which is included elsewhere in this annual report.
Years Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Historical Statements of
Income Data (1):
Gross revenue.......... $43,084,000 $34,021,000 $22,585,000 $14,344,000 $15,152,000
----------- ----------- ----------- ----------- -----------
Net revenue............ 39,636,000 29,182,000 18,592,000 12,966,000 14,039,000
Costs of revenue....... 26,987,000 19,287,000 11,871,000 9,229,000 10,212,000
----------- ----------- ----------- ----------- -----------
Gross profit........... 12,649,000 9,895,000 6,721,000 3,737,000 3,827,000
Selling, general and
administrative
expenses.............. 8,343,000 5,858,000 4,485,000 4,960,000 4,808,000
----------- ----------- ----------- ----------- -----------
Income (loss) from
operations............ 4,306,000 4,037,000 2,236,000 (1,223,000) (981,000)
Interest expense....... 807,000 967,000 852,000 720,000 568,000
Other expenses, net.... 16,000 66,000 83,000 5,000 68,000
----------- ----------- ----------- ----------- -----------
Income (loss) before
provision (benefit)
for income taxes and
extraordinary gain.... 3,483,000 3,004,000 1,301,000 (1,948,000) (1,617,000)
Provision (benefit) for
income taxes (1)...... 1,466,000 1,350,000 (1,397,000) 3,000 18,000
----------- ----------- ----------- ----------- -----------
Income (loss) before
extraordinary gain.... 2,017,000 1,654,000 2,698,000 (1,951,000) (1,635,000)
Extraordinary gain on
forgiveness of
liability (2)......... -- -- -- 2,686,000 --
----------- ----------- ----------- ----------- -----------
Net income (loss)...... 2,017,000 1,654,000 2,698,000 735,000 (1,635,000)
Reversal (accretion) of
redeemable securities
to redemption value,
net................... 230,000 (230,000) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss)
available to common
shareholders.......... $ 2,247,000 $ 1,424,000 $ 2,698,000 $ 735,000 $(1,635,000)
=========== =========== =========== =========== ===========
Earnings (loss) per
share-diluted......... $ 0.50 $ 0.39 $ 0.87 $ 0.25 $ (0.55)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding-diluted... 4,515,033 3,635,474 3,104,588 2,962,963 2,962,963
=========== =========== =========== =========== ===========
Pro Forma Statements of
Income Data:
Historical income
before provision for
income taxes.......... $ 3,483,000 $ 3,004,000 $ 1,301,000
Pro forma provision for
income taxes.......... 1,466,000 1,262,000 546,000
----------- ----------- -----------
Pro forma net income... 2,017,000 1,742,000 755,000
Reversal (accretion) of
redeemable securities
to redemption value,
net................... 230,000 (230,000) --
----------- ----------- -----------
Pro forma net income
available to common
shareholders.......... $ 2,247,000 $ 1,512,000 $ 755,000
=========== =========== ===========
Pro forma earnings per
share data-diluted.... $ 0.50 $ 0.42 $ 0.24
=========== =========== ===========
Weighted average number
of shares
outstanding-diluted... 4,515,033 3,635,474 3,104,588
=========== =========== ===========
As of December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
Historical Balance Sheet
Data:
Working capital
(deficit)............. $ 7,213,000 $ 5,180,000 $ 2,016,000 $(3,548,000) $(4,395,000)
Total assets........... 23,661,000 14,530,000 11,733,000 4,677,000 5,384,000
Total debt............. 4,835,000 9,667,000 8,087,000 6,597,000 5,302,000
Total shareholders'
equity (deficit)...... 12,836,000 (301,000) (1,725,000) (5,227,000) (5,962,000)
- --------
(1) Prior to August 1, 1998, Keith Engineering, which is included in our
consolidated financial statements, elected to be taxed as an S
corporation.
(2) In 1994, we accrued $2.0 million relating to excessive lease space in one
of our facilities. In 1996, amounts owed under the lease through December
31, 1995 were forgiven, resulting in an extraordinary gain on the
forgiveness of the liability and accrued but unpaid rent of $2.7 million.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of TKCI and its subsidiaries and the related
notes and the other financial information included elsewhere in this annual
report. 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 this
annual report. This Management's Discussion and Analysis of Financial
Condition and Results of Operations section describes the operations of TKCI
and its subsidiaries.
Overview
The following discussion should be read in conjunction with "Selected
Financial Data" and our consolidated financial statements and the related
notes, included elsewhere in this annual report, and includes the operations
of TKCI and our wholly-owned subsidiaries, including Keith Engineering. TKCI
and Keith Engineering have been under common management since the inception of
TKCI in 1986. TKCI and Keith Engineering were under common control as a result
of a contemporaneous written agreement dated July 1992 between their majority
shareholders which provided for these shareholders to vote in concert and thus
they became a common control group. Effective December 31, 1999, the agreement
between the majority shareholders of TKCI and Keith Engineering was amended to
delete the provision requiring them to vote in concert. On August 1, 1998,
TKCI was reorganized, so that Keith Engineering became a wholly-owned
subsidiary of TKCI. This reorganization was accounted for as a combination of
affiliated entities under common control in a manner similar to a pooling-of-
interests. Under this method, the assets, liabilities and equity were carried
over at their historical book values and the operations of TKCI and Keith
Engineering have been recorded on a combined historical basis. The combination
did not require any material adjustments to conform the accounting policies of
the separate entities. On November 30, 1998 Keith Engineering was merged with
and into TKCI.
In December 1997, TKCI purchased ESI and its wholly-owned subsidiary ESII,
Engineered Systems Integration, Inc., which was subsequently merged into ESI.
ESI provides consulting services related to process engineering design,
chemical engineering, electrical engineering, environmental waste processing
system design and petrochemical systems design. In August 1998, TKCI purchased
JMTA, which provides services relating to flood control and drainage
engineering, environmental permitting, and biological surveys and studies. On
July 15, 1999, TKCI acquired substantially all of the assets and assumed
substantially all of the liabilities of Thompson-Hysell. With the exception of
the services provided by ESI, Thompson-Hysell provides services similar to
ours in central and northern California and Utah. Further, on July 15, 1999,
TKCI completed an initial public offering of 1,500,000 shares of its common
stock. The offering price was $9.00 per share resulting in proceeds of
approximately $11,015,000 to TKCI, net of underwriters' discount and offering
costs. In December 1999, ESI, a wholly owned subsidiary of TKCI, was merged
with and into TKCI.
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.
In 1999, an estimated 80% 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
20
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. We estimate that during 1999, 69% of our net revenue was derived from
all services rendered in southern California. Consequently, adverse economic
conditions affecting the southern California economy could also have an
adverse effect on our consolidated results of operations. We anticipate that
as we consummate acquisitions in the future, the concentration of revenue from
both real estate development and southern California should decline.
Costs of revenue include labor, non-reimbursable subcontract costs,
materials and various direct and indirect overhead costs including rent,
utilities and depreciation. Direct labor employees work predominantly at our
offices, or in some cases at the clients job site. The number of direct labor
employees assigned to a contract will vary according to the size, complexity,
duration and demands of the project. Contract terminations, completions and
scheduling delays may result in periods when direct labor employees are not
fully utilized. As we continue to grow, we anticipate that we will continue to
add professional and administrative staff to support our growth. These
professionals are in great demand and are likely to remain a limited resource
for the foreseeable future. The significant competition for employees with the
required skills creates wage pressures on professional compensation. We
attempt to increase our billing rates to customers to compensate for wage
increases, however, there can be a lag before wage increases can be
incorporated into our existing contracts. Some expenses, primarily long term
leases, are fixed and cannot be adjusted in reaction to an economic downturn.
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,
provisions for doubtful accounts and other indirect overhead costs.
Results of Operations
The following table sets forth historical and unaudited pro forma
supplemental consolidated operating results for each of the periods presented
as a percentage of net revenue. Pro forma amounts for 1998 and 1997 reflect
adjustments for provisions for federal and state income taxes as if we had
been taxed as a C corporation, at an assumed annual effective income tax rate
of approximately 42%. On August 1, 1998, in connection with our
reorganization, Keith Engineering converted from an S corporation to a C
corporation. The pro forma supplemental data for the year ended December 31,
1999, represents historical amounts at the actual annual effective income tax
rate of 42%, and is shown for comparative purposes only.
Years Ended
December 31,
-----------------
1999 1998 1997
---- ---- ----
Gross revenue............................................... 109% 117% 121%
Subcontractor costs......................................... 9% 17% 21%
--- --- ---
Net revenue............................................... 100% 100% 100%
Costs of revenue............................................ 68% 66% 64%
--- --- ---
Gross profit.............................................. 32% 34% 36%
Selling, general and administrative expenses................ 21% 20% 24%
--- --- ---
Income from operations.................................... 11% 14% 12%
Interest expense............................................ 2% 3% 5%
--- --- ---
Income before pro forma provision for income taxes........ 9% 11% 7%
Pro forma provision for income taxes........................ 4% 5% 3%
--- --- ---
Pro forma net income........................................ 5% 6% 4%
Reversal (accretion) of redeemable securities to redemption
value, net................................................. 1% (1%) --
--- --- ---
Pro forma net income available to common shareholders..... 6% 5% 4%
=== === ===
21
Years Ended December 31, 1999 and December 31, 1998
Revenue. Net revenue for 1999 was $39.6 million compared to $29.2 million
for 1998, an increase of $10.5 million, or 36%. Net revenue increased by $6.2
million as a result of the acquisitions of JMTA in August 1998 and Thompson-
Hysell in July 1999. Excluding the revenue from acquisitions, our 1999 net
revenue grew $4.2 million, or 15%, compared to 1998, resulting primarily from
the continued overall strengthening of the California economy. Subcontractor
costs, as a percentage of net revenue, declined to 9% for 1999 compared to 17%
for 1998, resulting largely from a decrease of $1.9 million relating to our
primary telecommunications contract which came to substantial completion in
1998.
Gross Profit. Gross profit for 1999 was $12.6 million compared to $9.9
million for 1998, an increase of $2.8 million, or 28%. Gross profit growth is
attributable to both our internal revenue increases as well as the
acquisitions of JMTA and Thompson-Hysell. As a percentage of net revenue,
gross profit decreased slightly to 32% for 1999 compared to 34% for 1998. The
decline in the gross profit percentage is attributable primarily to an
increase to the estimated direct contract costs expected to be incurred on two
large projects resulting in a reduction to the estimated percentage of
completion on these contracts and consequently a $900,000 reduction in gross
profit. Excluding this impact, gross profit as a percentage of net revenue was
34% for 1999. The gross profit percentage was further reduced by a decline in
the profitability in the industrial, process and manufacturing operations of
ESI and our increase in the employer matching contribution of our 401(K) plan
in 1999, resulting from the continued need to attract and retain quality
professionals. Costs of revenue for 1999 was $27.0 million compared to $19.3
million for 1998, an increase of $7.7 million, or 40%. Costs of revenue
increases resulted primarily from growth in our employee base from 356 in 1998
to 473 in 1999, an increase of 117, or 33%. Excluding our acquisition of
Thompson-Hysell in July 1999, the number of employees increased by 17, or 5%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1999 were $8.3 million compared to $5.9 million
for 1998, an increase of $2.5 million, or 42%. As a percentage of net revenue,
selling, general and administrative expenses increased to 21% for 1999 from
20% for 1998. The percentage increase resulted primarily from the collection
in 1998 of approximately $390,000 of accounts receivables written off in prior
years.
Interest Expense. Interest expense for 1999 was $807,000 compared to
$967,000 for 1998, a decrease of $160,000, or 17%. As a percentage of net
revenue, interest expense was 2% for 1999 compared to 3% for 1998. The
percentage decrease resulted primarily from the repayment of our previous line
of credit, notes payable and related party notes payable totaling $7.4 million
with the net proceeds from the July 15, 1999 initial public offering.
Income Taxes. The provision for income taxes for 1999 was $1.5 million
compared to $1.4 million in 1998, an increase of $116,000, or 9%. This
increase in tax expense was due primarily to a higher taxable income base
partially offset by a higher effective tax rate in 1998 as a result of the
conversion of Keith Engineering from an S corporation to a C corporation in
August 1998. Our effective income tax rate was approximately 42% for 1999
compared to 45% for 1998. The 1998 effective income tax rate would have been
approximately 42% had Keith Engineering been a C corporation at the beginning
of 1998.
Years Ended December 31, 1998 and December 31, 1997
Revenue. Net revenue for 1998 was $29.2 million compared to $18.6 million
for 1997, an increase of $10.6 million, or 57%. Net revenue increased by $3.9
million and $700,000 as a result of the acquisitions of ESI in December 1997
and JMTA in August 1998, respectively. The remaining net revenue increase of
$7.0 million resulted primarily from the overall strengthening of the
California and Nevada economies. These net revenue increases were partially
offset by a $1.0 million decline in our wireless telecommunications business.
Excluding the revenue from the acquisitions of ESI and JMTA, our 1998 net
revenue grew $6.0 million, or 32%, compared to 1997. Subcontractor costs, as a
percentage of net revenue, declined to 17% for 1998 compared to 21% for 1997,
resulting largely from a decrease of $465,000 relating to our primary wireless
telecommunications contract which came to substantial completion in 1998.
22
Gross Profit. Gross profit for 1998 was $9.9 million compared to $6.7
million for 1997, an increase of $3.2 million, or 47%. Gross profit growth is
attributable to both our internal revenue increases as well as the
acquisitions of ESI and JMTA. As a percentage of net revenue, gross profit
decreased slightly to 34% for 1998 compared to 36% for 1997. The decline in
the gross profit percentage is attributable primarily to lower profit margins
in the industrial, process and manufacturing operations of ESI, which was
acquired in December 1997. Excluding the impact of the ESI acquisition, the
gross profit percentage was 36% for 1998 and 1997. Costs of revenue for 1998
was $19.3 million compared to $11.9 million in 1997, an increase of $7.4
million, or 63%. Costs of revenue increases resulted primarily from growth in
our employee base from 260 in 1997 to 356 in 1998, an increase of 96, or 37%.
Excluding the JMTA acquisition in 1998, the number of employees increased by
78, or 30%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1998 were $5.9 million compared to $4.5 million
for 1997, an increase of $1.4 million, or 31%. As a percentage of net revenue,
selling, general and administrative expenses decreased to 20% for 1998 from
24% for 1997. The percentage decrease resulted primarily from the collection
of approximately $390,000 of accounts receivable written off in prior years
and holding the growth in our corporate labor costs below our internal revenue
increases.
Interest Expense. Interest expense for 1998 was $967,000 compared to
$852,000 for 1997, an increase of $115,000, or 14%. As a percentage of net
revenue, interest expense was 3% for 1998 compared to 5% for 1997. The
percentage decrease resulted primarily from our increased revenue base and the
refinancing of our line of credit at a lower interest rate in February 1998.
Income Taxes. The provision for income taxes for 1998 was $1.4 million
compared to a tax benefit of $1.4 million in 1997. This increase in tax
expense was due primarily to higher pre-tax income in 1998, the conversion of
Keith Engineering from an S corporation to a C corporation in August 1998 and
recording a significant reduction in our federal valuation allowance in 1997,
attributable to our belief that it was more likely than not that we would be
able to realize the benefit of our net operating loss carryforwards. Our
effective income tax rate was approximately 45% for 1998 and would have been
approximately 42% had Keith Engineering been a C corporation at the beginning
of 1998.
23
Quarterly Results
The following table sets forth unaudited historical and supplemental pro
forma selected quarterly consolidated financial data. Pro forma amounts
reflect adjustments for provisions for federal and state income taxes as if we
had been taxed as a C corporation, at an assumed annual effective income tax
rate of approximately 42%, for all periods presented. On August 1, 1998, Keith
Engineering was converted from an S corporation to a C corporation. This
information has been derived from unaudited consolidated financial statements,
which, in the opinion of management, include all adjustments necessary for a
fair presentation of the information. Consolidated results of operations for
any one or more quarters are not necessarily indicative of results for an
entire year or the results to be expected for any future period.
Quarterly Results
-------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- --------- -------- -------- -------- --------- -------- --------
(in thousands)
Consolidated Statements
of Income Data:
Gross revenue........... $12,217 $11,397 $9,471 $9,999 $9,309 $9,192 $8,399 $7,121
------- ------- ------ ------ ------ ------ ------ ------
Net revenue............ 11,366 10,658 8,643 8,969 8,269 7,900 7,051 5,962
Costs of revenue........ 7,937 7,350 5,786 5,914 5,517 5,077 4,613 4,080
------- ------- ------ ------ ------ ------ ------ ------
Gross profit........... 3,429 3,308 2,857 3,055 2,752 2,823 2,438 1,882
Selling, general and
administrative
expense................ 2,439 2,211 1,797 1,896 1,631 1,626 1,131 1,470
------- ------- ------ ------ ------ ------ ------ ------
Income from
operations............ 990 1,097 1,060 1,159 1,121 1,197 1,307 412
Interest expense........ 130 149 268 260 253 249 244 221
Other expense (income),
net.................... (87) 132 (10) (19) 59 18 (18) 7
------- ------- ------ ------ ------ ------ ------ ------
Income before pro forma
provision for income
taxes................. 947 816 802 918 809 930 1,081 184
Pro forma provision for
incomes taxes.......... 394 346 340 386 340 391 454 77
------- ------- ------ ------ ------ ------ ------ ------
Pro forma net income... 553 470 462 532 469 539 627 107
Reversal (accretion) of
redeemable securities
to redemption value,
net.................... -- 344 (57) (57) (59) (57) (57) (57)
------- ------- ------ ------ ------ ------ ------ ------
Pro forma net income
available to common
shareholders.......... $ 553 $ 814 $ 405 $ 475 $ 410 $ 482 $ 570 $ 50
======= ======= ====== ====== ====== ====== ====== ======
As a Percentage of Net Revenues
-------------------------------------------------------------------------------
Three Months Ended
-------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
1999 1999 1999 1999 1998 1998 1998 1998
-------- --------- -------- -------- -------- --------- -------- --------
Consolidated Statements
of Income Data:
Gross revenue........... 107% 107% 110% 111% 113% 116% 119% 119%
------- ------- ------ ------ ------ ------ ------ ------
Net revenue............ 100% 100% 100% 100% 100% 100% 100% 100%
Costs of revenue........ 70% 69% 67% 66% 67% 64% 65% 68%
------- ------- ------ ------ ------ ------ ------ ------
Gross profit........... 30% 31% 33% 34% 33% 36% 35% 32%
Selling, general and
administrative expense 21% 21% 21% 21% 19% 21% 16% 25%
------- ------- ------ ------ ------ ------ ------ ------
Income from
operations............ 9% 10% 12% 13% 14% 15% 19% 7%
Interest expense........ 1% 1% 3% 3% 3% 3% 3% 4%
Other expenses (income),
net.................... -- 1% -- -- 1% -- -- --
------- ------- ------ ------ ------ ------ ------ ------
Income before pro forma
provision for income
taxes................. 8% 8% 9% 10% 10% 12% 16% 3%
Pro forma provision for
income taxes........... 3% 3% 4% 4% 4% 5% 7% 1%
------- ------- ------ ------ ------ ------ ------ ------
Pro forma net income... 5% 5% 5% 6% 6% 7% 9% 2%
Reversal (accretion) of
redeemable securities
to redemption value,
net.................... -- 3% (1%) (1%) (1%) (1%) (1%) (1%)
------- ------- ------ ------ ------ ------ ------ ------
Pro forma net income
available to
common shareholders... 5% 8% 4% 5% 5% 6% 8% 1%
======= ======= ====== ====== ====== ====== ====== ======
24
Our quarterly revenue and operating results fluctuate primarily as a result
of:
. client engagements commenced and completed during a quarter
. seasonality
. the number of business days in a quarter
. the number of work days lost as a result of adverse weather conditions
or delays caused by third parties
. employee hiring, billing and utilization rates
. the consummation of acquisitions
. the length of the sales cycle on new business
. the ability of clients to terminate engagements without penalty
. our ability to efficiently shift our employees from project to project
. the size and scope of assignments
. general economic conditions
Selling, general and administrative expense was affected by the collection
of an account receivable in the amount of $390,000, in the quarter ended June
30, 1998 that was previously written off.
Liquidity and Capital Resources
We have financed our working capital needs and capital expenditure
requirements through a combination of internally generated funds, bank
borrowings, leases and the sale of our common stock.
Working capital for 1999 was $7.2 million compared to $5.2 million in 1998,
an increase of $2.0 million, or 39%, resulting primarily from growth in cash
and cash equivalents, accounts receivable and costs and estimated earnings in
excess of billings, due to the acquisition of Thompson-Hysell and higher
revenue levels. Net cash provided by operating activities increased $2.8
million or 406%, to $3.5 million in 1999 compared to $686,000 in 1998,
resulting primarily from our growth in income from operations and increased
collection of contract and trade receivables. The growth in net cash provided
by operating activities was used primarily to fund capital expenditures of
$1.2 million in 1999 compared to $835,000 in 1998 and to partially finance the
acquisition of Thompson-Hysell. Capital expenditures consisted primarily of
computer equipment, upgrades to our information systems, and equipment and
vehicles used in our survey services.
In September 1999, we entered into a new line of credit agreement with a
bank, which allows us to borrow up to an aggregate of $8.5 million. The line
of credit consists of a working capital component with a maximum outstanding
principal balance of $6.0 million, maturing on September 3, 2001, and an
equipment component with a maximum outstanding principal balance of $3.5
million, maturing September 3, 2000, which may roll into a 60 month term note.
The working capital component bears interest at either the prime rate or at
approximately one and three-quarters percent above LIBOR and the equipment
component bears interest at either the prime rate or at approximately two
percent above LIBOR. At December 31, 1999, the outstanding borrowings under
the line of credit was $1.3 million bearing interest at 8.0%. The borrowings
on the new line of credit agreement were used primarily to purchase 97,600
treasury shares at a cost of $547,000 and for other working capital needs.
Net proceeds of $11,015,000 from our initial public offering were used
primarily to repay related party notes payable and accrued interest, to repay
notes payable, to repay the previous bank line of credit and to acquire
substantially all of the assets of and assume substantially all of the
liabilities of Thompson-Hysell.
We believe existing cash balances, internally generated funds, and
availability under our credit facility will be sufficient to fund our
anticipated internal operating needs for the next twelve months.
25
Inflation
Although our operations can be influenced by general economic trends, we do
not believe that inflation had a significant impact on our results of
operations for the periods presented. Due to the short-term nature of most of
our contracts, if costs of revenue increase, we attempt to pass these
increases to our clients.
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.
26
ITEM 7A. 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, weighted average interest
rates, fair values and other items required by year of expected maturity to
evaluate the expected cash flows and sensitivity to interest rate changes.
Dollars are expressed in thousands.
Fair
2000 2001 2002 2003 2004 Total Value(1)
---- ------ ---- ---- ---- ------ -------
Fixed rate debt(2)............ $195 $1,473 $110 $ 70 $ 15 $1,863 $1,863
Average interest rate......... 8.28% 9.84% 8.26% 8.26% 8.50% 9.51% 9.51%
Variable rate debt............ -- $1,300 -- -- -- $1,300 $1,300
Average interest rate......... -- 8.00% -- -- -- 8.00% 8.00%
- --------
(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 $290,000 as there is no established market for these notes.
As the table incorporates only those exposures that existed as of December
31, 1999, it does not consider those exposures or positions which could arise
after that date. Moreover, because firm commitments are not presented in the
table above, the information presented in the table has limited predictive
value. As a result, our ultimate realized gain or loss with respect to
interest rate fluctuations will depend on those exposures or positions that
arise during the period and interest rates.
27
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Independent Auditors' Report............................................. 29
Consolidated Balance Sheets as of December 31, 1999 and 1998............. 30
Consolidated Statements of Income for the years ended December 31, 1999,
1998 and 1997........................................................... 31
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1999, 1998 and 1997.................................. 32
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997..................................................... 33
Notes to Consolidated Financial Statements............................... 34
28
Independent Auditors' Report
The Board of Directors and Shareholders
The Keith Companies, Inc.:
We have audited the accompanying consolidated balance sheets of The Keith
Companies, Inc. and subsidiaries (note 1) as of December 31, 1999 and 1998,
and the related consolidated statements of income, shareholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Keith
Companies, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Orange County, California
February 4, 2000
29
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Note 1)
December 31,
-----------------------
1999 1998
----------- -----------
Assets
Current assets:
Cash and cash equivalents............................ $ 1,569,000 $ 457,000
Contracts and trade receivables, net of allowance for
doubtful accounts of $612,000 and $364,000 at
December 31, 1999 and 1998, respectively............ 7,176,000 5,582,000
Other receivables.................................... 86,000 282,000
Costs and estimated earnings in excess of billings... 5,037,000 3,783,000
Prepaid expenses and other currents assets........... 415,000 252,000
Deferred offering costs.............................. -- 291,000
Deferred tax assets.................................. -- 270,000
----------- -----------
Total current assets.............................. 14,283,000 10,917,000
Equipment and leasehold improvements, net............. 4,536,000 2,862,000
Goodwill, net of accumulated amortization of $109,000
and $10,000 at December 31, 1999 and 1998,
respectively......................................... 4,678,000 621,000
Other assets.......................................... 164,000 130,000
----------- -----------
Total assets...................................... $23,661,000 $14,530,000
=========== ===========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt and capital lease
obligations......................................... $ 1,292,000 $ 1,488,000
Trade accounts payable............................... 1,048,000 1,221,000
Accrued employee compensation........................ 2,342,000 1,720,000
Accrued liabilities to related parties............... -- 185,000
Current portion of deferred tax liabilities.......... 1,102,000 --
Other accrued liabilities............................ 734,000 688,000
Billings in excess of costs and estimated earnings... 552,000 435,000
----------- -----------
Total current liabilities......................... 7,070,000 5,737,000
Long-term debt and capital lease obligations, less
current portion...................................... 3,543,000 5,778,000
Notes payable to related parties...................... -- 2,401,000
Deferred tax liabilities.............................. 64,000 348,000
Accrued rent.......................................... 148,000 137,000
Redeemable securities................................. -- 430,000
----------- -----------
Shareholders' equity (deficit) (Note 1):
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 in 1999 and 1998; issued and
outstanding 5,070,224 shares in 1999, including
shares held in treasury, and 3,485,634 shares in
1998................................................ 5,000 3,000
Additional paid in capital........................... 12,317,000 652,000
Retained earnings (accumulated deficit).............. 1,061,000 (956,000)
----------- -----------
13,383,000 (301,000)
Less treasury stock, at cost of 97,600 shares........ 547,000 --
----------- -----------
Total shareholders' equity (deficit)................ 12,836,000 (301,000)
----------- -----------
Commitments and contingencies (Notes 4, 6, 8, 9, 11,
12 and 14)
Total liabilities and shareholders' equity
(deficit).......................................... $23,661,000 $14,530,000
=========== ===========
See accompanying notes to consolidated financial statements.
30
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Note 1)
Years ended December 31,
------------------------------------
1999 1998 1997
----------- ----------- -----------
Gross revenue........................... $43,084,000 $34,021,000 $22,585,000
Subcontractor costs..................... 3,448,000 4,839,000 3,993,000
----------- ----------- -----------
Net revenue........................... 39,636,000 29,182,000 18,592,000
Costs of revenue........................ 26,987,000 19,287,000 11,871,000
----------- ----------- -----------
Gross profit.......................... 12,649,000 9,895,000 6,721,000
Selling, general and administrative
expenses............................... 8,343,000 5,858,000 4,485,000
----------- ----------- -----------
Income from operations................ 4,306,000 4,037,000 2,236,000
Interest expense........................ 807,000 967,000 852,000
Other expenses, net..................... 16,000 66,000 83,000
----------- ----------- -----------
Income before provision (benefit) for
income taxes......................... 3,483,000 3,004,000 1,301,000
Provision (benefit) for income taxes.... 1,466,000 1,350,000 (1,397,000)
----------- ----------- -----------
Net income............................ 2,017,000 1,654,000 2,698,000
Reversal (accretion) of redeemable
securities to redemption value, net.... 230,000 (230,000) --
----------- ----------- -----------
Net income available to common
shareholders......................... $ 2,247,000 $ 1,424,000 $ 2,698,000
=========== =========== ===========
Earnings per share data:
Basic................................. $ 0.53 $ 0.41 $ 0.87
=========== =========== ===========
Diluted............................... $ 0.50 $ 0.39 $ 0.87
=========== =========== ===========
Weighted average number of shares
outstanding:
Basic................................. 4,211,318 3,485,634 3,104,588
=========== =========== ===========
Diluted............................... 4,515,033 3,635,474 3,104,588
=========== =========== ===========
Pro Forma Supplemental Data (unaudited):
Historical income before provision for
income taxes........................... $ 3,483,000 $ 3,004,000 $ 1,301,000
Pro forma provision for income taxes.... 1,466,000 1,262,000 546,000
----------- ----------- -----------
Pro forma net income.................. 2,017,000 1,742,000 755,000
Reversal (accretion) of redeemable
securities to redemption value, net.... 230,000 (230,000) --
----------- ----------- -----------
Pro forma net income available to
common shareholders.................. $ 2,247,000 $ 1,512,000 $ 755,000
=========== =========== ===========
Pro forma earnings per share data:
Basic................................. $ 0.53 $ 0.43 $ 0.24
=========== =========== ===========
Diluted............................... $ 0.50 $ 0.42 $ 0.24
=========== =========== ===========
Weighted average number of shares
outstanding:
Basic................................. 4,211,318 3,485,634 3,104,588
=========== =========== ===========
Diluted............................... 4,515,033 3,635,474 3,104,588
=========== =========== ===========
See accompanying notes to consolidated financial statements.
31
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity (Deficit) (Note 1)
Retained
Additional Earnings
Shares Common Paid-In (Accumulated Treasury
Outstanding Stock Capital Deficit) Stock Total
----------- ------ ----------- ------------ --------- -----------
Balance at December 31,
1996................... 2,962,963 $3,000 $ 77,000 $(5,308,000) $ -- $(5,228,000)
Issuance of common
stock.................. 522,671 -- 805,000 -- -- 805,000
Net income.............. -- -- -- 2,698,000 -- 2,698,000
--------- ------ ----------- ----------- --------- -----------
Balance at December 31,
1997................... 3,485,634 3,000 882,000 (2,610,000) -- (1,725,000)
Net income.............. -- -- -- 1,654,000 -- 1,654,000
Accretion of redeemable
securities............. -- -- (230,000) -- -- (230,000)
--------- ------ ----------- ----------- --------- -----------
Balance at December 31,
1998................... 3,485,634 3,000 652,000 (956,000) -- (301,000)
Issuance of common
stock.................. 1,584,590 2,000 11,435,000 -- -- 11,437,000
Net income.............. -- -- -- 2,017,000 -- 2,017,000
Treasury stock
purchased.............. -- -- -- -- (547,000) (547,000)
Reversal of accretion on
redeemable securities
to redemption value,
net.................... -- -- 230,000 -- -- 230,000
--------- ------ ----------- ----------- --------- -----------
Balance at December 31,
1999................... 5,070,224 $5,000 $12,317,000 $ 1,061,000 $(547,000) $12,836,000
========= ====== =========== =========== ========= ===========
See accompanying notes to consolidated financial statements.
32
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Note 1)
Years ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Cash flows from operating activities:
Net income................................. $2,017,000 $1,654,000 $2,698,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 1,037,000 595,000 371,000
Loss (gain) on sale of equipment.......... 6,000 (29,000) --
Stock compensation expense................ -- -- 206,000
Changes in operating assets and
liabilities, net of effects from
acquisitions:
Contracts and trade receivables, net..... 659,000 (1,597,000) 516,000
Other receivables........................ 197,000 (134,000) 53,000
Costs and estimated earnings in excess of
billings................................ (1,254,000) (423,000) (3,158,000)
Prepaid expenses and other current
assets.................................. (337,000) 250,000 (41,000)
Deferred tax assets...................... 270,000 1,224,000 (1,494,000)
Other assets............................. (29,000) 32,000 5,000