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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, 2000
COMMISSION FILE NUMBER 0-26561
THE KEITH COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0203193
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
2955 RED HILL AVENUE, COSTA MESA, CALIFORNIA 92626
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 668-7001
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. [X] Yes [ ] 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
March 23, 2001 was 5,369,997 shares. Based on the closing sale price on the
Nasdaq National Market on March 27, 2001, the aggregate market value of the
registrant's common stock held by non-affiliates of the registrant was
approximately $74,161,000.(1)
DOCUMENTS INCORPORATED BY REFERENCE
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 16, 2001.
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(1) For purposes of this calculation, shares owned by officers, directors and
10% shareholders known to the registrant have been deemed to be owned by
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
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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.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Our Common Equity and Related Stockholder
Matters..................................................... 20
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
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.................................... 52
PART III
Item 10. Directors and Executive Officers............................ 52
Item 11. Executive Compensation...................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 52
Item 13. Certain Relationships and Related Transactions.............. 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 52
(a) 1. Consolidated Financial Statements........................ 52
2. Financial Statement Schedules............................ 52
3. Exhibits................................................. 53
(b) Reports on Form 8-K......................................... 54
Signatures............................................................ 55
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PART I
ITEM 1. BUSINESS
GENERAL
We are a full service engineering and consulting services firm providing
professional services on a wide range of projects to both the real estate
development, public works/infrastructure and communications industry and the
industrial/energy industry.
We provide a full range of services from initial site acquisition studies
to construction management and electrical, mechanical and chemical/process
engineering services. 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 services that are needed to
effectively manage, engineer and design infrastructure and state-of-the-art
facilities.
The following illustrates the range of services that we offer:
Graphic depicting: (1) the following services: civil engineering, surveying
& mapping, planning, site acquisition, environmental, archaeology, construction
management, water resources engineering, instrumentation/control systems
integration engineering, fire protection engineering, electrical engineering,
mechanical engineering and chemical/process engineering; and (2) the following
industries served: real estate development, public works/infrastructure and
communications industry and the industrial/energy industry.
From fiscal 1996 through fiscal 2000, our net revenue has grown by a
compounded annual growth rate of 42% and our net income has grown at a
compounded annual growth rate of 59%. We have accomplished this through both
internal growth and through our acquisition strategy to diversify the scope of
our services and our geographic presence. We have acquired five companies in the
past four years and now operate from 13 offices (including 15 operating
divisions) in 6 states; California, Nevada, Utah, Arizona, Colorado and Wyoming.
INDUSTRIES SERVED
We serve both the real estate development, public works/infrastructure and
communications industry and the industrial/energy industry.
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REAL ESTATE DEVELOPMENT, PUBLIC WORKS/INFRASTRUCTURE AND COMMUNICATIONS
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 and 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 archaeology
services for planning and assistance with environmental approvals as well as
construction and post-construction phase monitoring services.
Residential development includes large-scale communities, senior citizen
and retirement communities, single family homes, condominiums and apartments.
Commercial development includes the development and construction of retail,
office, hotel and industrial facilities. Golf and recreational facility
development includes golf courses, driving ranges, parks, clubhouses, theme
parks, resorts and lakes.
There are generally two types of real estate development projects and
clients: the land developer and the builder. Some take on characteristics of
both. Developers generally must look long-term, utilize longer-term investment
financing and evaluate the performance of projects across multiple business
cycles. The developer pursues land development rights and implements the process
of designing and constructing infrastructure utility, roadway and landform
grading improvements. A developer's projects often span several years or even
decades. The builder, on the other hand, generally provides an end-user product,
including homes, retail stores, restaurants or clubhouses. The builder's
approach is generally based upon current and relatively short-term economic
conditions. Financing for a builder's work is often construction-oriented and
anticipates short-term returns. The builder often buys property that has already
been zoned, graded and otherwise improved by the land developer.
Public Works/Infrastructure
Transportation, water resources, and other public works projects provide
ongoing, more reliable sources of revenue for engineering firms and consultants
when private real estate development activities decline during unfavorable
economic periods. These public projects are often long-term and have
historically provided more determinable and consistent revenue streams than
non-publicly funded projects.
Transportation. Highway and interchange projects require engineering
designs for roadways and interchanges for the placement or relocation of sewer
and 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. Engineers develop street, major arterial and highway designs
in cooperation with federal, state and local agencies to improve transportation
networks. Highly experienced transportation planners, engineers, and designers
provide the entire spectrum of resources necessary to effectively engineer and
design state-of-the-art transportation infrastructure.
Water Resources. Water resource services encompass the study and analysis
of rainfall, water collection and distribution, use of water for cleanliness,
nourishment and irrigation and the treatment and disposal of used or
contaminated water. 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 and quality of water, water
districts, public agencies, agricultural users and municipalities are faced with
the challenge of managing their water supplies more efficiently.
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Protecting 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 water-managing agencies. Private developers also address
these issues as part of their land development projects.
Communications
Communications projects 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. With
the rapid growth of the communications services industry, the demand for
communications infrastructure has expanded dramatically.
Service providers and developers of communications infrastructure generally
hire outside experts to meet their design, site acquisition and lease
arrangement, land planning, civil engineering, purchasing and construction
management needs.
INDUSTRIAL/ENERGY
The industrial/energy industry consists of manufacturing facilities,
processing facilities, power generation and distribution, and
production/refining methods and systems. Power plants, 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 of their production effort. Comprehensive engineering services that
are required include:
- the design or redesign of electrical, heating, ventilation and air
conditioning systems;
- mechanical equipment design;
- equipment selection and purchasing;
- the design of integrated computer and monitoring device systems to
control manufacturing and process equipment;
- chemical/process engineering;
- energy generation and usage consulting;
- fire protection engineering;
- material handling and process flow planning;
- automation and robotics design;
- construction management and installation supervision;
- project management; and
- computer programming.
Projects that utilize mechanical, electrical and process engineering and
consulting services include:
- Energy/Power Generation and Management: power plants, natural
gas/electrical systems and distribution systems;
- High Tech Facilities: biotechnology, pharmaceutical and laboratory
facilities, computer centers, control rooms and 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 and food and beverage
manufacturing facilities;
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- Educational Facilities: school and university buildings and campuses;
and
- Public Facilities/Utilities: commercial and medical buildings.
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, design and consulting services to automate
and increase the efficiency of new and existing facilities.
THE TKCI ADVANTAGE
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. Management believes that in the areas in which we are located,
we are among the leading engineering and consulting services firms serving the
industries that we serve. We believe that we can further enhance our position in
the industries which we serve for the following reasons:
Reputation
We have a reputation for providing high quality services, which 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:
- Award of Excellence from the California Council of Civil Engineers and
Land Surveyors;
- Certificate of Recognition from the County of San Bernardino Board of
Supervisors;
- Letter of Appreciation from the State of California Department of
General Services;
- Project of the Year from the American Society of Civil Engineers;
- Outstanding Environmental Analysis Document from the Association of
Environmental Professionals; and
- Outstanding Planning Award from the American Planning Association.
Industry and Professional Experience
We believe that our senior management has the proven ability to execute our
business plan and capitalize on new opportunities. Over the past four years,
management has successfully closed and integrated five acquisitions, enabling us
to diversify both our revenue base and our geographic scope. This is a crucial
point, as acquisitions will continue to be a key component in our business plan.
In all acquisitions to date, we have retained the management teams of the
acquired companies and provided the financial and management controls to promote
sustainable growth. This enables the acquired management team to run their
business as they know best. In addition, the entire management team, from
project manager to senior executive manager, is particularly adept at the
relationship side of the business that plays a critical role in the world of
engineering and consulting services.
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.
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Full Service Approach
We provide a full complement of engineering and consulting 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 concentrating their engineering and consulting services in
as few firms as practicable.
Cross-Marketing
Due to our reputation within our industries 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 the services we
offer.
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 of a project, 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 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, national and international firms. Our organizational structure
combines the efficiencies associated with centralization and the flexibility of
decentralization. When appropriate, our primary administrative functions are
centralized in our corporate headquarters in Costa Mesa, California allowing us
to reduce duplicative functions and personnel at our divisional offices. We
believe that this centralization allows the management at our divisional offices
the freedom to focus on identifying new business opportunities and overseeing
the services they provide, and allows our project managers the flexibility to
focus on being responsive to client needs. Since our divisions are managed by
technical professionals with excellent client relationships and industry
reputations, we promote decentralization of those aspects of our business which
involve technical and client relationships.
BUSINESS STRATEGY
Our objective is to strengthen our position as a leading provider of
engineering and consulting services while growing our geographic presence and
enhancing the services we offer. To achieve this objective, we have developed a
strategy with the following key elements:
- Maintain High Quality 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.
- 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.
- Enhance and Strengthen Existing Client Relationships. By maintaining
strong relationships with existing clients and promoting the entire cross
section of services we provide to all clients, we believe that we can
enhance our reputation. By focusing our efforts in this area, we can
utilize the time that we spend with our clients on active work to promote
additional services to them and gain additional
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contract opportunities for us. We believe that our existing relationships
between our clients and employees is our greatest business development
asset.
- Expand Services in Both the Public Works/Infrastructure and
Communications Industry and the Industrial/Energy Industry. To diminish
our susceptibility to the economic cycles affecting any particular
industry, we intend to continue expanding our work in the public
works/infrastructure and communications and industrial/energy industries.
Much of our technical expertise, including, CAD technicians, certain
engineering specialists and administrative support, can provide support
across industries in the event that a particular industry segment
experiences economic downturns. We believe that by expanding our services
into industries which follow different economic cycles, we are able to
reassign talented employees to other project types and help provide
stability for our core staff, management and profit levels.
- 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 our
acquisitions of Thompson-Hysell and Crosby, Mead, Benton & Associates
have enabled us to more effectively sell additional services in
California and Utah and that our acquisition of Hook & Associates
Engineering, Inc. has enabled us to broaden our service offerings in
Arizona, Colorado and Wyoming.
- Expand and Enhance Technical Capabilities. We intend to build upon our
reputation as a quality provider of 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.
ACQUISITION STRATEGY
We intend to continue to pursue acquisitions that complement our business
strategy and enhance our range of services, geographic presence and/or client
base. 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. Upon the successful
completion of this offering, we may increase the pace and size of our
acquisitions.
In general, the key criteria we consider when evaluating potential
acquisitions include services offered, reputation, corporate culture, price,
profitability and geographic location.
The following table sets forth information regarding our five acquisitions
since late 1997.
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ACQUISITION PRIMARY
DATE COMPANY ACQUIRED MARKETS SERVED SERVICES OFFERED
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December 1997 ESI, Engineering Northern California Industrial/energy
Services Incorporated services
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August 1998 John M. Tettemer and Southern California Water resources
Associates, Ltd. engineering and services
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July 1999 Thompson-Hysell, Inc. Northern and Central Water resources and
California; Utah other engineering
services
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October 2000 Crosby, Mead, Benton & Southern California Land development design,
Associates infrastructure design
and landscape
architecture
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January 2001 Hook & Associates Arizona; Colorado; Land development,
Engineering, Inc. Wyoming transportation, and
communications services
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Consideration for the companies we have acquired has included cash, shares
of our common stock, promissory notes, or a combination of these forms of
consideration. The consideration is sometimes subject to earn-out or adjustment
provisions. Additionally, in connection with these acquisitions, we have entered
into noncompetition agreements with principals or key employees of an acquired
company.
SERVICES PROVIDED
We provide a broad range of services, including civil engineering,
surveying and mapping, planning, environmental, archaeology, construction
management, site acquisition, water resources engineering, and other services
needed by the industrial/energy industry, including instrumentation/control
systems integration 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 most of the constructed improvements involved lie on
the surface of, or below the ground. 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; construction documents; tentative mapping;
flood plain studies; sewer, water and drainage design; street and highway
design; site and subdivision design; and grading design.
We are the master engineer of a master-planned residential resort community
located in the central valley region of California. This 30,000-acre site is
comprised of five villages, and consists of 10,000 residential units, six golf
courses, a hotel and convention center, two wineries, a swim and tennis club and
85 acres of retail and commercial development. Our responsibilities on this
project include the civil engineering design of all onsite and offsite
improvements, such as roadways, water, sewer and drainage systems and grading.
We are also providing surveying and mapping services; coordinating with the
environmental consultants; providing construction management services; and
providing bid and finance administration services. We anticipate that this
project will have a duration of more than 20 years.
Surveying and Mapping Services
Surveying and mapping services include, among other things, the
establishment of boundaries for preliminary engineering, construction layout,
as-built surveys and the identification of features of a parcel of land that
directly affect a project's design. 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. We believe that 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 by providing surveying, mapping, charting,
imagery intelligence and photogrammetic services for an on-going multi-year,
task order contract with a United States federal agency. This includes providing
surveying and mapping services on air bases worldwide as part of a geospatial
information and imagery intelligence program. As a subconsultant to the program
manager, we assisted in developing their specifications and statement of work
for safety of navigation surveys on Department of Defense airfields. We have
also developed detailed ground survey and photogrammetric mapping plans and cost
breakdowns for the survey of multiple airfields in Washington, California and
Utah. This effort coordinates tasks to be performed by at least half a dozen
firms throughout the Western United States.
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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 the preparation and processing of a
Specific Plan document for a master-planned golf course community in the County
of San Bernardino, California. This community is approximately 460 acres in size
and contains more than 500 luxury homes surrounding a full-length 18-hole golf
course. We created the land use plan and developed the supporting Specific Plan
and Environmental Impact Report documents. These documents specify uses of land
such as residential, golf and open space. They also identify environmental
concerns and how to mitigate them. Additional services for which we are
responsible on this project include environmental, civil engineering and
surveying and mapping.
Environmental Services
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 environmental staff
offers the technical proficiency to provide one-stop preparation of
environmental documents that conform to current regulatory requirements.
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. 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.
Our award winning services on a recent project involved the preparation of
a master plan and Environmental Impact Report for a major sports complex, two
schools, an active park and a community center. The major issues surrounding the
project included the preservation of the habitat for the California gnatcatcher
and Quino checkerspot butterfly, potential land use impacts to the nearby Los
Alamos Historic District and securing water service. We successfully designed
and processed all of the necessary plans and received the "Outstanding Planning
Award, Planning Implementation, Small Jurisdiction" award from the American
Planning Association.
Archaeology Services
We perform archaeological 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 a site review, and previously documented
information to determine both the quantity and quality of archaeological
materials for a given site. Many environmental impact analyses require
protection of significant archaeological resources that may exist on a property,
such as native American community settings, artifacts, and burial sites.
We have provided monitoring of construction activities on numerous projects
and have also completed complex archaeological excavations in coordination with
state and federal agencies and native American representatives.
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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 communications clients.
One of our active construction management projects is a 650 acre master
planned, hillside golf course community with an 18-hole championship golf course
that is surrounded by approximately 200 estate residential lots and a high
quality country club facility. Our construction management efforts include the
coordination and scheduling of all construction activities at the project,
monitoring the performance of the contractors, confirming adherence to plans and
specifications and coordinating permits and approvals. We also provided
planning, civil engineering, archaeology, landscape architecture and surveying
and mapping services for this project.
Site Acquisition Services
Site acquisition services include the selection of prospective properties
that fit defined criteria, identifying and overcoming restrictions against
intended use of properties, negotiating agreements for the acquisition and
implementing the acquisition and final use of properties. 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 have provided site acquisition services for wireless communications sites in
Riverside, San Bernardino, Ventura, Los Angeles and San Diego counties in
California for a national wireless services provider.
Water Resources Engineering Services
Our water resources engineering services consist of 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: 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;
the development of a concept report and preliminary design for a 2,000
acre-feet, 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; and the design
of a 3.2 mgd (million gallons per day) water reclamation facility in Central
California. This facility will include a wastewater treatment facility and a
reclaimed effluent water reuse area comprised of a winter reuse water storage
pond and a spray irrigation disposal site. On this project, our primary scope of
services include performing field investigations; establishing survey controls
for topographic mapping; establishing a concept level layout for the facility;
assisting with the CEQA permit acquisition; developing the preliminary design
for the facility; preparing the technical specifications and final plans for the
civil, architectural, structural, mechanical, and heating, ventilation and air
conditioning (HVAC) system; and preparing a cost estimate and performing
inspections.
Instrumentation/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.
Our engineers designed control systems for major assembly lines for a large
automotive manufacturing facility. One system, the passenger Paint Line
Monitoring System, monitors equipment alarms signaling
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problems on the assembling line. This system tracks 51 separate processors
throughout multiple networks for a total of approximately 12,000 data points.
Another system that we were responsible for was the RF Automatic Vehicle
Identification system which tracks vehicle/carrier movement throughout the
painting assembly line by reading RF tags affixed to the carrier. RF tags store
vehicle information including make, model and color, which is transmitted to the
processing equipment systems to ensure that the proper operations are performed
automatically on each vehicle, such as paint color and trim detail. This
information is then automatically transmitted to the historical database on the
paint shop server.
Fire Protection Engineering Services. We provide fire protection
engineering services in connection with both new construction and the renovation
or modification of existing facilities to assist clients in defining and
providing an acceptable level of fire safety in a cost-effective manner.
One of our recent fire protection services projects entailed detailed
engineering and design to upgrade and expand the fire protection and life safety
systems for a large building complex at a University of California campus in
Northern California. The primary systems included advanced fire sprinkler and
fire alarm facilities. We also provided engineering field support and
construction management services for the installation of these systems.
Electrical Engineering Services. These services include the 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. We are currently engaged in the design of
peak power usage generating stations (peaker projects). These stations augment
the power grid in times of high energy usage and have the benefit of being
relatively small-scale, efficient to construct and suitable in more densely
improved areas. We are also providing cogeneration and backup emergency power
supply designs for university campuses and multiple building commercial
facilities.
For example, our electrical and mechanical engineers have been working very
closely with a major energy provider to design and build power generation
plants, called "peaker projects," in multiple states to provide power during
periods of peak demand. Our scope of services includes providing engineering,
design and field support services including site selection, surveying,
licensing, permitting and coordinating high voltage electrical connections to
the local utilities. Our engineers are also responsible for equipment
specification and procurement, emissions control, layout drawings and piping
drawings for water, wastewater and natural gas lines.
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. We are currently providing
mechanical engineering and construction management services for a major
aerospace company. The project involves a large satellite testing facility
encompassing multiple buildings for which we are designing mechanical systems
and facilities, including, new boiler, chilled water, compressed air and HVAC
systems as well as large, proprietary space system equipment. Design and
construction are ongoing and we have a full staff of construction management
personnel on-site to oversee the installation and start-up of these new
mechanical systems.
Chemical/Process Engineering Services. Our chemical/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.
As an example, we designed a specialty chemical processing and drying
facility. Our scope of work entailed conceptual design, project planning,
permitting and detailed design for this facility. Our engineers designed a new
facility which improved the existing facilities by increasing the processing and
drying speeds and reducing the operational costs.
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BUSINESS DEVELOPMENT AND MARKETING
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. We use a client service value-added approach to our
business development and marketing efforts by employing a variety of techniques
to obtain contracts with new clients, repeat business with existing clients, and
maintain a positive reputation.
Additionally, our business development and marketing efforts assist our
management and clients in assuring quality performance and client satisfaction.
To accomplish this, we provide our clients with referrals for project partners
and financing sources, assist with legislative matters and monitor in-house
performance. 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 we believe have financial
strength, long-term growth potential and established reputations.
Our growing list of services provides us with the opportunity to
cross-market and sell additional services to our clients. We intend to leverage
our broad service capabilities and continue to take advantage of our ability to
increase our revenue by cross-selling services to existing clients and to build
new client relationships.
One of the keys to being successful in cross-marketing our services is to
ensure that all of our managers understand the complete capabilities of our
company, including our full range of services and the geographic locations and
industries in which we offer and provide our services. We give formal
presentations to our staff to educate them on our full capabilities and to
encourage them to identify cross-marketing opportunities. In addition, we are in
the process of implementing a more formal cross-marketing program. We are
producing "Cross-Marketing Notebooks" which highlight all the pertinent
information on each division company-wide. These will be given to all managers
in each division as part of a formal presentation geared to facilitate easy
"lead sharing" between divisions and to maximize the effectiveness of our
cross-marketing efforts.
Our business development staff has been trained to identify and pursue
these types of opportunities. They report all such opportunities to the
corporate office where a spreadsheet report is used to track all proposals and
contracts. This cross-marketing approach has resulted in several new contracts
for our various divisions. For example, our ESI division (industrial/energy) was
awarded a contract for engineering services for multiple power plants. Through
our cross-marketing efforts, we were able to expand the contracts to include
planning, civil engineering and surveying and mapping services for the benefit
of both the client and us. Likewise, one of our business development managers in
Southern California provided a lead to our Thompson-Hysell division in Central
California which resulted in a contract for that office to provide planning and
civil engineering services for a large golf course and residential community.
One of our most effective methods of developing client relationships and
winning new contracts has been our Executive Land Search Program. We have
developed "map rooms" containing computerized geographic information systems
maps, aerial maps and city and county maps. We use these maps along with
corresponding data spreadsheets to identify and track a multitude of existing
and potential projects. We meet with existing and prospective clients and refer
available projects to them. For example, upon referring a large undeveloped
parcel of land in Southern California to a land development company that was not
an existing client, we were awarded multiple contracts to provide planning,
civil engineering and mapping and surveying services. As the project progressed,
we received multiple additional contracts from home builders who bought parcels
of land from our client. By March 15, 2001, we had received over $2,600,000 in
contract authorizations on this project.
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CLIENTS
Our primary private sector clients consist of real estate developers,
builders, communications 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.
REAL ESTATE PUBLIC WORKS/INFRASTRUCTURE
----------- ---------------------------
Centex Homes City of Rancho Mirage
Del Webb Coachella Valley Water District
Pulte Home Corporation Central Utah Water Conservation District
ProLogis Orange County Transportation Authority
Shea Homes Colorado Department of Transportation
The Irvine Company Arizona Department of Transportation
Thomas & Mack Development Company Metropolitan Water District of Southern
California
INDUSTRIAL/ENERGY COMMUNICATIONS
- --------------------------------------------- ---------------------------------------------
California Energy Commission Mountain Union Telecom
Clorox Products Company Sprint PCS
Enron Energy Services Velocitel, Inc.
Ernest & Julio Gallo Whalen & Company
Kellogg U.S.A. Inc. ATI
PG&E National Energy Group Delta Group
New United Motors Manufacturing, Inc. Scientech, Inc.
(NUMMI -- GM & Toyota)
No individual client accounted for more than 10% of our net revenue in
1998, 1999 and 2000.
BACKLOG
At December 31, 2000, our gross revenue backlog was approximately $29
million as compared to $22 million at December 31, 1999. Our backlog represents
an estimate of the remaining future gross revenues from existing signed
contracts, and contracts which have been awarded with a defined scope of work
and contract value and on which we have begun work with oral client approval. We
do not believe that backlog is indicative of the amount of future revenues that
we may achieve because of the short-term nature of the contracts under which we
generally provide our services compared to the long-term nature of the projects.
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
energy, residential, commercial, recreational, public works, communications and
industrial, process and manufacturing. We believe that our competitive
advantages include our multiple industries and services, reputation,
organizational structure and business strategy. We believe that the principal
factors in the engineering and consulting services selection criteria include:
- quality of service;
- relevant experience;
- staffing capabilities;
- reputation;
- geographic presence;
- stability; and
- price.
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EMPLOYEES
We have approximately 650 employees, of which over 525 are technicians and
technical professionals. 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, geodesists and doctoral
archaeologists.
Our field survey employees in our Southern California offices are covered
by a Master Labor Agreement between the International Union of Operating
Engineers Local Union No. 12 and the Southern California Association of Civil
Engineers and Land Surveyors. The agreement applies to civil engineering and
land surveying work, including global positioning system surveys, and covers our
employees in Imperial, Inyo, Kern, Los Angeles, Mono, Orange, Riverside, San
Bernardino, San Diego, San Luis Obispo, Santa Barbara and Ventura counties. Our
field survey employees in our Northern California offices are covered by a
Master Agreement between the Bay Counties Civil and Land Surveyors Association
and Operating Engineers Local Union No. 3. 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
The following discussion summarizes material risks which you should
carefully consider before you decide to invest in our common stock or to
maintain or increase your investment. Any of the following risks, if they
actually occur, would likely harm our business. The trading price of our common
stock could then decline, and you may lose all or part of the money you paid to
buy our common stock.
RISKS RELATED TO OUR INDUSTRIES
OUR BUSINESS COULD SUFFER IF THERE IS A DOWNTURN IN THE REAL ESTATE MARKET
We estimate that during 2000, 80% of our services were rendered in
connection with commercial and residential real estate development projects.
Reduced demand in the real estate market would likely decrease the demand for
our services. A decrease in the demand for our services could result in cash
flow difficulties and operating losses for our company.
The real estate market and, therefore, our business, may be impacted by a
number of factors, which may include:
- changes in employment levels and other national and local economic
conditions;
- changes in interest rates and in the availability, cost and terms of
financing;
- the impact of present or future environmental, zoning or other laws and
regulations;
- changes in real estate tax rates and assessments and other operating
expenses;
- changes in levels of government spending and fiscal policies; and
- earthquakes and other natural or manmade disasters and other factors
which are beyond our control.
WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING QUALIFIED PROFESSIONALS,
WHICH MAY HARM OUR REPUTATION IN THE MARKETPLACE AND RESTRICT OUR ABILITY TO
IMPLEMENT OUR BUSINESS STRATEGY
We derive our revenues almost exclusively from services performed by our
professionals. We may not be able to attract and retain the desired number of
professionals over the short- or long-term. There is significant competition for
professionals with the skills necessary for the provision of our services from
major and boutique consulting, engineering, research and other professional
service firms. Our inability to attract and retain qualified professionals could
impede our ability to secure and complete engagements which would reduce our
revenues and could also limit our ability to expand our service offerings in the
future.
IF OUR EMPLOYEES LEAVE OUR COMPANY AND JOIN A COMPETITOR, WE MAY LOSE BUSINESS
Our employees might leave our company and become competitors of ours. If
this happens, we may lose some of our existing clients that have formed
relationships with our former employees. In addition, we may lose future clients
to a former employee as a new competitor. In either event, we would lose clients
and revenues.
RISKS RELATED TO OUR BUSINESS
OUR REVENUE, INCOME AND CASH FLOW COULD DECLINE IF THERE IS A DOWNTURN IN THE
CALIFORNIA ECONOMY OR REAL ESTATE MARKET
We estimate that during 2000, 86% of our net revenue was derived from
services rendered in California. Poor economic conditions in California may
significantly reduce the demand for our services and decrease our revenues and
profits. From 1991 to 1996, our business was negatively impacted during the real
estate market downturn in Southern California, and we experienced cash flow
difficulties and substantial operating losses.
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IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE COULD INCUR UNFORESEEN
COSTS OR DELAYS AND OUR REPUTATION AND RELIABILITY IN THE MARKETPLACE COULD BE
DAMAGED
We have grown rapidly and intend to pursue further growth, through
acquisitions and otherwise, as part of our business strategy but we may not be
able to manage our growth effectively and efficiently. Our inability to manage
our growth effectively and efficiently could cause us to incur unforeseen costs,
time delays or otherwise adversely impact our business. Our rapid growth has
presented and will continue to present numerous administrative and 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.
IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO FULLY
IMPLEMENT OUR ACQUISITION STRATEGY
We may need to raise additional equity or debt financing in the future to
implement our acquisition strategy (which may include an increase in the number
and/or size of acquisitions). If we are unable to raise additional equity or
debt financing, we may not be able to fully implement our acquisition strategy.
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, including acquisitions
that may be larger than our historic acquisitions. If we are unsuccessful in
implementing our acquisition strategy, we could fail to achieve the revenue and
profitability growth that we currently expect. We may not be successful in
implementing our acquisition strategy for a number of reasons, including the
following:
- As the engineering industry consolidates, suitable acquisition
candidates are expected to become more difficult to locate and may only
be available at an increased price or under terms that are less
favorable than are presently available;
- We may not be able to locate suitable financing to consummate an
acquisition;
- We may not be successful in integrating an acquired company's
professionals, clientele and culture into ours;
- We may not be successful in generating the same level of operating
performance as an acquired company experienced prior to the 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 may not be able to maintain our reputation in an acquired entity's
geographic area or service offerings and as a consequence, our ability
to attract and retain clients in those or other areas may be negatively
impacted;
- An acquired company may be less profitable than us resulting in reduced
profit margins; and
- The acquisition and subsequent integration of an acquired company may
require a significant amount of management's time diverting their
attention from our existing operations and clients, which could result
in the loss of key employees or clients.
WE COULD LOSE MONEY IF WE FAIL TO ACCURATELY ESTIMATE OUR COSTS ON FIXED-PRICE
CONTRACTS OR CONTRACTS WITH NOT-TO-EXCEED PROVISIONS
In 2000, approximately 40%, 41% and 19% of our net revenue was derived from
fixed-price, time-and-materials with not-to-exceed provisions and
time-and-materials contracts, respectively.
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We expect to perform services under contracts that may limit our
profitability. Under fixed-price contracts we perform services at a stipulated
price. Under time-and-materials contracts with not-to-exceed provisions, we are
reimbursed for the number of labor hours expended at an established hourly rate
plus the cost of materials incurred, however, there is a stated maximum dollar
amount for the services to be provided under the contract. In both of these
types of contracts, we agree to provide our services based on our estimate of
the costs a particular project will involve. Our estimates are not always
accurate. Underestimation of costs for these types of contracts may cause us to
incur losses or result in a project not being as profitable as we expected. We
may fail to estimate costs accurately for a number of reasons, including:
- problems with new technologies;
- delays beyond our control; and
- changes in the costs of goods and services that may occur during the
contract period.
THE LOSS OF MR. KEITH 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 chief executive officer. If we lose the services
of Mr. Keith, we may be less likely to secure or complete contracts and to
attract and retain additional employees. The efforts, abilities, business
generation capabilities and name recognition of Mr. Keith are important to our
success in those activities.
OUR SERVICES MAY EXPOSE US TO PROFESSIONAL LIABILITY IN EXCESS OF OUR CURRENT
INSURANCE COVERAGE
We are exposed to potential liabilities to clients for errors or omissions
in the services we perform. Such liabilities could exceed our current insurance
coverage and the fees we derive from those services. We cannot always predict
the magnitude of these potential liabilities but due to the large size of the
projects on which we typically provide services, claims could be millions of
dollars. A partially or completely uninsured claim, if successful and of
significant magnitude, could result in substantial losses.
We currently maintain general liability insurance, 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 and 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, our 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.
IF WE ARE UNABLE TO ENGAGE QUALIFIED SUBCONTRACTORS, WE MAY LOSE PROJECTS,
REVENUES AND CLIENTS
We often contract with outside companies to perform designated portions of
the services we perform for our clients. If we are unable to engage
subcontractors, our ability to perform under some of our contracts may be
impeded and the quality of our service may decline. As a consequence, we may
lose projects, revenues and clients. In 2000, subcontractor costs accounted for
approximately 8% of our net revenue.
RISKS RELATED TO OWNERSHIP OF OUR STOCK
OUR STOCK PRICE MAY DECREASE, WHICH COULD RESULT IN SIGNIFICANT LOSSES FOR
INVESTORS OR ADVERSELY AFFECT OUR BUSINESS
For a majority of the time since our initial public offering in July 1999,
our common stock has traded at a market price significantly less than the
current market price.
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The following factors could cause the market price of our common stock to
decrease, perhaps substantially:
- the failure of our quarterly operating results to meet expectations;
- adverse developments in the financial markets, the real estate market,
the engineering and consulting services market and the worldwide
economy;
- interest rates;
- our failure to meet securities analysts' expectations;
- changes in accounting principles;
- sales of common stock by existing shareholders or holders of options;
- announcements of key developments by our competitors; and
- the reaction of markets and securities analysts to announcements and
developments involving our company.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future, be the target of similar litigation.
Securities litigation could result in substantial costs and divert management's
attention and resources.
INSIDERS HAVE SUBSTANTIAL CONTROL OVER US, WHICH COULD LIMIT YOUR ABILITY TO
INFLUENCE THE OUTCOME OF KEY TRANSACTIONS
Our executive officers, directors and one other significant shareholder, in
the aggregate, hold approximately 46% of our outstanding common stock. These
shareholders, if they act together, can have significant influence over most
matters requiring approval by our shareholders, including the election of
directors and the approval of mergers or other business combination
transactions.
IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK AND/OR INCUR
ADDITIONAL DEBT TO FINANCE FUTURE ACQUISITIONS, YOUR 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, we may issue additional equity securities that could
dilute your 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.
OUR BOARD OF DIRECTORS HAS THE ABILITY TO DISCOURAGE TAKEOVER ATTEMPTS, WHICH
MAY REDUCE OR ELIMINATE YOUR ABILITY TO SELL YOUR SHARES FOR A PREMIUM IN A
CHANGE OF CONTROL TRANSACTION
Our amended and restated articles of incorporation provide us with the
ability to issue "blank check" preferred stock without consulting our
shareholders. As a result, our board of directors may frustrate a takeover
attempt by issuing shares to a friendly shareholder or acquiror, implementing a
"poison pill" or otherwise due to features of newly issued preferred stock.
SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE COULD CAUSE THE MARKET PRICE
OF OUR STOCK TO DROP, EVEN IF OUR BUSINESS IS DOING WELL
We have outstanding 5,369,997 shares of common stock. Sales of a
substantial number of shares of our common stock in the public market, or the
perception that these sales could occur, could adversely affect the market price
for our common stock. Certain shareholders hold large amounts of shares which
they are able to sell in the public market. Although some of the shares held by
these shareholders are subject to restrictions on resale under Rule 144 of the
Securities Act of 1933, as amended, or the Securities Act, or because they are
subject to lock-up agreements, as these restrictions end, significant resales of
these shares could cause the market price of our common stock to decline
regardless of the performance of our business. These sales also might make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking
statements, including among others:
- anticipated growth in the real estate development, public
works/infrastructure and communications industry and the
industrial/energy industry;
- anticipated growth and economic expansion in the Western United States;
- our business strategy for expanding our presence in these industries;
- anticipated trends in our financial condition and results of operations;
- anticipated growth in the pace and size of our acquisitions;
- anticipated impact of future acquisitions on the condition of our
business by industry and geographic location;
- the long-term nature of our projects;
- our ability to attract and retain employees;
- our business strategy for integrating businesses that we acquire; and
- our ability to distinguish ourselves from our current and future
competitors.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "could," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions. You may find these forward-looking statements under the captions
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business," as well as under other captions
elsewhere in this Annual Report on Form 10-K. A number of factors could cause
results to differ materially from those anticipated by such forward-looking
statements, including those discussed under "Risk Factors" and "Business." These
forward-looking statements necessarily depend upon assumptions and estimates
that may prove to be incorrect. Although we believe that the assumptions and
estimates reflected in the forward-looking statements contained in this Annual
Report on Form 10-K are reasonable, we cannot guarantee that we will achieve our
plans, intentions or expectations. The forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause actual results
to differ in significant ways from any future results expressed or implied by
the forward-looking statements.
ITEM 2. PROPERTIES
We occupy offices and facilities in various locations in California,
Nevada, Utah, Arizona, Colorado and Wyoming. Our corporate headquarters are
located in Costa Mesa, California and consist of approximately 60,000 square
feet of space. Our corporate headquarters lease, which consists of separate
leases for the two floors that we occupy, extends until October 2003. We also
maintain offices in the California cities of Walnut Creek, Moreno Valley,
Modesto, Palm Desert, Encino, Carlsbad and Thousand Oaks. Outside of California,
we have offices in each of the following locations: Las Vegas, Nevada; Salt Lake
City, Utah; Phoenix, Arizona; Denver, Colorado; and Cheyenne, Wyoming. We
believe that our existing office space is adequate to meet our current and
foreseeable future requirements.
ITEM 3. LEGAL PROCEEDINGS
In March 2000, Clayton Engineering filed a claim against The Irvine Company
alleging that The Irvine Company failed to pay Clayton Engineering for the
removal of 30,000 cubic yards of dirt in the Peters Wash located in Irvine,
California. JMTA had provided engineering design services for The Irvine Company
in connection with this project. JMTA was a wholly-owned subsidiary of ours at
the time the claim by Clayton was filed. In January 2001, The Irvine Company
filed a claim against JMTA for indemnity. Clayton Engineering is demanding
damages in the sum of $2 million against The Irvine Company for construction
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services rendered and $10 million as a result of consequential loss of business
opportunity. Clayton Engineering has made the allegation that plans prepared by
JMTA were inaccurate as to the elevation of the bottom of the Peters Wash. The
Irvine Company has not stated that JMTA violated the standard of care, but has
filed an equitable indemnity cross-complaint against JMTA. No demand for
settlement has been made against JMTA. In December 2000, JMTA was merged into
us. We believe that the claim made against us is without merit and intend to
defend ourselves vigorously in this action.
We are also involved in other non-material legal proceedings, claims and
litigation arising in the ordinary course of business.
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, 2000.
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PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market since July
13, 1999 under the symbol "TKCI." Prior to July 13, 1999, there was no public
market for our common stock. The following table sets forth for each calendar
quarter indicated the low and high closing sale prices per share of our common
stock as reported on the Nasdaq National Market.
LOW HIGH
----- ------
YEAR ENDED DECEMBER 31, 1999
Third Quarter (beginning July 13)......................... $5.25 $ 9.00
Fourth Quarter............................................ 3.75 6.44
YEAR ENDED DECEMBER 31, 2000
First Quarter............................................. $3.88 $ 5.56
Second Quarter............................................ 3.19 4.88
Third Quarter............................................. 3.94 5.63
Fourth Quarter............................................ 4.94 8.56
At March 23, 2001, there were approximately 56 holders of record and 4,536
beneficial holders of our outstanding shares of common stock and the last
reported sale price of our common stock on the Nasdaq National Market was $22.31
per share.
We have not declared or paid any cash dividends on our capital stock and do
not anticipate paying cash dividends on our common stock in the foreseeable
future. In addition, our credit agreement with our bank restricts the payment of
dividends without the bank's consent.
In connection with our acquisition of Crosby, Mead, Benton & Associates in
October 2000, we are obligated to issue to the former shareholders of that
company, $1,000,000 in unregistered shares of our common stock payable in two
installments on October 13, 2001 and October 21, 2002, subject to adjustment.
The issuance of these shares will be exempt from registration under Section 4(2)
of the Securities Act of 1933, as amended. The former shareholders of Crosby,
Mead, Benton & Associates were provided with full access to the kind of
information that would be disclosed if we had registered these shares.
Additionally, the former shareholders represented to us that they were acquiring
the shares for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends will be affixed to the
certificates representing these shares when issued.
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,
1998, 1999 and 2000, and the historical balance sheet data as of December 31,
1999 and 2000, have been derived from our historical consolidated financial
statements audited by KPMG LLP, independent auditors, which consolidated
financial statements and independent auditors' report are included elsewhere in
this Annual Report on Form 10-K. The historical statements of income data for
the years ended December 31, 1996 and 1997, and the historical balance sheet
data as of December 31, 1996, 1997 and 1998, have been derived from our audited
historical consolidated financial statements which are not included in this
Annual Report on Form 10-K.
The pro forma statements of income data for the years ended December 31,
1996, 1997 and 1998 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 statements of income data
for the years ended December 31, 1999 and 2000, represents historical amounts at
the actual annual effective income tax rates of 42.1% and 40.4%, respectively,
and are shown for comparative purposes only.
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The following information should be read in conjunction with our
consolidated financial statements and the related notes and our "Management's
Discussion and Analysis of Financial Condition and Results of Operations" which
are included elsewhere in this Annual Report on Form 10-K.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
HISTORICAL STATEMENTS OF INCOME DATA(1)
Gross revenue.......................................... $ 14,344 $ 22,585 $ 34,021 $ 43,084 $ 57,835
---------- ---------- ---------- ---------- ----------
Net revenue........................................ 12,966 18,592 29,182 39,636 53,381
Costs of revenue....................................... 9,229 11,871 19,287 26,987 34,362
---------- ---------- ---------- ---------- ----------
Gross profit....................................... 3,737 6,721 9,895 12,649 19,019
Selling, general and administrative expenses........... 4,960 4,485 5,858 8,343 10,834
---------- ---------- ---------- ---------- ----------
Income (loss) from operations...................... (1,223) 2,236 4,037 4,306 8,185
Interest expense....................................... 720 852 967 807 341
Other expenses (income), net........................... 5 83 66 16 (75)
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes and extraordinary gain..................... (1,948) 1,301 3,004 3,483 7,919
Provision (benefit) for income taxes(1)................ 3 (1,397) 1,350 1,466 3,199
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary gain............ (1,951) 2,698 1,654 2,017 4,720
Extraordinary gain on forgiveness of liability, net of
income taxes(2)...................................... 2,686 -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income......................................... 735 2,698 1,654 2,017 4,720
Reversal (accretion) of redeemable securities to
redemption value, net................................ -- -- (230) 230 --
---------- ---------- ---------- ---------- ----------
Net income available to common shareholders........ $ 735 $ 2,698 $ 1,424 $ 2,247 $ 4,720
========== ========== ========== ========== ==========
Earnings per share -- diluted.......................... $ 0.25 $ 0.87 $ 0.39 $ 0.50 $ 0.89
========== ========== ========== ========== ==========
Weighted average shares outstanding -- diluted......... 2,962,963 3,104,588 3,635,474 4,515,033 5,299,679
========== ========== ========== ========== ==========
EBITDA(3).............................................. $ (934) $ 2,521 $ 4,562 $ 5,314 $ 9,787
========== ========== ========== ========== ==========
PRO FORMA STATEMENTS OF INCOME DATA:
Historical income (loss) before provision (benefit) for
income taxes and extraordinary gain.................. $ (1,948) $ 1,301 $ 3,004 $ 3,483 $ 7,919
Pro forma provision (benefit) for income taxes......... (818) 546 1,262 1,466 3,199
---------- ---------- ---------- ---------- ----------
Pro forma income (loss) before extraordinary
gain............................................. (1,130) 755 1,742 2,017 4,720
Extraordinary gain on forgiveness of liability, net of
income taxes......................................... 1,558 -- -- -- --
---------- ---------- ---------- ---------- ----------
Pro forma net income............................... 428 755 1,742 2,017 4,720
Reversal (accretion) of redeemable securities to
redemption value, net................................ -- -- (230) 230 --
---------- ---------- ---------- ---------- ----------
Pro forma net income available to common
shareholders..................................... $ 428 $ 755 $ 1,512 $ 2,247 $ 4,720
========== ========== ========== ========== ==========
Pro forma earnings per share data-diluted.............. $ 0.14 $ 0.24 $ 0.42 $ 0.50 $ 0.89
========== ========== ========== ========== ==========
Weighted average number of shares
outstanding-diluted.................................. 2,962,963 3,104,588 3,635,474 4,515,033 5,299,679
========== ========== ========== ========== ==========
AS OF DECEMBER 31,
--------------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit).............................. $ (3,548) $ 2,016 $ 5,180 $ 7,213 $ 7,343
Total assets........................................... 4,677 11,733 14,530 23,661 33,312
Total debt............................................. 6,597 8,087 9,667 4,835 5,745
Total shareholders' equity (deficit)................... (5,227) (1,725) (301) 12,836 18,239
- -------------------------
(1) Prior to August 1, 1998, Keith Engineering, which is included in TKCI's
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, net of income
taxes.
(3) EBITDA refers to income (loss) before provision (benefit) for income taxes
and extraordinary gain plus interest expense and depreciation and
amortization expense less interest income. Because all companies do not
calculate EBITDA or similarly titled financial measures in the same manner,
other companies' disclosures of EBITDA may not be comparable with EBITDA as
used here. EBITDA should not be considered as an alternative to net income
or loss (as an indicator of operating performance) or as an alternative to
cash flow (as a measure of liquidity or ability to service debt obligations)
and is not a measure of performance or financial condition under accounting
principles generally accepted in the United States of America. EBITDA is
intended to provide additional information for evaluating the ability of an
entity to meet its financial conditions.
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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 on Form 10-K. 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 under other
captions contained elsewhere in this Annual Report on Form 10-K.
OVERVIEW
We derive most of our revenue from professional service activities. The
majority of these activities are billed under various types of contracts with
our clients, including fixed price and time-and-materials 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 these 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
reimbursable subcontractor costs. Our revenue is generated from a large number
of relatively small contracts.
Costs of revenue include labor, non-reimbursable subcontractor costs,
materials and various direct and indirect overhead costs including rent,
utilities and depreciation. Direct labor employees work predominantly at our
offices and at the clients' job sites. 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 skills we require 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, amortization of goodwill and other indirect overhead costs.
On August 1, 1998, we were reorganized so that Keith Engineering, an entity
under common control with TKCI, became a wholly-owned subsidiary of TKCI. In
August 1998, we purchased John M. Tettemer & Associates, Ltd., or JMTA, which
provides services relating to flood control and drainage engineering,
environmental permitting, and biological surveys and studies. On July 15, 1999,
we acquired substantially all of the assets and assumed substantially all of the
liabilities of Thompson-Hysell, Inc., or Thompson-Hysell. Further, in July 1999,
we completed an initial public offering of 1,500,000 shares of our common stock,
resulting in net proceeds of approximately $11,015,000. In October 2000, we
acquired Crosby, Mead, Benton & Associates which provides engineering and design
services for master planned communities in Southern California. In January 2001,
we acquired substantially all of the assets and assumed substantially all of the
liabilities of Hook & Associates Engineering, Inc., an engineering and
consulting services firm with offices located in Phoenix, Arizona, Denver,
Colorado and Cheyenne, Wyoming, providing a full range of services to clients in
an array of industries including real estate development, public
works/infrastructure and communications.
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RESULTS OF OPERATIONS
The following table sets forth supplemental consolidated operating results
for each of the periods presented as a percentage of net revenue.
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999 2000
----- ----- -----
Gross revenue............................................... 117% 109% 108%
Subcontractor costs......................................... 17 9 8
---- ---- ----
Net revenue............................................... 100 100 100
Costs of revenue............................................ 66 68 64
---- ---- ----
Gross profit.............................................. 34 32 36
Selling, general and administrative expenses................ 20 21 20
---- ---- ----
Income from operations.................................... 14 11 16
Interest expense............................................ 3 2 1
---- ---- ----
Income before provision for income taxes.................. 11 9 15
Provision for income taxes.................................. 5 4 6
---- ---- ----
Net income............................................. 6 5 9
Reversal (accretion) of redeemable securities to redemption
value, net................................................ (1) 1 --
---- ---- ----
Net income available to common shareholders............... 5% 6% 9%
==== ==== ====
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
Revenue. Net revenue for 2000 was $53.4 million compared to $39.6 million
for 1999, an increase of $13.7 million, or 35%. Net revenue growth for 2000
compared to 1999 resulted primarily from our acquisitions of Thompson-Hysell in
July 1999 and Crosby, Mead, Benton & Associates in October 2000, which
contributed $14.2 million to net revenue for 2000, compared to $6.3 million in
1999; growth in our surveying and mapping services, resulting primarily from the
strong demand for housing in California and Nevada; and from growth in our
industrial/energy segment, partially as a result of the need to design and
construct backup and new power generation systems needed by individual power
users and power providers. Subcontractor costs, as a percentage of net revenue,
declined slightly to 8% for 2000 compared to 9% for 1999, resulting largely from
a reduction in subcontractor services for several large contracts in our real
estate development, public works/infrastructure and communications segment.
Gross Profit. Gross profit for 2000 was $19.0 million compared to $12.6
million for 1999, an increase of $6.4 million, or 50%. As a percentage of net
revenue, gross profit increased to 36% for 2000 compared to 32% for 1999. The
increase in gross profit and gross profit percentage for 2000 compared to 1999,
resulted primarily from higher net revenue and profit margins generated through
our acquisition of Thompson-Hysell, improved profit margins in our
industrial/energy segment, improved utilization of our professionals and an
increased focus on contracts with higher profit margins. These gross profit
increases were partially offset by an increase in the employer matching
contribution of our 401(k) plan in 2000. In addition, gross profit margins in
1999 were negatively impacted by operating results on two large projects,
resulting in a less favorable comparison with the 2000 gross profit margin which
was not similarly impacted.
Costs of revenue for 2000 was $34.4 million compared to $27.0 million for
1999, an increase of $7.4 million, or 27%. Costs of revenue increases resulted
primarily from increased expenses associated with the growth in our total
employee base from 473 in 1999 to 540 in 2000, an increase of 67, or 14%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 2000 were $10.8 million compared to $8.3 million for
1999, an increase of $2.5 million, or 30%. As a percentage of net revenue,
selling, general and administrative expenses decreased to 20% for 2000 from 21%
for 1999. The increases in selling, general and administrative expenses resulted
primarily from our acquisitions of Thompson-Hysell in July 1999 and Crosby,
Mead, Benton & Associates in October 2000, including the amortization of
goodwill; employee recruiting costs; and a full year of other costs associated
with operating as a public company. The percentage decrease was due principally
to economies of scale associated with our acquisitions, which has resulted in
lower administrative costs in comparison to revenue generated.
23
26
Interest Expense. Interest expense for 2000 was $341,000 compared to
$807,000 for 1999, a decrease of $466,000, or 58%. As a percentage of net
revenue, interest expense was 1% for 2000 compared to 2% for 1999. The
percentage decrease resulted largely from the repayment of our previous line of
credit and various related party notes payable with a portion of our net
proceeds from our initial public offering in July 1999 and the repayment of
certain capital leases in 2000.
Income Taxes. The provision for income taxes for 2000 was $3.2 million
compared to $1.5 million in 1999, an increase of $1.7 million, or 118%. This
increase in income tax expense was due primarily to a higher taxable income
base, mitigated by a lower effective income tax rate. Our effective income tax
rate was approximately 40.4% for 2000 compared to 42.1% for 1999.
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 in 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 total 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 total 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.
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27
QUARTERLY RESULTS
The following tables set forth unaudited selected quarterly consolidated
financial data for each of our last two fiscal years ended December 31, 1999 and
2000. This data is also expressed as a percentage of net revenue for the
respective quarters. This information has been derived from our unaudited
consolidated financial statements, which, in the opinion of management, include
all adjustments necessary for a fair presentation of the quarterly 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
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- --------
CONSOLIDATED STATEMENTS OF INCOME DATA:
Gross revenue........................... $9,999 $9,471 $11,397 $12,217 $13,107 $13,567 $14,541 $16,620
------ ------ ------- ------- ------- ------- ------- -------
Net revenue........................... 8,969 8,643 10,658 11,366 12,419 12,681 13,638 14,643
Costs of revenue........................ 5,914 5,786 7,350 7,937 8,382 8,307 8,448 9,225
------ ------ ------- ------- ------- ------- ------- -------
Gross profit.......................... 3,055 2,857 3,308 3,429 4,037 4,374 5,190 5,418
Selling, general and administrative
expenses.............................. 1,896 1,797 2,211 2,439 2,650 2,486 2,756 2,942
------ ------ ------- ------- ------- ------- ------- -------
Income from operations................ 1,159 1,060 1,097 990 1,387 1,888 2,434 2,476
Interest expense........................ 260 268 149 130 107 88 65 81
Other expenses (income), net............ (19) (10) 132 (87) 10 22 (111) 4
------ ------ ------- ------- ------- ------- ------- -------
Income before provision for income
taxes............................... 918 802 816 947 1,270 1,778 2,480 2,391
Provision for income taxes.............. 389 340 347 390 508 711 992 988
------ ------ ------- ------- ------- ------- ------- -------
Net income............................ 529 462 469 557 762 1,067 1,488 1,403
Reversal (accretion) of redeemable
securities to redemption value, net... (57) (57) 344 -- -- -- -- --
------ ------ ------- ------- ------- ------- ------- -------
Net income available to common
shareholders........................ $ 472 $ 405 $ 813 $ 557 $ 762 $ 1,067 $ 1,488 $ 1,403
====== ====== ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUE
---------------------------------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- --------
CONSOLIDATED STATEMENTS OF INCOME DATA:
Gross revenue........................... 111% 110% 107% 107% 106% 107% 107% 114%
---- ---- ---- ---- ---- ---- ---- ----
Net revenue........................... 100 100 100 100 100 100 100 100
Costs of revenue........................ 66 67 69 70 67 66 62 63
---- ---- ---- ---- ---- ---- ---- ----
Gross profit.......................... 34 33 31 30 33 34 38 37
Selling, general and administrative
expenses.............................. 21 21 21 21 21 20 20 20
---- ---- ---- ---- ---- ---- ---- ----
Income from operations................ 13 12 10 9 12 14 18 17
Interest expense........................ 3 3 1 1 2 -- 1 1
Other expenses (income), net............ -- -- 1 -- -- -- (1) --
---- ---- ---- ---- ---- ---- ---- ----
Income before provision for income
taxes............................... 10 9 8 8 10 14 18 16
Provision for income taxes.............. 4 4 3 3 4 6 7 6
---- ---- ---- ---- ---- ---- ---- ----
Net income............................ 6 5 5 5 6 8 11 10
Reversal (accretion) of redeemable
securities to redemption value, net... (1) -- 3 -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Net income available to common
shareholders........................ 5% 5% 8% 5% 6% 8% 11% 10%
==== ==== ==== ==== ==== ==== ==== ====
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;
25
28
- 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.
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.
Cash and cash equivalents as of December 31, 2000, were $1.0 million
compared to $1.6 million as of December 31, 1999. Working capital as of December
31, 2000 was $7.3 million compared to $7.2 million as of December 31, 1999, an
increase of $130,000, or 2%, resulting primarily from the growth in contracts
and trade receivables and costs and estimated earnings in excess of billings,
primarily due to our acquisition of Crosby, Mead, Benton & Associates and higher
revenue levels. This was offset by an increase in the current portion of
long-term debt and capital lease obligations as a note payable with a principal
balance of $2.4 million as of December 31, 2000 was reclassified from long-term
to short-term based on its maturity date. In addition, our line of credit was
reclassified to current based on its September 2001 maturity date. The debt to
equity ratio as of December 31, 2000 was 0.31 to 1 compared to 0.38 to 1 as of
December 31, 1999. Net cash provided by operating activities decreased $462,000
or 13%, to $3.0 million in 2000 compared to $3.5 million in 1999. The decrease
in net cash provided by operating activities was a result of an increase in
contracts and trade receivables and costs and estimated earnings in excess of
billings and the reduction of trade accounts payable and accrued liabilities,
primarily due to the paydown of employee accrued vacation and sick time
accumulated in prior years. These decreases were partially offset by higher
income before the effects of depreciation and amortization. The 2000 cash
generated from operating activities was used primarily to make principal
payments on long-term and short-term debt and capital leases, to pay off certain
capital leases, to fund capital expenditures, and to partially fund our
acquisition of Crosby, Mead, Benton & Associates in October 2000. Capital
expenditures for 2000 were $1.3 million compared to $1.2 million in 1999. The
2000 capital expenditures consisted primarily of computer equipment and upgrades
to our information systems. We expect to maintain capital expenditures in fiscal
2001 at approximately the 2000 level, before consideration for future
acquisitions, to support technology investments.
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, which matured on September 3, 2000. On September 3, 2000 and November
3, 2000, the line of credit was amended to extend the maturity of the equipment
component to January 3, 2001. The equipment component ultimately matured on
January 3, 2001 and we elected not to amend or extend this component. We plan on
reestablishing the equipment component when we renew the working capital
component as a result of negotiations with the bank in 2001. The working capital
component bears interest at either the prime rate or at approximately 1 3/4%
above LIBOR and the equipment component bore interest at either the prime rate
or at approximately 2% above LIBOR. At December 31, 2000, the outstanding
borrowings under the working capital component of the line of credit was $2.0
million bearing interest at 9.5%. The borrowings on the line of credit agreement
were used primarily to fund our acquisition of Crosby, Mead, Benton & Associates
and for other working capital needs.
Net proceeds of $11,015,000 from our initial public offering in July 1999
were used primarily to repay related party notes payable and accrued interest,
to repay notes payable, to repay our previous bank line of credit and to acquire
Thompson-Hysell.
In 2001, our primary expected sources of liquidity are existing cash
balances, cash generated by operations and availability under our credit
facility. Our primary cash requirements are expected to include capital
expenditures estimated to be approximately $1.5 million and scheduled reductions
of principal on outstanding indebtedness of approximately $5.4 million. Assuming
our credit facility is renewed at maturity in
26
29
September 2001, or we are able to arrange for a replacement credit facility with
a similar availability, we will have sufficient cash resources to fund our
anticipated operations and planned capital expenditures and debt reductions for
the next 12 months.
INFLATION
Although our operations can be influenced by general economic trends, we do
not believe that inflation had a significant impact on our results of operations
for the periods presented. Due to the short-term nature of most of our
contracts, if costs of revenue increase, we attempt to pass these increases to
our clients.
IMPACT OF ISSUED BUT NOT YET ADOPTED ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137
and 138, describes the accounting for derivative instruments and hedging
activities. SFAS No. 133, as amended, is effective for the first fiscal quarter
of the first fiscal year beginning after June 15, 2000. We do not believe that
the implementation of SFAS No. 133, as amended, will have an impact on our
financial position or results of operations.
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. Due to the relatively immaterial levels
of our current borrowings, our earnings and cash flows are not materially
impacted by changes in interest rates. Promissory notes delivered in connection
with