10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2001
Commission File Number 0-26561

THE KEITH COMPANIES, INC.

(Exact name of registrant as specified in its charter)

California	33-0203193
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2955 REDHILL AVENUE, COSTA MESA, CALIFORNIA 92626

(Address of principal executive offices and zip code)
 
Registrant’s telephone number, including area code: (714) 540-0800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]      No [   ]

The number of outstanding shares of the registrant’s common stock as of October 19, 2001 was 7,306,573.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets
		Consolidated Statements of Income
		Consolidated Statements of Cash Flows
		Notes to the Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3: Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 2. Changes In Securities and Use of Proceeds
	Item 3. Defaults Upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 10.19
EXHIBIT 10.20

THE KEITH COMPANIES, INC. AND SUBSIDIARIES
 
INDEX

			PAGE NO.
PART I.	FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Consolidated Balance Sheets		2
		Consolidated Statements of Income		3
		Consolidated Statements of Cash Flows		4
		Notes to the Consolidated Financial Statements		5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		17
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings		18
	Item 2.	Changes in Securities and Use of Proceeds		18
	Item 3.	Defaults Upon Senior Securities		18
	Item 4.	Submission of Matters to a Vote of Security Holders		18
	Item 5.	Other Information		18
	Item 6.	Exhibits and Reports on Form 8-K		18
	Signatures			19

1

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
 
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

			September 30,		December 31,
			2001		2000
			(Unaudited)
	Assets
Current assets:
	Cash and cash equivalents		$	11,295,000	$	1,043,000
	Securities held-to-maturity			12,556,000		—
	Contracts and trade receivables, net of allowance for doubtful accounts of $991,000 and $1,166,000 at September 30, 2001 and December 31, 2000, respectively			14,657,000		12,089,000
	Costs and estimated earnings in excess of billings			8,948,000		6,334,000
	Prepaid expenses and other current assets			1,118,000		766,000
		Total current assets		48,574,000		20,232,000
Equipment and leasehold improvements, net				5,226,000		4,713,000
Goodwill, net of accumulated amortization of $649,000 and $329,000 at September 30, 2001 and December 31, 2000, respectively				12,251,000		8,128,000
Other assets				247,000		239,000
		Total assets	$	66,298,000	$	33,312,000
	Liabilities and Shareholders’ Equity
Current liabilities:
	Line of credit		$	—	$	2,025,000
	Current portion of long-term debt and capital lease obligations			362,000		3,359,000
	Trade accounts payable			1,910,000		1,689,000
	Accrued employee compensation			2,853,000		2,467,000
	Current portion of deferred tax liabilities			1,541,000		1,541,000
	Other accrued liabilities			2,209,000		807,000
	Billings in excess of costs and estimated earnings			1,273,000		1,001,000
		Total current liabilities		10,148,000		12,889,000
Long-term debt and capital lease obligations, less current portion				1,489,000		361,000
Issuable common stock				1,700,000		1,000,000
Deferred tax liabilities				719,000		719,000
Accrued rent				169,000		104,000
		Total liabilities		14,225,000		15,073,000
Shareholders’ equity:
	Preferred stock, $0.001 par value. Authorized 5,000,000 shares; no shares issued or outstanding			—		—
	Common stock, $0.001 par value. Authorized 100,000,000 shares at September 30, 2001 and December 31, 2000; issued and outstanding 7,270,668 and 5,115,882 shares at September 30, 2001 and December 31, 2000, respectively			7,000		5,000
	Additional paid-in capital			41,635,000		12,453,000
	Retained earnings			10,431,000		5,781,000
		Total shareholders’ equity		52,073,000		18,239,000
		Total liabilities and shareholders’ equity	$	66,298,000	$	33,312,000

See accompanying notes to the consolidated financial statements.

2

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

		For the Three Months Ended						For the Nine Months Ended
		September 30,						September 30,
		2001			2000			2001			2000
Gross revenue		$	18,685,000		$	14,541,000		$	56,626,000		$	41,215,000
Subcontractor costs			1,212,000			903,000			4,814,000			2,477,000
	Net revenue		17,473,000			13,638,000			51,812,000			38,738,000
Costs of revenue			11,232,000			8,448,000			33,485,000			25,137,000
	Gross profit		6,241,000			5,190,000			18,327,000			13,601,000
Selling, general and administrative expenses			3,614,000			2,756,000			10,674,000			7,892,000
	Income from operations		2,627,000			2,434,000			7,653,000			5,709,000
Interest income			(227,000	)		(15,000	)		(378,000	)		(27,000	)
Interest expense			28,000			65,000			237,000			260,000
Other expenses (income)			12,000			(96,000	)		44,000			(52,000	)
	Income before provision for income taxes		2,814,000			2,480,000			7,750,000			5,528,000
Provision for income taxes			1,126,000			992,000			3,100,000			2,211,000
	Net income	$	1,688,000		$	1,488,000		$	4,650,000		$	3,317,000
Earnings per share data:
	Basic	$	0.23		$	0.30		$	0.73		$	0.67
	Diluted	$	0.22		$	0.29		$	0.67		$	0.63
Weighted average number of shares outstanding:
	Basic		7,318,645			4,954,639			6,368,648			4,956,827
	Diluted		7,778,457			5,220,775			6,892,988			5,224,293

See accompanying notes to the consolidated financial statements.

3

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

					For the Nine Months Ended
					September 30,
					2001			2000
Cash flows from operating activities:
	Net income				$	4,650,000		$	3,317,000
	Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization			1,708,000			1,119,000
			Loss on sale of equipment			17,000			—
			Tax benefit from exercise of stock options			600,000			—
			Changes in operating assets and liabilities, net of effects from acquisition:
				Contracts and trade receivables, net		168,000			(1,643,000	)
				Costs and estimated earnings in excess of billings		(2,486,000	)		(1,156,000	)
				Prepaid expenses and other assets		(165,000	)		122,000
				Trade accounts payable and accrued liabilities		674,000			1,264,000
				Billings in excess of costs and estimated earnings		74,000			252,000
				Net cash provided by operating activities		5,240,000			3,275,000
Cash flows from investing activities:
			Net cash expended for acquisition			(3,465,000	)		—
			Additions to equipment and leasehold improvements			(1,379,000	)		(1,064,000	)
			Purchase of securities held-to-maturity			(12,556,000	)		—
			Proceeds from sale of equipment			20,000			—
				Net cash used in investing activities		(17,380,000	)		(1,064,000	)
Cash flows from financing activities:
		Payments on line of credit, net				(2,294,000	)		(1,300,000	)
		Principal payments on long-term debt and capital lease obligations, including current portion				(3,399,000	)		(1,131,000	)
		Repurchase of common stock				(433,000	)		(136,000	)
		Net proceeds from secondary offering				27,935,000			—
		Proceeds from exercise of stock options				583,000			28,000
				Net cash provided by (used in) financing activities		22,392,000			(2,539,000	)
				Net increase (decrease) in cash and cash equivalents		10,252,000			(328,000	)
Cash and cash equivalents, beginning of period						1,043,000			1,569,000
Cash and cash equivalents, end of period					$	11,295,000		$	1,241,000

See supplemental cash flow information at Note 9.

See accompanying notes to the consolidated financial statements.

4

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

1.  Basis of Presentation

The accompanying consolidated balance sheet as of September 30, 2001, the consolidated statements of income for the three and nine months ended September 30, 2001 and 2000, and the consolidated statements of cash flows for the nine months ended September 30, 2001 and 2000, are unaudited and in the opinion of management include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. All significant intercompany transactions have been eliminated and certain reclassifications have been made to prior periods’ consolidated financial statements to conform to the current period presentation. The results of operations for these interim periods are not necessarily indicative of results for the full year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K/A of The Keith Companies, Inc. (together with its subsidiaries, the “Company”) for the year ended December 31, 2000 as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report.

2.  Repurchase of Common Stock

During the three months ended September 30, 2001, the Company repurchased and retired 55,000 shares of its common stock at a cost of $433,000.

3.  Per Share Data

Basic earnings per share (“EPS”) is computed by dividing net income during the period by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income during the period by the weighted average number of shares that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period, net of shares assumed to be repurchased using the treasury stock method.

The following is a reconciliation of the denominator for the basic EPS computation to the denominator of the diluted EPS computation:

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2001		2000		2001		2000
Weighted average shares used for the basic EPS computation		7,318,645		4,954,639		6,368,648		4,956,827
Incremental shares from the assumed exercise of dilutive stock options and stock warrants, issuable shares and contingently issuable shares		459,812		266,136		524,340		267,466
Weighted average shares used for the diluted EPS computation		7,778,457		5,220,775		6,892,988		5,224,293

In conjunction with certain acquisitions, the Company agreed to pay consideration consisting of shares of its common stock. As a result, the Company estimated and included 167,196 and 160,512 weighted average issuable and contingently issuable shares in its weighted average shares used for the diluted EPS computation for the three and nine months ended September 30, 2001, respectively, and 120,157 weighted average issuable shares for the three and nine months ended September 30, 2000.

Anti-dilutive weighted potential common shares excluded from the above calculations were 113,310 and 11,156 for the three and nine months ended September 30, 2001, respectively, and 657,773 and 641,624 for the three and nine months ended September 30, 2000, respectively.

5

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

4.	Secondary Offering
	In May 2001, the Company completed a secondary offering of an aggregate of 2.3 million shares of common stock (including an over-allotment of 300,000 shares), of which 1.9 million shares were sold by the Company and 400,000 shares were sold by selling shareholders. The public offering price was $16.00 per share which resulted in proceeds to the Company, net of underwriting fees and offering expenses, of approximately $28 million.
	The Company used a portion of the net proceeds from the secondary offering to repay its line of credit balance and for general corporate purposes, including working capital, and may also use a portion of the net proceeds to acquire other businesses. The remaining balance of the net proceeds has been invested in highly liquid investment grade short-term debt securities.
5.	Securities Held-To-Maturity
	The Company accounts for its securities held-to-maturity (“Securities”) under the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS No. 115”). Under SFAS No. 115, the Company is required to classify its Securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities for which the Company has the intent and ability to hold until maturity. All other securities not included in trading or held-to-maturity categories are classified as available-for-sale. The Company has the ability and intent to hold all of its Securities until maturity and therefore, has classified its Securities as held-to-maturity. Accordingly, the Securities are stated at amortized cost.
6.	Acquisitions
	Pacific Engineering Corporation
	On September 28, 2001, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Pacific Engineering Corporation (“PEC”) for an estimated purchase price of $2,331,000. PEC is an Oregon based engineering and design services firm specializing in the fields of power transmission and distribution, hydroelectric energy facilities, communication and other utility infrastructure services. The purchase price consisted of $1,975,000 in cash, $250,000 in contingent holdbacks, and an estimated $106,000 to be paid related to an income tax reimbursement to the seller.
	In accordance with SFAS No. 141, this acquisition was accounted for using the purchase method of accounting. Therefore, the Company recorded goodwill of $1,724,000, which represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. See “Effect of Recent Accounting Pronouncements” for a discussion of the treatment of goodwill.
	Hook & Associates Engineering, Inc.
	On January 31, 2001, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Hook & Associates Engineering, Inc. (“Hook”) for an estimated purchase price of $4,430,000. The purchase price consisted of $1,530,000 in cash, $1,200,000 of issuable common stock of the Company, a subordinated promissory note in the original amount of $1,300,000 and an estimated $400,000 to be paid in cash related to an income tax reimbursement to the seller. The common stock of the Company is to be issued in two installments; 34,188 shares were issued in February 2001 with a value of $500,000, with the remaining $700,000 to be issued in 2002. The issuance of the $700,000 of common stock and the amount of the subordinated promissory note are subject to certain adjustments extending up to one year from the date of acquisition related to the book value of net assets acquired, cash, accounts receivable, costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings as of December 31, 2000.
	This acquisition was accounted for using the purchase method of accounting. Accordingly, the Company recorded goodwill of $2,716,000, which represents the excess of the purchase price over the fair value of the net tangible and

6

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

identifiable intangible assets acquired and liabilities assumed. Such amount is being amortized over a period of 25 years. See “Effect of Recent Accounting Pronouncements” for a discussion of the treatment of goodwill.

The following unaudited pro forma data presents information as if the acquisition of Hook and PEC had occurred on both January 1, 2001 and January 1, 2000. The pro forma data is provided for informational purposes only and is based on historical information. The pro forma data does not necessarily reflect the actual results of operations that would have occurred had Hook, PEC and the Company comprised a single entity during the periods presented, nor is it necessarily indicative of future results of operations of the combined entities.

	Pro Forma for the Three				Pro Forma for the Nine
	Months Ended September 30,				Months Ended September 30,
	2001		2000		2001		2000
Net revenue	$	18,298,000	$	15,972,000	$	55,002,000	$	45,551,000
Net income	$	1,732,000	$	1,597,000	$	4,847,000	$	3,698,000
Basic earnings per share	$	0.24	$	0.32	$	0.76	$	0.74

7.	Indebtedness
	In September 2001, the Company entered into a $10.0 million unsecured line of credit agreement consisting of three components: (i) an acquisition component, (ii) an equipment and auto financing component, and (iii) a working capital component. The line provides up to a maximum of $5.0 million to finance acquisitions, up to a maximum of $3.0 million to finance equipment and vehicle purchases and up to a maximum of $10.0 million less the aggregate outstanding principal balance of the acquisition and equipment and vehicle components for working capital. The line bears interest at either a range of 0.25% below prime to prime, or a range of 1.25% to 1.75% over LIBOR depending on the Company’s ability to meet certain financial covenants. The equipment and vehicle financing components mature in September 2002, while the acquisition and working capital components mature in June 2003. There were no amounts outstanding under this line of credit agreement as of September 30, 2001.
8.	Segment and Related Information
	The Company evaluates performance and makes resource allocation decisions based on the overall type of services provided to customers. For financial reporting purposes, the Company has grouped its operations into two primary reportable segments: Real Estate Development, Public Works/Infrastructure and Communications (“REPWIC”) and Industrial/Energy (“IE”). The REPWIC segment includes engineering and consulting services for the development of both private projects, such as residential communities, commercial and industrial properties and recreational projects; public works/infrastructure projects, such as transportation and water/sewage facilities; and site acquisition and construction management services for wireless communications. The IE segment provides the technical expertise and management required to design and test manufacturing facilities and processes and to facilitate the construction of alternate electrical power systems that supplement public power supply and large scale power consumers.
	The acquisition of Crosby, Mead, Benton & Associates in October, 2000 and Hook in January, 2001 are reported as part of the Company’s REPWIC segment, while the acquisition of PEC has been grouped and reported under the IE reporting segment.

7

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

The following tables set forth certain information regarding the Company’s operating segments for the three and nine months ended September 30, 2001 and 2000:

For the Three Months Ended September 30, 2001
	REPWIC		IE		Corporate Costs			Consolidated
Net revenue	$	16,357,000	$	1,116,000	$	—		$	17,473,000
Income from operations	$	4,235,000	$	145,000	$	(1,753,000	)	$	2,627,000
Identifiable assets	$	62,211,000	$	4,087,000	$	—		$	66,298,000

For the Three Months Ended September 30, 2000
	REPWIC		IE		Corporate Costs			Consolidated
Net revenue	$	12,576,000	$	1,062,000	$	—		$	13,638,000
Income from operations	$	3,546,000	$	139,000	$	(1,251,000	)	$	2,434,000
Identifiable assets	$	24,891,000	$	1,723,000	$	—		$	26,614,000

For the Nine Months Ended September 30, 2001
	REPWIC		IE		Corporate Costs			Consolidated
Net revenue	$	48,504,000	$	3,308,000	$	—		$	51,812,000
Income from operations	$	12,212,000	$	167,000	$	(4,726,000	)	$	7,653,000

For the Nine Months Ended September 30, 2000
	REPWIC		IE		Corporate Costs			Consolidated
Net revenue	$	35,443,000	$	3,295,000	$	—		$	38,738,000
Income from operations	$	8,869,000	$	483,000	$	(3,643,000	)	$	5,709,000

8

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

9.  Supplemental Cash Flow Information

		For the Nine Months
		Ended September 30,
		2001		2000
Supplemental disclosure of cash flow information:
	Cash paid for interest	$	242,000	$	299,000
	Cash paid for income taxes	$	1,384,000	$	2,306,000
Noncash financing and investing activities:
	Purchase price adjustment to goodwill and trade accounts payable and accrued liabilities	$	2,000	$	631,000
	Insurance financing	$	—	$	28,000
	Accrued deferred offering costs	$	285,000	$	—
	Transfer of deferred offering costs to additional paid in capital	$	285,000	$	—
	Issuable common stock issued	$	500,000	$	—
	Transfer of leasehold improvements to prepaid expenses and other assets	$	159,000	$	—

The acquisition of Hook on January 31, 2001 and PEC on September 28, 2001 resulted in the following increases:

		Hook			PEC			Total
Contracts and trade receivables		$	(2,147,000	)	$	(589,000	)	$	(2,736,000	)
Costs and estimated earnings in excess of billings			(112,000	)		(17,000	)		(129,000	)
Prepaid expenses and other current assets			(12,000	)		(23,000	)		(35,000	)
Equipment and leasehold improvements			(696,000	)		(20,000	)		(716,000	)
Goodwill			(2,716,000	)		(1,724,000	)		(4,440,000	)
Other assets			(12,000	)		(5,000	)		(17,000	)
Line of credit			269,000			—			269,000
Long term debt, including current portion			1,530,000			—			1,530,000
Trade accounts payable and accrued liabilities			968,000			443,000			1,411,000
Billings in excess of costs and estimated earnings			198,000			—			198,000
Issuable common stock			1,200,000			—			1,200,000
	Net cash expended for acquisition	$	(1,530,000	)	$	(1,935,000	)	$	(3,465,000	)

9

Item 2.  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 the Company and the related notes included elsewhere in this Form 10-Q and the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000 filed by the Company. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under “Risk Factors” and elsewhere in the Annual Report on Form 10-K/A filed by the Company.

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 material contracts. Most of our time and material contracts have not-to-exceed provisions. Revenue is recognized on the percentage of completion method of accounting based on the proportion of actual direct contract costs incurred to total estimated direct contract costs to be incurred at completion. We believe that costs incurred is the best available measure of progress towards completion on the contracts. In the course of providing services, we sometimes subcontract for various services. These costs are included in billings to clients and, in accordance with industry practice, are included in our gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, we also report net revenue, which is gross revenue less subcontractor costs. Our revenue is generated from a large number of relatively small contracts. The Company had one client that accounted for 11.5% and 10.1% of total net revenue for the quarter and nine months ended September 30, 2001, respectively. The same client accounted for 13.2% and 9.7% of total net revenues for the quarter and nine months ended September 30, 2000, respectively.

Costs of revenue include labor, non-reimbursable subcontractor costs, materials and various direct and indirect overhead costs including rent, utilities and depreciation. Selling, general, and administrative expenses consist primarily of corporate costs related to finance and accounting, information technology, business development and marketing, contract proposal, executive salaries, amortization of goodwill, provisions for doubtful accounts and other indirect overhead costs.

10

Results of Operations

The following table sets forth unaudited historical consolidated operating results for each of the periods presented as a percentage of net revenue:

		For the Three Months Ended						For the Nine Months Ended
		September 30,						September 30,
		2001			2000			2001			2000
Gross revenue			106.9	%		106.6	%		109.3	%		106.4	%
Subcontractor costs			6.9	%		6.6	%		9.3	%		6.4	%
	Net revenue		100.0	%		100.0	%		100.0	%		100.0	%
Costs of revenue			64.3	%		61.9	%		64.6	%		64.9	%
	Gross profit		35.7	%		38.1	%		35.4	%		35.1	%
Selling, general and administrative expenses			20.7	%		20.3	%		20.6	%		20.4	%
	Income from operations		15.0	%		17.8	%		14.8	%		14.7	%
Interest income			(1.4	%)		(0.2	%)		(0.8	%)		(0.2	%)
Interest expense			0.2	%		0.5	%		0.5	%		0.7	%
Other expenses (income)			0.1	%		(0.7	%)		0.1	%		(0.1	%)
	Income before provision for income taxes		16.1	%		18.2	%		15.0	%		14.3	%
Provision for income taxes			6.4	%		7.3	%		6.0	%		5.7	%
	Net income		9.7	%		10.9	%		9.0	%		8.6	%

Three and Nine Months Ended September 30, 2001 and September 30, 2000

Net Revenue. Net revenue for the three months ended September 30, 2001 increased $3.8 million, or 28% to $17.5 million compared to $13.6 million for the three months ended September 30, 2000. Net revenue for the nine months ended September 30, 2001 increased $13.1 million, or 34% to $51.8 million compared to $38.7 million for the nine months ended September 30, 2000. Contributing to the increase in net revenue was the completion of two acquisitions. Net revenue increased $3.3 million and $9.7 million for the three and nine months ended September 30, 2001, respectively, as a result of the acquisitions of Crosby, Mead, Benton & Associates (“CMB”) in October 2000 and Hook & Associates Engineering, Inc. (“Hook”) in January 2001. Excluding the revenue from these acquisitions, net revenue grew $540,000 or 4%, and $3.4 million or 9% for the three and nine months ended September 30, 2001, respectively, compared to the three and nine months ended September 30, 2000. The remaining net revenue growth for both periods is primarily attributable to: (i) continued growth in the Company’s civil engineering services resulting from the strong demand for real estate in California, and (ii) the contribution of net revenue from two new divisions. The first of the two new divisions is a civil engineering office located in Ventura County, California, and commenced operations during the fourth quarter of 2000, while the second, which is dedicated to servicing the communication industry and is located in San Diego County, California, commenced operations during the first quarter of 2001. These new divisions contributed approximately $250,000 and $480,000 to the Company’s net revenue for the quarter and nine months ended September 30, 2001, respectively. The above mentioned increases during 2001 were partially offset by lower net revenues at one of the Company’s Northern California offices due to several large projects that had significant activity during 2000 and have since been completed or are currently in the final stages of completion. Subcontractor costs, as a percentage of net revenue, increased to 6.9% and 9.3% for the three and nine months ended September 30, 2001, respectively, compared to 6.6% and 6.4% for the three and nine months ended September 30, 2000. The percentage increase in subcontractor costs for the nine months ended September 30, 2001, resulted primarily from a significant increase in subcontract services related to a large contract in our industrial/energy segment.

Gross Profit. Gross profit for the three months ended September 30, 2001 increased $1.0 million, or 20% to $6.2 million compared to $5.2 million for the three months ended September 30, 2000. Gross profit for the nine months ended September 30, 2001 increased $4.7 million, or 35% to $18.3 million compared to $13.6 million for the nine months ended September 30, 2000. The increase in gross profit is primarily attributable to the acquisitions of CMB in October 2000 and Hook in January 2001. Gross profit increased $900,000 and $3.0 million for the three and nine months ended September 30, 2001, respectively, as a result of such acquisitions. As a percent of net revenue, gross profit decreased to 35.7% during the quarter ended September 30, 2001 as compared to 38.1% for the quarter ended September 30, 2000, while gross profit as a percent of net revenue increased to 35.4% for the nine months ended September 30, 2001 as compared to 35.1% for the corresponding prior year period. The decrease in gross profit as a percent of net revenue during the 2001 quarter is partially attributable to lower margins related to the Hook acquisition. In addition, during the 2000 quarter, changes to estimated direct contract

11

costs expected to be incurred on several large projects resulted in an approximately $200,000 increase to gross margins. The increase in gross profit as a percent of net revenue for the nine months ended September 30, 2001, is primarily due to lower margins, during the nine months ended September 30, 2000, from several large projects, partially offset by lower margins during the nine months ended September 30, 2001 related to one of the Hook divisions. Excluding the effect of such items, gross margin as a percent of net revenue would have been 37.3% and 36.4% for the quarter and nine months ended September 30, 2001 respectively, as compared to 37.1% and 36.0% for the quarter and nine months ended September 30, 2000.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2001 increased $858,000 or 31% to $3.6 million compared to $2.8 million for the three months ended September 30, 2000. Selling, general and administrative expenses for the nine months ended September 30, 2001 increased $2.8 million, or 35% to $10.7 million compared to $7.9 million for the nine months ended September 30, 2000. The increases for both periods resulted primarily from the acquisitions of Crosby Mead Benton & Associates and Hook & Associates Engineering, Inc., higher overall corporate costs and goodwill amortization. As a percentage of net revenue, selling, general and administrative expenses increased to 20.7% and 20.6% for the three and nine months ended September 30, 2001, respectively, from 20.3% and 20.4% for the three and nine months ended September 30, 2000, respectively. The percentage increases in both periods were primarily due to an increase in administrative costs as a result of additional contract proposal time, partially offset by a lower provision for doubtful accounts due to improved collection efforts on older receivable balances.

Interest Income. Interest income for the three and nine months ended September 30, 2001 was $227,000 and $378,000, respectively, compared to $15,000 and $27,000 for the three and nine months ended September 30, 2000, respectively. Such increases are due to interest earned on securities purchased with a portion of the net proceeds generated from the Company’s May 2001 secondary offering.

Interest Expense. Interest expense for the three months ended September 30, 2001 decreased $37,000 or 57% to $28,000 compared to $65,000 for the three months ended September 30, 2000. Interest expense for the nine months ended September 30, 2001 decreased $23,000 or 9% to $237,000 compared to $260,000 for the nine months ended September 30, 2000. The decrease in interest expense during both periods is primarily due to the repayment of a $2.4 million acquisition note in April 2001, and the repayment of our line of credit in May 2001. This decrease in interest expense was partially offset by increased interest expense related to a $1.3 million note issued in connection with the Hook acquisition in January 2001.

Other Expenses (Income). Other expense increased $108,000 and $96,000 for the quarter and year ended September 30, 2001, respectively as compared to the corresponding prior year periods. These increases are primarily a result of a collection during the third quarter of 2000 of an accounts receivable previously written off.

Income Taxes. For the three months ended September 30, 2001, the provision for income taxes was $1.1 million compared to $992,000 for the three months ended September 30, 2000. The provision for income taxes for the nine months ended September 30, 2001 was $3.1 million compared to $2.2 million for the nine months ended September 30, 2000. The increase in income tax expense was due to higher taxable income for the quarter and nine months ended September 30, 2001 as compared to the corresponding prior year period. Our effective income tax rate has remained at approximately 40%, consistent with our effective tax rate during 2000.

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 combined with securities held-to-maturity accounted for $23.9 million as of September 30, 2001, compared to $1.0 million as of December 31, 2000. Working capital as of September 30, 2001 was $38.4 million compared to $7.3 million as of December 31, 2000, an increase of $31.1 million, resulting primarily from net proceeds of approximately $28 million received in connection with the secondary offering and net income of $4.7 million during the nine months ended September 30, 2001. The debt to equity ratio (excluding the effect of issuable common stock) as of September 30, 2001 improved to 0.04 to 1 compared to 0.31 to 1 at December 31, 2000 primarily as a result of the secondary offering and the repayment of both our line of credit balance and a $2.4 million acquisition note. Net cash provided by operating activities increased $1.9 million to $5.2 million for the nine months ended September 30, 2001 compared to $3.3 million for the corresponding prior year period. The increase in net cash provided by operating activities was a result of higher income before the effects of depreciation and amortization, tax benefit from the exercise of stock options and a decrease in contract and trade receivables, offset by an increase in costs and estimated earnings in excess of billings and a decrease in accounts

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payable and accrued liabilities. The cash generated from operating activities was primarily used to make principal payments on debt and capital leases, fund capital expenditures, and partially fund our acquisition of Pacific Engineering Corporation in September 2001 and Hook & Associates Engineering, Inc. in January 2001.

In September 2001, we entered into a $10.0 million unsecured line of credit agreement consisting of three components: (i) an acquisition component, (ii) an equipment and vehicle financing component, and (iii) a working capital component. The line provides up to a maximum of $5.0 million to finance acquisitions, up to a maximum of $3.0 million to finance equipment and vehicle purchases and up to a maximum of $10.0 million less the aggregate outstanding principal balance of the acquisition and equipment and vehicle components for working capital. The line bears interest at either a range of 0.25% below prime to prime, or a range of 1.25% to 1.75% over LIBOR depending on the Company’s ability to meet certain financial covenants. The equipment and vehicle financing components mature in September 2002, while the acquisition and working capital components mature in June 2003. There were no amounts outstanding under this line of credit agreement as of September 30, 2001.

Based upon our current cash position and our $10 million unsecured line of credit, we expect to have sufficient cash resources to fund our anticipated operations, planned capital expenditures and debt reductions for the next 12 months.

Effect of Recent Accounting Pronouncements

In October 2001, the Financial Accounting Standard Board (“FASB”) issued Statements of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS 144 supersedes Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”, and requires (i) the recognition and measurement of the impairment of long-lived assets to be held and used and (ii) the measurement of long-lived assets to be disposed of by sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company has not yet completed its analysis of the effect this standard will have on the Company’s financial condition, results of operations or cash flows.

In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets” which is effective January 1, 2002. This statement requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment. Goodwill acquired in a business combination consummated after June 30, 2001 shall not be amortized, but rather reviewed for impairment until the date this statement is applied in its entirety. Goodwill amortization expense for the nine months ended September 30, 2001 was approximately $320,000. The Company has not yet completed its analysis of the effect this standard will have on the Company's financial condition, results of operations or cash flow.

In July 2001, the FASB issued SFAS No. 141, “Business Combinations” which was effective upon issuance. This statement requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The adoption of this standard did not have a material effect on the Company’s financial condition, results of operations or cash flows.

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 will attempt to pass these increases on to our clients.

Risk Factors — Risks Related To Our Industries

Terrorism and the uncertainty of war may have a material adverse effect on our operating results.

Terrorist attacks, such as the attacks that occurred in New York and Washington, D.C. on September 11, 2001, the response by the United States initiated on October 7, 2001 and other acts of violence or war may affect the market on which our common stock will trade, the markets in which we operate and our operations and profitability. Further terrorist attacks against the United States or United States businesses may occur. The potential near-term and long-term effect these attacks may have for our customers, the market for our common stock, the markets for our services and the United States economy are uncertain. The consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our markets or our business.

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Our business could suffer if there is a downturn in the real estate market

We estimate that during 2001, approximately 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 us.

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 our competitors. If this happens, we may lose some of our existing clients that have formed relationships with those former employees. In addition, we may lose future clients to a former employee as a competitor. In either event, we would lose clients and revenues.

Risk Factors — 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 2001, approximately 79% 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.

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 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.

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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 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

We expect to perform service under contracts that may limit our profitability. Under fixed-price contracts we perform services at a stipulated price. Under time-and-material 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

15

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. For the nine months ended September 30, 2001, subcontractor costs accounted for approximately 9% of our net revenue.

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

We are exposed to interest rate changes primarily as a result of our securities held-to-maturity, line of credit and long-term debt, which are used to maintain liquidity and to fund capital expenditures and our expansion. The Company intends to hold all of its securities until maturity, and therefore, should not bear any interest rate risk due to early disposition. Due to the relatively immaterial levels of our current borrowings, our earnings and cash flows should not be materially impacted by changes in interest rates. Promissory notes delivered in connection with our acquisitions have generally been at fixed rates. Our bank line of credit is based on variable interest rates and is therefore affected by changes in market rates. We do not enter into derivative or interest rate hedging transactions.

The table below presents the principal amounts of debt (excluding capital lease obligations of $332,000 and a note payable of $1,300,000), weighted average interest rates, fair values and other items required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of September 30, 2001.

																Fair
	2001			2002			2003			2004			Total			Value (1)
Securities held-to-maturity (non-trading)	$	1,988,000		$	10,568,000			—			—		$	12,556,000		$	12,581,000
Weighted average interest rate (2)		3.82	%		3.30	%		—			—			3.38	%		3.38	%
Fixed rate debt (3)	$	49,000		$	92,000		$	66,000		$	13,000		$	220,000		$	220,000
Weighted average interest rate		7.99	%		7.17	%		7.07	%		6.26	%		7.27	%		7.27	%

(1)	The fair value of fixed rate debt was determined based on current rates offered for debt instruments with similar risks and maturities, while the fair value for securities held-to-maturity was based on the quoted market price of such securities as of September 30, 2001.
(2)	Approximately 51% of the Company’s securities held-to-maturity are invested in federally tax-exempt bonds. The weighted average interest rate shown above is a combination of a pre-tax interest rate for taxable securities and an after tax interest rate for tax-exempt securities.
(3)	Fixed rate debt excludes an acquisition note payable with a carrying amount of $1,300,000 due to the nature of the financing.

As the table incorporates only those exposures that existed as of September 30, 2001, it does not consider those exposures or positions which could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented in the table has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on those exposures or positions that arise during the period and interest rates.

17

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In March 2000, Clayton Engineering filed a claim against The Irvine Company, which was subsequently settled, 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 our wholly-owned subsidiary at the time the claim by Clayton was filed and was subsequently merged with and into the Company in December 2000. Clayton Engineering has made the allegation that plans prepared by JMTA were inaccurate as to the elevation of the bottom of the Peters Wash. Consequently, during January of 2001, The Irvine Company filed an equitable indemnity cross-complaint against JMTA in the Superior Court of California, in the County of Orange. The Company, through its insurance carrier, is in the process of settling this dispute with The Irvine Company for an amount commensurate with anticipated legal defense costs and uncertainties associated with continued litigation. The outcome of this settlement is not expected to have a material adverse effect on the Company’s financial condition. It is anticipated that this claim will be concluded before year-end.

Item 2. Changes In Securities and Use of Proceeds

     None

Item 3. Defaults Upon Senior Securities

     None

Item 4. Submission of Matters to a Vote of Security Holders

     None

Item 5. Other Information

     None

Item 6. Exhibits and Reports on Form 8-K

     (a)  Exhibits

Exhibits
Number	Description
10.19	Credit Agreement dated September 4, 2001 by and between the Registrant and Wells Fargo Bank, National Association. *
10.20	Line of Credit Note dated September 4, 2001 by and between the Registrant and Wells Fargo Bank National Association. *

     *     Filed herewith

     (b)  Reports on Form 8-K

     None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated:	November 13, 2001	THE KEITH COMPANIES, INC.
By:	/s/ Aram H. Keith
	Aram H. Keith Chairman of the Board of Directors and Chief Executive Officer
By:	/s/ Gary C. Campanaro
	Gary C. Campanaro Chief Financial Officer and Secretary

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EXHIBIT INDEX

Exhibits
Number	Description
10.19	Credit Agreement dated September 4, 2001 by and between the Registrant and Wells Fargo Bank, National Association. *
10.20	Line of Credit Note dated September 4, 2001 by and between the Registrant and Wells Fargo Bank National Association. *

     *     Filed herewith EX-10.19 3 a76947ex10-19.txt EXHIBIT 10.19 EXHIBIT 10.19 CREDIT AGREEMENT THIS AGREEMENT is entered into as of September 4, 2001, by and between THE KEITH COMPANIES, INC., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS Borrower has requested that Bank extend or continue credit to Borrower as described below, and Bank has agreed to provide such credit to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I CREDIT TERMS SECTION 1.1. LINE OF CREDIT. (a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to an aggregate maximum outstanding principal balance of $10,000,000.00 (the "Line of Credit"), the proceeds of shall be used for working capital requirement, acquisitions and equipment and vehicles purchases, provided, however, that advances (i) up to a maximum outstanding principal balance of $5,000,000.00 may be used to finance acquisitions ("Acquisition Advances"), (ii) up to a maximum outstanding principal balance of $3,000,000.00 (less the amount of Lease Obligations, as defined below) may be used for equipment and vehicle purchases ("Equipment Advances", which shall be available until September 1, 2002), and (iii) up to a maximum outstanding principal balance of $10,000,000.00 less the aggregate outstanding principal balance of Equipment Advances and Acquisition Advances may be used for working capital purposes, other than the purposes set forth in clauses (i) and (ii) hereof ("Working Capital Advances"). Acquisition Advances and Working Capital Advances shall be available to and including June 15, 2003. Borrower's obligation to repay Acquisition Advances, Equipment Advances and Working Capital Advances shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. The term "Lease Obligations" means the aggregate amount of all lease obligations under leases entered into between any of Bank's equipment leasing affiliates or divisions as lessor and Borrower as lessee during the period when Equipment Advances are available. (b) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit with respect to Working Capital Advances and Acquisition Advances, borrow, partially or wholly repay its outstanding borrowings, and reborrow, and, with respect to Equipment Advances, borrow, partially or wholly repay its outstanding borrowings, but not reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder set forth above. As of and after September 1, 2002, (i) no new Equipment Advances shall be available, and (ii) the availability for Working Capital Advances shall be limited to an amount equal to $10,000,000.00 less the aggregate outstanding principal balance of Acquisition Advances (which shall remain subject to the $5,000,000.00 limitation set forth above) and Equipment Advances from time to time. Repayments of principal received by Bank shall be applied, prior to September 1, 2002 (unless Bank receives written instructions to the contrary prior to each payment), first to outstanding Working Capital Advances, then to outstanding Acquisition Advances and finally to outstanding Equipment Advances, and after September 1, 2002, first to the scheduled installment of the Equipment Advances if such an installment is then due and payable, second to outstanding Working Capital Advances, third to outstanding Acquisition Advances and then as a prepayment of Equipment Advances (subject to the prepayment provisions set forth in the Line of Credit Note). (c) Advances. (i) Each request for an Equipment Advance shall be in writing, shall specify the amount and date of the requested advance and shall be accompanied by an invoice or appraisal (as required below) in form and content acceptable to Bank. The principal amount of each Equipment Advance shall not exceed 90% of the purchase price of the applicable equipment (if such equipment is new or has been acquired within 90 days preceding the date of the requested advance) as evidenced by invoice delivered to Bank, or 80% of the value of the applicable equipment (if such equipment is used or has been acquired more than 90 days prior to the date of the requested advance) as evidenced by appraisal delivered to Bank. (ii) Each request for an Acquisition Advance or Working Capital Advances shall be available in the manner set forth in the Line of Credit Note. Bank is hereby authorized to note the original principal amount of and any payments made on Working Capital Advances, Acquisition Advances and Equipment Advances on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Agreement or to the Line of Credit Note, which notations shall be prima facie evidence of the accuracy of the information noted. SECTION 1.2. INTEREST/FEES. (a) Interest. The outstanding principal balance of each credit subject hereto shall bear interest at the rate of interest set forth in each promissory note or other instrument executed in connection therewith. (b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in each promissory note or other instrument required hereby. (c) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to one-eighth percent (0. 125%) per annum (computed on the basis of a 360-day year, actual days elapsed) on the average daily unused amount of the Line of Credit, which fee shall be calculated on a quarterly basis by Bank and shall be due and payable by Borrower in arrears on the first day of each March, June, September and December, commencing December 1, 2001. SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under each credit subject hereto by charging Borrower's deposit account number (number omitted) with Bank, or any other deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 1.4. GUARANTIES. All indebtedness of Borrower to Bank shall be guaranteed jointly and severally by Hook Engineering, Inc., Crosby, Mead, Benton & Associates and all other Subsidiaries in the principal amount of Ten Million Dollars ($10,000,000.00), as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank. The term "Subsidiaries" means Hook Engineering, Inc., Crosby, Mead, Benton & Associates and each other entity in which Borrower purchases all or substantially all of the ownership interest, subject to the terms of Section 5.4. SECTION 1.5. SUBORDINATION OF DEBT. All obligations of Borrower and HEA Acquisition, Inc. (now known as Hook Engineering, Inc.) to Hook & Associates Engineering, Inc. shall be subordinated in right of repayment to all obligations of Borrower to Bank, as evidenced by and subject to the terms of subordination agreements in form and substance satisfactory to Bank. ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the State of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement and each promissory note, contract, instrument and other document required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrowers knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated June 30, 2001, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof and to the best of Borrower's knowledge, Borrower is in compliance in all material respects with all applicable federal or state; environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrowers operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. SECTION 2.12. SUBSIDIARIES. As of the date hereof, the only Subsidiaries in existence are Hook Engineering, Inc. and Crosby, Mead, Benton & Associates. ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to extend any credit contemplated by this Agreement is subject to the fulfillment to Bank's satisfaction of all of the following conditions: (a) Approval of Bank Counsel. All legal matters incidental to the extension of credit by Bank shall be satisfactory to Bank's counsel. (b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and each promissory note or other instrument required hereby. (ii) Corporate Borrowing Resolution. (iii) Certificates of Incumbency. (iv) Articles of Incorporation. (v) Continuing Guaranty. (vi) Resolution Authorizing Execution of Continuing Guaranty. (vii) Subordination Agreement. (viii) Corporate Resolution: Subordination. (ix) Such other documents as Bank may require under any other Section of this Agreement. (c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower and Subsidiaries, taken as a whole, nor any material decline, as determined by Bank, in the market value of a substantial or material portion of the assets of Borrower and Subsidiaries, taken as a whole. (d) Insurance. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit. ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, and shall cause each Subsidiary to, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower or any Subsidiary. SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 90 days after and as of the end of each fiscal year, a copy of Borrower's consolidated 10K report filed with the Securities Exchange Commission, audited by a certified public accountant acceptable to Bank; (b) not later than 45 days after and as of the end of each fiscal quarter, a copy of Borrower's consolidated 10Q report filed with the Securities Exchange Commission, reviewed by a certified public accountant acceptable to Bank; (c) not later than 30 days after and as of the end of each fiscal quarter, a work-in-progress or job status report; (d) from time to time such other information as Bank may reasonably request. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower and each Subsidiary is organized and/or which govern Borrower's and each Subsidiary's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower, each Subsidiary and/or their business. SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower and each Subsidiary, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's and each Subsidiary's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower or any Subsidiary may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower or such Subsidiary has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower or such Subsidiary is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower or any Subsidiary with a claim in excess of $200,000.00. SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's consolidated financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): (a) Ratio of Total Liabilities to Tangible Net Worth not greater than 0.90 to 1.0, determined as of the end of each fiscal quarter, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (b) Quick Ratio not less than 1.5 to 1.0, determined as of the end of each fiscal quarter, with "Quick Ratio" defined as the aggregate of unrestricted cash, unrestricted marketable securities and receivables convertible into cash divided by total current liabilities, including without limitation, the outstanding principal balance of the Line of Credit notwithstanding the fact that advances thereunder may mature more than one (1) year beyond the date of computation. (c) Net income after taxes not less than $1.00, determined as of the end of each fiscal quarter on a rolling four-quarter basis. (d) EBITDA Coverage Ratio not less than 2.75 to 1.0 determined as of the end of each fiscal quarter on a rolling four-quarter basis, with "EBITDA" defined as net profit before tax plus interest expense (net of capitalized interest expense), depreciation expense and amortization expense, and with "EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total interest expense plus the prior period current maturity of long-term debt and the prior period current maturity of subordinated debt. "Current maturity of long-term debt" shall not include Working Capital Advances or Acquisition Advances under the Line of Credit notwithstanding the fact that the maturity date thereof may extend more than 1-year beyond the date of computation. SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower or any Subsidiary; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower or any Subsidiary is required to maintain, or any uninsured or partially uninsured loss in excess of $100,000.00 through liability or property damage, or through fire, theft or any other cause affecting Borrower's property. ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not, and will not cause or permit any Subsidiary to, without Bank's prior written consent: SECTION 5.1 USE OF FUNDS. Use any of the proceeds of any credit extended hereunder except for the purposes stated -in Article I hereof. SECTION 5.2. CAPITAL AND LEASE EXPENDITURES. Make any additional investment in, incur new lease expenditures, or incur purchase money indebtedness with respect to fixed assets in any fiscal year in excess of an aggregate of $3,750,000.00, of which no more than $850,000.00 may be under vehicle leases. SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower or any Subsidiary to Bank, (b) any other liabilities of Borrower or any Subsidiary existing as of, and disclosed to Bank prior to, the date hereof, (c) leases and purchase money indebtedness permitted under Section 5.2 above, (d) the subordinated indebtedness described in Section 1.5 above, and (e) trade liabilities incurred in the ordinary course of business. SECTION 5.4 MERGER, CONSOLIDATION, INVESTMENTS. Merge into or consolidate with any other entity, nor acquire all or substantially all of the assets of any other entity, nor purchase or otherwise acquire any stock or other ownership interests, or otherwise invest, in other entities. SECTION 5.5. LOANS, ADVANCES, TRANSFER OF ASSETS. Make any loans or advances to any person or entity, except (a) any loans and advances existing as of, and disclosed to Bank prior to, the date hereof, and (b) loans and advances to Subsidiaries in the ordinary course of Borrower's business; nor make any substantial change in the nature of Borrower's or any Subsidiary's business as conducted as of the date hereof; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower or any Subsidiary as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. SECTION 5.7. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or distribution either in cash, stock or any other property on Borrowers stock now or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding; provided that Borrower is permitted to (a) make distributions of its stock as required under (i) a Stock Purchase Agreement dated as of October 13, 2000 by and among The Keith Companies, Inc., as Buyer, Crosby, Mead, Benton & Associates as Company, and certain shareholders, and (ii) an Asset Purchase Agreement dated as of January 31, 2001 by and among The Keith Companies, Inc., as Buyer, Hook & Associates Engineering, Inc. as Company and certain shareholders, and (b) repurchase Borrower's outstanding common stock, in an aggregate amount, of $750,000.00 during the term of this Agreement. This covenant shall not be construed so as to prohibit Borrower from engaging in a stock split, a reverse stock split, a stock dividend or any other similar capital reorganization whereby the aggregate value of all capital stock outstanding after such transaction is not less than the value of all such capital stock before such transaction. SECTION 5.8. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower's or any Subsidiary's assets now owned or hereafter acquired, except any of the foregoing in favor of Bank or which is existing as of, and disclosed to Bank in writing prior to, the date hereof, or as permitted under Section 5.2 hereof. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower, any Subsidiary or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of twenty (20) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower or any Subsidiary has incurred any debt or other liability to any person or entity, including Bank, and, if the debt or other liability is owed to a party other than Bank, the amount thereof exceed $50,000 (e) The filing of a notice of judgment lien against Borrower or any Subsidiary; or the recording of any abstract of judgment against Borrower or any Subsidiary in any county in which Borrower or such Subsidiary has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any Subsidiary; or the entry of a judgment against Borrower or any Subsidiary; and with respect to each of the foregoing, the amount thereof exceeds $50,000.00. (f) Borrower or any Subsidiary shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any Subsidiary shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any Subsidiary, or Borrower or any Subsidiary shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any Subsidiary shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any Subsidiary by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) The dissolution or liquidation of Borrower or any guarantor hereunder; or Borrower or any such guarantor, or any of their directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower or such guarantor. (h) Any change in the Senior Management (defined as Chairman or Chief Executive Officer) of Borrower. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any credit subject hereto and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: THE KEITH COMPANIES, INC. 2955 Red Hill Avenue Costa Mesa, CA 92626 Attn: Chief Financial Officer BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION Orange Coast Regional Commercial Banking Office 2030 Main Street, Suite 900 Irvine, CA 92614 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents (to a maximum of $2,000.00), Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any credit subject hereto, Borrower or any Subsidiary or its business. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to each credit subject hereto and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. SECTION 7.11. ARBITRATION. (a) Arbitration. The parties hereto agree, upon demand by any party, to submit to binding arbitration all claims, disputes and controversies between or among them (and their respective employees, officers, directors, attorneys, and other agents), whether in tort, contract or otherwise arising out of or relating to in any way (i) the loan and related Loan Documents which are the subject of this Agreement and its negotiation, execution, collateralization, administration, repayment, modification, extension, substitution, formation, inducement, enforcement, default or termination; or (ii) requests for additional credit. (b) Governing Rules. Any arbitration proceeding will (i) proceed in a location in California selected by the American Arbitration Association ("AAA") (ii) be governed by the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the documents between the parties; and (iii) be conducted by the AAA, or such other administrator as the parties shall mutually agree upon, in accordance with the AAA's commercial dispute resolution procedures, unless the claim or counterclaim is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and costs in which case the arbitration shall be conducted in accordance with the AAA's optional procedures for large, complex commercial disputes (the commercial dispute resolution procedures or the optional procedures for large, complex commercial disputes to be referred to, as applicable, as the "Rules"). If there is any inconsistency between the terms hereof and the Rules, the terms and procedures set forth herein shall control. Any party who fails or refuses to submit to arbitration following a demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any dispute. Nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any similar applicable state law. (c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The arbitration requirement does not limit the right of any party to (i) foreclose against real or personal property collateral; (ii) exercise self-help remedies relating to collateral or proceeds of collateral such as setoff or repossession; or (iii) obtain provisional or ancillary remedies such as replevin, injunctive relief, attachment or the appointment of a receiver, before during or after the pendency of any arbitration proceeding. This exclusion does not constitute a waiver of the right or obligation of any party to submit any dispute to arbitration or reference hereunder, including those arising from the exercise of the actions detailed in sections (i), (ii) and (iii) of this paragraph. (d) Arbitrator Qualifications and Powers. Any arbitration proceeding in which the amount in controversy is $5,000,000.00 or less will be decided by a single arbitrator selected according to the Rules, and who shall not render an award of greater than $5,000,000.00. Any dispute in which the amount in controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. The arbitrator will be a neutral attorney licensed in the State of California or a neutral retired judge of the state or federal judiciary of California, in either case with a minimum of ten years experience in the substantive law applicable to the subject matter of the dispute to be arbitrated. The arbitrator will determine whether or not an issue is arbitratable and will give effect to the statutes of limitation in determining any claim. In any arbitration proceeding the arbitrator will decide (by documents only or with a hearing at the arbitrator's discretion) any pre-hearing motions which are similar to motions to dismiss for failure to state a claim or motions for summary adjudication. The arbitrator shall resolve all disputes in accordance with the substantive law of California and may grant any remedy or relief that a court of such state could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award. The arbitrator shall also have the power to award recovery of all costs and fees, to impose sanctions and to take such other action as the arbitrator deems necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. The institution and maintenance of an action for judicial relief or pursuit of a provisional or ancillary remedy shall not constitute a waiver of the right of any party, including the plaintiff, to submit the controversy or claim to arbitration if any other party contests such action for judicial relief. (e) Discovery. In any arbitration proceeding discovery will be permitted in accordance with the Rules. All discovery shall be expressly limited to matters directly relevant to the dispute being arbitrated and must be completed no later than 20 days before the hearing date and within 180 days of the filing of the dispute with the AAA. Any requests for an extension of the discovery periods, or any discovery disputes, will be subject to final determination by the arbitrator upon a showing that the request for discovery is essential for the party's presentation and that no alternative means for obtaining information is available. (f) Class Proceedings and Consolidations. The resolution of any dispute arising pursuant to the terms of this Agreement shall be determined by a separate arbitration proceeding and such dispute shall not be consolidated with other disputes or included in any class proceeding. (g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all costs and expenses of the arbitration proceeding. (h) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no dispute shall be submitted to arbitration if the dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such dispute is not submitted to arbitration, the dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (i) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business or by applicable law or regulation. If more than one agreement for arbitration by or between the parties potentially applies to a dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, THE KEITH COMPANIES, INC. NATIONAL ASSOCIATION By: /s/ Gary Campanaro by: /s/ Elliot E. Ichinose - ----------------------- --------------------------- Chief Financial Officer Vice President EX-10.20 4 a76947ex10-20.txt EXHIBIT 10.20 EXHIBIT 10.20 LINE OF CREDIT NOTE $10,000,000.00 Irvine, California September 4, 2001 FOR VALUE RECEIVED, the undersigned THE KEITH COMPANIES, INC ("Borrower") promise to pay to the order of Wells Fargo Bank, National Association ("Bank") at its Orange Coast Regional Commercial Banking Office at 2030 Main Street, Suite 900, Irvine, California 90071, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Ten Million Dollars ($10,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined: (a) "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required bylaw to close. (b) "Fixed Rate Term" means a period commencing on a Business Day and continuing for 1, 2, 3, or 6 months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal, amount less than $100,000.00 with respect to Working Capital Advances or $100,000.00 with respect to Equipment Advances; and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. (c) "LIBOR" means the rate per annum and determined pursuant to the following formula: LIBOR = Base LIBOR ---------- 100% - LIBOR Reserve Percentage (i) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market. (ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. (d) "Prime Rate" means at anytime the rate of interest most recently announced within Bank at its principal office as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. INTEREST: (a) Interest. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be one and one quarter percent (1.25%) above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR selection hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. (b) Selection of Interest Rate Options. At anytime any portion of this Note bears interest determined in relation to LIBOR, it maybe continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select a LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR selection, (A) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three (3) Business Days after such notice is given, and (B) such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later time during any Business Day if Bank, at it's, sole option but without obligation to do so, accepts Borrowers notice and quotes a fixed rate to Borrower. If Borrower does not immediately accept a fixed rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request from Borrower shall be subject to a redetermination by Bank of the applicable fixed rate. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. (c) Taxes and Regulatory Costs. Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (ii) future, supplemental, emergency or other changes in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR. In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (d) Payment of Interest. Interest accrued on this Note shall be payable on the third day of each month, commencing October 3, 2001. (e) Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to two percent (2%) above the rate of interest from time to time applicable to this Note. BORROWING AND REPAYMENT: (a) Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow Working Capital Advances and Acquisition Advances, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at anytime exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of Equipment Advances on September 1, 2002 shall be due and payable on the third day of each month in 48 equal consecutive installments, each equal to 1/48th of such outstanding principal balance, commencing on October 3, 2002 to and including September 3, 2006. The outstanding principal balance of Working Capital Advances and Acquisition Advances shall be due and payable in full on June 15, 2003. (b) Advances. Acquisition Advances and Working Capital Advances, subject to the limitations set forth in the Credit Agreement (defined below), may be made by the holder at the oral or written request of (i) Aram Keith or Gary Campanaro, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. Equipment Advances shall be available in the manner set forth in the Credit Agreement. (c) Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof All payments credited to principal shall be applied to Working Capital Advances, Acquisition Advances and/or Equipment Advances as described in the Credit Agreement, and shall be so applied first, to the outstanding principal balance of applicable advances which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of the advances which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first. PREPAYMENT: (a) Prime Rate. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at anytime, in any amount and without penalty. (b) LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at anytime and in the minimum amount of $500,000.00; provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: (i) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above. Each Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum 2.00% above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). Each change in the rate of interest on any such past due prepayment fee shall become effective on the date each Prime Rate change is announced within Bank. Prepayments of principal applied to Equipment Advances after September 1, 2002 shall be applied to the scheduled installments in inverse order of maturity. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of September 4, 2001, as amended or restated from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. MISCELLANEOUS: (a) Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holders in-house counsel), expended or incurred by the holder in connection with the enforcement of the holders rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in anyway related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. (b) Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. (c) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above. THE KEITH COMPANIES, INC. By: /s/ Gary Campanaro - ---------------------- Title: CFO ADDENDUM TO PROMISSORY NOTE (PRIME/LIBOR PRICING ADJUSTMENTS) THIS ADDENDUM is attached to and made a part of that certain promissory note executed by THE KEITH COMPANIES, INC. ("Borrower") and payable to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), or order, dated as of September 4, 2001, in the principal amount of Ten Million Dollars ($10,000,000.00) (the "Note"). The following provisions are hereby incorporated into the Note to reflect the interest rate adjustments agreed to by Bank and Borrower: INTEREST RATE ADJUSTMENTS: (a) Initial Interest Rates. The initial interest rates applicable to this Note shall be the rates set forth in the "Interest" paragraph herein. (b) Interest Rate Adjustments. In addition to any interest rate adjustments resulting from changes in the Prime Rate, Bank shall adjust the Prime Rate and LIBOR margins used to determine the rates of interest applicable to this Note on a quarterly basis, commencing with Borrower's fiscal quarter ending June 30, 2001, if required to reflect a change in Borrower's ratio of Total Liabilities to Tangible Net Worth (as defined in the Credit Agreement referenced herein), in accordance with the following grid:

Applicable Applicable Total Liabilities to Prime Rate LIBOR Tangible Net Worth Margin Margin ------------------ ---------- ---------- 0.65 to 1.0 or greater 0% 1.75% at least 0.40 to 1.0 but less than 0.65 to 1.0 0% 1.50% less than 0.40 to 1.0 -0.25% 1.25%

Each such adjustment shall be effective on the first Business Day of Borrower's fiscal quarter following the quarter during which Bank receives and reviews Borrower's most current fiscal quarter-end financial statements in accordance with any requirements established by Bank for the preparation and delivery thereof. IN WITNESS WHEREOF, this Addendum has been executed as of the same date as the Note. THE KEITH COMPANIES, INC. By: /s/ Gary Campanaro - ----------------------- Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.19

                                                                   EXHIBIT 10.19

                                CREDIT AGREEMENT

       THIS AGREEMENT is entered into as of September 4, 2001, by and between
THE KEITH COMPANIES, INC., a California corporation ("Borrower"), and WELLS
FARGO BANK, NATIONAL ASSOCIATION ("Bank").

                                    RECITALS

       Borrower has requested that Bank extend or continue credit to Borrower as
described below, and Bank has agreed to provide such credit to Borrower on the
terms and conditions contained herein.

       NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:

                                    ARTICLE I

                                  CREDIT TERMS

       SECTION 1.1. LINE OF CREDIT.

       (a) Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to an aggregate maximum outstanding principal balance of $10,000,000.00 (the
"Line of Credit"), the proceeds of shall be used for working capital
requirement, acquisitions and equipment and vehicles purchases, provided,
however, that advances (i) up to a maximum outstanding principal balance of
$5,000,000.00 may be used to finance acquisitions ("Acquisition Advances"), (ii)
up to a maximum outstanding principal balance of $3,000,000.00 (less the amount
of Lease Obligations, as defined below) may be used for equipment and vehicle
purchases ("Equipment Advances", which shall be available until September 1,
2002), and (iii) up to a maximum outstanding principal balance of $10,000,000.00
less the aggregate outstanding principal balance of Equipment Advances and
Acquisition Advances may be used for working capital purposes, other than the
purposes set forth in clauses (i) and (ii) hereof ("Working Capital Advances").
Acquisition Advances and Working Capital Advances shall be available to and
including June 15, 2003. Borrower's obligation to repay Acquisition Advances,
Equipment Advances and Working Capital Advances shall be evidenced by a
promissory note substantially in the form of Exhibit A attached hereto ("Line of
Credit Note"), all terms of which are incorporated herein by this reference. The
term "Lease Obligations" means the aggregate amount of all lease obligations
under leases entered into between any of Bank's equipment leasing affiliates or
divisions as lessor and Borrower as lessee during the period when Equipment
Advances are available.

       (b) Borrowing and Repayment. Borrower may from time to time during the
term of the Line of Credit with respect to Working Capital Advances and
Acquisition Advances, borrow, partially or wholly repay its outstanding
borrowings, and reborrow, and, with respect to Equipment Advances, borrow,
partially or wholly repay its outstanding borrowings, but not reborrow, subject
to all of the limitations, terms and conditions contained herein or in the Line
of Credit Note; provided however, that the total outstanding borrowings under
the Line of Credit shall not at any time exceed the maximum principal amount
available thereunder set forth above. As of and after September 1, 2002, (i) no
new Equipment Advances shall be available, and (ii) the availability for Working
Capital Advances shall be limited to an amount equal to $10,000,000.00 less the
aggregate outstanding principal balance of Acquisition Advances (which shall
remain subject to the $5,000,000.00 limitation set forth above) and Equipment
Advances from time to time. Repayments of principal received by Bank shall be
applied, prior to September 1, 2002 (unless Bank receives written instructions
to the contrary prior to each payment), first to outstanding Working Capital
Advances, then to outstanding Acquisition Advances and finally to outstanding
Equipment Advances, and after September 1, 2002, first to the scheduled
installment of the Equipment Advances if such an installment is then due and
payable, second to outstanding Working Capital Advances, third to outstanding
Acquisition Advances and then as a prepayment of Equipment Advances (subject to
the prepayment provisions set forth in the Line of Credit Note).

       (c) Advances. (i) Each request for an Equipment Advance shall be in
writing, shall specify the amount and date of the requested advance and shall be
accompanied by an invoice or appraisal (as required below) in form and content
acceptable to Bank. The principal amount of each Equipment Advance shall not
exceed 90% of the purchase price of the applicable equipment (if such equipment
is new or has been acquired within 90 days preceding the date of the requested
advance) as evidenced by invoice delivered to Bank, or 80% of the value of the
applicable equipment (if such equipment is used or has been acquired more than
90 days prior to the date of the requested advance) as evidenced by appraisal
delivered to Bank. (ii) Each request for an Acquisition Advance or Working
Capital Advances shall be available in the manner set forth in the Line of
Credit Note.




       Bank is hereby authorized to note the original principal amount of and
any payments made on Working Capital Advances, Acquisition Advances and
Equipment Advances on Bank's books and records (either manually or by electronic
entry) and/or on any schedule attached to this Agreement or to the Line of
Credit Note, which notations shall be prima facie evidence of the accuracy of
the information noted.

       SECTION 1.2. INTEREST/FEES.

       (a) Interest. The outstanding principal balance of each credit subject
hereto shall bear interest at the rate of interest set forth in each promissory
note or other instrument executed in connection therewith.

       (b) Computation and Payment. Interest shall be computed on the basis of a
360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in each promissory note or other instrument required hereby.

       (c) Unused Commitment Fee. Borrower shall pay to Bank a fee equal to
one-eighth percent (0. 125%) per annum (computed on the basis of a 360-day year,
actual days elapsed) on the average daily unused amount of the Line of Credit,
which fee shall be calculated on a quarterly basis by Bank and shall be due and
payable by Borrower in arrears on the first day of each March, June, September
and December, commencing December 1, 2001.

       SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect
all principal, interest and fees due under each credit subject hereto by
charging Borrower's deposit account number (number omitted) with Bank, or any
other deposit account maintained by Borrower with Bank, for the full amount
thereof. Should there be insufficient funds in any such deposit account to pay
all such sums when due, the full amount of such deficiency shall be immediately
due and payable by Borrower.

       SECTION 1.4. GUARANTIES. All indebtedness of Borrower to Bank shall be
guaranteed jointly and severally by Hook Engineering, Inc., Crosby, Mead, Benton
& Associates and all other Subsidiaries in the principal amount of Ten Million
Dollars ($10,000,000.00), as evidenced by and subject to the terms of guaranties
in form and substance satisfactory to Bank. The term "Subsidiaries" means Hook
Engineering, Inc., Crosby, Mead, Benton & Associates and each other entity in
which Borrower purchases all or substantially all of the ownership interest,
subject to the terms of Section 5.4.

       SECTION 1.5. SUBORDINATION OF DEBT. All obligations of Borrower and HEA
Acquisition, Inc. (now known as Hook Engineering, Inc.) to Hook & Associates
Engineering, Inc. shall be subordinated in right of repayment to all obligations
of Borrower to Bank, as evidenced by and subject to the terms of subordination
agreements in form and substance satisfactory to Bank.

                                   ARTICLE II
                         REPRESENTATIONS AND WARRANTIES

       Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to Bank
subject to this Agreement.

       SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the State of California, and is
qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.

       SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement and each
promissory note, contract, instrument and other document required hereby or at
any time hereafter delivered to Bank in connection herewith (collectively, the
"Loan Documents") have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof will constitute legal, valid
and binding agreements and obligations of Borrower or the party which executes
the same, enforceable in accordance with their respective terms.

       SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Articles of Incorporation or
By-Laws of Borrower, or result in any breach of or default under any contract,
obligation, indenture or other instrument to which Borrower is a party or by
which Borrower may be bound.




       SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrowers knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Bank in writing prior to the date hereof.

       SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement
of Borrower dated June 30, 2001, a true copy of which has been delivered by
Borrower to Bank prior to the date hereof, (a) is complete and correct and
presents fairly the financial condition of Borrower, (b) discloses all
liabilities of Borrower that are required to be reflected or reserved against
under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date of
such financial statement there has been no material adverse change in the
financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a
security interest in or otherwise encumbered any of its assets or properties
except in favor of Bank or as otherwise permitted by Bank in writing.

       SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending
assessments or adjustments of its income tax payable with respect to any year.

       SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract
or instrument to which Borrower is a party or by which Borrower may be bound
that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.

       SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter
possess, all permits, consents, approvals, franchises and licenses required and
rights to all trademarks, trade names, patents, and fictitious names, if any,
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law.

       SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations as they come due in accordance with the Plan
documents and under generally accepted accounting principles.

       SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.

       SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof and to the best of Borrower's
knowledge, Borrower is in compliance in all material respects with all
applicable federal or state; environmental, hazardous waste, health and safety
statutes, and any rules or regulations adopted pursuant thereto, which govern or
affect any of Borrowers operations and/or properties, including without
limitation, the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the
Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic
Substances Control Act as any of the same may be amended, modified or
supplemented from time to time. None of the operations of Borrower is the
subject of any federal or state investigation evaluating whether any remedial
action involving a material expenditure is needed to respond to a release of any
toxic or hazardous waste or substance into the environment. Borrower has no
material contingent liability in connection with any release of any toxic or
hazardous waste or substance into the environment.

       SECTION 2.12. SUBSIDIARIES. As of the date hereof, the only Subsidiaries
in existence are Hook Engineering, Inc. and Crosby, Mead, Benton & Associates.




                                   ARTICLE III
                                   CONDITIONS

       SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of
Bank to extend any credit contemplated by this Agreement is subject to the
fulfillment to Bank's satisfaction of all of the following conditions:

       (a) Approval of Bank Counsel. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.

       (b) Documentation. Bank shall have received, in form and substance
satisfactory to Bank, each of the following, duly executed:

       (i)    This Agreement and each promissory note or other instrument
              required hereby.

       (ii)   Corporate Borrowing Resolution.

       (iii)  Certificates of Incumbency.

       (iv)   Articles of Incorporation.

       (v)    Continuing Guaranty.

       (vi)   Resolution Authorizing Execution of Continuing Guaranty.

       (vii)  Subordination Agreement.

       (viii) Corporate Resolution: Subordination.

       (ix)   Such other documents as Bank may require under any other Section
              of this Agreement.

       (c) Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower and Subsidiaries, taken as a whole, nor any material decline, as
determined by Bank, in the market value of a substantial or material portion of
the assets of Borrower and Subsidiaries, taken as a whole.

       (d) Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Bank.

       SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:

       (a) Compliance. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no condition, event or act which with
the giving of notice or the passage of time or both would constitute such an
Event of Default, shall have occurred and be continuing or shall exist.

       (b) Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.

                                   ARTICLE IV
                              AFFIRMATIVE COVENANTS

       Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, and shall cause each Subsidiary to,
unless Bank otherwise consents in writing:

       SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest,
fees or other liabilities due under any of the Loan Documents at the times and
place and in the manner specified therein.

       SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit any representative of Bank, at any reasonable time, to inspect, audit
and examine such books and records, to make copies of the same, and to inspect
the properties of Borrower or any Subsidiary.

       SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following,
in form and detail satisfactory to Bank:

       (a) not later than 90 days after and as of the end of each fiscal year, a
copy of Borrower's consolidated 10K report filed with the Securities Exchange
Commission, audited by a certified public accountant acceptable to Bank;

       (b) not later than 45 days after and as of the end of each fiscal
quarter, a copy of Borrower's consolidated 10Q report filed with the Securities
Exchange Commission, reviewed by a certified public accountant acceptable to
Bank;


       (c) not later than 30 days after and as of the end of each fiscal
quarter, a work-in-progress or job status report;

       (d) from time to time such other information as Bank may reasonably
request.

       SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; and comply with the provisions of all documents
pursuant to which Borrower and each Subsidiary is organized and/or which govern
Borrower's and each Subsidiary's continued existence and with the requirements
of all laws, rules, regulations and orders of any governmental authority
applicable to Borrower, each Subsidiary and/or their business.

       SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types
and in amounts customarily carried in lines of business similar to that of
Borrower and each Subsidiary, including but not limited to fire, extended
coverage, public liability, flood, property damage and workers' compensation,
with all such insurance carried with companies and in amounts satisfactory to
Bank, and deliver to Bank from time to time at Bank's request schedules setting
forth all insurance then in effect.

       SECTION 4.6. FACILITIES. Keep all properties useful or necessary to
Borrower's and each Subsidiary's business in good repair and condition, and from
time to time make necessary repairs, renewals and replacements thereto so that
such properties shall be fully and efficiently preserved and maintained.

       SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any
and all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower or any Subsidiary
may in good faith contest or as to which a bona fide dispute may arise, and (b)
for which Borrower or such Subsidiary has made provision, to Bank's
satisfaction, for eventual payment thereof in the event Borrower or such
Subsidiary is obligated to make such payment.

       SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any
litigation pending or threatened against Borrower or any Subsidiary with a claim
in excess of $200,000.00.

       SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's consolidated
financial condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to the
extent modified by the definitions herein):

       (a) Ratio of Total Liabilities to Tangible Net Worth not greater than
0.90 to 1.0, determined as of the end of each fiscal quarter, with "Total
Liabilities" defined as the aggregate of current liabilities and non-current
liabilities less subordinated debt, and with "Tangible Net Worth" defined as the
aggregate of total stockholders' equity plus subordinated debt less any
intangible assets.

       (b) Quick Ratio not less than 1.5 to 1.0, determined as of the end of
each fiscal quarter, with "Quick Ratio" defined as the aggregate of unrestricted
cash, unrestricted marketable securities and receivables convertible into cash
divided by total current liabilities, including without limitation, the
outstanding principal balance of the Line of Credit notwithstanding the fact
that advances thereunder may mature more than one (1) year beyond the date of
computation.

       (c) Net income after taxes not less than $1.00, determined as of the end
of each fiscal quarter on a rolling four-quarter basis.

       (d) EBITDA Coverage Ratio not less than 2.75 to 1.0 determined as of the
end of each fiscal quarter on a rolling four-quarter basis, with "EBITDA"
defined as net profit before tax plus interest expense (net of capitalized
interest expense), depreciation expense and amortization expense, and with
"EBITDA Coverage Ratio" defined as EBITDA divided by the aggregate of total
interest expense plus the prior period current maturity of long-term debt and
the prior period current maturity of subordinated debt. "Current maturity of
long-term debt" shall not include Working Capital Advances or Acquisition
Advances under the Line of Credit notwithstanding the fact that the maturity
date thereof may extend more than 1-year beyond the date of computation.

       SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the occurrence of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute an Event of Default; (b) any change in the name or
the organizational structure of Borrower or any Subsidiary; (c) the occurrence
and nature of any Reportable Event or Prohibited Transaction, each as defined in
ERISA, or any funding deficiency with respect to any Plan; or (d) any
termination or cancellation of any insurance policy which Borrower or any
Subsidiary is required to




maintain, or any uninsured or partially uninsured loss in excess of $100,000.00
through liability or property damage, or through fire, theft or any other cause
affecting Borrower's property.

                                    ARTICLE V
                               NEGATIVE COVENANTS

       Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not, and will not cause or permit any
Subsidiary to, without Bank's prior written consent:

       SECTION 5.1 USE OF FUNDS. Use any of the proceeds of any credit extended
hereunder except for the purposes stated -in Article I hereof.

       SECTION 5.2. CAPITAL AND LEASE EXPENDITURES. Make any additional
investment in, incur new lease expenditures, or incur purchase money
indebtedness with respect to fixed assets in any fiscal year in excess of an
aggregate of $3,750,000.00, of which no more than $850,000.00 may be under
vehicle leases.

       SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist
any indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower or any Subsidiary to
Bank, (b) any other liabilities of Borrower or any Subsidiary existing as of,
and disclosed to Bank prior to, the date hereof, (c) leases and purchase money
indebtedness permitted under Section 5.2 above, (d) the subordinated
indebtedness described in Section 1.5 above, and (e) trade liabilities incurred
in the ordinary course of business.

       SECTION 5.4 MERGER, CONSOLIDATION, INVESTMENTS. Merge into or consolidate
with any other entity, nor acquire all or substantially all of the assets of any
other entity, nor purchase or otherwise acquire any stock or other ownership
interests, or otherwise invest, in other entities.

       SECTION 5.5. LOANS, ADVANCES, TRANSFER OF ASSETS. Make any loans or
advances to any person or entity, except (a) any loans and advances existing as
of, and disclosed to Bank prior to, the date hereof, and (b) loans and advances
to Subsidiaries in the ordinary course of Borrower's business; nor make any
substantial change in the nature of Borrower's or any Subsidiary's business as
conducted as of the date hereof; nor sell, lease, transfer or otherwise dispose
of all or a substantial or material portion of Borrower's assets except in the
ordinary course of its business.

       SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower or any
Subsidiary as security for, any liabilities or obligations of any other person
or entity, except any of the foregoing in favor of Bank.

       SECTION 5.7. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrowers stock now
or hereafter outstanding, nor redeem, retire, repurchase or otherwise acquire
any shares of any class of Borrower's stock now or hereafter outstanding;
provided that Borrower is permitted to (a) make distributions of its stock as
required under (i) a Stock Purchase Agreement dated as of October 13, 2000 by
and among The Keith Companies, Inc., as Buyer, Crosby, Mead, Benton & Associates
as Company, and certain shareholders, and (ii) an Asset Purchase Agreement dated
as of January 31, 2001 by and among The Keith Companies, Inc., as Buyer, Hook &
Associates Engineering, Inc. as Company and certain shareholders, and (b)
repurchase Borrower's outstanding common stock, in an aggregate amount, of
$750,000.00 during the term of this Agreement. This covenant shall not be
construed so as to prohibit Borrower from engaging in a stock split, a reverse
stock split, a stock dividend or any other similar capital reorganization
whereby the aggregate value of all capital stock outstanding after such
transaction is not less than the value of all such capital stock before such
transaction.

       SECTION 5.8. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist
a security interest in, or lien upon, all or any portion of Borrower's or any
Subsidiary's assets now owned or hereafter acquired, except any of the foregoing
in favor of Bank or which is existing as of, and disclosed to Bank in writing
prior to, the date hereof, or as permitted under Section 5.2 hereof.




                                   ARTICLE VI
                                EVENTS OF DEFAULT

       SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:

       (a) Borrower shall fail to pay when due any principal, interest, fees or
other amounts payable under any of the Loan Documents.

       (b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower, any
Subsidiary or any other party under this Agreement or any other Loan Document
shall prove to be incorrect, false or misleading in any material respect when
furnished or made.

       (c) Any default in the performance of or compliance with any obligation,
agreement or other provision contained herein or in any other Loan Document
(other than those referred to in subsections (a) and (b) above), and with
respect to any such default which by its nature can be cured, such default shall
continue for a period of twenty (20) days from its occurrence.

       (d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower or any Subsidiary has
incurred any debt or other liability to any person or entity, including Bank,
and, if the debt or other liability is owed to a party other than Bank, the
amount thereof exceed $50,000

       (e) The filing of a notice of judgment lien against Borrower or any
Subsidiary; or the recording of any abstract of judgment against Borrower or any
Subsidiary in any county in which Borrower or such Subsidiary has an interest in
real property; or the service of a notice of levy and/or of a writ of attachment
or execution, or other like process, against the assets of Borrower or any
Subsidiary; or the entry of a judgment against Borrower or any Subsidiary; and
with respect to each of the foregoing, the amount thereof exceeds $50,000.00.

       (f) Borrower or any Subsidiary shall become insolvent, or shall suffer or
consent to or apply for the appointment of a receiver, trustee, custodian or
liquidator of itself or any of its property, or shall generally fail to pay its
debts as they become due, or shall make a general assignment for the benefit of
creditors; Borrower or any Subsidiary shall file a voluntary petition in
bankruptcy, or seeking reorganization, in order to effect a plan or other
arrangement with creditors or any other relief under the Bankruptcy Reform Act,
Title 11 of the United States Code, as amended or recodified from time to time
("Bankruptcy Code"), or under any state or federal law granting relief to
debtors, whether now or hereafter in effect; or any involuntary petition or
proceeding pursuant to the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy, reorganization or other relief for debtors
is filed or commenced against Borrower or any Subsidiary, or Borrower or any
Subsidiary shall file an answer admitting the jurisdiction of the court and the
material allegations of any involuntary petition; or Borrower or any Subsidiary
shall be adjudicated a bankrupt, or an order for relief shall be entered against
Borrower or any Subsidiary by any court of competent jurisdiction under the
Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors.

       (g) The dissolution or liquidation of Borrower or any guarantor
hereunder; or Borrower or any such guarantor, or any of their directors,
stockholders or members, shall take action seeking to effect the dissolution or
liquidation of Borrower or such guarantor.

       (h) Any change in the Senior Management (defined as Chairman or Chief
Executive Officer) of Borrower.

       SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a)
all indebtedness of Borrower under each of the Loan Documents, any term thereof
to the contrary notwithstanding, shall at Bank's option and without notice
become immediately due and payable without presentment, demand, protest or
notice of dishonor, all of which are hereby expressly waived by each Borrower;
(b) the obligation, if any, of Bank to extend any further credit under any of
the Loan Documents shall immediately cease and terminate; and (c) Bank shall
have all rights, powers and remedies available under each of the Loan Documents,
or accorded by law, including without limitation the right to resort to any or
all security for any credit subject hereto and to exercise any or all of the
rights of a beneficiary or secured party pursuant to applicable law. All rights,
powers and remedies of Bank may be exercised at any time by Bank and from time
to time after the occurrence of an Event of Default, are cumulative and not
exclusive, and shall be in addition to any other rights, powers or remedies
provided by law or equity.




                                   ARTICLE VII
                                  MISCELLANEOUS

       SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.

       SECTION 7.2. NOTICES. All notices, requests and demands which any party
is required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:

        BORROWER:        THE KEITH COMPANIES, INC.
                         2955 Red Hill Avenue
                         Costa Mesa, CA 92626
                         Attn: Chief Financial Officer

        BANK:            WELLS FARGO BANK, NATIONAL ASSOCIATION
                         Orange Coast Regional Commercial Banking Office
                         2030 Main Street, Suite 900
                         Irvine, CA 92614

or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.

       SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of Bank's in-house counsel), expended or
incurred by Bank in connection with (a) the negotiation and preparation of this
Agreement and the other Loan Documents (to a maximum of $2,000.00), Bank's
continued administration hereof and thereof, and the preparation of any
amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights
and/or the collection of any amounts which become due to Bank under any of the
Loan Documents, and (c) the prosecution or defense of any action in any way
related to any of the Loan Documents, including without limitation, any action
for declaratory relief, whether incurred at the trial or appellate level, in an
arbitration proceeding or otherwise, and including any of the foregoing incurred
in connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.

       SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in, Bank's rights
and benefits under each of the Loan Documents. In connection therewith, Bank may
disclose all documents and information which Bank now has or may hereafter
acquire relating to any credit subject hereto, Borrower or any Subsidiary or its
business.

       SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other
Loan Documents constitute the entire agreement between Borrower and Bank with
respect to each credit subject hereto and supersede all prior negotiations,
communications, discussions and correspondence concerning the subject matter
hereof. This Agreement may be amended or modified only in writing signed by each
party hereto.

       SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.

       SECTION 7.7. TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.

       SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.


       SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed to be
an original, and all of which when taken together shall constitute one and the
same Agreement.

       SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.

       SECTION 7.11. ARBITRATION.

       (a) Arbitration. The parties hereto agree, upon demand by any party, to
submit to binding arbitration all claims, disputes and controversies between or
among them (and their respective employees, officers, directors, attorneys, and
other agents), whether in tort, contract or otherwise arising out of or relating
to in any way (i) the loan and related Loan Documents which are the subject of
this Agreement and its negotiation, execution, collateralization,
administration, repayment, modification, extension, substitution, formation,
inducement, enforcement, default or termination; or (ii) requests for additional
credit.

       (b) Governing Rules. Any arbitration proceeding will (i) proceed in a
location in California selected by the American Arbitration Association ("AAA")
(ii) be governed by the Federal Arbitration Act (Title 9 of the United States
Code), notwithstanding any conflicting choice of law provision in any of the
documents between the parties; and (iii) be conducted by the AAA, or such other
administrator as the parties shall mutually agree upon, in accordance with the
AAA's commercial dispute resolution procedures, unless the claim or counterclaim
is at least $1,000,000.00 exclusive of claimed interest, arbitration fees and
costs in which case the arbitration shall be conducted in accordance with the
AAA's optional procedures for large, complex commercial disputes (the commercial
dispute resolution procedures or the optional procedures for large, complex
commercial disputes to be referred to, as applicable, as the "Rules"). If there
is any inconsistency between the terms hereof and the Rules, the terms and
procedures set forth herein shall control. Any party who fails or refuses to
submit to arbitration following a demand by any other party shall bear all costs
and expenses incurred by such other party in compelling arbitration of any
dispute. Nothing contained herein shall be deemed to be a waiver by any party
that is a bank of the protections afforded to it under 12 U.S.C. Section 91 or
any similar applicable state law.

       (c) No Waiver of Provisional Remedies, Self-Help and Foreclosure. The
arbitration requirement does not limit the right of any party to (i) foreclose
against real or personal property collateral; (ii) exercise self-help remedies
relating to collateral or proceeds of collateral such as setoff or repossession;
or (iii) obtain provisional or ancillary remedies such as replevin, injunctive
relief, attachment or the appointment of a receiver, before during or after the
pendency of any arbitration proceeding. This exclusion does not constitute a
waiver of the right or obligation of any party to submit any dispute to
arbitration or reference hereunder, including those arising from the exercise of
the actions detailed in sections (i), (ii) and (iii) of this paragraph.

       (d) Arbitrator Qualifications and Powers. Any arbitration proceeding in
which the amount in controversy is $5,000,000.00 or less will be decided by a
single arbitrator selected according to the Rules, and who shall not render an
award of greater than $5,000,000.00. Any dispute in which the amount in
controversy exceeds $5,000,000.00 shall be decided by majority vote of a panel
of three arbitrators; provided however, that all three arbitrators must actively
participate in all hearings and deliberations. The arbitrator will be a neutral
attorney licensed in the State of California or a neutral retired judge of the
state or federal judiciary of California, in either case with a minimum of ten
years experience in the substantive law applicable to the subject matter of the
dispute to be arbitrated. The arbitrator will determine whether or not an issue
is arbitratable and will give effect to the statutes of limitation in
determining any claim. In any arbitration proceeding the arbitrator will decide
(by documents only or with a hearing at the arbitrator's discretion) any
pre-hearing motions which are similar to motions to dismiss for failure to state
a claim or motions for summary adjudication. The arbitrator shall resolve all
disputes in accordance with the substantive law of California and may grant any
remedy or relief that a court of such state could order or grant within the
scope hereof and such ancillary relief as is necessary to make effective any
award. The arbitrator shall also have the power to award recovery of all costs
and fees, to impose sanctions and to take such other action as the arbitrator
deems necessary to the same extent a judge could pursuant to the Federal Rules
of Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Judgment upon the award rendered by the arbitrator may be entered in any
court having jurisdiction. The institution and maintenance of an action for
judicial relief or pursuit of a provisional or ancillary remedy shall not
constitute a waiver of the right of any party, including the plaintiff, to
submit the controversy or claim to arbitration if any other party contests such
action for judicial relief.

       (e) Discovery. In any arbitration proceeding discovery will be permitted
in accordance with the Rules. All discovery shall be expressly limited to
matters directly relevant to the dispute being arbitrated and must be completed
no later than 20 days before the hearing date and within 180 days of the filing
of the dispute with the AAA. Any requests for an extension of the discovery
periods, or any discovery disputes, will be subject to final determination by
the arbitrator upon a




showing that the request for discovery is essential for the party's presentation
and that no alternative means for obtaining information is available.

       (f) Class Proceedings and Consolidations. The resolution of any dispute
arising pursuant to the terms of this Agreement shall be determined by a
separate arbitration proceeding and such dispute shall not be consolidated with
other disputes or included in any class proceeding.

       (g) Payment Of Arbitration Costs And Fees. The arbitrator shall award all
costs and expenses of the arbitration proceeding.

       (h) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no dispute shall be submitted to arbitration if
the dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such dispute is not submitted to arbitration, the dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.

       (i) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business or by applicable law or
regulation. If more than one agreement for arbitration by or between the parties
potentially applies to a dispute, the arbitration provision most directly
related to the Loan Documents or the subject matter of the dispute shall
control. This arbitration provision shall survive termination, amendment or
expiration of any of the Loan Documents or any relationship between the parties.

       IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.

                                                   WELLS FARGO BANK,
THE KEITH COMPANIES, INC.                          NATIONAL ASSOCIATION
By:  /s/ Gary Campanaro                            by:  /s/ Elliot E. Ichinose
- -----------------------                            ---------------------------
Chief Financial Officer                            Vice President

EX-10.20

                                                                   EXHIBIT 10.20


                              LINE OF CREDIT NOTE

$10,000,000.00                                                Irvine, California
                                                               September 4, 2001

       FOR VALUE RECEIVED, the undersigned THE KEITH COMPANIES, INC ("Borrower")
promise to pay to the order of Wells Fargo Bank, National Association ("Bank")
at its Orange Coast Regional Commercial Banking Office at 2030 Main Street,
Suite 900, Irvine, California 90071, or at such other place as the holder hereof
may designate, in lawful money of the United States of America and in
immediately available funds, the principal sum of Ten Million Dollars
($10,000,000.00), or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.

DEFINITIONS:

       As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:

       (a) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in California are authorized or required bylaw to
close.

       (b) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for 1, 2, 3, or 6 months, as designated by Borrower, during which all
or a portion of the outstanding principal balance of this Note bears interest
determined in relation to LIBOR; provided however, that no Fixed Rate Term may
be selected for a principal, amount less than $100,000.00 with respect to
Working Capital Advances or $100,000.00 with respect to Equipment Advances; and
provided further, that no Fixed Rate Term shall extend beyond the scheduled
maturity date hereof. If any Fixed Rate Term would end on a day which is not a
Business Day, then such Fixed Rate Term shall be extended to the next succeeding
Business Day.

       (c) "LIBOR" means the rate per annum and determined pursuant to the
following formula:

       LIBOR  =    Base LIBOR
                   ----------
                   100% - LIBOR Reserve Percentage

       (i) "Base LIBOR" means the rate per annum for United States dollar
deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the
understanding that such rate is quoted by Bank for the purpose of calculating
effective rates of interest for loans making reference thereto, on the first day
of a Fixed Rate Term for delivery of funds on said date for a period of time
approximately equal to the number of days in such Fixed Rate Term and in an
amount approximately equal to the principal amount to which such Fixed Rate Term
applies. Borrower understands and agrees that Bank may base its quotation of the
Inter-Bank Market Offered Rate upon such offers or other market indicators of
the Inter-Bank Market as Bank in its discretion deems appropriate including, but
not limited to, the rate offered for U.S. dollar deposits on the London
Inter-Bank Market.

       (ii) "LIBOR Reserve Percentage" means the reserve percentage prescribed
by the Board of Governors of the Federal Reserve System (or any successor) for
"Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve
Board, as amended), adjusted by Bank for expected changes in such reserve
percentage during the applicable Fixed Rate Term.

       (d) "Prime Rate" means at anytime the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate is one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.

INTEREST:

       (a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum equal to the Prime Rate in effect from time
to time, or (ii) at a fixed rate per annum determined by Bank to be one and one
quarter percent (1.25%) above LIBOR in effect on the first day of the applicable
Fixed Rate Term. When interest is determined in relation to the Prime Rate, each
change in the rate of interest hereunder shall become effective on the date each
Prime Rate change is announced within Bank. With


respect to each LIBOR selection hereunder, Bank is hereby authorized to note the
date, principal amount, interest rate and Fixed Rate Term applicable thereto and
any payments made thereon on Bank's books and records (either manually or by
electronic entry) and/or on any schedule attached to this Note, which notations
shall be prima facie evidence of the accuracy of the information noted.

       (b) Selection of Interest Rate Options. At anytime any portion of this
Note bears interest determined in relation to LIBOR, it maybe continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the
interest rate option selected by Borrower; (ii) the principal amount subject
thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed
Rate Term. Any such notice may be given by telephone (or such other electronic
method as Bank may permit) so long as, with respect to each LIBOR selection, (A)
if requested by Bank, Borrower provides to Bank written confirmation thereof not
later than three (3) Business Days after such notice is given, and (B) such
notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate
Term, or at a later time during any Business Day if Bank, at it's, sole option
but without obligation to do so, accepts Borrowers notice and quotes a fixed
rate to Borrower. If Borrower does not immediately accept a fixed rate when
quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request
from Borrower shall be subject to a redetermination by Bank of the applicable
fixed rate. If no specific designation of interest is made at the time any
advance is requested hereunder or at the end of any Fixed Rate Term, Borrower
shall be deemed to have made a Prime Rate interest selection for such advance or
the principal amount to which such Fixed Rate Term applied.

       (c) Taxes and Regulatory Costs. Borrower shall pay to Bank immediately
upon demand, in addition to any other amounts due or to become due hereunder,
any and all (i) withholdings, interest equalization taxes, stamp taxes or other
taxes (except income and franchise taxes) imposed by any domestic or foreign
governmental authority and related in any manner to LIBOR, and (ii) future,
supplemental, emergency or other changes in the LIBOR Reserve Percentage,
assessment rates imposed by the Federal Deposit Insurance Corporation, or
similar requirements or costs imposed by any domestic or foreign governmental
authority or resulting from compliance by Bank with any request or directive
(whether or not having the force of law) from any central bank or other
governmental authority and related in any manner to LIBOR to the extent they are
not included in the calculation of LIBOR. In determining which of the foregoing
are attributable to any LIBOR option available to Borrower hereunder, any
reasonable allocation made by Bank among its operations shall be conclusive and
binding upon Borrower.

       (d) Payment of Interest. Interest accrued on this Note shall be payable
on the third day of each month, commencing October 3, 2001.

       (e) Default Interest. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to two percent (2%) above
the rate of interest from time to time applicable to this Note.

BORROWING AND REPAYMENT:

       (a) Borrowing and Repayment. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow Working Capital Advances and Acquisition Advances, subject to all
of the limitations, terms and conditions of this Note and of any document
executed in connection with or governing this Note; provided however, that the
total outstanding borrowings under this Note shall not at anytime exceed the
principal amount stated above. The unpaid principal balance of this obligation
at any time shall be the total amounts advanced hereunder by the holder hereof
less the amount of principal payments made hereon by or for any Borrower, which
balance may be endorsed hereon from time to time by the holder. The outstanding
principal balance of Equipment Advances on September 1, 2002 shall be due and
payable on the third day of each month in 48 equal consecutive installments,
each equal to 1/48th of such outstanding principal balance, commencing on
October 3, 2002 to and including September 3, 2006. The outstanding principal
balance of Working Capital Advances and Acquisition Advances shall be due and
payable in full on June 15, 2003.

       (b) Advances. Acquisition Advances and Working Capital Advances, subject
to the limitations set forth in the Credit Agreement (defined below), may be
made by the holder at the oral or written request of (i) Aram Keith or Gary
Campanaro, any one acting alone, who are authorized to request advances and
direct the disposition of any advances




until written notice of the revocation of such authority is received by the
holder at the office designated above, or (ii) any person, with respect to
advances deposited to the credit of any account of any Borrower with the holder,
which advances, when so deposited, shall be conclusively presumed to have been
made to or for the benefit of each Borrower regardless of the fact that persons
other than those authorized to request advances may have authority to draw
against such account. The holder shall have no obligation to determine whether
any person requesting an advance is or has been authorized by any Borrower.
Equipment Advances shall be available in the manner set forth in the Credit
Agreement.

       (c) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof All payments credited to principal shall be applied to
Working Capital Advances, Acquisition Advances and/or Equipment Advances as
described in the Credit Agreement, and shall be so applied first, to the
outstanding principal balance of applicable advances which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of the advances which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.

PREPAYMENT:

       (a) Prime Rate. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to the Prime Rate at anytime, in any
amount and without penalty.

       (b) LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at anytime and in the
minimum amount of $500,000.00; provided however, that if the outstanding
principal balance of such portion of this Note is less than said amount, the
minimum prepayment amount shall be the entire outstanding principal balance
thereof. In consideration of Bank providing this prepayment option to Borrower,
or if any such portion of this Note shall become due and payable at any time
prior to the last day of the Fixed Rate Term applicable thereto by acceleration
or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is
the sum of the discounted monthly differences for each month from the month of
prepayment through the month in which such Fixed Rate Term matures, calculated
as follows for each such month:

       (i) Determine the amount of interest which would have accrued each month
       on the amount prepaid at the interest rate applicable to such amount had
       it remained outstanding until the last day of the Fixed Rate Term
       applicable thereto.

       (ii) Subtract from the amount determined in (i) above the amount of
       interest which would have accrued for the same month on the amount
       prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect
       on the date of prepayment for new loans made for such term and in a
       principal amount equal to the amount prepaid.

       (iii) If the result obtained in (ii) for any month is greater than zero,
       discount that difference by LIBOR used in (ii) above.

Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above-described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum 2.00% above the Prime Rate in
effect from time to time (computed on the basis of a 360-day year, actual days
elapsed). Each change in the rate of interest on any such past due prepayment
fee shall become effective on the date each Prime Rate change is announced
within Bank. Prepayments of principal applied to Equipment Advances after
September 1, 2002 shall be applied to the scheduled installments in inverse
order of maturity.

EVENTS OF DEFAULT:

       This Note is made pursuant to and is subject to the terms and conditions
of that certain Credit Agreement between Borrower and Bank dated as of September
4, 2001, as amended or restated from time to time (the "Credit Agreement"). Any
default in the payment or performance of any obligation under this Note, or any
defined event of default under the Credit Agreement, shall constitute an "Event
of Default" under this Note.

MISCELLANEOUS:




       (a) Remedies. Upon the occurrence of any Event of Default, the holder of
this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by each Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Each Borrower shall pay to the holder
immediately upon demand the full amount of all payments, advances, charges,
costs and expenses, including reasonable attorneys' fees (to include outside
counsel fees and all allocated costs of the holders in-house counsel), expended
or incurred by the holder in connection with the enforcement of the holders
rights and/or the collection of any amounts which become due to the holder under
this Note, and the prosecution or defense of any action in anyway related to
this Note, including without limitation, any action for declaratory relief,
whether incurred at the trial or appellate level, in an arbitration proceeding
or otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to any
Borrower or any other person or entity.

       (b) Obligations Joint and Several. Should more than one person or entity
sign this Note as a Borrower, the obligations of each such Borrower shall be
joint and several.

       (c) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first
written above.

THE KEITH COMPANIES, INC.

By: /s/ Gary Campanaro
- ----------------------
Title: CFO


                           ADDENDUM TO PROMISSORY NOTE
                        (PRIME/LIBOR PRICING ADJUSTMENTS)

       THIS ADDENDUM is attached to and made a part of that certain promissory
note executed by THE KEITH COMPANIES, INC. ("Borrower") and payable to WELLS
FARGO BANK, NATIONAL ASSOCIATION ("Bank"), or order, dated as of September 4,
2001, in the principal amount of Ten Million Dollars ($10,000,000.00) (the
"Note").

       The following provisions are hereby incorporated into the Note to reflect
the interest rate adjustments agreed to by Bank and Borrower:

INTEREST RATE ADJUSTMENTS:

       (a) Initial Interest Rates. The initial interest rates applicable to this
Note shall be the rates set forth in the "Interest" paragraph herein.

       (b) Interest Rate Adjustments. In addition to any interest rate
adjustments resulting from changes in the Prime Rate, Bank shall adjust the
Prime Rate and LIBOR margins used to determine the rates of interest applicable
to this Note on a quarterly basis, commencing with Borrower's fiscal quarter
ending June 30, 2001, if required to reflect a change in Borrower's ratio of
Total Liabilities to Tangible Net Worth (as defined in the Credit Agreement
referenced herein), in accordance with the following grid:



                                    Applicable            Applicable
        Total Liabilities to        Prime Rate            LIBOR
        Tangible Net Worth          Margin                Margin
        ------------------          ----------            ----------
                                                    
        0.65 to 1.0 or greater             0%               1.75%

        at least 0.40 to 1.0 but
        less than 0.65 to 1.0              0%               1.50%

        less than 0.40 to 1.0          -0.25%               1.25%


Each such adjustment shall be effective on the first Business Day of Borrower's
fiscal quarter following the quarter during which Bank receives and reviews
Borrower's most current fiscal quarter-end financial statements in accordance
with any requirements established by Bank for the preparation and delivery
thereof.

       IN WITNESS WHEREOF, this Addendum has been executed as of the same date
as the Note.

THE KEITH COMPANIES, INC.


By: /s/ Gary Campanaro
- -----------------------
Chief Financial Officer