-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ShRd4T6VDTBbb/Kxf7yFTGjQ2794mLzO5vPPIOnarnpQyiXM45yKfiLUCoi5bkRb 6Vl9PBuhbJxkW9o4CwXgxA== 0001017062-99-000748.txt : 19990429 0001017062-99-000748.hdr.sgml : 19990429 ACCESSION NUMBER: 0001017062-99-000748 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 40 FILED AS OF DATE: 19990428 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEITH COMPANIES INC CENTRAL INDEX KEY: 0001080922 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 330203193 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-77273 FILM NUMBER: 99603555 BUSINESS ADDRESS: STREET 1: 2955 RED HILL AVENUE CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7146687001 MAIL ADDRESS: STREET 1: 2955 RED HILL AVENUE CITY: COSTA MESA STATE: CA ZIP: 92626 S-1 1 REGISTRATION STATEMENT As Filed with the Securities and Exchange Commission on April 28, 1999 Registration No. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 -------------- THE KEITH COMPANIES, INC. (Exact name of registrant as specified in charter) California 8711 33-0203193 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification No.) incorporation or Classification Code organization) Number) -------------- 2955 Red Hill Avenue Costa Mesa, California 92626 (714) 540-0800 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) -------------- Aram H. Keith Chief Executive Officer The Keith Companies, Inc. 2955 Red Hill Avenue Costa Mesa, California 92626 (714) 540-0800 (Name, address, including zip code, and telephone number, including area code, of agent for service) -------------- Copies to: JAMES S. WEISZ, ESQ. JEREMY D. GLASER, ESQ. NATALIE DUNDAS, ESQ. COOLEY GODWARD LLP NATASHA LAKAMP, ESQ. 4365 Executive Drive, Suite 1100 RUTAN & TUCKER, LLP San Diego, California 92121 611 Anton Boulevard, 14th Floor (619) 550-6000 Costa Mesa, California 92626 (714) 641-5100 -------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. -------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
Proposed Proposed Amount Maximum Maximum Title of Each Class of to be Offering Price Aggregate Amount of Securities to be Registered Registered(1) Per Share(2) Offering Price(1)(2) Registration Fee - -------------------------------------------------------------------------------------------------- Common Stock, no par value................. 2,012,500 shares $10.00 $20,125,000 $5,595.00 - -------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------
(1) Includes 262,500 shares of common stock issuable upon exercise of the underwriters' over-allotment option. (2) Estimated using the proposed maximum offering price per share solely for the purpose of calculating the registration fee under Rule 457. -------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell securities, and we are not soliciting offers to buy these + +securities, in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, April 28, 1999 1,750,000 Shares [LOGO OF TKCI TO APPEAR HERE] Common Stock Of the shares of common stock offered, all 1,750,000 shares are being sold by The Keith Companies, Inc. We propose to list the shares on the Nasdaq National Market under the symbol "TKCI." This is our initial public offering and no public market currently exists for our shares. We currently estimate that the initial public offering price of our common stock will be between $8.00 and $10.00 per share. We have granted the underwriters an option, exercisable for 45 days from the date of this prospectus, to purchase a maximum of 262,500 additional shares to cover over-allotments of shares. See "Underwriting" for information related to the factors to be considered in determining the initial public offering price. This investment involves risk. See "Risks Factors" beginning on page 8. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
Underwriting Price Discounts and Proceeds to to Public Commissions TKCI Per Share................................ $ $ $ Total.................................... $ $ $
FIRST SECURITY VAN KASPER E*OFFERING Corp. , 1999 [COLLAGE OF TYPICAL PROJECTS WITH PHOTOGRAPHS AND BRIEF DESCRIPTIONS OF EACH PHOTOGRAPH] You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from the information contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions in which offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. ---------------- TABLE OF CONTENTS
Page ---- PROSPECTUS SUMMARY....................................................... 4 RISK FACTORS............................................................. 8 USE OF PROCEEDS.......................................................... 17 DIVIDEND POLICY.......................................................... 17 PRIOR S CORPORATION STATUS............................................... 18 ACQUISITION.............................................................. 18 CAPITALIZATION........................................................... 19 DILUTION................................................................. 20 SELECTED FINANCIAL DATA.................................................. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................................... 24 BUSINESS................................................................. 35 MANAGEMENT............................................................... 51 CERTAIN TRANSACTIONS..................................................... 57 PRINCIPAL SHAREHOLDERS................................................... 60 DESCRIPTION OF CAPITAL STOCK............................................. 61 SHARES ELIGIBLE FOR FUTURE SALE.......................................... 62 UNDERWRITING............................................................. 64 LEGAL MATTERS............................................................ 66 EXPERTS.................................................................. 66 WHERE YOU CAN FIND MORE INFORMATION...................................... 67 PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................... P-1 INDEX TO FINANCIAL STATEMENTS............................................ F-1
All trademarks or trade names referred to in this prospectus are the property of their respective owners. 3 PROSPECTUS SUMMARY The following is a summary of the more detailed information and financial statements appearing elsewhere in this prospectus. This summary is not complete and may not contain all of the information that is important to you. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and financial statements. We are one of the leading engineering, consulting and technical services firms in the western United States. We specialize in: . planning, engineering, designing, permitting and other services for a wide range of residential, commercial and recreational real estate development and public works projects and for wireless telecommunications networks . mechanical, electrical, chemical and other industrial engineering services to design and improve the efficiency and reliability of automated and manufacturing processes, production lines and fire protection systems We believe that our success is due to a number of factors, including: . our well-established reputation for providing timely and high quality services to our clients . our experienced professional staff . our ability to provide our clients with a full range of services, which many of our competitors are unable to provide, resulting in both cost and time savings to our clients as they no longer need to manage multiple providers . our ability to provide the increased scope of services that may arise beyond the original contract, often resulting in the fees paid to us significantly exceeding the original contract The geographic regions we serve in the western United States are undergoing economic expansion. Historical and projected growth in population, personal income and employment are all combining to provide a robust economic environment in which our services are necessary. As an example, we believe that southern California residential real estate development is in the beginning of the third year of what we believe has historically been a seven to ten year upturn for new home building. Our business strategy includes the following: . Maintain the high quality of our services . Continue to recruit and retain highly qualified personnel . Expand the geographic scope of our operations in the western United States . Expand our service offerings and the industries we serve . Continue to acquire and effectively integrate new business operations 4 We have provided engineering, consulting and technical services for over 16 years. Since late 1997, we have made three acquisitions that enabled us to expand our service offerings to include process engineering design, mechanical, chemical and electrical engineering, environmental waste processing systems design, petrochemical design, services relating to flood control and expanded water resources engineering, environmental permitting, and biological surveys and studies. In addition, we have expanded geographically into central and northern California and Utah, and we intend to continue to expand throughout the western United States to better service our clients. We employ 461 professionals in our eight offices located in three states. Our clients include major national and regional real estate development firms such as The Irvine Company, Kaufman & Broad Home Corporation and Pulte Home Corporation. We also serve architects, water districts, federal, state and local governments, including Orange County Transportation Authority, Metropolitan Water District of Southern California and Central Utah Water Conservation District. In addition, we serve cellular telephone service providers, universities and manufacturers of a wide variety of products, including Dow Chemical Company, Toyota Motor Company and Enron Energy Services. Our principal executive offices are located at 2955 Red Hill Avenue, Costa Mesa, California 92626, and our telephone number is (714) 540-0800. Our Internet address is http://www.keithco.com. Information contained on our web site should not be considered to be part of this prospectus. 5 The Offering Common stock offered ....... 1,750,000 shares Common stock to be outstanding after the offering(/1/)............... 5,309,708 shares Use of proceeds............. We intend to use the estimated net cash proceeds of $14.2 million that we will receive from this offering to partially finance the acquisition of substantially all of the assets and certain of the liabilities of Thompson-Hysell, to repay existing indebtedness and for general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol............... TKCI - ------------------ (1) Excludes outstanding options, warrants and other rights to acquire TKCI common stock. See "Capitalization." Simultaneously with the consummation of this offering, TKCI will acquire substantially all of the assets and assume certain liabilities of Thompson- Hysell Inc. As used in this prospectus, except where the context clearly requires otherwise, references made to "TKCI," "we," "our," or "us" mean The Keith Companies, Inc. and its subsidiaries (including substantially all of the assets and certain liabilities of Thompson-Hysell). Unless otherwise indicated, the information in this prospectus, including share and per share data: . assumes no exercise of the underwriters' over-allotment option . assumes no exercise of any other outstanding options, warrants or other rights to acquire shares of TKCI common stock . gives effect to the acquisition of substantially all of the assets and the assumption of certain of the liabilities of Thompson-Hysell . reflects a 2.70-for-1 reverse split of our common stock to be effected prior to the consummation of this offering 6 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Summary Financial Information
Three Months Year Ended December 31, Ended March 31, ------------------------------ ------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (in thousands, except share and per share data) Historical Statements of Operations Data(/2/): Net revenue................ $ 12,966 $ 18,592 $ 29,182 $ 5,962 $ 8,969 Gross profit............... 3,737 6,721 9,895 1,882 3,055 Income (loss) from operations................ (1,223) 2,236 4,037 412 1,159 Interest expense........... 720 852 967 221 260 Income (loss) before provision (benefit) for income taxes and extraordinary gain........ (1,948) 1,301 3,004 184 918 Extraordinary gain on forgiveness of liability(/1/)............ 2,686 -- -- -- -- Net income................. $ 735 $ 2,698 $ 1,654 $ 68 $ 529 --------- --------- --------- --------- --------- Pro Forma Supplemental Data(/3/): Net income................. $ 428 $ 755 $ 1,742 $ 107 $ 532 --------- --------- --------- --------- --------- Net income per share--diluted............ $ 0.14 $ 0.24 $ 0.47 $ 0.03 $ 0.14 ========= ========= ========= ========= ========= Weighted average shares outstanding--diluted...... 2,962,963 3,104,994 3,728,729 3,559,708 3,866,479 ========= ========= ========= ========= ========= Pro Forma Statements of Income Data(/3/)(/4/): Net revenue................ $ 37,971 $ 11,271 Gross profit............... 14,077 4,163 Income from operations..... 5,729 1,718 Interest expense........... 421 120 Income before provision for income taxes.............. 5,243 1,623 Provision for income taxes..................... 2,202 682 Net income................. $ 3,041 $ 941 ========= ========= Net income per share-- diluted................... $ 0.55 $ 0.17 ========= ========= Weighted average shares outstanding--diluted...... 5,568,957 5,611,360 ========= =========
As of March 31, 1999 ------------------------ Actual As Adjusted(/5/) ------- ---------------- (in thousands) Balance Sheet Data: Working capital.................. $ 567 $ 9,199 Total assets..................... 15,689 23,969 Total debt....................... 9,674 3,835 Total stockholders' equity....... 658 14,641
- ------------------ (1) In 1996, amounts owed through December 31, 1995, relating to excessive lease space in one of our facilities, were forgiven, resulting in an extraordinary gain on the forgiveness of the liability and accrued but unpaid rent of $2.7 million. See note 17 to the TKCI consolidated financial statements. (2) Prior to August 1, 1998, Keith Engineering, Inc., which is included in TKCI's consolidated financial statements, elected to be taxed as an S corporation. See "Prior S Corporation Status." (3) Amounts reflect pro forma adjustments for provision for federal and state income taxes at an assumed effective income tax rate of 42%. Net income per share--diluted reflects a 2.70-for-1 reverse split of TKCI's common stock to be effected prior to the consummation of this offering. (4) Amounts reflect pro forma adjustments for our initial public offering of 1,750,000 shares of common stock at an assumed initial public offering price of $9.00 per share, the acquisition and the application of the estimated net proceeds from this offering as if the transactions had occurred on January 1, 1998. See "Pro Forma Condensed Consolidated Financial Statements." (5) Amounts reflect pro forma adjustments for our initial public offering of 1,750,000 shares of common stock at an assumed initial public offering price of $9.00 per share, the acquisition and the application of the estimated net proceeds from this offering as if the transactions had occurred on March 31, 1999. See "Pro Forma Condensed Consolidated Financial Statements." 7 RISK FACTORS You should consider carefully the following risks before you decide to buy our common stock. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties may also adversely impact our business operations. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In such case, the trading price of our common stock could decline, and you may lose all or part of the money you paid to buy our common stock. A substantial portion of our business is dependent on the real estate market We estimate that during 1998 at least 85% of our services were rendered in connection with commercial and residential real estate development projects. Real estate activity is highly cyclical in nature and is highly sensitive to the rate of growth in employment within a geographic area, and as a result, our revenue base can be adversely affected during periods of negative job growth. From 1991 to 1996, our operations and financial condition were materially adversely impacted during the real estate market downturn in southern California, and we experienced cash flow difficulties and substantial operating losses. Our business, financial condition and results of operations may also be adversely affected by conditions that impact the real estate market in general, including, among other things: . changes in national economic conditions, changes in local market conditions due to changes in general or local economic conditions and neighborhood characteristics . changes in interest rates and in the availability, cost and terms of financing . the impact of present or future environmental legislation and compliance with environmental laws and other regulatory requirements . changes in real estate tax rates and assessments and other operating expenses . adverse changes in governmental rules and fiscal policies . adverse changes in zoning and other land use laws . earthquakes and other natural disasters (which may result in uninsured losses) and other factors which are beyond our control A substantial portion of our business is conducted in southern California We estimate that during 1998 at least 50% of our revenues were derived from services rendered in connection with commercial and residential real estate developments in southern California. Consequently, we are disproportionately exposed to adverse economic and other conditions affecting the southern California real estate market or local economy, any of which could have a material adverse effect on our business, financial condition and results of operations. From 1991 to 1996, concurrent with the economic recession in southern California, we experienced cash flow difficulties and substantial operating losses. 8 Our ability to attract and retain employees is critical to our business We derive our revenues almost exclusively from services performed by our professionals. Our future performance will continue to depend in large part upon our ability to attract and retain highly skilled professionals. Qualified professionals are in great demand and are likely to remain a limited resource for the foreseeable future. There is significant competition for employees with the requisite skills from major and boutique consulting, engineering, research and other professional service firms. We may not be able to attract and retain a substantial majority of our existing or future professionals for the long term. The loss of the services of, or the failure to recruit, a significant number of professionals could adversely affect our ability to secure and complete engagements and could have an adverse effect on our business, financial condition and results of operations. In addition, former employees might compete with us with respect to ongoing or potential future projects. We may face challenges managing our growth We have grown rapidly and intend to pursue further growth as part of our business strategy. Our rapid growth has presented and will continue to present numerous operational challenges, such as the management of an expanding array of engineering, consulting and technical services, the assimilation of financial reporting systems, increased pressure on our senior management and increased demand on our systems and internal controls. We may not be able to maintain or accelerate our current growth, effectively manage our expanding operations or achieve planned growth on a timely or profitable basis. Our inability to manage growth effectively and efficiently could materially and adversely affect our business, financial condition and results of operations. We may fail to successfully integrate our acquisitions A significant part of our growth strategy is to acquire other companies that complement or expand the scope of our services and/or broaden our geographic presence. Acquisitions involve certain risks that could cause our actual growth or operating results to differ from our expectations or the expectations of security analysts. For example: . We may not be able to identify suitable acquisition candidates or to acquire additional companies on favorable terms. . We compete with others to acquire companies. We believe that this competition will increase and may result in decreased availability or increased prices for suitable acquisition candidates. . We may not be able to obtain the necessary financing, on favorable terms or at all, to finance any of our potential acquisitions. . We may ultimately fail to consummate an acquisition even if we announce that we plan to acquire a company. . We may fail to integrate successfully or manage any acquired company due to differences in business backgrounds or corporate cultures. 9 . An acquired company may not perform as we expect. . We may choose to acquire a company that is less profitable than us or has lower profit margins than ours. . We may find it difficult to provide a consistent quality of service across our geographically diverse operations. . If we fail to integrate successfully any acquired company, our reputation could be damaged, potentially making it more difficult to market our services or to acquire additional companies in the future. . Our acquisition strategy may divert management's attention away from our primary service offerings, result in the loss of key clients and/or personnel and expose us to unanticipated liabilities. Since December 1997, we have acquired three companies in two separate transactions. At the present time, however, with the exception of our acquisition of substantially all of the assets and certain of the liabilities of Thompson-Hysell concurrent with this offering, we have no understandings or agreements relating to any additional acquisitions. We expect to continue to acquire companies as an element of our growth strategy in the future. We may need to sell additional shares of common stock and/or incur additional debt to finance future acquisitions Our business strategy is to expand into new markets and enhance our position in existing markets through the acquisition of complementary businesses. In order to successfully complete targeted acquisitions, it may be necessary for us to issue additional equity securities that could dilute your stock ownership. We may also incur additional debt and amortize expenses related to goodwill and other tangible assets if we acquire another company, and this could negatively impact our business, financial condition and results of operations. We rely on a relatively limited number of clients We derive a significant portion of our revenues and profits from a relatively limited number of clients. For example, net revenue from our five most significant clients accounted for approximately 21% of our total net revenues for the year ended December 31, 1998. There can be no assurance that any of our most significant clients will continue to engage us for additional projects or will do so at the same revenue levels. If we lose any significant client, our business, financial condition and results of operations could be materially adversely affected. In addition, the level of our services required by a significant client may diminish over the life of its relationship with us, and we may not be successful in establishing relationships with new clients as this occurs. We compete with other consulting firms The market for services in the engineering, consulting and technical services industries is highly competitive and is based primarily on quality of service, relative experience, staffing 10 capabilities, reputation, geographic presence, stability and price. Such competition is likely to increase in the future. Many of our competitors have more personnel and greater financial, technical and marketing resources than us. Such competitors include many larger consulting firms such as TetraTech Inc. and URS Corporation. We can offer no assurance that we will be able to compete successfully in the future with these or other competitors. We depend on key personnel Our success is highly dependent upon the efforts, abilities, business generation capabilities and project execution of our officers, especially those of Aram H. Keith, our President and Chief Executive Officer. We do not have an employment agreement with, or maintain key man life insurance on, Mr. Keith. If we lose his services or the services of other officers for any reason, our business, operating results and financial condition, including our ability to secure and complete engagements and retain some of our employees, could be materially adversely affected. There are risks associated with our contracts Our services are provided primarily through three types of contracts: fixed- price, time-and-materials and time-and-materials with "not to exceed" provisions. Under fixed price contracts, we perform services under a contract at a stipulated price. Under time-and-materials contracts, we are reimbursed for the number of labor hours expended at an established hourly rate negotiated in the contract, plus the cost of materials incurred. Under time-and-materials with "not to exceed" provisions contracts, we are reimbursed similar to time- and-materials contracts; however, there is a stated maximum dollar amount for the services to be provided under the contract. Fixed-price contracts and time-and-materials contracts with "not to exceed" provisions protect clients but expose us to a greater number of risks than time and materials contracts. These risks include: . underestimation of costs . problems with new technologies . unforeseen costs or difficulties . delays beyond our control . economic and other changes that may occur during the contract period If any of these events occur, a loss on the contract could be incurred and could result in a material adverse effect on our business, financial condition and results of operations. In fiscal 1998, approximately 54%, 17% and 29% of our net revenue was derived from fixed-price, time-and-materials and time-and-materials with "not to exceed" provisions contracts, respectively. 11 Our services may expose us to liability Our services involve significant risks of professional and other liabilities which may substantially exceed the fees we derive from our services. Our business activities could expose us to potential liability under various environmental laws, such as the Comprehensive Environmental Response, Compensation and Liability Act of 1980. In addition, from time to time, we contractually assume liability under indemnification agreements. We cannot predict the magnitude of such potential liabilities. We currently maintain comprehensive general liability, umbrella and professional liability insurance policies. These policies are "claims made" policies. Thus, only claims made during the term of the policy are covered. If we terminate our policies and do not obtain retroactive coverage, we would be uninsured for claims made after termination even if these claims are based on events or acts that occurred during the term of the policy. Our insurance may not protect us against liability because our policies typically have various exclusions and retentions. In addition, if we expand into new markets, we may not be able to obtain insurance coverage for such activities or, if insurance is obtained, the dollar amount of any liabilities incurred could exceed our insurance coverage. A partially or completely uninsured claim, if successful and of significant magnitude, could have a material adverse effect on our business, financial condition and results of operations. We rely on subcontractors Under some of our contracts, we rely on the efforts and skills of subcontractors for the performance of certain tasks. In 1998, subcontractor costs comprised approximately 14% of our gross revenue. The absence of qualified subcontractors with whom we have a satisfactory relationship could adversely affect the quality of our service and our ability to perform under some of our contracts. Our quarterly results may fluctuate Variations in our revenues and operating results can occur from quarter to quarter as a result of a number of factors, including: . client engagements commenced and completed during a quarter . seasonality . the number of business days in a quarter . the number of work days lost as a result of adverse weather conditions or delays caused by third parties . employee hiring, billing and utilization rates . the consummation of acquisitions . the length of the sales cycle on new business . the ability of clients to terminate engagements without penalty 12 . our ability to efficiently shift our employees from project to project . the size and scope of assignments . general economic conditions Our business is subject to seasonal and quarterly variations due primarily to climactic conditions. Due primarily to this variable, typically, the first and fourth quarters of our fiscal year have lower revenues and operating results than the second and third quarters. In addition, because a portion of our expenses are relatively fixed, significant variations in revenues or the number of days in a quarter can cause fluctuations in operating results from quarter to quarter and could result in losses. Our existing shareholders will retain significant control over TKCI following this offering Upon completion of this offering, our directors and executive officers and their respective affiliates will beneficially own 2,959,629 shares of common stock, or approximately 55.39% of our outstanding common stock. Of these shares, 1,533,704 shares, or approximately 28.7% of our outstanding common stock, will be owned by Aram H. Keith, and as a result, he will have the ability to control the election of directors and the results of other matters submitted to a vote of shareholders. In addition, Floyd S. Reid, who co-founded TKCI with Mr. Keith, will own 509,444 shares or approximately 9.53% of our outstanding common stock; and Walter W. Cruttenden, III, one of our directors, will own 418,137 shares or approximately 7.83% of our outstanding common stock. Such concentration of ownership may have the effect of delaying or preventing a change in control of us and may adversely affect the voting or other rights of other holders of our common stock. The book value of your common stock will be substantially diluted in this offering and may be diluted in the future The offering price for the shares of common stock in this offering is substantially higher than the book value per share of our common stock. Consequently, if you purchase shares of our common stock in this offering you will incur immediate and substantial dilution. In addition, we may sell shares in the future which may cause further dilution. If we issue shares of preferred stock, the rights of holders of common stock will be subject to the rights of holders of preferred stock Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any vote or action by the shareholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of the preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. 13 There has been no prior public market for our common stock and our stock price will likely be subject to significant volatility Prior to this offering, there has been no public market for our common stock, and there can be no assurance that an active public market for our common stock will develop or be sustained after the offering. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters and may bear no relationship to our book value, earnings history or other established criteria of value or to the price at which the common stock will trade after the offering. In addition, in recent years the stock market has experienced extreme price and volume fluctuations that have affected the market price of many service-based companies and which have, at times, been unrelated to the operating performance of the specific companies whose stocks were affected. Such fluctuations could adversely affect the market price of our common stock. We believe that in addition to the other factors discussed in this "Risk Factors" section, the following factors could also cause the market price of our common stock to fluctuate, perhaps substantially: . quarterly fluctuations in our operating results . loss of key personnel . general conditions in the financial markets, the real estate market, the engineering, consulting and technical services market and the worldwide economy . fluctuations in interest rates . announcement and market acceptance of acquisitions . our failure to meet securities analysts' expectations . changes in accounting principles . sales of common stock by existing shareholders or holders of options or warrants . adverse circumstances affecting the introduction or market acceptance of new services offered by us . announcements of key developments by competitors The large number of shares available for future sale could adversely affect the price of our publicly traded stock After this offering, the possibility that substantial amounts of our common stock may be sold in the public market will likely have a material adverse effect on prevailing market prices of our common stock and could impair our ability to raise capital through the sale of equity securities. Upon completion of this offering, 5,309,708 shares of our common stock will be outstanding. As of March 31, 1999, we have also granted options to employees to acquire an aggregate of 485,074 shares of common stock subject to certain vesting requirements pursuant to our Amended and Restated 1994 Stock Incentive Plan. Prior to the 14 consummation of the offering, we will also grant options to purchase an aggregate of 14,815 shares to outside directors under this plan. We intend to register on a registration statement on Form S-8, shortly after the closing of this offering, all 499,889 shares of common stock underlying the options then outstanding or issuable under such plan. We may also issue 148,148 shares of common stock in 2000 (which may be adjusted upward or downward depending on certain conditions), will reserve 37,037 shares of our common stock under our Amended and Restated 1994 Stock Incentive Plan and will issue a warrant to acquire 66,667 shares of TKCI common stock in relation to the acquisition of substantially all of the assets and the assumption of certain of the liabilities of Thompson-Hysell. We have also issued warrants to acquire 83,333 shares of TKCI common stock in connection with earlier acquisitions. The 1,750,000 shares sold in this offering (other than shares that may be purchased by our affiliates) will be freely tradeable. All of the remaining 5,309,708 shares held by existing shareholders will be "restricted securities" as defined in Rule 144 of the Securities Act of 1933, of which 492,037 shares will be eligible for sale in the public market on the date of this prospectus in reliance on Rule 144(k). The remainder of the restricted shares will be eligible for sale from time to time thereafter upon expiration of one-year holding periods and subject to the requirements of Rule 144. In addition, the shares held by all of our shareholders and persons with rights to acquire our shares, except certain non-management employees, are subject to agreements restricting the sale of their shares in favor of the representatives of the underwriters. The shares of common stock that may be issued in connection with our acquisition of Thompson-Hysell will be restricted securities but will include the right to have such shares registered for resale under the Securities Act of 1933. Year 2000 issues could affect our business Many existing computer programs use only two digits to identify the year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. As a result, any computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations, causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. We are heavily dependent upon the proper functioning of our own computer and data-dependent systems. This includes, but is not limited to, our support/administrative and operational/production systems. Any failure or malfunctioning on the part of these or other systems could harm our business in ways that we currently do not know and cannot discern, quantify or otherwise anticipate. In addition, if our key vendors experience Year 2000 compliance issues, then our business could be harmed. We may be unable to implement the upgrades necessary to resolve any significant problems we discover in our testing efforts. Even if we do make these upgrades, they may not be effective in addressing the problems identified. If required upgrades are not completed in a timely manner or are not successful, our business could be harmed. 15 There are risks associated with forward-looking statements made by us and actual results may differ This prospectus contains certain forward-looking statements, including, among others: . the anticipated growth in the engineering, consulting and technical services industries . anticipated trends in our financial condition and results of operations . our ability to finance our working capital requirements . our business strategy for expanding our presence in the engineering, consulting and technical services industry . our ability to distinguish ourselves from our current and future competitors When used in this prospectus, the words "anticipate," "believe," "estimate," "expect," "intend," "plan" and similar expressions as they relate to us are intended to identify such forward-looking statements. These forward-looking statements are based on our current expectations and are subject to a number of risks and uncertainties. In addition to the risks described elsewhere in this "Risk Factors" discussion, important factors to consider in evaluating such forward-looking statements include: . the shortage of reliable market data regarding the engineering, consulting and technical services industry . changes in external competitive market factors or in our internal budgeting process that might impact trends in our results of operations . unanticipated working capital or other cash requirements . changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the engineering, consulting and technical services industry . various other factors that may prevent us from competing successfully in the marketplace In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this "Risk Factors" discussion, our actual results may differ materially from any forward-looking statements contained in this prospectus. 16 USE OF PROCEEDS We estimate that we will receive net cash proceeds of $14,179,000 from the sale of 1,750,000 shares of common stock offered hereby, assuming an initial public offering price of $9.00 per share and after deducting estimated underwriting discounts and unpaid offering expenses. We currently intend to use the net proceeds of this offering to acquire substantially all of the assets and certain of the liabilities of Thompson-Hysell, to repay, in whole or in part, debt, capital lease obligations and notes payable to related parties, including accrued interest thereon, and for general corporate purposes. As of March 31, 1999, the debt, capital lease obligations and notes payable to related parties, including accrued interest thereon, expected to be repaid is as follows:
Type Amount Interest Rate Maturity - ---- ------ ------------- -------- (in thousands) Bank line of credit........... $4,180 10.50% March 2000 Bank line of credit........... 95 9.25% May 2000 Notes payable*................ 460 8.00% to 13.22% Offering date to December 2003 Capital lease obligations*.... 740 4.80% to 17.18% February 2000 to November 2002 Notes payable to related parties (including accrued interest)................... 2,602 10.00% July to October 2000
- ------------------ *Used for capital expenditures. We intend to acquire substantially all of the assets of Thompson-Hysell for cash of $3,333,333, a note payable of $1,333,333 and may issue 148,148 shares of TKCI common stock in 2000 if certain conditions are met (assuming an initial public offering price of $9.00 per share). We may also be required to pay an additional $500,000 if specified financial targets are met and approximately $400,000 for certain income tax effects. If the underwriters exercise all or a portion of their overallotment option, we will use the net proceeds for general corporate purposes. We intend to invest the remainder of the net proceeds in short-term, investment grade, interest-bearing cash equivalents until they are used. DIVIDEND POLICY TKCI has not declared or paid any cash dividends on TKCI's capital stock in either of the past two fiscal years and does not anticipate paying cash dividends on its common stock in the foreseeable future. The payment of any future dividends will be at the discretion of TKCI's board of directors and will depend upon, among other things, future earnings, capital requirements and the general financial condition of its business. TKCI's credit agreement with Imperial Bank restricts the payment of dividends without the bank's consent. We intend to repay most of our bank debt with the proceeds of the offering and then to attempt to negotiate a new credit agreement, although we anticipate that any new credit agreement will similarly restrict our ability to pay dividends. 17 PRIOR S CORPORATION STATUS From 1983 until 1998, Keith Engineering (a corporation originally affiliated with TKCI which then became a wholly-owned subsidiary and was merged into TKCI) was treated as an S corporation for purposes of federal and state income taxes. Accordingly, Keith Engineering had not been subject to regular federal income tax and was subject to California income tax at a rate of 1.5% of its taxable income. Each of the shareholders of Keith Engineering was required to include his portion of the Keith Engineering taxable income or loss in his individual income for state and federal income tax purposes. Effective August 1, 1998, Keith Engineering became a wholly-owned subsidiary, and its S corporation status terminated. As a result, it began being taxed as a C corporation and became subject to regular federal and state income taxes. Keith Engineering was merged into TKCI on November 30, 1998. ACQUISITION On April 9, 1999, TKCI entered into an Asset Purchase Agreement with Thompson- Hysell and its shareholders. Thompson-Hysell provides real estate services similar to TKCI in central and northern California and Utah. The founding shareholders of Thompson-Hysell, who will be employed by us after the acquisition, have been providing engineering, consulting and technical services for 17 years. Under the Asset Purchase Agreement, TKCI will acquire substantially all of the assets of Thompson-Hysell, including the right to use its name, and assume certain of its liabilities. TKCI will pay a purchase price of: (a) cash in the amount of $3,333,333; (b) a promissory note in the amount of $1,333,333 payable in 2001; and (c) shares of common stock with a value equal to $1,333,334 which may be issuable in 2000 if certain conditions are met. The purchase price is subject to adjustment upward or downward depending upon (a) certain financial targets being met related to the assets acquired and liabilities assumed; (b) earnings for the years ended December 31, 1999 and 2000; and (c) an adjustment for income tax effects. For purposes of this prospectus, including the pro forma information, we have assumed that an additional $500,000 will be payable pursuant to financial targets being met (which is the maximum additional amount payable for that purpose) and $400,000 will be payable for certain income tax effects. We have excluded the effect of the 1999 earnings target on our contingent obligation to issue shares of our common stock. We expect to close this acquisition concurrently with this offering. TKCI has also agreed to reserve 37,037 shares of its common stock for issuance under stock options to be granted to those employees of Thompson-Hysell who become employees of TKCI upon the consummation of this offering. All of the shareholders of Thompson- Hysell will enter into five year non-competition agreements with TKCI. 18 CAPITALIZATION The following table sets forth our capitalization as of March 31, 1999 and as adjusted to reflect our sale of 1,750,000 shares of common stock (assuming an initial public offering price of $9.00 per share) and application of the estimated net proceeds.
March 31, 1999 ------------------- Actual As Adjusted ------ ----------- (in thousands, except share data) Short term debt: Short term borrowings, including current portion of long term debt and capital lease obligations......... $6,325 $ 1,635 ====== ======= Long term debt: Long term debt and capital lease obligations, less current portion...................................... $ 948 $ 2,200 Notes payable to related parties....................... 2,401 -- Stockholders' equity: Preferred Stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding actual; and no shares issued and outstanding, as adjusted.... -- -- Common stock, no par value, 100,000,000 shares authorized; 3,559,708 shares issued and outstanding actual; and 5,309,708 shares issued and outstanding, as adjusted.......................................... 1,085 15,068 Accumulated deficit.................................... (427) (427) ------ ------- Total stockholders' equity............................. 658 14,641 ------ ------- Total capitalization.................................... $4,007 $16,841 ====== =======
- ------------------ The shares listed above exclude: (1) 1,111,111 shares of common stock reserved for issuance under our Amended and Restated 1994 Stock Incentive Plan, of which 499,889 shares are issuable pursuant to outstanding options or will be issuable pursuant to options to be granted prior to or upon the consummation of this offering. (2) 83,333 shares of common stock issuable upon the exercise of warrants granted in connection with the acquisitions of ESI, Engineering Services Incorporated and John M. Tettemer & Associates, Ltd. (3) up to 37,037 shares of common stock issuable if certain earnings, targets and other conditions are met by ESI. (4) that number of shares of common stock with a value of $1,333,334 (subject to adjustment upward or downward) which we may be required to issue to the shareholders of Thompson-Hysell in 2000 if certain conditions are met. (5) a warrant to purchase 66,667 shares of common stock which will be granted in connection with the acquisition of substantially all of the assets and the assumption of certain of the liabilities of Thompson-Hysell. 19 DILUTION At March 31, 1999, TKCI had a net tangible book value of $(2,000) or $0.00 per share of common stock. Net tangible book value per share represents tangible book value (total tangible assets less our total liabilities) divided by the total number of shares of common stock outstanding. Without taking into account any changes in net tangible book value after March 31, 1999 other than to give effect to our sale of 1,750,000 shares of common stock (at an assumed initial public offering price of $9.00 per share), our net tangible book value at March 31, 1999 would have been $13,831,000 or $2.60 per share. This represents an immediate decrease in the net tangible book value of $6.40 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share................... $9.00 Net tangible book value per share before the offering........... $0.00 Increase in net tangible book value per share attributable to new investors................................................. $2.60 ----- Net tangible book value per share after the offering.............. $2.60 ----- Dilution per share to new investors............................... $6.40 =====
The following table sets forth on a pro forma basis, as of March 31, 1999, the total number of shares of common stock purchased from us, after giving effect to our sale of 1,750,000 shares at an assumed initial public offering price of $9.00 per share, that total consideration paid and the average price per share paid by the existing shareholders and by new investors:
Shares Purchased Total Consideration ----------------- ---------------------- Average Price Number Percent Amount Percent Per Share --------- ------- ------------- -------- ------------- Existing shareholders.. 3,559,708 67% 658,000 4% $0.18 New investors.......... 1,750,000 33% 15,750,000 96% $9.00 --------- --- ------------- ------ Total................ 5,309,708 100% 16,408,000 100% ========= === ============= ======
- ------------------ The above information assumes no exercise of the over-allotment option or any other outstanding options, warrants or other rights to acquire shares. If all of such options and warrants are exercised in full, there would be further dilution to new investors. See "Management--Stock Options," "Description of Capital Stock" and "Certain Transactions." 20 THE KEITH COMPANIES, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA The selected financial data includes consolidated financial statement data for certain periods presented and combined financial statement data for certain periods presented. All financial statement data is referred to as consolidated. See Note 1 to the Consolidated Financial Statements of TKCI included elsewhere in this prospectus for a description of which periods reflect consolidated or combined financial statements. The Historical Statements of Operations Data for the years ended December 31, 1996, 1997 and 1998, and the Historical Balance Sheet Data as of December 31, 1997 and 1998, have been derived from the historical consolidated financial statements of TKCI audited by KPMG LLP, independent auditors, which consolidated financial statements and independent auditors' report are included elsewhere in this prospectus. The Historical Statements of Operations Data for the three months ended March 31, 1998 and 1999 and the Historical Balance Sheet Data as of March 31, 1999 have been derived from the unaudited consolidated financial statements of TKCI included elsewhere in this prospectus. The Historical Statements of Operations Data for the year ended December 31, 1995, and the Historical Balance Sheet Data as of December 31, 1996, have been derived from the audited historical consolidated financial statements of TKCI which are not included herein. The Historical Statements of Operations Data for the year ended December 31, 1994 and the Historical Balance Sheet Data as of December 31, 1994 and 1995, have been derived from the unaudited consolidated financial statements of TKCI which are not included herein and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations and financial position as of the dates and for the period presented. The Pro Forma Statements of Income Data for the year ended December 31, 1998 and the three months ended March 31, 1999, is unaudited and assumes an effective income tax rate of 42% and that the initial public offering of 1,750,000 shares of common stock at an assumed initial public offering price of $9.00 per share, the acquisition of substantially all of the assets and the assumption of certain of the liabilities of Thompson-Hysell, and the repayment of debt, capital lease obligations and notes payable to related parties with the net proceeds of this offering had all occurred on January 1, 1998. The Pro Forma Balance Sheet Data as of March 31, 1999 is unaudited and assumes that the initial public offering of 1,750,000 shares of common stock at an assumed initial public offering price of $9.00 per share, the acquisition of substantially all of the assets and the assumption of certain of the liabilities of Thompson-Hysell, and the repayment of short-term obligations, long-term debt, capital lease obligations and notes payable to related parties with the net proceeds of this offering had all occurred on March 31, 1999. 21 THE KEITH COMPANIES, INC. AND SUBSIDIARIES SELECTED FINANCIAL DATA The following information should be read in conjunction with the consolidated financial statements of TKCI and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this prospectus.
Three Months Year Ended December 31, Ended March 31, ------------------------------------------------- ---------------- 1994 (/1/) 1995 1996 (/1/) 1997 1998 1998 1999 ---------- ------- ---------- ------- --------- ------ --------- (in thousands, except share and per share data) Historical Statements of Operations Data(/2/): Gross revenue.......... $22,071 $15,152 $14,344 $22,585 $ 34,021 $7,121 $ 9,999 ------- ------- ------- ------- --------- ------ --------- Net revenue............ 19,979 14,039 12,966 18,592 29,182 5,962 8,969 Costs of revenue....... 14,837 10,212 9,229 11,871 19,287 4,080 5,914 ------- ------- ------- ------- --------- ------ --------- Gross profit........... 5,142 3,827 3,737 6,721 9,895 1,882 3,055 Selling, general and administrative expenses.............. 7,850 4,808 4,960 4,485 5,858 1,470 1,896 ------- ------- ------- ------- --------- ------ --------- Income (loss) from operations............ (2,708) (981) (1,223) 2,236 4,037 412 1,159 Interest expense....... 583 568 720 852 967 221 260 Other expenses (income), net......... 3 68 5 83 66 7 (19) ------- ------- ------- ------- --------- ------ --------- Income (loss) before provision (benefit) for income taxes and extraordinary gain.... (3,294) (1,617) (1,948) 1,301 3,004 184 918 Provision (benefit) for income taxes(/2/)..... (16) 18 3 (1,397) 1,350 116 389 ------- ------- ------- ------- --------- ------ --------- Income (loss) before extraordinary gain.... (3,278) (1,635) (1,951) 2,698 1,654 68 529 Extraordinary gain on forgiveness of liability(/1/)........ -- -- 2,686 -- -- -- -- ------- ------- ------- ------- --------- ------ --------- Net income (loss)...... $(3,278) $(1,635) $ 735 $ 2,698 $ 1,654 $ 68 $ 529 ======= ======= ======= ======= ========= ====== ========= Pro Forma Statements of Income Data(/3/)(/4/): Gross revenue.......... $ 43,133 $ 12,377 --------- --------- Net revenue............ 37,971 11,271 Costs of revenue....... 23,894 7,108 --------- --------- Gross profit........... 14,077 4,163 Selling, general and administrative expenses.............. 8,348 2,445 --------- --------- Income from operations............ 5,729 1,718 Interest expense....... 421 120 Other expenses (income), net......... 65 (25) --------- --------- Income before income taxes................. 5,243 1,623 Provision for income taxes................. 2,202 682 --------- --------- Net income............. $ 3,041 $ 941 ========= ========= Net income per share-- diluted............... $ 0.55 $ 0.17 ========= ========= Weighted average shares outstanding--diluted.. 5,568,957 5,611,360 ========= =========
22
As of December 31, As of March 31, 1999 ------------------------------------------- ---------------------- As 1994 1995 1996 1997 1998 Actual Adjusted (/5/) ------- ------- ------- ------- ------- ------- -------------- (in thousands) Balance Sheet Data: Working capital (deficit)............. $(3,671) $(4,395) $(3,548) $ 2,016 $ 5,180 $ 567 $ 9,199 Total assets........... 7,931 5,384 4,677 11,733 14,530 15,689 23,969 Total debt............. 5,069 5,302 6,597 8,087 9,667 9,674 3,835 Total stockholders' equity (deficit)...... (4,328) (5,962) (5,227) (1,525) 129 658 14,641
- ------------------ (1) In 1994, we accrued $2.0 million relating to excessive lease space in one of our facilities. In 1996, amounts owed under the lease through December 31, 1995 were forgiven, resulting in an extraordinary gain on the forgiveness of the liability and accrued but unpaid rent of $2.7 million. See Note 17 to the TKCI consolidated financial statements. (2) Prior to August 1, 1998, Keith Engineering, which is included in TKCI's consolidated financial statements, elected to be taxed as an S corporation. See "Prior S Corporation Status." (3) Amounts reflect pro forma adjustments for provision for federal and state income taxes at an assumed effective income tax rate of 42%. Net income per share--dilutive reflects a 2.70-for-1 reverse split of TKCI's common stock to be effected prior to the consummation of this offering. (4) Amounts reflect pro forma adjustments for our initial public offering of 1,750,000 shares of common stock at an assumed initial offering price of $9.00 per share, the acquisition and the application of the estimated net proceeds from this offering as if the transactions had occurred on January 1, 1998. See "Pro Forma Condensed Consolidated Financial Statements." (5) Amounts reflect pro forma adjustments for our initial public offering of 1,750,000 shares of common stock at an assumed initial offering price of $9.00 per share, the acquisition and the application of the estimated net proceeds from this offering as if the transactions had occurred on March 31, 1999. See "Pro Forma Condensed Consolidated Financial Statements." 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements of TKCI and its subsidiaries and the related notes and the other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. Overview The following discussion should be read in conjunction with "Selected Financial Data" and our consolidated financial statements and the related notes, included elsewhere in this prospectus, and includes the operations of TKCI and our wholly-owned subsidiaries, including Keith Engineering. TKCI and Keith Engineering have been under common management and ownership since the inception of TKCI in 1986. On August 1, 1998, TKCI was reorganized, such that Keith Engineering became a wholly-owned subsidiary of TKCI. This reorganization was accounted for as a combination of affiliated entities under common control in a manner similar to a pooling-of-interests. Under this method, the assets, liabilities and equity were carried over at their historical book values and the operations of TKCI and Keith Engineering have been recorded on a combined historical basis. The combination did not require any material adjustments to conform the accounting policies of the separate entities. On November 30, 1998 Keith Engineering was merged with and into TKCI. In this Management's Discussion and Analysis of Financial Condition and Results of Operations, references to "TKCI," "we," "our" and "us" mean TKCI and its subsidiaries without giving effect to the acquisition of Thompson-Hysell. In December 1997, TKCI purchased ESI and its wholly-owned subsidiary ESII, Engineered Systems Integration, Inc., which was subsequently merged into ESI. ESI provides consulting services related to process engineering design, chemical engineering, electrical engineering, environmental waste processing system design and petrochemical systems design. In August 1998, TKCI purchased John M. Tettemer and Associates, which provides services relating to flood control and drainage engineering, environmental permitting, and biological surveys and studies. In April 1999, TKCI entered into an asset purchase agreement with Thompson-Hysell, under which TKCI would acquire substantially all of the assets and assume certain liabilities of Thompson-Hysell. With the exception of the services provided by ESI, Thompson-Hysell provides services similar to ours in central and northern California and Utah. This acquisition will close concurrently with this offering and is expected to increase our revenue, and, based upon Thompson-Hysell's historical results, we anticipate that our gross margins after the acquisition will be positively impacted. We derive most of our revenue from professional service activities. The majority of these activities are billed under various types of contracts with our clients, including fixed fee and time and material contracts. Most of our time and material contracts have not-to-exceed provisions. Revenue is recognized on the percentage of completion method of accounting 24 based on the proportion of actual direct contract costs incurred to total estimated direct contract costs. We believe that costs incurred are the best available measure of progress towards completion on the contracts. In the course of providing services, we sometimes subcontract for various services. These costs are included in billings to clients and, in accordance with industry practice, are included in our gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, we also report net revenue, which is gross revenue less subcontractor costs. Our revenues are generated from a large number of relatively small contracts. In 1998, at least 85% of our revenues were derived from services rendered in connection with commercial and residential real estate development projects. The real estate market has historically experienced pronounced business cycles. Our consolidated results of operations can be adversely impacted by downturns in the real estate market. Based upon the number of building permits issued, the last peak of the business cycle in the southern California real estate market was in 1989 and the last trough was in 1996. At least 50% of our revenues are derived from services rendered in southern California. Consequently, adverse economic conditions affecting the southern California economy could also have an adverse effect on our consolidated results of operations. We anticipate that as we consummate acquisitions in the future, the concentration of revenue from both real estate development and southern California will decline. Costs of revenue include labor, non-reimbursable subcontract costs, materials and certain direct and indirect overhead costs such as rent, utilities and depreciation. Direct labor employees work predominantly at our offices, or in some cases at the clients job site. The number of direct labor employees assigned to a contract will vary according to the size, complexity, duration and demands of the project. Contract terminations, completions and scheduling delays may result in periods when direct labor employees are not fully utilized. As we continue to grow, we anticipate that we will continue to add professional and administrative staff to support our growth. Such professionals are in great demand and are likely to remain a limited resource for the foreseeable future. The significant competition for employees with the required skills creates wage pressures on professional compensation. We attempt to increase our billing rates to customers to compensate for wage increases, however, there can be a lag before wage increases can be incorporated into our existing contracts. Certain expenses, primarily long term leases, are fixed and cannot be adjusted in reaction to an economic downturn. Selling, general, and administrative expenses consist primarily of corporate costs related to finance and accounting, information technology, contract proposal, executive salaries, provisions for doubtful accounts and other indirect overhead costs. 25 Results of Operations The following table sets forth historical and unaudited pro forma supplemental consolidated operating results for each of the periods presented as a percentage of net revenue. Pro forma amounts for these periods reflect adjustments for provisions for federal and state income taxes as if we had been taxed as a C corporation, at an assumed effective income tax rate of approximately 42%. On August 1, 1998, in connection with our reorganization, Keith Engineering converted from an S corporation to a C corporation.
Year Ended Three Months December 31, Ended March 31, ----------------- --------------- 1996 1997 1998 1998 1999 ---- ---- ---- ------ ------ Gross revenue.............................. 111% 121% 117% 119% 111% Subcontractor costs........................ 11% 21% 17% 19% 11% --- --- --- ----- ----- Net revenue.............................. 100% 100% 100% 100% 100% Costs of revenue........................... 71% 64% 66% 68% 66% --- --- --- ----- ----- Gross profit............................. 29% 36% 34% 32% 34% Selling, general and administrative expenses................................. 38% 24% 20% 25% 21% --- --- --- ----- ----- Income (loss) from operations............ (9%) 12% 14% 7% 13% Interest expense........................... 6% 5% 3% 4% 3% --- --- --- ----- ----- Income (loss) before pro forma provision (benefit) for income taxes and extraordinary gain..................... (15%) 7% 11% 3% 10% Pro forma provision (benefit) for income taxes.................................... (6%) 3% 5% 1% 4% --- --- --- ----- ----- Pro forma income (loss) before extraordinary gain..................... (9%) 4% 6% 2% 6% Extraordinary gain on forgiveness of liability, net of pro forma income taxes.................................... 12% -- -- -- -- --- --- --- ----- ----- Pro forma net income..................... 3% 4% 6% 2% 6% === === === ===== =====
Three Months Ended March 31, 1999 and March 31, 1998 Revenue. Net revenue for the three months ended March 31, 1999 was $9.0 million compared to $6.0 million for the three months ended March 31, 1998, an increase of $3 million, or 50%. Net revenue growth resulted primarily from the continued strengthening of the California and Nevada housing markets; growth in our employee base and base of projects, which resulted in additional services and follow-up contracts being awarded in the first three months of 1999 relating to projects undertaken prior to 1999; improved weather conditions for field survey crews for the first three months of 1999; and additional revenue as a result of the acquisition of John M. Tettemer & Associates in August 1998. Excluding the revenue from the acquisition of John M. Tettemer & Associates, our net revenue for the three months ended 1999 grew $2.5 million, or 42%, compared to the three months ended March 31, 1998. Subcontractor costs, as a percentage of net revenue declined to 11% for the three months ended March 31, 1999 as compared to 19% for the three months ended March 31, 1998, resulting primarily from a decrease in services for our primary wireless telecommunications contract, which was substantially completed by the end of 1998. Gross Profit. Gross profit for the three months ended March 31, 1999 was $3.1 million compared to $1.9 million for the three months ended March 31, 1998, an increase of 26 $1.2 million, or 62%. Gross profit growth is attributable to both our internal revenue increases as well as the acquisition of John M. Tettemer & Associates. As a percentage of net revenue, gross profit increased slightly to 34% for the three months ended March 31, 1999 compared to 32% for the three months ended March 31, 1998, resulting primarily from increased utilization of employees and a reduction in facility costs as a percentage of net revenue. Costs of revenue for the three months ended March 31, 1999 were $5.9 million compared to $4.1 million for the three months ended March 31, 1998, an increase of $1.8 million, or 45%. Costs of revenue increases resulted primarily from growth in our employee base from 271 as of March 31, 1998 to 372 as of March 31, 1999, an increase of 101, or 37%. Excluding the acquisition of John M. Tettemer & Associates in 1998, the number of employees increased by 83, or 31%. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended March 31, 1999 were $1.9 million as compared to $1.5 million for the three months ended March 31, 1998, an increase of $426,000, or 29%. As a percentage of net revenue, selling, general and administrative expenses decreased to 21% for the three months ended March 31, 1999 from 25% for the three months ended March 31, 1998. The percentage decrease resulted primarily from holding the growth in our corporate labor costs and legal and accounting costs below our internal revenue increases. Years Ended December 31, 1998 and December 31, 1997 Revenue. Net revenue for 1998 was $29.2 million compared to $18.6 million for 1997, an increase of $10.6 million, or 57%. Net revenue growth resulted primarily from the continued strengthening of the California and Nevada housing markets, partially offset by a decline in our wireless telecommunications business; growth in our employee base and base of projects, which resulted in additional services and follow-up contracts being awarded in 1998 relating to projects undertaken prior to 1998; and additional revenue as a result of the acquisition of ESI in December 1997 and John M. Tettemer & Associates in August 1998. Excluding the revenue from the acquisitions of ESI and John M. Tettemer & Associates, our 1998 net revenue grew $6.0 million, or 32%, compared to 1997. Subcontractor costs, as a percentage of net revenue, declined to 17% for 1998 compared to 21% for 1997, resulting largely from our primary wireless telecommunication contract coming to substantial completion in 1998. Gross Profit. Gross profit for 1998 was $9.9 million compared to $6.7 million for 1997, an increase of $3.2 million, or 47%. Gross profit growth is attributable to both our internal revenue increases as well as the acquisitions of ESI and John M. Tettemer & Associates. As a percentage of net revenue, gross profit decreased slightly to 34% for 1998 compared to 36% for 1997. Costs of revenue for 1998 was $19.3 million compared to $11.9 million in 1997, an increase of $7.4 million, or 63%. Costs of revenue increases resulted primarily from growth in our employee base from 260 in 1997 to 356 in 1998, an increase of 96, or 37%, and wage pressures on professional compensation, which represents the largest component of cost of revenue. Excluding the John M. Tettemer & Associates acquisition in 1998, the number of employees increased by 78, or 30%. 27 Selling, General and Administrative Expenses. Selling, general and administrative expenses for 1998 were $5.9 million compared to $4.5 million for 1997, an increase of $1.4 million, or 31%. As a percentage of net revenue, selling, general and administrative expenses decreased to 20% for 1998 from 24% for 1997. The percentage decrease resulted primarily from the collection of approximately $390,000 of accounts receivable written off in prior years and holding the growth in our corporate labor costs below our internal revenue increases. Interest Expense. Interest expense for 1998 was $967,000 compared to $852,000 for 1997, an increase of $115,000, or 14%. As a percentage of net revenue, interest expense was 3% for 1998 compared to 5% for 1997. The percentage decrease resulted primarily from our increased revenue base and the refinancing of our line of credit at a lower interest rate in February 1998. Years Ended December 31, 1997 and December 31, 1996 Revenue. Net revenue for 1997 was $18.6 million compared to $13.0 million for 1996, an increase of $5.6 million, or 43%. Net revenue growth was driven primarily by improvement in the California and Nevada housing market; growth in our employee base and base of projects, which resulted in additional services and follow-up contracts being awarded in 1997 relating to projects undertaken prior to 1997; and our award of a significant contract with a wireless telecommunications client at the end of 1996. Subcontractor costs, as a percentage of net revenue, grew to 21% for 1997 compared to 11% for 1996, resulting primarily from the significant wireless telecommunications contract awarded at the end of 1996. Gross Profit. Gross profit for 1997 was $6.7 million compared to $3.7 million for 1996, an increase of $3.0 million, or 80%. As a percentage of net revenue, gross profit increased to 36% in 1997 compared to 29% in 1996 reflecting our ability to expand our revenue through increased utilization of employees and a reduction in facility and professional insurance costs as a percentage of net revenue. In addition, the gross profit percentage increased due to improvements in the overall economy in 1997 resulting in favorable pricing adjustments. Costs of revenue was $11.9 million for 1997 compared to $9.2 million for 1996, an increase of $2.7 million, or 29%. Costs of revenue increases resulted primarily from growth in our employee base from 181 in 1996 to 260 in 1997, an increase of 79, or 44%. Excluding the acquisition of ESI in 1997, the number of employees increased by 45, or 25%. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.5 million for 1997 compared to $5.0 million for 1996, a decrease of $475,000, or 10%. Selling, general and administrative expenses as a percentage of net revenue decreased to 24% for 1997 from 38% for 1996. The percentage decrease was primarily related to an approximate $822,000 reduction in the provision for doubtful accounts in 1997 compared to 1996. Concurrently with the prolonged southern California economic recession, in 1996, we reached the conclusion that a significant receivable was uncollectible and increased our provision for doubtful accounts by $710,000. The increase in selling, general and administrative expenses, as a percentage of revenue was impacted by holding the growth in our corporate labor and legal and accounting costs below our internal revenue increases. 28 Extraordinary Gain. Our 1996 results of operations were impacted by a one time gain on the forgiveness of a lease liability of $2.7 million. In August 1996, we entered into an agreement, whereby all amounts owed and accrued under a lease through December 31, 1995 were forgiven. Quarterly Results The following table sets forth unaudited historical and supplemental pro forma selected quarterly consolidated financial information. Pro forma amounts reflect adjustments for provisions for federal and state income taxes as if we had been taxed as a C corporation, at an assumed effective income tax rate of approximately 42%. On August 1, 1998, Keith Engineering was converted from an S corporation to a C corporation. This information has been derived from unaudited consolidated financial statements which, in the opinion of management, include all adjustments (consisting of normal recurring entries) necessary for a fair presentation of such information. Consolidated results of operations for any one or more quarters are not necessarily indicative of results for an entire year or the results to be expected for any future period.
Quarterly Results ---------------------------------------------------------------------------------- Three Months Ended ---------------------------------------------------------------------------------- Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 1997 1997 1997 1997 1998 1998 1998 1998 1999 -------- -------- --------- -------- -------- -------- --------- -------- -------- (in thousands) Consolidated Statement of Income Data: Gross revenue........... $4,423 $5,401 $6,060 $6,701 $7,121 $8,399 $9,192 $9,309 $9,999 ------ ------ ------ ------ ------ ------ ------ ------ ------ Net revenue............. 3,978 4,486 5,116 5,012 5,962 7,051 7,900 8,269 8,969 Costs of revenue........ 2,574 2,804 3,235 3,258 4,080 4,613 5,077 5,517 5,914 ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross profit........... 1,404 1,682 1,881 1,754 1,882 2,438 2,823 2,752 3,055 Selling, general and administrative expense................ 968 1,210 1,085 1,222 1,470 1,131 1,626 1,631 1,896 ------ ------ ------ ------ ------ ------ ------ ------ ------ Income from operations............ 436 472 796 532 412 1,307 1,197 1,121 1,159 Interest expense........ 167 212 229 244 221 244 249 253 260 Other expenses (income), net.................... 42 9 6 26 7 (18) 18 59 (19) ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before pro forma provision for income taxes................. 227 251 561 262 184 1,081 930 809 918 Pro forma provision for income taxes........... 95 105 236 110 77 454 391 340 386 ------ ------ ------ ------ ------ ------ ------ ------ ------ Pro forma net income... $ 132 $ 146 $ 325 $ 152 $ 107 $ 627 $ 539 $ 469 $ 532 ====== ====== ====== ====== ====== ====== ====== ====== ====== As a Percentage of Net Revenue ---------------------------------------------------------------------------------- Three Months Ended ---------------------------------------------------------------------------------- Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, 1997 1997 1997 1997 1998 1998 1998 1998 1999 -------- -------- --------- -------- -------- -------- --------- -------- -------- Consolidated Statement of Income Data: Gross revenue........... 111% 120% 118% 134% 119% 119% 116% 113% 111% ------ ------ ------ ------ ------ ------ ------ ------ ------ Net revenue............. 100% 100% 100% 100% 100% 100% 100% 100% 100% Costs of revenue........ 65% 63% 63% 65% 68% 65% 64% 67% 66% ------ ------ ------ ------ ------ ------ ------ ------ ------ Gross profit........... 35% 37% 37% 35% 32% 35% 36% 33% 34% Selling, general and administrative expense................ 24% 27% 21% 24% 25% 16% 21% 19% 21% ------ ------ ------ ------ ------ ------ ------ ------ ------ Income from operations............ 11% 10% 16% 11% 7% 19% 15% 14% 13% Interest expense........ 4% 5% 5% 5% 4% 3% 3% 3% 3% Other expenses (income), net.................... 1% -- -- 1% -- -- -- 1% -- ------ ------ ------ ------ ------ ------ ------ ------ ------ Income before pro forma provision for income taxes................. 6% 5% 11% 5% 3% 16% 12% 10% 10% Pro forma provision for income taxes........... 2% 2% 5% 2% 1% 7% 5% 4% 4% ------ ------ ------ ------ ------ ------ ------ ------ ------ Pro forma net income... 4% 3% 6% 3% 2% 9% 7% 6% 6% ====== ====== ====== ====== ====== ====== ====== ====== ======
29 Our quarterly revenue and operating results fluctuate primarily as a result of: . client engagements commenced and completed during a quarter . seasonality . the number of business days in a quarter . the number of work days lost as a result of adverse weather conditions or delays caused by third parties . employee hiring, billing and utilization rates . the consummation of acquisitions . the length of the sales cycle on new business . the ability of clients to terminate engagements without penalty . our ability to efficiently shift our employees from project to project . the size and scope of assignments . general economic conditions The treatment of $172,000 as compensation expense, resulting from an option granted in April 1997, and the collection of an account receivable in the amount of $390,000, previously written off affected selling, general and administrative expense in the quarters ended June 30, 1997 and 1998, respectively. Liquidity and Capital Resources We have financed our working capital needs and capital expenditure requirements through a combination of internally generated funds, bank and related party borrowings, leases and the sale of our common stock. Working capital for 1998 was $5.2 million compared to $2.0 million in 1997, an increase of $3.2 million, or 157%, resulting primarily from growth in accounts receivable and costs and estimated earnings in excess of billings, due to higher revenue levels. Cash generated from operating activities increased $310,000, or 82%, to $686,000 in 1998 compared to $376,000 in 1997, reflecting our increase in income from operations. The growth in cash generated from operating activities was used primarily to fund capital expenditures of $835,000 in 1998 compared to $276,000 in 1997 and to partially finance the acquisition of John M. Tettemer & Associates. Capital expenditures consisted primarily of computer equipment, upgrades to our information systems, and equipment and vehicles used in our survey services. We maintain a line of credit agreement with a bank, which as of March 31, 1999, allowed us to borrow up to $5.5 million, not to exceed 80% of our eligible accounts receivable, as defined in the agreement. On March 5, 1999, the bank amended the agreement to, among other things, amend certain financial related covenants effective December 31, 1998, adjust the interest rate to the bank's prime rate plus a variable margin tied to certain financial 30 covenants (10.5% at March 31, 1999) and extend the maturity on the line to March 1, 2000. Cash of $1.8 million drawn on our line of credit was used primarily for working capital purposes, to repay debt assumed in acquisitions and to repay existing debt. At December 31, 1998, we owed $4.5 million on this line of credit. We expect to repay approximately $4.2 million of the line of credit with a portion of the net proceeds from this offering. We must meet or exceed certain financial covenants to the bank under the line of credit. If we have not received the net proceeds from the offering by June 30, 1999, we may need additional equity or subordinated debt to satisfy these covenants. We expect certain of our shareholders to be able to provide additional equity or subordinated debt to us if necessary. Net cash received from related party borrowings decreased to $156,000 in 1998 from $919,000 in 1997. In addition, in 1997, we received $598,000 from a related party in exchange for shares of TKCI common stock. The reduction in cash received from related parties resulted primarily from our increase in cash generated from operating activities and availability under our line of credit. On April 9, 1999, TKCI entered into an Asset Purchase Agreement with Thompson- Hysell and its shareholders. Thompson-Hysell provides real estate services similar to TKCI in central and northern California and Utah. Under the Asset Purchase Agreement, TKCI will acquire substantially all of the assets of Thompson-Hysell, including the right to use its name, and assume certain of its liabilities. TKCI will pay a purchase price of: (a) cash in the amount of $3,333,333; (b) a promissory note in the amount of $1,333,333 payable in 2001; and (c) shares of common stock with a value equal to $1,333,334 which may be issuable in 2000 if certain conditions are met. The purchase price is subject to adjustment upward or downward depending upon (a) certain financial targets being met related to the assets acquired and liabilities assumed; (b) earnings for the years ended December 31, 1999 and 2000; and (c) an adjustment for income tax effects. We expect to close this acquisition concurrently with this offering. We expect the operations acquired to increase our revenues, and if the Thompson-Hysell operations perform as they have historically, to increase our gross margins. We believe existing cash balances, internally generated funds, and availability under credit facilities together with the proceeds of this offering will be sufficient to fund our anticipated internal operating needs for the next twelve months. Inflation Although our operations can be influenced by general economic trends, we do not believe that inflation had a significant impact on our results of operations for the periods presented. 31 Due to the short-term nature of most of our contracts, if costs of revenue increase, we attempt to pass these increases to our clients. Year 2000 We are currently in the final phase of identifying and evaluating the potential impacts of the Year 2000 on information systems and embedded systems. A Year 2000 Mitigation Committee comprised of senior management and functional managers is evaluating the following issues: . State of readiness . Costs to address Year 2000 issues . Risk assessment . Contingency plan The following is a description of the process we have established and which we intend to follow to minimize our Year 2000 risk exposure: State of readiness. Our information technology and non-information technology systems can be divided into support/administrative and operational/production systems. We have surveyed all significant systems used to perform our support/administrative functions and received written assurance from our system suppliers either that these systems are currently Year 2000 compliant or that a Year 2000 compliance update will be available by the end of the third quarter of 1999. We intend to perform internal tests on all mission critical systems to validate the supplier statements by the end of the third quarter of 1999. We use several major software programs to perform our daily operations and we are in the final stage of assessing these systems. We have received letters assuring us of Year 2000 compliance on almost all of these systems and have requested similar assurances relating to the remaining systems. We intend to perform in-house testing to validate the Year 2000 compliance of our operational production systems and expect to have such testing completed by the end of the third quarter of 1999. In May 1999, we intend to ask the vendors of embedded systems to provide us with written assurance of Year 2000 compliance. Cost to address Year 2000 issues. We have determined that the primary computer systems which we use are Year 2000 compliant and therefore we do not anticipate that costs related to the Year 2000 date change will be material to our business, financial condition or results of operations. Risk assessment. Based on the findings of our Mitigation Committee, we believe that the impact of Year 2000 issues on our internal operations will be minimal. In order to minimize any adverse effect caused by the Year 2000 date change, our operational personnel transfer their work to back-up tapes on a daily basis and store such tapes in an offsite facility. We have had difficulty estimating the impact of Year 2000 non-compliance by outside parties with whom we transact business. While we have received assurances from many of these third parties as to their Year 2000 compliance, we have not yet completed our survey. As a result, we are not in a position at this time to accurately ascertain the degree of 32 compliance by vendors and subconsultants with whom we conduct business. Although not all of the vendors and subconsultants from whom we have received responses are Year 2000 compliant at this time, we have received some assurances that these third parties will be prepared for the Year 2000 date change by the end of 1999. During May 1999, we intend to survey our vendors and subconsultants to ascertain their Year 2000 readiness. We are currently having discussions with other significant third parties such as our bank and payroll service and expect to receive assurances regarding Year 2000 compliance from such service providers by the end of the second quarter of 1999. Although our client base is diverse and no one client accounts for more than 10% of our gross revenue, we have had discussions with our major clients regarding their readiness for the Year 2000 date change and those who have not given us written assurance, we expect to receive it by the end of third quarter of 1999. Contingency plan. Because we have not completed our testing and assessment procedures, we have not developed any plans for likely scenarios involving Year 2000 failures. If, when testing and assessment is complete, it appears reasonably likely that such a failure may occur, management intends to develop appropriate plans to deal with such contingencies. If we are unsuccessful in developing or implementing a plan to correct possible Year 2000 failures, or if we fail properly to anticipate a Year 2000 failure either in our information technology (software) or non-information technology (microcontrollers in equipment), we may experience disruptions in operations. Our projection of the most serious disruptions which could occur include: . the loss of approximately two months' revenues if our accounting systems fail and we are unable to utilize backup information. We would, however, expect eventually to be able to recover a significant portion of this revenue by recreating time and cost entries from hard copies of such data. . the loss of engineering and project data if we are unable to utilize backup information, resulting in the need to re-input printed data. This effort could increase operating costs and reduce margins in the first two quarters of 2000 and might cause the loss of some projects if we are unable to fulfill our time commitments. . the loss of the services of subcontractors who are experiencing disruptions due to Year 2000 risks, resulting in the loss of contracts because of failure to meet deadlines . the loss of revenues if any of the accounting systems of our clients experience a Year 2000 failure Quantitative and Qualitative Disclosures About Market Risk We are exposed to interest rate changes primarily as a result of our line of credit, long-term debt, capital leases and notes payable to related parties, which are used to maintain liquidity and to fund capital expenditures and our expansion. Our interest rate risk management 33 objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we have borrowed at fixed rates and may enter into derivative financial instruments to mitigate our interest rate risk on variable rate debt. We do not enter into derivative or interest rate transactions for speculative purposes. The table below presents the principal amounts, weighted average interest rates, fair values and other items required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes (dollars in thousands).
Fair 1999 2000 2001 2002 2003 Total Value(/1/) ----- ------ ----- ----- ----- ------ ---------- Fixed rate debt(/2/)........... $ 519 $2,458 $ 61 $ 66 $ 47 $3,151 $3,151 Average interest rate.......... 8.00% 10.00% 8.00% 8.00% 8.00% 9.57% 9.57% Variable rate debt............. -- $4,527 -- -- -- $4,527 $4,527 Average interest rate.......... -- 9.25% -- -- -- 9.25% 9.25%
- ------------------ (1) The fair value of fixed rate debt and variable rate debt was determined based on current rates offered for debt instruments with similar risks and maturities. (2) Fixed rate debt excludes notes payable with an aggregate principal amount of $576,000 as there is no established market for these notes. As the table incorporates only those exposures that existed as of December 31, 1998, 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 therein has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposure that arises during the period and interest rates. 34 BUSINESS General We began operating in 1983 as Keith Engineering, which was incorporated on March 1, 1983. We formed TKCI in November 1986, under the name The Keith Companies-Inland Empire, Inc., and merged the two companies in November 1998 with TKCI as the survivor. We provide engineering, consulting and technical services to clients operating in a variety of environments. Industries Served The industries we serve are real estate development, public works and wireless telecommunications and industrial engineering. Real Estate Development, Public Works and Wireless Telecommunications Real Estate Development Residential, commercial and golf and other recreational developers use technical consultants to provide planning and environmental services to create land use plans, write the supporting planning and environmental documents and process entitlements and permits through governmental authorities. Technical consultants also assist clients in gaining approvals and permits from federal, state and local agencies. After projects are approved by governmental agencies, developers need surveying, mapping and civil engineering services to survey development sites, create accurate boundary/base maps and provide engineering designs for mass grading, streets, sewer pipelines and facilities, water pipelines and facilities, utilities and drainage facilities. Upon completion of the design phase, survey crews provide construction staking services to identify the precise locations of streets, utilities, pipelines and other facilities. In culturally sensitive projects or areas, developers may also require environmental and archaeological services for the planning and environmental approvals and construction and post-construction phase monitoring services. The U.S. real estate industry is commonly segmented into four geographic regions: northeast, south, mid-west and west. We operate in the west region, primarily in California and in Nevada and Utah. During the last economic upturn in the real estate industry in southern California, which we believe lasted eight years from 1983-1990, our gross revenue and number of employees grew. During the following downturn in southern California, through 1996, we experienced a reduction in revenue and employees. We believe that the southern California real estate market is in the third year of an economic upturn. In 1998, at least 80% of our revenue from residential real estate related development was in California. Residential. The residential development industry consists of large scale communities, seniors/retirement communities, single family homes and multi- family homes such as condominiums and apartments. The issuance of building permits is an important economic indicator in forecasting housing starts. The following table from Regional Financial 35 Associates, Inc., shows the actual building permits issued for 1996-1997 and the building permits expected to be issued for 1998-2000 in California, Nevada, Utah and nationally. Residential Building Permits (Issued Annually)
1996 1997 1998 1999 2000 ------ ------- ------- ------- ------- California 92,060 109,589 131,673 170,321 182,474 Nevada 37,242 34,811 36,092 28,000 25,973 Utah 23,481 19,263 20,005 18,885 18,267 National (million) 1.48 1.62 1.52 1.34 1.37
According to a report released by the U.S. Bureau of the Census in 1997, California, Nevada and Utah are projected to be among the top seven fastest growing states in population growth during the thirty year period from 1995 to 2025. In March 1999, the U.S. Bureau of the Census also reported that of the nation's 3,142 counties, four southern California counties (Los Angeles, Orange, San Diego and Riverside) and one Nevada county (Clark) were among the top seven in population gains between 1997 and 1998. In December 1998, a report prepared by Regional Financial Associates, Inc. showed that since 1991, the west region has outpaced the nation in population growth. Regional Financial Associates, Inc. forecasted that the region's population would continue to outpace the nation at least through the year 2002. The following three tables from Regional Financial Associates, Inc., show historical demographic data for 1996-1997 and projected demographic data for 1998-2000 for population, employment and personal income. Population
1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ California (000's) 31,858 32,268 32,756 33,271 33,740 Nevada (000's) 1,601 1,677 1,733 1,787 1,835 Utah (000's) 2,018 2,059 2,097 2,130 2,164 National (million) 267.7 270.3 272.6 274.9 277.2 Employment 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ California (000's) 12,743 13,169 13,577 13,827 14,104 Nevada (000's) 843 890 929 961 995 Utah (000's) 954 995 1,024 1,043 1,076 National (million) 122.7 125.8 127.8 129.0 131.1 Personal Income Growth (% Change) 1996 1997 1998 1999 2000 ------ ------ ------ ------ ------ California 5.8 6.0 6.5 5.7 6.1 Nevada 10.4 7.5 6.7 6.9 7.5 Utah 8.2 7.4 5.8 6.2 6.6 National 5.6 5.0 4.6 4.9 5.6
36 Commercial. The commercial development industry includes the construction of retail, office and industrial facilities. Important economic indicators in forecasting commercial development include, among others, growth in employment and personal income. According to research conducted in 1998 by Regional Financial Associates, Inc., employment and income in the west region are projected to grow by an annual average of 2.0% and 6.1%, respectively, from 1999 to 2000. Colliers International reported in a 1999 market study that retail development in Las Vegas continues to grow, with approximately 4 million square feet of new retail in the planning phase and 1.4 million square feet under construction. This constitutes a 26% increase over the existing 21 million square feet. Colliers also forecasts that with residential growth continuing to fuel retail growth in the Nevada marketplace, the construction of neighborhood and community centers lead commercial development growth with a 25% planned growth rate. During 1997, the United States' economy generated 730,000 new office jobs, according to the U.S. Bureau of Labor Statistics. In the same year, national office vacancy rates dropped below what is considered the market's equilibrium, lease rates continued to remain steady and construction for 1998 jumped from 49 million square feet at year end 1997 to 90 million square feet at year end 1998 according to 1998 and 1999 Grubb and Ellis commercial industry reports. The U.S. Commerce Department stated that through November 1998, office building construction was running at an annual rate of $41.5 billion, a 21% increase over 1997. The F.W. Dodge division of the McGraw-Hill Companies forecasts office building construction to increase by 9% in 1999. Golf and Other Recreational Facilities. Recreational projects include golf courses, hotels and resorts. The most significant proportion of our revenue from golf and other recreational projects is derived from golf related projects. According to the 1998 edition of Golf Participation in the United States and Trends in the Golf Industry, the United States currently has 26.5 million golfers over age 12, a 33% increase from 1986. Likewise, the National Golf Foundation published a report in March 1999 stating that the number of new courses in 1998 was 448 as compared with 10 years ago when the industry was averaging less than 175 courses per year. In addition, the National Golf Foundation states that the number of courses in planning and construction increased from 1,652 on January 1, 1998 to 1,777 on January 1, 1999, a 7.6% increase. Lastly, as of December 31, 1998, according to the National Golf Foundation, California is ranked among the top three states for total number of existing courses, new course openings, courses under construction and courses related to real estate development. Public Works Transportation, water resources, and other public works projects may provide ongoing, reliable sources of revenue for engineering firms and consultants when private development activities decline during unfavorable economic periods. These public projects are often long-term and ongoing, and have historically provided more determinable and consistent revenue streams. 37 Transportation. Highway and interchange projects require engineering designs for roadways, interchanges, the placement or relocation of sewer lines, water pipelines and utility lines and rainfall run-off management. In a recent publication, The American Society of Civil Engineers reported that as much as $1.3 trillion of capital investment is currently necessary to repair and renew our infrastructure to meet our growing needs. In 1998, the U.S. Congress authorized funding of $175 billion under the Transportation Equity Act for highway projects over the next six years, a 44% increase over the previous funding program according to the F.W. Dodge division of the McGraw Hill Companies. According to Dodge, western states will be the earliest recipient of funds from the program with non-building construction expected to increase 14% in 1999 over 1998. According to the California Department of Transportation, Governor Gray Davis has proposed more than $7.9 billion to fund Caltrans during the 1999-2000 fiscal year, which is $1.6 billion more than the 1998-1999 fiscal year. The largest portion of this budget is $3.9 billion for capital outlay projects (ongoing and new highway construction projects), according to the California Department of Transportation. Water Resources. Public water resource projects include the installation, rehabilitation or replacement of facilities or infrastructure for: . protection of water sources . storage (i.e., dams or reservoirs) . water treatment . water pipelines . collection of wastewater . sewer lines . treatment of wastewater In 1998, the American Society of Civil Engineers published the 1998 Report Card for America's Infrastructure. This report states that the total infrastructure needs for drinking water remain large, $138.4 billion, more than $76.8 billion of that is needed right now to protect public health. This organization also stated that America needs to invest roughly $140 billion over the next 20 years in its wastewater treatment systems and that an additional 2,000 plants may be necessary by the year 2016 to meet expanded treatment goals. Wireless Telecommunications With the emergence and growth of personal communication services and the conversion from analog to digital technology, the demand for the development and construction of new wireless transmission base stations, switching centers and microwave link networks has increased. For the development of most wireless telecommunications networks, wireless service providers hire outside experts in site acquisition/lease arrangement, land planning, permitting, civil engineering, equipment procurement and/or construction management. The development costs for a typical base station in southern California are approximately $350,000 to $700,000, of which engineering, consulting and technical services may account for approximately $50,000. 38 Wireless subscriber growth is the main driver in demand for new tower sites, according to a 1998 business model by Morgan Stanley Dean Witter Equity Research. In 1998, the Cellular Telecommunications Industry Association predicted that the number of United States wireless customers would grow from an estimated 124 million in 1998 to an estimated 209 million in 2003 and expected the compounded average growth rate from 1998 to 2003 to be 11%. The Personal Communications Industry Association estimated that 12,000 to 20,000 new towers are needed by 2003 to accommodate the growth of wireless services. In 1998, the Cellular Telecommunications Industry Association stated that the total number of communication sites would grow from 38,650 at the end of 1997 to approximately 100,000 by the year 2000. Industrial Engineering Modern machines, assembly lines, factories and refineries require industrial engineering services to enable utilization of new processes and to improve efficiency and reliability. Comprehensive industrial engineering services include the design or redesign of electrical systems and HVAC systems, mechanical equipment design and procurement, instrumentation and control systems integration, chemical process engineering, energy usage consulting, fire protection engineering, material handling and process flow planning, automation and robotics design, construction management and installation supervision, project management and computer programming. Industrial engineering projects which utilize engineering, consulting and technical services include: . High Tech Facilities: biotechnology, pharmaceutical, and laboratory facilities, computer centers, control rooms, research and development facilities . Consumer Product Facilities: automotive assembly, household products and packaging facilities . Food and Beverage Facilities: bottling/packaging facilities, material handling facilities, process controls, robotics, food and beverage manufacturing facilities . Educational Facilities: schools and universities . Public Facilities/Utilities/Energy/Power: power plants, natural gas, electric There is a continued trend in the manufacturing and assembly industry toward automation and increased efficiency. As these industries grow, so does their need for design and engineering services to automate and increase efficiency of new and existing facilities. According to a 1998 Standard & Poors survey of the manufacturing and assembly industries in the United States, the biotechnology industry is expected to grow annually in the 20-25% range in 1999 and 2000, the packaged food and beverage industry is expected to grow by 10% in 1999, and the non-alcoholic beverage sector is expected to grow by 12% in 1999. We expect these industries to increase their use of automation to make their facilities more efficient. 39 The TKCI Advantage The engineering, consulting and technical services industries are highly fragmented, ranging from a large number of relatively small local firms to large, multi-national firms. We estimate that there are over 500 firms providing the engineering, consulting and technical services to the industries we serve in our principal operating areas. We believe that we have successfully penetrated the regional residential real estate industry to capture a significant share of the market and establish ourselves as a leader in the market. In California, Nevada and Utah, residential building permits projected for issuance in 1999 through 2002 represented 908,172 residential units. In these locations, we are serving projects with over 100,000 estimated residential units. These projects range in duration from less than one year to more than five years. We believe that we can further enhance our leading position in the western United States in the industries we serve for the following reasons: Reputation Our reputation for providing high quality services has been a source of numerous project assignments. We believe our reputation is strengthened due to the personal relationships developed between our staff and representatives of clients and agencies. We have been awarded many projects either due to our expertise in working with an agency or project type or because a particular client desires to work with, and can count on, specific project managers. In addition, we have received numerous awards for technical excellence including the Project of the Year Award of Excellence in the award category of Engineering Land Development for the "Dana Point Townhomes" from the California Council of Civil Engineers and Land Surveyors; a Certificate of Recognition for the design of the "Grand Avenue-Chino Hills Parkway" from the County of San Bernardino, California Board of Supervisors; and a Letter of Appreciation from the State of California for streamlining the "Telecommunications Leasing Program" and for our assistance in formulating telecommunications real estate objectives and strategies. Industry and Professional Experience We recognize that our employees are our most valuable resource for providing ongoing quality service and for obtaining new work. Of our staff of over 450, we have over 100 individuals with professional registrations. During employee selection and as part of our acquisition criteria we require that the people added to our team have significant experience in the industries they serve. We supplement this industry experience by providing in-house continuing education seminars, design forums and training programs. Full Service Approach We provide civil engineering, surveying and mapping, planning, environmental, archaeological, construction management, site acquisition, water resource engineering, instrumentation and control systems engineering, fire protection engineering, electrical engineering, mechanical engineering and chemical process engineering services. Since most engineering, consulting and technical services firms specialize in only one or a few services, 40 a project owner may often be required to engage several engineering and/or consulting firms during the various phases of a project (i.e., from identifying and evaluating whether to acquire a parcel of land to designing, engineering and managing the construction of the finished project). We believe that clients realize significant cost and time savings and maintain consistent quality by utilizing a single firm for all services. Cross-Marketing Due to our reputation and industry and technical expertise, we have frequently increased the number and scope of services provided to a client from an initial engagement, such as land planning, to include other services, such as mapping and surveying. When we expand into new geographic regions, we have successfully cross-sold and intend to continue to cross-sell services offered by one office to clients in another office. Because our professionals provide many of the preliminary services on projects such as planning, civil engineering and surveying and mapping, we are frequently asked to bid on additional services on a project as it progresses. In performing the preliminary services in the initial phases of a project, we obtain background information and data relating to the project that may be inefficient and costly for another firm to compile. Consequently, we are often more knowledgeable about a project, and, as a result, we are often engaged to perform the additional engineering and consulting services that the client requires as the project progresses. Effective Organizational Structure We believe that our organizational structure allows us to compete effectively with small and mid-size local firms and with large regional and national firms. Our organizational structure combines the efficiencies associated with centralization and the flexibility of decentralization. Our administrative functions are centralized in our corporate headquarters in Costa Mesa, California allowing us to eliminate duplicative functions and personnel at our divisional offices. We believe this centralization allows the management at our divisional offices the freedom to focus on identifying new business opportunities and overseeing the technical services provided in that office, and allows the flexibility for those managers to maintain focus on being responsive to client needs. The centralization of administrative functions also allows us to effectively and efficiently integrate acquired companies. Business Strategy Our objective is to strengthen our position as a leading provider of engineering, consulting and technical services while growing our geographic presence and expanding the services we offer. To achieve this objective, we have developed a strategy with the following key elements: . Maintain High Quality of Service. To maintain high quality service, we focus on being responsive to customers and working diligently and responsibly to maintain schedules and budgets. As a result of our focus on quality and timeliness of service, we believe that we have established an excellent reputation 41 in the markets we serve. We intend to continue providing high quality service as we expand our geographic presence and service offerings. . Continue to Recruit and Retain Highly Qualified Personnel. We believe that recruiting and retaining skilled professionals is crucial to our success and our growth. As a result, we intend to continue to recruit experienced and talented individuals who can provide quality services and innovative solutions for our clients' projects. We believe that our employee benefits package provides incentives that enable us to continue to attract the most qualified candidates. . Expand Geographically. To diminish the impact of regional economic cycles, we intend to continue to expand our geographic presence by making acquisitions, opening additional divisional offices and marketing our services to clients with national and international needs. Our geographic growth will provide us with broader access to employee pools, work sharing between regions and new business opportunities. We believe the acquisition of Thompson-Hysell will enable us to more effectively sell additional services in both central and northern California and Utah. We intend to continue to increase our service offerings outside of California, Nevada and Utah. . Expand Scope of Services. We intend to build upon our reputation as a quality provider of real estate related engineering, consulting and technical services as we diversify our services to meet new demands of clients and the demands of new markets. As part of our effort to continue diversifying our scope of services, we intend to pursue strategic partnering relationships and acquisitions. . Continue to Effectively Integrate Acquired Operations. We intend to continue to pursue acquisitions that expand our range of services and/or our geographic presence and that result in an increase in our operating efficiencies. We believe that strategic acquisitions will enable us to more efficiently and quickly serve the diverse technical and geographic needs of, and secure additional business from, our national and international clients. We have implemented our strategy, by (a) providing services to the wireless telecommunications industry; (b) obtaining a subcontract to assist Marconi Integrated Systems, Inc. in a global mapping project for the National Imagery and Mapping Agency; and (c) acquiring ESI, John M. Tettemer & Associates and Thompson-Hysell. This diversification of our services has broadened our geographic presence, expanded the number of industries we serve and added our capability to provide water resources, environmental, mechanical, electrical, chemical process, and fire protection and other industrial engineering services. Services Provided We provide a broad range of services, including civil engineering, surveying and mapping, planning, environmental, archaeological, construction management, site acquisition, water resources engineering and other industrial engineering services (instrumentation and control 42 systems engineering, fire protection engineering, electrical engineering, mechanical engineering and chemical process engineering). Civil Engineering Services General civil engineering is often referred to as "design from the ground down" because it is part of all construction design work on the ground and below. Civil engineering services include: . project feasibility and due diligence analysis . development cost projections . access and circulation analysis . infrastructure design and analysis . pro forma cost studies . project management . construction documents . tentative mapping . flood plain studies . sewer, water and drainage design . street and highway design . site/subdivision design . grading design As an example of how our civil engineering services are utilized, our engineers were the master engineers for the Newport Coast development in southern California. This development consists of over 9,600 acres that has been planned for more than 2,400 residential units, three destination resorts, two championship golf courses (both part of the Pelican Hill Golf Club) and over 7,300 acres of dedicated open space. We were responsible for the preparation of a majority of the preliminary and final civil engineering designs, and provided the project with land surveying, mapping, water resources and archaeological services. In addition, as the infrastructure engineer for this project, we completed the master drainage plan, designed the master water and sewer facilities and designed many of the primary roadways. Surveying and Mapping Services From establishing boundaries for preliminary engineering through construction layout and as-built surveys, it is common for our surveying and mapping teams to be "the first in and the last out" on a construction project. We provide surveying and mapping services through our teams of skilled professionals that utilize the latest technology, including global positioning systems, geographic information systems, and field-to-office digital and electronic data capture, to produce information that will serve as the foundation for a variety of planning and engineering design and analysis endeavors. Our surveying and mapping services also include the identification of topography and boundary features that directly affect a project's design. We were among the first engineering and surveying consultants to support geographic information systems technology and to utilize global positioning systems to conduct precise and more efficient surveys and to establish accurate ground surveys. 43 We utilized our expertise in the use of ground and global positioning systems surveys to plot the aftermath of the Mt. Pinatubo eruption in the Philippines for a long-term lava flow management project. For Cox Communications (formerly Sprint), we provided site topographic and boundary surveys for approximately 500 proposed cellular telecommunication sites. Using these surveys, we designed and generated construction documents and developed legal descriptions that were used in lease contract documents. Government agencies and landowners have also utilized our surveying and mapping services to develop the basic elements (control, parcel, topographic and planimetric) of successful geographic information systems databases. Planning Services Planning services include both physical planning and policy planning. Physical planning is graphical and includes conception and layout of communities, land uses and residential and commercial neighborhoods. The resulting plan often becomes the basis for the preparation of engineering plans. To complement a physical plan, policy planning entails the preparation of supporting text and documents that establish procedures, requirements, aesthetic guidelines and legal mitigation requirements under which the physical plan may be implemented. Our planning services are designed to assist clients in maximizing the potential uses of real estate and other limited resources. We provide plans that take into account government regulations, effective and creative use of land assets, and the expectations and needs of the community. An example of our planning services was our involvement in the design of a major flood control dam on a 10,000 acre project in Los Angeles County that controlled yearly flooding of Palmdale, California, a downstream municipality, saving millions of dollars in flood control facilities. Our solution allowed plans for concrete channelization of the waterway to be abandoned, thus resolving the concerns of the local water agencies (concerned with groundwater recharge and replenishment) and local environmentalists. It also provided the inducement for the city to annex and entitle that project. Other projects for which we have provided planning services include Hanalei Garden Farm Estates in Hawaii, Jian Zhuan Lake Resort in China, a Jack Nicklaus Golf Course at Lake Las Vegas and Hurricane Iniki Emergency Permitting in Hawaii. Environmental Services Our environmental services include biology, permit processing, document preparation and mitigation monitoring. We assist clients with the complex federal, state and local permitting process enabling them to successfully implement private and public projects. As an example of our environmental services, we prepared design plans and analyses for the creation of a constructed wetlands project in southern California. This facility uses natural processes for extensive nitrate removal from water that flows from upstream dairy farms. The water is stored for groundwater recharging and used to supplement the drinking water supply. 44 Archaeological Services Many environmental impact analyses require protection of significant archaeological resources which may exist on a property, such as native peoples' community settings, artifacts and burial sites. We perform studies which range from site review and records analysis to a discussion of measures to protect sensitive or valuable archaeological resources. Further, we conduct field sampling and testing to establish or verify site review and records information and determine both the quantity and quality of archaeological materials on a given site. An example of the use of our archaeological services is when, after performing civil engineering services on a project for a client, the client asked us to provide archeological services on a different project in southern California. For this project, our archaeological staff mobilized, organized and supervised a team of 25 people in the excavation of one of the largest fossil whale beds in the continental United States. In the course of this excavation, we found rare samples of Baleen whales, which were subsequently donated for further academic study. Construction Management Services Construction management services are an efficient "bundling" of some of the other services which we provide. We direct development and construction tasks, including the preparation of cost projections, entitlement and feasibility analysis, professional consultant selection and supervision, contractor bidding, and construction supervision. We provide these services in discrete components or as a comprehensive package for private development, public works and wireless telecommunications clients. An example of our construction management services is a master planned community in Chino Hills, California, where a developer retained us to manage, plan, design, permit, stake and subcontract a 620 acre community, consisting of 1,410 residential units and associated park and community facilities. Site Acquisition Services We provide site acquisition services to assist our clients in obtaining the most appropriate real estate for their particular needs. For example, a property intended for the development of multi-family housing will have characteristics which vary greatly from that of a property intended for the siting of a heavy industrial use. We provided site acquisition services for over 700 wireless communications sites in Riverside, San Bernardino, Ventura, Los Angeles and San Diego counties for Cox Communications (formerly Sprint), a national wireless services provider. Water Resources Engineering Services Our water resources engineers frequently assist clients in financial planning, feasibility studies, demand forecasting, and hydraulic analysis to develop system master plans in addition to designing conventional systems of pipes and other conveyance systems. 45 Examples of the water resources engineering services that we have provided include the performance of a hydrological study of a 23 square-mile watershed in Riverside County, California and the development of a concept report and preliminary design for a 2,000 acre-feet (652 million gallon) water quality detention basin, including the relocation of 6,200 feet of roadway incidental to the construction of the basin and related structures. Industrial Engineering Services In addition to the engineering, consulting and technical services described above, we also provide the following industrial engineering services: Instrumentation & Control Systems Integration Engineering Services. Our professionals integrate equipment selection, maintenance requirements and spare parts inventory by designing, selecting and reviewing mechanical, piping and electrical layouts, and operating maintenance, training, start-up and emergency procedures during the design of contemporary processes or the automation of outdated manufacturing processes. These services are essential to creating an efficient and safe operating facility. Fire Protection Engineering Services. We provide fire protection engineering services in connection with both new construction and the renovation/modification of existing facilities to assist our clients in defining and providing an acceptable level of fire safety in a cost-effective manner. Electrical Engineering Services. These services include design of electrical power systems for buildings, manufacturing plants, and miscellaneous facilities, design of lighting systems, and selection of other equipment which delivers or uses electrical power. Mechanical Engineering Services. These services are required to design energy systems, HVAC systems, plumbing systems, water distribution systems and fire protection systems for facilities and buildings. Chemical Process Engineering Services. Our chemical and process engineers design systems for chemical reactions, distillations, polymerizations, filtration and centrifugation, thermal processes, blending and mixing, material handling, ultra filtration and reverse osmosis, and absorption and stripping. These services are necessary for the design of chemical processing operations in industries such as food and beverage, pharmaceutical, chemical and petroleum. Sales and Marketing Our Client Services Department is dedicated to business development and marketing activities. We employ a variety of strategic business development and marketing techniques to obtain contracts with new clients and repeat business with existing clients and to maintain our positive reputation. With our expansion of services in the past several years, cross-selling our services has become a large component of our active promotional efforts. Our marketing advantage in selling additional services is enhanced when we have already provided initial services on the project. For example, when we have provided planning and 46 civil engineering on a project, we have an advantage over our competitors in successfully cross-selling our other services, such as mechanical and electrical engineering. Our Client Services Department identifies and pursues these opportunities. A large portion of revenue is generated from ongoing work opportunities on long-term, large scale projects. In addition, our Client Services Department assists our in-house management and clients to assure quality performance and client satisfaction. To accomplish this effort, we provide clients with referrals to project partners and financing sources, assistance in legislative matters, monitoring of in-house performance and many other nontechnical support functions. Our Client Services Department also identifies projects and clients in each of the markets in which we are active. This is achieved through the use of many resources such as: geographic information systems maps and aerial maps, project/contact databases, the Internet, and leads publications, which track most public works and public agency projects. Our Client Services Department pursues those companies, agencies, projects and markets that have financial strength, long term growth potential and reputation. One of our most effective methods of winning new contracts has been the Executive Land Search program. We have developed map rooms containing a variety of maps such as computerized geographic information systems maps, aerial maps, and city and county maps. These cover most of the geographic regions in which we are active and identify a number of available properties which are of interest to our clients. We meet with existing and prospective clients and refer available projects to them in the hope of being selected to provide services to such clients if they successfully acquire the project. For example, upon referring a large undeveloped parcel of land in southern California to a land development company that was not an existing client, we were awarded multiple contracts to provide planning, civil engineering, mapping and surveying services which, by December 31, 1998, had resulted in over $700,000 in contract value. Clients We serve clients in the real estate development, public works and wireless telecommunications and industrial engineering industries. Our primary private clients consist of real estate developers, builders, wireless telecommunications providers, and major manufacturers. Our public clients include water and school districts, cities, and other local, state and federal government agencies. 47 The following are some of the clients to whom we have provided services: Real Estate Public Works Del Webb California Corporation City of Newport Beach The Irvine Company Clark County, Nevada Kaufman & Broad Home Corporation Metropolitan Water District of Lake Las Vegas Resorts Southern California Security Capital Industrial Trust Central Utah Water Conservation Pulte Home Corporation District Shea Homes Federal Emergency Management Agency Starwood Development Orange County Transportation Thomas & Mack Co. Authority Toll Brothers, Inc. Moulton Niguel Water District Industrial Engineering Wireless Telecommunications ARCO Products Company Bechtel Corporation California Energy Commission L.A. Cellular Dow Chemical Company Pacific Bell Mobile Services Enron Energy Services Sprint PCS/Cox Communications Ernest & Julio Gallo Winery Kellogg U.S.A. Inc. Toyota Motor Company In 1997, The Irvine Company accounted for 11% of our net revenue. No individual client accounted for more than 10% of our net revenue in 1998. Backlog Our backlog represents (a) an estimate of the remaining future gross revenues from existing signed contracts and (b) contracts which have been awarded, with a defined scope of work and contract value and on which we have begun work with verbal client approval. The backlog estimates do not include projected revenues from those projects for which we have provided services and anticipate additional services to be requested. Because our professionals provide much of the preliminary services on projects such as planning, civil engineering and surveying and mapping, we are frequently called upon to expand the scope of our work on a project as it progresses. In performing the preliminary services in the initial phases of a project, we obtain background information and data relating to the project that may be inefficient and costly for another firm to compile. As a result of this knowledge about the project, we are often chosen to perform the additional engineering and consulting services that such clients require as the project progresses. At March 31, 1999, our backlog was approximately $22 million, of which approximately $20 million is expected to be completed in 1999. Our engagements are terminable at will, and no assurance can be given that we will receive any of the revenues associated with the backlog described above. 48 Competition We believe that our principal competitors of our size or larger are: Robert Bein William Frost & Associates, Hunsaker & Associates, Inc., Psomas and Nolte & Associates, in the real estate development market; Tetra Tech, URS Corporation, and Black & Veatch Corporation, in the public works market; The Planning Center, in the wireless telecommunications market; and The Bentley Companies, Eichleay Engineers and Jacobs Engineering Group, in the industrial engineering market. In any market there are also several smaller firms with which we compete. We believe that the principal factors in the engineering, consulting and technical services selection criteria include, in order of importance: . quality of service . relative experience . staffing capabilities . reputation . geographic presence . stability . price Employees We have 461 employees, of which over 400 are technicians and technical professionals. Believing that our success depends significantly upon attracting and retaining talented, innovative and experienced professionals, we are comprised of highly skilled personnel with significant industry experience and strong client relationships. We employ licensed civil engineers, mechanical engineers, electrical engineers, land surveyors, landscape architects, certified planners, information technology specialists, biologists, doctoral archaeologists and geodesists. Our field survey employees in our southern California offices are covered by a Master Labor Agreement between the International Union of Operating Engineers and the Southern California Association of Civil Engineers and Land Surveyors. The agreement applies to civil engineering and land surveying work, including global positioning system surveys, and covers our employees in Imperial, Inyo, Kern, Los Angeles, Mono, Orange, Riverside, San Bernardino, San Diego, San Luis Obispo, Santa Barbara and Ventura counties. Our field survey employees in our Northern California offices are covered by a Master Agreement between the Bay Counties Civil and Land Surveyors Association and Operating Engineers Local Union No. 3. Our other employees are not represented by any labor union and we have never experienced a work stoppage from union actions. We believe that our relationship with our employees is good. Facilities We occupy offices and facilities in various locations in California, Nevada and, with the acquisition of Thompson-Hysell in Utah. Our corporate headquarters are located in Costa 49 Mesa, California and consist of approximately 49,000 square feet of space. Our monthly rent for this space consists of a base rent, including common area maintenance of approximately $71,200, with periodic adjustments. Our lease extends until August 1, 1999. We also maintain offices at another location in Costa Mesa and have additional offices in the California cities of Walnut Creek, Moreno Valley, Modesto, Palm Desert, and Salinas (projected opening 1999); one office in Las Vegas, Nevada; and one office in Taylorsville, Utah. Legal Proceedings From time to time, we have been involved in routine litigation incidental to the conduct of our business. There are currently no material pending litigation proceedings to which we are a party. 50 MANAGEMENT Directors and Executive Officers The directors and executive officers of TKCI and their ages and positions as of April 28, 1999 are as follows:
Name Age Position with the Company - ---- --- ------------------------- Aram H. Keith........... 54 President, Chief Executive Officer and Director Jerry M. Brickman....... 52 Chief Operating Officer Gary C. Campanaro....... 38 Chief Financial Officer, Secretary and Director Eric C. Nielsen......... 39 President, Costa Mesa division(/1/) Walter W. Cruttenden, III................... 48 Director(/2/)(/3/) George Deukmejian....... 70 Director(/4/) Christine M. Diemer..... 46 Director(/2/)(/3/)(/4/)
- ------------------ (1) Upon the consummation of this offering, Mr. Nielsen will become the President (and an executive officer) of TKCI. (2) Appointed as a member of the audit committee effective immediately prior to the consummation of this offering. (3) Appointed as a member of the compensation committee effective immediately prior to the consummation of this offering. (4) has been elected to our board of directors effective immediately prior to the consummation of this offering. All directors hold office until the next annual meeting of shareholders or the election and qualification of their successors. Officers are elected annually by the board of directors and serve at its discretion. Aram H. Keith co-founded TKCI in March 1983 and has served as our President, Chief Executive Officer and Chairman of the Board since that time. In addition, Mr. Keith is the President, Chief Executive Officer and Chairman of the Board of Directors of John M. Tettemer & Associates and the President and a director of ESI, each a wholly-owned subsidiary of TKCI. Mr. Keith has been a California licensed civil engineer since 1972. He also holds civil engineering licenses in the states of Arizona, Colorado, Nevada and Texas. Mr. Keith received a B.S. in Civil Engineering from California State University at Fresno. Jerry M. Brickman joined TKCI in March, 1988 and has served as our Chief Operating Officer since October 1993. Prior to his appointment to such office, Mr. Brickman held the positions of Senior Vice President and Contracts Administrator with TKCI. Additionally, Mr. Brickman is a director of ESI. Before joining TKCI, Mr. Brickman served 22 years in the United States Air Force, retiring at the rank of Major in February 1988. He received a B.S. in Business Administration from the University of Arizona and an M.S. in Logistics Management from the Air Force Institute of Technology. 51 Gary C. Campanaro has served as our Chief Financial Officer since January 1998 and as a director since July 1998. In addition, Mr. Campanaro is the Chief Financial Officer, Secretary, Treasurer and a director of ESI and the Chief Financial Officer of John M. Tettemer & Associates. Mr. Campanaro joined CB Commercial Real Estate Group, Inc. (now CB Richard Ellis), a commercial real estate brokerage firm, in November 1992 as a Vice President of the Financial Consulting Group and became Senior Vice President, Managing Officer of the Financial Consulting Group in February 1995 and also began serving on CB Commercial Real Estate Group Inc.'s operation management board. Mr. Campanaro served in those positions until he joined TKCI. From July 1988 to November 1992, he held various accounting, finance and real estate positions with CKE Restaurants, Inc., an owner and operator of a restaurant chain. Mr. Campanaro began his professional career with KPMG LLP and is licensed by the State of California as a Certified Public Accountant, and as a Real Estate Broker. He is a member of the American Institute of Certified Public Accountants. Mr. Campanaro received a B.S. in Accounting from the University of Utah. Eric C. Nielsen became the President of our Costa Mesa division in November 1994. Mr. Nielsen joined TKCI in November 1985 as Senior Designer and became a Vice President, Engineering and Mapping in July 1990. Upon the consummation of this offering, Mr. Nielsen will replace Mr. Keith as the President of TKCI. Mr. Nielsen received a B.S. in Civil Engineering from California Polytechnic State University and is a registered engineer in the states of California, Colorado and Hawaii. Walter W. Cruttenden, III was elected to our board of directors in July 1997. Mr. Cruttenden serves as Chairman of the Board of Directors and Chief Executive Officer of E*OFFERING Corp., the co-underwriter in this offering. In 1986, he founded Cruttenden Roth Incorporated and served as the Chairman of the Board of Directors and Chief Executive Officer until 1998. E*OFFERING Corp. and Cruttenden Roth Incorporated are both investment banking institutions. George Deukmejian has been elected to our board of directors to become effective immediately prior to the consummation of the offering. Mr. Deukmejian is the former Governor of the State of California, serving in such office from January 1983 until January 1991. Following his departure from the Governor's office, he joined the law firm of Sidley & Austin in its Los Angeles office where he currently practices as a partner. Prior to his election as Governor, Mr. Deukmejian served from 1979 to 1982 as the Attorney General of the State of California and from 1963 to 1978, served in the California State Legislature. Mr. Deukmejian currently serves on the boards of directors of Burlington Northern Santa Fe Corp., Foundation Health Systems, Inc. and the Whittaker Corporation. He also serves as a Deputy Trustee of the Golden Eagle Insurance Trust in Liquidation and on the Senior Advisory Council of the Industrial Bank of Japan's Los Angeles office. Mr. Deukmejian received a B.A. in Sociology from Siena College and a J.D. from St. Johns University Law School. 52 Christine M. Diemer has been elected to our board of directors to become effective immediately prior to the consummation of the offering. Ms. Diemer is the current Chief Executive Officer of the Building Industry Association of Southern California, Orange County chapter which she joined in July 1981. Prior to joining that organization, she was an appellate lawyer for the Attorney General of the State of California from 1981 to 1983, and served as the Director of the California Department of Housing and Community Development from 1983 to 1989. Ms. Diemer is a former board member of the Federal National Mortgage Association (Fannie Mae) and the California Housing Finance Agency (CHFA). Ms. Diemer received a B.A. in English from California State University at San Diego and a J.D. from Western State School of Law. Director Compensation Our non-employee directors will receive $1,500 for each board or committee meeting which they attend and are reimbursed for out-of-pocket expenses incurred in connection with attendance at board and committee meetings. Board Committees; Compensation Committee Interlocks and Insider Participation The board of directors has established an audit committee and a compensation committee. The audit committee, which will consist of Mr. Cruttenden and Ms. Diemer, will review the adequacy of TKCI's internal controls and the results and scope of the audit and other services provided by our independent auditors. The audit committee will meet periodically with management and our independent auditors. The compensation committee, which will consist of Mr. Cruttenden and Ms. Diemer will establish salaries and other forms of compensation for officers and other employees of TKCI and will administer our option plans. No executive officer of TKCI has served as a director or member of the compensation committee of any other entity whose executive officers served as a director or member of the compensation committee. Mr. Cruttenden owns approximately 11.64% of TKCI's common stock. In addition, in April 1997, Mr. Cruttenden loaned the company $700,000. Mr. Cruttenden was also a party in interest to a right of first refusal to have Cruttenden Roth serve as the managing underwriter in the offering, which he subsequently waived pursuant to a written waiver dated July 1998. 53 Executive Compensation The following table sets forth certain summary information concerning compensation paid or accrued for services rendered to TKCI in all capacities during the year ended December 31, 1998 to our Chief Executive Officer and to each of our other three most highly compensated executive officers whose total compensation in 1998 exceeded $100,000. Summary Compensation Table
Long Term Compensation Annual Compensation Awards -------------------------- ------------- Securities Name and Fiscal All Other Underlying Principal Position Year Salary Bonus Compensation Stock Options - ------------------------- ------ -------- ----- ------------ ------------- Aram H. Keith............ 1998 $373,419(/1/) -- $6,832(/4/) -- President and Chief Executive Officer Jerry M. Brickman........ 1998 $130,403 -- $5,186(/5/) 9,259 Chief Operating Officer Gary C. Campanaro........ 1998 $115,016(/2/) -- $5,171(/6/) 31,481 Chief Financial Officer Floyd S. Reid(/7/)....... 1998 $111,369(/3/) -- $4,119(/8/) --
- ------------------ (1) Consists of $371,562 in salary and $1,857 in matching contributions made by TKCI pursuant to our 401(k) plan. (2) Consists of $114,423 in salary and $593 in matching contributions made by TKCI pursuant to our 401(k) plan. (3) Consists of $110,816 in salary and $553 in matching contributions made by TKCI pursuant to our 401(k) plan. (4) Consists of a $1,500 auto allowance, $5,146 in membership dues paid on behalf of Mr. Keith by TKCI and $186 in premiums on a life insurance policy of which Mr. Keith is the beneficiary. (5) Consists of a $5,000 auto allowance and $186 in premiums paid on a life insurance policy of which Mr. Brickman is the beneficiary. (6) Consists of a $5,000 auto allowance and $171 in premiums paid on a life insurance policy of which Mr. Campanaro is the beneficiary. (7) Mr. Reid resigned as the Treasurer and Secretary of TKCI on April 12, 1999 and is no longer an executive officer. (8) Consists of a $500 auto allowance, $3,433 in membership dues paid on behalf of Mr. Reid by TKCI and $186 in premiums on a life insurance policy of which Mr. Reid is the beneficiary. 54 Option Grants in the Last Fiscal Year The following table sets forth certain information regarding options granted to the executive officers named in the Summary Compensation Table above during the fiscal year ended December 31, 1998.
Potential Realizable Value at Assumed Annual Rates % of Total of Stock Price Number of Options Appreciation Securities Granted to for Option Underlying Employees in Exercise Term(/3/) Options Fiscal Price Expiration ---------------- Name Granted(/1/) Year(/2/) ($/Share) Date 5% 10% - ---- ------------ ------------ --------- ---------- ------- -------- Aram H. Keith........... -- -- -- -- $ -- $ -- Jerry M. Brickman....... 9,259 6.8% $8.10 2008 $47,200 $119,500 Gary C. Campanaro....... 27,778 20.0% $2.70 2008 $47,200 $119,500 3,704 2.7% $8.10 2008 $18,900 $ 47,800 Floyd S. Reid........... -- -- -- -- $ -- $ --
Option Grants During Year Ended December 31, 1998 - ------------------ (/1/)Options vest 20% annually over five years. (/2/Based)on options to purchase 369,700 shares granted to employees during the fiscal year ended December 31, 1998, including Named Executive Officers. (/3/)Calculated using the potential realizable value of each grant. Stock Option Plans We have adopted an Amended and Restated 1994 Stock Incentive Plan effective as of March 31, 1999. The plan is administered by the Compensation Committee of the board of directors, which has discretion and authority, consistent with the provisions of the plan, to determine which eligible participants will receive options, the time when options will be granted, the terms of options granted and the number of shares which will be subject to options. Our plan provides for the granting of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, nonqualified options and rights to purchase shares of common stock. Under the plan, options and purchase rights covering an aggregate of 1,111,111 shares of TKCI's common stock may be granted, in each case to officers, directors, key employees and consultants of TKCI and its subsidiaries, except that incentive stock options may not be granted to nonemployee directors or nonemployee consultants. The exercise price of incentive stock options must not be less than the fair market value of a share of common stock on the date the option is granted (110% with respect to optionees who own at least 10% of the outstanding common stock). Our Compensation Committee has the authority to determine the time or times at which options granted under the plan become exercisable, provided that options expire no later than ten years from the date of grant (five years with respect to incentive stock options held by 55 optionees who own at least 10% of the outstanding common stock). Options are nontransferable, other than by will and the laws of descent and distribution, and generally may be exercised only by an employee while employed by TKCI. The plan terminates in July 2004. As of March 31, 1999, options to purchase 485,074 shares of common stock were outstanding under the plan. Indemnification of Directors and Officers The articles of incorporation of TKCI as amended, provide that the liability of our directors for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of TKCI for breach of a director's duties to TKCI or our shareholders except for liability: (a) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (b) for acts or omissions that a director believes to be contrary to the best interests of TKCI or our shareholders or that involve the absence of good faith on the part of the director; (c) for any transaction for which a director derived an improper personal benefit; (d) for acts or omission that show a reckless disregard for the director's duty to our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to TKCI or our shareholders; (e) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to TKCI or our shareholders; (f) with respect to certain transactions, or the approval of transactions in which a director has a material financial interest; and (g) expressly imposed by statute, for approval of certain improper distributions to shareholders or certain loans or guarantees. Our articles of incorporation also provide that we are authorized to provide indemnification to our officers and directors in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code. Our bylaws provide for indemnification of our officers, directors, employees, and other agents to the extent and under the circumstances permitted by California law. We have entered into agreements to indemnify our directors and executive officers in addition to the indemnification provided for in our articles of incorporation and bylaws. Among other things, these agreements provide that we will indemnify, subject to certain requirements, each of our directors and executive officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of TKCI, on account of services by such person as a director or executive officer of us, or as a director or executive officer of any other company or enterprise to which the person provides services at our request. 56 CERTAIN TRANSACTIONS In November 1998, we entered into Indemnification Agreements with all of our directors and executive officers providing for indemnification rights in certain circumstances. See "Management--Indemnification of Directors and Officers." In August 1998, the holders of all of the outstanding shares of Keith Engineering common stock contributed their shares to TKCI as a contribution to capital. In consideration of this contribution, we issued to the contributing shareholders one share of TKCI common stock for each share of Keith Engineering stock contributed. Pursuant to this transaction, Aram H. Keith, through the Aram H. Keith and Margie R. Keith Trust, acquired 738,889 shares of TKCI common stock. Floyd S. Reid, as trustee of the Floyd S. Reid and Ruth L. Reid Family Trust dated March 30, 1990, acquired 351,852 shares of TKCI common stock. Mr. Keith is our President, Chief Executive Officer and the Chairman of our board of our directors, and Mr. Reid is a former director and executive officer of our company and remains a principal shareholder. On December 31, 1997, we borrowed $910,177 and $127,815 from Aram H. Keith and Floyd S. Reid, respectively, under promissory notes. On June 3, 1998, we borrowed an additional $300,000 from Mr. Keith. We have borrowed funds from Mr. Keith from time to time as cash flow was needed. In February 1998, as a condition to our credit agreement with Imperial Bank, subordination agreements were executed by Messrs. Keith and Reid subordinating our payment obligations to them under the notes to our obligations to Imperial Bank under our credit agreement. The notes to Messrs. Keith and Reid were subsequently amended and restated to include language which referenced these agreements and the two separate notes to Mr. Keith were consolidated into a single note in the principal amount of $1,210,177. Each of these notes provides for an interest rate of 10% per annum and is due and payable in full on July 1, 2000. As of March 31, 1999, we were indebted to Messrs. Keith and Reid under such notes in the respective amounts of $1,371,697 and $161,048. In October 1997, we borrowed an aggregate of $213,782 from the Erica Keith Educational Trust and the Susan E. Reid Housing Trust under two separate promissory notes in the amounts of $129,205 and $84,577, respectively. The obligees on these notes are trusts established for the benefit of the children of Messrs. Reid and Keith. In February 1998, as a condition to our credit agreement with Imperial Bank, subordination agreements were executed on behalf of these trusts subordinating our payment obligations to the trusts under the notes to our obligations to Imperial Bank under our credit agreement. Amended and restated notes were executed in February 1999 to include accrued and unpaid interest in the principal amounts, to extend the maturation dates and to include language on the face of the notes to reference the subordination to our obligations to Imperial Bank. The amended and restated notes to the Erica Keith Educational Trust and the Susan E. Reid Housing Trust were in the amounts of $132,000 and $86,000, respectively. These notes replaced the October 1997 notes. Each of these notes provides for an interest rate of 10% per annum and is due and payable in full on October 30, 2000. As of March 31, 1999, we were indebted to the obligees of these notes in the amounts of $134,134 and $87,390. 57 In April 1997, we entered into an Agreement for Advisory Services with Walter W. Cruttenden, III, which provided that Mr. Cruttenden would provide us with advice regarding strategic acquisitions and that Mr. Cruttenden, or a designee, would serve on our board of directors. Mr. Cruttenden currently serves as a director on our board of directors. In exchange for these services, we agreed to pay Mr. Cruttenden $2,500 per quarter. In addition, for $10,000, we granted Mr. Cruttenden options to purchase 10% of our outstanding common stock upon the payment of additional consideration of $88,000. In July 1997, upon his exercise of this option, we issued 325,926 shares of our common stock to Mr. Cruttenden. The agreement also provides for indemnification by us and Mr. Keith in certain circumstances. Further, the agreement provides Mr. Cruttenden with a right of first refusal to have Cruttenden Roth serve as the managing underwriter in our initial public offering, which he waived pursuant to a written waiver in July 1998. The agreement terminated on April 10, 1999. In December 1997, Mr. Cruttenden and members of his family purchased 196,745 shares of TKCI common stock for an aggregate purchase price of $500,000. In April 1997, we borrowed $700,000 from Mr. Cruttenden under a Secured Promissory Note Line of Credit. This note provides for an interest rate of 10% per annum and becomes fully due and payable on July 1, 2000. As of March 31, 1999, our obligations under the note were $700,000. In conjunction with the note, we entered into a Security Agreement with Mr. Cruttenden, Keith Engineering and Mr. Keith, granting to Mr. Cruttenden a security interest in all of our assets to secure the repayment of the amounts due under the note. Mr. Keith personally guaranteed our obligations under the note. The note also provides that our indebtedness to Mr. Keith and Mr. Reid under their December 31, 1997 notes (discussed above) are subordinate to our obligations under the note. In February 1999, the note to Mr. Cruttenden was amended and restated to provide for its subordination to our obligations to Imperial Bank. In February 1997, Keith International borrowed $100,000 from Douglas Travato under a promissory note. In February 1998 pursuant to a written agreement, Mr. Keith assumed the Travato note and fully paid all amounts due under the note by transferring 55,556 shares of Mr. Keith's TKCI common stock to the Travato Family Trust. We entered into a promissory note dated February 10, 1998 in favor of Mr. Keith in the principal amount of $150,000, of which $100,000 reflected our obligation to Mr. Keith in connection with his assumption of the Travato note. In October 1998, we made a $150,000 cash payment to Mr. Keith in full satisfaction of our obligations under our note to him. Keith International was a corporation owned by Messrs. Keith and Reid that was dissolved in November 1998. On February 26, 1996, Keith Engineering borrowed $50,000 from the Wyckoff Company Money Purchase Pension Plan. In February 1997, the parties reduced this loan to writing under a promissory note. The original maturity date of the loan was August 26, 1996, which was successively extended to become fully due and payable on February 26, 1998. In February 1998, Mr. Keith assumed the Wyckoff note and fully paid all amounts due under the note by transferring to the Wyckoff Company Profit Sharing Plan 18,519 shares of 58 Mr. Keith's TKCI common stock. In connection with this transaction, we entered into a promissory note in favor of Mr. Keith in the principal amount of $150,000 (discussed above), of which $50,000 reflected our obligation to Mr. Keith pursuant to his assumption of the Wyckoff note. In October 1998, we made a $150,000 cash payment to Mr. Keith in full satisfaction under our note to him. In February 1998, Mr. Keith personally guaranteed the repayment of our obligations under our credit agreement with Imperial Bank. 59 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 31, 1999 and as adjusted to reflect the sale of common stock offered hereby, by (a) each person known by us to beneficially own more than 5% of the outstanding shares of common stock, (b) each of our directors, (c) each of the executive officers listed in the Summary Compensation Table, and (d) all of our directors and executive officers as a group. Except as otherwise indicated, we believe that the beneficial owners of the common stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
Shares Beneficially Shares Beneficially Owned Prior to Owned After Offering Offering Name of Beneficial Owner -------------------------------------------- or Identity of Group(/1/)(/2/) Number Percent Number Percent ------------------------------ ----------- --------------------- ---------- Aram H. Keith...................... 1,533,704 42.68% 1,533,704 28.70% Floyd S. Reid(/3/)................. 509,444 14.18% 509,444 9.53% Gary C. Campanaro(/4/)............. 5,556 * 5,556 * Jerry M. Brickman(/4/)............. 13,333 * 13,333 * Walter W. Cruttenden, III.......... 418,137 11.64% 418,137 7.83% George Deukmejian(/5/)............. 7,407 * 7,407 * Christine M. Diemer(/5/)........... 7,407 * 7,407 * All directors and executive officers as a group (6 persons)..
- ------------------ * Less than 1% (1) The address of each person listed is c/o The Keith Companies, Inc., 2955 Red Hill Avenue, Costa Mesa, California 92626. (2) Mr. Keith is the President, Chief Executive Officer and Chairman of the Board of TKCI; Mr. Campanaro is Secretary and Chief Financial Officer of TKCI; and Mr. Brickman is Chief Operating Officer of TKCI. (3) Mr. Reid resigned as the Treasurer and Secretary of TKCI on April 12, 1999 and is no longer an executive officer. (4) Consists solely of shares issuable under options presently exercisable or which will become exercisable within 60 days. (5) Consists solely of shares issuable under options which will be granted immediately prior to the offering and which will be immediately exercisable upon grant. 60 DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 100,000,000 shares of common stock, no par value, and 5,000,000 shares of preferred stock, no par value. The following description of our capital stock is qualified in all respects by reference to our amended and restated articles of incorporation, which has been filed as an exhibit to the registration statement incorporating this prospectus. As of March 31, 1999, there were 41 holders of TKCI's common stock. Common Stock The holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the board of directors may, from time to time, determine, subject to any preferences which may be granted to the holders of preferred stock and to certain restrictions on the payment of dividends contained in our credit agreement with Imperial Bank. Holders of common stock are entitled to one vote per share on all matters on which the holders of common stock are entitled to vote. The common stock is not entitled to preemptive rights and is not subject to redemption or conversion. Upon liquidation, dissolution or winding-up of TKCI, the assets (if any) legally available for distribution to shareholders are distributable ratably among the holders of the common stock after payment of all of our debts and liabilities and the liquidation preference of any outstanding class or series of preferred stock. All outstanding shares of common stock are, and the shares of common stock to be issued pursuant to this offering will be, when issued and delivered, validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to any series of preferred stock that we may issue in the future. Preferred Stock Preferred stock may be issued from time to time in one or more series, and our board of directors, without action by the holders of common stock, may fix or alter the voting rights, redemption provisions (including sinking fund provisions), dividend rights, dividend rates, liquidation preferences, conversion rights and any other rights, preferences, privileges and restrictions of any wholly unissued series of preferred stock. The board of directors, without shareholder approval, can issue shares of preferred stock with rights that could adversely affect the rights of the holders of common stock. No shares of preferred stock presently are outstanding, and we have no present plans to issue any such shares. The issuance of shares of preferred stock could adversely affect the voting power of the holders of common stock and could have the effect of making it more difficult for a third party to acquire, or could discourage or delay a third party from acquiring, a majority of our outstanding stock. Registration Rights Following this offering, the shareholders of Thompson-Hysell will be entitled to certain registration rights with respect to the shares they may receive in 2000. No other persons have registration rights. 61 Transfer Agent and Registrar The stock transfer agent and registrar for TKCI common stock is U.S. Stock Transfer Corporation. SHARES ELIGIBLE FOR FUTURE SALE As of March 31, 1999, TKCI had outstanding 3,559,708 shares of common stock. The 1,750,000 shares sold pursuant to this offering (assuming the overallotment option is not exercised) will be freely tradeable without restriction or further registration under the Securities Act of 1933, unless held by an "affiliate" of TKCI within the meaning of Rule 144 adopted under the Securities Act of 1933. Any such affiliate would be subject to the resale limitations of Rule 144. The remaining shares of outstanding common stock are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933 and may not be sold in the absence of a registration under the Securities Act of 1933 unless an exemption from registration is available, including an exemption contained in Rule 144. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated for purposes of Rule 144) who has beneficially owned restricted securities, as that term is defined in Rule 144, for at least one year (including, in the case of a nonaffiliate holder, any period of ownership of preceding nonaffiliate holders) is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of (a) 1% of the then outstanding shares of our common stock, or (b) the average weekly trading volume in our common stock during the four calendar weeks preceding such sale, provided that certain public information about us, as required by Rule 144, is then available and the seller complies with the manner of sale and notification requirements of the rule. A person who is not an affiliate and has not been an affiliate within three months prior to the sale and has, together with any previous owners who were not affiliates, beneficially owned restricted securities for at least two years is entitled to sell such shares under Rule 144(k) without regard to any of the volume limitations described above. As of March 31, 1999, 492,037 restricted shares were eligible for sale under Rule 144(k). The remainder of the restricted shares will be eligible for sale from time to time thereafter upon expiration of one-year holding periods and subject to the requirements of Rule 144. In addition, the shares held by all of our shareholders and persons with rights to acquire our shares, except certain non-management employees, are subject to agreements restricting the sale of their shares in favor of the representatives of the underwriters. Upon the consummation of this offering, we will have outstanding options to purchase 499,889 shares of our common stock held by certain employees and directors pursuant to our Amended and Restated 1994 Stock Incentive Plan. We intend to register on a registration statement on Form S-8, on or shortly after the date of this prospectus, all 499,889 shares of common stock underlying the options that are then outstanding or issuable pursuant to the Amended and Restated 1994 Stock Incentive Plan. TKCI also has outstanding four warrants to purchase an aggregate of 83,333 shares of common stock granted in connection with the acquisitions of ESI and John M. Tettemer & 62 Associates. The shares issued upon exercise of such warrants will be restricted securities. In connection with the acquisition of ESI, if certain earnings targets and other conditions are met, TKCI has also agreed to issue (a) up to 37,037 shares of TKCI common stock and (b) options to purchase an additional 37,037 shares of common stock to employees of ESI. In connection with the acquisition of Thompson-Hysell, TKCI will grant a warrant to purchase 66,667 shares of common stock to a finder and has agreed to (a) issue that number of shares with a value of $1,333,334 (subject to adjustment upward or downward) to the shareholders of Thompson-Hysell if certain conditions are met; and (b) reserve options to purchase 37,037 shares of common stock for granting to those employees of Thompson-Hysell who become employees of TKCI following this offering. Such shares, if issued, will be restricted securities but will include the right to have the shares registered for resale under the Securities Act of 1933. No predictions can be made of the effect, if any, that future sales of shares of our common stock, and grants of options and warrants to acquire shares of our common stock, or the availability of shares for future sale, will have on the market price of the common stock prevailing from time to time. Sales of substantial amounts of common stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market prices of the common stock. See "Principal Shareholders," "Description of Capital Stock" and "Underwriting. 63 UNDERWRITING Under the underwriting agreement, which is filed as an exhibit to the registration statement relating to this prospectus, the underwriters named below for whom First Security Van Kasper and E*OFFERING Corp. are serving as representatives, have severally agreed to purchase from us and we have agreed to sell to each of the underwriters, an aggregate of 1,750,000 shares of common stock. The number of shares of common stock that each underwriter has agreed to purchase is set forth opposite its name below:
Underwriters Number of Shares - ------------ ---------------- First Security Van Kasper...................................... E*OFFERING Corp................................................ --- Total........................................................ ===
The underwriting agreement provides that the obligations of the several underwriters to purchase shares of common stock are subject to the approval of certain legal matters by counsel and to certain other conditions. If any of the shares of common stock are purchased by the underwriters pursuant to the underwriting agreement, all of the shares of common stock (other than the shares of common stock covered by the underwriters' over-allotment option described below) must be so purchased. Prior to this offering, there has been no established trading market for our common stock. The initial price to the public for our common stock offered hereby will be determined by negotiation between the representatives and us. The factors to be considered in determining the initial price to the public include the history of and the prospects for the industry in which we compete, the performance and ability of our management, our past and present operations, our historical results of operations, our prospects for future earnings, the general condition of the securities markets at the time of this offering and the recent market prices of securities of generally comparable companies. The estimated initial public offering price range set forth on the cover page of this prospectus is subject to change as a result of market conditions and other factors. The underwriters propose to offer the shares of common stock in part directly to the public at the offering price set forth on the cover page of this prospectus, and to certain dealers (including the underwriters) at such price less a concession not in excess of $ per share. Any dealers or agents that participate in the distribution of the common stock may be deemed to be underwriters within the meaning of the Securities Act of 1933, and any discounts, commission or concessions received by them and any provided pursuant to the sale of the shares by them might be deemed to be underwriting discounts and commissions 64 under the Securities Act of 1933. TKCI has agreed to pay the representatives a non-accountable expense allowance of 1% of the proceeds of this offering. After the public offering of the shares, the offering price and other selling terms may be changed by the underwriters. A prospectus in electronic format is being made available on an Internet website maintained by E*OFFERING Corp. at http://www@eoffering.com. Except for this prospectus, nothing on E*OFFERING Corp.'s web site shall be deemed to be a part of this prospectus. We have agreed to indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments that the underwriters may be required to make in respect thereof. TKCI, and each of its directors, executive officers, shareholders and certain of its option,warrant and rights holders have agreed not to offer, sell contract to sell or otherwise dispose of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock, or in any manner transfer all or a portion of the economic consequences associated with the ownership of such common stock, or to cause a registration statement covering any shares of common stock to be filed, for 180 days after the date of the underwriting agreement without the prior written consent of the representatives, subject to certain limited exceptions, and provided that we may grant options pursuant to, and issue shares of common stock upon the exercise of options under our Amended and Restated 1994 Stock Incentive Plan. See "Shares Eligible for Future Sale." TKCI has granted to the underwriters an option to purchase up to an aggregate of additional shares of our common stock, at the initial public offering price less underwriting discounts and commissions, solely to cover over- allotments. Such option may be exercised in whole or in part from time to time during the 45-day period after the date of this prospectus. To the extent that the underwriters exercise such option, each of the underwriters will be committed, subject to certain conditions, to purchase from us a number of option shares proportionate to such underwriters' initial commitment as indicated in the preceding table. The following table shows the underwriting fees to be paid to the underwriters by us in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of common stock.
No Exercise Full Exercise ----------- ------------- Per share............................................. $ $ ---- ---- Total............................................... $ $ ==== ====
We estimate that our share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ . In the event our common stock does not constitute an excepted security under the provisions of Regulation M promulgated by the Securities and Exchange Commission, the underwriters and dealers may engage in passive market making transactions in accordance with Rule 103. In general, a passive market maker may not bid for or purchase shares of common stock at a 65 price that exceeds the highest independent bid. In addition, the net daily purchase made by any passive market maker generally may not exceed 30% of its average daily trading volume in the common stock during a specified two-month prior period, or 2000 shares, whichever is greater. A passive market maker must identify passive market making bids as such on the Nasdaq electronic later- dealer reporting system. Passive market making may stabilize or maintain the market price of the common stock above independent market levels. Underwriters and dealers are not required to engage in passive market making and may end passive market making activities at any time. In connection with this offering, certain underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot this offering, creating a syndicate short position. In addition, the underwriters may bid for and purchase shares of our common stock in the open market to cover syndicate short positions or to stabilize the price of our common stock. These activities may stabilize or maintain the market price of our common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. We have applied for the listing of our common stock on the Nasdaq National Market under the symbol "TKCI." The representatives have informed us that the underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Rutan & Tucker, LLP, Costa Mesa, California. Certain legal matters in connection with the offering will be passed upon for the underwriters by Cooley Godward LLP, San Diego, California. EXPERTS The consolidated financial statements of The Keith Companies, Inc. and subsidiaries as of December 31, 1997 and 1998, and for each of the years in the three-year period ended December 31, 1998, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of Thompson-Hysell, Inc. as of December 31, 1997 and 1998, and for the years then ended, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 66 WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act of 1933, and the rules and regulations promulgated thereunder, with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the full text of such contract or other document which is filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. For further information regarding us and the common stock offered hereby, reference is made to such registration statement and the exhibits and schedules thereto. The registration statement, including the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such documents may be obtained from the Commission at its principal office in Washington, D.C. upon the payment of the charges prescribed by the Commission. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The Commission's address on the World Wide Web is http://www.sec.gov. All trademarks or trade names referred to in this prospectus are the property of their respective owners. 67 THE KEITH COMPANIES, INC. AND SUBSIDIARIES PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The TKCI unaudited pro forma condensed consolidated balance sheet as of March 31, 1999 is presented as if the initial public offering of 1,750,000 shares of common stock, at an assumed initial public offering price of $9.00 per share; the acquisition of substantially all of the assets and the assumption of certain of the liabilities of Thompson-Hysell; and the repayment of debt, capital lease obligations and notes payable to related parties with the net proceeds of the offering had all occurred on March 31, 1999. The TKCI unaudited pro forma condensed consolidated statements of income for the year ended December 31, 1998 and the three months ended March 31, 1999 are presented as if the initial public offering of 1,750,000 shares of common stock, at an assumed initial public offering price of $9.00 per share; the acquisition of substantially all of the assets and the assumption of certain of the liabilities of Thompson-Hysell; and the repayment of debt, capital lease obligations and notes payable to related parties with the net proceeds of the offering had all occurred on January 1, 1998. The pro forma adjustments are based upon currently available information and upon certain assumptions that we believe are reasonable. There can be no assurances that the actual effect will not differ significantly from the pro forma adjustments reflected in the pro forma condensed consolidated financial statements. The pro forma condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of TKCI and its subsidiaries, and the notes thereto, and the financial statements of Thompson- Hysell, and the notes thereto, included elsewhere in this prospectus. The pro forma condensed consolidated financial statements do not purport to represent our financial position as of March 31, 1999 or the results of operations for the year ended December 31, 1998 or the three months ended March 31, 1999 that would actually have occurred had the initial public offering of 1,750,000 shares of common stock, at an assumed initial public offering price of $9.00 per share; the acquisition of substantially all of the assets and the assumption of certain of the liabilities of Thompson-Hysell; and the repayment of debt, capital lease obligations and notes payable to related parties with the net proceeds of the offering had all occurred on March 31, 1999 or on January 1, 1998, or to project our financial position or results of operations as of any future date or for any future period. P-1 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Pro Forma Condensed Consolidated Balance Sheet As of March 31, 1999 (Unaudited)
Historical Pro Forma Adjustments ------------------ ------------------------------ Thompson- Acquisition of Initial Public TKCI Hysell Thompson-Hysell Offering Pro Forma ------- --------- --------------- -------------- --------- (in thousands) Assets Current assets: Cash and cash equivalents.......... $ 144 $ 264 $(4,728)(a) $14,179 (b) $ 1,782 (8,077)(c) Contracts and trade receivables, net..... 6,124 2,456 -- -- 8,580 Costs and estimated earnings in excess of billings............. 4,748 265 -- -- 5,013 Deferred offering costs................ 346 -- -- (346)(b) -- Other current assets.. 525 65 -- -- 590 ------- ------ ------- ------- ------- Total current assets............. 11,887 3,050 (4,728) 5,756 15,965 Equipment and improvements, net.... 2,974 1,097 -- -- 4,071 Goodwill, net......... 556 -- 3,205 (a) -- 3,761 Other assets.......... 272 247 (347)(a) -- 172 ------- ------ ------- ------- ------- Total assets........ $15,689 $4,394 $(1,870) $ 5,756 $23,969 ======= ====== ======= ======= ======= Liabilities and Stockholders' Equity Current liabilities: Short-term borrowings........... $ 4,881 $ -- $ 95 (a) $(4,275)(c) $ 701 Current portion of long-term debt and capital lease obligations.......... 1,444 231 -- (741)(c) 934 Trade accounts payable.............. 1,280 103 -- -- 1,383 Accrued liabilities... 2,955 234 -- -- 3,189 Accrued liabilities to related parties...... 201 23 (23)(a) (201)(c) -- Billings in excess of costs and estimated earnings............. 559 -- -- -- 559 ------- ------ ------- ------- ------- Total current liabilities........ 11,320 591 72 (5,217) 6,766 Long-term debt and capital lease obligations, less current portion....... 948 378 1,333 (a) (459)(c) 2,200 Notes payable to related parties, less current portion....... 2,401 579 (579)(a) (2,401)(c) -- Other liabilities...... 362 -- -- -- 362 ------- ------ ------- ------- ------- Total liabilities... 15,031 1,548 826 (8,077) 9,328 ------- ------ ------- ------- ------- Stockholders' equity: Common stock.......... 1,085 1 149 (a) 13,833 (b) 15,068 Retained earnings (accumulated deficit)............. (427) 2,822 (2,822)(a) -- (427) Accumulated other comprehensive income............... -- 23 (23)(a) -- -- ------- ------ ------- ------- ------- Total stockholders' equity............. 658 2,846 (2,696) 13,833 14,641 ------- ------ ------- ------- ------- Total liabilities and stockholders' equity............. $15,689 $4,394 $(1,870) $ 5,756 $23,969 ======= ====== ======= ======= =======
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements P-2 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Pro Forma Condensed Consolidated Statement of Income Year Ended December 31, 1998 (Unaudited)
Historical Pro Forma Adjustments ----------------- ------------------------------ Thompson- Acquisition of Initial Public TKCI Hysell Thompson-Hysell Offering Pro Forma ------- --------- --------------- -------------- --------- (in thousands, except share and per share data) Gross revenue........... $34,021 $9,112 $ -- $ -- $ 43,133 Subcontractor costs..... 4,839 323 -- -- 5,162 ------- ------ ------ ------ --------- Net revenue......... 29,182 8,789 -- -- 37,971 Costs of revenue........ 19,287 4,607 -- -- 23,894 ------- ------ ------ ------ --------- Gross profit........ 9,895 4,182 -- -- 14,077 Selling, general and administrative expenses............... 5,858 2,187 128 (d) 175 (e) 8,348 ------- ------ ------ ------ --------- Income from operations......... 4,037 1,995 (128) (175) 5,729 Interest expense........ 967 80 133 (d) (759)(f) 421 Other expenses (income), net.................... 66 (32) 31 (d) -- 65 ------- ------ ------ ------ --------- Income before provision for income taxes....... 3,004 1,947 (292) 584 5,243 Provision for income taxes.................. 1,350 6 -- 846 (g) 2,202 ------- ------ ------ ------ --------- Net income.......... $ 1,654 $1,941 $ (292) $ (262) $ 3,041 ======= ====== ====== ====== ========= Net income per share: Basic................. $ 0.57 ========= Diluted............... $ 0.55 ========= Weighted average shares used in computing net income per share amounts: Basic................. 5,309,708 ========= Diluted............... 5,568,957 (h) =========
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements P-3 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Pro Forma Condensed Consolidated Statement Of Income Three Months Ended March 31, 1999 (Unaudited)
Historical Pro Forma Adjustments ----------------- ------------------------------ Thompson- Acquisition of Initial Public TKCI Hysell Thompson-Hysell Offering Pro Forma ------ --------- --------------- -------------- --------- (in thousands, except share and per share data) Gross revenue........... $9,999 $2,378 $-- $ -- $ 12,377 Subcontractor costs..... 1,030 76 -- -- 1,106 ------ ------ ---- ----- --------- Net revenue......... 8,969 2,302 -- -- 11,271 Costs of revenue........ 5,914 1,194 -- -- 7,108 ------ ------ ---- ----- --------- Gross profit........ 3,055 1,108 -- -- 4,163 Selling, general and administrative expenses............... 1,896 473 32 (d) 44 (e) 2,445 ------ ------ ---- ----- --------- Income from operations.. 1,159 635 (32) (44) 1,718 Interest expense........ 260 32 33 (d) (190)(f) 120 (15)(d) Other expenses (income), net.................... (19) (18) 12 (d) -- (25) ------ ------ ---- ----- --------- Income before provision for income taxes....... 918 621 (62) 146 1,623 Provision for income taxes.................. 389 -- -- 293 (g) 682 ------ ------ ---- ----- --------- Net income............ $ 529 $ 621 $(62) $(147) $ 941 ====== ====== ==== ===== ========= Net income per share: Basic................. $ 0.18 ========= Diluted............... $ 0.17 ========= Weighted average shares used in computing net income per share amounts: Basic................. 5,309,708 ========= Diluted............... 5,611,360 (h) =========
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements P-4 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Pro forma Condensed Consolidated Financial Statements (continued) (Unaudited) Adjustments to the Pro Forma Condensed Consolidated Balance Sheet The pro forma adjustments to the Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1999 are as follows: (a) Acquisition of substantially all of the assets and certain of the liabilities of Thompson-Hysell (accounted for using purchase accounting; the purchase price is allocated based upon estimated fair value of assets and liabilities acquired, which approximates book value): (in thousands) Cash............................................................. $(4,233) Goodwill......................................................... 2,720 Issuance of note payable (interest at 10%)....................... 1,333 Common stock..................................................... (1) Retained earnings................................................ (2,822) Accumulated other comprehensive income........................... (23) Costs associated with the acquisition: Cash............................................................. $ (231) Goodwill......................................................... 485 Other assets..................................................... (104) Common stock (issuance of warrants as finders fee)............... 150 Assets and liabilities which will not be acquired or assumed, and a line of credit balance to be drawn on by Thompson-Hysell to repay certain liabilities not assumed by TKCI (in thousands): Cash............................................................. $ (264) Other assets..................................................... (243) Line of credit to be assumed..................................... 95 Accrued liabilities to related parties........................... (23) Notes payable to related parties................................. (579)
The acquisition of substantially all of the assets and certain of the liabilities of Thompson-Hysell results in a purchase price of $3,333,333 in cash, $1,333,333 in a note payable and $1,333,334 in common stock. In addition, TKCI is obligated to pay cash of $500,000 and $400,000 related to financial targets and certain income tax effects to the sellers, respectively. The note payable will be issued at closing, but is subject to adjustment based on an earnings target in 2000. The common stock may or may not be issued subject to an earnings target in 1999. Due to the financial targets assumed to be met and assumed income tax effects to the sellers, TKCI made a pro forma adjustment for the payment of cash of $500,000 and $400,000, respectively. Due to the assumed issuance of the note payable, TKCI made a pro forma adjustment for the debt issued. Due to the uncertainty surrounding the 1999 earnings target, TKCI excluded the contingent issuance of common stock. P-5 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Pro forma Condensed Consolidated Financial Statements (continued) (Unaudited) (in thousands, except share and per share data) (b) Sale of 1,750,000 shares of common stock at an assumed initial public offering price of $9.00 per share pursuant the offering: Proceeds from the offering, net of underwriting discount........ $14,648 Cash paid relating to offering costs............................ (469) ------- Net cash proceeds from offering................................. 14,179 Deferred offering costs......................................... (346) ------- Common stock.................................................... $13,833 ======= (c) Repayment of short-term borrowings, long-term debt, capital lease obligations and notes payable to related parties (including accrued interest) with the net proceeds from the offering: Short-term borrowings: Line of credit (interest at 10.5%)............................ $ 4,180 Line of credit (interest at 9.25%)............................ 95 ------- $ 4,275 ======= Long-term debt and capital lease obligations: Note payable (interest at 11.5%).............................. $ 82 Notes payable (interest at 8%)................................ 250 Notes payable (interest ranging from 8.65% to 13.22%)......... 128 Capital lease obligations (interest ranging from 4.80% to 17.18%)...................................................... 740 ------- 1,200 Less current portion.......................................... (741) ------- $ 459 ======= Notes payable to related parties (interest at 10%).............. $ 2,401 ======= Accrued interest to related parties............................. $ 201 ======= Cash expended................................................... $ 8,077 =======
P-6 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Pro forma Condensed Consolidated Financial Statements (continued) (Unaudited) (in thousands, except share and per share data) Adjustments to the Pro Forma Condensed Consolidated Statements of Income The pro forma adjustments to the Pro Forma Condensed Consolidated Statements of Income for the year ended December 31, 1998 and the three months ended March 31, 1999 are as follows:
Three months Year ended ended December 31, 1998 March 31, 1999 ----------------- -------------- (d) Acquisition of substantially all of the assets and the assumption of certain of the liabilities of Thompson-Hysell (accounted for using purchase accounting): Amortization of goodwill...................... $ 128 $ 32 Interest expense related to long-term debt (interest rate of 10%).................. $ 133 $ 33 Decrease in interest expense related to excluded notes payable to related parties...................................... $ -- $ (15) Decrease in other income related to excluded interest and investment income....................................... $ 31 $ 12 (e) Increase in selling, general and administrative expenses for the incremental costs of operating as a public company (accounting, legal, printing, reporting and directors and officers' insurance).............................. $ 175 $ 44 (f) Decrease in interest expense resulting from the repayment of short-term borrowings, long-term debt, capital lease obligations and notes payable to related parties with the net proceeds from the offering (see note c): Short-term borrowings (interest at 10.5%)....................................... $(387) $ (97) Long-term debt and capital lease obligations (interest ranging from 4.80% to 17.18%)................................... (132) (33) Notes payable to related parties (interest at 10%)............................ (240) (60) ----- ----- $(759) $(190) ===== ===== (g) Income tax effect assuming a 42% effective income tax rate................................... $ 846 $ 293 ===== ===== (h) Weighted average shares--diluted used in computing net income per share amounts assumes a fair value of $9.00 per share for the periods presented.
P-7 INDEX TO FINANCIAL STATEMENTS Page ---- Consolidated Financial Statements of The Keith Companies, Inc. and subsidiaries Independent Auditors' Report.............................................. F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited)........................................................ F-3 Consolidated Statements of Income for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited)............................................................. F-4 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1999 (unaudited).................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited)............................................................. F-6 Notes to Consolidated Financial Statements................................ F-7 Financial Statements of Thompson-Hysell, Inc. Independent Auditors' Report.............................................. F-30 Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited)............................................................. F-31 Statements of Income for the years ended December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited).............. F-32 Statements of Stockholders' Equity for the years ended December 31, 1997 and 1998 and the three months ended March 31, 1999 (unaudited).......... F-33 Statements of Cash Flows for the years ended December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999 (unaudited).......... F-34 Notes to Financial Statements............................................. F-35 F-1 Independent Auditors' Report The Board of Directors and Stockholders The Keith Companies, Inc.: We have audited the accompanying consolidated balance sheets of The Keith Companies, Inc. and subsidiaries (note 1) as of December 31, 1997 and 1998, and the related consolidated statements of income, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Keith Companies, Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Orange County, California February 12, 1999, except as to the fifth paragraph of Note 5, which is as of March 5, 1999, and to Note 18, which is as of April 9, 1999 F-2 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Note 1)
December 31, ------------------------ March 31, 1997 1998 1999 ----------- ----------- ----------- (unaudited) Assets (Note 5) Current assets: Cash................................... $ 587,000 $ 457,000 $ 144,000 Contracts and trade receivables (net of allowance for doubtful accounts of $348,000, $364,000 and $376,000 at December 31, 1997, 1998 and March 31, 1999, respectively)................... 3,701,000 5,582,000 6,124,000 Other receivables...................... 148,000 282,000 238,000 Costs and estimated earnings in excess of billings........................... 3,161,000 3,783,000 4,748,000 Prepaid expenses....................... 502,000 252,000 287,000 Deferred offering costs................ 169,000 291,000 346,000 Deferred tax assets.................... -- 270,000 -- ----------- ----------- ----------- Total current assets................ 8,268,000 10,917,000 11,887,000 Equipment and improvements, net......... 1,839,000 2,862,000 2,974,000 Deferred tax assets..................... 1,494,000 -- -- Goodwill, net of accumulated amortization of $10,000 and $15,000 at December 31, 1998 and March 31, 1999, respectively........................... -- 621,000 556,000 Other assets............................ 132,000 130,000 272,000 ----------- ----------- ----------- Total assets........................ $11,733,000 $14,530,000 $15,689,000 =========== =========== =========== Liabilities and Stockholders' Equity (Deficit) Current liabilities: Short-term borrowings.................. $ 310,000 $ -- $ 4,881,000 Current portion of long-term debt and capital lease obligations............. 900,000 1,488,000 1,444,000 Trade accounts payable................. 2,871,000 1,221,000 1,280,000 Accrued employee compensation.......... 1,055,000 1,720,000 2,342,000 Accrued liabilities to related parties............................... 116,000 185,000 201,000 Other accrued liabilities.............. 378,000 688,000 613,000 Billings in excess of costs and estimated earnings.................... 622,000 435,000 559,000 ----------- ----------- ----------- Total current liabilities........... 6,252,000 5,737,000 11,320,000 Long-term debt and capital lease obligations, less current portion...... 4,632,000 5,778,000 948,000 Notes payable to related parties........ 2,245,000 2,401,000 2,401,000 Deferred tax liabilities................ -- 348,000 225,000 Accrued rent............................ 129,000 137,000 137,000 ----------- ----------- ----------- Total liabilities................... 13,258,000 14,401,000 15,031,000 ----------- ----------- ----------- Stockholders' equity (deficit): Preferred stock, no par value. Authorized 20,000,000 shares; no shares issued or outstanding.......... -- -- -- Common stock, no par value. Authorized 105,000,000 shares in 1997 and 100,000,000 shares in 1998 and 1999; issued and outstanding 9,611,211 shares in 1997, 1998 and 1999......... 1,085,000 1,085,000 1,085,000 Accumulated deficit.................... (2,610,000) (956,000) (427,000) ----------- ----------- ----------- Total stockholders' equity (deficit).......................... (1,525,000) 129,000 658,000 ----------- ----------- ----------- Commitments and contingencies (Notes 3, 5, 7, 9, 10 and 12).................... Total liabilities and stockholders' equity (deficit)................... $11,733,000 $14,530,000 $15,689,000 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Note 1)
Three months Years ended December 31, ended March 31, -------------------------------------- --------------------- 1996 1997 1998 1998 1999 ------------ ----------- ----------- ---------- ---------- (unaudited) Gross revenue........... $ 14,344,000 $22,585,000 $34,021,000 $7,121,000 $9,999,000 Subcontractor costs..... 1,378,000 3,993,000 4,839,000 1,159,000 1,030,000 ------------ ----------- ----------- ---------- ---------- Net revenue........... 12,966,000 18,592,000 29,182,000 5,962,000 8,969,000 Costs of revenue........ 9,229,000 11,871,000 19,287,000 4,080,000 5,914,000 ------------ ----------- ----------- ---------- ---------- Gross profit.......... 3,737,000 6,721,000 9,895,000 1,882,000 3,055,000 Selling, general and administrative expenses............... 4,960,000 4,485,000 5,858,000 1,470,000 1,896,000 ------------ ----------- ----------- ---------- ---------- Income (loss) from operations........... (1,223,000) 2,236,000 4,037,000 412,000 1,159,000 Interest expense........ 720,000 852,000 967,000 221,000 260,000 Other expenses (income), net.................... 5,000 83,000 66,000 7,000 (19,000) ------------ ----------- ----------- ---------- ---------- Income (loss) before provision (benefit) for income taxes and extraordinary gain... (1,948,000) 1,301,000 3,004,000 184,000 918,000 Provision (benefit) for income taxes........... 3,000 (1,397,000) 1,350,000 116,000 389,000 ------------ ----------- ----------- ---------- ---------- Income (loss) before extraordinary gain... (1,951,000) 2,698,000 1,654,000 68,000 529,000 Extraordinary gain on forgiveness of liability, net of income taxes........... 2,686,000 -- -- -- -- ------------ ----------- ----------- ---------- ---------- Net income.......... $ 735,000 $ 2,698,000 $ 1,654,000 $ 68,000 $ 529,000 ============ =========== =========== ========== ========== Per share data: Basic................. $ 0.06 ========== Diluted............... $ 0.05 ========== Weighted average number of shares outstanding: Basic................. 9,611,211 ========== Diluted............... 10,439,493 ========== Pro Forma Supplemental Data (unaudited): Historical income (loss) before provision (benefit) for income taxes and extraordinary gain................... $ (1,948,000) $ 1,301,000 $ 3,004,000 $ 184,000 $ 918,000 Pro forma provision (benefit) for income taxes.................. (818,000) 546,000 1,262,000 77,000 386,000 ------------ ----------- ----------- ---------- ---------- Pro forma income (loss) before extraordinary gain... (1,130,000) 755,000 1,742,000 107,000 532,000 Extraordinary gain on forgiveness of liability, net of income taxes........... 1,558,000 -- -- -- -- ------------ ----------- ----------- ---------- ---------- Pro forma net income.. $ 428,000 $ 755,000 $ 1,742,000 $ 107,000 $ 532,000 ============ =========== =========== ========== ==========
See accompanying notes to consolidated financial statements. F-4 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) (Note 1)
Shares Common Accumulated Outstanding Stock Deficit Total ----------- ---------- ----------- ----------- Balance at December 31, 1995........................ 8,000,000 $ 80,000 $(6,043,000) $(5,963,000) Net income................... -- -- 735,000 735,000 --------- ---------- ----------- ----------- Balance at December 31, 1996........................ 8,000,000 80,000 (5,308,000) (5,228,000) Issuance of common stock..... 1,611,211 1,005,000 -- 1,005,000 Net income................... -- -- 2,698,000 2,698,000 --------- ---------- ----------- ----------- Balance at December 31, 1997........................ 9,611,211 1,085,000 (2,610,000) (1,525,000) Net income................... -- -- 1,654,000 1,654,000 --------- ---------- ----------- ----------- Balance at December 31, 1998........................ 9,611,211 1,085,000 (956,000) 129,000 Net income (unaudited)....... -- -- 529,000 529,000 --------- ---------- ----------- ----------- Balance at March 31, 1999 (unaudited)................. 9,611,211 $1,085,000 $ (427,000) $ 658,000 ========= ========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Note 1)
Three months ended Years ended December 31, March 31, ------------------------------------- ---------------------- 1996 1997 1998 1998 1999 ----------- ----------- ----------- ----------- --------- (unaudited) Cash flows from operating activities: Net income.............. $ 735,000 $ 2,698,000 $ 1,654,000 $ 68,000 $ 529,000 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization......... 294,000 371,000 595,000 112,000 191,000 Gain on sale of equipment............ (11,000) -- (29,000) -- -- Stock compensation expense.............. -- 206,000 -- -- -- Extraordinary gain on forgiveness of liability, net of income taxes......... (2,686,000) -- -- -- -- Changes in operating assets and liabilities, net of effects from acquisitions: Contracts and trade receivables......... 633,000 516,000 (1,597,000) (1,814,000) (542,000) Other receivables.... 12,000 53,000 (134,000) (35,000) 44,000 Costs and estimated earnings in excess of billings......... 18,000 (3,158,000) (423,000) 2,538,000 (965,000) Billings in excess of costs and estimated earnings............ 15,000 (323,000) (187,000) (418,000) 124,000 Prepaid expenses..... 6,000 (41,000) 250,000 104,000 (35,000) Deferred tax assets.. -- (1,494,000) 1,224,000 79,000 270,000 Other long-term assets.............. (1,000) 5,000 32,000 1,000 (142,000) Trade accounts payable and accrued liabilities......... 438,000 1,590,000 (1,116,000) (1,064,000) 607,000 Accrued liabilities to related parties.. 71,000 (47,000) 69,000 (79,000) 15,000 Deferred tax liabilities......... -- -- 348,000 97,000 (123,000) ----------- ----------- ----------- ----------- --------- Net cash provided by (used in) operating activities......... (476,000) 376,000 686,000 (411,000) (27,000) ----------- ----------- ----------- ----------- --------- Cash flows from investing activities: Net cash (expended for) acquired in connection with acquisitions......... -- 12,000 (77,000) -- -- Additions to equipment and improvements..... (214,000) (276,000) (835,000) (90,000) (298,000) Proceeds from sales of equipment............ 33,000 -- 126,000 -- -- ----------- ----------- ----------- ----------- --------- Net cash used in investing activities......... (181,000) (264,000) (786,000) (90,000) (298,000) ----------- ----------- ----------- ----------- --------- Cash flows from financing activities: Net payments under short-term borrowings........... -- -- (310,000) (310,000) -- Proceeds (payments) from line of credit, net.................. (202,000) (393,000) 1,844,000 624,000 354,000 Principal payments on long-term debt and capital lease obligations, including current portion.............. (271,000) (598,000) (1,598,000) (261,000) (287,000) Proceeds from issuance of debt.............. 557,000 100,000 -- -- -- Borrowings on notes payable to related parties.............. 588,000 919,000 300,000 -- -- Payments on notes payable to related parties.............. -- -- (144,000) -- -- Payment of deferred offering costs....... -- (169,000) (122,000) -- (55,000) Proceeds from issuance of common stock...... -- 598,000 -- -- -- ----------- ----------- ----------- ----------- --------- Net cash provided by (used in) financing activities........... 672,000 457,000 (30,000) 53,000 12,000 ----------- ----------- ----------- ----------- --------- Net increase (decrease) in cash... 15,000 569,000 (130,000) (448,000) (313,000) Cash, beginning of period............... 3,000 18,000 587,000 587,000 457,000 ----------- ----------- ----------- ----------- --------- Cash, end of period... $ 18,000 $ 587,000 $ 457,000 $ 139,000 $ 144,000 =========== =========== =========== =========== =========
See supplemental cash flow information at Note 15. See accompanying notes to consolidated financial statements. F-6 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Years ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (1) Organization and Basis of Presentation The Keith Companies, Inc. (formerly The Keith Companies--Inland Empire, Inc.) ("TKCI") was incorporated in the State of California in November 1986. Keith Engineering, Inc. ("KEI") was incorporated in the State of California in March 1983. The Keith Companies--Hawaii, Inc. ("TKCH"), a wholly-owned subsidiary of TKCI, was incorporated in the state of Hawaii on January 4, 1989. TKCH no longer maintains an office in Hawaii and had minimal operations in 1996, 1997, 1998 and 1999. In December 1997, TKCI acquired Engineering Services Incorporated, and its wholly-owned subsidiary Engineered Systems Integrated, Inc. (which was merged with Engineering Services Incorporated on August 1, 1998) (collectively, "ESI"). In addition, in August 1998, TKCI acquired John M. Tettemer and Associates, Inc. ("JMTA"). TKCI and KEI have been under common management and ownership since inception. On August 1, 1998, TKCI acquired all of the outstanding common stock of KEI (the "Reorganization"), and on November 30, 1998, KEI was merged with and into TKCI. The Reorganization was accounted for as a combination of affiliated entities under common control in a manner similar to a pooling-of-interests. Under this method, the assets, liabilities and equity were carried over at their historical book values and their operations have been recorded on a combined historical basis. The combination did not require any material adjustments to conform the accounting policies of the separate entities. TKCI and its wholly-owned subsidiaries (the "Company") is a leading provider of engineering, consulting and technical services. The Company primarily serves clients in the real estate development, public works and wireless telecommunications and industrial engineering industries, pursuant to short and long-term construction type contracts principally in California and Nevada. The Company specializes in the planning, engineering, permitting and other services essential to create and build infrastructure for a wide range of real estate development and public works projects and provides site acquisition and construction management services for the wireless telecommunications industry. In addition, the Company provides a complete array of industrial engineering services required to design and test automated processes, manufacturing production lines and fire protection systems. Services offered by the Company include civil engineering, surveying and mapping, planning, environmental, archaeological, construction management, site acquisition, water resource engineering, instrumentation and control systems engineering, fire protection engineering, electrical engineering, mechanical engineering and chemical process engineering. The Company's clients include real estate developers, residential and commercial builders, architects, cities, counties, water districts, local and federal agencies, universities, retailers, cellular phone service providers and manufacturers of a variety of products. F-7 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (2) Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of TKCI, KEI, ESI, JMTA and TKCH (see Note 1). All material intercompany transactions and balances have been eliminated in consolidation. Revenue and Cost Recognition on Engineering Contracts The Company enters into fixed fee contracts and contracts that provide for fees on a time and materials basis, most of which have not to exceed provisions. Contracts typically vary in length between six months and three years. However, certain contracts are for small increments of work, which can be completed in less than six months. Revenue is recognized on the percentage of completion method of accounting based on the proportion of actual contract costs incurred to total estimated contract costs. Management considers costs incurred to be the best available measure of progress on the contracts. In the course of providing its services, the Company sometimes subcontracts for various services such as landscape architecture, architecture, geotechnical engineering, structural engineering, traffic engineering, and aerial photography. These costs are included in the billings to the clients and, in accordance with industry practice, are included in the Company's gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, the Company also reports net revenue, which is gross revenue less subcontractor costs. Costs of revenue include labor, nonreimbursable subcontract costs, materials and certain direct and indirect overhead costs such as rent, utilities and depreciation. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Additional revenue resulting from requests for additional work due to changes in the scope of engineering services to be rendered, are included in revenues when realization is probable and can be estimated with reasonable certainty. Costs and estimated earnings in excess of billings represents revenue recognized in excess of amounts billed on the respective uncompleted engineering contracts. Billings in excess of costs and estimated earnings represents amounts billed in excess of revenue recognized on the respective uncompleted contracts. F-8 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (2) Summary of Significant Accounting Policies (continued) At December 31, 1997, 1998 and March 31, 1999 (unaudited), the Company had no significant amounts included in contracts and trade receivables or trade accounts payable representing amounts retained pending contract or subcontract completion. Equipment and Leasehold Improvements Equipment and leasehold improvements are stated at cost or, in the case of leased assets, the lesser of the present value of future minimum lease payments or fair value. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, or, in the case of capital leased assets, over the lease term if shorter, as follows: Equipment................................................. 5 to 10 years Leasehold Improvements.................................... 1 to 10 years
When assets are sold or otherwise retired, the related cost and accumulated depreciation are removed from the accounts and the resulting gain or loss is included in other expenses (income), net in the accompanying consolidated statements of income. Income Taxes and Pro Forma Supplemental Data Prior to August 1, 1998, KEI, with the consent of its stockholders, elected to be taxed as an S corporation under certain sections of the Internal Revenue Code of 1986, as amended. As an S corporation, corporate income or loss flows through to the stockholders who are responsible for including the income, deductions, losses and credits in their individual income tax returns. Accordingly, prior to August 1, 1998, no provision for federal or state income taxes for KEI is included in the accompanying consolidated financial statements, except for California income taxes at the greater of $800 or the S corporation rate of 1.5% of taxable income. As a result of the Reorganization, KEI no longer qualified to be taxed as an S corporation and effective August 1, 1998, its operations were included in the consolidated C corporation tax return of the Company. TKCI, ESI, JMTA and TKCH are C corporations and account for income taxes, under the asset and liability method, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-9 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (2) Summary of Significant Accounting Policies (continued) Historical pro forma supplemental data are unaudited and are presented as if the Company had been taxed as a C corporation for the periods presented. The pro forma tax provision has been calculated assuming a 42% combined effective tax rate. Goodwill Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 25 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Amortization expense related to goodwill totaled $10,000 and $5,000 (unaudited) for the year ended December 31, 1998 and the three months ended March 31, 1999, respectively. Stock Options The Company accounts for its stock options in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for Stock Based Compensation," permits entities to recognize the fair value of all stock-based awards on the date of grant as expense over the vesting period. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. Deferred Offering Costs The Company expects to complete an initial public offering during 1999. Certain related costs incurred have been deferred and included in the accompanying 1997, 1998 and 1999 consolidated balance sheets as deferred offering costs. Should the Company decide not to consummate the offering, these costs would then be expensed. F-10 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (2) Summary of Significant Accounting Policies (continued) Per Share Data Disclosure of per share data for the years ended December 31, 1996, 1997 and 1998 has been omitted, as a result of KEI's S corporation status prior to the Reorganization. Basic EPS is computed by dividing earnings available to common stockholders during the period by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing earnings available to common stockholders 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 (all net income is available to common stockholders for the period presented):
Three months ended March 31, 1999 (unaudited) ------------------ Weighted average shares used for the basic EPS computation (deemed outstanding the entire period) 9,611,211 Incremental shares from the assumed exercise of dilutive stock options and stock warrants 828,282 ---------- Weighted average shares used for the diluted EPS computation 10,439,493 ==========
There were no anti-dilutive shares excluded from the above calculation. Interim Financial Statements The accompanying consolidated balance sheet as of March 31, 1999 and the statements of income and cash flows for the three months ended March 31, 1998 and 1999, and the statement of stockholders' equity for the three months ended March 31, 1999 are unaudited and have been prepared on the same basis as the audited consolidated financial statements included herein. In the opinion of management, such unaudited consolidated financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full year. F-11 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (2) Summary of Significant Accounting Policies (continued) Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of these consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amounts of revenue and expenses reported during the periods. Actual results may differ from the estimates and assumptions used in preparing these consolidated financial statements. Reclassifications Certain 1996 and 1997 balances have been reclassified to conform to the presentation used in 1998. (3) Acquisitions John M. Tettemer & Associates, Inc. On August 1, 1998, TKCI acquired all of the outstanding common stock of JMTA, in exchange for cash of $150,000; $300,000 in amortizing notes bearing interest at 8% payable in 60 monthly payments; $250,000 in interest only notes bearing interest at 8% payable quarterly; due the sooner of the first anniversary date of the purchase agreement or the date the Company closes its anticipated initial public offering and warrants to purchase 150,000 shares of TKCI common stock, exercisable immediately at a purchase price of $1.75 per share, expiring July 31, 2003. The amortizing and interest only notes include the principal stockholder of TKCI as co-maker. The amortizing notes are subject to an adjustment based on a calculation tied to the JMTA book value at August 1, 1998. The acquisition was accounted for using the purchase method of accounting and, accordingly, the consolidated financial statements include the assets and liabilities and results of operations of JMTA as of and subsequent to August 1, 1998. The excess purchase price over the fair value of the net identified assets acquired of $631,000, has been recorded as goodwill in the accompanying December 31, 1998 consolidated balance sheet. During 1999, the purchase price allocation was revised to reflect an adjustment to the JMTA book value at August 1, 1998. The purchase price allocation revision resulted in a $60,000 (unaudited) adjustment to decrease goodwill and long-term debt in the accompanying March 31, 1999 consolidated balance sheet. F-12 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (3) Acquisitions (continued) ESI, Engineering Services Incorporated On December 30, 1997, TKCI acquired all of the outstanding common stock of ESI, Engineering Services Incorporated, and its wholly-owned subsidiary Engineered Systems Integrated, Inc., in exchange for 200,000 shares of TKCI common stock valued at $1.00 per share. The acquisition was accounted for using the purchase method of accounting and accordingly, the consolidated financial statements include the assets and liabilities and results of operations of ESI as of and subsequent to December 30, 1997. The purchase agreement contains a provision whereby TKCI, under certain conditions, must, at the sole discretion of the seller, repurchase any or all of the seller's portion of the 200,000 shares issued for a price of $2.50 per share, if the Company does not complete an initial public offering by October 31, 1999. This right of the seller expires November 15, 1999. Both dates are automatically extended under certain conditions. The Company must also repurchase stock options granted under certain conditions (see note 9). TKCI's officers and/or shareholders have agreed, with ESI's former shareholders, to subordinate repayment of debt owed to them up to such amount as, when netted with the book value of TKCI's equity, equals $750,000. Further, an additional 100,000 shares of TKCI common stock may be issued to the prior ESI owners subject to attainment of certain performance criteria related to the fiscal years ended 1998, 1999 and 2000. As of March 31, 1999, none of the 100,000 shares have been issued. In addition, the ESI purchase agreement provides for an anti-dilution provision whereby TKCI may not issue additional shares of stock without the sellers' consent; except as may be required to comply with the terms of the ESI agreement, to issue shares in connection with future acquisitions, to provide additional shares for Incentive Stock Option Plans, or for the contemplated initial public offering by TKCI. The following unaudited pro forma data presents information as if the acquisition of ESI had occurred at the beginning of the period presented. The pro forma information is provided for information purposes only. It is based on historical information and does not necessarily reflect the actual results of operations that would have occurred had ESI and the Company comprised a single entity during such period, nor is it necessarily indicative of future results of operations of the Company.
Pro forma for the year ended December 31, 1997 (unaudited) ---------------------------- Net revenue................................. $22,983,000 Net income.................................. $ 2,782,000
F-13 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (4) Equipment and Improvements Equipment and leasehold improvements at December 31, 1997 and 1998 consist of the following:
1997 1998 ----------- ----------- Equipment $ 4,465,000 $ 5,949,000 Leasehold improvements 78,000 91,000 Accumulated depreciation and amortization (2,704,000) (3,178,000) ----------- ----------- Net equipment and improvements $ 1,839,000 $ 2,862,000 =========== ===========
At December 31, 1997 and 1998, the cost of computer equipment, vehicles and office furniture and fixtures recorded under capital leases, net of the related accumulated amortization, were $1,181,000 and $1,634,000, respectively. (5) Indebtedness The Company's short-term borrowings and long-term debt, some of which prohibit payment of dividends, are substantially all guaranteed by the principal stockholder of TKCI. Short-Term Borrowings The Company had a consolidated and restated credit agreement, as amended in December 1996 and September 1997, which allowed the Company to borrow up to $10,500,000 at the bank's prime rate plus 3.25%, with all unpaid principal and interest due on March 1, 1998. The bank's prime rate at December 31, 1997 was 8.5%. The credit agreement was collateralized by accounts receivable and UCC-1 filing on tangible assets and was guaranteed by TKCI's principal stockholder. As of December 31, 1997, the Company owed $2,683,000 and $27,000 in principal and accrued interest, respectively, under this line of credit. On February 9, 1998, the Company obtained a new line of credit from a bank and used the proceeds to repay all amounts due under its previous consolidated and restated credit agreement. This new line of credit agreement, which was to expire on April 30, 1999, contained positive and negative covenants of both a financial and nonfinancial nature, as amended. As a result of the Company's demonstrated ability and intent to refinance the short-term obligation on a long-term basis, borrowings under the previous line of credit at December 31, 1997 were classified as long-term in the accompanying consolidated balance sheet. F-14 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (5) Indebtedness (continued) The new line of credit permitted the Company to borrow up to $5,000,000, but not in excess of 75% of eligible accounts receivable as defined in the agreement. The interest rate is at the bank's prime rate plus 1.5% (9.25% at December 31, 1998), payable monthly, with the principal maturing one year from the date of the agreement. The line of credit is collateralized by a first- priority perfected security interest in all assets of the Company and is guaranteed by TKCI's principal stockholder. The new line of credit agreement was amended in March 1998, June 1998 and October 1998 to, among other things, add ESI and JMTA as co-borrowers on the agreement, increase the percentage of eligible receivables to 80%, increase the amount available to borrow to $5,500,000, extend the maturity on the line to April 30, 1999 and amend certain financial related covenants. As of September 30, 1998, the Company was in default of certain financial related covenants. On March 5, 1999, the bank waived compliance related to these covenants as of September 30, 1998. In addition, the bank further amended the agreement to, among other things, amend certain financial related covenants as of December 31, 1998, adjust the interest rate to the bank's prime rate plus a variable margin tied to certain financial covenants (10.5% at March 5, 1999) and extend the maturity on the line to March 1, 2000. As a result of the Company's demonstrated ability and intent to refinance the short-term obligation on a long-term basis, the outstanding borrowings under the line of credit of $4,527,000 as of December 31, 1998 are classified as long-term in the accompanying consolidated balance sheet. The outstanding borrowings under the line of credit of $4,881,000 (unaudited) as of March 31, 1999 are classified as short-term borrowings in the accompanying consolidated balance sheet. On December 30, 1997, the Company acquired ESI, which had a line of credit with a commercial bank in the amount of $1,250,000, bearing interest at the bank's reference rate plus 1.25% (9.75% at December 31, 1997), subject to periodic adjustment. As of December 31, 1997, the Company had an outstanding balance of $310,000 on this line of credit. On January 6, 1998, the outstanding balance was paid off and the line of credit was terminated. F-15 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (5) Indebtedness (continued) Long-Term Debt and Capital Lease Obligations
December 31, ----------------------- 1997 1998 ---------- ----------- Short-term borrowings refinanced as long-term debt $2,683,000 $ 4,527,000 Note payable; no stated interest rate; interest im- puted at an annual rate of 10.75%; payable in monthly installments of $12,000 including interest; final payment due November 2002 (see (a)) 564,000 460,000 Unsecured note payable to landlord; interest at 11.5%; payable in monthly installments of $10,000 including interest; all unpaid principal and inter- est was due May 1998. On February 4, 1998, this note was amended to provide for its repayment in 24 monthly installments of principal and interest in the initial amount of $9,000 209,000 116,000 Note payable; interest at the lender's prime rate plus 1.5% (10% at December 31, 1997). In June 1998, the loan was paid off and the agreement was termi- nated 600,000 -- Notes payable; interest at 7.75%; payable in monthly installments of $23,000, including interest, through August 1999 351,000 216,000 Notes payable; bearing interest at 8%; interest only payable quarterly; principal and unpaid interest are due the sooner of August 3, 1999 or the date TKCI closes an initial public offering -- 250,000 Notes payable; bearing interest at 8%; payable in monthly installments of $6,000 including interest; final payment due August 2003 -- 284,000 Capital lease obligations; interest ranging from 4.8% to 17.18%; monthly principal and interest payments ranging from $1,000 to $5,000 through 2002 1,125,000 1,413,000 ---------- ----------- 5,532,000 7,266,000 Less current portion (900,000) (1,488,000) ---------- ----------- $4,632,000 $ 5,778,000 ========== ===========
F-16 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (5) Indebtedness (continued) (a) TKCI and certain of its affiliates, as specified in the agreement, and KEI's majority stockholder entered into a settlement agreement and mutual release on November 14, 1995 related to the default by KEI on payment of rent and other amounts due under a lease. The Company agreed to pay the sum of $1,490,000, of which $140,000 was paid upon execution of the agreement and $1,350,000 was payable under the terms of a promissory note. The obligations under the promissory note are collateralized by a judgment of $1,800,000, less any amounts previously paid under the agreement, not to be executed unless and until an event of default has occurred, as defined. The promissory note, as amended, required a $300,000 payment in November 1996 and monthly payments of $12,000, until paid in full. The $300,000 payment due in November 1996 was renegotiated and paid in three $100,000 payments in November 1996, March 1997 and June 1997. The monthly payments for a particular calendar quarter are to be increased, in the event that consolidated sales of TKCI and certain of its affiliates, as specified in the agreement, exceed $5,000,000 in the previous calendar quarter. Such increase is proportional to the percentage by which quarterly sales exceed $5,000,000. In 1998, the Company made additional principal payments of $47,000 related to this provision. Future annual principal maturities of long-term debt (including short-term borrowings refinanced as long-term-debt) as of December 31, 1998 are as follows: Years ending December 31, 1999....................................................... $1,488,000 2000....................................................... 5,364,000 2001....................................................... 299,000 2002....................................................... 68,000 2003....................................................... 47,000 ---------- $7,266,000 ==========
(6) Notes Payable to Related Parties Notes payable to related parties consist of unsecured borrowings for operating purposes from the principal stockholders and parties related to the Company's stockholders. Interest only payments at 10% per annum are due quarterly on each January 1, April 1, July 1, and October 1, commencing on April 1, 1998. Accrued interest at December 31, 1997 and 1998 related to these notes was $116,000 and $185,000, respectively. These notes mature on July 1, 2000, with all the outstanding principal and unpaid interest then due, and are subordinate to the line of credit obtained from the Company's primary bank in February 1998 (see note 5). F-17 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (6) Notes Payable to Related Parties (continued) In February 1996 and 1997, $50,000 and $100,000, respectively, were loaned to the Company by two related parties in exchange for promissory notes bearing interest at 10%. These notes were subsequently amended to extend the due dates to February 1998. In February 1998, agreements were entered into whereby the notes were assigned to the principal stockholder of TKCI in exchange for shares of TKCI common stock, which the principal stockholder owns personally. The old notes were subsequently cancelled and a new note was created for $150,000, with a maturity date of January 15, 2000 and bearing interest at 10% payable quarterly. As a result of the Company's demonstrated ability and intent to refinance the short-term obligations on a long-term basis, the Company has recorded the above loans in the amounts of $50,000 and $100,000, respectively, as long-term notes payable to related parties in the December 31, 1997 consolidated balance sheet. This note was paid in full along with all accrued interest in October 1998. In April 1997, the Company entered into a collateralized promissory note agreement, which was amended in December 1997, for working capital purposes with a related party in the principal amount of $700,000. Interest on the note accrues at a rate of 10% per annum and is payable on each of January 1, April 1, July 1 and October 1, commencing April 1, 1998. The note matures on July 1, 2000 with all the outstanding principal and unpaid interest then due. The note is collateralized by all property of the Company, as defined in the agreement, and is subordinate to the line of credit obtained from the Company's primary bank in February 1998. This related party also received an option to purchase common stock in the Company (see note 8). Principal payments due to related parties of $2,401,000 are due in 2000. (7) Leases The Company leases equipment and vehicles under capital lease agreements that expire at various dates through 2002. The Company also has several noncancelable operating leases, primarily for office facilities, that expire through 2004. These leases generally contain renewal options for periods ranging from one to five years and require the Company to pay costs such as common area maintenance and insurance charges. Rental expense for operating leases during 1996, 1997 and 1998 totaled $1,190,000, $1,183,000 and $1,671,000, respectively. F-18 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (7) Leases (continued) Certain facilities have been sublet under month-to-month subleases that provide for reimbursement of various common area maintenance charges. Rental expense has been reduced for sublease income of $92,000, $81,000 and $64,000 for the years ended December 31, 1996, 1997 and 1998, respectively. Future minimum lease payments as of December 31, 1998 are as follows:
Operating Capital leases leases ---------- ---------- Years ending December 31: 1999................................................ $2,009,000 $ 789,000 2000................................................ 1,391,000 570,000 2001................................................ 738,000 199,000 2002................................................ 259,000 2,000 2003................................................ 221,000 -- Thereafter.......................................... 37,000 -- ---------- ---------- Total future minimum lease payments................... $4,655,000 $1,560,000 ========== Less amounts representing interest.................... (147,000) ---------- Total obligations under capital leases................ 1,413,000 Less current portion.................................. (662,000) ---------- Long-term capital lease obligations................... $ 751,000 ==========
(8) Common Stock All issued and outstanding shares of KEI prior to the Reorganization were exchanged into an equivalent number of shares of TKCI and all of the shares of KEI were subsequently cancelled. The outstanding shares of TKCI prior to the Reorganization remained outstanding and were not affected by the Reorganization. In April 1997, an option to purchase 10% of the Company's outstanding common stock (calculated after the option purchase) was granted to a related party for $10,000. The option was exercised in July 1997, for $88,000, resulting in the issuance of 880,000 shares. On December 31, 1997, an additional 531,211 shares of the Company's stock were purchased by this related party for $500,000. In connection with the grant of options and sale of stock to this related party, a total of $206,000 was recorded as common stock and stock compensation expense, representing the difference between the exercise price at which the options were granted and the price at which the stock was sold, and the estimated fair value of the Company's stock at the date of grant and sale, respectively. The related party was also granted a position on the Company's board of directors. In April 1997, the Company also entered into a collateralized promissory note agreement with this related party for $700,000 (see note 6). F-19 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (9) Stock Plans The following options and warrants are authorized for issuance at December 31, 1998: Stock options.................................................. 1,500,000 Stock warrants related to acquisitions......................... 225,000 --------- 1,725,000 =========
Stock Option Plans In 1994, KEI and TKCI each adopted stock option plans (the "Plans"). Under the terms of the Plans, the Boards of Directors of KEI and TKCI were able to grant stock options to officers and key employees. The Plans, as amended in 1997, authorize grants of options to purchase a total 1,500,000 shares of authorized but unissued common stock in TKCI and KEI. Stock options are granted with an exercise price equal to or greater than the stock's estimated fair market value at the date of grant. All stock options issued in connection with the Plans have ten-year terms and vest and become exercisable ratably each year for the first five years from the grant date. In connection with the Reorganization, the KEI plan was terminated and options to purchase shares of common stock of KEI outstanding at August 1, 1998 were automatically converted into options to purchase a like number of shares of TKCI common stock, with the same exercise price, expiration date and other terms as prior to the Reorganization (the "Plan"). At December 31, 1998, there were options to acquire 189,000 shares available for grant under the Plan. The following represents the estimated fair value of options granted, as determined using the Black-Scholes option pricing model and the assumptions used for calculation:
Years ended December 31, ---------------------------- 1996 1997 1998 -------- -------- -------- Weighted average estimated fair value per option at grant date....................... $ 1.00 $ 1.00 $ 1.26 Average exercise price per option granted... $ 1.00 $ 1.00 $ 1.26 Risk-free interest rate..................... 6.0% 6.0% 5.0% Option term (years)......................... 10 10 10 Stock dividend yield........................ 0.0% 0.0% 0.0%
F-20 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (9) Stock Plans (continued) In accounting for its Plans, the Company elected the pro forma disclosure option under SFAS No. 123. Accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been adjusted to the pro forma amount indicated below:
Years ended December 31, ------------------------------ 1996 1997 1998 -------- ---------- ---------- Net income: As reported................................. $735,000 $2,698,000 $1,654,000 Pro forma................................... $735,000 $2,675,000 $1,601,000
Pro forma net income reflects only options granted after January 1, 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of five years and compensation cost for options granted prior to January 1, 1995 is not considered. Stock option activity during the periods indicated is as follows:
Number of shares Weighted-average underlying options exercise price ------------------ ---------------- Balance at December 31, 1995............. 502,000 Granted................................ 75,000 $1.00 Forfeited.............................. (100,000) $1.00 --------- Balance at December 31, 1996............. 477,000 Granted................................ 487,000 $1.00 Forfeited.............................. (35,000) $1.00 --------- Balance at December 31, 1997............. 929,000 $1.00 Granted................................ 385,000 $1.90 Forfeited.............................. (3,000) $1.00 --------- Balance at December 31, 1998............. 1,311,000 $1.26 =========
At December 31, 1998, options outstanding had an exercise price ranging from $1.00 to $3.00 and a weighted average remaining contractual life of 7.92 years. At December 31, 1996, 1997 and 1998, the number of shares of common stock subject to exercisable options were 161,000, 235,000 and 429,000, respectively, and the weighted-average exercise price of those options was $1 for each year. F-21 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (9) Stock Plans (continued) In 1997 and 1998, in connection with acquisitions, TKCI reserved for grant options to purchase 350,000 shares of its common stock to employees of the acquired companies under the Plan. Of the shares reserved for grant, 120,000 have provisions such that in the event that the underlying shares do not have a fair market value of at least $3.00 per share at some time during the period between October 1, 1999 and October 1, 2002, the holders are entitled to receive $2.00 in cash for each share of common stock subject to the exercise of any tendered unexercised vested stock options. In addition, under the same provisions, the holders of the options to acquire 120,000 shares of common stock have the right, to be exercised only during October 2002, to sell any shares acquired by exercise of options to the Company for $3.00 per share. Further, included in the options reserved for grant, TKCI is required to provide options for no less than 100,000 shares of common stock as of January 1, 2000, subject to certain earnings goals being obtained by the acquired company (see note 3). As of December 31, 1998, the options to purchase 213,000 shares of common stock reserved for grant have been granted subject to the Plan. Stock Warrants The Company has issued stock warrants to purchase common stock in connection with the acquisitions of ESI and JMTA. The terms of stock warrants to acquire shares of common stock are as follows at December 31, 1998:
Exercise Warrants Grant Date Price Expiration Date -------- ------------------ -------- ------------------ 150,000 August 3, 1998 $1.75 July 31, 2003 75,000 September 15, 1998 $2.50 September 18, 2001 -------- 225,000 ========
Warrants are granted with an exercise price equal to or greater than the stock's estimated fair market value at the date of grant, vest immediately and may be exercised at any time until the expiration date. (10) Employee Benefit Plans The Company has two defined contribution 401(k) plans, which commenced in 1980 and 1988, covering a majority of its employees. These plans are designed to be tax deferred in accordance with the provisions of Section 401(k) of the Internal Revenue Code. Employees may contribute from 1% to 20% of compensation (subject to certain limitations) on a tax-deferred basis through a "salary reduction" arrangement. In 1998, the Company implemented an employer matching contribution program, with a five year vesting schedule, F-22 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (10) Employee Benefit Plans (continued) whereby the Company matches 50% of the first 1% of employee contributions for the year. No employer contributions were made during 1996 and 1997. During 1998, the Company contributed $55,000 to its 401(k) plans. Effective January 1, 1999, the Company increased the employer contribution percentage to 50% of the first 6% of employee contributions, not to exceed $1,500 per employee per year. (11) Income Taxes Income tax expense (benefit) consists of the following:
Years ended December 31, ------------------------------ 1996 1997 1998 ------ ----------- ---------- Current: Federal.................................... $ -- $ -- $ (29,000) State...................................... 3,000 3,000 (99,000) ------ ----------- ---------- Subtotal................................. 3,000 3,000 (128,000) ------ ----------- ---------- Deferred: Federal.................................... -- (1,299,000) 1,262,000 State...................................... -- (101,000) 216,000 ------ ----------- ---------- Subtotal................................. -- (1,400,000) 1,478,000 ------ ----------- ---------- Total.................................... $3,000 $(1,397,000) $1,350,000 ====== =========== ==========
A reconciliation of income tax expense (benefit) at the federal statutory rate of 34% to the Company's provision (benefit) for income taxes is as follows:
Years ended December 31, ----------------------------------- 1996 1997 1998 ---------- ----------- ---------- Computed "expected" federal income tax expense (benefit)..................... $ (662,000) $ 443,000 $1,021,000 State income tax expense (benefit), net of federal income tax benefit......... 2,000 (64,000) 77,000 Tax effect of (earnings) losses not subject to federal income tax due to S corporation election.................. 1,023,000 (223,000) (513,000) Tax effect of S to C corporation conversion............................ -- -- 595,000 Change in federal deferred tax valuation allowance................... (565,000) (1,585,000) 35,000 Other.................................. 205,000 32,000 135,000 ---------- ----------- ---------- $ 3,000 $(1,397,000) $1,350,000 ========== =========== ==========
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows: F-23 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (11) Income Taxes (continued)
December 31, ---------------------- 1997 1998 ---------- ---------- Deferred tax assets: Trade accounts payable............................ $ 823,000 $ -- Intercompany/related party payables............... 259,000 76,000 Accrued liabilities and employee compensation..... 159,000 383,000 Billings in excess of costs and earnings.......... 39,000 180,000 Allowance for doubtful accounts................... -- 117,000 Settlement obligations............................ -- 188,000 Other............................................. 36,000 174,000 Net operating loss carryforwards.................. 1,233,000 1,304,000 Less valuation allowance.......................... (31,000) (62,000) ---------- ---------- Total deferred tax assets....................... 2,518,000 2,360,000 ---------- ---------- Deferred tax liabilities: Trade receivable, net............................. 885,000 -- Section 481, change from cash to accrual.......... -- 818,000 Costs and earnings in excess of billings.......... 168,000 1,541,000 Other............................................. 12,000 79,000 ---------- ---------- Total deferred tax liabilities.................. 1,065,000 2,438,000 ---------- ---------- Net deferred tax assets (liabilities)........... $1,453,000 $ (78,000) ========== ==========
The net change in the valuation allowance for the years ended December 31, 1996, 1997 and 1998 was a decrease of $663,000 and $1,761,000, and an increase of $31,000, respectively. The Company considers recording a valuation allowance in accordance with the provisions of SFAS No. 109 to reflect the estimated amount of deferred tax assets, which may not be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not, that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment, and believes it is more likely than not the Company will realize the benefits of its deferred tax assets, net of the existing valuation allowance at December 31, 1998. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. As of December 31, 1998, the Company had approximately $3,500,000 and $1,400,000 in federal and state net operating loss carryforwards, respectively, available to offset future taxable income, if any. The federal carryforwards expire from the years 2007 to 2018. The state carryforwards expire from the years 1999 to 2003. F-24 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (12) Commitments and Contingencies The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management and the Company's legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial statements taken as a whole. (13) 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, we have grouped our operations into two primary reportable segments. The Real Estate Development, Public Works and Wireless Telecommunications ("REPWWT") segment includes engineering, consulting and technical services for the development of both private projects, such as residential communities, commercial and industrial properties and recreational projects; public works projects, such as transportation and water/sewage facilities; and site acquisition and construction management services for wireless telecommunications. The Industrial Engineering ("IE") segment, which consists of ESI, provides the technical expertise and management required to design and test manufacturing facilities and processes. The accounting policies of the segments are the same as those described in note 2. The following tables set forth certain information regarding the Company's operating segments as of and for the years ended December 31, 1996, 1997, 1998 and the three months ended March 31, 1998 and 1999 (unaudited):
Year ended December 31, 1996 ----------------------------------------------- Corporate REPWWT IE Costs Consolidated ----------- --------- ----------- ------------ Net revenue............... $12,966,000 $ -- $ -- $ 12,966,000 Income (loss) from opera- tions.................... $ 216,000 $ -- $(1,439,000) $ (1,223,000) Identifiable assets....... $ 4,677,000 $ -- $ -- $ 4,677,000
Year ended December 31, 1997 ------------------------------------------------ Corporate REPWWT IE Costs Consolidated ----------- ---------- ----------- ------------ Net revenue............... $18,592,000 $ -- $ -- $18,592,000 Income (loss) from opera- tions.................... $ 4,180,000 $ -- $(1,944,000) $ 2,236,000 Identifiable assets....... $10,485,000 $1,248,000 $ -- $11,733,000
Year ended December 31, 1998 ------------------------------------------------ Corporate REPWWT IE Costs Consolidated ----------- ---------- ----------- ------------ Net revenue............... $25,330,000 $3,852,000 $ -- $29,182,000 Income (loss) from opera- tions.................... $ 5,761,000 $ 244,000 $(1,968,000) $ 4,037,000 Identifiable assets....... $13,068,000 $1,462,000 $ -- $14,530,000
F-25 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (13) Segment and Related Information (continued)
Three months ended March 31, 1998 (unaudited) --------------------------------------------- Corporate REPWWT IE Costs Consolidated ---------- ---------- --------- ------------ Net revenue.................. $5,074,000 $ 888,000 $ -- $ 5,962,000 Income (loss) from operations.................. $ 886,000 $ 20,000 $(494,000) $ 412,000 Identifiable assets.......... $9,386,000 $1,570,000 $ -- $10,956,000
Three months ended March 31, 1999 (unaudited) ---------------------------------------------- Corporate REPWWT IE Costs Consolidated ----------- ---------- --------- ------------ Net revenue................. $ 7,993,000 $ 976,000 $ -- $ 8,969,000 Income (loss) from opera- tions...................... $ 1,764,000 $ 32,000 $(637,000) $ 1,159,000 Identifiable assets......... $14,167,000 $1,522,000 $ -- $15,689,000
Business Concentrations In 1996 and 1998, the Company had no customers which represented greater than 10% of consolidated net revenue. In 1997, the Company had one customer which represented 11% of net revenue. In addition, in 1997 the Company had one customer representing greater than 10% of net contract and trade receivables. Receivables from this customer totaled $1,283,000 at December 31, 1997. No customers represented greater than 10% of net contract and trade receivables at December 31, 1998. (14) Fair Value of Financial Instruments The carrying amounts of the Company's financial instruments reported in the accompanying consolidated balance sheets for cash, contracts and trade receivables, other receivables, short-term borrowings, trade accounts payable, accrued employee compensation, accrued liabilities to related parties, and other accrued liabilities approximate fair values due to the short maturity of these instruments. At December 31, 1998, long-term debt, excluding capital lease obligations, consisted of the Company's line of credit payable, notes payable and notes payable to related parties. The carrying value of the Company's line of credit payable approximates its fair value, based upon the borrowing rate currently available to the Company for loans with similar terms. It was not practicable to estimate the fair value of two notes payable with a combined carrying value of $576,000, as there is no established market for these notes. The carrying value of the remaining long-term debt and notes payable to related parties was $3,151,000, which approximates fair value, determined using estimates for similar debt instruments (see notes 5 and 6). F-26 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (15) Supplemental Cash Flow Information
Three months ended Years ended December 31, March 31, ------------------------------ ------------------- 1996 1997 1998 1998 1999 -------- ---------- ---------- --------- --------- (unaudited) Supplemental disclosure of cash flow information: Cash paid during the period for interest..... $587,000 $ 725,000 $1,024,000 $ 439,000 $ 240,000 ======== ========== ========== ========= ========= Cash paid during the period for income taxes................... $ 3,000 $ 28,000 $ 144,000 $ 2,000 $ 2,000 ======== ========== ========== ========= ========= Noncash financing and investing activities: Capital lease obligations recorded in connection with equipment acquisitions............ $ 50,000 $1,120,000 $ 788,000 $ 105,000 $ -- ======== ========== ========== ========= ========= Purchase price adjustment.............. $ -- $ -- $ 26,000 $ -- $ 60,000 ======== ========== ========== ========= ========= Issuance of common stock................... $ -- $ 206,000 $ -- $ -- $ -- ======== ========== ========== ========= ========= Insurance financing...... $ -- $ 311,000 $ 202,000 $ -- $ -- ======== ========== ========== ========= =========
The acquisition of ESI and JMTA on December 30, 1997 and August 1, 1998, respectively, resulted in the following: Increases in:
ESI JMTA December 30, 1997 August 1, 1998 ----------------- -------------- Contracts and trade receivables........... $(541,000) $(309,000) Costs and estimated earnings in excess of billings................................. (131,000) (201,000) Other receivables......................... (63,000) -- Goodwill.................................. -- (631,000) Equipment and improvements................ -- (56,000) Other assets.............................. (127,000) (29,000) Short-term borrowings..................... 310,000 -- Long-term debt, including current por- tion..................................... -- 700,000 Accounts payable, accrued expenses and other liabilities........................ 364,000 449,000 Common stock.............................. 200,000 -- --------- --------- Cash acquired in (expended for) acquisi- tions.................................... $ 12,000 $ (77,000) ========= =========
F-27 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (16) Valuation and Qualifying Accounts For the years ending in December 1996, 1997 and 1998, certain supplementary information regarding valuation and qualifying accounts follows:
Provisions Balance at for beginning of doubtful Balance at end period accounts Deductions of period ------------ ---------- ---------- -------------- Allowance for doubtful ac- counts: 1996...................... $918,000 $1,146,000 $1,477,000 $587,000 1997...................... $587,000 $ 324,000 $ 563,000 $348,000 1998...................... $348,000 $ 300,000 $ 284,000 $364,000
(17) Extraordinary Gain In 1990, the Company entered into a facility lease in Moreno Valley, California anticipating growth in operations. By December 31, 1994, concurrent with the recession in the southern California real estate industry, the Company's operations from this location had diminished significantly resulting in excessive lease space. Accordingly, the Company accrued a loss of $2,028,000, based on its obligation for the excess space through the lease expiration date, as the excess space had no substantive future use or benefit to the Company. In addition, the Company was in default under the lease and had accrued unpaid rent totaling $658,000 through December 31, 1995. During 1995, the landlord issued a deed-in-lieu of foreclosure to the mortgage holder who subsequently sold the building. The Company entered into an agreement with the new landlord in August 1996, whereby all amounts owing under the previous lease through December 31, 1995 were forgiven and a new lease was negotiated effective January 1, 1996. Therefore, the Company recorded an extraordinary gain on the forgiveness of $2,686,000 in 1996. In connection with the original lease, a partnership owned by the two major stockholders of TKCI, held a 25% ownership interest in the building and a small interest in the overall project. As a result of the Company's default on the lease, the partnership's ownership interest in the project was forfeited. F-28 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements--(Continued) Years Ended December 31, 1996, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (18) Subsequent Event Thompson-Hysell, Inc. On April 9, 1999, TKCI entered into an Asset Purchase Agreement with Thompson- Hysell, Inc. ("Thompson-Hysell") and its shareholders (the "Acquisition Agreement"). Under the terms of the Acquisition Agreement, TKCI is to acquire substantially all of the assets of and assume certain of the liabilities of Thompson-Hysell. Based on the terms of the Acquisition Agreement, TKCI is obligated to pay cash in the amount of $3,333,333 and execute a promissory note in the original principal amount of $1,333,333. TKCI may also be obligated to issue shares of common stock with a value equal to $1,333,334. The purchase price is subject to adjustment upward or downward depending upon certain financial targets related to the assets acquired and liabilities assumed, earnings for the years ended December 31, 1999 and 2000 and the effect on the net proceeds to Thompson-Hysell and its shareholders of certain income tax attributed to the assets acquired and liabilities assumed. It is anticipated this transaction is to close concurrent with the Company's planned initial public offering. As of March 31, 1999, the Company has incurred approximately $104,000 (unaudited), consisting primarily of legal and accounting costs, related to the acquisition of Thompson-Hysell. These acquisition costs have been deferred and included in the March 31, 1999 accompanying consolidated balance sheet in other assets. Should the Company decide not to consummate the Thompson-Hysell acquisition, these costs would then be expensed. F-29 Independent Auditors' Report The Stockholders Thompson-Hysell, Inc.: We have audited the accompanying balance sheets of Thompson-Hysell, Inc. as of December 31, 1997 and 1998, and the related statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Thompson-Hysell, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. KPMG LLP Sacramento, California February 26, 1999, except as to Note 13, which is as of April 9, 1999 F-30 THOMPSON-HYSELL, INC. Balance Sheets
December 31, ---------------------- 1997 1998 March 31, 1999 ---------- ---------- -------------- (unaudited) Assets Current assets: Cash and cash equivalents............. $ 118,000 $ 366,000 $ 264,000 Accounts receivable (net of allowance for doubtful accounts of $68,000, $102,000 and $113,000 at December 31, 1997, 1998 and March 31, 1999, respectively)........................ 1,408,000 2,118,000 2,456,000 Costs and estimated earnings in excess of billings.......................... 64,000 271,000 265,000 Prepaid expenses...................... -- 15,000 65,000 ---------- ---------- ---------- Total current assets................ 1,590,000 2,770,000 3,050,000 Equipment and improvements, net......... 380,000 987,000 1,097,000 Marketable investment securities........ 215,000 232,000 243,000 Deposits................................ 4,000 4,000 4,000 ---------- ---------- ---------- Total assets........................ $2,189,000 $3,993,000 $4,394,000 ========== ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable...................... $ 154,000 $ 57,000 $ 103,000 Accrued liabilities................... 173,000 278,000 234,000 Dividends payable..................... -- 100,000 -- Related party payables................ 669,000 200,000 23,000 Line of credit payable................ 427,000 -- -- Current portion of notes payable and capital lease obligations............ 124,000 209,000 231,000 Billings in excess of costs and estimated earnings................... -- 3,000 -- ---------- ---------- ---------- Total current liabilities........... 1,547,000 847,000 591,000 Notes payable and capital lease obligations, net of current portion.... 254,000 344,000 378,000 Related party payables, net of current portion................................ -- 587,000 579,000 ---------- ---------- ---------- Total liabilities................... 1,801,000 1,778,000 1,548,000 ---------- ---------- ---------- Stockholders' equity: Common stock, $1 par value, 10,000 shares authorized, 1,000 shares issued and outstanding............... 1,000 1,000 1,000 Notes receivable--stockholders........ (1,000) (1,000) -- Retained earnings..................... 360,000 2,201,000 2,822,000 Accumulated other comprehensive income............................... 28,000 14,000 23,000 ---------- ---------- ---------- Total stockholders' equity.......... 388,000 2,215,000 2,846,000 ---------- ---------- ---------- Commitments and contingencies (notes 7, 11, 12, and 13)................... Total liabilities and stockholders' equity............................. $2,189,000 $3,993,000 $4,394,000 ========== ========== ==========
See accompanying notes to financial statements. F-31 THOMPSON-HYSELL, INC. Statements of Income
Years ended December 31, Three months ended March 31, -------------------------- ------------------------------ 1997 1998 1998 1999 ------------ ------------ -------------- -------------- (unaudited) Gross revenue........... $ 4,567,000 $ 9,112,000 $ 1,660,000 $ 2,378,000 Subcontractor costs..... 238,000 323,000 88,000 76,000 ------------ ----------- -------------- -------------- Net revenue........... 4,329,000 8,789,000 1,572,000 2,302,000 Costs of revenue........ 2,695,000 4,607,000 799,000 1,194,000 ------------ ----------- -------------- -------------- Gross profit.......... 1,634,000 4,182,000 773,000 1,108,000 Selling, general and administrative expenses............... 1,264,000 2,187,000 321,000 473,000 ------------ ----------- -------------- -------------- Income from operations........... 370,000 1,995,000 452,000 635,000 Interest expense........ 52,000 80,000 20,000 32,000 Other income, net....... (43,000) (32,000) (28,000) (18,000) ------------ ----------- -------------- -------------- Income before provision for income taxes................ 361,000 1,947,000 460,000 621,000 Provision for income taxes.................. 1,000 6,000 1,000 -- ------------ ----------- -------------- -------------- Net income............ $ 360,000 $ 1,941,000 $ 459,000 $ 621,000 ============ =========== ============== ==============
See accompanying notes to financial statements. F-32 THOMPSON-HYSELL, INC. Statements of Stockholders' Equity
Accumulated Notes Other Shares Common Receivable-- Retained Comprehensive Outstanding Stock Stockholders Earnings Income Total ----------- ------ ------------ ---------- ------------- ---------- December 31, 1996....... 1,000 $1,000 $(1,000) $ -- $ -- $ -- Comprehensive income: Net income............ -- -- -- 360,000 -- 360,000 Other comprehensive income--unrealized holding gains arising during the period.... -- -- -- -- 28,000 28,000 ----- ------ ------- ---------- ------- ---------- Balance at December 31, 1997................... 1,000 1,000 (1,000) 360,000 28,000 388,000 ----- ------ ------- ---------- ------- ---------- Comprehensive income (loss): Net income............ -- -- -- 1,941,000 -- 1,941,000 Other comprehensive income--unrealized holding losses arising during the period............... -- -- -- -- (12,000) (12,000) Less reclassification adjustment for gain included in net income............... -- -- -- -- (2,000) (2,000) ----- ------ ------- ---------- ------- ---------- Total comprehensive income (loss)......... -- -- -- 1,941,000 (14,000) 1,927,000 Dividends declared .... -- -- -- (100,000) -- (100,000) ----- ------ ------- ---------- ------- ---------- Balance at December 31, 1998................... 1,000 1,000 (1,000) 2,201,000 14,000 2,215,000 ----- ------ ------- ---------- ------- ---------- Comprehensive income: Net income............ -- -- -- 621,000 -- 621,000 Other comprehensive income--unrealized holding gains arising during the period.... -- -- -- -- 9,000 9,000 ----- ------ ------- ---------- ------- ---------- Total comprehensive income................ -- -- -- 621,000 9,000 630,000 Collection of notes receivable-- stockholders. -- -- 1,000 -- -- 1,000 ----- ------ ------- ---------- ------- ---------- Balance at March 31, 1999 (unaudited)...... 1,000 $1,000 $ -- $2,822,000 $23,000 $2,846,000 ===== ====== ======= ========== ======= ==========
See accompanying notes to financial statements. F-33 THOMPSON-HYSELL, INC. Statements of Cash Flows
Years ended Three Months ended December 31, March 31, ----------------------- -------------------- 1997 1998 1998 1999 ----------- ---------- --------- --------- (unaudited) Cash flows from operating activities: Net income.................................. $ 360,000 $1,941,000 $ 459,000 $ 621,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization............ 47,000 138,000 20,000 20,000 Bad debt expense (recoveries)............ 68,000 34,000 3,000 (16,000) Gain on sale of marketable investment securities.............................. (23,000) (6,000) -- -- Changes in operating assets and liabilities: Accounts receivable...................... (1,476,000) (744,000) (107,000) (322,000) Costs and estimated earnings in excess of billings................................ (64,000) (207,000) (1,000) 6,000 Prepaid expenses......................... -- (15,000) (61,000) (50,000) Deposits................................. (4,000) -- -- -- Accounts payable......................... 28,000 (97,000) 98,000 46,000 Accrued liabilities...................... 139,000 105,000 (28,000) (44,000) Billings in excess of costs and estimated earnings................................ -- 3,000 -- (3,000) ----------- ---------- --------- --------- Net cash (used in) provided by operating activities.............................. $ (925,000) $1,152,000 $ 383,000 $ 258,000 ----------- ---------- --------- --------- Cash flows from investing activities: Acquisition of equipment and improvements.. (80,000) (346,000) (54,000) (33,000) Purchase of marketable investment securities................................ (5,000) (99,000) (8,000) (2,000) Proceeds from sale of marketable investment securities................................ 80,000 74,000 -- -- ----------- ---------- --------- --------- Net cash used in investing activities.... $ (5,000) $ (371,000) $ (62,000) $ (35,000) ----------- ---------- --------- --------- Cash flows from financing activities: Net change in related party payables....... 869,000 (207,000) (123,000) (184,000) Net change in line of credit payable....... 172,000 (427,000) (172,000) -- Payments on notes payable and capital lease obligations............................... (64,000) (164,000) (24,000) (63,000) Proceeds from notes payable................ 71,000 265,000 42,000 22,000 Distributions to stockholders.............. -- -- -- (100,000) ----------- ---------- --------- --------- Net cash provided by (used in) financing activities.............................. $ 1,048,000 $ (533,000) $(277,000) $(325,000) ----------- ---------- --------- --------- Cash and cash equivalents.................... 118,000 248,000 44,000 (102,000) Cash and cash equivalents, beginning of period...................................... -- 118,000 118,000 366,000 ----------- ---------- --------- --------- Cash and cash equivalents, end of period..... $ 118,000 $ 366,000 $ 162,000 $ 264,000 =========== ========== ========= =========
See supplemental cash flow information at Note 9 See accompanying notes to financial statements. F-34 THOMPSON-HYSELL, INC. Notes to Financial Statements Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (1) Organization and Summary of Significant Accounting Policies Company's Activities and Operating Cycle Thompson-Hysell, Inc. (the "Company") was incorporated as an S Corporation on December 20, 1996 in California, with significant operations commencing on May 1, 1997. The Company provides civil engineering for private land development and large development projects, and provides project planning and heavy construction surveying/staking along with construction management, primarily in central California and Utah. The work is performed under fixed price and time and material contracts, some of which have not to exceed provisions. The length of the Company's contracts varies but are typically from one to three years. In accordance with normal practice in the civil engineering industry, the Company includes asset and liability accounts relating to engineering contracts in current assets and liabilities even when such amounts are realizable or payable over a period in excess of one year. Interim Financial Statements The accompanying balance sheet as of March 31, 1999 and the statements of income and cash flows for the three months ended March 31, 1998 and 1999, and the statement of stockholders' equity for the three months ended March 31, 1999 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full year. Engineering Contract Income Recognition For financial reporting purposes, profits on engineering contracts are recorded using the percentage-of-completion method of accounting, determined by the ratio of costs incurred to date to management's estimates of total anticipated costs. Such amounts necessarily are based on estimates, and the uncertainty inherent in the estimates initially is reduced progressively as work on the contract nears completion. Costs of revenue include all direct material, labor, subcontractor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, equipment costs, and depreciation and amortization applicable to autos and trucks under capital leases. Selling, general and administrative costs are expensed as incurred. If estimated total costs for a F-35 THOMPSON-HYSELL, INC. Notes to Financial Statements--(Continued) Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) contract indicate a loss, the Company provides currently for the total anticipated loss on the contract. Changes in job performance, job conditions, and estimated profitability may result in revisions to revenue and costs, which are recognized in the period in which the revisions are determined. Costs and estimated earnings in excess of billings represents revenue recognized in excess of amounts billed. Billings in excess of costs and estimated earnings represents billings in excess of revenue recognized. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers all cash accounts that are not subject to withdrawal restrictions or penalties with maturities at date of purchase of three months or less, to be cash or cash equivalents. Equipment and Improvements Equipment and improvements are recorded at cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets. Autos and trucks held under capital leases (stated at the present value of the future minimum lease payments) and leasehold improvements are amortized on the straight-line method over the shorter of the lease term or the estimated useful life of the asset. Expenditures for maintenance and repairs are charged against income in the year in which they are incurred and betterments are capitalized. When depreciable assets are sold or disposed of, the cost and accumulated depreciation accounts are reduced by the applicable amounts, and any profit or loss is credited or charged to income. F-36 THOMPSON-HYSELL, INC. Notes to Financial Statements--(Continued) Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) Equipment and improvements consist of the following:
December 31, --------------------------------- March 31, 1997 1998 1999 -------- ---------- ----------- (unaudited) Equipment................................ $ 99,000 $ 627,000 $ 627,000 Leasehold improvements................... -- 313,000 316,000 Office furniture and fixtures............ 1,000 226,000 234,000 Autos and trucks......................... 13,000 195,000 217,000 Autos and trucks under capital leases.... 339,000 413,000 510,000 -------- ---------- ---------- 452,000 1,774,000 1,904,000 Accumulated depreciation and amortiza- tion.................................... (72,000) (787,000) (807,000) -------- ---------- ---------- $380,000 $ 987,000 $1,097,000 ======== ========== ==========
Depreciation and amortization are based on the following estimated useful lives:
Years ----- Leasehold improvements................................ 15 Equipment, autos and trucks........................... 5 Office furniture and fixtures......................... 3--7
Depreciation expense for the years ended December 31, 1997 and 1998, totaled $11,000 and $65,000, respectively. Amortization expense for autos and trucks under capital leases for the years ended December 31, 1997 and 1998, totaled $36,000 and $73,000, respectively. Marketable Investment Securities Marketable investment securities at December 31, 1997 and 1998 and March 31, 1999, consist of equity securities and mutual funds. The Company has classified its investments as available-for-sale, and has recorded them at fair market value with any unrealized gains or losses reflected as a component of stockholders' equity. Income Taxes The Company, with the consent of its stockholders, elected, under the Internal Revenue Code, to be an S Corporation effective December 20, 1996. Under the S election, the Company's income or loss is passed on to the individual stockholders for federal and state income tax purposes. Therefore, there is no federal tax liability at the corporate level and thus, no provision for federal income taxes has been included in these financial statements. However, a tax is assessed on income apportioned to California equal to the greater of $800 or 1.5% of income apportioned to California for franchise tax purposes. F-37 THOMPSON-HYSELL, INC. Notes to Financial Statements--(Continued) Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) Fair Value of Financial Instruments The carrying amount reported in the balance sheet of the assets and liabilities that are considered to be financial instruments (such as cash and cash equivalents, accounts receivable, deposits, accounts payable, accrued liabilities, dividends payable, related party payables and line of credit payable) approximate their fair value based upon their short-term nature. The carrying amount of notes payable approximates fair value since their terms and conditions are similar to those currently available to the Company. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. (2) Accounts Receivable and Allowance for Doubtful Accounts Accounts receivable is composed of amounts due from clients, which vary from private individuals to large construction companies. Consequently, the Company's ability to collect the amounts due is affected by fluctuations in the economy of the local community. The Company provides an allowance for uncollectible accounts based upon prior experience and management's assessment of the collectibility of existing specific accounts. F-38 THOMPSON-HYSELL, INC. Notes to Financial Statements--(Continued) Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (3) Marketable Investment Securities The Company has invested in stocks and mutual funds through AG Edwards & Sons, Inc. Securities classified as available-for-sale as of December 31, 1997, consisted of the following:
Gross Gross Current Cost Unrealized Unrealized Market Shares Basis Gains Losses Value ------ -------- ---------- ---------- -------- Putnam--CA Tax Exempt......... 600 $ 5,000 $ -- $ -- $ 5,000 Putnam--Hi Yield.............. 3,700 47,000 2,000 -- 49,000 Putnam--Growth Fund........... 3,000 37,000 21,000 -- 58,000 Alliance Growth Fund.......... 400 10,000 6,000 -- 16,000 Silicon....................... 400 5,000 -- 3,000 2,000 AT&T.......................... 300 15,000 6,000 -- 21,000 E. I. Dupont De Nemours....... 300 16,000 -- 1,000 15,000 Eastman Kodak................. 200 15,000 -- -- 15,000 Philip Morris................. 400 15,000 1,000 -- 16,000 Somatogen, Inc................ 1,000 7,000 -- 2,000 5,000 Union Carbide Corp............ 300 15,000 -- 2,000 13,000 -------- ------- ------ -------- Totals...................... $187,000 $36,000 $8,000 $215,000 ======== ======= ====== ========
During 1997, the Company sold securities classified as available-for-sale for total proceeds of approximately $80,000 resulting in gross realized gains of $23,000. Securities classified as available-for-sale as of December 31, 1998, consisted of the following:
Gross Gross Current Cost Unrealized Unrealized Market Shares Basis Gains Losses Value ------ -------- ---------- ---------- -------- Putnam--CA Tax Exempt........ 600 $ 5,000 $ -- $ -- $ 5,000 Putnam--Hi Yield............. 4,000 53,000 14,000 -- 67,000 Putnam--Growth Fund.......... 3,000 50,000 -- 5,000 45,000 Alliance Growth Fund......... 400 11,000 9,000 -- 20,000 Silicon...................... 400 5,000 -- 4,000 1,000 E. I. Dupont De Nemours...... 300 16,000 -- 2,000 14,000 International Paper Co....... 300 17,000 -- 2,000 15,000 BankAmerica Corporation...... 200 13,000 -- 1,000 12,000 Preferred Network Inc........ 2,600 5,000 -- 4,000 1,000 Caterpillar Inc.............. 300 15,000 1,000 -- 16,000 General Motors............... 300 14,000 7,000 -- 21,000 Good Year Tire and Rubber.... 300 14,000 1,000 -- 15,000 -------- ------- ------- -------- Totals..................... $218,000 $32,000 $18,000 $232,000 ======== ======= ======= ========
F-39 THOMPSON-HYSELL, INC. Notes to Financial Statements--(Continued) Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) During 1998, the Company sold securities classified as available-for-sale for total proceeds of approximately $74,000 resulting in gross realized gains of $6,000. (4) Line of Credit Payable The Company has a line of credit which allows the Company, at its discretion, to borrow up to $500,000 at prime plus 1.5%, with all unpaid principal and interest due on May 10, 2000. As of December 31, 1997, the effective interest rate was 9.75% and the outstanding balance was $427,000. There was no outstanding balance at December 31, 1998 and March 31, 1999 (unaudited). (5) Notes Payable Notes payable is comprised of the following:
December 31, ------------------ 1997 1998 -------- -------- Notes payable to various third parties secured by equipment, payable in monthly installments ranging from $70 to $700, including principal and interest at rates ranging from 8.65% to 13.22%, maturing between 2000 and 2003................................................... $ 95,000 $285,000 Less current portion.................................... (26,000) (93,000) -------- -------- $ 69,000 $192,000 ======== ========
Maturities of notes payable as of December 31, 1998 are:
Years Ending December 31: ------------ 1999.......................................................... $ 93,000 2000.......................................................... 97,000 2001.......................................................... 59,000 2002.......................................................... 23,000 2003.......................................................... 13,000 -------- $285,000 ========
F-40 THOMPSON-HYSELL, INC. Notes to Financial Statements--(Continued) Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (6) Autos and Trucks Under Capital Leases The Company leases various vehicles under capital lease agreements that expire at various dates over the next four years. Future minimum payments on capitalized leases as of December 31, 1998 are:
Years ending December 31: ------------ 1999...................................................... $ 146,000 2000...................................................... 125,000 2001...................................................... 20,000 2002...................................................... 26,000 --------- 317,000 Amount representing interest (at rates ranging from approxi- mately 5% to 16%).......................................... (48,000) --------- Present value of future minimum capital lease payments...... 269,000 Less current portion........................................ (116,000) --------- Long-term capital lease portion............................. $ 153,000 =========
(7) Operating Leases The Company has several noncancelable operating leases, primarily for office facilities and equipment used in its operations, that expire over the next 15 years. The facility leases require the Company to pay such costs as common area maintenance and insurance. During the years ended December 31, 1997 and 1998, rentals under long-term lease obligations were $156,000 and $268,000, respectively. Future minimum lease payments on these leases at December 31, 1998 are:
Years ending Third Related December 31: Parties Parties ------------ -------- ---------- 1999............................................... $116,000 $ 144,000 2000............................................... 113,000 144,000 2001............................................... 74,000 144,000 2002............................................... 10,000 144,000 2003............................................... -- 144,000 Thereafter......................................... -- 684,000 -------- ---------- $313,000 $1,404,000 ======== ==========
F-41 THOMPSON-HYSELL, INC. Notes to Financial Statements--(Continued) Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) The Company leases a building from shareholders of the Company. The lease is for an initial fifteen year term expiring in 2008 and has been classified as an operating lease. Total rent expense associated with this lease for the years ended December 31, 1997 and 1998, was $96,000 and $158,000, respectively, and $36,000 for each of the three months ended March 31, 1998 and 1999. (8) Transactions with Related Parties In addition to related party leasing transactions as noted in footnote 7, amounts due from (to) related parties are as follows:
December 31, -------------------- 1997 1998 --------- --------- Notes receivable--stockholders..................... $ 1,000 $ 1,000 ========= ========= Related party payables: Notes payable.................................... -- 608,000 Other............................................ $ 669,000 $ 179,000 --------- --------- 669,000 787,000 Less current portion of related party payables..... (669,000) (200,000) --------- --------- Related party payables, net of current portion.... $ -- $ 587,000 ========= =========
Notes receivable--stockholders--The stockholders were issued 1,000 shares of Company stock ($1 par value) in exchange for $1,000 in notes receivable. The notes are secured by the underlying shares of Company stock. Notes payable--related party--Balance represents the amounts due to a former stockholder of a related party for buyout of his stock in the related party, severance package upon termination of his employment/ownership with the related party, and amounts owed to a former stockholder of the related party in return for a covenant not to compete with related party and/or the Company. The notes have a remaining life of 14 years, have been discounted at 9%. The current portion of the notes payable-related party, was $0 and $200,000, as of December 31, 1997 and 1998, respectively. Other related party payables--Balance represents the net position of payments for expenses made by a related party on behalf of the Company and collections of receivables made by the Company on behalf of a related party. The balance due to the related party was paid in full as of March 31, 1999 (unaudited). F-42 THOMPSON-HYSELL, INC. Notes to Financial Statements--(Continued) Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (9) Supplemental Cash Flow Information
Year ended Three months December 31, ended ----------------- March 31, 1997 1998 1999 -------- -------- ------------ (unaudited) Cash paid for: Interest................................... $ 47,000 $ 82,000 $32,000 Taxes...................................... $ -- $ 2,000 $ -- Noncash transactions: Equipment acquired through financing/leasing......................... $339,000 $ 73,000 $97,000 Dividends declared, but unpaid as of Decem- ber 31, 1998.............................. $ -- $100,000 $ --
On May 1, 1997 and December 31, 1998, certain assets and liabilities were transferred from Thompson-Hysell Engineers, Inc. (a related party) of the Company. The assets and liabilities were transferred at book value as follows:
1997 1998 --------- --------- Cash................................................. $ 2,000 $ -- Prepaid expenses..................................... 62,000 -- Leasehold improvements............................... -- 313,000 Equipment............................................ 20,000 301,000 Office furniture and fixtures........................ -- 216,000 Autos and trucks..................................... 13,000 72,000 Accumulated depreciation and amortization............ (25,000) (576,000) Marketable investment securities..................... 182,000 -- Security deposits.................................... 2,000 -- Accounts payable..................................... (126,000) -- Accrued liabilities.................................. (34,000) (26,000) Related party receivable (recorded as a reduction in related party payable).............................. 192,000 308,000 Line of credit payable............................... (255,000) -- Notes payable........................................ (33,000) -- Notes payable, former stockholder of a related par- ty.................................................. -- (608,000)
F-43 THOMPSON-HYSELL, INC. Notes to Financial Statements--(Continued) Years Ended December 31, 1997 and 1998 and Three Months Ended March 31, 1998 and 1999 (Unaudited) (10) 401(k) Profit Sharing Plan The Company provides a 401(k) Profit Sharing Plan to their employees. Employees are eligible to participate immediately; however, the Company does not match until after one full year of service. After one year, the Company matches 50% of what each employee puts into the plan, up to 5% of their gross annual salary subject to limitations imposed by the Internal Revenue Code. Matching contributions to the plan for the years ended December 31, 1997 and 1998, were $27,000 and $54,000, respectively. (11) Business and Credit Concentrations The Company's primary operations are located in central California, and the Salt Lake City, Utah areas. Thus, the Company is susceptible to economic conditions in those geographical areas. The Company maintains its cash balances at Wells Fargo Bank. Combined accounts at the institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At December 31, 1998 and March 31, 1999, the Company's uninsured cash balances totaled $266,000 and $164,000, respectively. (12) Purchase of Stock The Company has a shareholder agreement for the purchase of a retiring shareholder's stock in the Company. Included in the agreement is term life insurance on some of the shareholders. By board action, it is understood that when a shareholder's stock is purchased, the term life insurance will be transferred to the shareholder. (13) Subsequent Event On April 9, 1999, the Company entered into an Asset Purchase Agreement with an unrelated third party to sell substantially all of the assets and certain of the liabilities of the Company for cash, a promissory note and common stock of the Company with an aggregate value of $6,000,000. The purchase price is subject to change based on certain financial targets. The transaction is anticipated to be consummated concurrent with the unrelated third party's initial public offering. F-44 [TKCI GRAPHICS] Until , 1999 (25 days after the date of this Prospectus) all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table itemizes the estimated expenses incurred in connection with the offering described in this Registration Statement. Registration fee.......................................................... $ NASD filing fee........................................................... $ Printing and engraving expenses........................................... * Nasdaq application fee.................................................... * Blue sky qualification fees and expenses.................................. * Legal fees and expenses................................................... * Accountants' fees and expenses............................................ * Transfer agent and registrar fees......................................... * Miscellaneous............................................................. * ---- Total................................................................ $ * ====
- ------------------ * To be supplied by amendment Item 14. Indemnification of Directors and Officers The underwriting agreement (Exhibit 1.1 hereto) provides for indemnification by the underwriters of the Registrant and its officers and directors, and by the Registrant of the underwriters for certain liabilities arising under the Securities Act of 1933 or otherwise. Our articles of incorporation provide that the liability of our directors for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of TKCI for breach of a director's duties to TKCI or our shareholders except for liability: (a) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (b) for acts or omissions that a director believes to be contrary to the best interests of TKCI or our shareholders or that involve the absence of good faith on the part of the director; (c) for any transaction for which a director derived an improper personal benefit; (d) for acts or omission that show a reckless disregard for the director's duty to TKCI or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to TKCI or our shareholders; (e) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to TKCI or our shareholders; (f) with respect to certain transactions, or the approval of transactions in which a director has a material financial interest; and (g) expressly imposed by statute, for approval of certain improper distributions to shareholders or certain loans or guarantees. II-1 Our articles also provide that we are authorized to provide indemnification to our officers and directors in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code. Our bylaws provide for indemnification of our officers, directors, employees, and other agents to the extent and under the circumstances permitted by California law. We have entered into agreements to indemnify our directors and executive officers in addition to the indemnification provided for in the articles of incorporation and bylaws. Among other things, these agreements provide that we will indemnify, subject to certain requirements, each of our directors for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of TKCI, on account of services by such person as a director or officer of TKCI, or as a director or officer of any other company or enterprise to which the person provides services at our request. We have also purchased directors and officers liability insurance, which provides coverage against certain liabilities including liabilities under the Securities Act. The inclusion of the above provisions in our articles of incorporation and bylaws, the existence of the indemnification agreements and directors and officers insurance may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Registrant and its shareholders. At present, there is no litigation or proceeding pending involving a director of the Registrant as to which indemnification is being sought, nor is the Registrant aware of any threatened litigation that may result in claims for indemnification by any director. Item 15. Recent Sales of Unregistered Securities. In April 1997, we entered into an agreement for advisory services with Walter W. Cruttenden, III, pursuant to which, among other things, for $10,000 we provided Mr. Cruttenden with an option to purchase 10% of our outstanding common stock upon the payment of additional consideration of $88,000. In July 1997, upon his exercise of this option, we issued 325,926 shares of our common stock to Mr. Cruttenden. In December 1997, Mr. Cruttenden and members of his family purchased an additional 196,745 shares of common stock for an aggregate purchase price of $500,000. The securities issued to Mr. Cruttenden and his family members were issued in private transactions pursuant to Section 4(2) of the Securities Act of 1933. In December 1997, in connection with our acquisition of all of the outstanding common stock of ESI, we issued an aggregate of 74,074 shares of our common stock to the three selling shareholders in partial consideration of the ESI common stock. These securities were issued in a private transaction pursuant to Section 4(2) of the Securities Act of 1933. II-2 In August 1998, the holders of all of the outstanding shares of Keith Engineering contributed their shares to TKCI as a contribution to capital. In consideration of this contribution, we issued to the contributing shareholders one share of TKCI common stock for each share of Keith Engineering stock contributed. We issued an aggregate of 1,222,222 shares of our common stock pursuant to Section 4(2) of the Securities Act of 1933. We have granted options to purchase an aggregate of 485,074 shares of our common stock pursuant to our Amended and Restated 1994 Stock Incentive Plan to certain employees, officers and directors. The issuance of these securities was exempt from registration pursuant to Rule 701 of the Securities Act of 1933. In connection with our acquisitions of ESI and John M. Tettemer & Associates in December, 1997, we issued four warrants to purchase an aggregate of 83,333 shares of common stock. These warrants were exercisable for a period of five years at exercise prices ranging from $1.75 to $2.50 per share. These securities were issued in private transactions under Section 4(2) of the Securities Act of 1933. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits.
Exhibit Number Description ------- ----------- 1.1 Form of Underwriting Agreement.* 2.1 Asset Purchase Agreement dated April 9, 1999 between the Registrant and Thompson-Hysell, Inc. 2.2 Agreement for the Acquisition of All Outstanding Stock of ESI, Engineering Services Incorporated by the Registrant dated September 22, 1997. 2.3 Stock Purchase Agreement dated July 10, 1998 by and among the Registrant; John M. Tettemer & Associates, Inc.; Murdoch V. and Nadine R. Heideman, trustees of the Murdoch V. Heideman and Nadine R. Heideman Living Trust U/D/T dated October 16, 1992; and Jimmie E. and Jolene M. Dysert, trustees of the Jimmie E. Dysert and Jolene M. Dysert Living Trust U/D/T dated February 20, 1993. 3.1 Amended and Restated Articles of Incorporation filed on August 19, 1994 and Certificate of Amendment of Articles of Incorporation filed on April 26, 1999. 3.2 Amended and Restated Bylaws of the Registrant. 4.1 Specimen Stock Certificate.* 5.1 Opinion of Rutan & Tucker, LLP.* 10.1 Amended and Restated 1994 Stock Incentive Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement.*
II-3
Exhibit Number Description ------- ----------- 10.2 Form of Indemnification Agreement. 10.3 Security and Loan Agreement dated February 9, 1998 between the Registrant, Keith Engineering, Inc. and Imperial Bank and Addendum to Security and Loan Agreement dated February 9, 1998. 10.4 First Amendment to Security and Loan Agreement dated March 23, 1998 between the Registrant, Keith Engineering, Inc. and Imperial Bank. 10.5 Second Amendment to Security and Loan Agreement dated June 22, 1998 between the Registrant; Keith Engineering, Inc.; ESI, Engineering Services Incorporated and Imperial Bank. 10.6 Third Amendment to Security and Loan Agreement dated October 7, 1998 between the Registrant; Keith Engineering, Inc.; ESI, Engineering Services Incorporated and Imperial Bank. 10.7 Fourth Amendment to Security and Loan Agreement dated March 5, 1999 between the Registrant; Keith Engineering, Inc.; ESI, Engineering Services Incorporated; John M. Tettemer & Associates, LTD and Imperial Bank. 10.8 General Security Agreement dated February 9, 1998 between ESI, Engineering Services Incorporated and Imperial Bank and General Security Agreement dated February 9, 1998 between the Registrant, Keith Engineering, Inc. and Imperial Bank. 10.9 Commercial Security Agreement dated October 7, 1998 between the Registrant; Keith Engineering, Inc.; ESI, Engineering Services Incorporated; John M. Tettemer & Associates, LTD and Imperial Bank. 10.10 Waiver dated July 1998 executed by Walter W. Cruttenden, III. 10.11 Lease dated August 16, 1989 between Keith Engineering, Inc. and Scripps Center Associates, Work Letter Agreement dated August 16, 1989, Tenant Estoppel Certificate dated August 16, 1989 and Addendum to Lease, as amended by Lease Amendment No. 1 dated November 30, 1989, as amended by Lease Amendment No. 2 dated August 31, 1990, as amended by Lease Amendment No. 3 dated October 24, 1991, as amended by Lease Amendment No. 3 (sic) dated April 15 1993, as amended by Lease Amendment No. 4 dated October 1, 1993, as amended by Fifth Amendment to Lease dated May 1998. 10.12 Lease dated January 1, 1996 between Moreno Corporate Center, L.L.C. and the Registrant, as amended by First Amendment to Lease dated December 1, 1997. 10.13 Agreement Regarding Lease and Assignment of Leases and Release dated January 1, 1996 between Moreno Corporate Center, L.L.C. and the Registrant. 10.14 Agreement for Advisory Services dated April 10, 1997 between the Registrant; Keith Engineering, Inc.; Keith International, Inc.; Aram Keith and Walter W. Cruttenden, III.
II-4
Exhibit Number Description ------- ----------- 10.15 Security Agreement dated April 10, 1997 between the Registrant; Keith International, Inc.; Keith Engineering, Inc. and Walter W. Cruttenden, III. 10.16 Promissory Note dated August 1, 1996 between the Registrant; Keith International, Inc.; The Keith Companies--North Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii, Inc.; Aram H. Keith and Moreno Corporate Center, L.L.C. in the principal amount of $273,893. 10.17 Amendment to Promissory Note dated April 29, 1997 between the Registrant; Keith International, Inc.; The Keith Companies--North Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii, Inc.; Aram H. Keith and Moreno Corporate Center, L.L.C. 10.18 Second Amendment to Promissory Note dated February 4, 1998 between the Registrant; Keith International, Inc.; The Keith Companies--North Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii, Inc.; Aram H. Keith, and Moreno Corporate Center, L.L.C. 10.19 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Ruth Ann Fallon as trustee for the Erica Keith Educational Trust in the principal amount of $132,000, and Imperial Bank-- Subordination Agreement dated February 9, 1998. 10.20 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Ruth Ann Fallon as trustee for the Kimberly Keith Educational Trust in the principal amount of $33,000, and Imperial Bank-- Subordination Agreement dated February 9, 1998. 10.21 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Ruth Ann Fallon as trustee for the Ryan Keith Educational Trust in the principal amount of $11,000, and Imperial Bank-- Subordination Agreement dated February 9, 1998. 10.22 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Aram H. Keith as trustee for the Susan Reid Housing Trust in the principal amount of $86,000, and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.23 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Aram H. Keith as trustee for the Ruth Reid Housing Trust in the principal amount of $53,000, and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.24 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Aram H. Keith as trustee for the William Scott Reid Housing Trust in the principal amount of $48,000, and Imperial Bank-- Subordination Agreement dated February 9, 1998.
II-5
Exhibit Number Description ------- ----------- 10.25 Amended and Restated Promissory Note dated February 25, 1999 by the Registrant in favor of Walter W. Cruttenden, III in the principal amount of $700,000 and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.26 Amended and Restated Promissory Note dated February 25, 1999 by the Registrant in favor of Aram H. Keith in the principal amount of $1,210,177 and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.27 Restated and Amended Promissory Note dated February 25, 1999 by the Registrant in favor of Floyd S. Reid in the principal amount of $127,815 and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.28 Employment Agreement dated October 1, 1997 between ESI, Engineering Services Incorporated and Lynn C. Cannady. 10.29 Employment Agreement dated October 1, 1997 between ESI, Engineering Services Incorporated and Glenn I. Chase. 10.30 Employment Agreement dated October 1, 1997 between ESI, Engineering Services Incorporated and Stephen J. Lane. 10.31 Promissory Note dated February 21, 1997 by Keith International, Inc. in favor of Doug Travato in the principle amount of $100,000. 10.32 Promissory Note dated February 26, 1997 by Keith Engineering, Inc. in favor of the Wyckoff Company Money Purchase Pension Plan in the principle amount of $50,000. 10.33 Promissory Note dated February 10, 1998 by Keith Engineering, Inc. in favor of Aram H. Keith in the principle amount of $150,000. 23.1 Consent of Independent Auditors. 23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed herewith as Exhibit 5.1).* 24 Power of Attorney (included on signature page hereof). 27 Financial Data Schedule.
- ------------------ * To be filed by amendment. II-6 (b) Financial Statement Schedules. None. Item 17. Undertakings The Registrant hereby undertakes to provide the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14 hereof, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newport Beach, State of California, on April 28, 1999. The Keith Companies, Inc. /s/ Aram H. Keith By:_________________________________ Aram H. Keith POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Messrs. Aram H. Keith and Gary C. Campanaro his or her true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, at any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, or any Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith or in connection with the registration of the Common Stock under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary in connection with such matters and hereby ratifying and confirming that each of said attorneys-in-fact and agents, acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Aram H. Keith Chief Executive Officer, April 28, 1999 ______________________________________ President and Director Aram H. Keith (Principal Executive Officer) /s/ Gary C. Campanaro Chief Financial Officer April 28, 1999 ______________________________________ and Director (Principal Gary C. Campanaro Financial and Accounting Officer) /s/ Walter W. Cruttenden, III Director April 28, 1999 ______________________________________ Walter W. Cruttenden, III
II-8 EXHIBIT INDEX
Exhibit Number Description ------- ----------- 1.1 Form of Underwriting Agreement.* 2.1 Asset Purchase Agreement dated April 9, 1999 between the Registrant and Thompson-Hysell, Inc. 2.2 Agreement for the Acquisition of All Outstanding Stock of ESI, Engineering Services Incorporated by the Registrant dated September 22, 1997. 2.3 Stock Purchase Agreement dated July 10, 1998 by and among the Registrant; John M. Tettemer & Associates, Inc.; Murdoch V. and Nadine R. Heideman, trustees of the Murdoch V. Heideman and Nadine R. Heideman Living Trust U/D/T dated October 16, 1992; and Jimmie E. and Jolene M. Dysert, trustees of the Jimmie E. Dysert and Jolene M. Dysert Living Trust U/D/T dated February 20, 1993. 3.1 Amended and Restated Articles of Incorporation filed on August 19, 1994 and Certificate of Amendment of Articles of Incorporation filed on April 26, 1999. 3.2 Amended and Restated Bylaws of the Registrant. 4.1 Specimen Stock Certificate.* 5.1 Opinion of Rutan & Tucker, LLP.* 10.1 Amended and Restated 1994 Stock Incentive Plan, together with form of Nonqualified Stock Option Agreement and form of Incentive Stock Option Agreement.* 10.2 Form of Indemnification Agreement. 10.3 Security and Loan Agreement dated February 9, 1998 between the Registrant, Keith Engineering, Inc. and Imperial Bank and Addendum to Security and Loan Agreement dated February 9, 1998. 10.4 First Amendment to Security and Loan Agreement dated March 23, 1998 between the Registrant, Keith Engineering, Inc. and Imperial Bank. 10.5 Second Amendment to Security and Loan Agreement dated June 22, 1998 between the Registrant; Keith Engineering, Inc.; ESI, Engineering Services Incorporated and Imperial Bank. 10.6 Third Amendment to Security and Loan Agreement dated October 7, 1998 between the Registrant; Keith Engineering, Inc.; ESI, Engineering Services Incorporated and Imperial Bank. 10.7 Fourth Amendment to Security and Loan Agreement dated March 5, 1999 between the Registrant; Keith Engineering, Inc.; ESI, Engineering Services Incorporated; John M. Tettemer & Associates, LTD and Imperial Bank.
1
Exhibit Number Description ------- ----------- 10.8 General Security Agreement dated February 9, 1998 between ESI, Engineering Services Incorporated and Imperial Bank and General Security Agreement dated February 9, 1998 between the Registrant, Keith Engineering, Inc. and Imperial Bank. 10.9 Commercial Security Agreement dated October 7, 1998 between the Registrant; Keith Engineering, Inc.; ESI, Engineering Services Incorporated; John M. Tettemer & Associates, LTD and Imperial Bank. 10.10 Waiver dated July 1998 executed by Walter W. Cruttenden, III. 10.11 Lease dated August 16, 1989 between Keith Engineering, Inc. and Scripps Center Associates. Work Letter Agreement dated August 16, 1989, Tenant Estoppel Certificate dated August 16, 1989 and Addendum to Lease, as amended by Lease Amendment No. 1 dated November 30, 1989, as amended by Lease Amendment No. 2 dated August 31, 1990, as amended by Lease Amendment No. 3 dated October 24, 1991, as amended by Lease Amendment No. 3 (sic) dated April 15 1993, as amended by Lease Amendment No. 4 dated October 1, 1993, as amended by Fifth Amendment to Lease dated May 1998. 10.12 Lease dated January 1, 1996 between Moreno Corporate Center, L.L.C. and the Registrant, as amended by First Amendment to Lease dated December 1, 1997. 10.13 Agreement Regarding Lease and Assignment of Leases and Release dated January 1, 1996 between Moreno Corporate Center, L.L.C. and the Registrant. 10.14 Agreement for Advisory Services dated April 10, 1997 between the Registrant; Keith Engineering, Inc.; Keith International, Inc.; Aram Keith and Walter W. Cruttenden, III. 10.15 Security Agreement dated April 10, 1997 between the Registrant; Keith International, Inc.; Keith Engineering, Inc. and Walter W. Cruttenden, III. 10.16 Promissory Note dated August 1, 1996 between the Registrant; Keith International, Inc.; The Keith Companies--North Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii, Inc.; Aram H. Keith and Moreno Corporate Center, L.L.C. in the principal amount of $273,893. 10.17 Amendment to Promissory Note dated April 29, 1997 between the Registrant; Keith International, Inc.; The Keith Companies--North Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii, Inc.; Aram H. Keith and Moreno Corporate Center, L.L.C. 10.18 Second Amendment to Promissory Note dated February 4, 1998 between the Registrant; Keith International, Inc.; The Keith Companies--North Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii, Inc.; Aram H. Keith and Moreno Corporate Center, L.L.C.
2
Exhibit Number Description ------- ----------- 10.19 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Ruth Ann Fallon as trustee for the Erica Keith Educational Trust in the principal amount of $132,000, and Imperial Bank-- Subordination Agreement dated February 9, 1998. 10.20 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Ruth Ann Fallon as trustee for the Kimberly Keith Educational Trust in the principal amount of $33,000, and Imperial Bank-- Subordination Agreement dated February 9, 1998. 10.21 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Ruth Ann Fallon as trustee for the Ryan Keith Educational Trust in the principal amount of $11,000, and Imperial Bank-- Subordination Agreement dated February 9, 1998. 10.22 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Aram H. Keith as trustee for the Susan Reid Housing Trust in the principal amount of $86,000, and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.23 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Aram H. Keith as trustee for the Ruth Reid Housing Trust in the principal amount of $53,000, and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.24 Unsecured Promissory Note dated October 31, 1998 by the Registrant in favor of Aram H. Keith as trustee for the William Scott Reid Housing Trust in the principal amount of $48,000, and Imperial Bank-- Subordination Agreement dated February 9, 1998. 10.25 Amended and Restated Promissory Note dated February 25, 1999 by the Registrant in favor of Walter W. Cruttenden, III in the principal amount of $700,000 and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.26 Amended and Restated Promissory Note dated February 25, 1999 by the Registrant in favor of Aram H. Keith in the principal amount of $1,210,177 and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.27 Restated and Amended Promissory Note dated February 25, 1999 by the Registrant in favor of Floyd S. Reid in the principal amount of $127,815 and Imperial Bank--Subordination Agreement dated February 9, 1998. 10.28 Employment Agreement dated October 1, 1997 between ESI, Engineering Services Incorporated and Lynn C. Cannady.
3
Exhibit Number Description ------- ----------- 10.29 Employment Agreement dated October 1, 1997 between ESI, Engineering Services Incorporated and Glenn I. Chase. 10.30 Employment Agreement dated October 1, 1997 between ESI, Engineering Services Incorporated and Stephen J. Lane. 10.31 Promissory Note dated February 21, 1997 by Keith International, Inc. in favor of Doug Travato in the principle amount of $100,000. 10.32 Promissory Note dated February 26, 1997 by Keith Engineering, Inc. in favor of the Wyckoff Company Money Purchase Pension Plan in the principle amount of $50,000. 10.33 Promissory Note dated February 10, 1998 by Keith Engineering, Inc. in favor of Aram H. Keith in the principle amount of $150,000. 23.1 Consent of Independent Auditors. 23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed herewith as Exhibit 5.1).* 24 Power of Attorney (included on signature page hereof). 27 Financial Data Schedule.
- ------------------ * To be filed by amendment. 4 EX-2.1 2 ASSET PURCHASE AGREEMENT EXHIBIT 2.1 ASSET PURCHASE AGREEMENT AMONG THOMPSON-HYSELL, INC. AND THE KEITH COMPANIES, INC. April 9, 1999 TABLE OF CONTENTS -----------------
Page ---- ARTICLE 1 PURCHASE AND SALE OF ASSETS.................................. 1 1.1 Assets to be Transferred..................................... 1 1.2 Excluded Assets.............................................. 3 (a) Consideration.......................................... 3 (b) Corporate Franchise.................................... 3 (c) Tax Matters............................................ 3 (d) Agreement.............................................. 3 (e) Other Rights........................................... 3 ARTICLE 2 LIABILITIES.................................................. 4 2.1 Excluded Liabilities......................................... 4 2.2 Assumed Liabilities.......................................... 4 2.3 No Assignment Causing Breach................................. 5 ARTICLE 3 PURCHASE PRICE............................................... 5 3.1 Purchase Price............................................... 5 3.2 Book Value Adjustment........................................ 5 3.3 Purchase Price Adjustment.................................... 6 3.4 Terms of Promissory Note..................................... 7 3.5 Additional Payment........................................... 7 3.6 Payment of Purchase Price.................................... 8 3.7 Allocation of Purchase Price................................. 8 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF SELLER AND THE SHAREHOLDERS................................................. 9 4.1 Corporate.................................................... 9 (a) Organization........................................... 9 (b) Corporate Power........................................ 9 (c) Qualification.......................................... 9 (d) Subsidiaries........................................... 9 (e) Corporate Documents, etc............................... 9 (f) Capitalization of the Seller........................... 10 4.2 Authorization; Validity...................................... 10 4.3 No Violation................................................. 11 4.4 Financial Statements......................................... 11 4.5 Tax Matters.................................................. 11 4.6 Accounts Receivable and Costs in Excess of Billings.......... 12 4.7 Work-in-Process.............................................. 12 4.8 Absence of Certain Changes................................... 12 (a) No Adverse Change...................................... 12 (b) No Damage.............................................. 13 (c) No Increase in Compensation............................ 13 (d) No Labor Disputes...................................... 13 (e) No Commitments......................................... 13 (f) No Dividends........................................... 13 (g) No Disposition of Property............................. 13 (h) No Indebtedness........................................ 13 (i) No Liens............................................... 13 (j) No Amendment of Contracts.............................. 13 (k) Loans and Advances..................................... 13
-i- (l) Credit................................................. 14 (m) No Unusual Events...................................... 14 4.9 Absence of Undisclosed Liabilities........................... 14 4.10 No Litigation................................................ 14 4.11 Compliance With Laws......................................... 15 (a) Compliance............................................. 15 (b) Licenses and Permits................................... 15 4.12 Title to and Condition of Properties......................... 15 (a) Marketable Title....................................... 15 (b) Condition.............................................. 16 (c) Real Property.......................................... 16 (d) No Condemnation or Expropriation....................... 17 4.13 Insurance.................................................... 17 4.14 Contracts and Commitments.................................... 18 (a) Real Property Leases................................... 18 (b) Personal Property Leases............................... 18 (c) Purchase Commitments................................... 18 (d) Sales Commitments...................................... 18 (e) Contracts With Affiliates and Certain Others........... 18 (f) Powers of Attorney..................................... 18 (g) Collective Bargaining Agreements....................... 18 (h) Loan Agreements........................................ 18 (i) Guarantees............................................. 19 (j) Burdensome or Restrictive Agreements................... 19 (k) Other Material Contracts............................... 19 (l) No Default............................................. 19 4.15 Labor Matters................................................ 19 4.16 Employee Benefit Plans....................................... 20 (a) Disclosure............................................. 20 (b) Terminations, Proceedings, Penalties, etc.............. 20 (c) Prohibited Transactions, etc........................... 21 (d) Full Funding........................................... 22 (e) Controlled Group; Affiliated Service Group; Leased Employees....................................... 22 (f) Payments and Compliance................................ 22 (g) Post-Retirement Benefits............................... 23 (h) No Triggering of Obligations........................... 23 (i) Delivery of Documents.................................. 23 (j) Future Commitments..................................... 24 4.17 Employment Compensation...................................... 24 4.18 Trade Rights................................................. 24 4.19 Major Customers and Suppliers................................ 25 (a) Major Customers........................................ 25 (b) Major Suppliers........................................ 25 4.20 Warranty and Product Liability............................... 25 4.21 Bank Accounts................................................ 26 4.22 Affiliates, Relationships to Seller.......................... 26 (a) Contracts With Affiliates.............................. 26 (b) No Adverse Interests................................... 26 (c) Obligations............................................ 26 4.23 No Brokers or Finders........................................ 26 4.24 Disclosure................................................... 26
-ii- ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER.................. 26 5.1 Corporate.................................................... 26 5.2 Authority.................................................... 27 5.3 Consents, Approvals and Authorizations....................... 27 5.4 Violations................................................... 27 5.5 No Brokers or Finders........................................ 27 5.6 Shares Issued as Additional Payment.......................... 27 ARTICLE 6 COVENANTS OF SELLER AND THE SHAREHOLDERS..................... 28 6.1 Access to Information and Records............................ 28 6.2 Conduct of Business Pending the Closing...................... 28 (a) No Changes............................................. 28 (b) Maintain Organization.................................. 28 (c) No Breach.............................................. 29 (d) No Material Contracts.................................. 29 (e) Material Transactions.................................. 29 (f) No Corporate Changes................................... 30 (g) Maintenance of Insurance............................... 30 (h) Maintenance of Property................................ 30 (i) Interim Financials.. .................................. 30 6.3 No Negotiations.............................................. 31 6.4 Consents..................................................... 31 6.5 Other Action................................................. 31 6.6 Disclosure Schedule.......................................... 31 6.7 Confidentiality.............................................. 31 (a) Covenant............................................... 31 (b) Employees.............................................. 32 (c) Equitable Relief for Violations........................ 32 6.8 Insurance.................................................... 32 6.9 Use of Seller's Names........................................ 34 6.10 Sales Tax.................................................... 34 6.11 Employee Matters............................................. 34 6.12 Unemployment Compensation.................................... 34 6.13 Expenses..................................................... 34 6.14 Noncompetition Agreements.................................... 34 ARTICLE 7 COVENANTS OF PURCHASER....................................... 34 7.1 Conditions................................................... 34 7.2 Employees.................................................... 35 7.3 Insurance.................................................... 35 7.4 Reservation of Stock Options................................. 35 7.5 Maintain Records............................................. 35 7.6 Personal Guaranties.......................................... 35 7.7 Separate Accounting.......................................... 35 7.8 Equivalent Compensation...................................... 36 ARTICLE 8 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS.............. 36 8.1 Representations and Warranties True as of the Closing Date................................................. 36 8.2 Compliance With Agreement.................................... 36 8.3 Absence of Suit.............................................. 36 8.4 Consents and Approvals....................................... 37 8.5 Section 1445 Affidavit....................................... 37
-iii- 8.6 Lease........................................................ 37 8.7 Insurance.................................................... 37 8.8 Initial Public Offering of Purchaser......................... 37 ARTICLE 9 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER AND THE SHAREHOLDERS............................................. 37 9.1 Representations and Warranties True on the Closing Date...... 37 9.2 Compliance With Agreement.................................... 37 9.3 Absence of Suit.............................................. 37 9.4 Initial Public Offering of Purchaser......................... 38 9.5 Leases....................................................... 38 ARTICLE 10 SURVIVAL AND EFFECT OF WARRANTIES, REPRESENTATIONS AND COVENANTS................................................ 38 10.1 Integration.................................................. 38 ARTICLE 11 INDEMNIFICATION.............................................. 38 11.1 By Seller and the Shareholders............................... 38 11.2 By Purchaser................................................. 39 11.3 Indemnification of Third-Party Claims........................ 39 (a) Notice and Defense..................................... 39 (b) Failure to Defend...................................... 39 (c) Indemnified Party's Rights............................. 40 11.4 Payment...................................................... 40 11.5 Limitations on Indemnification............................... 40 11.6 No Waiver.................................................... 41 11.7 Exclusivity.................................................. 41 ARTICLE 12 CLOSING...................................................... 42 12.1 Closing...................................................... 42 12.2 Documents to be Delivered by Seller.......................... 42 (a) Bills of Sale.......................................... 42 (b) Compliance Certificates................................ 42 (c) Certified Resolutions.................................. 42 (d) Shareholder Releases................................... 43 (e) Other Documents........................................ 43 12.3 Documents to be Delivered by Purchaser....................... 43 (a) Purchase Note.......................................... 43 (b) Assumption of Liabilities.............................. 43 (c) Compliance Certificate................................. 43 (d) Certified Resolutions.................................. 43 (e) Other Documents........................................ 43 ARTICLE 13 TERMINATION.................................................. 44 13.1 Termination.................................................. 44 13.2 Effect of Termination........................................ 44 ARTICLE 14 MISCELLANEOUS................................................ 44 14.1 Further Assurance............................................ 44 14.2 Parties in Interest.......................................... 45 14.3 Law Governing Agreement...................................... 45 14.4 Notice....................................................... 45
-iv- 14.5 Amendment and Modification................................... 46 14.6 Announcements................................................ 46 14.7 Expenses..................................................... 46 (a) Brokerage.............................................. 46 (b) Transfer Taxes......................................... 47 (c) Expenses............................................... 47 (d) Costs of Litigation.................................... 47 14.8 Entire Agreement............................................. 47 14.9 Counterparts................................................. 47 14.10 Headings..................................................... 47 14.11 Further Documents............................................ 47 14.12 Severability................................................. 47 14.13 No Third Party Beneficiaries................................. 48 14.14 Cumulative Effect of Representations......................... 48 14.15 Risk of Loss................................................. 48
-v- ASSET PURCHASE AGREEMENT ------------------------ This ASSET PURCHASE AGREEMENT ("Agreement") dated as of April 9, 1999 by --------- and among THE KEITH COMPANIES, INC., a California corporation ("Purchaser") and --------- THOMPSON-HYSELL, INC., a California corporation ("Seller"), and the shareholders ------ identified on the signature page below (collectively, the "Shareholders"). ------------ Seller is in the business of providing engineering, surveying, mapping and Construction Management Services (the "Business") from its facilities located at -------- 1016 12th Street, Modesto, California 95354 and 2496 West 4700 South, Taylorsville, Utah 84118 (collectively, the "Facilities"). ---------- Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, the Business and substantially all the assets of Seller upon the terms and subject to the conditions set forth herein. Accordingly, Seller and Purchaser hereby agree as follows: ARTICLE 1 PURCHASE AND SALE OF ASSETS --------------------------- 1.1 Assets to be Transferred. Except as hereinafter provided, on the ------------------------ Closing Date (as hereinafter defined), Seller will sell, transfer and deliver to Purchaser, and Purchaser will purchase and accept from Seller, all the Seller's right, title and interest in and to the properties, assets and rights of every kind and description whatsoever, whether personal, tangible, intangible or mixed, whether accrued, contingent or otherwise useful for or otherwise used in connection with the Business (other than the Excluded Assets (as defined below)), including all assets and rights that may have been acquired by Seller for use in the Business between the date hereof and the Closing Date, and including those assets useful for or otherwise used by the Business that are owned or in the possession of some person other than Seller (collectively, the "Purchased Assets"). The Purchased Assets include, without limitation, all of - ----------------- those items in the following categories useful in the Business, but shall not include the Excluded Assets: (a) all inventories, accounts and notes receivable, costs in excess of billings, deferred charges (excluding prepaid income taxes, if any), deposits, advance payments and prepaid items; (b) all tangible property, real and personal, equipment and leasehold improvements owned or leased by Seller, which are used or intended for use in connection with the Business, including that listed on Exhibit 1.1(b) -------------- attached hereto; (c) all contracts, including purchase orders and sales contracts, and all backlog and work in progress, leases and -1- agreements, including those listed on Exhibit 1.1(c) attached hereto; -------------- (d) all licenses, easements, rights of entry and similar rights of Seller, including those listed in Exhibit 1.1(d) attached hereto; -------------- (e) all patents, trademarks, trade names, inventions, copyrights, trade secrets and other proprietary rights and items of intellectual property of Seller relating to the Business or operations and all pending applications therefor, including those listed Exhibit 1.1(e) attached -------------- hereto; (f) All United States, state and foreign trademark rights, trademark registrations and applications, trade names, service marks and brand names, including all claims for infringement, and all registrations therefor and all goodwill associated with the foregoing accruing from the dates of first use thereof, of Seller; all United States and foreign copyrights, copyright registrations and copyright applications, including all claims for infringement, and all other rights associated with the foregoing and the underlying works of authorship, of Seller; all United States and foreign patents and patent applications, including all claims for infringement and all international proprietary rights associated therewith, of Seller; all contracts or agreements granting Seller any right, title, license or privilege under the intellectual property rights or any third party; all inventions, mask work and mark work registrations, know-how and related show-how discoveries, improvements, blueprints, specifications, drawings, designs, trade secrets, shop and royalty rights, processes, employee covenants and agreements respecting intellectual property and noncompetition and all other types of intellectual property of Seller; all rights and interest of Seller in the names "Thompson-Hysell," "Thompson- Hysell Engineering," "Thompson-Hysell, Inc.," "Thompson-Hysell Enterprises," and any other names as have been as used in connection with the Business, and any names and logos associated with any such names; (g) all known and unknown, liquidated or unliquidated, contingent or fixed, claims, rights or causes of action which Seller has or may have against any third party and all such rights which Seller has or may have in or to any asset or property other than such claims, rights or causes of action to the extent that they arise out of or directly relate to any asset not purchased by, or any liability, obligation or claim specifically not assumed by Purchaser pursuant to this Agreement; (h) all insurance policies relating to the Purchased Assets; (i) all governmental and business permits, licenses, authorizations and manufacturing association certifications -2- owned or held by Seller, including those set forth in Exhibit 1.1(f) -------------- attached hereto; (j) Originals or copies of all books and records (other than personnel records and other than those referred to in Section 1.2(b)) and -------------- all files, including without limitation, documents, papers, agreements, drawings, designs, plans, methods, engineering and manufacturing specifications, formulas, procedures, computer programs and customer lists which are useful in the Business, but excluding those related exclusively to the Excluded Assets; and (k) all claims or rights of Seller to receive refunds or credits with respect to federal, state, local and foreign franchise taxes and taxes based on income for the current or prior years which were treated as assets on the balance sheet included in the Recent GAAP Financial Statements (as hereinafter defined). 1.2 Excluded Assets. The following shall be retained by Seller and --------------- excluded from the Purchased Assets (the "Excluded Assets"): --------------- (a) Consideration. The consideration delivered by Purchaser to ------------- Seller pursuant to this Agreement; (b) Corporate Franchise. Seller's franchise to be a corporation ------------------- (except its continued use of the names described in Section 1.1(f) above), -------------- its article of incorporation, corporate seal, stock books, minutes books and other corporate records having exclusively to do with the corporate organization and capitalization of Seller; (c) Tax Matters. All claims or rights of Seller to receive funds or ----------- credits with respect to federal, state, local and foreign franchise taxes and taxes based on income for the current or prior years which were not treated as assets on the balance sheet included in the Recent GAAP Financial Statements; (d) Agreement. Rights and/or claims of Seller arising out of this --------- Agreement and any other agreement with Purchaser; and (e) Other Rights. All contracts, leases and agreements listed on ------------ Exhibit 1.2(e) attached hereto. -------------- ARTICLE 2 LIABILITIES ----------- 2.1 Excluded Liabilities. Except as set forth in Section 2.2, in -------------------- ----------- Schedule 4.9, or (except as indicated on Schedule 2.1) as accrued on the Recent - ------------ ------------ GAAP Financial Statements (as defined in Section 4.4), Purchaser does not ----------- assume, agree to -3- perform or discharge or otherwise have any liability or obligation with respect to any of the following liabilities, debts, contracts or obligations of Seller, and Seller shall remain solely responsible for satisfying, discharging or performing all of the following liabilities, debts, contracts and obligations on a timely basis in accordance with their respective terms (the following liabilities, debts, contracts and obligations of Seller are hereinafter referred to as the "Excluded Liabilities") any of Seller's or its officers', directors', -------------------- or shareholders' liabilities or obligations for any breach or failure to perform any of their duties (including fiduciary duties such as the duty of loyalty and the duty of good faith and fair dealing), covenants, obligations and agreements (i) contained in, or made pursuant to, this Agreement or (ii) resulting from claims made by anyone with respect to the consideration payable by Purchaser to Seller and the Shareholders or the transactions contemplated by this Agreement. 2.2 Assumed Liabilities. At the Closing, and without limiting ------------------- Purchaser's right to indemnification pursuant to Article 11, and except as ---------- indicated on Schedule 2.1, Purchaser shall assume only the following specific ------------ liabilities and obligations of Seller to the extent they are unpaid, undelivered or unperformed on the Closing Date (collectively, the "Assumed Liabilities"): ------------------- (a) Except as indicated on Schedule 2.1, all liabilities of Seller of ------------ the nature reflected or reserved against on the Recent GAAP Financial Statement, but not in excess of (i) the amount of such liabilities set forth on the Recent GAAP Financial Statements (ii) as reduced by liabilities paid or discharged after the Balance Sheet Date (as hereinafter defined) and (iii) as increased by liabilities incurred after the Balance Sheet Date in the ordinary course of business and in compliance with the representations, warranties and covenants contained in this Agreement, including, without limitation: (A) trade accounts payable; and (B) accrued expenses, salaries and wages, vacation pay, payroll taxes, insurance, real estate taxes, personal property taxes, sales and excise taxes, and other expenses; (b) Seller's obligations to perform after the Closing under all contracts, contractual rights, purchase orders, sales orders, leases, loan agreements and promissory notes ("Contracts"). --------- (c) Any and all tax liabilities of Seller arising prior to the Closing or arising subsequent thereto as a result of events or conditions which existed prior to the Closing; and (d) Any and all liabilities of any kind whatsoever, whether disclosed or undisclosed, contingent or accrued. 2.3 No Assignment Causing Breach. The consummation of the transactions ---------------------------- contemplated by this Agreement shall not constitute an assignment of any lease, contract, agreement or license or any -4- claim or right or any benefit arising thereunder or resulting therefrom if an attempted assignment thereof without the consent of any party thereto (other than Seller, or the shareholders) would constitute a breach thereof or in any way adversely affect the rights to be assigned. Until such consent is obtained, or if an attempted assignment thereof would be ineffective or would affect the rights of Seller, as the case may be, thereunder so that Purchaser would not in fact receive all such rights, Seller as the case may be, and Purchaser will cooperate with each other to provide for Purchaser the benefits of, and (so long as Purchaser receives such benefits) to permit Purchaser to assume all liabilities under, any such claim, contract, license, lease, commitment, sales order or purchase order, including enforcement at the request and expense of Purchaser, and Purchaser and for the benefit of Purchaser, of any and all rights of Seller, as the case may be, against a third party thereto arising out of the breach or cancellation thereof by such third party or otherwise; and, any transfer or assignment to Purchaser by Seller, as the case may be, of any property or property rights or any lease, license, contract or agreement which shall require the consent or approval of any third party shall be subject to such consent or approval being obtained. ARTICLE 3 PURCHASE PRICE -------------- 3.1 Purchase Price. The aggregate purchase price for the Purchased -------------- Assets of Seller (the "Purchase Price") shall be the sum of the following: (a) -------------- Three Million Three Hundred Thirty Three Thousand Three Hundred and Thirty Three Dollars ($3,333,333) (the "Seller Cash Amount"), (b) the Book Value Adjustment ------------------ (defined below) as described in Section 3.2 below, (c) a Promissory Note with ----------- the original principal amount of One Million Three Hundred Thirty-Three Thousand Three Hundred and Thirty-Three Dollars ($1,333,333), subject to adjustment as provided in Section 3.4 below (the "Purchase Note"), (d) the assumption of the ----------- ------------- Assumed Liabilities of Seller, (e) the Additional Payment under the circumstances provided in Section 3.5 hereof, and (f) the payment described in ----------- Section 3.3. - ----------- 3.2 Book Value Adjustment. Purchaser shall pay to Seller an amount, if --------------------- any (the "Closing Balance Sheet Payment"), equal to the Book Value Adjustment ----------------------------- (defined below). The "Book Value Adjustment" shall mean an amount equal to --------------------- $1.00 multiplied by the difference between, on the one hand, $1,000,000, and on the other hand, the Net Book Value indicated on a balance sheet (the "Closing ------- Balance Sheet") prepared and delivered by Purchaser to Seller within one hundred - ------------- and thirty five (135) days following the Closing Date (or the soonest practicable date thereafter if the delay results from inadequacies in Seller's records or accounting systems) by recording the Purchased Assets (excluding intangible assets) and the Assumed Liabilities, and otherwise in accordance with Generally Accepted Accounting Principles as consistently applied using the same methodology as the Recent GAAP Financial Statements (defined -5- below), including the standards expressed in Statement of Position 81-1 (all of the foregoing are collectively referred to herein as "GAAP"); provided, however ---- that in no event shall the amount of the Book Value Adjustment exceed $500,000. If Purchaser does not deliver the Closing Balance Sheet within the time frame set forth above, the Book Value Adjustment shall be deemed to be $500,000. If the Book Value adjustment is negative, then it shall reduce the principal amount of the Purchase Note effective as of the date of issuance thereof. If the Book Value Adjustment is positive, Purchaser shall pay it in accordance with Section ------- 3.6(c). If Seller and the Shareholders do not agree upon the Closing Balance - ------ Sheet within five (5) business days of receipt of the Closing Balance Sheet from Purchaser and so notify Purchaser, then Purchaser's independent accounting firm shall select a firm of regionally recognized certified public accountants to resolve any disputed items on the Closing Balance Sheet which resolution shall be conclusive upon all parties. If Seller and the Shareholders do not object to the Closing Balance Sheet within such five (5) business day period, then it shall be deemed accepted. Said firm shall be required to apply "GAAP" as defined herein. Purchaser and Seller shall each pay one half of the expense of such firm of regionally recognized certified public accountants. 3.3 Purchase Price Adjustment. Purchaser shall pay to Seller an amount ------------------------- equal to the difference between an estimate of the net proceeds after income tax to the Seller and the Shareholders resulting from the transactions contemplated hereby and an estimate of the net proceeds after income tax to the Sellers and the Shareholders if Purchaser had instead purchased all of the outstanding common stock of Seller, including, without limitation, all of Seller's California state income tax liability for the period from January 1, 1999 through the Closing. Such difference shall be calculated without regard to any income tax liability attributable to Internal Revenue Code Section 1374 (built in gains), and shall otherwise be calculated pursuant to the formula attached as Exhibit 3.3, which formula shall be applied (i) regardless of the actual income - ----------- tax liability of Seller and the Shareholders as a result of the transactions contemplated hereby, (ii) giving effect to the impact of the 1.5% California income tax on the taxable net income of S corporations as affected by the adjustments, if any, to the Purchase Price as a result of 1999 EBIT or 2000 EBIT (as defined below), (iii) based solely upon the Closing Balance Sheet (except to the extent that a final determination of the allocation of the Purchase Price results in the assessment of a greater income tax to Seller and the Shareholders). The parties shall use all commercially reasonable efforts to support the allocation set forth in Section 3.7 and to mitigate the income tax ----------- liability with respect to the transactions contemplated hereby. This Purchase Price Adjustment shall be payable by Purchaser pursuant to Section 3.6(c). -------------- 3.4 Terms of Promissory Note. The Purchase Note shall bear interest at ------------------------ the rate of ten percent (10%) per annum, simple interest payable January 1, April 1, July 1, and November 1 and shall be subject to adjustment as provided below. The principal -6- amount of the Purchase Note shall be increased or reduced $67.00 for every $100.00 by which 2000 EBIT (as defined below) exceeds or is less than, respectively, $2,160,000. For purposes of this Agreement, "EBIT" shall mean the ---- earnings of the Business calculated in accordance with GAAP, before subtracting interest expense or income tax expense and shall not include an amount for General and Administrative Expenses (or an allocation related thereto) greater than the amount indicated on the Recent GAAP Financial Statements adjusted annually for any increases in the Consumer Price Index most closely associated with the San Francisco metropolitan area. "2000 EBIT" shall mean the EBIT for --------- the year ended December 31, 2000, adjusted as follows: If the EBIT for the year ended December 31, 2000 is less than $2,160,000, then the amount of EBIT for the year ended December 31, 1998 in excess of $1,500,000 shall be added to the EBIT for the year ended December 31, 2000; provided however, that such excess amount so added cannot either (i) exceed $500,000 or (ii) exceed an amount which will cause the sum of the actual EBIT for the year ended December 31, 2000 and the amount so added to exceed $2,160,000. All accrued but unpaid interest and all principal (as adjusted hereby) shall be paid within ten (10) days of the date Purchaser's Form 10-K for the year ended December 31, 2000 must be filed with the United States Securities and Exchange Commission (or would have had to have been filed, in the event Purchaser is not a registrant pursuant to the Securities Exchange Act of 1934). If the principal amount of the Purchase Note is decreased because the Book Value Adjustment is a negative number or because of the adjustment specified in the second sentence of this Section 3.4, the ----------- interest otherwise payable on the Purchase Note shall be reduced as though such principal amount were reduced as of the issuance of the Purchase Note and all interest paid in excess of what would have otherwise been required shall reduce the amount of principal payable at the maturity of the Purchase Note. 3.5 Additional Payment. Within ten (10) days of the date Purchaser's ------------------ Form 10-K for the year ended December 31, 1999 must be filed with the United States Securities and Exchange Commission (or would have had to have been filed, in the event Purchaser is not a registrant pursuant to the Securities Exchange Act of 1934), Purchaser shall transfer that number of shares (rounded to the nearest whole share) of Purchaser's common stock (the "Additional Payment") ------------------ equal to the Earnout Amount (as defined below) divided by the price at which such stock was sold to the public upon the Purchaser's initial public offering. The "Earnout Amount" shall mean $1,333,334 increased or reduced $67.00 for every -------------- $100.00 by which 1999 EBIT (as defined below) exceeds or is less than, respectively, $1,800,000. "1999 EBIT" shall mean EBIT for the year ended --------- December 31, 1999. The Additional Payment shall have certain rights and restrictions, which such rights and restrictions shall be set forth in detail in that certain Registration Rights Agreement, substantially in the form of Exhibit ------- 3.5 attached hereto. - --- 3.6 Payment of Purchase Price. Purchaser will pay Seller the Purchase ------------------------- Price as follows: -7- (a) At the Closing, Purchaser shall deliver to Seller such documents and instruments as are reasonably required to evidence the assumption of the Assumed Liabilities of Seller; (b) At the Closing, Purchaser shall deliver the Seller Cash Amount to Seller by certified or bank cashier's check payable to Seller, or, at Purchaser's option, a wire transfer of immediately available funds to an account designated by Seller not less than 48 hours prior to Closing. (c) Within ten (10) business days of the date upon which the Closing Balance Sheet is final, Purchaser shall deliver the amount specified in Section 3.3 and the Book Value Adjustment, if any, to Seller by certified ----------- or bank cashier's check payable to Seller, or, at Purchaser's option, a wire transfer of immediately available funds to an account designated by Seller not less than 48 hours prior to the time for payment thereof; (d) At the Closing, the Purchase Note; and (e) At the time indicated in Section 3.5, the Additional Payment. ----------- 3.7 Allocation of Purchase Price. The Purchase Price and Assumed ---------------------------- Liabilities shall be allocated: (a) To the Purchased Assets at the amount at which such assets are recorded on the Closing Balance Sheet; (b) To goodwill, the remainder of the Purchase Price and Assumed Liabilities. The parties will follow and use such allocation in all income, sales, registration and other tax returns, filings or other related reports made by them to any governmental agencies. To the extent that disclosures of this allocation are required to be made by the parties to the Internal Revenue Service ("IRS") under the provisions of Section 1060 of the Internal Revenue --- Code of 1986, as amended (the "Code"), or any regulations thereunder, Seller and ---- Purchaser shall disclose such reports to the other prior to filing with the IRS. ARTICLE 4 REPRESENTATIONS AND WARRANTIES - ------------------------------ OF SELLER AND THE SHAREHOLDERS - ------------------------------ Seller, and the Shareholders, jointly and severally, make the following representations and warranties to Purchaser, each of which is true and correct on the date hereof and shall be unaffected by any investigation heretofore or hereafter made by Purchaser or any knowledge of Purchaser other than as set forth in the Disclosure Schedule referred to below. The representations and warranties of Seller and Shareholders are subject to, and qualified -8- by, any fact or facts disclosed in the relevant section of the attached Disclosure Schedule prepared and executed by Seller and Shareholders and delivered to Purchaser on the date of this Agreement (the "Disclosure ---------- Schedule"), provided that each representation and warranty is subject to and - -------- qualified by only such matters as are (i) set forth in that section of the Disclosure Schedule that corresponds to the representation and warranty or (ii) otherwise set forth in the Disclosure Schedule in a manner such that their relationship to any representation or warranty is readily apparent. An item contained in the Disclosure Schedule, or any part thereof, shall be specifically referenced to the section or sections of this Article to which such item relates. The Disclosure Schedule shall not vary, change or alter the language of the representations and warranties contained in this Agreement. 4.1 Corporate. --------- (a) Organization. Seller is a corporation duly organized, validly ------------ existing and in good standing under the laws of the State of California. (b) Corporate Power. Seller has all requisite corporate power and --------------- authority to own, operate and lease its properties and to carry on its business as and where such is now being conducted. (c) Qualification. Seller is duly licensed or qualified to do ------------- business as a foreign corporation, and is in good standing, in each jurisdiction wherein the character of the properties owned or leased by it, or the nature of its business, makes such licensing or qualification necessary except where the cumulative effect of all failures to be so qualified would not have a material adverse effect on the Business. The states in which Seller is licensed or qualified to do business are listed in Schedule 4.1(c). --------------- (d) Subsidiaries. Seller does not own any interest in any ------------ corporation, partnership or other entity. (e) Corporate Documents, etc. The copies of the Articles of ------------------------- Incorporation and Bylaws of the Seller, including any amendments thereto, which have been delivered by Shareholders to Purchaser are true, correct and complete copies of such instruments as presently in effect. The corporate minute book and stock records of the Seller which have been furnished to Purchaser for inspection are true, correct and complete and accurately reflect all material corporate action taken by the Seller. The directors and officers of the Seller are listed in Schedule 4.1(e). --------------- (f) Capitalization of the Seller. The authorized capital stock of ---------------------------- the Seller is as set forth on Schedule 4.1(f). No shares of such capital --------------- stock are issued or outstanding except for shares of common stock of the Seller which are owned of record and beneficially by Shareholders in -9- the respective numbers set forth in Schedule 4.1(f). All such shares of --------------- capital stock of the Seller are validly issued, fully paid and nonassessable. Except as set forth on Schedule 4.1(f), there are no (a) --------------- securities convertible into or exchangeable for any of the Seller's capital stock or other securities, (b) options, warrants or other rights to purchase or subscribe to capital stock or other securities of the Seller or securities which are convertible into or exchangeable for capital stock or other securities of the Seller, or (c) contracts, commitments, agreements, understandings or arrangements of any kind relating to the issuance, sale or transfer of any capital stock or other equity securities of the Seller, any such convertible or exchangeable securities or any such options, warrants or other rights. 4.2 Authorization; Validity. ----------------------- (a) The execution and delivery of this Agreement and the other agreements, documents and instruments to be executed and delivered by Seller and the Shareholders pursuant hereto (the "Ancillary Instruments") --------------------- and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the board of directors of Seller, and by every shareholder of Seller. No other or further corporate act or proceeding on the part of Seller is necessary to authorize this Agreement or the Ancillary Instruments to be executed and delivered by Seller or the Shareholders pursuant hereto or the consummation of the transactions contemplated hereby and thereby. (b) Each of Seller and all of the Shareholders has full power, legal right and authority to enter into, execute and deliver this Agreement and the Ancillary Instruments contemplated hereby and to carry out the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by each of Seller and all of the Shareholders and is, and when executed and delivered each of the Ancillary Instruments to be executed and delivered by any or all of them pursuant hereto will be, the legal, valid and binding obligation of each of them enforceable in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application affecting the enforcement of creditors rights and to the availability of equitable remedies. 4.3 No Violation. Except as set forth on Schedule 4.3, neither the ------------ ------------ execution and delivery of this Agreement or the Ancillary Instruments nor the consummation by Seller and Shareholders of the transactions contemplated hereby and thereby (a) will violate any statute or law or any rule, regulation, order, writ, injunction or decree of any court or governmental authority, (b) will require any authorization, consent, approval, exemption or other action by or notice to any court, administrative or governmental agency, instrumentality, commission, authority, board -10- or body (including, without limitation, under any "plant-closing" or similar ------------- law), or (c) subject to obtaining the consents referred to in Schedule 4.3, will ------------ violate or conflict with, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or will result in the termination of, or accelerate the performance required by, or result in the creation of any Lien (as defined in Section 4.12) upon any of the ------------ assets of Seller under any term or provision of the Articles of Incorporation or Bylaws of Seller or of any contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which Seller or any Shareholder is a party or by which Seller or any Shareholder or any of its or their assets or properties may be bound or affected except where the cumulative effect of any such violations, lack of consents or creation of Liens would not have a material adverse effect on the Business. 4.4 Financial Statements. Included as Schedule 4.4 are true and complete -------------------- ------------ copies of (i) the financial statements of Seller identified on Schedule 4.4, and ------------ (ii) a balance sheet (the "Recent Balance Sheet") of Seller as of December 31, -------------------- 1998 (the "Balance Sheet Date") and the related statements of income and cash ------------------ flows for the months then ended and for the corresponding period of the prior year (including the notes and schedules contained therein or annexed thereto) (the "Recent GAAP Financial Statements"). The Recent GAAP Recent Statements -------------------------------- have been prepared in accordance with the books and records of Seller, and fairly present, the assets, liabilities and financial position, the results of operations and cash flows of the Seller as of the date indicated and for the periods indicated. All of such financial statements (including all notes and schedules contained therein or annexed thereto) are true, complete and accurate. 4.5 Tax Matters. Seller does not have liability, fixed or contingent, ----------- for any unpaid federal, state or local taxes or other governmental or regulatory charges whatsoever (including without limitation withholding and payroll taxes), other than for taxes not yet due and payable, which could result in a lien on the Purchased Assets or the Business after conveyance thereof to Purchaser or in any other form of transferee liability to Purchaser. 4.6 Accounts Receivable and Costs in Excess of Billings. Except as --------------------------------------------------- disclosed in Schedule 4.6, all accounts receivable of Seller reflected on the ------------ Recent Balance Sheet, and as incurred in the normal course of business since the date thereof, represent arm's length sales actually made in the ordinary course of business; are collectible (net of the reserve shown on the Recent Balance Sheet for doubtful accounts) in the ordinary course of business without the necessity of commencing legal proceedings; are subject to no counterclaim or setoff; and are not in dispute. Schedule 4.6 contains an aged schedule of ------------ accounts receivable included in the Recent Balance Sheet. The entire amount shown on the Recent Balance Sheet as "Costs in Excess of Billings" represents costs incurred by Seller which is, or will become billable, and when billed, will be collectible in the ordinary course of business without the necessity of commencing legal -11- proceedings; is subject to no counterclaim or setoff; and is not in dispute. 4.7 Work-in-Process. Except as disclosed in Schedule 4.7, (i) all work- --------------- ------------ in-process and contracts underway ("Work-In-Process") constitute work performed --------------- pursuant to contracts or sales orders taken in the ordinary course of business, from regular customers of Seller with no recent history of credit problems with respect to Seller; (ii) neither Seller nor, to the knowledge of the Seller and the Shareholders, any such customer is in material breach of the terms of any obligation to the other, and, to the knowledge of the Seller and the Shareholders, no valid grounds exist for any set-off of amounts billable to such customers on the completion of orders to which Work-In-Process relates; (iii) all Work-In-Process is of a quality ordinarily produced in accordance with the requirements of the orders to which such Work-In-Process is identified, and will require no rework with respect to services performed prior to Closing; (iv) all Work-In-Process is being conducted pursuant to contracts, orders and change orders issued within the terms of the relationship pursuant to which such Work- In-Process is being conducted; and (v) all Work-In-Process set forth on Schedule -------- 4.7 (which as of the date hereof reflects Work-In-Process as of the Balance - --- Sheet Date and, subsequent to the Closing Date, shall be updated to include the schedules supporting the Recent GAAP Financial Statements) are estimates only and could be completed if managed consistently with the past practices of the Seller without adversely effecting, in the aggregate when complete, the profitability of the Seller compared to previous periods; provided, however, that the Seller and the Shareholders make no representations and warranties concerning whether any customer will cancel any contract otherwise in accordance with its terms. 4.8 Absence of Certain Changes. Except as and to the extent set forth in -------------------------- Schedule 4.8, since the date of the Recent GAAP Financial Statements there has - ------------ not been: (a) No Adverse Change. Any adverse change in the financial ----------------- condition, assets, liabilities, business, prospects or operations of Seller; (b) No Damage. Any material loss, damage or destruction, whether --------- covered by insurance or not, affecting Seller's business or properties; (c) No Increase in Compensation. Any material increase in the --------------------------- compensation, salaries or wages payable or to become payable to any employee or agent of Seller (including, without limitation, any increase or change pursuant to any bonus, pension, profit sharing, retirement or other plan or commitment), or any bonus or other employee benefit granted, made or accrued other than in the ordinary course of business; (d) No Labor Disputes. Any labor dispute, disturbance or organizing ----------------- activity, other than routine individual -12- grievances which are not material to the business, financial condition or results of operations of Seller; (e) No Commitments. Any commitment or transaction by Seller -------------- (including, without limitation, any borrowing or capital expenditure) other than in the ordinary course of business consistent with past practice; (f) No Dividends. Except to the extent necessary to enable the ------------ Shareholders to pay income taxes attributable to them from Seller for 1998 and the period beginning January 1, 1999 through the Closing, any declaration, setting aside, or payment of any dividend or any other distribution in respect of Seller's capital stock; any redemption, purchase or other acquisition by Seller of any capital stock of Seller, or any security relating thereto; or any other payment to any shareholder of Seller as such a shareholder; (g) No Disposition of Property. Any sale, lease or other transfer -------------------------- or disposition of any properties or assets of Seller, except for the sale of inventory items in the ordinary course of business; (h) No Indebtedness. Any indebtedness for borrowed money incurred, --------------- assumed or guaranteed by Seller; (i) No Liens. Any mortgage, pledge, lien or encumbrance made on any -------- of the properties or assets of Seller; (j) No Amendment of Contracts. Any entering into, amendment or ------------------------- termination by Seller of any contract, or any waiver of material rights thereunder, other than in the ordinary course of business; (k) Loans and Advances. Any loan or advance (other than advances to ------------------ employees in the ordinary course of business for travel and entertainment in accordance with past practice) to or from any person including, but not limited to, any Affiliate (for purposes of this Agreement, the term "Affiliate" shall mean and include all Shareholders, directors and officers ---------- of Seller; the spouse of any such person; any person who would be the heir or descendant of any such person if he or she were not living; and any entity in which any of the foregoing has a direct or indirect interest, except through ownership of less than 5% of the outstanding shares of any entity whose securities are listed on a national securities exchange or traded in the national over-the-counter market); (l) Credit. Any grant of credit to any customer or distributor on ------ terms or in amounts more favorable than those which have been extended to such customer or distributor in the past, any other change in the terms of any credit heretofore extended, or any other change of Seller's policies or practices with respect to the granting of credit; or -13- (m) No Unusual Events. Any other event or condition not in the ----------------- ordinary course of business of Seller. 4.9 Absence of Undisclosed Liabilities. Except as and to the extent ---------------------------------- specifically disclosed in the Recent GAAP Financial Statements, in Schedule 4.9, ------------ or otherwise not required to be disclosed pursuant to the terms of this Agreement, the Shareholders have no actual knowledge that the Seller has any liabilities, commitments or obligations (secured or unsecured, and whether accrued, absolute, contingent, direct, indirect or otherwise), other than commercial liabilities and obligations incurred since the date of the Recent GAAP Financial Statements in the ordinary course of business and consistent with past practice and none of which has or will have a material adverse effect on the business, financial condition or results of operations of Seller. Except as and to the extent described in the Recent GAAP Financial Statements or in Schedule 4.9, neither Seller nor any Shareholder has actual knowledge of any - ------------ basis for the assertion against Seller of any liability or of any circumstances, conditions, happenings, events or arrangements, contractual or otherwise, which may give rise to liabilities, except commercial liabilities and obligations incurred in the ordinary course of Seller's business and consistent with past practice. 4.10 No Litigation. Except as set forth in Schedule 4.10 there is no ------------- ------------- action, suit, arbitration proceeding, investigation or inquiry pending or threatened against Seller, its directors (in such capacity), the Business or any of its assets, nor does Seller or any Shareholder know, or have grounds to know, of any basis for any such proceedings, investigations or inquiries. Schedule -------- 4.10 also identifies all such actions, suits, proceedings, investigations and - ---- inquiries to which Seller or any of its directors have been parties within the last three (3) years. Except as set forth in Schedule 4.10, neither Seller nor ------------- its business or assets is subject to any judgment, order, writ or injunction of any court, arbitrator or federal, state, foreign, municipal or other governmental department, commission, board, bureau, agency or instrumentality. 4.11 Compliance With Laws. -------------------- (a) Compliance. Except as set forth in Schedule 4.11(a), or where ---------- ---------------- the cumulative effect of failures to be in compliance would not have a material adverse effect on the Business, the Shareholders have no actual knowledge that the Seller (including each and all of its operations, practices, properties and assets) is not in compliance with all applicable federal, state, local and foreign laws, ordinances, orders, rules and regulations (collectively, "Laws"), including without limitation, those ---- applicable to discrimination in employment, occupational safety and health, trade practices, competition and pricing, product warranties, zoning, building and sanitation, employment, retirement and labor relations, product advertising and laws relating to pollution or protection of the environment, including Laws -14- relating to emissions, discharges, generation, storage, releases or threatened releases of pollutants, contaminants, chemicals or industrial, toxic, hazardous or petroleum or petroleum-based substances or wastes into the environment ("Environmental Laws"). Except as set forth in Schedule ------------------ -------- 4.11(a), Seller has not received notice of any violation or alleged ------- violation of, and is subject to no liability (whether accrued, absolute, contingent, direct or indirect) for past or continuing violation of, any Laws. The Shareholders have no actual knowledge of any reports and returns (i) required to be filed by Seller with any governmental authority not having been filed, and (ii) being other than accurate and complete when filed. (b) Licenses and Permits. Seller has all licenses, permits, -------------------- approvals, authorizations and consents of all governmental and regulatory authorities and all certification organizations required for the conduct of the business (as presently conducted and as proposed to be conducted) and operation of the Facilities. All such licenses, permits, approvals, authorizations and consents are described in Schedule 4.11(b), are in full ---------------- force and effect and will not be affected or made subject to loss, limitation or any obligation to reapply as a result of the transactions contemplated hereby. Except as set forth in Schedule 4.11(b), Seller ---------------- (including its operations, properties and assets) is and has been in material compliance with all such permits and licenses, approvals, authorizations and consents. 4.12 Title to and Condition of Properties. ------------------------------------ (a) Marketable Title. Seller has good and marketable title to all ---------------- of the assets, business and properties necessary or useful in conducting the Business, including, without limitation, all such properties (tangible and intangible) reflected in the Recent GAAP Financial Statements and all assets which are fully depreciated or used under license, including but not limited to, software, databases, reference materials and other intellectual property, in all cases free and clear of all mortgages, liens, (statutory or otherwise) security interests, claims, pledges, licenses, equities, options, conditional sales contracts, assessments, levies, easements, covenants, reservations, restrictions, rights-of-way, exceptions, limitations, charges or encumbrances of any nature whatsoever (collectively, "Liens") except those described in Schedule 4.12(a). None ----- ---------------- of the assets, business or properties necessary or useful in conducting the Business are subject to any restrictions with respect to the transferability thereof. (b) Condition. All property and assets owned or utilized by Seller --------- in conducting the Business are in good operating condition and repair, free from any defects (except such minor defects as do not interfere with the use thereof in the conduct of the normal operations of Seller), have been -15- maintained consistent with the standards generally followed in the industry and are sufficient to carry on the business of Seller as conducted during the preceding twelve (12) months. (c) Real Property. Schedule 4.12(c) sets forth all real property ------------- ---------------- owned, used or occupied by Seller (the "Real Property"), including a ------------- description of all land, and all plants, buildings or other structures located thereon. Schedule 4.12(c) also sets forth, with respect to each ---------------- parcel of Real Property which is leased, the material terms of such lease. To the best of the Shareholders' actual knowledge, all buildings, plants and other structures owned or otherwise utilized by Seller are in good condition and repair and have no structural defects or defects affecting the plumbing, electrical, sewerage, or heating, ventilating or air conditioning systems. Shareholders have no actual knowledge of any fact or condition exists which would prohibit or adversely affect the ordinary rights of use by the Seller of the Real Property. Neither Seller nor any Shareholder has notice or knowledge of any (i) planned or proposed increase in assessed valuations of any Real Property, (ii) governmental agency or court order requiring repair, alteration, or correction of any existing condition affecting any Real Property or the systems or improvements thereat, (iii) condition or defect which could give rise to an order of the sort referred to in "(ii)" above, (iv) underground storage tanks, or any structural, mechanical, or other defects of material significance affecting any Real Property or the systems or improvements thereat (including, but not limited to, inadequacy for normal use of mechanical systems or disposal or water systems at or serving the Real Property), or (v) work that has been done or labor or materials that has or have been furnished to any Real Property during the period of six (6) months immediately preceding the date of this Agreement for which liens could be filed against any of the Real Property. (d) No Condemnation or Expropriation. Neither the whole nor any -------------------------------- portion of the property or any other assets of Seller is subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor to the best of Seller's and Shareholders' knowledge has any such condemnation, expropriation or taking been proposed. 4.13 Insurance. Set forth in Schedule 4.13 is a complete and accurate --------- ------------- list and description of all policies of fire, liability, errors and omissions, workers compensation, health and other forms of insurance presently in effect with respect to the business and properties of Seller, true and correct copies of which have heretofore been delivered to Purchaser. Schedule 4.13 includes, ------------- without limitation, the carrier, the description of coverage, the limits of coverage, retention or deductible amounts, amount of annual premiums, date of expiration and the date through which -16- premiums have been paid with respect to each such policy, and any claims made within the last five (5) years. All such policies are valid, outstanding and enforceable policies and provide insurance coverage for the properties, assets and operations of Seller, of the kinds, in the amounts and against the risks customarily maintained by organizations similarly situated; and no such policy (nor any previous policy) provides for or is subject to any currently enforceable retroactive rate or premium adjustment, loss sharing arrangement or other actual or contingent liability arising wholly or partially out of events arising prior to the date hereof. Schedule 4.13 indicates each policy as to ------------- which (a) the coverage limit has been reached or (b) the total incurred losses to date equal 50% or more of the coverage limit. No notice of cancellation or termination has been received with respect to any such policy, and neither Seller nor any Shareholder has knowledge of any act or omission of Seller which could result in cancellation of any such policy prior to its scheduled expiration date. To the knowledge of Seller and the Shareholders, Seller has not been refused any insurance with respect to any aspect of the operations of the Business nor has its coverage been limited by any insurance carrier (other than the initial policy limit) to which it has applied for insurance or with which it has carried insurance during the last three (3) years. Seller has duly and timely made all claims it has been entitled to make under each policy of insurance. There is no claim by Seller pending under any such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies, and neither Seller nor any of the Shareholders knows of any basis for denial of any claim under any such policy. Seller has not received any written notice from or on behalf of any insurance carrier issuing any such policy that insurance rates therefor will hereafter be substantially increased (except to the extent that insurance rates may be increased for all similarly situated risks) or that there will hereafter be a cancellation or an increase in a deductible (or an increase in premiums in order to maintain an existing deductible) or nonrenewal of any such policy. Such policies are sufficient in all material respects for compliance by Seller with all requirements of law and with the requirements of all material contracts to which Seller is a party. 4.14 Contracts and Commitments. ------------------------- (a) Real Property Leases. Except as set forth in Schedule 4.12(c), -------------------- ---------------- Seller has no leases of real property. (b) Personal Property Leases. Except as set forth in Schedule ------------------------ -------- 4.14(b), Seller has no leases of personal property. ------- (c) Purchase Commitments. Seller has no purchase commitments for -------------------- inventory items or supplies that, together with amounts on hand, constitute in excess of two (2) months normal usage. (d) Sales Commitments. Except as set forth on Schedule 4.14(d), ----------------- ---------------- Seller has no sales contracts or commitments -17- to customers or distributors which aggregate in excess of $25,000 to any one customer or distributor (or group of affiliated customers or distributors). Seller has no sales contracts or commitments except those made in the ordinary course of business, at arm's length, and no such contracts or commitments are for a sales price which would result in a profit margin to Seller less than that reported on the Recent GAAP Financial Statements. (e) Contracts With Affiliates and Certain Others. Seller has no -------------------------------------------- agreement, understanding, contract or commitment (written or oral) with any Affiliate or any employee, agent, consultant, distributor, dealer or franchisee that is not cancelable by Seller on notice of not longer than thirty (30) days without liability, penalty or premium of any nature or kind whatsoever. (f) Powers of Attorney. Except as set forth in Schedule 4.14(f), ------------------ ---------------- the Seller has not given a power of attorney, which is currently in effect, to any person, firm or corporation for any purpose whatsoever. (g) Collective Bargaining Agreements. Except as provided in -------------------------------- Schedule 4.14(g), Seller is not a party to or in negotiations concerning ---------------- any collective bargaining agreements with any unions, guilds, shop committees or other collective bargaining groups. (h) Loan Agreements. Except as set forth in Schedule 4.14(h), --------------- ---------------- Seller is not obligated under any loan agreement, promissory note, letter of credit, or other evidence of indebtedness as a signatory, guarantor or otherwise. (i) Guarantees. Except as disclosed on Schedule 4.14(i), Seller has ---------- ---------------- not guaranteed the payment or performance of any person, firm or corporation, agreed to indemnify any person or act as a surety, or otherwise agreed to be contingently or secondarily liable for the obligations of any person. (j) Burdensome or Restrictive Agreements. Seller is not a party to ------------------------------------ nor is it bound by any agreement, deed, lease or other instrument which is so burdensome as to materially affect or impair the operation of the Business. Without limiting the generality of the foregoing, Seller is not a party to nor is it bound by any agreement requiring Seller to assign any interest in any trade secret or proprietary information, or prohibiting or restricting Seller from competing in any business or geographical area or soliciting customers or otherwise restricting it from carrying on its business anywhere in the world. (k) Other Material Contracts. Seller has no lease, contract or ------------------------ commitment of any nature involving consideration -18- or other expenditure in excess of $5,000 for the life of the contract, or involving performance over a period of more than twelve (12) months, or which is otherwise individually material to the Business, except as explicitly described in Schedule 4.14(1) or in any other Schedule. ---------------- (l) No Default. Seller is not in default under any lease, contract ---------- or commitment, nor has any event or omission occurred which through the passage of time or the giving of notice, or both, would constitute a default thereunder or cause the acceleration of any of Seller's obligations or result in the creation of any Lien on any of the assets owned, used or occupied by Seller. No third party is in default under any lease, contract or commitment to which Seller is a party, nor has any event or omission occurred which, through the passage of time or the giving of notice, or both, would constitute a default thereunder or give rise to an automatic termination, or the right of discretionary termination, thereof. 4.15 Labor Matters. Except as set forth in Schedule 4.15, within the last ------------- ------------- five (5) years Seller has not experienced any labor disputes, union organization attempts or any work stoppage due to labor disagreements in connection with its business. Except to the extent set forth in Schedule 4.15, (a) Seller is in ------------- material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice; (b) there is no unfair labor practice charge or complaint against Seller pending, or to the knowledge of Seller or the Shareholders, threatened; (c) there is no labor strike, dispute, request for representation, slowdown or stoppage actually pending, or to the knowledge of Seller or the Shareholders, threatened against or affecting Seller nor any secondary boycott with respect to products of Seller; (d) no question concerning representation has been raised or is threatened respecting the employees of Seller; (e) no grievance which might have a material adverse effect on Seller, nor any arbitration proceeding arising out of or under collective bargaining agreements, is pending and, to the knowledge of Seller or the Shareholders, no such claim therefor exists; and (f) there are no administrative charges or court complaints against Seller concerning alleged employment discrimination or other employment related matters pending or threatened before the U.S. Equal Employment Opportunity commission or any state or federal court or agency. 4.16 Employee Benefit Plans. ---------------------- (a) Disclosure. Schedule 4.16(a) sets forth all pension, thrift, ---------- ---------------- savings, profit sharing, retirement, incentive bonus or other bonus, medical, dental, life, accident insurance, benefit, employee welfare, disability, group insurance, stock purchase, stock option, stock appreciation, stock bonus, executive or deferred compensation, hospitalization and other similar fringe or employee benefit -19- plans, programs and arrangements, and any employment or consulting contracts, "golden parachutes," collective bargaining agreements, severance agreements or plans, vacation and sick leave plans, programs, arrangements and policies, including, without limitation, all "employee benefit plans" ---------------------- (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all employee manuals, and all written or ----- binding oral statements of policies, practices or understandings relating to employment, which are provided to, for the benefit of, or relate to, any persons ("Seller Employees") employed by Seller. The items described in ---------------- the foregoing sentence are hereinafter sometimes referred to collectively as "Employee Plans/Agreements," and each individually as an "Employee ------------------------- -------- Plan/Agreement." True and correct copies of all the Employee -------------- Plans/Agreements, including all amendments thereto, have heretofore been provided to Buyer. No Employee Plan/Agreement is a "multiemployer plan" ------------------ (as defined in Section 4001 of ERISA), and Seller has never contributed nor been obligated to contribute to any such multiemployer plan. (b) Terminations, Proceedings, Penalties, etc. With respect to each ----------------------------------------- employee benefit plan (including, without limitation, the Employee Plans/Agreements) that is subject to the provisions of Title IV of ERISA and with respect to which the Seller or any of its assets may, directly or indirectly, be subject to any liability, contingent or otherwise, or the imposition of any lien (whether by reason of the complete or partial termination of any such plan, the funded status of any such plan, any "complete withdrawal" (as defined in Section 4203 of ERISA) or "partial -------------------- ------- withdrawal" (as defined in Section 4205 of ERISA) by any person from any ---------- such plan, or otherwise): (i) no such plan has been terminated so as to subject, directly or indirectly, any assets of Seller to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA; (ii) no proceeding has been initiated or threatened by any person (including the Pension Benefit Guaranty Corporation ("PBGC") to ---- terminate any such plan; (iii) no condition or event currently exists or currently is expected to occur that could subject, directly or indirectly, any assets of Seller to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA, whether to the PBGC or to any other person or otherwise on account of the termination of any such plan; (iv) if any such plan were to be terminated as of or prior to the Closing Date, no assets of Seller would be subject, directly or indirectly, to any liability, -20- contingent or otherwise, or the imposition of any lien under Title IV of ERISA; (v) no "reportable event" (as defined in Section 4043 of ERISA) ---------------- has occurred with respect to any such plan; (vi) no such plan which is subject to Section 302 of ERISA or Section 412 of the Code has incurred any "accumulated funding ------------------- deficiency" (as defined in Section 302 of ERISA and Section 412 of the ---------- Code, respectively), whether or not waived; and (vii) no such plan is a multiemployer plan or a plan described in Section 4064 of ERISA. (c) Prohibited Transactions, etc. There have been no "prohibited ---------------------------- ---------- transactions" within the meaning of Section 406 or 407 of ERISA or Section ------------ 4975 of the Code for which a statutory or administrative exemption does not exist with respect to any Employee Plan/Agreement, and no event or omission has occurred in connection with which the Seller or any of its assets or any Employee Plan/Agreement, directly or indirectly, could be subject to any liability under ERISA, the Code or any other law, regulation or governmental order applicable to any Employee Plan/Agreement, or under any agreement, instrument, statute, rule of law or regulation pursuant to or under which Seller has agreed to indemnify or is required to indemnify any person against liability incurred under, or for a violation or failure to satisfy the requirements of, any such statute, regulation or order. (d) Full Funding. The funds available under each Employee ------------ Plan/Agreement which is intended to be a funded plan exceed the amounts required to be paid, or which would be required to be paid if such Employee Plan/Agreement were terminated, on account of rights vested or accrued as of the Closing Date (using the actuarial methods and assumptions then used by Seller's actuaries in connection with the funding of such Employee Plan/Agreement). (e) Controlled Group; Affiliated Service Group; Leased Employees. ------------------------------------------------------------ Seller is not and never has been a member of a controlled group of corporations as defined in Section 414(b) of the Code or in common control with any unincorporated trade or business as determined under Section 414(c) of the Code. Seller is not and never has been a member of an "affiliated service group" within the meaning of Section 414(m) of the ------------------------- Code. There are not and never have been any leased employees within the meaning of Section 414(n) of the Code who perform services for Seller, and no individuals are expected to become leased employees with the passage of time. (f) Payments and Compliance. With respect to each Employee ----------------------- Plan/Agreement, (i) all payments due from Seller to -21- date have been made and all amounts properly accrued to date as liabilities of Seller which have not been paid have been properly recorded on the books of Seller and are reflected in the Recent GAAP Financial Statements; (ii) Seller has complied with, and each such Employee Plan/Agreement conforms in form and operation to, all applicable laws and regulations, including but not limited to ERISA and the Code, in all respects and all reports and information relating to such Employee Plan/Agreement required to be filed with any governmental entity have been timely filed; (iii) all reports and information relating to each such Employee Plan/Agreement required to be disclosed or provided to participants or their beneficiaries have been timely disclosed or provided; (iv) each such Employee Plan/Agreement which is intended to qualify under Section 401 of the Code has received a favorable determination letter from the Internal Revenue Service with respect to such qualification, its related trust has been determined to be exempt from taxation under Section 501(a) of the Code, and nothing has occurred since the date of such letter that has or is likely to adversely affect such qualification or exemption; (iv) there are no actions, suits or claims pending (other than routine claims for benefits) or threatened with respect to such Employee Plan/Agreement or against the assets of such Employee Plan/Agreement; and (v) no Employee Plan/Agreement is a plan which is established and maintained outside the United States primarily for the benefit of individuals substantially all of whom are nonresident aliens. (g) Post-Retirement Benefits. No Employee Plan/Agreement provides ------------------------ benefits, including, without limitation, death or medical benefits (whether or not insured) with respect to current or former Seller employees beyond their retirement or other termination of service other than (i) coverage mandated by applicable law, (ii) death or retirement benefits under any Employee Plan/Agreement that is an employee pension benefit plan, (iii) deferred compensation benefits accrued as liabilities on the books of Seller (including the Recent GAAP Financial Statements), (iv) disability benefits under any Employee Plan/ Agreement that is an employee welfare benefit plan and which have been fully provided for by insurance or otherwise or (v) benefits in the nature of severance pay. (h) No Triggering of Obligations. The consummation of the ---------------------------- transactions contemplated by this Agreement will not (i) entitle any current or former employee of Seller to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, (ii) accelerate the time of payment or vesting, or increase the amount of compensation due to any such employee or former employee or (iii) result in any.prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code for which an exemption is not available. -22- (i) Delivery of Documents. There has been delivered to Purchaser, --------------------- with respect to each Employee Plan/Agreement: (i) a copy of the annual report, if required under ERISA, with respect to each such Employee Plan/Agreement for the last two (2) years; (ii) a copy of the summary plan description, together with each summary of material modifications, required under ERISA with respect to such Employee Plan/Agreement, all material employee communications relating to such Employee Plan/Agreement, and, unless the Employee Plan/Agreement is embodied entirely in an insurance policy to which Seller is a party, a true and complete copy of such Employee Plan/Agreement; (iii) if the Employee Plan/Agreement is funded through a trust or any third party funding vehicle (other than an insurance policy), a copy of the trust or other funding agreement and the latest financial statements thereof; and (iv) the most recent determination letter received from the Internal Revenue Service with respect to each Employee Plan/Agreement that is intended to be a "qualified plan" under Section 401 of the -------------- Code. With respect to each Employee Plan/Agreement for which an annual report has been filed and delivered to Purchaser pursuant to clause (i) of this Section 4.16(i), no material adverse change has occurred with respect to --------------- the matters covered by the latest such annual report since the date thereof. (j) Future Commitments. Seller has no announced plan or legally ------------------ binding commitment to create any additional Employee Plans/Agreements or to amend or modify any existing Employee Plan/Agreement. 4.17 Employment Compensation. Schedule 4.17 contains a true and correct ----------------------- ------------- list of all employees to whom Seller is paying compensation and the compensation paid thereto during the twelve (12) month period ending as of the date of the Recent GAAP Financial Statements, including bonuses and incentives, and listing the current annual rate of compensation for each employee. 4.18 Trade Rights. Schedule 4.18 lists all Trade Rights (as defined ------------ ------------- below) in which Seller now has any interest, specifying whether such Trade Rights are owned, controlled, used or held (under license or otherwise) by Seller, and also indicating which of such Trade Rights are registered. All Trade Rights shown as registered in Schedule 4.18 have been properly registered, ------------- all pending registrations and applications have been properly made and filed and all maintenance, renewal and other fees relating to registrations or applications are current. In order to conduct the -23- Business, as such is currently being conducted or proposed to be conducted, Seller does not require any Trade Rights that it does not already have. Seller is not infringing and has not infringed any Trade Rights of another in the operation of the business of Seller, nor is any other person infringing the Trade Rights of Seller. Seller has not granted any license or made any assignment of any Trade Right listed on Schedule 4.18, nor does Seller pay any ------------- royalties or other consideration for the right to use any Trade Rights of others. There are no inquiries, investigations or claims or litigation challenging or threatening to challenge Seller's right, title and interest with respect to its continued use and right to preclude others from using any Trade Rights of Seller. All Trade Rights of Seller are valid, enforceable and in good standing, and there are no equitable defenses to enforcement based on any act or omission of Seller. The consummation of the transactions contemplated hereby will not alter or impair any Trade Rights owned or used by Seller. As used herein, the term "Trade Rights" shall mean and include: (i) all trademark ------------ rights, business identifiers, trade dress, service marks, trade names and brand names, all registrations thereof and applications therefor and all goodwill associated with the foregoing; (ii) all copyrights, copyright registrations and copyright applications, and all other rights associated with the foregoing and the underlying works of authorship; (iii) all patents and patent applications, and all international proprietary rights associated therewith; (iv) all contracts or agreements granting any right, title, license or privilege under the intellectual property rights of any third party; (v) all inventions, mask works and mask work registrations, know-how, discoveries, improvements, designs, trade secrets, shop and royalty rights, employee covenants and agreements respecting intellectual property and non-competition and all other types of intellectual property; and (vi) all claims for infringement or breach of any of the foregoing. 4.19 Major Customers and Suppliers. ----------------------------- (a) Major Customers. Schedule 4.19(a) contains a list of the 10 --------------- ---------------- largest customers of Seller for each of the two (2) most recent fiscal years (determined on the basis of the total dollar amount of net sales) showing the total dollar amount of net sales to each such customer during each such year. Neither Seller nor any Shareholder has any knowledge or information of any facts indicating, nor any other reason to believe, (i) that the Seller's relationship with any of the customers listed on Schedule -------- 4.19(a) is other than that which is likely to give rise to a positive ------- recommendation by such customer of the Seller to others, or (ii) that to the extent any Customer listed on Schedule 4.19(a) would have recurring ---------------- projects, that such Customer would be other than likely to retain the Seller to perform such project. (b) Major Suppliers. Schedule 4.19(b) contains a list of the 5 --------------- ---------------- largest suppliers to Seller for each of the two (2) most recent fiscal years (determined on the basis of the total dollar amount of purchases) showing the total dollar amount of -24- purchases from each such supplier during each such year. Neither Seller nor any Shareholder has any knowledge or information of any facts indicating, nor any other reason to believe, that any of the suppliers listed on Schedule 4.19(b) will not continue to be suppliers to the business of ---------------- Seller after the Closing and will not continue to supply the business with substantially the same quantity and quality of goods at competitive prices. 4.20 Warranty and Product Liability. Schedule 4.20 contains a true, ------------------------------ ------------- correct and complete copy of Seller's standard warranty or warranties and, except as stated therein, there are no warranties, commitments or obligations with respect to the Seller's services. Schedule 4.20 sets forth the estimated ------------- aggregate annual cost to Seller of performing warranty obligations for customers for each of the five (5) preceding fiscal years and the current fiscal year to the date of the Recent GAAP Financial Statements. Schedule 4.20 contains a ------------- description of all product liability claims and/or errors and omission claims and similar claims, actions, litigation and other proceedings relating to services rendered, which are presently pending or which to Seller's or any Shareholder's knowledge are threatened, or which have been asserted or commenced against Seller within the last five (5) years, in which a party thereto either requests injunctive relief or alleges damages (whether or not covered by insurance). 4.21 Bank Accounts. Schedule 4.21 sets forth the names and locations of ------------- ------------- all banks, trust companies, savings and loan associations and other financial institutions at which the company maintains a safe deposit box, lock box or checking, savings, custodial or other account of any nature, the type and number of each such account and the signatories therefore, a description of any compensating balance arrangements, and the names of all persons authorized to draw thereon, make withdrawals therefrom or have access thereto. 4.22 Affiliates, Relationships to Seller. ----------------------------------- (a) Contracts With Affiliates. All leases, contracts, agreements or ------------------------- other arrangements between Seller and any Affiliate are described on Schedule 4.22(a). ---------------- (b) No Adverse Interests. No Affiliate has any direct or indirect -------------------- interest in (i) any entity which does business with Seller or is competitive with Seller's business, or (ii) any property, asset or right which is used by Seller in the conduct of its business. (c) Obligations. All obligations of any Affiliate to Seller, and ----------- all obligations of Seller to any Affiliate, are listed on Schedule 4.22(c). ---------------- 4.23 No Brokers or Finders. Except as set forth in Schedule 4.23, neither --------------------- ------------- Seller nor any of its directors, officers, employees, Shareholders or agents have retained, employed or used -25- any broker or finder in connection with the transaction provided for herein or in connection with the negotiation thereof. 4.24 Disclosure. No representation or warranty by the Shareholders in ---------- this Agreement, nor any statement, certificate, schedule, document or exhibit hereto furnished or to be furnished by or on behalf of Seller or any of the Shareholders pursuant to this Agreement or in connection with transactions contemplated hereby, contains or shall contain any untrue statement of material fact or omits or shall omit a material fact necessary to make the statements contained therein not misleading. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF PURCHASER ------------------------------------------- Purchaser makes the following representations and warranties to Seller and the Shareholders, each of which is true and correct on the date hereof and shall be unaffected by any investigation heretofore or hereafter made by Seller or the Shareholders or any notice to any of them. 5.1 Corporate. Purchaser is a corporation duly organized, validly --------- existing and in good standing under the laws of the State of California. Purchaser has all requisite corporate power to enter into this Agreement and the other documents and instruments to be executed and delivered by Purchaser and to carry out the transactions contemplated hereby and thereby. 5.2 Authority. The execution and delivery of this Agreement and the --------- other documents and instruments to be executed and delivered by Purchaser pursuant hereto and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of Purchaser. No other corporate act or proceeding on the part of Purchaser or its shareholders is necessary to authorize this Agreement or the other documents and instruments to be executed and delivered by Purchaser pursuant hereto or the consummation of the transactions contemplated hereby and thereby. This Agreement constitutes, and when executed and delivered, the other documents and instruments to be executed and delivered by Purchaser pursuant hereto will constitute, valid and binding agreements of Purchaser, enforceable in accordance with their respective terms, subject, as to enforcement, to bankruptcy, insolvency, moratorium, reorganization and other laws of general application affecting the enforcement of creditors' rights, and to the availability of equitable remedies. 5.3 Consents, Approvals and Authorizations. No consent, approval or ------------------------------------- authorization of, or filing or registration with, any governmental authority or other person is required by Purchaser in connection with Purchaser's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby. -26- 5.4 Violations. The execution, delivery and performance of this ---------- Agreement do not and will not (i) contravene the Articles of Incorporation or Bylaws of Purchaser; (ii) with or without the giving of notice or the passage of time or both, constitute a default under, result in a breach of, result in the termination of, result in the acceleration of performance of, require any consent under, or result in the imposition of any encumbrance upon any material assets of Purchaser under any material agreement or instrument to which Purchaser is a party or by which any of the assets of Purchaser are bound the occurrence of which would have a material adverse impact upon the financial condition of Purchaser, or (iii) violate any law, statute or regulation or any judgment, order, ruling or other decision of any governmental authority, court or arbitrator. 5.5 No Brokers or Finders. Other than J. Gregory & Company, neither --------------------- Purchaser nor any of its directors, officers, employees or agents have retained, employed or used any broker or finder in connection with the transaction provided for herein or in connection with the negotiation thereof. 5.6 Shares Issued as Additional Payment. All of the shares of the ----------------------------------- Purchaser's common stock, if any, issued as the Additional Payment contemplated by Section 3.5, shall be, when issued, validly issued, fully paid and ----------- nonassessable. ARTICLE 6 COVENANTS OF SELLER AND THE SHAREHOLDERS ---------------------------------------- Seller and all of the Shareholders covenant and agree as follows: 6.1 Access to Information and Records. During the period prior to the --------------------------------- Closing, Seller shall give Purchaser, its counsel, accountants and other representatives access during normal business hours to all of the properties, books, records, contracts and documents of Seller and available work papers of Seller's independent accountants ("Seller's Accountants") and representatives of -------------------- Seller's Accountants, which access is necessary to review the Recent GAAP Financial Statements and the GAAP Financial Statements, and Seller shall furnish or cause to be furnished to Purchaser and its representatives all information with respect to the business and affairs of Seller as Purchaser may request. During the period prior to the Closing, Seller shall give Purchaser, its counsel, accountants and other representatives access to employees, agents and representatives for the purposes of such meetings and communications as Purchaser reasonably desires, and with the prior consent of Seller in each instance (which consent shall not be unreasonably withheld), access to customers and suppliers of Seller. Following the Closing, Seller shall (i) maintain the books, records, contracts and documents of Seller, as the case may be, among the Excluded Assets for not less than five (5) years (and longer if required by law) and (ii) give Purchaser, its counsel, accountants and other representatives access during -27- normal business hours to all such books, records, contracts and documents of Seller among the Excluded Assets as Purchaser shall reasonably request. 6.2 Conduct of Business Pending the Closing. From the date hereof until --------------------------------------- the Closing, except as otherwise approved in writing by Purchaser (which approval shall not be unreasonably or arbitrarily withheld or delayed), Seller will each comply with the following: (a) No Changes. Seller will carry on its business diligently and in ---------- the same manner as heretofore and will not make or institute any changes in its methods of purchase, sale, management, accounting (other than the change in accounting procedure resulting from the timing of the preparation of the Balance Sheets) or operation. (b) Maintain Organization. Seller will take such action as may be --------------------- necessary to maintain, preserve, renew and keep in favor and effect the existence, rights and franchises of the Seller and will use its best efforts to preserve the business organization of the Seller intact, to keep available to Purchaser the present officers and employees of the Seller, and to preserve for Purchaser its present relationships with suppliers and customers and others having business relationships with the Seller. (c) No Breach. The Seller will not do or omit any act, or permit --------- any omission to act, which may cause a breach of any material contract, commitment or obligation, or any breach of any representation, warranty, covenant or agreement made by Seller or any of the Shareholders. (d) No Material Contracts. No contract or commitment will be --------------------- entered into, and no purchase of raw materials or supplies and no sale of assets (real, personal, or mixed, tangible or intangible) will be made, by or on behalf of the Seller except (i) contracts or commitments for the purchase of, and purchases of, raw materials and supplies made in the ordinary course of business and consistent with past practice, (ii) contracts or commitments for the sale of, and sales of, services or inventory in the ordinary course of business and consistent with past practice, and (iii) other contracts, commitments, purchases or sales in the ordinary course of business and consistent with past practice which are not material to the Seller and which, had they been in existence on the date of this Agreement, would not have been required to be disclosed in the Disclosure Schedule. (e) Material Transactions. Except as otherwise expressly provided --------------------- in this Agreement, the Seller will not: (i) Enter into any employment or consulting contract or arrangement with any person which is not terminable at will, without penalty or continuing -28- obligation other than in the ordinary course of business; (ii) Sell, transfer, lease or otherwise dispose of any asset, except in the ordinary course of business and consistent with past practice; (iii) Incur, create, or assume any mortgage, pledge, lien, restriction, encumbrance, tenancy, license, encroachment, covenant, condition, right-of-way, easement, claim, security interest, charge or other matter affecting title on any of its assets or other property other than in the ordinary course of business; (iv) Fail to pay all taxes, assessments, governmental charges or levies imposed upon it or its income, profits or assets or otherwise required to be paid by it, or fail to pay when due any liability or charge, except for taxes the Seller is protesting in good faith if the Seller promptly gives notice to Purchaser of any such protest; (v) Increase or otherwise change the compensation payable or to become payable to any officer, employee or agent, except normal merit increases made in the ordinary course of business and consistent with past practice; (vi) Make or authorize the making of any capital expenditure other than capital expenditures in the ordinary course of business and not exceeding $5,000 individually or $50,000 in the aggregate; (vii) Incur any debt or other obligation for money borrowed except open account trade payables incurred in the ordinary course of business; (viii) Incur any other obligation or liability, absolute or contingent, except in the ordinary course of business and consistent with past practice; (ix) Waive or permit the loss of any substantial right; or (x) Deliver any cash or property to any of (A) the Shareholders, (B) any other shareholders of Seller or (C) any Affiliate of the Seller or of any such other person, whether as compensation for goods or services or payments under existing commitments or obligations (other than payments of wages and other compensation in amounts not greater than that of the Recent GAAP Financial Statement to the Shareholders), or incur any obligation to do so, except that Seller may make any lease payments it is obligated to make under the lease pursuant to which it occupies the Facilities. -29- (f) No Corporate Changes. The Seller shall not amend its articles -------------------- of incorporation or bylaws or make any changes in authorized or issued capital stock. (g) Maintenance of Insurance. The Seller shall maintain all of the ------------------------ insurance in effect as of the date hereof and shall procure such additional insurance as shall be reasonably requested by Purchaser at Purchaser's expense. (h) Maintenance of Property. The Seller shall use, operate, ----------------------- maintain and repair all property used in its business in a normal business manner. (i) Interim Financials. The Seller will provide Purchaser with ------------------ interim monthly financial statements and other management reports on a timely basis, and quarterly financial statements in accordance with GAAP by such time as necessary to facilitate filings with the Securities and Exchange Commission as and when they are available. 6.3 No Negotiations. From the date hereof until the Closing or the --------------- termination of this Agreement, neither Seller nor either of the Shareholders will directly or indirectly (through a representative, Affiliate or otherwise) solicit or furnish any information to any prospective buyer, commence, or conduct presently ongoing, negotiations with any other party or enter into any agreement with any other party concerning the sale of Seller or the assets or the Business or any part thereof of Seller (an "acquisition proposal"), and -------------------- Seller shall immediately advise Purchaser of the receipt of any acquisition proposal. 6.4 Consents. -------- (a) Prior to Closing, Seller will take all steps necessary to obtain, and will obtain, all consents necessary for the consummation of the transactions contemplated hereby. (b) Seller will use its best efforts prior to Closing to obtain all other consents necessary for the consummation of the transactions contemplated hereby including without limitation under government contracts, and contracts expressly assumed pursuant to Section 2.2(b). -------------- (c) All such consents shall be in writing and executed counterparts thereof shall be delivered to Purchaser promptly after Seller's receipt thereof but in no event later than immediately prior to the Closing. 6.5 Other Action. Seller and the Shareholders shall use their best ------------ efforts to cause the fulfillment at the earliest practicable date of all of the conditions to the obligations of Seller and the Shareholders. 6.6 Disclosure Schedule. Seller shall have a continuing obligation to ------------------- promptly notify Purchaser in writing with respect to -30- any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Disclosure Schedule; provided, however, that no such disclosure shall cure any breach of any representation or warranty which was inaccurate on the date of this Agreement, and that the acceptance of any one or more of such amendments by Purchaser shall not affect the condition to the obligation of Purchaser to consummate the transactions contemplated hereby contained in Section 8.1 but if ----------- Purchaser does consummate the transactions contemplated hereby, such disclosure shall be deemed to have cured any such breach of a representation or warranty; any and all adverse changes contained in any such amendments shall be considered in the determination of whether the condition under Section 8.1 has been ----------- satisfied. 6.7 Confidentiality. --------------- (a) Covenant. Without limiting the extent of any other provisions -------- of this Agreement and except as may be necessary to prepare reports and returns to governmental agencies for financial record keeping purposes or for other proper business reasons, neither Seller nor any of the Shareholders shall subsequent to the Closing (i) retain copies of any customer lists, any information regarding customers which is not available to the public or any trade secrets or other books, records, contracts and documents of Seller among the Purchased Assets, except that Seller may retain the information included in this Agreement or in the Disclosure Schedule; or (ii) disclose any of the foregoing to any person. Subsequent to the Closing, Purchaser shall afford Seller reasonable access to, and allow Seller to make copies for a reasonable purpose of, the foregoing information for the purposes specified in the preceding sentence during normal business hours and upon reasonable notice to Purchaser. (b) Employees. For a period of two (2) years from the Closing Date, --------- neither Seller, none of the Shareholders nor any Affiliate of either shall offer employment to any employee of Seller on the date hereof without the prior written consent of Purchaser, except that the foregoing restriction shall not apply to any such employee who is not hired, or is hired but subsequently terminated, by Purchaser following the Closing. (c) Equitable Relief for Violations. Seller agree that the ------------------------------- provisions and restrictions contained in this Section 6.7 are necessary to ----------- protect the legitimate continuing interests of Purchaser in acquiring the Business through the purchase of the Purchased Assets, and that any violation or breach of these provisions will result in irreparable injury to Purchaser for which a remedy at law would be inadequate and that, in addition to any relief at law which may be available to Purchaser for such violation or breach, Purchaser shall be entitled to injunctive and other equitable relief as a court may grant after considering the intent of this Section 6.7. ------------ -31- 6.8 Insurance. --------- (a) As soon as practicable after the date hereof and prior to the Closing, Seller and the Shareholders shall use their best efforts (which shall not be construed to require the payment of cash) to cause the following to occur prior to the Closing with respect to all policies of fire, liability, product liability, workers compensation, health and other forms of insurance of which Seller is the owner, insured or beneficiary, or covering any of the Purchased Assets: (i) upon the reasonable request of Purchaser, cause each insurer under any such policy to consent to the transfer of such insurance to Purchaser at the Closing as contemplated by this Agreement; (ii) deliver to Purchaser evidence reasonably satisfactory to Purchaser that Purchaser will not be liable to any insurer under any policy that provides for or is subject to any retroactive rate or premium adjustment, loss sharing arrangement or other actual or contingent liability arising wholly or partially out of events arising prior to the Closing for any such rate or premium adjustment, loss sharing arrangement or other actual or contingent liability; (iii) ensure that Purchaser will receive the benefit of prepayments for insurance reflected on the Recent GAAP Financial Statements or the GAAP Financial Statements; (iv) upon the request and at the expense of Purchaser, obtain discontinued products liability coverage that names Purchaser as named insureds; and (v) at the reasonable request of Purchaser, cause Purchaser to be named as an additional insured under each of its occurrence-type policies of insurance insuring against general liability claims, claims for personal injury and property damage arising out of or resulting from any products sold by Seller prior to the Closing Date and workers compensation claims, to the extent an insurer does not allow the transfer to Purchaser of any such policies. (b) Following the Closing, Seller will, to the extent that coverage under its insurance policies extends to include Purchaser in accordance with the foregoing, (i) take no action to eliminate or reduce such coverage, other than normal elimination or reduction of coverage as they occur by virtue of the filing of claims in the ordinary course under such insurance policies, (ii) pay when due any premiums under such policies for periods through the Closing Date, including retroactive premium adjustments, and (iii) use its best efforts to assist in filing and processing claims under, and -32- otherwise cooperate with Purchaser to allow it, in its own name, or on behalf of Seller, as the case may be, to obtain all coverage benefits under such insurance policies, including without limitation the execution of assignments or powers of attorney for the benefit of Purchaser. Any proceeds of insurance paid by an insurer to Seller for claims of Purchaser made in accordance with this Section shall be promptly paid to Purchaser. (c) At the Closing, Seller shall deliver to Purchaser one or more certificates of insurance evidencing that the insurance retained or obtained by it pursuant to this Section is in effect and providing for notification to Purchaser at least ten (10) days prior to the effective date of any termination or cancellation of such insurance. 6.9 Use of Seller's Names. Concurrently with the Closing, Seller shall --------------------- change its corporate name to a new name bearing no resemblance to its present name so as to permit the use of its present name by Purchaser. Following the Closing, neither Seller, nor any Shareholder nor any Affiliate of either shall, without the prior written consent of Purchaser which consent shall not be unreasonably withheld, make any use, in a commercial context, of the name "Thompson" or "Hysell" or "Thompson-Hysell" or any other name confusingly similar thereto, except as may be necessary for Seller to pay its liabilities, prepare tax returns and other reports, and to otherwise wind up and conclude its business. 6.10 Sales Tax. Notwithstanding Purchaser's obligations with respect to --------- Section 14.7(b), Seller will not take any action that would or may reasonably be - --------------- expected to jeopardize any exemption from sales tax that would otherwise be available to Purchaser, and Seller will take all commercially reasonable actions to allow Purchaser to avail itself of such exemptions. 6.11 Employee Matters. Nothing in this Agreement, express or implied, is ----------------- intended to confer upon any of Seller's employees, former employees, collective bargaining representatives, job applicants, any association or group of such persons or any employees of Seller who are employed by Purchaser immediately after the Closing any rights or remedies of any nature or kind whatsoever under or by reason of this Agreement, including, without limitation, any rights of employment. 6.12 Unemployment Compensation. To the extent allowable under applicable ------------------------- law, Seller will, at the request of Purchaser, use its best efforts to assign to Purchaser unemployment compensation contribution rates and account balances of Seller, respectively. 6.13 Expenses. Except as otherwise expressly provided herein, Seller -------- shall bear Seller's expenses, the expenses of its counsel and other agents and any other out-of-pocket expenses in connection with the transactions contemplated hereby (including without limitation the costs to comply with Section 6.4), and/or - ----------- -33- Seller shall ensure that such expenses are paid out of the cash consideration to be delivered to Seller at the Closing. 6.14 Noncompetition Agreements. At the Closing, each of the Shareholders ------------------------- shall execute and deliver to Purchaser a Noncompetition Agreement in the form attached hereto as Exhibit 6.14. ------------- ARTICLE 7 COVENANTS OF PURCHASER ---------------------- 7.1 Conditions. Purchaser shall use its best efforts to cause the ---------- fulfillment at the earliest practicable date of all of the conditions to Purchaser's obligations to consummate the transactions contemplated by this Agreement that are within the control of Purchaser. 7.2 Employees. Immediately following the Closing, Purchaser shall offer --------- employment, as of the Closing Date, to all then current employees of Seller identified on Schedule 4.17 on substantially the same terms and conditions as ------------- immediately before the Closing; provided, however, that Purchaser assumes no obligation to continue such employment or the terms and conditions therefor for any particular time after the Closing Date. 7.3 Insurance. Following the Closing, Purchaser agrees that, to the --------- extent that coverage under insurance policies included in the Purchased Assets extends to include either Seller in respect of claims or occurrences concerning Seller prior to the Closing that are among the Excluded Liabilities, Purchaser will use its reasonable efforts to assist in filing and processing claims under, and otherwise cooperate with Seller to allow them, in their own names, or on behalf of Purchaser, to obtain all coverage benefits applicable to Purchaser or Seller under such insurance policies, including without limitation the execution of assignments or powers of attorney for the benefit of Seller. Any proceeds of insurance paid by an insurer to Purchaser for claims of Seller and/or Purchaser made in accordance with this Section shall be promptly paid to Seller, as the case may be. 7.4 Reservation of Stock Options. Purchaser shall reserve 100,000 ---------------------------- options to purchase Purchaser's common stock under Purchaser's existing stock option plans for grants, as determined by Purchaser and Shareholders, to employees of Seller who are employed by Purchaser or who may be hired by Purchaser in the future. 7.5 Maintain Records. Following the Closing, Purchaser shall maintain ---------------- and provide Seller and the Shareholders access to the books, records, contracts and documents of Seller among the purchased Assets for not less than five (5) years (and longer if required by law). -34- 7.6 Personal Guaranties. To the extent Purchaser is unable to cause any ------------------- and all of the Shareholders' personal guaranties for the Assumed Liabilities to be released on or prior to the Closing, Purchaser shall indemnify, defend and hold harmless the Shareholders from any losses or damages (including attorneys' fees and costs) they may suffer upon enforcement of such guaranties by the holders thereof. 7.7 Separate Accounting. Purchaser covenants that for purposes of ------------------- calculating 1999 EBIT and 2000 EBIT, Purchaser shall separately monitor and account for the operations of the Business so as not to impair Seller's or the Shareholders' ability to determine 1999 EBIT or 2000 EBIT as set forth in Sections 3.4 and 3.5. Purchaser shall not take actions which unreasonably - -------------------- prevent the Shareholders from managing the Business to maximize 1999 EBIT and 2000 EBIT. 7.8 Equivalent Compensation. Purchaser, upon hiring persons employed by ----------------------- Seller as of the Closing, shall endeavor to insure that the overall compensation package for such employees meets or exceeds the compensation package provided to such employees by Seller. The compensation package may include such benefits as 401(k) contributions and salary and wages. The parties shall cooperate in analyzing the equivalency of the foregoing and presenting any adjustments to employees. ARTICLE 8 CONDITIONS PRECEDENT TO PURCHASER'S OBLIGATIONS ----------------------------------------------- Each and every obligation of Purchaser to be performed on the Closing Date shall be subject to the satisfaction prior to or at the Closing of each of the following conditions: 8.1 Representations and Warranties True as of the Closing Date. Each of ---------------------------------------------------------- the representations and warranties made by Seller and the Shareholders in this Agreement, and the statements contained in the Disclosure Schedule or in any instrument, list, certificate or writing delivered by Seller pursuant to this Agreement, shall be true and correct in all respects when made and shall be true and correct in all material respects (except that such qualification as to materiality shall not apply to any representation or warranty that expressly includes a qualification as to materiality) at and as of the Closing Date as though such representations and warranties were made or given on and as of the Closing Date, except for any changes permitted by the terms of this Agreement or consented to in writing by Purchaser. 8.2 Compliance With Agreement. Seller shall have performed and complied ------------------------- in all material respects with each of their respective agreements and obligations under this Agreement which are to be performed or complied with by them prior to or on the Closing Date, including the delivery of the closing documents specified in Section 12.2. ------------ -35- 8.3 Absence of Suit. No demand, action, suit or proceeding have been --------------- made, commenced or threatened, and no investigation by any governmental or regulating authority shall have been commenced, against Seller, the Shareholders Purchaser or any of the Affiliates, officers or directors of any of them, seeking to restrain, prevent or change the transactions contemplated hereby, or questioning the validity or legality of any such transactions, or seeking damages in connection with, or imposing any condition on, any such transactions. 8.4 Consents and Approvals. All approvals, consents and waivers ---------------------- (including without limitation novations relating to government contracts) that are required to effect the transactions contemplated hereby shall have been received, and executed counterparts thereof shall have been delivered to Purchaser. 8.5 Section 1445 Affidavit. Seller shall have delivered to Purchaser an ---------------------- affidavit, in form satisfactory to Purchaser, to the effect that Seller is not a "foreign person" under Section 1445 of the Code. 8.6 Lease. Purchaser and Seller shall have agreed upon a form of lease ----- or assignment of lease, as applicable, with respect to each of the Facilities. 8.7 Insurance. Seller shall have taken the actions contemplated by --------- Section 6.10 to be taken prior to the Closing and the results of such actions - ------------ shall be reasonably satisfactory to Purchaser. 8.8 Initial Public Offering of Purchaser. The Purchaser shall have ------------------------------------ received the proceeds from an initial public offering of Purchaser's common stock pursuant to a registration statement on Form S-1 declared effective by the United States Securities and Exchange Commission. ARTICLE 9 CONDITIONS PRECEDENT TO OBLIGATIONS ----------------------------------- OF SELLER AND THE SHAREHOLDERS ------------------------------ Each and every obligation of Seller and the Shareholders to be performed on the Closing Date shall be subject to the satisfaction prior to or at the Closing of the following conditions: 9.1 Representations and Warranties True on the Closing Date. Each of the ------------------------------------------------------- representations and warranties made by Purchaser in this Agreement shall be true and correct in all respects when made and shall be true and correct in all material respects at and as of the Closing Date as though such representations and warranties were made or given on and as of the Closing Date. 9.2 Compliance With Agreement. Purchaser shall have in all material ------------------------- respects performed and complied with each of Purchaser's agreements and obligations under this Agreement which are to be -36- performed or complied with by Purchaser prior to or on the Closing Date, including the delivery of the closing documents specified in Section 12.3. ------------- 9.3 Absence of Suit. No demand, action, suit or proceeding have been --------------- made, commenced or threatened, and no investigation by any governmental or regulating authority shall have been commenced, against Seller, the Shareholders Purchaser or any of the Affiliates, officers or directors of any of them, seeking to restrain, prevent or change the transactions contemplated hereby, or questioning the validity or legality of any such transactions, or seeking damages in connection with, or imposing any condition on, any such transactions. 9.4 Initial Public Offering of Purchaser. The Purchaser shall have ------------------------------------ received the proceeds from an initial public offering of Purchaser's common stock pursuant to a registration statement on Form S-1 declared effective by the United States Securities and Exchange Commission. 9.5 Leases. Purchaser and Seller shall have agreed upon a form of lease ------ or assignment of lease, as applicable, with respect to each of the Facilities. ARTICLE 10 SURVIVAL AND EFFECT OF WARRANTIES, - ---------------------------------- REPRESENTATIONS AND COVENANTS - ----------------------------- 10.1 Integration. All statements and information contained in any ----------- certificate, instrument or document delivered by or on behalf of the parties pursuant to this Agreement and the transactions contemplated hereby shall be deemed representations and warranties by the parties making such delivery. ARTICLE 11 INDEMNIFICATION --------------- 11.1 By Seller and the Shareholders. Subject to the terms and conditions ------------------------------ of this Section 11, Seller and each Shareholder, jointly and severally, hereby ---------- agree to indemnify, defend and hold harmless Purchaser, its directors, officers, employees and controlled and controlling persons (hereinafter "Purchaser's ----------- Affiliates") from and against all Claims asserted against, resulting to, imposed - ---------- upon, or incurred by Purchaser or Purchaser's Affiliates, directly or indirectly, by reason of, arising out of, resulting from or not otherwise disclosed as a result of (a) the excluded Liabilities, (b) the inaccuracy or breach of any representation or warranty of the Seller or any Shareholder contained in or made pursuant to this Agreement, or (c) the breach of any covenant of the Seller or any Shareholder contained in this Agreement provided, however, that, except with respect to any Claims pursuant to the Excluded Liabilities, Section 4.1, Section 4.2, Section 4.6, Section 4.7 and Section -------------------------------------------------------------- 4.12, Seller and the - ---- -37- Shareholders shall have no liability hereunder until the total liability hereunder for all Claims considered together exceeds $150,000 (and then only to the excess), and shall have no liability hereunder in excess of one half of the Purchase Price, provided, however, that the exception to the limit on indemnification for a breach of Section 4.6 shall apply only to the extent that ----------- the amount of the Accounts Receivable and Costs in Excess of Billings reflected on the Closing Balance Sheet which are in breach of Section 4.6 did not cause ----------- the Book Value Adjustment to exceed $500,000. As used in this Section 11, the ---------- term "Claim" shall include (i) all debts, liabilities and obligations; (ii) all ----- losses, damages (including, without limitation, consequential damages), judgments, awards, settlements, costs and expenses (including, without limitation, interest (including prejudgment interest in any litigated matter), penalties, court costs and attorneys fees and expenses); and (iii) all demands, claims, suits, actions, costs of investigation, causes of action, proceedings and assessments, whether or not ultimately determined to be valid. 11.2 By Purchaser. Subject to the terms and conditions of this Section ------------ ------- 11, Purchaser hereby agrees to indemnify, defend and hold harmless Seller and each Shareholder from and against all Claims asserted against, resulting to, imposed upon or incurred by any such person, directly or indirectly, by reason of or resulting from (a) the inaccuracy or breach of any representation or warranty of Purchaser contained in or made pursuant to this Agreement, or (b) the breach of any covenant of Purchaser contained in this Agreement, including any claim accruing after the Closing Date and for which the Seller or the Shareholders are not otherwise liable hereunder. 11.3 Indemnification of Third-Party Claims. The obligations and ------------------------------------- liabilities of any party to indemnify any other under this Section 11 with ---------- respect to Claims relating to third parties shall be subject to the following terms and conditions: (a) Notice and Defense. The party or parties to be indemnified ------------------ (whether one or more, the "Indemnified Party") will give the party from ----------------- whom indemnification is sought (the "Indemnifying Party") prompt written ------------------ notice of any such Claim, and the Indemnifying Party will undertake the defense thereof by representatives chosen by it. Failure to give such notice shall not affect the Indemnifying Party's duty or obligations under this Section 11, except to the extent the Indemnifying Party is prejudiced ---------- thereby. So long as the Indemnifying Party is defending any such Claim actively and in good faith, the Indemnified Party shall not settle such Claim. The Indemnified Party shall make available to the Indemnifying Party or its representatives all records and other materials required by them and in the possession or under the control of the Indemnified Party, for the use of the Indemnifying Party and its representatives in defending any such Claim, and shall in other respects give reasonable cooperation in such defense. -38- (b) Failure to Defend. If the Indemnifying Party, within a ----------------- reasonable time after notice of any such Claim, fails to defend such Claim actively and in good faith, the Indemnified Party (upon further notice) has the right to undertake the defense, compromise or settlement of such Claim or consent to the entry of a judgment with respect to such Claim, on behalf of and for the account and risk of the Indemnifying Party, and the Indemnifying Party shall thereafter have no right to challenge the Indemnified Party's defense, compromise, settlement or consent to judgment therein. (c) Indemnified Party's Rights. Anything in this Section 11.3 to -------------------------- ------------ the contrary notwithstanding, (i) if there is a reasonable probability that a Claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, the Indemnified Party shall have the right to defend, compromise or settle such Claim, and (ii) the Indemnifying Party shall not, without the written consent of the Indemnified Party, settle or compromise any Claim or consent to the entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in respect of such Claim. 11.4 Payment. The Indemnifying Party shall promptly pay the Indemnified ------- Party any amount due under this Section 11, which payment may be accomplished in ---------- whole or in part, at the option of the Indemnified Party, by the Indemnified Party setting off any amount owed to the Indemnifying Party by the Indemnified Party. To the extent set-off is made by an Indemnified Party in satisfaction or partial satisfaction of an indemnity obligation under this Section 11 that is ---------- disputed by the Indemnifying Party, upon a subsequent determination by final judgment not subject to appeal that all or a portion of such indemnity obligation was not owed to the Indemnified Party, the Indemnified Party shall pay the Indemnifying Party the amount which was set off and not owed together with interest from the date of set-off until the date of such payment at an annual rate equal to the annual rate set forth in the Purchase Note. Upon judgment, determination, settlement or compromise of any third party Claim, the Indemnifying Party shall pay promptly on behalf of the Indemnified Party, and/or to the Indemnified Party in reimbursement of any amount theretofore required to be paid by it, the amount so determined by judgment, determination, settlement or compromise and all other Claims of the Indemnified Party with respect thereto, unless in the case of a judgment an appeal is made from the judgment. If the Indemnifying Party desires to appeal from an adverse judgment, then the Indemnifying Party shall post and pay the cost of the security or bond to stay execution of the judgment pending appeal. Upon the payment in full by the Indemnifying Party of such amounts, the Indemnifying Party shall succeed to the rights of such Indemnified Party, to the extent not waived in settlement, against the third party who made such third party Claim. -39- 11.5 Limitations on Indemnification. Except as provided below, no claim ------------------------------ or action shall be brought under this Section 11 for breach of a representation ---------- or warranty after the lapse of eighteen (18) months following the Closing: (i) The time limitation on claims on actions brought for breach of any representation or warranty made by the Seller or the Shareholders in or pursuant to Sections 4.1 and 4.2 shall be the -------------------- applicable statutory limitation periods with respect thereto as finally determined in any proceeding in which such defense is raised. (ii) Any claim or action brought for breach of any representation or warranty made by the Seller or the Shareholders in or pursuant to Section 4.5 may be brought at any time until the ----------- underlying tax obligation is barred by the applicable period of limitation under federal and state laws relating thereto (as such period may be extended by waiver). (iii) Any claim or action brought for breach of any representation or warranty made by the Seller or the Shareholders in or pursuant to Section 4.11 may be brought at any time until the ------------ underlying claim is barred by the applicable period of limitation under federal and state laws relating thereto (as such period may be extended by waiver). (iv) Any claim made by a party hereunder by filing a suit or action in a court of competent jurisdiction or a court reasonably believed to be of competent jurisdiction for breach of a representation or warranty prior to the termination of the survival period for such claim shall be preserved despite the subsequent termination of such survival period. (v) If any act, omission, disclosure or failure to disclosure shall form the basis for a claim for breach of more than one representation or warranty, and such claims have different periods of survival hereunder, the termination of the survival period of one claim shall not affect a party's right to make a claim based on the breach of representation or warranty still surviving. 11.6 No Waiver. Except as specifically provided herein, the Closing of --------- the transactions contemplated by this Agreement shall not constitute a waiver by any party of its rights to indemnification hereunder, regardless of whether the party seeking indemnification has knowledge of the breach, violation or failure of condition constituting the basis of the Claim at or before the Closing. -40- 11.7 Exclusivity. From and after the Closing, the provisions of this ----------- Article 11 shall be the exclusive basis for the assertion of claims by or - ---------- imposition of liability on the parties hereto arising under or as a result of a breach of any representation or warranty contained in or made pursuant to this Agreement; provided, however, nothing herein shall preclude any party hereto from asserting a claim (i) for monetary damages on a basis other than the breach of a representation or warranty or (ii) for nonmonetary remedies. ARTICLE 12 CLOSING ------- 12.1 Closing. The closing of the transactions contemplated hereby shall ------- occur in two phases: Phase I of the closing ("Phase I") shall consist of the ------- execution of all documents at such time as all of the conditions to Closing have been satisfied except the condition specified in Sections 8.8 and 9.4 (the "IPO -------------------- --- Condition"), and the delivery of same to counsel for the Purchaser under - --------- instructions not to deliver such documents to the parties until the IPO Condition has been satisfied. Phase I shall occur no later than two (2) days before the anticipated execution by the Purchaser of a definitive underwriting agreement between the Purchaser and the underwriter of its common stock. The closing of the transactions contemplated hereby (the "Closing") shall take place ------- at the offices of Rutan & Tucker, LLP, 611 Anton Boulevard, 14th Floor, Costa Mesa, California 92626, at the same time the IPO Condition is satisfied. Such date is referred to in this Agreement as the "Closing Date." ------------ 12.2 Documents to be Delivered by Seller. At Phase I, Seller or each of ----------------------------------- the Shareholders, as the case may be, shall execute and deliver to counsel for Purchaser the following documents, in each case duly executed or otherwise in proper form: (a) Bills of Sale. Bills of sale and such other instruments of ------------- assignment, transfer, conveyance and endorsement as will be sufficient in the opinion of Purchaser and its counsel to transfer, assign, convey and deliver to Purchaser the Purchased Assets. (b) Compliance Certificates. A certificate signed by the chief ----------------------- executive officer of Seller and each of the Shareholders that each of the representations and warranties made by Seller and each of the Shareholders in this Agreement is true and correct in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on and as of the Closing Date (except for any changes permitted by the terms of this Agreement or consented to in writing by Purchaser), and that Seller and each of the Shareholders have performed and complied with each of their respective obligations under this Agreement which are to be performed or complied with on or prior to the Closing Date. -41- (c) Certified Resolutions. Certified copies of the resolutions of --------------------- the Board of Directors of Seller and the shareholders of Seller authorizing and approving this Agreement and the consummation of the transactions contemplated by this Agreement. (d) Shareholder Releases. Releases executed by each of the direct -------------------- and indirect shareholders of Seller in the form of Exhibit 12.2(d) hereto. --------------- (e) Other Documents. All other documents, instruments or writings --------------- required to be delivered to Purchaser at or prior to the Closing pursuant to this Agreement and such other certificates of authority and documents as Purchaser may reasonably request. 12.3 Documents to be Delivered by Purchaser. At Phase I, Purchaser shall -------------------------------------- execute and deliver to its counsel the following documents, in each case duly executed or otherwise in proper form: (a) Purchase Note. The Purchase Note, substantially in the form of ------------- Exhibit 12.3(a) hereto. --------------- (b) Assumption of Liabilities. Such undertakings and instruments of ------------------------- assumption as will be reasonably sufficient in the opinion of Seller and Seller's counsel to evidence the assumption of the Assumed Liabilities as provided for in Article 2. ---------- (c) Compliance Certificate. A certificate signed by the chief ---------------------- executive officer of Purchaser that the representations and warranties made by Purchaser in this Agreement are true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on and as of the Closing Date (except for any changes permitted by the terms of this Agreement or consented to in writing by Seller), and that the Purchaser has performed and complied with all of Purchaser's obligations under this Agreement which are to be performed or complied with on or prior to the Closing Date. (d) Certified Resolutions. A certified copy of the resolutions of --------------------- the board of directors of Purchaser authorizing and approving this Agreement and the consummation of the transactions contemplated by this Agreement. (e) Other Documents. All other documents, instruments or writings --------------- required to be delivered to Seller at or prior to the Closing pursuant to this Agreement and such other certificates of authority and documents as Seller may reasonably request. -42- ARTICLE 13 TERMINATION ----------- 13.1 Termination. This Agreement may be terminated at any time prior to ----------- the Closing: (a) by mutual agreement of Seller and each of the Shareholders, on the one hand, and Purchaser, on the other hand; (b) by Purchaser, if there has been a material violation or breach by Seller or any of the Shareholders of any of the agreements, representations or warranties of Seller or any of the Shareholders contained in this Agreement which has not been waived in writing or if there has been a failure of satisfaction of a condition to the obligations of Purchaser which has not been waived in writing; (c) by Seller, if there has been a material violation or breach by Purchaser of any of the agreements, representations or warranties of Purchaser contained in this Agreement which has not been waived in writing or if there has been a material failure of satisfaction of a condition to the obligations of Seller hereunder which has not been waived in writing; (d) by Seller, at or before Phase I, if Phase I has not occurred by November 15, 1999, and if so terminated by Seller, Purchaser shall reimburse Seller for one half of its legal fees incurred as a result of the transactions contemplated by this Agreement, up to $50,000; provided, however, that Seller and the Shareholders will negotiate in good faith with Purchaser to agree not to so terminate this Agreement if the satisfaction of the IPO Condition is imminent; and (e) by either party, in each party's sole discretion, within twenty one (21) days of the date hereof, if the Exhibits and Schedules to be attached hereto are not agreed to by the party to whom such Exhibit or Schedule was delivered. 13.2 Effect of Termination. Notwithstanding the foregoing, termination of --------------------- this Agreement pursuant to this Article 13 shall not in any way limit or ---------- restrict the rights and remedies of any party hereto against any other party hereto which has violated or breached any of the representations, warranties, agreements or other provisions of this Agreement prior to termination hereof. ARTICLE 14 MISCELLANEOUS ------------- 14.1 Further Assurance. From time to time, at Purchaser's request and ----------------- without further consideration, Seller will execute and deliver to Purchaser such documents and take such other action as Purchaser may reasonably request in order to consummate more effectively the transactions contemplated hereby and to vest in -43- Purchaser good, valid and marketable title to the Purchased Assets being transferred hereunder. 14.2 Parties in Interest. ------------------- (a) This Agreement shall not be assigned by a party hereto without the prior written consent of the other parties hereto, except that (i) at the direction of the Shareholders, all components of the Purchase Price other than the Seller Cash Amount shall be payable to, or issued in the name of, the individual Shareholders; and (ii) that Purchaser may freely assign, in whole or in part, its rights and obligations under this Agreement to one or more Acquisition Subsidiaries (as hereinafter defined) or to any other corporation or entity affiliated with Purchaser. Subject to the foregoing, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective successors and assigns of the parties hereto. Notwithstanding the foregoing, no such assignment shall relieve Purchaser of its obligations hereunder. (b) Purchaser may cause any wholly-owned subsidiary designated by it ("Acquisition Subsidiary") to carry out all or part of the transactions ---------------------- contemplated by this Agreement. If Purchaser notifies Seller in writing of its election to cause an Acquisition Subsidiary to purchase all or part of the Purchased Assets of Seller, Seller shall sell such Purchased Assets to such Acquisition Subsidiary and such Acquisition Subsidiary shall assume the corresponding Assumed Liabilities on the terms and conditions contained herein, and such Acquisition Subsidiary shall otherwise acquire all of Purchaser's right, title and interest hereunder with respect thereto. Notwithstanding the foregoing, no such assignment shall relieve Purchaser of its obligations hereunder. 14.3 Law Governing Agreement. This Agreement may not be modified or ----------------------- terminated orally, and shall be construed and interpreted according to the internal laws of the State of California, excluding any choice of law rules that may direct the application of the laws of another jurisdiction. 14.4 Notice. All notices, requests, demands and other communications ------ hereunder shall be given in writing and shall be: (a) personally delivered; (b) sent by telecopier, facsimile transmission or other electronic means of transmitting written documents if followed by certified mail; or (c) sent to the parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service. The respective addresses to be used for all such notices, demands or requests are as follows: -44- (a) If to Purchaser, to: The Keith Companies, Inc. 2955 Redhill Avenue Costa Mesa, CA 92626 Attention: Gary Campanaro Facsimile: (714) 668-7026 or to such other person or address as Purchaser shall furnish to Seller and each of the Shareholders in writing. (b) If to Seller or any of the Shareholders, to the addresses set forth below the signature of each Shareholder below; with a copy to: Donald R. Share, Esq. Greene Radovsky Maloney & Share LLP Four Embarcadero Center, Suite 4000 San Francisco, California 94111-4108 Facsimile: (415) 777-4961 or to such other person or address as the Seller or any of the Shareholders shall designate in accordance with this Agreement. If personally delivered, such communication shall be deemed delivered upon actual receipt; if electronically transmitted pursuant to this paragraph, such communication shall be deemed delivered the next business day after transmission; if sent by overnight courier pursuant to this paragraph, such communication shall be deemed delivered upon receipt; and if sent by U.S. mail pursuant to this paragraph, such communication shall be deemed delivered as of the date of delivery indicated on the receipt issued by the relevant postal service, or, if the addressee fails or refuses to accept delivery, as of the date of such failure or refusal. Any party to this Agreement may change its address for the purposes of this Agreement by giving notice thereof in accordance with this section. 14.5 Amendment and Modification. The parties hereto may amend, modify and -------------------------- supplement this Agreement in such manner as may be agreed upon in writing between them in writing. 14.6 Announcements. Announcements concerning the transactions provided ------------- for in this Agreement by either Seller, on the one hand, or Purchaser, on the other hand, shall be subject to the approval of the other in all essential respects. 14.7 Expenses. -------- (a) Brokerage. Seller and Purchaser each represent and warrant to --------- each other that (other than J. Gregory & Company acting on behalf of Purchaser), there is no broker involved or in any way connected with the transfer provided for herein and -45- each agrees to hold the other harmless from and against all other claims for brokerage commissions or finder's fees in connection with the execution of this Agreement or the transactions provided for herein. (b) Transfer Taxes. Any sales, use, excise, transfer or other -------------- similar tax imposed with respect to the transactions provided for in this Agreement, and interest or penalties related thereto, shall be borne by Purchaser. (c) Expenses. Except as otherwise provided herein, each of the -------- parties shall bear its own expenses and the expenses of its counsel and other agents in connection with the transactions contemplated hereby. (d) Costs of Litigation. The parties agree that the prevailing ------------------- party in any action brought with respect to or to enforce any right or remedy under this Agreement shall be entitled to recover from the other party or parties all reasonable costs and expenses of any nature whatsoever incurred by the prevailing party in connection with such action, including without limitation attorneys' fees. 14.8 Entire Agreement. Except for the Ancillary Instruments, this ---------------- instrument embodies the entire agreement between the parties hereto with respect to the transactions contemplated herein, and there have been and are no agreements, representations or warranties between the parties other than those set forth or provided for herein. 14.9 Counterparts. This Agreement may be executed simultaneously in one ------------ or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 14.10 Headings. The headings in this Agreement are inserted for -------- convenience only and shall not constitute a part hereof. 14.11 Further Documents. Purchaser, Seller and each of the Shareholders ----------------- agree to execute all other documents and to take such other action or corporate proceedings as may be necessary or desirable to carry out the terms hereof. 14.12 Severability. If any term or other provision of this Agreement is ------------ invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that -46- transactions contemplated hereby are fulfilled to the extent possible. 14.13 No Third Party Beneficiaries. This Agreement is not intended to ---------------------------- confer upon any person other than the parties hereto any rights or remedies hereunder. 14.14 Cumulative Effect of Representations. The representations and ------------------------------------ warranties set forth in Articles 4 and 5 are considered to be cumulative, and ---------------- any limitation or qualification set forth in any representation and warranty therein shall not limit or qualify any other representation and warranty therein unless otherwise explicitly provided therein. 14.15 Risk of Loss. Until completion of the Closing, all Purchased Assets ------------ shall remain at the risk of Seller and the Assumed Liabilities shall remain the sole responsibility of Seller. If prior to completion of the Closing any Purchased Asset is damaged, destroyed or lost, Purchaser, at its option, may (i) complete the purchase without reduction of the appropriate Purchase Price and take an assignment of all insurance proceeds and other payments to Seller as a result of such damage, destruction or loss or (ii) if the Purchased Assets are damaged, destroyed or lost to the extent that Purchaser is of the opinion that immediately after the Closing it will be unable to conduct the Business or operate the Facilities on substantially a full-time basis and deliver services in a manner consistent with the practices of the Seller immediately prior to such loss, in each case without material expense to Purchaser, Purchaser may terminate this Agreement without liability to it by delivering written notice of termination to Seller. -47- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. PURCHASER: THE KEITH COMPANIES, INC., a California corporation By: /s/ Gary C. Campanaro --------------------- Its: CFO ------------------ SELLER: THOMPSON-HYSELL, INC., a California corporation By:/s/ H. Stanley Thompson ----------------------- Its: V.P. ------------------- SHAREHOLDERS: /s/ H. Stanley Thompson ----------------------- H. STANLEY THOMPSON Address: -------- (Illegible) ----------------------- ----------------------- ----------------------- /s/ William B. Hysell ---------------------- WILLIAM B. HYSELL Address: -------- 1713 River Road ----------------------- Modesto, CA 95351 ---------------------- ---------------------- /s/ Thomas A. Holstrom ---------------------- THOMAS A. HOLSTROM Address: ------- (Illegible) ---------------------- ---------------------- ---------------------- /s/ Brian D. Jones --------------------- BRIAN D. JONES Address: ------- (Illegible) ---------------------- ---------------------- ---------------------- (Signatures continued on following page) -48- /s/ Michael T. Persak --------------------- MICHAEL T. PERSAK Address: ------- 209 Charlemagne Way ---------------------- Modesto, CA 95350 ---------------------- ---------------------- /s/ Kent Hysell ------------------------- KENT HYSELL Address: ------- 31277 E. Lone Tree Road ------------------------- Oakdale, CA 95361 ------------------------- ------------------------- -49- EX-2.2 3 AGREEMENT FOR ACQUISITION EXHIBIT 2.2 AGREEMENT FOR THE ACQUISITION OF ALL OUTSTANDING STOCK OF ESI, ENGINEERING SERVICES, INC. BY THE KEITH COMPANIES, INC. TABLE OF CONTENTS RECITALS................................................ 1-3 I. INCORPORATION BY REFERENCE.............................. 3 II. PURCHASE AND SALE....................................... 3 A. Purchase and Sale of ESI Stock.................... 3 B. Assets and Liabilities Included in Transaction.... 4 C. Closing........................................... 4 D. Possible Adjustment in Consideration Paid by Keith 4 E. Consideration to be Paid by Keith................. 5 F. Additional Documentation.......................... 9 G. ESI's Current Employees; Seniority................ 9 H. Protection of ESI's Business Operations........... 9 I. Insurance; Risk of Loss........................... 9 III. REPRESENTATIONS AND WARRANTIES OF SELLER................ 10 A. No Pending Litigation............................. 10 B. Authority to Perform.............................. 10 C. No consent Required............................... 10 D. No Notices........................................ 10 E. Enforceability.................................... 10 F. No Prohibition.................................... 10 G. No Attachments.................................... 11 H. No Other Agreements............................... 11 I. Notification...................................... 11 J. Employee Relations................................ 11 K. No Breach of Existing Agreement................... 11 L. Warranties Effective at Time of Closing........... 11 M. Tax and Other Liabilities......................... 11 IV. REPRESENTATIONS OF BUYER................................ 12 A. Authority to Perform.............................. 12 B. No Consent Required............................... 12 C. No Prohibition.................................... 12 V. CONDITIONS PRECEDENT TO OBLIGATIONS OF KEITH............ 12 VI. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS.......... 14
VII. RIGHTS AND REMEDIES IN CASE OF DEFAULT.............. 15 A. Buyer's Remedies............................... 15 B. Seller's Remedies.............................. 15 VIII. INDEMNIFICATION..................................... 16 IX. MISCELLANEOUS PROVISIONS............................ 16 A. Extension of Time and Waiver of Performance.... 16 B. Amendments..................................... 16 C. Notices........................................ 16 D. Counterparts................................... 17 E. Governing Law.................................. 17 F. Successors..................................... 18 G. Severability................................... 17 H. Entire Agreement............................... 17 I. Further Assurances............................. 18 J. Time of Essence................................ 18 K. Computation of Time............................ 18 L. Terminology.................................... 18 M. Survival....................................... 18 N. Attorney's Fees................................ 18 O. Authority...................................... 19 P. No Third Party Beneficiary..................... 19
TABLE OF EXHIBITS A. ESI, Engineering Services, Inc., Consolidated Statement of Income, Year Ended June 30, 1997; June 30, 1996; and June 30, 1995. B. ESI, Engineering Services, Inc., Jobs in Process, 8/31/97 C. ESI, Engineering Services, Inc., Balance Sheet, 6/30/97 D. Current Clients of ESI, Engineering Services, Inc. E. Keith's Incentive Stock Option Plan and typical Option Agreement F. Employment Contract of current owners of ESI, Engineering Services, Inc. AGREEMENT FOR THE ACQUISITION OF ALL OUTSTANDING STOCK OF ESI, ENGINEERING SERVICES, INC BY THE KEITH COMPANIES, INC This Agreement (the "Agreement") is entered into as of the 22nd day of September, 1997 between The Keith Companies, Inc., a Corporation organized in the State of California on November 20, 1986 under its then name of "The Keith Companies - Inland Empire, Inc." (hereinafter referred to as "Keith" or "Buyer"), and Lynn C. Cannady, Glenn I. Chase and Stephen J. Lane, (collectively "Sellers" or "Seller") who together own all of the issued and outstanding capital stock of ESI, Engineering Services, Inc., a Corporation organized in the State of California (hereinafter referred to as "ESI") as of the date of this Agreement. ESI owns all of the outstanding capital stock of ESII, Engineered Systems Integration, Inc. ("ESII"). The above described Buyer and Seller desire to and hereby do enter into this Agreement whereby Buyer will acquire from Sellers the consulting engineering businesses currently operated by ESI and its wholly owned subsidiary, ESII, both located at 370 Wiget Lane, Suite 210, Walnut Creek, California, and will acquire all of ESI's and ESII's assets and will assume certain liabilities, upon the terms and conditions as set forth in this Agreement. RECITALS A. Seller has been in the business of providing consulting engineering services to various manufacturers and operators of environmental waste disposal systems since 1979. Professional services include, amongst others, process engineering design, chemical engineering, electrical engineering, environmental waste processing system design, petrochemical system design and related professional services. All references to ESI in this Agreement include its wholly owned subsidiary, ESII, unless the context clearly indicates otherwise. Sellers, in addition to owning ESI, are the owners of Design Services ("DSI"), which provides the temporary placement of professional employees. Sellers intend to, and will utilize their best, good faith, efforts to dispose of their ownership interest in DSI at the earliest practicable time. No portion of the assets, liabilities, operations or activities of DSI are included in the within Agreement. Despite their ownership of DSI, Sellers agree to devote substantially full time efforts to the business of ESI and ESII. B. Sellers have delivered to Keith a statement of income of ESI for the year ended June 30, 1997, and will provide financial statements for the years ended June 30, 1995, and 1996, to be attached as Exhibit A to this Agreement. Said financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout each period involved and in accordance with accounting practices used by ESI with respect to its prior financial statements. Sellers represent that the financial statements present fairly the results of operations of ESI on a consolidated basis for the three year period represented by the three financial statements referenced in this paragraph. 1 C. ESI operates from its offices in Walnut Creek, California in suite 210 of a building at 370 Wiget Lane at the current monthly rental of $21,374.45, of which ESI's share currently is $14,687. The lease expires February 29, 2004. D. ESI currently has approximately 32 full time ESI employees, including the three Sellers and approximately six contract employees who are employed by DSI. Certain administrative employees of DSI are currently on ESI's payroll, and will remain on ESI's payroll until the end of 1997, unless DSI is sold prior to year end. ESI also provides accounting and computer services for DSI. ESI will be fairly compensated for such services and will be reimbursed for payroll and fringe payroll costs of DSI employees. E. ESI has a number of contracts with its clients, which will not be completed by the Closing Date of this Agreement. On or before October 9, 1997, Sellers will cause to be attached hereto as Exhibit B, a listing of all jobs not yet completed by ESI as of August 31, 1997 with the balance yet to be billed indicated as of said date. In addition, for those jobs which indicate a balance yet to be billed of $10,000 or more, Sellers will have made a good faith estimate of the cost to complete the scope of services provided for in the contract between Seller and its client. Buyer and Sellers acknowledge that estimating the cost to complete each job is not an exact science, and thus Sellers make no representations or warranties as to the correctness of its good faith estimate. In the event that any job is indicated with an estimate of cost to complete which is in excess of the remaining fees to be billed, the excess, along with a ten percent profit margin on the remaining work, shall be accrued as a liability of ESI for purposes of this Agreement. F. Buyer has been informed that some of ESI's contracts with its clients may contain a clause which restricts or prevents any change in ownership of ESI without the prior written consent of the client. Accordingly, it is possible that one or more clients may claim a default by ESI and seek to exercise its unilateral right to cancel the remaining work encompassed by such contract. In such an event, the client may have the right to seek monetary damages from ESI should it terminate its contract with ESI, and engage another professional engineering firm to complete the work remaining on the contract at a cost which is greater than the remaining balance to be billed under the contract. As an alternative, a client may attempt to exert its right of offset by reducing the outstanding balance of any previously billed work by the monetary damages which it claims to have sustained by reason of engaging a new consulting engineering firm. G. Keith, its subsidiaries and affiliates (the "Keith Group") have been engaged in the business of civil engineering in Southern California since March 1, 1983. The Keith Group currently employs about 230 people, and operates offices in the California cities of Costa Mesa, Moreno Valley, San Diego, Thousand Oaks and Palm Desert, and in Las Vegas, Nevada. 2 H. Buyer desires to employ Lynn C. Cannady, Glenn I. Chase and Stephen J. Lane, as well as the other current employees of ESI on a full time basis and operate the ESI business as a part of the Keith Group of Companies. Sellers desire to sell their stock in ESI to Buyer and to no longer engage in the business of consulting engineering, except as a part of the Keith Group and as employees of ESI. I. Keith's shareholders include Walter W. Cruttenden III, who became a ten percent shareholder in Keith during July 1997. Accordingly, as of August 31, 1997, an aggregate of 8,880,000 shares of Buyer have been issued and are outstanding, and an additional 1,000,000 shares have been reserved for issuance pursuant to Keith's Incentive Stock Option Plan J. Buyer and Sellers have reduced to writing in this Agreement their full and complete understanding and accord with respect to all matters relating to said purchase and sale of assets, so as to enable the same to be consummated in an expeditious and orderly manner. NOW THEREFORE, in consideration of the mutual covenants and agreements, representations and warranties hereinafter set forth, the parties agree as follows: AGREEMENT --------- I. INCORPORATION BY REFERENCE: -------------------------- Each of the Recitals, A through J, is hereby incorporated into this Agreement and made an integral part hereof, as if those recitals were again set forth in full herein. Each Seller and Buyer hereby acknowledges and confirms to each other the truth and correctness or each such recital. II. PURCHASE AND SALE OF ESI STOCK, CLOSING, CONSIDERATION: ------------------------------------------------------- A. PURCHASE AND SALE OF ESI STOCK: On the basis of the representations and warranties, and subject to all of the terms and conditions set forth in this Agreement, Sellers agree to sell and convey to Keith, and Buyer agrees to purchase and acquire from Sellers, for the total purchase consideration as hereinafter provided, all of the issued and outstanding capital stock of ESI, which represents the ownership rights to all of the business operations, fixed assets, good will and other intangible assets of ESI, of every nature, kind and description, wheresoever located and whether or not carried or reflected on ESI's books and records, as the same shall exist at the time of Closing, including, but not by way of limitation: 1. All accounts and notes receivable incurred in the ordinary course of business for work performed to the time of Closing, whether or not actually billed to clients; 2. All prepaid expenses and deposits of ESI relating to its business and operations; 3. Cash on hand and in banks; 4. All fixed assets, including those comprising real property, personal property and of mixed nature, together with all computer equipment, office equipment, machinery, tools, parts, findings, attachments, accessories, fixtures, trade fixtures, 3 leasehold improvements, office furniture, supplies and sundries, equipment, motor vehicles, mechanical devices, patents, copyrights, trademarks, trade names, good will, leasehold interests and estates, customer files and records of prior work, billings and collection activity, supplier lists and pricing schedules, trade information and trade secrets, employee files, union, labor and other collective bargaining agreements, all of which properties have been used or connected directly or indirectly with the business and operations of ESI (whether or not such properties are encumbered, pledged or otherwise hypothecated to secure the payment of any debt or other obligation owed or incurred by ESI); and 5. The trade names of ESII, Engineered Systems Integration, Inc.; ESI, Engineering Services, Inc.; or any variation thereof, and any non- copyrighted variation thereof not previously copywrited by any third party. B. ASSETS AND LIABILITIES INCLUDED IN TRANSACTION: Said assets shall be acquired by Keith, subject only to the lien and charge of those certain specifically enumerated debts, claims, liabilities, obligations and security interests, if any, set forth in and disclosed by the June 30, 1997, Balance Sheet of ESI, and to be assumed by Keith as set forth in this Agreement. Other than liabilities disclosed on the June 30, 1997, balance sheet of ESI and liabilities incurred in the normal course of operations between said date and the Closing date or otherwise specifically provided in this Agreement, Keith will not assume and will not be liable for the payment or other discharge of any other liabilities or obligations of ESI existing at the Closing Date, whatsoever. ESI shall cause its June 30, 1997, Balance sheet to be attached as Exhibit C to this Agreement. Keith will be responsible for and shall assume all liabilities incurred by ESI from June 30, 1997, until the Closing Date in the ordinary course of its business and all liabilities incurred thereafter, including, but not by way of limitation, accounts payable, salaries and wages, and accrued employee expenses. C. CLOSING: Except as herein otherwise provided, the closing under this Agreement will take place at 10:00 AM, prevailing California time on October 30, 1997, or at such other time and date as the parties hereto may in writing agree upon, such time and date being herein referred to as the "Closing" or "Closing Date", at the office of Keith at 2955 Redhill Avenue, Costa Mesa, California (or at such other place as the parties may in writing agree upon). Irrespective of the foregoing sentence, the closing will be delayed until Buyer is prepared to pay off the ESI loan from Union Bank and to replace ESI's portion of a Letter of Credit issued by Union Bank to secure certain leasehold improvements. In no event shall the closing be delayed past December 31, 1997. In the event that Buyer in unable to pay off the ESI loan from Union Bank (including replacing the ESI Letter of Credit to Union Bank, and Buyer does not conclude the purchase of ESI stock contemplated by this Agreement, then Buyer shall pay the greater of fifty thousand dollars ($50,000) to Sellers as liquidated damages or the amount of actual monetary damages sustained by Sellers. For this purpose only, the parties agree to submit the determination of such actual monetary damages to binding arbitration conducted pursuant to the rules of the American Arbitration Association, with Buyer and Seller each paying their own costs of the arbitration, and each paying one half of the fees and costs charged by the arbitrator. 4 D. POSSIBLE ADJUSTMENT IN CONSIDERATION PAID BY KEITH: The total consideration to be paid by Keith for all of the outstanding capital stock of ESI to be acquired by Keith shall be subject to adjustment, based upon the determination of the book value of ESI, which will not exceed the value of all tangible assets as valued below as of June 30, 1997, less liabilities assumed by Buyer. The following procedures shall be utilized in establishing the Net Book Value of ESI's assets acquired by Keith as of June 30, 1997 and as of the Closing including liabilities of ESI assumed by Buyer: 1. Work in process shall be valued at zero, except that in the event there exists any fixed price contracts or work with milestone billings (where the milestone has not been attained), the amounts billed or otherwise accrued as revenues through the valuation date shall not exceed an amount which will permit the remaining portion of the contract to be completed at profit margins of no less than ten percent (10%). To correct any such over-accrual of revenues at each valuation date, the stated accounts receivable book value shall be reduced in an appropriate amount to accomplish the adjustment as set forth in the preceding sentence. 2. Prepaid expenses and deposits shall be recorded at their unamortized cash value. 3. Fixed assets shall be valued at the original cost of each item, less accumulated depreciation claimed for Federal Income Tax purposes, but shall not exceed the total estimated current fair market value of the total fixed assets. Fair market value of computer equipment and software (which is subject to technical obsolescence) shall be determined by reference to its current replacement value. Fair market value of any vehicle shall be determined by reference to the Kelly Blue Book wholesale value, reasonably adjusted for mileage and the physical condition of each vehicle. 4. Other tangible assets of ESI and all of its liabilities shall be valued pursuant to generally accepted accounting principles consistently applied. A current listing of ESI's major clients as of August 31, 1997, is attached as Exhibit D. 5. Sellers guarantee that at June 30, 1997, and at the time of Closing, the value of ESI's tangible assets as determined above, less its liabilities shall not be less than $350,000. In the event that such net book value is under $350,000 and to the extent that it is less than $350,000, the number of Keith shares to be issued to Sellers at Closing shall be reduced by one share for each one dollar seventy five cents ($1.75) that the actual net book value of ESI is below $350,000. However, at Seller's exclusive option, they may contribute cash to ESI during October, 1997, and in such an amount as is necessary to bring the net book value to $350,000 in lieu of reducing the number of Keith shares to be issued to Sellers. 5 E. CONSIDERATION TO BE PAID BY KEITH: The consideration to be given to Sellers by Keith in exchange for Sellers' stock in ESI shall be as follows: 1. ESI's shareholders will exchange all of ESI's outstanding shares of common stock with Buyer in exchange for 200,000 shares of Buyer's Common Stock and such other shares as set forth herein. Unless otherwise provided in this Agreement, all shares issued to Sellers will be issued one-third to each Seller, with any odd, fractional share issued to Sellers in alphabetical order of their last names. a. Buyer agrees, at the sole discretion of any Seller, to repurchase any or all of that Seller's portion of the 200,000 shares issued at the Closing at the price of $2.50 per share provided that an Initial Public Offering of the Buyer's Common Stock has not been effected by October 31, 1999. This election shall be made individually by any of the Sellers during the time period of November 1, 1999 to November 15, 1999 (the "Notice Period") by delivery of written notice thereof to Buyer. After November 15, 1999, this right shall expire. b. Irrespective of the above, in the event that the Dow Jones Average is below 7,000 at any time from April 1, 1999 to September 30, 1999, the Notice Period shall be extended until the expiration of nine months after the Dow again exceeds 7,000 on a consistent basis; and the expiration date of the time for giving notice shall be extended for a similar period. In no event shall the extension period be extended past December 31, 2001. c. In the event that any Seller exercises this right to cause Buyer to repurchase his stock, such Seller shall also convey all other shares of Keith stock which may have been issued to such Seller, whether acquired by exercise of Stock Options, Incentive Shares, or otherwise, and all additional stock options then outstanding issued to such Seller shall forthwith be canceled and shares acquired by exercise of stock options shall be acquired by Keith at their per share purchase price. d. Keith's financial statements reflect a deficit in the shareholders' equity portion of its balance sheet ("Keith Equity") as of July 31, 1997. Keith's officers and/or shareholders will subordinate repayment of such amount of the principal portion of debt owed to shareholders to such amount as, when netted with the net book value of Keith's Equity, equals $750,000. 2. As of the Closing Date, Buyer will issue incentive stock options aggregating 200,000 shares of the Buyer's Common Stock. (A copy of Keith's Incentive Stock Option Plan and a copy of a typical Stock Option Agreement are attached as Exhibit E hereto). Of these options, 40,000 options shall be issued to each of the three Sellers. Of the remaining optioned shares, approximately 60,000 options would be allocated among ESI's second tier technical and management personnel (Surinder, Mike, Terry, Tony, Ralph, etc.); and approximately 20,000 of 6 such options will be issued to other key personnel (Linda, Jim, etc.). Sellers will have substantial discretion in the allocation of the 80,000 options offered to ESI's employees with the primary objective being to motivate not only the three current owners of ESI, but also the next tier of management, primarily those employees and prospective employees with superior future potential, and others deemed important to the future success of ESI. The Stock Options will have a $1.00 exercise price. Buyer expects that its shares, which are subject to the above described options, shall have a value substantially greater than the exercise price in future years. Accordingly, in the event that such shares do not have a fair market value of at least three dollars per share at some time during the time period between October 1, 1999, and October 1, 2002, Sellers, at each of their exclusive options, may exchange and cancel any unexercised, vested stock options and receive two dollars in cash from Keith for each such option share which such Seller tenders to Keith for cancellation. In addition, each Seller shall have the right, to be exercised only during October, 2002, to sell any shares in Keith which he acquired by exercise of his stock options to Keith for three dollars per share, subject to the same condition as to fair market value of Keith shares as is applicable to unexercised, vested options during the period of October, 1999 to 2002. 3. Buyer will provide no less than an additional 100,000 of incentive stock options ("Additional Options") as of January 1, 2000, to be granted to ESI employees subject to the condition precedent that certain earnings goals have been attained by ESI as set forth in the following paragraph. The current three owners of ESI shall be eligible to be awarded a portion of such Additional Options. The Additional Options will have an exercise price of the fair market value of the shares at the time of the grant of each option, which exercise price is required pursuant to IRS regulations which allow the employee the ability to defer recognition of taxable income until the shares are sold and the ability to be taxed at capital gains rates where the holding period requirements are met. 4. Buyer will issue up to an additional 100,000 shares of its common stock ("Incentive Stock"), to be issued to Sellers and shared equally by the three Sellers, subject to attainment of the following performance criteria: a) Maximum number of shares to be issued: -------------------------------------- During the period from June 30, 1997 through and including the year ended November 30, 2000, for each $3.00 of Net Income per year in excess in the required minimum net income as described in 4.b., after provision for Federal and California Taxes on Income ("Net Income"), as computed on a quarterly basis pursuant to GAAP earned by ESI, Buyer will issue one share of the Buyer's Common Stock, not to exceed an aggregate of 100,000 shares to be issued pursuant to this provision. b) Required minimum Net Income: --------------------------- 7 ESI shall be required to earn a minimum amount of Net Income based on the number of shares ("Base Shares") which Buyer has both previously issued to ESI's current shareholders and its employees, and the number of granted, but unexercised employee stock options issued to ESI's current shareholders and its present and future employees. (Initially the number of shares to be utilized in making this calculation is 400,000 shares). The minimum Net Income to be earned by ESI before the issuance of any Incentive Stock shall be $.80 per share for the fiscal years of 1997 and 1998; $1.00 for 1999; and $1.25 for the year 2000. For these purposes, the year 1997 shall end 11/30/97, 1998 shall end 11/30/98, etc. Accordingly, a base amount of Net Income of $320,000 would be required for the year ended November 30, 1998; and Net Income above that level would be eligible for the issuance of Incentive Stock. c) Determination of number of Base Shares: -------------------------------------- The number of Base Shares to be utilized in calculating the minimum Net Income requirements of ESI in order to qualify for the issuance of Incentive Stock shall be determined by averaging the Base Shares at the beginning of each quarter during the year. For example, if the applicable number of shares were 400,000 at December 1st, 425,000 shares at March 1st; 440,000 shares at June 1st , and 450,000 shares at September 1st, then the average shares for the year would be 428,750 (1,715,000/4 = 428,750). d) Accounting procedures and policies to be employed: ------------------------------------------------- For the purpose of this Agreement, Net Income shall be determined based upon ESI's cost and overhead structure and applying GAAP to ESI's financial statements. Expenses of Buyer's corporate overhead shall be reasonably allocated among all of the business units owned or controlled by Buyer from time to time. Buyer allocates approximately 75% of its corporate overhead among Buyer's business units based upon employee head count at each business unit as of the beginning of each month, and approximately 25% is allocated based upon revenues earned (Calculated on the accrual basis of accounting, as measured by the "value added" by each business unit) during the trailing calendar quarter. For example, net revenues earned and employee head count statistics for the first quarter of 1998 would be used to calculate corporate fees for the third quarter of 1998. 5. Anti dilution provision: ----------------------- It is agreed that no additional shares of stock in Buyer will be issued without Sellers' prior written consent, except as may be required from time to time to comply with the terms of this Agreement and the terms of any future acquisitions by Buyer or to provide additional shares for the Incentive Stock Option Plan necessitated by the growth of Buyer's and ESI's professional and management staffs, or for the contemplated Initial Public Offering of Buyer, currently anticipated to occur in late 1998. 8 6. Additional Consideration - Employment and Non-Competition Agreements: --------------------------------------------------------------------- Lynn C. Cannady, Glenn I. Chase and Stephen J. Lane shall each be offered a five year employment agreement in the form of Exhibit F attached hereto. Each employment agreement provides that for a period of 24 months after termination of employment, employee shall not disclose proprietary information of employer and that, for a period of 12 months after termination of employment, employee shall not compete with ESI or The Keith Companies by operating within 30 miles of any then ESI or TKC office. F. ADDITIONAL DOCUMENTATION: For a reasonable time and from time to time after the Time of Closing, upon reasonable request of Buyer, Seller will duly execute, acknowledge and deliver all such further assignments, conveyances and other instruments of transfer and other assurances and documents and will take such other action consistent with the terms of the Agreement as reasonably may be requested by Buyer for the purpose of better assigning, transferring and conveying to Buyer or reducing to its possession any or all of the business assets being sold and conveyed to Buyer hereunder, providing that the costs of preparation of all thereof shall be paid by Buyer. G. ESI'S CURRENT EMPLOYEES; SENIORITY: Buyer intends to offer employment to all current, full time employees of ESI as of the Time of Closing and will execute an employment contract with each of the three Sellers in the form attached as Exhibit F. Keith will grant one year of service credit towards its seniority calculations (for vacation pay and length of service awards) for each two years of full time employment with ESI, up to a maximum of seven years of credit towards Keith service awards and Keith benefits. H. PROTECTION OF ESI'S BUSINESS OPERATIONS: Seller will use its best, good faith efforts until and following the date of this Agreement to preserve and maintain its business organization intact and to keep available to Buyer its favorable relationships with employees, suppliers, customers and others, all to the end that the going business of Seller will be unimpaired at the Time of Closing. Seller shall not change compensation rates of its employees prior to close without Buyer's consent. I. INSURANCE; RISK OF LOSS: Seller will continue in force at ESI's expense until the Closing Date of this Agreement its existing professional errors and omissions, liability and property damage, fire and other casualty insurance. ESI's current policy is to provide errors and omissions insurance on specific assignments or projects when such coverage is requested by the client, thus, it has no E&O coverage for much of its prior work. Prior to the Closing Date, the risk of loss to the assets subject to purchase and sale hereunder shall be borne entirely by Seller. Buyer agrees to assume each officer's personal liability for professional errors and omissions of any officers of Seller who become employees of Buyer as of the effective date. 9 III. REPRESENTATIONS AND WARRANTIES OF SELLER: Seller represents and warrants ----------------------------------------- to Buyer, as of the date hereof and as of Closing, as follows: A. NO PENDING LITIGATION: To Seller's actual knowledge, there is no --------------------- litigation pending or threatened against or affecting any of Seller's assets which would limit Seller's ability to perform his obligation hereunder, including professional errors or omissions, bankruptcies or receiverships, which might adversely affect the assets of the business. ESI is plaintiff on several lawsuits in which it seeks to recover amounts billed to clients which have not been paid to date. One such legal action against Power Generation, Inc. is scheduled for a mediation conference on September 15, 1997, and Power Generation has counter sued. In addition, ESI is considering litigation to collect certain amounts from Nimbus, Inc. If the matter is collected without litigation, ESI may be required to reduce its claim by as much as $10,000. ESI warrants that if a full recovery is not made of its receivables, it will nevertheless meet the net worth requirements of $350,000 at closing. B. AUTHORITY TO PERFORM: Sellers have full power and authority to execute, -------------------- deliver and perform this Agreement and all other documents and certificates contemplated hereby, and the execution, delivery and performance thereof has been duly authorized by Sellers. No other action is required to be taken by Sellers to permit the execution, delivery and performance of this Agreement, the transaction contemplated hereby, and all other documents and certificates contemplated hereby, and no consent or approval of any third party is required in connection with the execution of this Agreement or to consummate the transaction contemplated hereby. C. NO CONSENT REQUIRED: The execution of this Agreement by Sellers, the ------------------- performance by Sellers of Sellers' obligations hereunder and the sale, transfer and conveyance of Sellers' stock in ESI do not require the consent of any third party, other than possibly the Secretary of State of the State of California. D. NO NOTICES: Sellers have not received and have no knowledge of any ---------- notification from any city, county, state, or Federal or other authority or any governmental or quasi-governmental authority which would inhibit the continued operation of ESI. E. ENFORCEABILITY: ESI owns good, clear and marketable title to the assets -------------- reflected on its June 30, 1997, Balance Sheet (Exhibit C), and upon execution of this Agreement by the signatory parties hereto all of the covenants, conditions and promises to be performed by Sellers under this Agreement shall be binding upon and enforceable against each Seller in accordance with the terms hereof. In addition, all assignments entered into by Sellers in favor of Buyer shall effectively transfer all of Sellers' rights to Buyer as to each document assigned by Sellers to Buyer. F. NO PROHIBITION: No Seller is prohibited from consummating the transactions -------------- contemplated herein by any law or regulation, agreement, instrument, restriction, order or judgment. 10 G. NO ATTACHMENTS: There are no attachments, executions, assignments for the -------------- benefit of creditors, receiverships, conservatorships or voluntary or involuntary proceedings in bankruptcy or pursuant to any other debtor relief law contemplated or filed by ESI or pending against ESI or ESI's assets. H. NO OTHER AGREEMENTS: No Seller is a party to any contract or other ------------------- agreement, nor does any Seller have any knowledge of the existence of any such agreement which would be binding upon Buyer, other than contracts entered into by ESI in the ordinary course of its business. I. NOTIFICATION: Each Seller shall promptly notify Buyer of any change in any ------------ condition with respect to ESI's assets or of any event or circumstance actually known to such Seller that makes any representation or warranty of any Seller contained in this Agreement untrue or materially misleading. J. EMPLOYEE RELATIONS: There is no pending or threatened dispute between ------------------ Sellers, ESI and any of its employees which might materially and adversely affect the continuance of ESI's business. There is no claim, suit, proceeding, arbitration or investigation or other legal or administrative proceeding pending or, to the knowledge of Sellers or any of its officers, directors, employees or shareholders threatened against Seller or against any officer, director, employee, or shareholder which might result in any material adverse change in the financial condition or business of ESI or which would question the validity or propriety of this Agreement or of any action taken or to be taken in accordance with or in connection with this Agreement or in any other way directly or indirectly affecting the stock in ESI which is subject to purchase and sale hereunder. K. NO BREACH OF EXISTING AGREEMENT: The execution and performance of this ------------------------------- Agreement will not result in a breach of, or constitute a default under: 1. Any charter, by-law, agreement or other document to or by which ESI or any shareholder of ESI is a party or is bound; or 2. Any decree, order or rule of any court or governmental authority which is binding on ESI or any shareholder of ESI or on any of ESI's properties; or 3. Any agreement, indenture or understanding to which ESI or any one or more of its shareholders is a party. L. WARRANTIES EFFECTIVE AT TIME OF CLOSING: If the purchase and sale of --------------------------------------- Sellers' stock in ESI, as provided for in this Agreement, is consummated at the Time of Closing, all of the representations and warranties hereinbefore contained in this Paragraph will be true and correct at and as of the Time of Closing, except for immaterial and non-adverse changes contemplated or permitted by this Agreement. M. TAX AND OTHER LIABILITIES ------------------------- ESI has no tax liabilities or other liabilities not disclosed on its financial statements. 11 IV. REPRESENTATIONS OF BUYER: Buyer represents and warrants to Seller, as of ------------------------ the date hereof and as of the closing, as follows: A. AUTHORITY TO PERFORM: Buyer has full power and authority to execute, -------------------- deliver and perform this Agreement, and all other documents and certificates contemplated hereby, and the execution, delivery and performance thereof have been duly authorized by Buyer. No other action is required to be taken by Buyer to permit the execution, delivery and performance of this Agreement, the transaction contemplated hereby, and all other documents and certificates contemplated hereby, and no consent or approval of any third party is required in connection with the execution of this Agreement, or to consummate the transaction contemplated hereby. B. NO CONSENT REQUIRED: The execution of this Agreement by Buyer, the ------------------- performance by Buyer of Buyer's obligations hereunder and the sale, transfer and conveyance of ESI's stock to Keith do not require the consent of any third party, other than possibly the Secretary of State of the State of California. C. NO PROHIBITION: Buyer is not prohibited from consummating the transactions -------------- contemplated herein by any law or regulation, agreement, instrument, restriction, order or judgment. V. CONDITIONS PRECEDENT TO OBLIGATIONS OF KEITH: -------------------------------------------- A. The obligation of Keith to purchase all of the outstanding shares of ESI pursuant to the terms of this Agreement shall be subject to the fulfillment at or prior to the Time of Closing of each of the following precedent conditions: 1. All representations and warranties of Sellers contained in this Agreement shall be true and correct at and as of the Closing, with the same force and effect as though made at and as of the Closing, except for changes contemplated or permitted by this Agreement. 2. Sellers shall have fully performed and complied with all of the obligations and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing. 3. Upon demand, ESI, its officers, directors and shareholders shall each have delivered to Buyer their respective certificate, dated the day of the Closing, as to the fulfillment of the conditions set forth in the two preceding sub-paragraphs. 4. Upon its demand, Buyer shall have received a favorable opinion from legal counsel for Sellers, dated the day of Closing, in form and substance satisfactory to counsel for Buyer, to the effect that (based upon review by Seller's counsel of corporate records and documents necessary to enable Seller's counsel to render said opinion): 12 a. ESI is a corporation duly organized and legally existing in good standing under the laws of the State of California, has full corporate power to own its properties and conduct its business as now being conducted; and the business carried on by ESI is not such as to require that it be qualified to transact business as a foreign corporation in any jurisdiction other than in the State of California, wherein it is duly qualified as of the Closing; b. To the best knowledge and belief of said counsel, this Agreement has been duly and legally executed and delivered by Sellers and is the valid and binding agreement of Sellers which is fully enforceable in accordance with all of its terms and conditions; this Agreement has been duly authorized by resolutions of ESI's shareholders, which resolutions were validly adopted by unanimous written consent of the Shareholders at which no less than seventy-five percent of all shareholders voted to adopt and approve of the execution of this Agreement by such shareholders, and the full performance of all of Seller's obligations and undertakings hereunder; c. Said counsel does not know, and has no reason to believe that any suit, proceeding or investigation is pending, threatened against ESI or any shareholder of ESI, or questions the validity or propriety of this Agreement or of any action taken or to be taken pursuant to or in connection with this Agreement. d. Said counsel does not know or have any reason to know or believe that the execution and performance of this Agreement will result in a breach of or constitute a default under any charter or by-law provision which is binding on ESI; or that any shareholder of ESI is a party or is bound or any decree, order or rule of a court or other governmental authority which is binding on ESI or any shareholder of ESI; and e. Such opinion shall cover such related matters as Buyer may reasonably require. If ESI and its shareholders are represented by different counsel, each such counsel shall render its separate opinion. f. It is Buyer's present intention to waive the attorney representation letter provided that Sellers individually each make said representations. 5. The ongoing business of ESI and its business organization, personnel and relations with suppliers, customers, dealers and distributors and other shall have been preserved intact and shall not have been impaired at the Closing. 6. Sellers shall not have incurred any material breach of any warranty or representation contained in this Agreement nor any material adverse change in the financial position or results of ESI's operations, as shown by the financial statements and warranties referred to herein. 13 7. Buyer has not disapproved of any documents or information submitted to it for its review and approval in accordance with the requirements of this Agreement. 8. Sellers shall have executed and delivered to buyer appropriate Stock Certificates, either signed or accompanied by signed stock powers, and all other agreements, documents and instruments deemed necessary by Buyer and its counsel to sell and transfer ESI's stock to Buyer as contemplated by this Agreement. All such instruments and documents shall be in form and substance reasonably satisfactory to Buyer and its counsel. 9. No action or proceeding shall have been commenced or threatened by any client, person or governmental agency by reason of this transaction, the result of which might render it impossible or inadvisable in Buyer's opinion for Buyer to close this transaction. 10. There shall have been no material adverse change in the financial condition of ESI. 11. Buyer shall have completed its "Due Diligence" examination of the business operations of ESI, including review of the financial statements of ESI; access to job contracts and records; employee files; billing files; vendors and vendor files; subconsultants and subconsultant files; insurance files; legal counsel and legal files; and any additional information which Buyer, in good faith, believes is relevant to ESI's financial condition and future operations. Buyer agrees to use its good faith best efforts to conclude its remaining due diligence work on or before September 18, 1997. 12. Sellers shall have satisfied and complied with all other conditions, obligations and undertakings hereunder required to be done by them prior to or at the closing. 13. Sellers shall provide Keith with Certificates of Good Standing for ESI and ESII. B. If any of the above conditions precedent is not met or fulfilled or is violated, Buyer shall not be under any obligation to consummate this Agreement and may terminate this Agreement without liability to it or, at its exclusive option, may postpone the Closing, as hereinbefore provided, until the conditions have been met. VI. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLERS: ---------------------------------------------- The obligations of Sellers to sell and transfer its stock in ESI to Buyer in exchange for the consideration specified in this Agreement shall be subject to the fulfillment at or prior to the Closing of each of the following precedent conditions: A. All representations and warranties of Buyer contained in this Agreement shall be true and correct at and as of the Closing, except for changes contemplated or permitted by this Agreement. 14 B. Buyer shall have performed and complied with all of the obligations and conditions required by this Agreement to be performed or complied with by it at or prior to the Closing. C. Upon demand of Seller, Buyer shall deliver to Seller its certificate, dated the day of the Closing, executed on its behalf by an officer of Buyer, as to the fulfillment of the conditions set forth in the two preceding subparagraphs. D. Upon demand, Seller shall have received a favorable opinion from Buyer's legal counsel, dated the day of the Closing, in form and substance satisfactory to counsel for Sellers (which approval shall not be unreasonably withheld), to the effect that: 1. Buyer is a corporation duly organized and legally existing in good standing under the laws of the State of California; 2. This Agreement has been duly and legally authorized by all necessary corporate action on the part of Buyer, has been duly and legally executed and delivered by Buyer and is the valid and binding Agreement of Buyer, enforceable in accordance with its terms; 3. The execution and performance of this Agreement by Buyer shall have been duly and legally authorized in accordance with applicable law, and Buyer shall have furnished to counsel for Sellers certified copies of resolutions adopted by Buyer's Board of Directors and no less than 75% of its shareholders authorizing and approving the execution and delivery of this Agreement. VII. RIGHTS AND REMEDIES IN CASE OF DEFAULT -------------------------------------- A. BUYER'S REMEDIES: If any Seller defaults in the performance of his ---------------- obligations pursuant to this Agreement, Buyer shall have the right to demand specific performance by such Seller and such other remedies as are accorded by relevant law. B. SELLER'S REMEDIES: In the event of the failure of the Buyer to comply with ----------------- the terms and conditions of this Agreement, each Seller shall be released from all obligations in law or equity to transfer and convey its stock certificates representing ESI shares or any part thereof pursuant to this Agreement; and the Buyer shall relinquish all rights under this Agreement. In the event that Seller has exchanged his stock in ESI for Keith shares at the time of Buyer's breach of this Agreement, Seller shall have the right to demand specific performance by Keith and such other remedies as are accorded by relevant law. VIII. INDEMNIFICATION: --------------- Sellers on the one part and Buyer on the other part each hereby agree to indemnify and hold the other harmless at all times of, from and against any and all losses, costs, expenses liabilities or other damages, including without limitation reasonable legal fees and 15 expenses, resulting from or arising out of, or by reason of its default under any of the warranties, representations, covenants or agreements made by such party in this Agreement, or breach of or default under any condition required to be performed hereunder by such party. In addition to the foregoing and not by way of limitation thereof, Sellers hereby agree to indemnify and hold Buyer safe and harmless of, from and against and in respect of each of the following: A. Any and all loss, liability or damage resulting from any untrue representation, breach of warranty or non-fulfillment of any covenant by any Seller contained herein or in any certificate, document or instrument delivered to Buyer hereunder; B. Any and all liabilities of Seller not specifically disclosed on ESI's consolidated balance sheet or recorded in ESI's books of account as of June 30, 1997, or which arose between said date and the Closing other than in the normal course of business; and C. Any and all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, including, without limitation, legal fees and expenses, including without limitation, legal fees and expenses, incident to any of the foregoing or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnity. IX. MISCELLANEOUS PROVISIONS: ------------------------- A. EXTENSION OF TIME AND WAIVER OF PERFORMANCE: Either Sellers or Buyer may, ------------------------------------------- if not then in breach of this Agreement, extend the time for or waive the performance of any of the obligations of the other, waive any inaccuracies in the representations or warranties by the other, or waive compliance by the other with any of the covenants or conditions contained in this Agreement. Any such extension or waiver shall be in writing and signed by Sellers or Buyer, as the case may be. B. AMENDMENTS: This Agreement may be amended at any time and from time to --------- time, but any amendment must be in writing and signed by an authorized representative of Buyer and by each Seller. C. NOTICES: Any written notice to any of the parties required or permitted ------- under this Agreement shall be deemed to have been duly given on the date of service if served personally on the party to whom notice is to be given, or on the second business day after mailing if mailed to the party to whom notice is to be given, first class postage prepaid, return receipt requested, and addressed to the addressee at the address stated opposite his or her name below, or at the most recent address specified by written notice given to the sender by addressee under this provision. 16 Notices to Sellers shall be to each of the following, individually: Lynn C. Cannady 30 Valley Drive Orinda, CA 94563 Glenn I. Chase 11 Stugun Court Pleasant Hill, CA 94523 Stephen J. Lane 38 Leeds Court Danville, CA 94526 With a copy of each to the following: Lynn C. Cannady, Glenn I Chase, and Stephen J. Lane, all at 370 Wiget Lane, Suite 210 Walnut Creek, CA 94598 Notices to Buyer shall be in duplicate with a copy each to: THE KEITH COMPANIES, INC. Attn: Aram H. Keith, President 2955 Redhill Avenue, Suite 201 Costa Mesa, CA 92626 And THE KEITH COMPANIES, INC. Attn: Corporate Secretary 2955 Redhill Avenue, Suite 201 Costa Mesa, CA 92626 D. COUNTERPARTS: The parties may execute this Agreement in two or more ------------ counterparts, which shall, in the aggregate, be signed by all the parties. Each counterpart shall be deemed an original instrument as against any party who has signed it. E. GOVERNING LAW: This Agreement is executed in and intended to be performed in ------------- the State of California, and the laws of that state (other than as to choice of laws) shall govern its interpretation and effect. The Superior Courts of Orange County, California shall be the appropriate Court in which either party may seek to enforce its rights hereunder. F. SUCCESSORS: This Agreement shall be binding upon and inure to the benefit of ---------- the respective successors, assigns, and personal representatives of the parties, except to the extent of any contrary provision in this Agreement. 17 G. SEVERABILITY: If any term, provision, covenant, or condition of this ------------ Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the rest of the Agreement shall remain in full force and effect and shall in no way be affected, impaired, or invalidated. H. ENTIRE AGREEMENT: This instrument contains the entire Agreement of the ---------------- parties relating to the rights granted and obligations assumed in this instrument. Any oral representations or modifications concerning this instrument shall be of no force or effect unless contained in a subsequent written modification signed by the party to be charged. I. FURTHER ASSURANCES: Each party agrees to execute such other and further ------------------ instruments and documents as may be necessary or proper in order to complete the transactions contemplated by this Agreement. J. TIME OF ESSENCE: Time is hereby expressly made of the essence with respect --------------- to the performance by the parties of their respective obligations under this agreement. K. COMPUTATION OF TIME: If any period of time specified in this Agreement would ------------------- otherwise end on a Saturday, Sunday or legal holiday, it shall be deemed extended to end on the next day following which is not a Saturday, Sunday or legal holiday. L. TERMINOLOGY: All personal pronouns used in this Agreement, whether used in ----------- the masculine, feminine, or neuter gender, shall include all other genders; the singular shall include the plural, and vice versa. Titles of articles, sections and sub-sections are for convenience only and neither limit nor amplify the provisions of the Agreement itself, and all references herein to articles, sections or sub-sections shall refer to the corresponding article, section or sub-section of this Agreement, unless specific reference is made to such article, section or sub-section of another document or instrument. The use of the term "section" in this Agreement shall be deemed to refer to "sub-sections," whenever the context so requires, and vice versa. In interpreting this Agreement, it shall be presumed that each party contributed equally to its construction. M. SURVIVAL: All of the respective representations, warranties and -------- indemnifications of the parties to this Agreement shall survive the consummation of the transactions contemplated by this Agreement. N. ATTORNEY'S FEES: In the event of the bringing of any action or suit by a --------------- party hereto against another party hereunder by reason of any breach of any of the covenants, agreements or provisions on the part of the other party arising out of this Agreement, then in that event the prevailing party shall be entitled to have and recover of and from the other party all costs and expenses of the action of suit, including reasonable attorney, accounting and engineering fees, any other professional fees resulting therefrom and for reasonable travel and living costs incurred during any trial. 18 O. AUTHORITY: Each individual signing for each of the parties hereunder --------- warrants and represents that he is an authorized agent of such party, on whose benefit he is executing this Agreement, and is authorized to execute the same. P. NO THIRD PARTY BENEFICIARY: No provision of this Agreement is intended to --------------------------- create any third party beneficiaries. 19 In witness whereof, the parties have executed this Agreement as of the day and date first above written. SELLERS - ------ /s/ LYNN C. CANNADY _________________________________ Lynn C. Cannady, Shareholder of ESI /s/ GLENN I. CHASE _________________________________ Glenn I. Chase, Shareholder of ESI /s/ STEPHEN J. LANE _________________________________ Stephen J. Lane, Shareholder of ESI BUYER - ----- THE KEITH COMPANIES, INC. 2955 Redhill Avenue, Suite 201 Costa Mesa, CA 92626 /s/ ARAM H. KEITH By: __________________________________ Aram H. Keith, President /s/ FLOYD S. REID By: __________________________________ Floyd S. Reid, Secretary 20 EX-2.3 4 STOCK PURCHASE AGREEMENT EXHIBIT 2.3 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (this "Agreement") dated as of July 10, 1998, by and among THE KEITH COMPANIES, LTD., a California corporation ("Buyer"), JOHN M. TETTEMER & ASSOCIATES, INC., a California corporation ("Company"), and MURDOCH V. AND NADINE R. HEIDEMAN, TRUSTEES OF THE MURDOCH V. HEIDEMAN AND NADINE R. HEIDEMAN LIVING TRUST U/D/T DATED OCTOBER 16, 1992, and JIMMIE E. AND JOLENE M. DYSERT, TRUSTEES OF THE JIMMIE E. DYSERT AND JOLENE M. DYSERT LIVING TRUST U/D/T DATED FEBRUARY 20, 1993 (individually "Shareholder" and together the "Shareholders"). R E C I T A L S: A. Company is engaged in the water engineering consulting business (the "Business"). Shareholders own all of the issued and outstanding shares (the "Shares") of capital stock of Company through their ownership of the common stock, no par value ("Common Shares"). B. Company's facilities consist of executive and field offices located in California (the "Facilities"). C. Buyer desires to purchase the Shares from Shareholders and Shareholders desire to sell the Shares to Buyer, upon the terms and conditions herein set forth. NOW THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants, agreements and conditions hereinafter set forth, and intending to be legally bound hereby, the parties hereto agree as follows. 1. PURCHASE AND SALE OF SHARES. Subject to the terms and conditions of this Agreement, on the Closing Date (as hereinafter defined) Shareholders shall sell to Buyer and Buyer shall purchase from Shareholders all the Shares. 2. PURCHASE PRICE - PAYMENT. 2.1 Purchase Price. The purchase price (the "Purchase Price") payable for the Shares shall be: (a) $150,000, payable on the Closing Date; provided, however, that if Buyer has paid to Shareholders the payment contemplated by Section 5.13, then such amount shall be reduced to $100,000. (b) On the Closing date, a note payable (the "Amortizing Note") to the Shareholders in the original principal amount of $300,000 adding or subtracting (as described below) the "Book Value Adjustment" (defined below), bearing interest at 8% per annum, simple interest, payable in 60 fully amortizing monthly payments, and otherwise substantially in the form as attached hereto as Exhibit A-1. Aram H. Keith shall be a co-maker of the Amortizing Note. The "Book Value Adjustment" shall mean an adjustment reducing or increasing the principal amount due under the Amortizing Note in an amount equal to $1.00 multiplied by the difference between, on the one hand, $400,000, and the other hand the amount obtained by taking (x) the total assets of the Company, excluding intangible assets and fixed assets (less the applicable accumulated depreciation) minus (y) the total liabilities of the Company on the balance sheet of the Company dated July 31, 1998 (the "Closing Balance Sheet"), calculated in accordance with Generally Accepted Accounting Principles as consistently applied using the same methodology as the Recent GAAP Financial Statements (defined below), particularly with regard to revenue recognition as set forth on Schedule 2.1(b) ("GAAP"), except that total liabilities shall not include (i) obligations payable to Shareholders up to $150,000, (ii) any amount to be reimbursed by Buyer pursuant to Section 5.6 and (iii) the amount of income taxes payable reduced by $46,468 and then divided by two (2); provided, however that in no event shall the amount excluded from total liabilities pursuant to this clause (iii) shall not be greater than $40,000; and further provided, however, that if the difference is a negative amount, the Book Value Adjustment shall not exceed $50,000 and shall be added to the Amortizing Note, and if the difference is a positive amount, the Book Value Adjustment shall be subtracted from the Amortizing Note without limitation. In the event that Buyer and Shareholders are unable to agree upon the Closing Balance Sheet within 30 days of receipt of the Closing Balance Sheet, then Buyer's independent accounting firm shall select a firm of regionally recognized certified public accountants to resolve any disputed items on the Closing Balance Sheet which resolution shall be conclusive upon all parties. Said firm shall be required to apply "GAAP" as defined herein. Buyer and Shareholders shall each pay one half of the expense of such firm of regionally recognized certified public accountants. (c) On the Closing Date, a note payable (the "Interest Only Note") to the Shareholders in the original principal amount of $250,000, bearing interest at 8% per annum, simple interest, payable interest only quarterly, with all principal and accrued but unpaid interest due and payable on the first to occur of (i) first anniversary of the Closing Date or (ii) that date upon which Buyer closes an initial public offering of its securities pursuant to a registration statement of Form S-1. The Interest Only Note shall otherwise be substantially in the form as attached hereto as Exhibit A-2. Aram H. Keith shall be a co-maker of the Interest Only Note. -2- (d) On the Closing Date, Buyer shall issue to Shareholders a warrant to purchase up to 150,000 shares of Buyer's common stock at an exercise price of $1.75 per share, and otherwise substantially in the form as attached hereto as Exhibit A-3. 2.2 Payment. All payments under this Section 2 shall be made in the form of Buyer's check payable to the order of the recipient. All payments of the Purchase Price are to be made to the Shareholders for pro rata allocation among the Shareholders in accordance with their respective holdings of Common Shares. At Shareholders' election, the payment required by Section 2.1(a) shall be made by wire transfer pursuant to instructions from Shareholders. 3. JOINT AND SEVERAL REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS. Shareholders, jointly and severally, make the following representations and warranties to Buyer, each of which is true and correct on the date hereof, shall remain true and correct to and including the Closing Date, and shall survive the Closing of the transactions provided for herein as set forth in Section 8.5. 3.1 Corporate. (a) Organization. Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California. (b) Corporate Power. Company has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as and where such is now being conducted. (c) Qualification. Company is duly licensed or qualified to do business as a foreign corporation, and is in good standing, in each jurisdiction wherein the character of the properties owned or leased by it, or the nature of its business, makes such licensing or qualification necessary. The states in which Company is licensed or qualified to do business are listed in Schedule 3.1(c). (d) Subsidiaries. Company does not own any interest in any corporation, partnership or other entity. (e) Corporate Documents, etc. The copies of the Articles of Incorporation and Bylaws of the Company, including any amendments thereto, which have been delivered by Shareholders to Buyer are true, correct and complete copies of such instruments as presently in effect. The corporate minute book and stock records of the Company which have been furnished to Buyer for inspection are true, correct and -3- complete and accurately reflect all material corporate action taken by the Company. The directors and officers of the Company are listed in Schedule 3.1(e). (f) Capitalization of the Company. The authorized capital stock of the Company consists entirely of 25,000 shares of common stock, no par value. No shares of such capital stock are issued or outstanding except for shares of common stock of the Company which are owned of record and beneficially by Shareholders in the respective numbers set forth in Schedule 3.1(f). All such shares of capital stock of the Company are validly issued, fully paid and nonassessable. Except as set forth on Schedule 3.1(f), there are no (a) securities convertible into or exchangeable for any of the Company's capital stock or other securities, (b) options, warrants or other rights to purchase or subscribe to capital stock or other securities of the Company or securities which are convertible into or exchangeable for capital stock or other securities of the Company, or (c) contracts, commitments, agreements, understandings or arrangements of any kind relating to the issuance, sale or transfer of any capital stock or other equity securities of the Company, any such convertible or exchangeable securities or any such options, warrants or other rights. 3.2 Shareholders. (a) Power. Each Shareholder has full power, legal right and authority to enter into, execute and deliver this Agreement and the other agreements, instruments and documents contemplated hereby (such other documents sometimes referred to herein as "Ancillary Instruments"), and to carry out the transactions contemplated hereby. (b) Validity. This Agreement has been duly and validly executed and delivered by each Shareholder and is, and when executed and delivered each Ancillary Instrument will be, the legal, valid and binding obligation of such Shareholder, enforceable in accordance with its terms, except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally, and by general equitable principles. (c) Title. Each Shareholder has, and at Closing Buyer will receive, good and marketable title to the Shares to be sold by such Shareholder hereunder, free and clear of all liens, security interests, pledges, assessments, levies, restrictions, options, voting trusts or agreements, proxies, encumbrances, marital or community property interests or other claims or charges of any nature whatsoever. 3.3 No Violation. Except as set forth on Schedule 3.3, neither the execution and delivery of this Agreement or the Ancillary Instruments nor the consummation by Company and -4- Shareholders of the transactions contemplated hereby and thereby (a) will violate any statute or law or any rule, regulation, order, writ, injunction or decree of any court or governmental authority, (b) will require any authorization, consent, approval, exemption or other action by or notice to any court, administrative or governmental agency, instrumentality, commission, authority, board or body (including, without limitation, under any "plant- closing" or similar law), or (c) subject to obtaining the consents referred to in Schedule 3.3, will violate or conflict with, or constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, or will result in the termination of, or accelerate the performance required by, or result in the creation of any Lien (as defined in Section 3.12) upon any of the assets of Company (or the Shares) under, any term or provision of the Articles of Incorporation or Bylaws of Company or of any contract, commitment, understanding, arrangement, agreement or restriction of any kind or character to which Company or any Shareholder is a party or by which Company or any Shareholder or any of its or their assets or properties may be bound or affected. 3.4 Financial Statements. Included as Schedule 3.4 are true and complete copies of (i) the financial statements of Company identified on Schedule 3.4, (ii) a balance sheet of Company as of April 30, 1998, and the related statements of income and cash flows for the months then ended and for the corresponding period of the prior year (including the notes and schedules contained therein or annexed thereto) (the "Recent GAAP Financial Statements"), and, (iii) a balance sheet of Company as of December 31, 1997, and related statements of income and cash flows for the year then ended (including the notes contained therein or annexed thereto) (the "GAAP Financial Statements"). The Recent GAAP Financial Statements have been prepared (or restated) in conformity with GAAP. The Recent GAAP Recent Statements and the GAAP Financial Statements have been prepared in accordance with the books and records of Company, and fairly present, the assets, liabilities and financial position, the results of operations and cash flows of the Company as of the date indicated and for the periods indicated. All of such financial statements (including all notes and schedules contained therein or annexed thereto) are true, complete and accurate. 3.5 Tax Matters. (a) Provision For Taxes. The provision made for taxes on the Recent GAAP Financial Statements is sufficient for the current and deferred payment of all federal, state, foreign, county, local and other income, ad valorem, excise, profits, franchise, occupation, property, payroll, sales, use, gross receipts and other taxes (and any interest and penalties) and assessments, whether or not disputed, at the date of the Recent GAAP Financial Statements and for all years and periods prior thereto. Since the date of the Recent GAAP Financial Statements, Company has not incurred any taxes other than -5- taxes incurred in the ordinary course of business consistent in type and amount with past practices of Company. (b) Tax Returns Filed. Except as set forth on Schedule 3.5(b), all federal, state, foreign, county, local and other tax returns required to be filed by or on behalf of Company have been timely filed and when filed were true and correct in all material respects, and the taxes shown as due thereon were paid or adequately accrued. True and complete copies of all tax returns or reports filed by Company for each of its three (3) most recent fiscal years have been delivered to Buyer. Company has duly withheld and paid all taxes which it is required to withhold and pay relating to salaries and other compensation heretofore paid to the employees of Company. (c) Tax Audits. The federal and state income tax returns of Company have been audited by the Internal Revenue Service and appropriate state taxing authorities for the periods and to the extent set forth in Schedule 3.5(c), and Company has not received from the Internal Revenue Service or from the tax authorities of any state, county, local or other jurisdiction any notice of underpayment of taxes or other deficiency which has not been paid nor any objection to any return or report filed by Company. There are outstanding no agreements or waivers extending the statutory period of limitations applicable to any tax return or report. (d) Consolidated Group. Company is not and has never been a member of an affiliated group of corporations that filed a consolidated tax return. (e) Other. Except as set forth in Schedule 3.5(e), within the last five (5) years, Company has not (i) filed any consent or agreement under Section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) applied for any tax ruling, (iii) entered into a closing agreement with any taxing authority, (iv) filed an election under Section 338(g) or Section 338(h)(10) of the Code (nor has a deemed election under Section 338(e) of the Code occurred), (v) made any payments, or been a party to an agreement (including this Agreement) that under any circumstances could obligate it to make payments that will not be deductible because of Section 28OG of the Code, or (vi) been a party to any tax allocation or tax sharing agreement. 3.6 Accounts Receivable. Except as disclosed in Schedule 3.6, all accounts receivable of Company reflected on the Closing Balance Sheet, and as incurred in the normal course of business since the date thereof, represent arm's length sales actually made in the ordinary course of business; are collectible (net of the reserve shown on the Closing Balance Sheet for doubtful accounts) in the ordinary course of business without the necessity of commencing legal proceedings; are subject to no counterclaim or -6- setoff; and are not in dispute. Schedule 3.6 contains an aged schedule of accounts receivable included in the Closing Balance Sheet. 3.7 Work-in-Process. Except as disclosed in Schedule 3.7, (i) all work-in- process and contracts underway ("Work-In-Process") constitute work performed pursuant to contracts or sales orders taken in the ordinary course of business, from regular customers of Company with no recent history of credit problems with respect to Company; (ii) neither Company nor any such customer is in material breach of the terms of any obligation to the other, and no valid grounds exist for any set-off of amounts billable to such customers on the completion of orders to which Work-In-Process relates; (iii) all Work-In-Process is of a quality ordinarily produced in accordance with the requirements of the orders to which such Work-In-Process is identified, and will require no rework with respect to services performed prior to Closing; (iv) all Work-In-Process is being conducted pursuant to contracts, orders and change orders issued within the terms of the relationship pursuant to which such Work-In-Process is being conducted; and (v) all Work-In-Process set forth on Schedule 3.7 (which as of the date hereof reflects Work-In-Process as of April 30, 1998 and, subsequent to the Closing Date, shall be updated to include the schedules supporting the Closing Balance Sheet) are estimates only and could be completed if managed consistently with the past practices of the Company without adversely effecting, in the aggregate when complete, the profitability of the Company compared to previous periods; provided, however, that the Shareholders make no representations and warranties concerning whether any customer will cancel any contract otherwise in accordance with its terms. 3.8 Absence of Certain Changes. Except as and to the extent set forth in Schedule 3.8, since the date of the Recent GAAP Financial Statements there has not been: (a) No Adverse Change. Any adverse change in the financial condition, assets, liabilities, business, prospects or operations of Company; (b) No Damage. Any loss, damage or destruction, whether covered by insurance or not, affecting Company's business or properties; (c) No Increase in Compensation. Any increase in the compensation, salaries or wages payable or to become payable to any employee or agent of Company (including, without limitation, any increase or change pursuant to any bonus, pension, profit sharing, retirement or other plan or commitment), or any bonus or other employee benefit granted, made or accrued; (d) No Labor Disputes. Any labor dispute, disturbance or organizing activity, other than routine individual -7- grievances which are not material to the business, financial condition or results of operations of Company; (e) No Commitments. Any commitment or transaction by Company (including, without limitation, any borrowing or capital expenditure) other than in the ordinary course of business consistent with past practice; (f) No Dividends. Any declaration, setting aside, or payment of any dividend or any other distribution in respect of Company's capital stock; any redemption, purchase or other acquisition by Company of any capital stock of Company, or any security relating thereto; or any other payment to any shareholder of Company as such a shareholder; (g) No Disposition of Property. Any sale, lease or other transfer or disposition of any properties or assets of Company, except for the sale of inventory items in the ordinary course of business; (h) No Indebtedness. Any indebtedness for borrowed money incurred, assumed or guaranteed by Company; (i) No Liens. Any mortgage, pledge, lien or encumbrance made on any of the properties or assets of Company; (j) No Amendment of Contracts. Any entering into, amendment or termination by Company of any contract, or any waiver of material rights thereunder, other than in the ordinary course of business; (k) Loans and Advances. Any loan or advance (other than advances to employees in the ordinary course of business for travel and entertainment in accordance with past practice) to or from any person including, but not limited to, any Affiliate (for purposes of this Agreement, the term "Affiliate" shall mean and include all Shareholders, directors and officers of Company; the spouse of any such person; any person who would be the heir or descendant of any such person if he or she were not living; and any entity in which any of the foregoing has a direct or indirect interest, except through ownership of less than 5% of the outstanding shares of any entity whose securities are listed on a national securities exchange or traded in the national over-the-counter market); (l) Credit. Any grant of credit to any customer or distributor on terms or in amounts more favorable than those which have been extended to such customer or distributor in the past, any other change in the terms of any credit heretofore extended, or any other change of Company's policies or practices with respect to the granting of credit; or -8- (m) No Unusual Events. Any other event or condition not in the ordinary course of business of Company. 3.9 Absence of Undisclosed Liabilities. Except as and to the extent specifically disclosed in the Recent GAAP Financial Statements, or in Schedule 3.9, the Shareholders have no actual knowledge that the Company has any liabilities, commitments or obligations (secured or unsecured, and whether accrued, absolute, contingent, direct, indirect or otherwise), other than commercial liabilities and obligations incurred since the date of the Recent GAAP Financial Statements in the ordinary course of business and consistent with past practice and none of which has or will have a material adverse effect on the business, financial condition or results of operations of Company. Except as and to the extent described in the Recent GAAP Financial Statements or in Schedule 3.9, neither Company nor any Shareholder has actual knowledge of any basis for the assertion against Company of any liability or of any circumstances, conditions, happenings, events or arrangements, contractual or otherwise, which may give rise to liabilities, except commercial liabilities and obligations incurred in the ordinary course of Company's business and consistent with past practice. 3.10 No Litigation. Except as set forth in Schedule 3.10 there is no action, suit, arbitration proceeding, investigation or inquiry pending or threatened against Company, its directors (in such capacity), its business or any of its assets, nor does Company or any Shareholder know, or have grounds to know, of any basis for any such proceedings, investigations or inquiries. Schedule 3.10 also identifies all such actions, suits, proceedings, investigations and inquiries to which company or any of its directors have been parties within the last three (3) years. Except as set forth in Schedule 3.10, neither Company nor its business or assets is subject to any judgment, order, writ or injunction of any court, arbitrator or federal, state, foreign, municipal or other governmental department, commission, board, bureau, agency or instrumentality. 3.11 Compliance With Laws. (a) Compliance. Except as set forth in Schedule 3.11(a), the Shareholders have no actual knowledge that the Company (including each and all of its operations, practices, properties and assets) is not in compliance with all applicable federal, state, local and foreign laws, ordinances, orders, rules and regulations (collectively, "Laws"), including without limitation, those applicable to discrimination in employment, occupational safety and health, trade practices, competition and pricing, product warranties, zoning, building and sanitation, employment, retirement and labor relations, product advertising and laws relating to pollution or protection of the environment, including Laws relating to emissions, discharges, generation, storage, releases or threatened releases of pollutants, contaminants, -9- chemicals or industrial, toxic, hazardous or petroleum or petroleum-based substances or wastes into the environment. Except as set forth in Schedule 3.11(a), Company has not received notice of any violation or alleged violation of, and is subject to no liability (whether accrued, absolute, contingent, direct or indirect) for past or continuing violation of, any Laws. The Shareholders have no actual knowledge of any reports and returns (i) required to be filed by Company with any governmental authority not having been filed, and (ii) being other than accurate and complete when filed. (b) Licenses and Permits. Company has all licenses, permits, approvals, authorizations and consents of all governmental and regulatory authorities and all certification organizations required for the conduct of the business (as presently conducted and as proposed to be conducted) and operation of the Facilities. All such licenses, permits, approvals, authorizations and consents are described in Schedule 3.11(b), are in full force and effect and will not be affected or made subject to loss, limitation or any obligation to reapply as a result of the transactions contemplated hereby. Except as set forth in Schedule 3.11(b), Company (including its operations, properties and assets) is and has been in compliance with all such permits and licenses, approvals, authorizations and consents. 3.12 Title to and Condition of Properties. (a) Marketable Title. Company has good and marketable title to all of Company's assets, business and properties necessary or useful in conducting the Business, including, without limitation, all such properties (tangible and intangible) reflected in the Recent GAAP Financial Statements and all assets which are fully depreciated or used under license, including but not limited to, software, databases, reference materials and other intellectual property, in all cases free and clear of all mortgages, liens, (statutory or otherwise) security interests, claims, pledges, licenses, equities, options, conditional sales contracts, assessments, levies, easements, covenants, reservations, restrictions, rights-of-way, exceptions, limitations, charges or encumbrances of any nature whatsoever (collectively, "Liens") except those described in Schedule 3.12(a). None of Company's assets, business or properties are subject to any restrictions with respect to the transferability thereof; and the Company's title thereto will not be affected in any way by the transactions contemplated hereby. (b) Condition. All property and assets owned or utilized by Company are in good operating condition and repair, free from any defects (except such minor defects as do not interfere with the use thereof in the conduct of the normal operations of Company), have been maintained consistent -10- with the standards generally followed in the industry and are sufficient to carry on the business of Company as conducted during the preceding twelve (12) months. (c) Real Property. Schedule 3.12(c) sets forth all real property owned, used or occupied by Company (the "Real Property"), including a description of all land, and all encumbrances, easements or rights of way of record (or, if not of record, of which Company has notice or knowledge) granted on or appurtenant to or otherwise affecting such Real Property, the zoning classification thereof, and all plants, buildings or other structures located thereon. Schedule 3.12(c) also sets forth, with respect to each parcel of Real Property which is leased, the material terms of such lease. To the best of the Shareholders' actual knowledge, all buildings, plants and other structures owned or otherwise utilized by Company are in good condition and repair and have no structural defects or defects affecting the plumbing, electrical, sewerage, or heating, ventilating or air conditioning systems. There are now in full force and effect duly issued certificates of occupancy permitting the Real Property and improvements located thereon to be legally used and occupied as the same are now constituted. Shareholders have no actual knowledge of any fact or condition exists which would prohibit or adversely affect the ordinary rights of use by the Company of the Real Property. Neither Company nor any Shareholder has notice or knowledge of any (i) planned or proposed increase in assessed valuations of any Real Property, (ii) governmental agency or court order requiring repair, alteration, or correction of any existing condition affecting any Real Property or the systems or improvements thereat, (iii) condition or defect which could give rise to an order of the sort referred to in "(ii)" above, (iv) underground storage tanks, or any structural, mechanical, or other defects of material significance affecting any Real Property or the systems or improvements thereat (including, but not limited to, inadequacy for normal use of mechanical systems or disposal or water systems at or serving the Real Property), or (v) work that has been done or labor or materials that has or have been furnished to any Real Property during the period of six (6) months immediately preceding the date of this Agreement for which liens could be filed against any of the Real Property. (d) No Condemnation or Expropriation. Neither the whole nor any portion of the property or any other assets of Company is subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor to the best of Company's and Shareholders' knowledge has any such condemnation, expropriation or taking been proposed. -11- 3.13 Insurance. Set forth in Schedule 3.13 is a complete and accurate list and description of all policies of fire, liability, errors and omissions, workers compensation, health and other forms of insurance presently in effect with respect to the business and properties of Company, true and correct copies of which have heretofore been delivered to Buyer. Schedule 3.13 includes, without limitation, the carrier, the description of coverage, the limits of coverage, retention or deductible amounts, amount of annual premiums, date of expiration and the date through which premiums have been paid with respect to each such policy, and any pending claims in excess of $25,000. All such policies are valid, outstanding and enforceable policies and provide insurance coverage for the properties, assets and operations of Company, of the kinds, in the amounts and against the risks customarily maintained by organizations similarly situated; and no such policy (nor any previous policy) provides for or is subject to any currently enforceable retroactive rate or premium adjustment, loss sharing arrangement or other actual or contingent liability arising wholly or partially out of events arising prior to the date hereof. Schedule 3.13 indicates each policy as to which (a) the coverage limit has been reached or (b) the total incurred losses to date equal 50% or more of the coverage limit. No notice of cancellation or termination has been received with respect to any such policy, and neither Company nor any Shareholder has knowledge of any act or omission of Company which could result in cancellation of any such policy prior to its scheduled expiration date. Company has not been refused any insurance with respect to any aspect of the operations of the business nor has its coverage been limited by any insurance carrier (other than the initial policy limit) to which it has applied for insurance or with which it has carried insurance during the last three (3) years. Company has duly and timely made all claims it has been entitled to make under each policy of insurance. At all times during the last three (3) years, all errors and omissions and general liability policies maintained by or for the benefit of Company have been "occurrence" policies and not "claims made" policies. There is no claim by Company pending under any such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies, and neither Company nor any of the Shareholders knows of any basis for denial of any claim under any such policy. Company has not received any written notice from or on behalf of any insurance carrier issuing any such policy that insurance rates therefor will hereafter be substantially increased (except to the extent that insurance rates may be increased for all similarly situated risks) or that there will hereafter be a cancellation or an increase in a deductible (or an increase in premiums in order to maintain an existing deductible) or nonrenewal of any such policy. Such policies are sufficient in all material respects for compliance by Company with all requirements of law and with the requirements of all material contracts to which Company is a party. -12- 3.14 Contracts and Commitments. (a) Real Property Leases. Except as set forth in Schedule 3.12(c), Company has no leases of real property. (b) Personal Property Leases. Except as set forth in Schedule 3.14(b), Company has no leases of personal property involving consideration or other expenditure in excess of $5,000 or involving performance over a period of more than twelve (12) months. (c) Purchase Commitments. Company has no purchase commitments for inventory items or supplies that, together with amounts on hand, constitute in excess of two (2) months normal usage. (d) Sales Commitments. Except as set forth on Schedule 3.14(d), Company has no sales contracts or commitments to customers or distributors which aggregate in excess of $25,000 to any one customer or distributor (or group of affiliated customers or distributors). Company has no sales contracts or commitments except those made in the ordinary course of business, at arm's length, and no such contracts or commitments are for a sales price which would result in a loss to the Company. (e) Contracts With Affiliates and Certain Others. Company has no agreement, understanding, contract or commitment (written or oral) with any Affiliate or any employee, agent, consultant, distributor, dealer or franchisee that is not cancelable by Company on notice of not longer than thirty (30) days without liability, penalty or premium of any nature or kind whatsoever. (f) Powers of Attorney. The Company has not given a power of attorney, which is currently in effect, to any person, firm or corporation for any purpose whatsoever. (g) Collective Bargaining Agreements. Company is not a party to or in negotiations concerning any collective bargaining agreements with any unions, guilds, shop committees or other collective bargaining groups. (h) Loan Agreements. Except as set forth in Schedule 3.14(h), Company is not obligated under any loan agreement, promissory note, letter of credit, or other evidence of indebtedness as a signatory, guarantor or otherwise. (i) Guarantees. Except as disclosed on Schedule 3.14(i), Company has not guaranteed the payment or performance of any person, firm or corporation, agreed to indemnify any person or act as a surety, or otherwise agreed -13- to be contingently or secondarily liable for the obligations of any person. (j) Contracts Subject to Renegotiation. Company is not a party to any contract with any governmental body which is subject to renegotiation. (k) Burdensome or Restrictive Agreements. Company is not a party to nor is it bound by any agreement, deed, lease or other instrument which is so burdensome as to materially affect or impair the operation of Company. Without limiting the generality of the foregoing, Company is not a party to nor is it bound by any agreement requiring Company to assign any interest in any trade secret or proprietary information, or prohibiting or restricting Company from competing in any business or geographical area or soliciting customers or otherwise restricting it from carrying on its business anywhere in the world. (l) Other Material Contracts. Company has no lease, contract or commitment of any nature involving consideration or other expenditure in excess of $25,000, or involving performance over a period of more than twelve (12) months, or which is otherwise individually material to the operations of Company, except as explicitly described in Schedule 3.14(1) or in any other Schedule. (m) No Default. Company is not in default under any lease, contract or commitment, nor has any event or omission occurred which through the passage of time or the giving of notice, or both, would constitute a default thereunder or cause the acceleration of any of Company's obligations or result in the creation of any Lien on any of the assets owned, used or occupied by Company. No third party is in default under any lease, contract or commitment to which Company is a party, nor has any event or omission occurred which, through the passage of time or the giving of notice, or both, would constitute a default thereunder or give rise to an automatic termination, or the right of discretionary termination, thereof. 3.15 Labor Matters. Except as set forth in Schedule 3.15, within the last five (5) years Company has not experienced any labor disputes, union organization attempts or any work stoppage due to labor disagreements in connection with its business. Except to the extent set forth in Schedule 3.15, (a) Company is in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and is not engaged in any unfair labor practice; (b) there is no unfair labor practice charge or complaint against Company pending or threatened; (c) there is no labor strike, dispute, request for representation, slowdown or stoppage actually pending or threatened against or affecting Company nor any secondary boycott with respect to products of Company; (d) no -14- question concerning representation has been raised or is threatened respecting the employees of Company; (e) no grievance which might have a material adverse effect on Company, nor any arbitration proceeding arising out of or under collective bargaining agreements, is pending and no such claim therefor exists; and (f) there are no administrative charges or court complaints against Company concerning alleged employment discrimination or other employment related matters pending or threatened before the U.S. Equal Employment Opportunity commission or any state or federal court or agency. 3.16 Employee Benefit Plans (a) Disclosure. Schedule 3.16(a) sets forth all pension, thrift, savings, profit sharing, retirement, incentive bonus or other bonus, medical, dental, life, accident insurance, benefit, employee welfare, disability, group insurance, stock purchase, stock option, stock appreciation, stock bonus, executive or deferred compensation, hospitalization and other similar fringe or employee benefit plans, programs and arrangements, and any employment or consulting contracts, "golden parachutes," collective bargaining agreements, severance agreements or plans, vacation and sick leave plans, programs, arrangements and policies, including, without limitation, all "employee benefit plans" (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), all employee manuals, and all written or binding oral statements of policies, practices or understandings relating to employment, which are provided to, for the benefit of, or relate to, any persons ("Company Employees") employed by Company. The items described in the foregoing sentence are hereinafter sometimes referred to collectively as "Employee Plans/Agreements," and each individually as an "Employee Plan/Agreement." True and correct copies of all the Employee Plans/Agreements, including all amendments thereto, have heretofore been provided to Buyer. Each of the Employee Plans/Agreements is identified on Schedule 3.16(a), to the extent applicable, as one or more of the following: an "employee pension benefit plan" (as defined in Section 3(2) of ERISA), a "defined benefit plan" (as defined in Section 414 of the Code), an "employee welfare benefit plan" (as defined in Section 3(1) of ERISA), and/or as a plan intended to be qualified under Section 401 of the Code. No Employee Plan/Agreement is a "multiemployer plan" (as defined in Section 4001 of ERISA), and Company has never contributed nor been obligated to contribute to any such multiemployer plan. (b) Terminations, Proceedings, Penalties, etc. With respect to each employee benefit plan (including, without limitation, the Employee Plans/Agreements) that is subject to the provisions of Title IV of ERISA and with respect to which the Company or any of its assets may, directly or indirectly, be subject to any liability, contingent or otherwise, or the -15- imposition of any lien (whether by reason of the complete or partial termination of any such plan, the funded status of any such plan, any "complete withdrawal" (as defined in Section 4203 of ERISA) or "partial withdrawal" (as defined in Section 4205 of ERISA) by any person from any such plan, or otherwise): (i) no such plan has been terminated so as to subject, directly or indirectly, any assets of Company to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA; (ii) no proceeding has been initiated or threatened by any person (including the Pension Benefit Guaranty Corporation ("PBGC") to terminate any such plan; (iii) no condition or event currently exists or currently is expected to occur that could subject, directly or indirectly, any assets of Company to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA, whether to the PBGC or to any other person or otherwise on account of the termination of any such plan; (iv) if any such plan were to be terminated as of or prior to the Closing Date, no assets of Company would be subject, directly or indirectly, to any liability, contingent or otherwise, or the imposition of any lien under Title IV of ERISA; (v) no "reportable event" (as defined in Section 4043 of ERISA) has occurred with respect to any such plan; (vi) no such plan which is subject to Section 302 of ERISA or Section 412 of the Code has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code, respectively), whether or not waived; and (vii) no such plan is a multiemployer plan or a plan described in Section 4064 of ERISA. (c) Prohibited Transactions, etc. There have been no "prohibited transactions" within the meaning of Section 406 or 407 of ERISA or Section 4975 of the Code for which a statutory or administrative exemption does not exist with respect to any Employee Plan/Agreement, and no event or omission has occurred in connection with which the Company or any of its assets or any Employee Plan/Agreement, directly or indirectly, could be subject to any liability under ERISA, the Code or any other law, regulation or governmental order applicable to any Employee Plan/Agreement, or under any agreement, instrument, -16- statute, rule of law or regulation pursuant to or under which Company has agreed to indemnify or is required to indemnify any person against liability incurred under, or for a violation or failure to satisfy the requirements of, any such statute, regulation or order. (d) Full Funding. The funds available under each Employee Plan/Agreement which is intended to be a funded plan exceed the amounts required to be paid, or which would be required to be paid if such Employee Plan/Agreement were terminated, on account of rights vested or accrued as of the Closing Date (using the actuarial methods and assumptions then used by Company's actuaries in connection with the funding of such Employee Plan/Agreement). (e) Controlled Group; Affiliated Service Group; Leased Employees. Company is not and never has been a member of a controlled group of corporations as defined in Section 414(b) of the Code or in common control with any unincorporated trade or business as determined under Section 414(c) of the Code. Company is not and never has been a member of an "affiliated service group" within the meaning of Section 414(m) of the Code. There are not and never have been any leased employees within the meaning of Section 414(n) of the Code who perform services for Company, and no individuals are expected to become leased employees with the passage of time. (f) Payments and Compliance. With respect to each Employee Plan/Agreement, (i) all payments due from Company to date have been made and all amounts properly accrued to date as liabilities of Company which have not been paid have been properly recorded on the books of Company and are reflected in the Recent GAAP Financial Statements; (ii) Company has complied with, and each such Employee Plan/Agreement conforms in form and operation to, all applicable laws and regulations, including but not limited to ERISA and the Code, in all respects and all reports and information relating to such Employee Plan/Agreement required to be filed with any governmental entity have been timely filed; (iii) all reports and information relating to each such Employee Plan/Agreement required to be disclosed or provided to participants or their beneficiaries have been timely disclosed or provided; (iv) each such Employee Plan/Agreement which is intended to qualify under Section 401 of the Code has received a favorable determination letter from the Internal Revenue Service with respect to such qualification, its related trust has been determined to be exempt from taxation under Section 501(a) of the Code, and nothing has occurred since the date of such letter that has or is likely to adversely affect such qualification or exemption; (iv) there are no actions, suits or claims pending (other than routine claims for benefits) or threatened with respect to such Employee Plan/Agreement or against the assets of such Employee Plan/Agreement; and (v) no Employee Plan/Agreement is a plan which is established and -17- maintained outside the United States primarily for the benefit of individuals substantially all of whom are nonresident aliens. (g) Post-Retirement Benefits. No Employee Plan/Agreement provides benefits, including, without limitation, death or medical benefits (whether or not insured) with respect to current or former Company employees beyond their retirement or other termination of service other than (i) coverage mandated by applicable law, (ii) death or retirement benefits under any Employee Plan/Agreement that is an employee pension benefit plan, (iii) deferred compensation benefits accrued as liabilities on the books of Company (including the Recent GAAP Financial Statements), (iv) disability benefits under any Employee Plan/ Agreement that is an employee welfare benefit plan and which have been fully provided for by insurance or otherwise or (v) benefits in the nature of severance pay. (h) No Triggering of Obligations. The consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee of Company to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement, (ii) accelerate the time of payment or vesting, or increase the amount of compensation due to any such employee or former employee or (iii) result in any prohibited transaction described in Section 406 of ERISA or Section 4975 of the Code for which an exemption is not available. (i) Delivery of Documents. There has been delivered to Buyer, with respect to each Employee Plan/Agreement: (i) a copy of the annual report, if required under ERISA, with respect to each such Employee Plan/Agreement for the last two (2) years; (ii) a copy of the summary plan description, together with each summary of material modifications, required under ERISA with respect to such Employee Plan/Agreement, all material employee communications relating to such Employee Plan/Agreement, and, unless the Employee Plan/Agreement is embodied entirely in an insurance policy to which Company is a party, a true and complete copy of such Employee Plan/Agreement; (iii) if the Employee Plan/Agreement is funded through a trust or any third party funding vehicle (other than an insurance policy), a copy of the trust or other funding agreement and the latest financial statements thereof; and (iv) the most recent determination letter received from the Internal Revenue Service with respect to each -18- Employee Plan/Agreement that is intended to be a "qualified plan" under Section 401 of the Code. With respect to each Employee Plan/Agreement for which an annual report has been filed and delivered to Buyer pursuant to clause (i) of this Section 3.16(i), no material adverse change has occurred with respect to the matters covered by the latest such annual report since the date thereof. (j) Future Commitments. Company has no announced plan or legally binding commitment to create any additional Employee Plans/Agreements or to amend or modify any existing Employee Plan/Agreement. 3.17 Employment Compensation. Schedule 3.17 contains a true and correct list of all employees to whom Company is paying compensation and the compensation paid thereto during the twelve month period ending as of the date of the Recent GAAP Financial Statements, including bonuses and incentives, and listing the current annual rate of compensation for each employee. 3.18 Trade Rights. Schedule 3.18 lists all Trade Rights (as defined below) in which Company now has any interest, specifying whether such Trade Rights are owned, controlled, used or held (under license or otherwise) by Company, and also indicating which of such Trade Rights are registered. All Trade Rights shown as registered in Schedule 3.18 have been properly registered, all pending registrations and applications have been properly made and filed and all maintenance, renewal and other fees relating to registrations or applications are current. In order to conduct the business of Company, as such is currently being conducted or proposed to be conducted, Company does not require any Trade Rights that it does not already have. Company is not infringing and has not infringed any Trade Rights of another in the operation of the business of Company, nor is any other person infringing the Trade Rights of Company. Company has not granted any license or made any assignment of any Trade Right listed on Schedule 3.18, nor does Company pay any royalties or other consideration for the right to use any Trade Rights of others. There are no inquiries, investigations or claims or litigation challenging or threatening to challenge Company's right, title and interest with respect to its continued use and right to preclude others from using any Trade Rights of Company. All Trade Rights of Company are valid, enforceable and in good standing, and there are no equitable defenses to enforcement based on any act or omission of Company. The consummation of the transactions contemplated hereby will not alter or impair any Trade Rights owned or used by Company. As used herein, the term "Trade Rights" shall mean and include: i) all trademark rights, business identifiers, trade dress, service marks, trade names and brand names, all registrations thereof and applications therefor and all goodwill associated with the foregoing; (ii) all copyrights, copyright registrations and copyright applications, and all other rights associated with the foregoing and the underlying works of authorship; (iii) all patents -19- and patent applications, and all international proprietary rights associated therewith; (iv) all contracts or agreements granting any right, title, license or privilege under the intellectual property rights of any third party; (v) all inventions, mask works and mask work registrations, know-how, discoveries, improvements, designs, trade secrets, shop and royalty rights, employee covenants and agreements respecting intellectual property and non-competition and all other types of intellectual property; and (vi) all claims for infringement or breach of any of the foregoing. 3.19 Major Customers and Suppliers. (a) Major Customers. Schedule 3.19(a) contains a list of the 10 largest customers of Company for each of the two (2) most recent fiscal years (determined on the basis of the total dollar amount of net sales) showing the total dollar amount of net sales to each such customer during each such year. Neither Company nor any Shareholder has any knowledge or information of any facts indicating, nor any other reason to believe, (i) that the Company's relationship with any of the customers listed on Schedule 3.19(a) is other than that which is likely to give rise to a positive recommendation by such customer of the Company to others, or (ii) that to the extent any Customer listed on Schedule 3.19(a) would have recurring projects, that such Customer would be other than likely to retain the Company to perform such project. (b) Major Suppliers. Schedule 3.19(b) contains a list of the 5 largest suppliers to Company for each of the two (2) most recent fiscal years (determined on the basis of the total dollar amount of purchases) showing the total dollar amount of purchases from each such supplier during each such year. Neither Company nor any Shareholder has any knowledge or information of any facts indicating, nor any other reason to believe, that any of the suppliers listed on Schedule 3.19(b) will not continue to be suppliers to the business of Company after the Closing and will not continue to supply the business with substantially the same quantity and quality of goods at competitive prices. 3.20 Warranty and Product Liability. Schedule 3.20 contains a true, correct and complete copy of Company's standard warranty or warranties and, except as stated therein, there are no warranties, commitments or obligations with respect to the Company's services. Schedule 3.20 sets forth the estimated aggregate annual cost to Company of performing warranty obligations for customers for each of the five (5) preceding fiscal years and the current fiscal year to the date of the Recent GAAP Financial Statements. Schedule 3.20 contains a description of all product liability claims and/or errors and omission claims and similar claims, actions, litigation and other proceedings relating to services rendered, which are presently pending or which to Company's or any Shareholder's knowledge are threatened, or which have been asserted or commenced against Company within the last five (5) years, in which a party -20- thereto either requests injunctive relief or alleges damages (whether or not covered by insurance). 3.21 Bank Accounts. Schedule 3.21 sets forth the names and locations of all banks, trust companies, savings and loan associations and other financial institutions at which the company maintains a safe deposit box, lock box or checking, savings, custodial or other account of any nature, the type and number of each such account and the signatories therefore, a description of any compensating balance arrangements, and the names of all persons authorized to draw thereon, make withdrawals therefrom or have access thereto. 3.22 Affiliates, Relationships to Company. (a) Contracts With Affiliates. All leases, contracts, agreements or other arrangements between Company and any Affiliate are described on Schedule 3.22(a). (b) No Adverse Interests. No Affiliate has any direct or indirect interest in (i) any entity which does business with Company or is competitive with Company's business, or (ii) any property, asset or right which is used by Company in the conduct of its business. (c) Obligations. All obligations of any Affiliate to Company, and all obligations of Company to any Affiliate, are listed on Schedule 3.22(c). 3.23 No Brokers or Finders. Except as set forth in Schedule 3.24, neither Company nor any of its directors, officers, employees, Shareholders or agents have retained, employed or used any broker or finder in connection with the transaction provided for herein or in connection with the negotiation thereof. 3.24 Disclosure. No representation or warranty by the Shareholders in this Agreement, nor any statement, certificate, schedule, document or exhibit hereto furnished or to be furnished by or on behalf of Shareholders pursuant to this Agreement or in connection with transactions contemplated hereby, contains or shall contain any untrue statement of material fact or omits or shall omit a material fact necessary to make the statements contained therein not misleading. 4. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer makes the following representations and warranties to the Shareholders, each of which is true and correct on the date hereof, shall remain true and correct to and including the Closing Date, shall be unaffected by any investigation heretofore or hereafter made by Shareholders or any notice to Shareholders, and shall survive the Closing of the transactions provided for herein. -21- 4.1 Corporate. (a) Organization. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of California. (b) Corporate Power. Buyer has all requisite corporate power to enter into this Agreement and the other documents and instruments to be executed and delivered by Buyer and to carry out the transactions contemplated hereby and thereby. 4.2 Authority. The execution and delivery of this Agreement and the other documents and instruments to be executed and delivered by Buyer pursuant hereto and the consummation of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of Buyer. No other corporate act or proceeding on the part of Buyer or its shareholders is necessary to authorize this Agreement or the other documents and instruments to be executed and delivered by Buyer pursuant hereto or the consummation of the transactions contemplated hereby and thereby. This Agreement constitutes, and when executed and delivered, the other documents and instruments to be executed and delivered by Buyer pursuant hereto will constitute, valid and binding agreements of Buyer, enforceable in accordance with their respective terms, except as such may be limited by bankruptcy, insolvency, reorganization or other laws affecting creditors' rights generally, and by general equitable principles. 4.3 No Brokers or Finders. Except as set forth on Schedule 4.3, neither Buyer nor any of its directors, officers, employees or agents have retained, employed or used any broker or finder in connection with the transaction provided for herein or in connection with the negotiation thereof. 4.4 Disclosure. No representation or warranty by Buyer in this Agreement, nor any statement, certificate, schedule, document or exhibit hereto furnished or to be furnished by or on behalf of Buyer pursuant to this Agreement or in connection with transactions contemplated hereby, contains or shall contain any untrue statement of material fact or omits or shall omit a material fact necessary to make the statements contained therein not misleading. 4.5 Investment Intent. The Shares are being acquired by Buyer for investment only and not with the view to resale or other distribution. 5. COVENANTS. 5.1 Referral of Clients. Buyer and the Company shall use commercially reasonable efforts to refer potential clients and projects to the other to the extent that such clients or projects require services that are within the scope of each of their respective core expertise. -22- 5.2 Employee Options. Buyer shall reserve up to 50,000 options to purchase its common stock for grant to employees of the Company other than the Shareholders, subject to the approval of Buyer, which such approval shall not be unreasonably withheld. 5.3 Noncompetition. Subject to the Closing, and as an inducement to Buyer to execute this Agreement and complete the transactions contemplated hereby, and in order to preserve the goodwill associated with the business of Company being acquired pursuant to this Agreement, Murdoch Heideman and Jimmie E. Dysert hereby covenant and agree that for a period of five (5) years from the Closing Date, Murdoch Heideman and Jimmie E. Dysert will not directly or indirectly: (a) engage in, continue in or carry on any business which competes with the Business or is substantially similar thereto, including owning or controlling any financial interest in any corporation, partnership, firm or other form of business organization which is so engaged; (b) consult with, advise or assist in any way, whether or not for consideration, any corporation, partnership, firm or other business organization which is now or becomes a competitor of company or Buyer in any aspect with respect to the Business, including, but not limited to, advertising or otherwise endorsing the products of any such competitor; soliciting customers or otherwise serving as an intermediary for any such competitor; loaning money or rendering any other form of financial assistance to or engaging in any form of business transaction on other than an arm's length basis with any such competitor; (c) offer employment to an employee of Company, without the prior written consent of Buyer; or (d) engage in any practice the purpose of which is to evade the provisions of this covenant not to compete or to commit any act which adversely affects the Business; provided, however, that the foregoing shall not prohibit the ownership of securities of corporations which are listed on a national securities exchange or traded in the national over-the-counter market in an amount which shall not exceed 5% of the outstanding shares of any such corporation. The parties agree that the geographic scope of this covenant not to compete shall extend to the United States, Mexico and Canada. The parties agree that Buyer may sell, assign or otherwise transfer this covenant not to compete, in whole or in part, to any person, corporation, firm or entity that purchases all or part of the business of the Company. In the event a court of competent jurisdiction determines that the provisions of this covenant not to compete are excessively broad as to duration, geographical scope or activity, it is expressly agreed that this covenant not to compete shall be construed so that the -23- remaining provisions shall not be affected, but shall remain in full force and effect, and any such over broad provisions shall be deemed, without further action on the part of any person, to be modified, amended and/or limited, but only to the extent necessary to render the same valid and enforceable in such jurisdiction. (e) Notwithstanding anything else herein to the contrary, Shareholders shall have the right to engage in mechanical and chemical engineering for the treatment of water. 5.4 Confidentiality. Subject to the Closing, and as an inducement to Buyer to execute this Agreement and complete the transactions contemplated hereby, and in order to preserve the goodwill associated with the business of the Company, each Shareholder hereby covenants and agrees as follows: (a) Covenant of Confidentiality. No Shareholder shall at any time subsequent to the Closing, except as explicitly requested by Buyer, (i) use for any purpose, (ii) disclose to any person, or (iii) keep or make copies of documents, tapes, discs or programs containing, any confidential information concerning Company. For purposes hereof, "confidential information" shall mean and include, without limitation, all Trade Rights in which Company has an interest, all customer lists and customer information, and all other information concerning Company's processes, apparatus, equipment, packaging, products, marketing and distribution methods, not previously disclosed to the public directly by Company. (b) Equitable Relief for Violations. Each Shareholder agrees that the provisions and restrictions contained in Section 5.3 and this Section 5.4 are necessary to protect the legitimate continuing interests of Buyer in acquiring the Shares, and that any violation or breach of these provisions will result in irreparable injury to Buyer for which a remedy at law would be inadequate and that, in addition to any relief at law which may be available to Buyer for such violation or breach and regardless of any other provision contained in this Agreement, Buyer shall be entitled to injunctive and other equitable relief as a court may grant after considering the intent of Section 5.3 and this Section 5.4. 5.5 General Releases. At the Closing, each Shareholder shall deliver, general releases to Buyer, in form and substance satisfactory to Buyer and its counsel, releasing Company and the directors, officers, agents and employees of Company from all claims to the Closing Date, except (i) as may be described in written contracts disclosed in the Disclosure Schedule and expressly described and excepted from such releases, and (ii) in the case of persons who are employees of the Company, compensation for current periods expressly described and excepted from such releases. -24- 5.6 Books and Records Request. The Company, at its own expense, shall cause its books and records to conform to GAAP for the engineering/construction industry prior to the review by Buyer described in Section 5.7. Upon the Closing, Buyer shall reimburse the Company for its out-of-pocket costs up to $5,000 for such conforming of its books and records. Shareholders shall cooperate with Buyer in completing the Company's state and federal income tax returns for the fiscal year ended July 31, 1998. Buyer shall pay up to $4,000 for the cost of such preparation. 5.7 Access to Information and Records. During the period prior to the Closing, Shareholders shall cause Company to give Buyer, its counsel, accountants and other representatives (i) access during normal business hours to all of the properties, books, records, contracts and documents of Company for the purpose of such inspection, investigation and testing as Buyer deems appropriate (and Company shall furnish or cause to be furnished to Buyer and its representatives all information with respect to the business and affairs of Company as Buyer may request); (ii) access to employees, agents and representatives for the purposes of such meetings and communications as Buyer reasonably desires; and (iii) with the prior consent of Company in each instance (which consent shall not be unreasonably withheld), access to vendors, customers, manufacturers of its machinery and equipment, and others having business dealings with Company. 5.8 Conduct of Business Pending the Closing. From the date hereof until the Closing, except as otherwise approved in writing by the Buyer, Company covenants as follows, and Shareholders shall cause each of the following to occur: (a) No Changes. Company will carry on its business diligently and in the same manner as heretofore and will not make or institute any changes in its methods of purchase, sale, management, accounting or operation. (b) Maintain Organization. Company will take such action as may be necessary to maintain, preserve, renew and keep in favor and effect the existence, rights and franchises of Company and will use its best efforts to preserve the business organization of Company intact, to keep available to Company the present officers and employees, and to preserve for Company its present relationships with suppliers and customers and others having business relationships with Company. (c) No Breach. Company and Shareholders will not do or omit any act, or permit any omission to act, which may cause a breach of any material contract, commitment or obligation, or any breach of any representation, warranty, covenant or agreement made by the Shareholders herein, or which would have required disclosure on Schedule 3.8 had it occurred after the date of the Recent GAAP Financial Statements and prior to the date of this Agreement. -25- (d) No Material Contracts. Without the prior written consent of Buyer, no contract or commitment will be entered into, and no purchase of supplies and no sale of goods or services (real, personal, or mixed, tangible or intangible) will be made, by or on behalf of Company, except contracts, commitments, purchases or sales which are in the ordinary course of business and consistent with past practice, are not material to the Company (individually or in the aggregate) and would not have been required to be disclosed in the Disclosure Schedule had they been in existence on the date of this Agreement. (e) No Corporate Changes. Company shall not amend its Articles of Incorporation or Bylaws or make any changes in authorized or issued capital stock. (f) Maintenance of Insurance. Company shall maintain all of the insurance in effect as of the date hereof and shall procure such additional insurance as shall be reasonably requested by Buyer. (g) Maintenance of Property. Company shall use, operate, maintain and repair all property of Company in a normal business manner. (h) Interim Financials. Company will provide Buyer with interim monthly financial statements and other management reports as and when they are available. (i) No Negotiations. Neither Company nor any Shareholder will directly or indirectly (through a representative or otherwise) solicit or furnish any information to any prospective buyer, commence, or conduct presently ongoing, negotiations with any other party or enter into any agreement with any other party concerning the sale of Company, Company's assets or business or any part thereof or any equity securities of Company (an "acquisition proposal"), and Company and Shareholders shall immediately advise Buyer of the receipt of any acquisition proposal. (j) No Transfer of Shares. No Shareholder shall transfer or attempt to transfer any of the Shares except to Buyer pursuant hereto; and Company shall refuse to accept any certificates for Shares to be transferred or otherwise to allow such transfers to occur upon its books. 5.9 Consents. Company and Shareholders will use their best efforts prior to Closing to obtain all consents necessary for the consummation of the transactions contemplated hereby. 5.10 Other Action. Company and Shareholders shall use their best efforts to cause the fulfillment at the earliest practicable date of all of the conditions to the parties' obligations to consummate the transactions contemplated in this Agreement. -26- 5.11 Disclosure Schedule. Shareholders and Company shall have a continuing obligation to promptly notify Buyer in writing with respect to any matter hereafter arising or discovered which, if existing or known at the date of this Agreement, would have been required to be set forth or described in the Disclosure Schedule, but no such disclosure shall cure any breach of any representation or warranty which is inaccurate. 5.12 No Solicitation. In the event that the Closing does not occur, neither Buyer, Shareholders nor the Company shall actively solicit any existing employees of the Company or the Buyer for a one year period, commencing the date of this Agreement. This does not preclude either party for having discussions with and hiring employees of the Company or the Buyer, if those employees initiate the process. If Buyer, Shareholders or the Company does initiate the solicitation of the other party's employees, that party shall be liable to pay the other for liquidated damages therefore, an amount equal to the annual salary of the employee with whom such party initiated discussions. 5.13 Nonrefundable Deposit. Unless Buyer has terminated this Agreement in writing pursuant to its determination that the conditions in Section 6 cannot be satisfied to its satisfaction, Buyer shall pay to Shareholders no later than 4:00 p.m. PDT July 20, 1998, $50,000, which such payment shall thereupon become nonrefundable to Buyer. 6. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. Each and every obligation of Buyer to be performed on the Closing Date shall be subject to the satisfaction prior to or at the Closing of each of the following conditions: 6.1 Representations and Warranties True as of the Closing Date. Each of the representations and warranties made by Shareholders in this Agreement, and the statements contained in the Disclosure Schedule or in any instrument, list, certificate or writing delivered by Shareholders or Company pursuant to this Agreement, shall be true and correct in all material respects when made and shall be true and correct in all material respects at and as of the Closing Date as though such representations and warranties were made or given on and as of the Closing Date, except for any changes permitted by the terms of this Agreement or consented to in writing by Buyer. 6.2 Compliance With Agreement. Shareholders and Company shall have in all material respects performed and complied with all of their agreements and obligations under this Agreement which are to be performed or complied with by them prior to or on the Closing Date, including the delivery of the closing documents specified in Section 9.1. -27- 6.3 Absence of Suit. No action, suit or proceeding before any court or any governmental authority shall have been commenced or threatened, and no investigation by any governmental or regulating authority shall have been commenced, against Buyer, Company or any of the affiliates, officers or directors of any of them, with respect to the transactions contemplated hereby. 6.4 Consents and Approvals. All approvals, consents and waivers that are required to effect the transactions contemplated hereby shall have been received, and executed counterparts thereof shall have been delivered to Buyer not less than two (2) business days prior to the Closing. 6.5 Third Party Consents. Company shall have delivered to Buyer on or prior to the Closing Date, consents from landlords under each lease of Real Property to the transactions contemplated by this Agreement. 6.6 Section 1445 Affidavit. Company shall have delivered to Buyer an affidavit, in form satisfactory to Buyer, to the effect that Company is not a "foreign person," "foreign corporation," "foreign partnership," "foreign trust," or "foreign estate" under Section 1445 of the Code, and containing all such other information as is required to comply with the requirements of such section. 6.7 Not Used. 6.8 Tettemer Liabilities. Shareholders (i) shall have caused the Company not to be liable to John M. Tettemer ("Tettemer"), or shall have executed, in a form satisfactory to Buyer, an instrument of assumption of liability of the Company's obligations to Tettemer for any obligation whatsoever, now or in the future (other than obligations that are expressly created by Buyer), including, but not limited to, obligations pursuant to that certain Sale Agreement by and among Tettemer and the Shareholders dated as of December 31, 1997 and that certain Severance Agreement by and among the Company, Tettemer, the Shareholders, and Autry Properties, a California general partnership dated as of January 1, 1998, (ii) shall have caused Tettemer to confirm that the agreement not to compete with the Company pursuant to such Severance Agreement will remain in full force and effect after the Closing according to its terms, and (iii) shall have obtained Tettemer's consent, in writing, to the use of the name "John M. Tettemer" in connection with the Company. 6.9 Termination of Qualified Plans. The Board of Directors of the Company shall have executed a unanimous written consent substantially in the form of Exhibit B-1 hereto terminating its 401(k) plan sufficiently prior to the Closing to cause, to the reasonable satisfaction of Buyer and its counsel, Buyer's qualified plans not to be deemed to be successor plans, and the Company shall amend its 401(k) plan by adopting the amendment substantially in the form of Exhibit B-2 hereto. -28- 6.10 Imperial Bank Approval. Imperial Bank shall have authorized the Buyer to proceed with the Closing. 6.11 Alan Swanson. The clarification in writing that any obligation to grant an option to purchase the common stock of Buyer to Alan Swanson shall be provided by Shareholders out of options or warrants otherwise owned by Shareholders, and not by the Buyer. 6.12 Union Bank of California Lien. The credit line from and lien in favor of the Union Bank of California shall have been terminated. 6.13 Mansour Vahid. The Company's employment relationship with Mansour Vahid shall be demonstrated to the satisfaction of Buyer to be "terminable at will." 6.14 Satisfactory Due Diligence and Disclosure. Buyer shall have been provided with all reasonably requested due diligence materials and the schedules attached hereto and shall have completed, to its satisfaction, a "due diligence" review of the assets, liabilities, operations, financial condition, and proprietary rights of the Company. 6.15 Satisfactory Evidence of Authority to Execute. Shareholders shall have provided such documents or instruments as are necessary, in the reasonable judgment of buyer's counsel, to establish the authority of the person or persons executing this Agreement on behalf of the Shareholders. 7. CONDITIONS PRECEDENT TO SHAREHOLDERS' OBLIGATIONS. Each and every obligation of Shareholders to be performed on the Closing Date shall be subject to the satisfaction prior to or at the Closing of the following conditions: 7.1 Representations and Warranties True on the Closing Date. Each of the representations and warranties made by Buyer in this Agreement shall be true and correct in all material respects when made and shall be true and correct in all material respects at and as of the Closing Date as though such representations and warranties were made or given on and as of the Closing Date. 7.2 Compliance With Agreement. Buyer shall have in all material respects performed and complied with all of Buyer's agreements and obligations under this Agreement which are to be performed or complied with by Buyer prior to or on the Closing Date, including the delivery of the closing documents specified in Section 9.2. 7.3 Absence of Suit. No action, suit or proceeding before any court or any governmental authority shall have been commenced or threatened, and no investigation by any governmental or regulating authority shall have been commenced, against Buyer, -29- Company or any of the affiliates, officers or directors of any of them, with respect to the transactions contemplated hereby. 8. INDEMNIFICATION. 8.1 By Shareholders. Subject to the terms and conditions of this Section 8, each Shareholder, jointly and severally, hereby agrees to indemnify, defend and hold harmless Buyer, its directors, officers, employees and controlled and controlling persons (hereinafter "Buyer's Affiliates") and the Company from and against all Claims asserted against, resulting to, imposed upon, or incurred by Buyer, Buyer's Affiliates or the Company, directly or indirectly, by reason of, arising out of, resulting from or not otherwise disclosed as a result of (a) the inaccuracy or breach of any representation or warranty of any Shareholder or Company contained in or made pursuant to this Agreement (regardless of whether such breach is deemed "material" if for purpose of Section 6.1), or (b) the breach of any covenant of any Shareholder or the Company contained in this Agreement, provided, however, that, except with respect to any Claims pursuant to Section 3.6, Shareholders shall have no liability hereunder until the total liability hereunder for all Claims considered together exceeds $50,000 (and then only to the excess), and shall have no liability hereunder in excess of one-half of the sum of (i) the cash payable pursuant to Section 2.1(a), (ii) the adjusted principal amount of the Amortizing Note, (iii) the Interest Only Note and (iv) $150,000. As used in this Section 8, the term "Claim" shall include (i) all debts, liabilities and obligations; (ii) all losses, damages (including, without limitation, consequential damages), judgments, awards, settlements, costs and expenses (including, without limitation, interest (including prejudgment interest in any litigated matter), penalties, court costs and attorneys fees and expenses); and (iii) all demands, claims, suits, actions, costs of investigation, causes of action, proceedings and assessments, whether or not ultimately determined to be valid. 8.2 By Buyer. Subject to the terms and conditions of this Section 8, Buyer hereby agrees to indemnify, defend and hold harmless each Shareholder from and against all Claims asserted against, resulting to, imposed upon or incurred by any such person, directly or indirectly, by reason of or resulting from (a) the inaccuracy or breach of any representation or warranty of Buyer contained in or made pursuant to this Agreement (regardless of whether such breach is deemed "material" for purposes of Section 7.1), or (b) the breach of any covenant of Buyer contained in this Agreement, including any claim accruing after the Closing Date and for which the Shareholders are not otherwise liable hereunder. 8.3 Indemnification of Third-Party Claims. The obligations and liabilities of any party to indemnify any other under this Section 8 with respect to Claims relating to third parties shall be subject to the following terms and conditions: -30- (a) Notice and Defense. The party or parties to be indemnified (whether one or more, the "Indemnified Party") will give the party from whom indemnification is sought (the "Indemnifying Party") prompt written notice of any such Claim, and the Indemnifying Party will undertake the defense thereof by representatives chosen by it. Failure to give such notice shall not affect the Indemnifying Party's duty or obligations under this Section 8, except to the extent the Indemnifying Party is prejudiced thereby. So long as the Indemnifying Party is defending any such Claim actively and in good faith, the Indemnified Party shall not settle such Claim. The Indemnified Party shall make available to the Indemnifying Party or its representatives all records and other materials required by them and in the possession or under the control of the Indemnified Party, for the use of the Indemnifying Party and its representatives in defending any such Claim, and shall in other respects give reasonable cooperation in such defense. (b) Failure to Defend. If the Indemnifying Party, within a reasonable time after notice of any such Claim, fails to defend such Claim actively and in good faith, the Indemnified Party (upon further notice) has the right to undertake the defense, compromise or settlement of such Claim or consent to the entry of a judgment with respect to such Claim, on behalf of and for the account and risk of the Indemnifying Party, and the Indemnifying Party shall thereafter have no right to challenge the Indemnified Party's defense, compromise, settlement or consent to judgment therein. (c) Indemnified Party's Rights. Anything in this Section 8.3 to the contrary notwithstanding, (i) if there is a reasonable probability that a Claim may materially and adversely affect the Indemnified Party other than as a result of money damages or other money payments, the Indemnified Party shall have the right to defend, compromise or settle such Claim, and (ii) the Indemnifying Party shall not, without the written consent of the Indemnified Party, settle or compromise any Claim or consent to the entry of any judgment which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party of a release from all liability in respect of such Claim. 8.4 Payment. The Indemnifying Party shall promptly pay the Indemnified Party any amount due under this Section 8, which payment may be accomplished in whole or in part, at the option of the Indemnified Party, by the Indemnified Party setting off any amount owed to the Indemnifying Party by the Indemnified Party. To the extent set-off is made by an Indemnified Party in satisfaction or partial satisfaction of an indemnity obligation under this Section 8 that is disputed by the Indemnifying Party, upon a subsequent determination by final judgment not subject to appeal that all or a portion of such indemnity obligation was not owed to -31- the Indemnified Party, the Indemnified Party shall pay the Indemnifying Party the amount which was set off and not owed together with interest from the date of set-off until the date of such payment at an annual rate equal to the annual rate set forth in the Amortizing Note. Upon judgment, determination, settlement or compromise of any third party Claim, the Indemnifying Party shall pay promptly on behalf of the Indemnified Party, and/or to the Indemnified Party in reimbursement of any amount theretofore required to be paid by it, the amount so determined by judgment, determination, settlement or compromise and all other Claims of the Indemnified Party with respect thereto, unless in the case of a judgment an appeal is made from the judgment. If the Indemnifying Party desires to appeal from an adverse judgment, then the Indemnifying Party shall post and pay the cost of the security or bond to stay execution of the judgment pending appeal. Upon the payment in full by the Indemnifying Party of such amounts, the Indemnifying Party shall succeed to the rights of such Indemnified Party, to the extent not waived in settlement, against the third party who made such third party Claim. 8.5 Limitations on Indemnification. Except for any willful or knowing breach or misrepresentation, as to which claims may be brought without limitation as to time or amount: (a) Time Limitation. Except as provided below, no claim or action shall be brought under this Section 8 for breach of a representation or warranty after the lapse of one (1) year following the Closing: (i) There shall be no time limitation on claims on actions brought for breach of any representation or warranty made by Shareholders in or pursuant to Sections 3.1 and 3.2, and Shareholders hereby waive all applicable statutory limitation periods with respect thereto. (ii) Any claim or action brought for breach of any representation or warranty made by Shareholders in or pursuant to Section 3.5 may be brought at any time until the underlying tax obligation is barred by the applicable period of limitation under federal and state laws relating thereto (as such period may be extended by waiver). (iii) Any claim or action brought for breach of any representation or warranty made by Shareholders in or pursuant to Section 3.11 may be brought at any time until the underlying claim is barred by the applicable period of limitation under federal and state laws relating thereto (as such period may be extended by waiver). (iv) Any claim made by a party hereunder by filing a suit or action in a court of competent jurisdiction or -32- a court reasonably believed to be of competent jurisdiction for breach of a representation or warranty prior to the termination of the survival period for such claim shall be preserved despite the subsequent termination of such survival period. (v) If any act, omission, disclosure or failure to disclosure shall form the basis for a claim for breach of more than one representation or warranty, and such claims have different periods of survival hereunder, the termination of the survival period of one claim shall not affect a party's right to make a claim based on the breach of representation or warranty still surviving. 8.6 No Waiver. The Closing of the transactions contemplated by this Agreement shall not constitute a waiver by any party of its rights to indemnification hereunder, regardless of whether the party seeking indemnification has knowledge of the breach, violation or failure of condition constituting the basis of the Claim at or before the Closing, and regardless of whether such breach, violation or failure is deemed to be "material" for purposes of Section 10.2. 9. CLOSING. The closing of this transaction (the "Closing") shall take place at the offices of Rutan & Tucker, 611 Anton Boulevard, Suite 1400, Costa Mesa, California 92626, at 10:00 A.M. on August 3, 1998, or at such other time and place as the parties hereto shall agree upon. Such date is referred to in this Agreement as the "Closing Date." 9.1 Documents to be Delivered by Company and Shareholders. At the Closing, Company and Shareholders shall deliver to Buyer the following documents, in each case duly executed or otherwise in proper form: (a) Stock Certificate(s). A stock certificate or certificates representing the Shares, duly endorsed for transfer or with duly executed stock powers attached. (b) Compliance Certificate. A certificate signed by each Shareholder that each of the representations and warranties made by Shareholders in this Agreement is true and correct in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on and as of the Closing Date (except for any changes permitted by the terms of this Agreement or consented to in writing by Buyer), and that Company and Shareholders have performed and complied with all of Company's and Shareholders' obligations under this -33- Agreement which are to be performed or complied with on or prior to the Closing Date. (c) Certified Resolutions. Certified copies of the resolutions of the Board of Directors and the Shareholders of Company, authorizing and approving this Agreement and the consummation of the transactions contemplated by this Agreement. (d) Articles of Incorporation: Bylaws. A copy of the Bylaws of Company certified by the secretary of Company, and a copy of the Articles of Incorporation of Company certified by the Secretary of State of the state of incorporation of Company. (e) Incumbency Certificate. Incumbency certificates relating to each person executing (as a corporate officer or otherwise on behalf of another person) any document executed and delivered to Buyer pursuant to the terms hereof. (f) General Releases. The General Releases referred to in Section 5.5, duly executed by the persons referred to in such section. (g) Resignations. The resignations of Murdoch V. Heideman and Jimmie E. Dysert as officers and directors of the Company,'effective as of the Closing Date and in form satisfactory to Buyer's counsel. (h) Other Documents. All other documents, instruments or writings required to be delivered to Buyer at or prior to the Closing pursuant to this Agreement and such other certificates of authority and documents as Buyer may reasonably request. 9.2 Documents to be Delivered by Buyer. At the Closing, Buyer shall deliver to Shareholders the following documents, in each case duly executed or otherwise in proper form: (a) Cash. To Shareholders, Buyer's check as required by Section 2.1(a) hereof. (b) Compliance Certificate. A certificate signed by the chief financial officer of Buyer that the representations and warranties made by Buyer in this Agreement are true and correct on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on and as of the Closing Date (except for any changes permitted by the terms of this Agreement or consented to in writing by Shareholders), and that Buyer has performed and complied with all of Buyer's obligations under this Agreement which are to be performed or complied with on or prior to the Closing Date. -34- (c) Certified Resolutions. A certified copy of the resolutions of the Board of Directors of Buyer authorizing and approving this Agreement and the consummation of the transactions contemplated by this Agreement. (d) Notes. The Notes as required by Sections 2.1(b) and (c) duly executed by Buyer and Aram H. Keith. (e) Warrant Certificates. The Warrant Certificates as required by Section 2.1(d). (f) Incumbency Certificate. Incumbency certificates relating to each person executing any document executed and delivered to Company or Shareholders by Buyer pursuant to the terms hereof. (g) Other Documents. All other documents, instruments or writings required to be delivered to Company at or prior to the Closing pursuant to this Agreement and such other certificates of authority and documents as Company may reasonably request. 10. TERMINATION. 10.1 Right of Termination without Breach. This Agreement may be terminated without further liability of any party at any time prior to the Closing: (a) by mutual written agreement of Buyer and Shareholders' Agent, or (b) by either Buyer or Shareholders if the Closing shall not have occurred on or before August 31, 1998, provided the terminating party has not, through breach of a representation, warranty or covenant, prevented the Closing from occurring on or before such date. 10.2 Termination for Breach. (a) Termination by Buyer. If (i) there has been a material violation or breach by any Shareholder or Company of any of the agreements, representations or warranties contained in this Agreement which has not been waived in writing by Buyer, or (ii) there has been a failure of satisfaction of a condition to the obligations of Buyer which has not been so waived, or (iii) Company, Shareholders' Agent or any Shareholder shall have attempted to terminate this Agreement under this Section 10 or otherwise without grounds to do so, then Buyer may, by written notice to Shareholders' Agent at any time prior to the Closing that such violation, breach, failure or wrongful termination attempt is continuing, terminate this Agreement with the effect set forth in Section 10.2(c) hereof. -35- (b) Termination by Shareholders. If (i) there has been a material violation or breach by Buyer of any of the agreements, representations or warranties contained in this Agreement which has not been waived in writing by Shareholders, or (ii) there has been a failure of satisfaction of a condition to the obligations of Shareholders which has not been so waived, or (iii) Buyer shall have attempted to terminate this Agreement under this Section 10 or otherwise without grounds to do so, then Shareholders may, by written notice to Buyer at any time prior to the Closing that such violation, breach, failure or wrongful termination attempt is continuing, terminate this Agreement with the effect set forth in Section 10.2(c) hereof. (c) Effect of Termination. Termination of this Agreement pursuant to this Section 10.2 shall not in any way terminate, limit or restrict the rights and remedies of any party hereto against any other party which has violated, breached or failed to satisfy any of the representations, warranties, covenants, agreements, conditions or other provisions of this Agreement prior to termination hereof. In addition to the right of any party under common law to redress for any such breach or violation, each party whose breach or violation has occurred prior to termination shall jointly and severally indemnify each other party for whose benefit such representation, warranty, covenant, agreement or other provision was made ("indemnified party") from and against all losses, damages (including, without limitation, consequential damages), costs and expenses (including, without limitation, interest (including prejudgment interest in any litigated matter), penalties, court costs, and attorneys fees and expenses) asserted against, resulting to, imposed upon, or incurred by the indemnified party, directly or indirectly, by reason of, arising out of or resulting from such breach or violation. Subject to the foregoing, the parties' obligations under Section 11.8(a) of this Agreement shall survive termination. 11. MISCELLANEOUS. 11.1 Disclosure Schedule. The Schedules have been compiled in a bound volume (the "Disclosure Schedule"), executed by Shareholders and dated and delivered to Buyer on the date of this Agreement. Information set forth in the Disclosure Schedule specifically refers to the article and section of this Agreement to which such information is responsive and such information shall not be deemed to have been disclosed with respect to any other article or section of this Agreement or for any other purpose. The Disclosure Schedule shall not vary, change or alter the language of the representations and warranties contained in this Agreement and, to the extent the language in the Disclosure Schedule does not conform in every respect to the language of such representations -36- and warranties, such language in the Disclosure Schedule shall be disregarded and be of no force or effect. 11.2 Further Assurance. From time to time, at Buyer's request and without further consideration, Company and Shareholders will execute and deliver to Buyer such documents and take such other action as Buyer may reasonably request in order to consummate more effectively the transactions contemplated hereby. 11.3 Disclosures and Announcements. Announcements concerning the transactions provided for in this Agreement by Buyer, Company or Shareholders shall be subject to the approval of the other parties in all essential respects, except that approval of the Shareholders or Company shall not be required as to any statements and other information which Buyer may submit to the Securities and Exchange Commission or Buyer's stockholders or be required to make pursuant to any rule or regulation of the Securities and Exchange commission, the National Association of Securities Dealers, Inc. or the Nasdaq Stock Market, Inc. or otherwise required by law. 11.4 Assignment; Parties in Interest. (a) Assignment. Except as expressly provided herein, the rights and obligations of a party hereunder may not be assigned, transferred or encumbered without the prior written consent of the other parties. Notwithstanding the foregoing, Buyer may, without consent of any other party, cause one or more subsidiaries or affiliates of Buyer to carry out all or part of the transactions contemplated hereby; provided, however, that Buyer shall, nevertheless, remain liable for all of its obligations, and those of any such subsidiary, to Shareholders hereunder. (b) Parties in Interest. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by the respective successors and permitted assigns of the parties hereto. Nothing contained herein shall be deemed to confer upon any other person any right or remedy under or by reason of this Agreement. 11.5 Law Governing Agreement. This Agreement may not be modified or terminated orally, and shall be construed and interpreted according to the internal laws of the State of California, excluding any choice of law rules that may direct the application of the laws of another jurisdiction. 11.6 Amendment and Modification. Buyer and Shareholders may amend, modify and supplement this Agreement in such manner as may be agreed upon in writing between Buyer and Shareholders. 11.7 Notice. All notices, requests, demands and other communications hereunder shall be given in writing and shall be: (a) personally delivered; (b) sent by telecopier, facsimile transmission or other electronic means of transmitting written -37- documents if followed by certified mail; or (c) sent to the parties at their respective addresses indicated herein by registered or certified U.S. mail, return receipt requested and postage prepaid, or by private overnight mail courier service. The respective addresses to be used for all such notices, demands or requests are as follows: (a) If to Buyer, to: The Keith Companies, Inc. 2955 Redhill Avenue Costa Mesa, CA 92626 Attention: Gary Campanaro Facsimile: (714) 668-7026 or to such other person or address as Buyer shall furnish to Shareholders in writing. (b) If to Shareholders, to: Murdoch V. Heideman Jimmie E. Dysert c/o Martin B. Jannol, Esq. Woollacott Jannol & Woollacott 1875 Century Park East, Suite 1400 Facsimile: 310-552-7552 or to such other person or address as Shareholders shall designate in accordance with this Agreement. In addition, any notice to Shareholders shall also be deemed to be notice to the Company. If personally delivered, such communication shall be deemed delivered upon actual receipt; if electronically transmitted pursuant to this paragraph, such communication shall be deemed delivered the next business day after transmission; if sent by overnight courier pursuant to this paragraph, such communication shall be deemed delivered upon receipt; and if sent by U.S. mail pursuant to this paragraph, such communication shall be deemed delivered as of the date of delivery indicated on the receipt issued by the relevant postal service, or, if the addressee fails or refuses to accept delivery, as of the date of such failure or refusal. Delivery to either Shareholder shall constitute delivery to all Shareholders. Any party to this Agreement may change its address for the purposes of this Agreement by giving notice thereof in accordance with this section. 11.8 Expenses. Regardless of whether or not the transactions contemplated hereby are consummated: (a) Expenses to be Paid by Shareholders. Shareholders shall pay, and shall indemnify, defend and hold Buyer and Company harmless from and against, each of the following: -38- (i) Transfer Taxes. Any sales, use, excise, transfer or other similar tax imposed with respect to the transactions provided for in this Agreement, and any interest or penalties related thereto. (ii) Professional Fees. Except to the extent described in Section 5.6, all fees and expenses of their own and Company's legal, accounting, investment banking and other professional counsel in connection with the transactions contemplated hereby. (iii) Broker's and Finder's Fees. All fees and expenses of their own and Company's brokers and finders in connection with the transactions contemplated hereby. (b) Other. Except as otherwise provided herein, each of the parties shall bear its own expenses and the expenses of its counsel and other agents in connection with the transactions contemplated hereby. (c) Costs of Litigation. The parties agree that the prevailing party in any action brought with respect to or to enforce or interpret any right or remedy under this Agreement shall be entitled to recover from the other party or parties all reasonable costs and expenses of any nature whatsoever incurred by the prevailing party in connection with such action, including without limitation attorneys' fees and prejudgment interest. 11.9 Entire Agreement. This instrument embodies the entire agreement between the parties hereto with respect to the transactions contemplated herein, and there have been and are no agreements, representations or warranties between the parties other than those set forth or provided for herein. 11.10 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 11.11 Headings. The headings in this Agreement are inserted for convenience only and shall not constitute a part hereof. -39- IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. BUYER: THE KEITH COMPANIES, INC., a California corporation By: /s/ Gary C. Camparano --------------------------------- Printed Name: Gary C. Camparano ----------------------- Title: CFO ------------------------------ COMPANY: JOHN M. TETTEMER & ASSOCIATES, LTD., a California corporation By: /s/ Murdoch Heideman --------------------------------- Printed Name: Murdoch Heideman ----------------------- Title: President ------------------------------ SHAREHOLDERS: THE MURDOCH V. HEIDEMAN AND NADINE R. HEIDEMAN LIVING TRUST U/D/T DATED OCTOBER 16, 1992 /s/ Murdoch Heideman ------------------------------------ By: MURDOCH HEIDEMAN, TRUSTEE THE JIMMIE E. DYSERT AND JOLENE M. DYSERT LIVING TRUST U/D/T DATED FEBRUARY 20, 1993 /s/ Jimmie E. Dysert ------------------------------------ By: JIMMIE DYSERT, TRUSTEE -40- EX-3.1 5 AMENDED AND RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF THE KEITH COMPANIES-INLAND EMPIRE, INC., a California corporation The undersigned, Aram H. Keith and Floyd S. Reid, hereby certify as follows: 1. They are the duly elected and acting President and Secretary, respectively, of THE KEITH COMPANIES-INLAND EMPIRE, INC., a California corporation (the "Corporation"). 2. The Articles of Incorporation of this Corporation are hereby amended and restated to read in full as follows: "I. NAME The name of this Corporation is THE KEITH COMPANIES, INC. II. PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which a Corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. III. STOCK This Corporation is authorized to issue only one class of shares of stock, which shall be designated "common shares". The total number of shares which this Corporation is authorized to issue is Twenty Million (20,000,000) shares. IV. LIMITATION OF LIABILITY The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. V. INDEMNIFICATION This Corporation is authorized to indemnify the directors and officers of this Corporation to the fullest extent permissible under California law and in excess of that otherwise permitted under Section 317 of the California Corporations Code." 3. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the Board of Directors of this Corporation. 4. The foregoing amendment and restatement of the Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Sections 902 and 903 of the Corporations Code. The Corporation has one class of stock outstanding. The total number of outstanding shares of Common Stock of this Corporation is 4,200,000. The number of shares voting in favor of the amendment and restatement exceeded the vote required, such required vote being a majority of the outstanding shares of Common Stock. The undersigned further declare under penalty of perjury that the matters set forth in this certificate are true and correct of their own knowledge. Executed at Costa Mesa, California, on July 25, 1994. /s/ Aram H. Keith -------------------------------- Aram H. Keith, President /s/ Floyd S. Reid -------------------------------- Floyd S. Reid, Secretary 2 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF THE KEITH COMPANIES, INC. Aram H. Keith and Gary C. Campanaro hereby certify that: 1. They are the President and Secretary, respectively, of The Keith Companies, Inc., a California corporation. 2. Article III of the Articles of Incorporation of this corporation is amended to read as follows: III A. Classes of Stock. Upon the amendment of this Article III to read ---------------- as set forth below, each 2.7 shares of common stock outstanding shall be converted into 1 share of common stock. Following the reverse stock split and after aggregating all shares held by each holder, any fractional shares resulting from the conversion of the outstanding shares shall be rounded to the nearest whole number (with one-half being rounded upward). Upon the effectiveness of this amendment, this Corporation shall be authorized to issue two classes of stock to be designated, respectively, as "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is One Hundred and Five Million (105,000,000) shares. One Hundred Million (100,000,000) shares shall be Common Stock, no par value and Five Million (5,000,000) shares shall be Preferred Stock, no par value. B. Rights, Preferences and Restrictions of Preferred Stock. The ------------------------------------------------------- Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, and the liquidation preferences of any wholly unissued series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status they had prior to the adoption of the resolution originally fixing the number of shares of such series. 3. The foregoing Amendment of Articles of Incorporation set forth herein has been duly approved by unanimous written consent of a majority of the shareholders of the Corporation in accordance with the California Corporations Code and the Bylaws of the Corporation. The total number of shares entitled to vote on or consent to this Amendment is 9,611,211 and the number of shares voting in favor of this amendment was 9,611,211. The undersigned further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Amendment to Articles of Incorporation are true and correct of his own knowledge. Date: April 23, 1999 /s/ Aram H. Keith ---------------------------------- Aram H. Keith, President /s/ Gary C. Campanaro ---------------------------------- Gary C. Campanaro, Chief Financial Officer and Secretary EX-3.2 6 AMENDED AND RESTATED BYLAWS OF THE REGISTRANT EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF THE KEITH COMPANIES, INC., a California corporation TABLE OF CONTENTS
Page ---- ARTICLE I OFFICES............................................................................. 1 Section 1. Principal Executive Office..................................................... 1 Section 2. Other Offices.................................................................. 1 ARTICLE II SHAREHOLDERS........................................................................ 1 Section 1. Place of Meetings.............................................................. 1 Section 2. Annual Meetings................................................................ 1 Section 3. Special Meetings............................................................... 1 Section 4. Notice of Annual or Special Meeting............................................ 2 Section 5. Quorum......................................................................... 2 Section 6. Adjourned Meeting and Notice Thereof........................................... 2 Section 7. Voting......................................................................... 3 Section 8. Record Date.................................................................... 5 Section 9. Consent of Absentees........................................................... 5 Section 10. Action Without Meeting......................................................... 6 Section 11. Proxies........................................................................ 6 Section 12. Inspectors of Election......................................................... 6 ARTICLE III DIRECTORS........................................................................... 7 Section 1. Powers......................................................................... 7 Section 2. Number of Directors............................................................ 8 Section 3. Election and Term of Office.................................................... 8 Section 4. Vacancies...................................................................... 8 Section 5. Place of Meeting............................................................... 9 Section 6. Regular Meetings............................................................... 9 Section 7. Special Meetings............................................................... 9 Section 8. Quorum......................................................................... 10 Section 9. Participation in Meetings by Conference Telephone.............................. 10 Section 10. Waiver of Notice............................................................... 10 Section 11. Adjournment.................................................................... 10 Section 12. Fees and Compensation.......................................................... 10 Section 13. Action Without Meeting......................................................... 10 Section 14. Rights and Inspection.......................................................... 10 Section 15. Committees..................................................................... 11 ARTICLE IV OFFICERS............................................................................ 11 Section 1. Officers....................................................................... 11 Section 2. Election....................................................................... 12 Section 3. Subordinate Officers........................................................... 12 Section 4. Removal and Resignation........................................................ 12 Section 5. Vacancies...................................................................... 12 Section 6. Chairman of the Board.......................................................... 12 Section 7. President...................................................................... 12 Section 8. Vice President................................................................. 13 Section 9. Secretary...................................................................... 13 Section 10. Chief Financial Officer........................................................ 13 ARTICLE V OTHER PROVISIONS.................................................................... 14 Section 1. Inspection of Corporate Records................................................ 14
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Page ---- Section 2. Inspection of Bylaws........................................................... 15 Section 3. Endorsement of Documents; Contracts............................................ 15 Section 4. Certificates of Stock.......................................................... 15 Section 5. Representation of Shares of other Corporations................................. 16 Section 6. Stock Purchase Plans........................................................... 16 Section 7. Annual Report to Shareholders.................................................. 16 Section 8. Construction and Definitions................................................... 16 ARTICLE VI INDEMNIFICATION..................................................................... 17 Section 1. Definitions.................................................................... 17 Section 2. Indemnification in Actions by Third Parties.................................... 17 Section 3. Indemnification in Actions by or in the Right of the Corporation............... 17 Section 4. Mandatory Indemnification Against Expenses..................................... 18 Section 5. Required Determinations........................................................ 18 Section 6. Advance of Expenses............................................................ 18 Section 7. Other Indemnification.......................................................... 18 Section 8. Circumstances Where Indemnification Not Permitted.............................. 19 Section 9. Insurance...................................................................... 19 Section 10. Nonapplicability to Fiduciaries of Employee Benefit Plans...................... 19 ARTICLE VII AMENDMENTS.......................................................................... 19
-ii- AMENDED AND RESTATED BYLAWS Bylaws for the regulation, except as otherwise provided by statute or its Articles of Incorporation of THE KEITH COMPANIES, INC., a California corporation ARTICLE I OFFICES ------- Section 1. Principal Executive Office. The principal executive office of --------- -------------------------- the Corporation shall be located at 2955 Red Hill Avenue, Costa Mesa, CA 92626. The Board of Directors (herein called the "Board") is granted full power and authority to change said principal executive office from one location to another. Section 2. Other Offices. Branch or subordinate offices may be --------- ------------- established at any time by the Board at any place or places. ARTICLE II SHAREHOLDERS ------------ Section 1. Place of Meetings. Meetings of shareholders shall be held --------- ----------------- either at the principal executive office of the Corporation or at any other place within or without the State of California which may be designated either by the Board or by the written consent of all persons entitled to vote thereat, given either before or after the meeting and filed with the Secretary. Section 2. Annual Meetings. The annual meetings of the shareholders --------- --------------- shall be held on such date and at such time as may be fixed by the Board. At such meetings, directors shall be elected and any other proper business may be transacted. Section 3. Special Meetings. Special meetings of the shareholders may --------- ---------------- be called at any time by the Board, the Chairman of the Board, the President, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at such meeting. Upon request in writing to the Chairman of the Board, the President, any Vice President or the Secretary by any person (other than the Board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five nor more than sixty days after the receipt of the request. If the notice is not given within twenty days after receipt of the request, the persons entitled to call the meeting may give the notice. -1- Section 4. Notice of Annual or Special Meeting. Written notice of each --------- ----------------------------------- annual or special meeting of shareholders shall be given not less than ten nor more than sixty days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, and no other business may be transacted, or (ii) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law, any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. Notice of a shareholders' meeting shall be given either personally or by mail or by other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the Corporation or given by the shareholder to the Corporation for the purpose of notice; or, if no such address appears or is given, at the place where the principal executive office of the Corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person given the notice by electronic means, to the recipient. Section 5. Quorum. A majority of the shares entitled to vote, --------- ------ represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to have less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 6. Adjourned Meeting and Notice Thereof. Any shareholders' --------- ------------------------------------ meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum (except as provided in Section 5 of this Article) no other business may be --------- transacted at such meeting. It shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement at the meeting at which such adjournment is taken; provided, however, when any shareholders' meeting is adjourned for more than 45 days or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the -2- adjourned meeting shall be given as in the case of an original meeting. Section 7. Voting. The shareholders entitled to notice of any meeting or --------- ------ to vote at any such meeting shall be only persons in whose name shares stand on the stock records of the Corporation on the record date determined in accordance with Section 8 of this Article. --------- Voting shall in all cases be subject to the provisions of Chapter 7 of the California General Corporation Law, and to the following provisions: (a) Subject to clause (g), shares held by an administrator, executor, guardian, conservator or custodian may be voted by such holder either in person or by proxy, without a transfer of such shares into the holder's name; and shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares held by such trustee without a transfer of such shares into the trustee's name. (b) Shares standing in the name of a receiver may be voted by such receiver; and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the receiver's name if authority to do so is contained in the order of the court by which such receiver was appointed. (c) Subject to the provisions of Section 705 of the California General Corporation Law and except where otherwise agreed in writing between the parties, a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. (d) Shares standing in the name of a minor may be voted and the Corporation may treat all rights incident thereto as exercisable by the minor, in person or by proxy, whether or not the Corporation has notice, actual or constructive, of the nonage, unless a guardian of the minor's property has been appointed and written notice of such appointment given to the Corporation. (e) Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxyholder as the bylaws of such other corporation may prescribe or, in the absence of such provision, as the Board of Directors of such other corporation may determine or, in the absence of such determination, by the chairman of the board, president or any vice president of such other corporation. Shares which are purported to be voted or any proxy purported to be executed in the name of a -3- corporation (whether or not any title of the person signing is indicated) shall be presumed to be voted or the proxy executed in accordance with the provisions of this subdivision, unless the contrary is shown. (f) Shares of the Corporation owned by any subsidiary shall not be entitled to vote on any matter. (g) Shares held by the Corporation in a fiduciary capacity, and shares of the issuing corporation held in a fiduciary capacity by any subsidiary, shall not be entitled to vote on any matter, except to the extent that the settlor or beneficial owner possesses and exercises a right to vote or to give the Corporation binding instructions as to how to vote such shares. (h) If shares stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, husband and wife as community property, tenants by the entirety, voting trustees, persons entitled to vote under a shareholder voting agreement or otherwise, or if two or more persons (including proxyholders) have the same fiduciary relationship respecting the same shares, unless the secretary of the Corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) If only one votes, such act binds all; (ii) If more than one vote, the act of the majority so voting binds all; (iii) If more than one vote, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionately. If the instrument so filed or the registration of the shares shows that any such tenancy is held in unequal interests, a majority or even split for the purpose of this section shall be a majority or even split in interest. Subject to the following sentence and to the provisions of Section 708 of the California General Corporation Law, every shareholder entitled to vote at any election of directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. No shareholder shall be entitled to cumulate votes for any candidate or candidates pursuant to the preceding sentence unless such candidate or candidates' names have been placed in nomination -4- prior to the voting and the shareholder has given notice at a meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. At the time the Corporation becomes a listed corporation within the meaning of Section 301.5 of the California General Corporation Law, the provisions of this paragraph shall be of no further force and effect and no shareholder shall be entitled to cumulate such shareholder's votes at any election of directors. Elections need not be by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at the meeting and before the voting begins. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. Section 8. Record Date. The Board may fix, in advance, a record date for --------- ----------- the determination of the shareholders entitled to notice of any meeting to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to the exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the Corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The Board shall fix a new record date if the meeting is adjourned for more than 45 days. If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the next business day next preceding the day on which the meeting is held. The record date for determining shareholders for any purpose other than set forth in this Section 8 or Section 10 of this Article shall be at the close of business on the - --------- ---------- day on which the Board adopts the resolution relating thereto, or the sixtieth day prior to the date of such other action, whichever is later. Section 9. Consent of Absentees. The transactions of any meeting of --------- -------------------- shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after -5- regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, except as provided in Section 601(f) of the California General Corporation Law. Section 10. Action Without Meeting. Subject to Section 603 of the ---------- ---------------------- California General Corporation Law, any action which, under any provision of the California General Corporation Law, may be taken at any annual or special meeting of shareholders, may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless a record date for voting purposes be fixed as provided in Section 8 of this --------- Article, the record date for determining shareholders entitled to give consent shall be the day on which the first written consent is given. Section 11. Proxies. Every person entitled to vote shares has the right ---------- ------- to do so either in person or by one or more persons authorized by a written proxy executed by such shareholder and filed with the Secretary. Every proxy duly executed shall continue in full force and effect until revoked by the person executing it prior to the vote pursuant thereto effected by a writing delivered to the Corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or by attendance at the meeting and voting in person by the person executing the proxy; provided, however, that no proxy shall be valid after the expiration of eleven months from the date of its execution unless otherwise provided in the proxy. Section 12. Inspectors of Election. In advance of any meeting of ---------- ---------------------- shareholders, the Board may appoint any persons, other than nominees for office inspectors of election to act at such meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any such meeting may, and on the request of any shareholder or shareholder's proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present shall determine whether one or three inspectors are to be appointed. -6- The duties of such inspectors shall be as prescribed by Section 707(b) of the California General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each; the shares represented at the meeting; the existence of a quorum; the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. ARTICLE III DIRECTORS --------- Section 1. Powers. Subject to limitations of the Articles of --------- ------ Incorporation, of these Bylaws and of the California General Corporation Law relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board. The Board may delegate the management of the day-to-day operation of the business of the Corporation to a management company or other person provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the following powers in addition to the other powers enumerated in these Bylaws: (a) To select and remove all the other officers, agents and employees of the Corporation, prescribe the powers and duties for them as may not be inconsistent with applicable law, with the Articles of the Corporation or these Bylaws, fix their compensation and require from them security for faithful service. (b) To conduct, manage and control the affairs and business of the Corporation and to make such rules and regulations therefor not inconsistent with applicable law, or with the Articles of the Corporation or these Bylaws, as they may deem best. (c) To adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time as in their judgment they may deem best. -7- (d) To authorize the issuance of shares of stock of the Corporation from time to time, upon such terms and for such consideration as may be lawful. (e) To borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecation or other evidences of debt and securities thereof. Section 2. Number of Directors. The authorized number of directors shall --------- ------------------- be, until changed by amendment of the Articles or by a Bylaw duly adopted by the shareholders, such number as may from time to time be authorized by resolution of the Board of Directors or the shareholders, provided that such number shall not be less than three (3) nor more than five (5). Section 3. Election and Term of Office. The directors shall be elected --------- --------------------------- at each annual meeting of the shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director shall hold office until the next annual meeting and until a successor has been elected and qualified. Section 4. Vacancies. Any director may resign effective upon giving --------- --------- written notice to the Chairman of the Board, the President, Secretary or the Board, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Vacancies in the Board, except those existing as a result of a removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until the next annual meeting and until such director's successor has been elected and qualified. A vacancy or vacancies in the Board shall be deemed to exist in the case of the death, resignation or removal of any director, or if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent other than to fill a vacancy -8- created by removal requires the consent of a majority of the outstanding shares entitled to vote. If the Board accepts the resignation of a director tendered to take effect at a future time, the Board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of the director's term of office. Section 5. Place of Meeting. Regular or special meetings of the Board --------- ---------------- shall be held at any place within or without the State of California which has been designated from time to time by the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the Corporation. Section 6. Regular Meetings. Immediately following each annual meeting --------- ---------------- of shareholders, the Board shall hold a regular meeting for the purpose of organization, election of officers and the transaction of other business. Call and notice of all such regular meetings of the Board of Directors is hereby dispensed with. Other regular meetings of the Board shall be held without call on such dates and at such times as may be fixed by the Board, and shall be subject to the notice requirements set forth in Section 7 hereof. --------- Section 7. Special Meetings. Special meetings of the Board for any --------- ---------------- purpose or purposes may be called at any time by the Chairman of the Board, the President or the Secretary or by any two directors. Special meetings of the Board shall be held upon four days' written notice or 48 hours' notice given personally or by telephone, telegraph, telecopier, telex or other similar means of communication. Any such notice shall be addressed or delivered to each director at such director's address as it is shown upon the records of the Corporation or as may have been given to the Corporation by the director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated in person or by telephone or wireless, to the recipient or to a person at the office or residence of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. -9- Section 8. Quorum. One third of the authorized number of directors or --------- ------ two directors, whichever is larger, constitutes a quorum of the Board for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number be required by law or by the Articles. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 9. Participation in Meetings by Conference Telephone. Members of --------- ------------------------------------------------- the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Section 10. Waiver of Notice. The transactions of any meeting of the ---------- ---------------- Board, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding such a meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 11. Adjournment. A majority of the directors present, whether ---------- ----------- or not a quorum is present, may adjourn any directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 12. Fees and Compensation. Directors and members of committees ---------- --------------------- may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board. Section 13. Action Without Meeting. Any action required or permitted to ---------- ---------------------- be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such consent or consents shall have the same effect as a unanimous vote of the Board and shall be filed with minutes of the proceedings of the Board. Section 14. Rights and Inspection. Every director shall have the ---------- --------------------- absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation and also of its subsidiary -10- corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts. Section 15. Committees. The Board may appoint one or more committees, ---------- ---------- each consisting of two or more directors, and delegate to such committees any of the authority of the Board except with respect to: (i) The approval of any action for which the California General Corporation Law also requires shareholders' approval of the outstanding shares. (ii) The filling of vacancies on the Board or in any committee; (iii) The fixing of compensation of the directors for serving on the Board or on any committee; (iv) The amendment or repeal of Bylaws or the adoption of new Bylaws; (v) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (vi) A distribution to the shareholders of the Corporation except at a rate or in a periodic amount or within a price range determined by the Board; or (vii) The appointment of other committees of the Board or the members thereof. Any such committee must be appointed by resolution adopted by a majority of the authorized number of directors and may be designated an Executive Committee or by such other name as the Board shall specify. The Board shall have the power to prescribe the manner in which proceedings of any such committee shall be conducted. In the absence of any such prescription, such committee shall have the power to prescribe the manner in which its proceedings shall be conducted. Unless the Board or such committee shall otherwise provide, the regular and special meetings and other actions of any such committee shall be governed by the provisions of this Article applicable to meetings and actions of the Board. Minutes shall be kept of each meeting of each committee. ARTICLE IV OFFICERS -------- Section 1. Officers. The officers of the Corporation shall be a --------- -------- President, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more -11- Assistant Financial Officers and such other officers as may be elected or appointed in accordance with the provisions of Section 3 of this Article. --------- Section 2. Election. The officers of the Corporation, except such --------- -------- officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by, and shall - --------- --------- serve at the pleasure of the Board, and shall hold their respective offices until their resignation, removal or other disqualification from service, or until their respective successors shall be elected. Section 3. Subordinate Officers. The Board may elect, and may empower --------- -------------------- the President to appoint such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these Bylaws or as the Board may from time to time determine. Section 4. Removal and Resignation. Any officer may be removed, either --------- ----------------------- with or without cause, by the Board of Directors at any time or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any such removal shall be without prejudice to the rights, if any, of the officer under any contract of employment. Any officer may resign at any time by giving written notice to the Corporation, but without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy in any office because of death, --------- --------- resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular election or appointment to such office. Section 6. Chairman of the Board. The Chairman of the Board, if there --------- --------------------- shall be such an officer, shall, if present, preside at all meetings of the Board and exercise and perform such other powers and duties as may be from time to time assigned by the Board. Section 7. President. Subject to such powers, if any, as may be given by --------- --------- the Board to the Chairman of the Board, if there be such an officer, the President is the general manager and chief executive officer of the Corporation and has, subject to the control of the Board, general supervision, direction and control of the business and officers of the Corporation. The President shall preside at all meetings of the shareholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board. The President has the general powers and duties of -12- management usually vested in the office of president and general manager of a corporation and such other powers and duties as may be prescribed by the Board. Section 8. Vice President. In the absence or disability of the --------- -------------- President, the Vice Presidents in order of their rank as fixed by the Board or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board. Section 9. Secretary. The Secretary shall keep or cause to be kept, at --------- --------- the principal executive office and such other place as the Board may order, a book of minutes of all meetings of shareholders, the Board and its committees, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Board and committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the Corporation at the principal executive offices or business office in accordance with Section 213 of the California General Corporation Law. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders of the Board and of any committees thereof required by these Bylaws or by law to be given, shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board. Section 10. Chief Financial Officer. The Chief Financial Officer is the ---------- ----------------------- chief financial officer of the Corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, and shall send or cause to be sent to the shareholders of the Corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. The books of account shall at all times be open to inspection by any director. The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board. The Chief -13- Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board, shall render to the President and directors, whenever they request it, an account of all transactions entered into as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board. ARTICLE V OTHER PROVISIONS ---------------- Section 1. Inspection of Corporate Records. --------- ------------------------------- (a) A shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the Corporation shall have an absolute right to do either or both of the following: (i) Inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the Corporation; or (ii) Obtain from the transfer agent, if any, for the Corporation, upon five business days' prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. (b) The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the Corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. (c) The accounting books and records and minutes of proceedings of the shareholders and the Board and committees of the Board shall be open to inspection upon written demand on the Corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as a holder of such voting trust certificate. (d) Any inspection and copying under this Article may be made in person or by agent or attorney. -14- Section 2. Inspection of Bylaws. The Corporation shall keep in its --------- -------------------- principal executive office the original or a copy of these Bylaws as amended to date, which shall be open to inspection by shareholders at all reasonable times, during office hours. If the principal executive office of the Corporation is located outside the State of California and the Corporation has no principal business office in such state, it shall upon the written notice of any shareholder furnish to such shareholder a copy of these Bylaws as amended to date. Section 3. Endorsement of Documents; Contracts. Subject to the --------- ----------------------------------- provisions of applicable law, any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance or other instrument in writing and any assignment or endorsements thereof executed or entered into between the Corporation and any other person, when signed by the Chairman of the Board, the President or any Vice President and the Secretary, any Assistant Secretary, the Chief Financial Officer or any Assistant Financial Officer of the Corporation shall be valid and binding on the Corporation in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same. Any such instruments may be signed by another person or persons and in such manner as from time to time shall be determined by the Board, and, unless so authorized by the Board, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount. Section 4. Certificates of Stock. Every holder of shares of the --------- --------------------- Corporation shall be entitled to have a certificate signed in the name of the Corporation by the Chairman of the Board, the President or a Vice President and by the Chief Financial Officer or an Assistant Financial Officer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. If any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board may provide; provided, however, that on any certificate issued to represent any partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Except as provided in this section, no new certificate for shares shall be issued in lieu of an old one unless the latter is surrendered and cancelled at the same time. The Board may, however, if any certificate for shares is alleged to have been -15- lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, and the Corporation may require that the Corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including expense or liability) on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 5. Representation of Shares of other Corporations. The President --------- ---------------------------------------------- or any other officer or officers authorized by the Board or the President are each authorized to vote, represent and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation. The authority herein granted may be exercised either by any such officer in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officer. Section 6. Stock Purchase Plans. The Corporation may adopt and carry out --------- -------------------- a stock purchase plan or agreement or stock option plan or agreement providing for the issue and sale for such consideration as may be fixed of its unissued shares, or of issued shares acquired or to be acquired, to one or more of the employees or directors of the Corporation or of a subsidiary or to a trustee on their behalf and for the payment for such shares in installments or at one time, and may provide for aiding any such persons in paying for such shares by compensation for services rendered, promissory notes or otherwise. Any such stock purchase plan or agreement or stock option plan or agreement may include, among other features, the fixing of eligibility for participation therein, the class and price of shares to be issued or sold under the plan or agreement, the number of shares which may be subscribed for, the method of payment therefor, the reservation of title until full payment therefor, the effect of the termination of employment and option or obligation on the part of the Corporation to repurchase the shares upon termination of employment, restrictions upon transfer of the shares, the time limits of and termination of the plan, and any other matters, not in violation of applicable law, as may be included in the plan as approved or authorized by the Board or any committee of the Board. Section 7. Annual Report to Shareholders. The annual report to --------- ----------------------------- shareholders referred to in Section 1501 of the California General Corporation Law is expressly waived, but nothing herein shall be interpreted as prohibiting the Board from issuing annual or other periodic reports to shareholders. Section 8. Construction and Definitions. Unless the context otherwise --------- ---------------------------- requires, the general provisions, rules of construction and definitions contained in the General Provisions of the California Corporations Code and in the California General Corporation Law shall govern the construction of these Bylaws. -16- ARTICLE VI INDEMNIFICATION --------------- Section 1. Definitions. For the purposes of this Article, "agent" means --------- ----------- any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. "Proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative and "expenses" includes without limitation attorneys' fees and any expenses of establishing a right to indemnification under Sections 4 or 5(d). ------------------ Section 2. Indemnification in Actions by Third Parties. The Corporation --------- ------------------------------------------- shall have power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that such person is or was an agent of the Corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the Corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. Section 3. Indemnification in Actions by or in the Right of the --------- ---------------------------------------------------- Corporation. The Corporation shall have the power to indemnify any person who - ----------- was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of the Corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action, provided that no such person shall be indemnified for acts, omissions or transactions for which California Corporations Code Section 204(a)(10) disallows eliminating or limiting the personal liability of a director. No indemnification shall be made under this Section 3 for any of the following: --------- (a) In respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation in the performance of such person's duty to the -17- Corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (b) Of amounts paid in settling or otherwise disposing of a pending action without court approval; or (c) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. Section 4. Mandatory Indemnification Against Expenses. To the extent --------- ------------------------------------------ that an agent of the Corporation has been successful on the merits in defense of any proceeding referred to in Sections 2 or 3 or in defense of any claim, issue --------------- or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. Section 5. Required Determinations. Except as provided in Section 4, any --------- ----------------------- --------- indemnification under this Article shall be made by the Corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3, by any of the --------------- following: (a) A majority vote of a quorum consisting of directors who are not parties to such proceeding; (b) If a quorum of directors is not obtainable, by independent legal counsel in a written opinion; (c) Approval of the shareholders, with the shares owned by the person to be indemnified not being entitled to vote thereon; or (d) The court in which such proceeding is or was pending upon application made by the Corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by the Corporation. Section 6. Advance of Expenses. Expenses incurred in defending any --------- ------------------- proceeding may be advanced by the Corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent to repay such amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this Article. Section 7. Other Indemnification. The indemnification provided by this --------- --------------------- section shall not be deemed exclusive of any other -18- rights to which those seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent such additional rights to indemnification are authorized in the Articles of this corporation. The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of the person. Nothing contained in this Article shall affect any right to indemnification to which persons other than such directors and officers may be entitled by contract or otherwise. Section 8. Circumstances Where Indemnification Not Permitted. No --------- ------------------------------------------------- indemnification or advance shall be made under this Article, except as provided in Sections 4 or 5(d), in any circumstance where it appears: ------------------ (a) That it would be inconsistent with a provision of the Articles, a resolution of the shareholders or an agreement in effect at the time of the occurrence of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. Section 9. Insurance. The Corporation shall have power to purchase and --------- --------- maintain insurance on behalf of any agent of the Corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the Corporation would have the power to indemnify the agent against such liability under the provisions of this Article. Section 10. Nonapplicability to Fiduciaries of Employee Benefit Plans. ---------- --------------------------------------------------------- This Article does not apply to a proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an agent as defined in Section 1 of --------- the employer Corporation. The Corporation shall have power to indemnify such a trustee, investment manager or other fiduciary to the extent permitted by subdivision (f) of Section 207 of the California General Corporation Law. ARTICLE VII AMENDMENTS ---------- These Bylaws may be amended or repealed either by approval of the outstanding shares or by the approval of the Board; provided, however, that after the issuance of shares, a Bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable Board or vice versa may only be adopted by approval of the outstanding shares. -19- EX-10.2 7 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.2 INDEMNIFICATION AGREEMENT ------------------------- THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made as of this ___ day --------- of ____________, 1998, by and among THE KEITH COMPANIES, INC., a California corporation ("TKC"), KEITH ENGINEERING, INC., a California corporation ("KEI"), --- --- THE KEITH COMPANIES-NORTH COUNTIES, INC., a California corporation ("TKC-NC"), ------ ESI, ENGINEERING SERVICES, INC., a California corporation ("ESI"), ESII, --- ENGINEERED SYSTEMS INTEGRATION, INC., a California corporation ("ESII"), JOHN M. ---- TETTEMER & ASSOCIATES, LTD., a California corporation ("JTMA") and ____________ ---- ("Indemnitee"). KEI, TKC-NC, ESI, ESII and JTMA are affiliated entities and ---------- together with any other entity which is presently or is in the future controlled by, under common control with, or controlling TKC (an "Affiliate") shall --------- together with TKC, be collectively referred to herein as the "Company." ------- R E C I T A L S - - - - - - - - A. The Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. B. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. C. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection. D. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law. A G R E E M E N T - - - - - - - - - NOW, THEREFORE, The Company and Indemnitee hereby agree as follows: 1. Agreement to Indemnify. ---------------------- The Company hereby agrees to indemnify Indemnitee and hold Indemnitee harmless to the full extent authorized or permitted by the provisions of the General Corporation Law of California, or by any amendment thereof or other statutory provision requiring, authorizing or permitting such indemnification which may be adopted after the date hereof; provided, however, that any such amendment or other statutory provision which further limits the availability of or further restricts the Company's ability to provide such indemnification shall operate prospectively only, to the extent permitted by law. This Agreement shall be effective as of the date Indemnitee was first appointed as an officer or director of the Company and/or any affiliate and Company's indemnification obligations to Indemnitee hereunder shall terminate on the date Indemnitee ceases to be an officer or director of the Company except (i) as provided in Section 3 below, and (ii) the Company shall continue to be obligated to - --------- indemnify Indemnitee hereunder, after Indemnitee ceases to be an officer or director, with respect to all claims arising out of events that occurred on or prior to the date that Indemnitee ceased to be an officer or director. 2. Agreement to Serve. ------------------ In consideration of the protection afforded by this Agreement, Indemnitee agrees to continue to serve as an officer and/or director of the Company at the will of the Company (or under separate agreement, if such agreement exists) so long as Indemnitee is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or until such time as Indemnitee tenders Indemnitee's resignation in writing. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment. 3. Indemnification of Indemnitee as Employee. ----------------------------------------- If, by mutual written consent of the Company and Indemnitee, Indemnitee shall cease to serve as an officer or director of the Company but remains in the employ of the Company, the Company's indemnification obligations created by this Agreement shall terminate except as provided in Section 1 above. The Company --------- shall, however, continue to be subject to the indemnification provisions of Labor Code Section 2802 which provides that: "An employer shall indemnify his employee for all that the employee necessarily expends or loses in direct consequence of the discharge of his duties as such, or of his obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying such directions, believed them to be unlawful." -2- 4. Expenses; Indemnification Procedure. ----------------------------------- (a) Advancement of Expenses. The Company shall advance all expenses ----------------------- incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding for which Indemnitee is entitled to be indemnified hereunder, until the final disposition of such action, suit or proceeding. Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to the Indemnitee as soon as possible following delivery of a written request therefor by Indemnitee to the Company, but in no event more than twenty (20) days after such request. (b) Notice/Cooperation by Indemnitee. Indemnitee shall give the Company -------------------------------- notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be given and deemed received as provided in Section 12(d) ------------- below. Indemnitee's omission to so notify the Company under this Section 4(b) ------------ shall not relieve the Company from any liability which it may have to Indemnitee under this Agreement (provided that the Company shall retain the right to reimbursement from the Indemnitee for any damages it may have suffered as a result of the failure so to notify). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) Procedure. Any indemnification and advances provided for in Section 1 --------- --------- and this Section 4 shall be made no later than twenty (20) days after receipt by --------- the Company of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Articles of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within twenty (20) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 12(c) of this Agreement, Indemnitee shall ------------- also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action together with interest at the rate applicable to judgments. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 4(a) unless and until ------------ such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the -3- question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the receipt of a notice of a ------------------ claim pursuant to Section 4(b) hereof, the Company has director and officer ------------ liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated -------------------- under Section 4(a) hereof to pay the expenses of any proceeding against ------------ Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel reasonably acceptable to the Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ Indemnitee's counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 5. Additional Indemnification Rights; Nonexclusivity. ------------------------------------------------- (a) Scope. Notwithstanding any other provision of this Agreement, the ----- Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a California -4- corporation to indemnify a member of its Board of Directors or an officer, such changes shall be, ipso facto, within the purview of Indemnitee's rights and ---- ----- Company's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a California corporation to indemnify a member of its Board of Directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall -------------- not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its Bylaws, any agreement, any vote of shareholders or disinterested Directors, the California General Corporation Law, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office (an "Indemnified Capacity"). The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an Indemnified Capacity even though Indemnitee may have ceased to serve in an Indemnified Capacity at the time of any action, suit or other covered proceeding. 6. Partial Indemnification. ----------------------- If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by Indemnitee in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 7. Enforcement. ----------- (a) Public Policy. Both the Company and Indemnitee acknowledge that in ------------- certain instances, federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. -5- (b) Inducement. The Company expressly confirms and agrees that it has ---------- entered into this Agreement and assumed the obligations imposed on the Company hereby in order to induce Indemnitee to continue to serve as a director or officer of the Company and acknowledges that Indemnitee is relying upon this Agreement in continuing in such capacity. 8. Officer and Director Liability Insurance. ---------------------------------------- The Company shall, from time to time, make the good faith determination, in its sole and absolute discretion, whether it is practicable for the Company to maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or to the Company's officers, if Indemnitee is not a director of the Company but is an officer; or to the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company, in its sole and absolute discretion, determines that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by insurance which would be duplicative. 9. Severability. ------------ Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law, and to the extent this Agreement requires any act or omission to act which would be in violation of applicable law, such requirement shall be ipso facto ---- ----- eliminated herefrom. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 9. If this Agreement or any portion hereof shall be invalidated --------- on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. -6- 10. Exceptions. ---------- Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Claims Initiated by Indemnitee. To indemnify or advance expenses to ------------------------------ Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under applicable law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; or (b) Insured Claims. To indemnify Indemnitee for expenses or liabilities of -------------- any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been actually paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company, without further liability to the Indemnitee for reimbursement of any such amounts; or (c) Claims Under Section 16(b). To indemnify Indemnitee for expenses or -------------------------- the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar or successor statute (including any similar state statute), if applicable, unless Indemnitee has otherwise complied with applicable Company policy concerning purchases or sales of securities by Indemnitee. 11. Construction of Certain Phrases. ------------------------------- (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, (i) any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued, and (ii) all past, present or future Affiliates. -7- (b) For purposes of this Agreement, references to "other enterprise" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to any employee benefit plan, its participants or beneficiaries. 12. Miscellaneous. ------------- (a) Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall constitute an original. (b) Successors and Assigns. This Agreement shall be binding upon the ---------------------- Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. (c) Attorneys' Fees. In the event that any action is instituted by --------------- Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. (d) Notice. All notices, requests, demands and other communications under ------ this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. (e) Consent to Jurisdiction. The Company and the Indemnitee each hereby ----------------------- irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California. -8- (f) Choice of Law. This Agreement shall be governed by and its provisions ------------- construed in accordance with the laws of the State of California, as applied to contracts between California residents entered into and to be performed entirely within California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. THE KEITH COMPANIES, INC. By:__________________________________ Its:______________________________ Address: 2955 Red Hill Avenue Costa Mesa, California 92626 KEITH ENGINEERING, INC. By:__________________________________ Its:______________________________ Address: 2955 Red Hill Avenue Costa Mesa, California 92626 -9- THE KEITH COMPANIES-NORTH COUNTIES, INC. By:__________________________________ Its:______________________________ Address: 2955 Red Hill Avenue Costa Mesa, California 92626 ESI, ENGINEERING SERVICES, INC. By:__________________________________ Its:______________________________ Address: 2955 Red Hill Avenue Costa Mesa, California 92626 ESII, ENGINEERED SYSTEMS INTEGRATION, INC. By:__________________________________ Its:______________________________ Address: 2955 Red Hill Avenue Costa Mesa, California 92626 -10- JOHN M. TETTEMER & ASSOCIATES, LTD. By:_________________________________ Its:___________________________ Address: 2955 Red Hill Avenue Costa Mesa, California 92626 AGREED TO AND ACCEPTED: INDEMNITEE: ________________________________ (Address) c/o The Keith Companies, Inc. 2955 Red Hill Avenue Costa Mesa, CA 92626 -11- EX-10.3 8 SECURITY AND LOAN AGREEMENT EXHIBIT 10.3 SECURITY AND LOAN AGREEMENT (ACCOUNTS RECEIVABLE) This Agreement is entered into between THE KEITH COMPANIES, INC. AND KEITH ENGINEERING, INC. doing business as California corporations (herein called "Borrower") and IMPERIAL BANK (herein called "BANK"). 1. Bank hereby commits, subject to all the terms and conditions of this Agreement and prior to the termination of its commitment as hereinafter provided, to make loans to Borrower from time to time in such amounts as may be determined by Bank up to, but not exceeding in the aggregate unpaid principal balance, the following Borrowing Base: 75.000% of Eligible Accounts and in no event more than $ 5,000,000.00 2. The amount of each loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank (herein called "Loan Account") and Bank shall credit the Loan Account with all loan repayments made by Borrower. Borrower promises to pay Bank (a) the unpaid balance of Borrower's Loan Account on demand and (b) on or before the tenth day of each month, interest on the average daily unpaid balance of the Loan Account during the immediately preceding month at the rate of one and one half percent (1.500%) per annum in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest computation purposes be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest at any time. Such notice may be given verbally or in writing and should be effective upon receipt by Borrower. The amount of interest payable each month by Borrower shall not be less than a minimum monthly charge of $ 250.00. Bank is hereby authorized to charge Borrower's deposit account(s) with Bank for all sums due Bank under this Agreement. 3. Requests for loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to bank and shall contain a certification setting forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of loan being requested. 4. As used in this Agreement, the following terms shall have the following meanings: A. "Accounts" means any right to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. B. "Collateral" means any and all personal property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest. C. "Eligible Accounts" means all of Borrower's Accounts excluding, however, (1) all Accounts under which payment is not received within 90 days from any invoice date, (2) all Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account and (3) any Accounts if the account debtor or any other person liable in connection therewith is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. 5. Borrower hereby assigns to Bank all Borrower's present and future Accounts, including all proceeds due thereunder, all guaranties and security therefor, and hereby grants to Bank a continuing security interest in all moneys in the Collateral Account referred to in Section 6 hereof, as security for any and all obligations of Borrower to Bank, whether now owing or hereafter incurred and whether direct, indirect, absolute or contingent. So long as Borrower is indebted to Bank or Bank is committed to extend credit to Borrower, Borrower will execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in the Collateral. 6. Until Bank exercises its rights to collect the Accounts pursuant to paragraph 10, Borrower will collect with diligence all Borrower's Accounts, provided that no legal action shall be maintained thereon or in connection therewith without Bank's prior written consent. Any collection of Accounts by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank, and Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver said collections daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Returned items at Bank's option may be charged to Borrower's general account. All collections of the Accounts shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. 7. Until Bank exercises its rights to collect the Accounts pursuant to paragraph 10, Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall immediately notify Bank of all cases involving returns, repossessions, and loss or damage of or to merchandise represented by the Accounts and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts and, in any of such events, Borrower will immediately pay to Bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower's Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. 8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation, that Borrower is duly organized and existing in the State of its incorporation and the execution, delivery and performance hereof are within Borrower's corporate powers, have been duly authorized and are not in conflict with law or the terms of any charter, by-law or other incorporation papers, or of any indenture, agreement or undertaking to which Borrower is a party by which Borrower is found or affected; (ii) Borrower is, or at the time the collateral becomes subject to Bank's security interest will be, the true and lawful owner of and has, or at the time the Collateral becomes subject to Bank's security interest will have, good and clear title to the Collateral, subject only to Bank's rights herein; (iii) Each Account is, or at the time the Account comes into existence will be, a true and correct statement of a bona fide indebtedness incurred by the debtor named therein in the amount of the Account for either merchandise sold or delivered (or being held subject to Borrower's delivery instructions) to, or services rendered, performed and accepted by, the account debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs which may be asserted against the Accounts; and (v) any and all financial information, including information relating to the Collateral, submitted by Borrower to Bank, whether previously or in the future, is or will be true and correct. Page 1 of 2 9. Borrower will: (i) Furnish Bank from time to time such financial statements and information as Bank may reasonably request and inform Bank immediately upon the occurrence of a material adverse change therein; (ii) Furnish Bank periodically, in such form and detail and such times as Bank may require, statements showing aging and reconciliation of the Accounts and collections thereon; (iii) Permit representatives of Bank to inspect the Borrower's books and records relating to the Collateral and make extracts therefrom at any reasonable time and to arrange for verification of the Accounts, under reasonable procedures, acceptable to Bank, directly with the account debtors or otherwise at Borrower's expense; (iv) Promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto; (v) Reimburse Bank upon demand for any and all legal costs, including reasonable attorneys' fees, and other expense incurred in collecting any sums payable by Borrower under Borrower's Loan Account or any other obligation secured hereby, enforcing any term or provision of this Security Agreement or otherwise on the checking, handling and collection of the Collateral and the preparation and enforcement of any agreement relating thereto; (vi) Notify Bank of each location and of each office of Borrower at which records of Borrower relating to the Accounts are kept; (vii) Provide, maintain and deliver to Bank policies insuring the Collateral against loss or damage by such risks and in such amounts, forms and companies as Bank may require and with loss payable solely to Bank, and, in the event Bank takes possession of the Collateral, the insurance policy or policies and any unearned or returned premium thereon shall at the option of Bank become the sole property of Bank, such policies and the proceeds of any other insurance covering or in any way relating to the Collateral, whether now in existence or hereafter obtained, being hereby assigned to Bank; (viii) In the event the unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding loans to which Borrower is entitled under Section 1 hereof, Borrower shall immediately pay to Bank, from its own funds and not from the proceeds of Collateral, for credit to Borrower' Loan Account the amount of such excess. 10. Bank may at any time, without prior notice to Borrower, collect the Accounts and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. 11. Until Borrower's Loan Account and all other obligations secured hereby shall have been repaid in full, Borrower shall not sell, dispose of or grant a security interest in any of the Collateral other than to Bank, or execute any financing statements covering the Collateral in favor of any secured party or person other than Bank. 12. Should: (i) Default be made in the payment of any obligation, or breach be made in any warranty, statement, promise, term or condition, contained herein or hereby secured; (ii) Any statement or representation made for the purpose of obtaining credit hereunder prove false; (iii) Bank deem the Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower become insolvent or make an assignment for the benefit of creditors; or (v) Any proceeding be commenced by or against Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt of moratorium law or statute; then in any such event, Bank may, at its option and without demand first made and without notice to Borrower, do any one or more of the following: (a) Terminate its obligation to make loans to Borrower as provided in Section 1 hereof; (b) Declare all sums secured hereby immediately due and payable; (c) Immediately take possession of the Collateral wherever it may be found, using all necessary force so to do, or require Borrower to assemble the Collateral and make it available to Bank at a place designated by Bank which is reasonably convenient to Borrower and Bank, and Borrower waives all claims for damages due to or arising from or connected with any such taking; (d) Proceed in the foreclosure of Bank's security interest and sale of the Collateral in any manner permitted by law, or provided for herein; (e) Sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale, and upon terms and in such manner as Bank may determine, and Bank may purchase same at any such sale; (f) Retain the Collateral in full satisfaction of the obligations secured thereby; (g) Exercise any remedies of a secured party under the Uniform Commercial Code. Prior to any such disposition, Bank may, at as [sic] option, cause any of the Collateral to be repaired or reconditioned in such manner and to such extent as Bank may deem advisable, and any sums expended therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall have the right to enforce one or more remedies hereunder successively or concurrently, and any such action shall not estop or prevent Bank from pursuing any further remedy which it may have hereunder or by law. If a sufficient sum is not realized from any such disposition of Collateral to pay all obligations secured by this Security Agreement, Borrower hereby promises and agrees to pay Bank any deficiency. 13. If any writ of attachment, garnishment, execution or other legal process be issued against any property of Borrower, or if any assessment for taxes against Borrower, other than real property, is made by the Federal or State government or any department thereof, the obligation of Bank to make loans to Borrower as provided in Section 1 hereof shall immediately terminate and the unpaid balance of the Loan Account, all other obligations secured hereby and all other sums due hereunder shall immediately become due and payable without demand, presentment or notice. 14. Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to Bank in connection with the transactions contemplated herein at any time subsequent to four months from the time such items are delivered to Bank. 16. Additional Provisions: SUBJECT TO THE CONDITIONS, RESTRICTIONS AND LIMITATIONS CONTAINED IN THE ADDENDUM TO THE SECURITY AND LOAN AGREEMENT, EXHIBIT "A" DATED FEBRUARY 9, 1998 AND ALL AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. (Initialed by Aram H. Keith) Executed this 9th day of February, 1998 THE KEITH COMPANIES, INC. -------------------------------------------- (Name of Borrower) IMPERIAL BANK By: /s/ ARAM H. KEITH, PRESIDENT ----------------------------------------- (Authorized Signature and Title) By: /s/ DENISE PARDUE By: /s/ ARAM H. KEITH, PRESIDENT ----------------------------- ----------------------------------------- Denise Pardue, Vice President (Authorized Signature and Title) *if none, insert "None" Page 2 of 2 "EXHIBIT A" ADDENDUM TO SECURITY AND LOAN AGREEMENT BETWEEN THE KEITH COMPANIES, INC. AND KEITH ENGINEERING, INC. AS CO-BORROWERS AND IMPERIAL BANK DATED FEBRUARY 9, 1998 This Addendum is made and entered into as of February 9, 1998, between THE KEITH COMPANIES, INC. AND KEITH ENGINEERING, INC. ("Co-Borrowers") and IMPERIAL BANK ("Bank"). This Addendum amends and supplements the Security and Loan Agreement. In the event of any inconsistency between the terms herein and the terms of the Security and Loan Agreement, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meaning set forth in the Security and Loan Agreement. 1. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on FEBRUARY 8, 1999, subject to Bank's right to renew said commitment in its sole discretion. Any such renewal of the commitment shall not be binding upon Bank unless it is in writing and signed by an officer of the Bank. 2. Borrowers represent and warrant that: a. LITIGATION. There is no litigation or other proceeding pending or threatened against or affecting Borrowers, and Borrowers are not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. b. FINANCIAL CONDITION. The consolidated balance sheet of Borrowers of NOVEMBER 30, 1997, and the related profit and loss statement on that date, a copy of which has heretofore been delivered to Bank by Borrowers, and all other statements and data submitted in writing by Borrowers to Bank in connection with this request for credit are true and correct, and said consolidated balance sheet and profit and loss statement truly present the financial condition of Borrowers as of the date thereof and the results of the operations of Borrowers for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date, there have been no materially adverse changes in the financial condition or business of Borrowers. Borrowers have no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said consolidated balance sheet, and Borrowers have not entered into any special commitments or substantial contracts which are not reflected in said consolidated balance sheet, other than in the ordinary and normal course of their businesses, which may have a materially adverse effect upon their financial condition, operations or businesses as now conducted. c. TRADEMARKS, PATENTS. Borrowers, as of the date hereof, possess all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct their business as now operated, without any known conflict with valid trademarks, trade names, copyrights, patents and license rights of others. EXHIBIT A PAGE 2 - d. TAX STATUS. Borrowers have no liability for any delinquent state, local or federal taxes, and, if Borrowers have contracted with any government agency, Borrowers have no liability for renegotiation of profits. 3. Borrowers agree that so long as they are indebted to Bank, they WILL NOT, without Bank's WRITTEN CONSENT a. TYPE OF BUSINESS. MANAGEMENT Make any substantial change in the character of their businesses; or make any change in their executive management. b. OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from Bank except obligations now existing as shown in consolidated financial statement dated NOVEMBER 30, 1997, including those being refinanced by Bank; or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due to become due. c. LIENS AND ENCUMBRANCES. Create, incur, assume any mortgage, pledge, encumbrance, lien or charge of any kind (including the charge upon property at any time purchased or acquired under conditional sale or other title retention agreement) upon any asset now owned or hereafter acquired by them, other than liens for taxes not delinquent, and liens in Bank's favor, and other than liens permitted under Section 3. h . d. LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to any person or other entity other than in the ordinary and normal course of their businesses as now conducted or make any investment in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of their businesses. e. ACQUISITION OR SALE OF BUSINESS; Merger or Consolidation. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefore; or sell any assets except in the ordinary and normal course of their businesses as now conducted; or sell, lease, assign, or transfer any substantial part of their businesses or fixed assets, or any property or other assets necessary for the continuance of their businesses as now conducted, including without limitation the selling of any property or other asset accompanied by the leasing back of the same. f. DIVIDENDS, STOCK PAYMENTS. Declare or pay any dividend (other than dividends payable in common stocks of Borrowers) or make any other distribution on any of their capital stock now outstanding or hereafter issued, or purchase, redeem or retire any of such stock. g. CAPITAL EXPENDITURES. Make or incur obligations for capital expenditures in excess of $1,500,000 in any one fiscal year. EXHIBIT A PAGE 3 - h. LEASE LIABILITY. Make or incur liability for payments of rent under existing operating and capital leases of real property in excess of $1,660,000 in any one fiscal year or incur obligations for payment under new operating and capital lease obligations in excess of $750,000 in any one fiscal year. 4. Should there be a default under the Security and Loan Agreement, the General Security Agreement, or under the Note, all obligations, loans and liabilities of Borrowers to Bank, due or to become due, whether now existing or hereafter arising, shall, at the option of Bank, (i) in the case of any financial covenant default, payment default or voluntary or involuntary bankruptcy of the Borrowers become immediately due and payable without notice or demand, and (ii) in the case of any other breach after 10 days and notice from the Bank will become due and payable, and Bank shall thereupon have the right to exercise all of its default rights and remedies. The default rate of interest shall be five percent per year in excess of the rate otherwise charged. 5. As a condition precedent to Bank's obligation to make any advances to Borrowers, Borrower shall, among other things: cause a guarantee to be executed by ARAM H. KEITH in the amount of $5,000,000 in form and substance satisfactory to Bank. 6. In addition to the provisions in the Security and Loan Agreement, Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. "Eligible Accounts" shall also NOT include any of the following: a. Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of Borrowers. b. Accounts with respect to which 25% or more of the account debtor's total accounts or obligations outstanding to Borrowers are more than 90 days from invoice date. c. Salesmen's accounts for promotional purposes. d. For accounts representing more than 20% of total accounts receivable, the balance in excess of the 20%. However, the Bank may deem, at its sole discretion, the entire amount, or any portion thereof, eligible. With respect to COX COMMUNICATIONS, INC. the balance in excess of 25% of the total accounts receivable will be ineligible, unless the Bank deems the entire amount eligible in its sole discretion. EXHIBIT A PAGE 4 - e. Accounts with respect to international transactions unless insured by an insurance company acceptable to the Bank or covered by letters of credit issued or confirmed by a bank acceptable to the Bank. f. Credit balances greater than 90 days from invoice date. g. U.S. Government receivables, unless formally assigned to the Bank. h. Accounts over 90 days from invoice date. i. Accounts where the account debtor is a seller to Borrowers, whereby a potential offset exists. j. Consignment or guaranteed sales. k. Contract receivables; bill and hold accounts. l. Equipment and rental offsets; collection accounts (aged up to 90 days from invoice date). 7. All financial covenants and financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principles applied on a basis consistent with previous years. Compliance with financial covenants shall be calculated and monitored on a quarterly basis, commencing December 31, 1997. 8. Borrowers affirmatively covenant that so long as any loans, obligations or liabilities remain outstanding or unpaid to Bank, they WILL: a. Have and maintain a Minimum Tangible Net Worth (meaning the excess of all assets, excluding any value for goodwill, trademarks, patents, copyrights, organization expense and other similar intangible items, over its liabilities, less subordinated debt) of not less than $1,500,000 from 12/31/97 increasing to $1,750,000 from 03/31/98; increasing to $2,250,000 from 06/30/98; increasing to $2,500,000 from 09/30/98 and increasing to $2,750,000 at FYE 12/31/98; increasing by $250,000 on a quarterly basis thereafter. b. Have and maintain a ratio of total liabilities to Tangible Net Worth of not greater than 6.25 to 1.0 from 12/31/97; decreasing to 5.50 to 1.0 from 03/31/98; decreasing to 4.50 to 1.0 from 06/30/98; decreasing to 4.0 to 1.0 from 09/30/98; decreasing to 3.25 to 1.0 from FYE 12/31/98 and decreasing to 3.0 to 1.0 thereafter. c. Have and maintain a Current Ratio of not less than .90 to 1.0 from 12/31/97; increasing to 1.10 to 1.0 from 03/31/98; increasing to 1.15 to 1.0 from 06/30/98; EXHIBIT A Page 5 - increasing to 1.20 to 1.0 from 09/30/98; increasing to 1.25 to 1.0 from FYE 12/31/98 and thereafter. Current Ratio shall mean Current Assets divided by Current Liabilities. d. Have and maintain a minimum Coverage Ratio [EBITDA less non-financed CAPEX less cash taxes paid, divided by interest expense, plus CPLTD plus Current Portion of Notes Payable plus Capital Leases] of not less than 1.25 to 1.0. EBITDA is defined as earnings before interest expense, taxes, depreciation and amortization for the prior 12 month period. CAPEX is defined as amounts paid, or indebtedness incurred by the Borrowers, in connection with the purchase or lease by the Borrowers of fixed assets with useful lives of greater than one year. As used in the Coverage Ratio, CAPEX will exclude those purchases or leases financed by outside creditors as permitted under this agreement. CPLTD is defined as those current maturities of long term debt and capital leases which are due within the succeeding 12 month period. e. Maintain profitable operations both quarterly and at fiscal year end. f. Maintain all significant bank deposit accounts and banking relationship with Bank. g. Within 10 days from each month-end, deliver to Bank accounts receivable agings reconciled to the general ledgers of Borrowers, detailed accounts payable agings reconciled to the Borrowers' general ledgers and setting forth the amount of any book overdrafts or the amount of checks issued but not sent. All the foregoing will be in a form and with such detail as Bank may request from time to time. h. Within 30 days after the end of each month, deliver to Bank a profit and loss statement and a balance sheet in form satisfactory to Bank all certified by an officer of Borrowers, and 30 days after the end of each quarter a letter certifying compliance with all loan covenants signed by the Chief Financial Officers of Borrowers. i. Within 120 days after the end of Borrowers' fiscal year, deliver to Bank the same financial statements as otherwise provided monthly together with Changes in Financial Position Statement, prepared on an audited basis by an independent certified public accountant selected by Borrowers, but acceptable to Bank. j. On a quarterly basis, provide Bank with an alphabetized list of customers including addresses. k. By April 30, 1998, deliver to Bank the CPA audited FYE 1995 and FYE 1996 financial statements, prepared by a nationally recognized independent certified public accountant selected by Borrowers but acceptable to Bank. l. RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and other authority adequate for the conduct of their businesses; maintain their properties, equipment and facilities in good order and repair; conduct their businesses in an orderly manner without voluntary interruption and, if a corporation or partnership, maintain and preserve their existence. EXHIBIT A Page 6 - m. INSURANCE. Maintain public liability, property damage and workers compensation insurance and insurance on all their insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. Borrowers shall provide evidence of property insurance in amounts and types acceptable to the Bank and Bank shall be named as Loss Payee in a Lender's Loss Payable Endorsement form 438BFU or equivalent. n. TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental charges upon or against them or any of their properties, and any of their other liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon their financial condition or the loss of any right of redemption from any sale thereunder; and (b) They shall have set aside on their books reserves (segregated to the extent required by generally accepted accounting practice) deemed by them adequate with respect thereto. o. RECORDS AND REPORTS. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine their properties, books and records at all reasonable times. P. SUBORDINATION. Cause the following dollar amounts due to the named note holder(s) to be subordinated to Bank's line of credit by subordination agreement(s) acceptable to Bank: Erica Keith Educational Trust $ 129,205 Ryan Keith Educational Trust $ 11,066 Kimberly Keith Educational Trust $ 32,956 William Scott Larkins Reid Housing Trust $ 47,676 Susan Elizabeth Reid Housing Trust $ 84,576 Ruth Ann Reid Housing Trust $ 51,843 ---------- $ 357,322 Aram H. Keith $ 910,177 Floyd S. Reid $ 129,815 Walter W. Cruttenden III $ 700,000 ---------- $1,737,992 TOTAL $2,095,314
EXHIBIT A Page 7 - 9. The extensions of credit under the Security and Loan Agreement shall be available as follows: Up to $5,000,000 in direct advances. 10. FEES AND INTEREST: The rate of interest applicable to the Line of Credit Loan Account shall be 1.50% in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. A documentation fee of $250 shall be due upon execution of documents as will a commitment fee of $50,000 also be due. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest computation purposes be considered one year. The default rate shall be five percent per year in excess of the rate otherwise applicable. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent twenty or more days, Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of Bank to accept payment of any payment past due or less than the total unpaid principal balance after maturity. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. 11. MISCELLANEOUS PROVISIONS. Failure or Indulgence Not Waiver. No failure or delay on the part of your Bank or any holder or Notes Issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof or of any other right, power or privilege. All rights and remedies existing under this agreement or any not issued in connection with a loan that your Bank may make hereunder, are cumulative to, and not exclusive of, any rights or remedies otherwise available. 12. NOTICE OF DEFAULT. Borrower shall promptly notify Bank in writing of the occurrence of any event of default hereunder or any event which upon notice and lapse of time would be an event of default. 13. REFERENCE PROVISION. The terms of the attached Reference Provisions are incorporated herein. This addendum is executed by and on behalf of the parties as of the date first above written. (signatures on the following page) EXHIBIT A Page 8 - THE KEITH COMPANIES, INC. AND KEITH ENGINEERING, INC. "CO-BORROWERS" BY: /s/ ARAM H. KEITH BY: /s/ ARAM H. KEITH - ----------------------------- ----------------------------- KEITH COMPANIES, INC. KEITH ENGINEERING, INC. President President - --------- --------- Title Title IMPERIAL BANK, "BANK" BY: /s/ DENISE PARDUE - ------------------------------ Vice President - -------------- Title REFERENCE PROVISION ------------------- 1. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Note ("Agreement"), which controversy, dispute or claim is not settled in writing within thirty (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure ("CCP"), or their ------ successor, section which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers of a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP (S)170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP (S)644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following the notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Court is empowered to issue temporary and/or provisional remedies, as appropriate. 2. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. 3. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. 4. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act, (S)1280 through (S)1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. EX-10.4 9 FIRST AMENDMENT TO SECURITY & LOAN AGREEMENT EXHIBIT 10.4 First Amendment to Security and Loan Agreement (Accounts Receivable) This First Amendment ("Amendment") amends that certain Security and Loan Agreement (Accounts Receivable) ("Security and Loan Agreement") with the attached Addendum ("Addendum") both dated February 9 , 1998 (such Security and Loan Agreement and Addendum herein referred to as "Agreement") by and between Imperial Bank ("Bank") The Keith Companies, Inc. and Keith Engineering, Inc. ("Co-Borrowers") as follows-. 1. The first paragraph of the Security and Loan Agreement is hereby amended to read in full as follows: "This Agreement is entered into between The Keith Companies ("Companies"), Keith Engineering ("Engineering"), ESI, Engineering Services, Inc. ("ESI") ("Companies, Engineering and ESI each a co-borrower hereunder and jointly and severally herein called "Borrower") and IMPERIAL BANK (herein called "Bank")" 2. ESI is hereby added as a Borrower to the Agreement, and wherever the term "Borrower" "Borrowers", "Co-Borrower" or "Co-Borrowers" is used in the Agreement it shall mean each Borrower jointly and severally. 3. Paragraph 1. of the Agreement is amended by deleting the term "75.000% of Eligible Accounts" therefrom and substituting the following therefore: "75.000% of the Eligible Accounts of Companies and Engineering, and 80.000% of the Eligible Accounts of ESI" 4. Paragraph 1. of the Addendum is hereby amended in full to read as follows: "1. a. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on FEBRUARY 8, 1999, subject to Bank's right to renew said commitment at its sole discretion. Any renewal of the commitment shall not be binding upon the Bank unless it is in writing and signed by an officer of the Bank. b. The extensions of credit under the Security and Loan Agreement shall be available as follows: (i). Up to $5,000,000 in direct advances. (ii). Up to $ 150,000 for the issuance of a standby letter of credit with a termination date of no later than January 31, 1999. (iii) The aggregate amount of all (a) direct advances to ESI and (b) all letters of credit issued by the Bank for the Account of ESI cannot exceed $750,000 at any one time. (iv). The combined outstandings of (i) and (ii) shall not exceed $5,000,000. 5. The following is added as sub-paragraph m to Paragraph 6 of the Addendum: "m Any account receivable of any Borrower shall be ineligible until such time that Bank has perfected a first priority security interest in any such account." 6. The following is added as Paragraph l4 of the Addendum:. " 14. a . Each of the Borrowers is accepting joint and several liability hereunder in consideration of the financial accommodations to be provided by the Bank, for, the mutual benefit, directly and indirectly, of each of the Borrowers and in consideration of the undertakings of each of the Borrowers to accept joint and several liability for the obligations of each of them. b. Each of the Borrowers, jointly and severally, hereby irrevocable and unconditionally accept, not merely as a surety but also as a co-debtor, joint and several liability with each of the other Borrowers, with respect to the payment and performance of all of the obligations of each Borrower to Bank hereunder, it being the intention of the parties hereto that all the obligations of any Borrower to Bank be joint and several obligations of all of the Borrowers without preferences or distinction among them. c. If and to the extent that any of the Borrowers shall fail to make any payment with respect of any of the obligations hereunder when due, or to perform any of such obligations in accordance with the terms thereof, then in each such event each of the other Borrowers will make such payment with respect to, or perform such obligation. d. The obligations of each Borrower under the provisions of this Section 14 constitute the absolute and unconditional obligations of such Borrower enforceable against it to the full extent permitted under the terms hereof, irrespective of the validity, regularity or enforceability of this Agreement or any other circumstances whatsoever. e. Each Borrower waives (i) any notice of acceptance of its joint and several liability, or any right to require the Bank to proceed against any other Borrower or any other person, firm or corporation or to proceed against or exhaust any security held by it at any time or to pursue any other remedy in its power, (ii) any defense that may arise by reason of the incapacity, lack of authority, death or disability of, or revocation hereof by any other Borrower or others or the failure of the Bank to file or enforce a claim against the estate (either in administration, bankruptcy or other proceeding) of any other Borrower or any others, (iii) demand, protest and notice of any kind including, without limiting the generality of the foregoing, notice of the existence, creation or incurring of new or additional indebtedness or of any action or non-action on the part of any Borrower, the Bank, any endorser, creditor of any Borrower under this or any other instrument, or any other person whomsoever, in connection with any obligation or evidence of indebtedness of the Borrowers; (iv) any defense based upon an election of remedies by the Bank, including, without limitation, an election to proceed by nonjudicial rather than judicial foreclosure, which election destroys or otherwise impairs subrogation rights of any Borrower or the right of a Borrower to proceed against any other Borrower for reimbursement, or both, and (v) any defense or right based upon the acceptance by the Bank or an affiliate of the Bank of a deed in lieu of foreclosure, without extinguishing the indebtedness, even if such acceptance destroys, alters or otherwise impairs subrogation rights of any Borrower or the right of any Borrower to proceed against any other Borrower for reimbursement, or both." 7. Except as provided above, the Agreement remains unchanged. 8. This Amendment is effective as of March 23, 1998, and the parties hereby confirm that the Agreement as amended is in full force and effect. THE KEITH COMPANIES, INC. By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: Signatures continued on next page. KEITH ENGINEERING, INC By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: ESI, ENGINEERING SERVICES, INC. By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: IMPERIAL BANK By: /s/ DENISE PARDUE Name: Denise Pardue Title: V.P. EX-10.5 10 SECOND AMENDMENT TO SECURITY LOAN AGREEMENT EXHIBIT 10.5 Second Amendment to Security and Loan Agreement (Accounts Receivable) This Second Amendment ("Amendment") amends that certain Security and Loan Agreement (Accounts Receivable) ("Security and Loan Agreement") with the attached Addendum ("Addendum") both dated February 9 , 1998, as amended (such Security and Loan Agreement and Addendum herein referred to as "Agreement") by and between Imperial Bank ("Bank"), The Keith Companies, Inc., Keith Engineering, Inc., and ESI, Engineering Services, Inc. ("Co-Borrowers") as follows: 1. Paragraph 8.b of the Addendum is hereby amended in full to read as follows: "b. Have and maintain a ratio of total liabilities to Tangible Net Worth of not greater than 6.25 to 1.0 from 12/31/97 through 3/30/98; decreasing to 5.50 to 1.0 from 3/31/98 through 6/29/98, decreasing to 4.75 to 1.0 from 6/30/98 through 9/29/98; decreasing to 4.00 to 1.0 from 9/30/98 through 12/30/98; decreasing to 3.25 to 1.0 from 12/31/98 and thereafter." 2. Paragraph 8.c of the Addendum is hereby amended in full to read as follows: "c. Have and maintain a Current Ratio of not less than .90:1 to 1.0 from 12/31/97 through 3/30/98; increasing to 1.10 to 1.0 from 3/31/98 through 6/29/98 ; decreasing to .90 to 1.0 from 6/30/98 through 9/29/98; increasing to .95 to 1.0 from 9/30/98 through 12/30/98; increasing to 1.00 to 1.0 from 12/31/98 and thereafter. Current Ratio shall mean Current Assets divided by Current Liabilities." 3 Except as provided above, the Agreement remains unchanged. 4 This Amendment is effective as of June 22, 1998, and the parties hereby confirm that the Agreement as amended is in full force and effect. THE KEITH COMPANIES, INC. By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: President SIGNATURES CONTINUED ON NEXT PAGE KEITH ENGINEERING, INC. By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: President ESI, ENGINEERING SERVICES, INC. By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: President IMPERIAL BANK By: /s/ DENISE PARDUE Name: Denise Pardue Title: VP EX-10.6 11 THIRD AMENDMENT TO SECURITY AND LOAN AGREEMENT EXHIBIT 10.6 Third Amendment to Security and Loan Agreement (Accounts Receivable) This Third Amendment ("Amendment") amends that certain Security and Loan Agreement (Accounts Receivable) ("Security and Loan Agreement") with the attached Addendum ("Addendum") both dated February 9, 1998, as amended (such Security and Loan Agreement and Addendum herein referred to as "Agreement") by and between Imperial Bank ("Bank") The Keith Companies, Inc., Keith Engineering, Inc., and ESI, Engineering Services, Inc. ("Co-Borrowers") as follows: 1. The first paragraph of the Security and Loan Agreement is hereby amended to read in full as follows: "This Agreement is entered into between The Keith Companies ("Companies"), Keith Engineering ("Engineering"), ESI, Engineering Services, Inc. ("ESI"), John M. Tettemer & Associates, Ltd. ("Tettemer") ("Companies, Engineering, ESI and Tettemer each a co-borrower hereunder and jointly and severally herein called "Borrower") and IMPERIAL BANK (herein called "Bank")" 2. Tettemer is hereby added as a Borrower to the Agreement, and wherever the term "Borrower" "Borrowers", "Co-Borrower" or "Co-Borrowers" is used in the Agreement it shall mean each Borrower jointly and severally. 3. Paragraph 1. of the Agreement is amended by deleting the term "75.000% of Eligible Accounts of Companies and Engineering, and 80% of Eligible Accounts of ESI and in no event more than $5,000,000" therefrom and substituting the following therefore "80.000% of Eligible Accounts and in no event more than $5,500,000". 4. Paragraph 1. of the Addendum is hereby amended in full to read as follows: "1.a. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on APRIL 30, 1999, subject to Bank's right to renew said commitment at its sole discretion. Any renewal of the commitment shall not be binding upon the Bank unless it is in writing and signed by an officer of the Bank. b. The extensions of credit under the Security and Loan Agreement shall be available as follows: (i). Up to $5,500,000 in direct advances. (ii). Up to $ 150,000 for the issuance of a standby letter of credit with a termination date of no later than January 31, 1999. (iii) The aggregate amount of all (a) direct advances to ESI and (b) all letters of credit issued by the Bank for the Account of ESI cannot exceed $750,000 at any one time. (iv) The aggregate amount of all direct advances to Tettemer cannot exceed $450,000 at any one time. (iv). The combined outstandings of (i) and (ii) shall not exceed $5,500,000. 5. The following is hereby added to Paragraph 2 of the Addendum: "e. YEAR 2000 COMPLIANCE. Borrower and its subsidiaries, as applicable, have reviewed the areas within their operations and business which could be adversely affected by, and have developed or are developing a program to address on a timely basis, the Year 2000 Problem and have made related appropriate inquiry of material suppliers and vendors, and based on such review and program, the Year 2000 Problem will not have a material adverse effect upon their financial condition, operations or business as now conducted. "Year 2000 Problem" means the possibility that any computer applications or equipment used by Borrower may be unable to recognize and properly perform date sensitive functions involving certain dates prior to and any dates on or after December 31, 1999." 6. Paragraph 5 of the Addendum is amended in full to read: "As a condition precedent to Bank's obligation to make any advances to Borrowers, Borrowers shall, among other things: cause a guarantee to be executed by ARAM H. KEITH in the amount of $5,500,000 in form and substance satisfactory to Bank." 7. The following is hereby add to paragraph 8 of the Addendum: "q. YEAR 2000 COMPLIANCE. Perform all acts reasonably necessary to ensure that (a) Borrower and any business in which Borrower holds a substantial interest, and (b) all customers, suppliers and vendors that are material to Borrower's business, become Year 2000 Compliant in a timely manner. Such acts shall include, without limitation, performing a comprehensive review and assessment of all Borrower's systems and adopting a detailed plan, with itemized budget, for the remediation, monitoring and testing of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any entity, that all software, hardware, firmware, equipment, goods or systems utilized by or material to the business operations or financial condition of such entity, will properly perform date sensitive functions before, during and after the year 2000. Borrower shall, immediately upon request, provide to Bank such certifications or other evidence of Borrower's compliance with the terms of this paragraph as Bank may from time to time require." 8. Paragraph 9 of the Addendum is amended in full to read: "The extensions of credit under the Security and Loan Agreement shall be available as follows: Up to a) $5,500,000 in direct advances and b) $150,000 in standby letters of credit, provided that the combined outstandings of a) and b) do not exceed $5,500,000. 9. Paragraph 10 of the Addendum is amended by adding the following to the end of the first paragraph: "A fee of .50% p.a. on the unused portion of the commitment shall be due quarterly in arrears, commencing with the quarter beginning October 1, 1998 and ending December 31, 1998, on the last $500,000.00 of the commitment." 10. Except as provided above, the Agreement remains unchanged. 11. This Amendment is effective as of October 7, 1998, and the parties hereby confirm that the Agreement as amended is in full force and effect. THE KEITH COMPANIES, INC. By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: President Signatures continued on next page. KEITH ENGINEERING, INC. By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: President ESI, ENGINEERING SERVICES, INC. By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: President JOHN M. TETTEMER & ASSOCIATES, LTD. By: /s/ ARAM H. KEITH Name: Aram H. Keith Title: President IMPERIAL BANK By: /s/ DENISE PARDUE Name: Denise Pardue Title: Vice President EX-10.7 12 FOURTH AMENDMENT TO SECURITY AND LOAN AGREEMENT EXHIBIT 10.7 Fourth Amendment to Security and Loan Agreement (Accounts Receivable) This Fourth Amendment ("Amendment") amends that certain Security and Loan Agreement (Accounts Receivable) ("Security and Loan Agreement") with the attached Addendum ("Addendum") both dated February 9, 1998, as amended (such Security and Loan Agreement and Addendum and amendments herein referred to as "Agreement"), by and between Imperial Bank ("Bank"), The Keith Companies, Inc., Keith Engineering, Inc., ESI, Engineering Services, Inc., and John M. Tettemer & Associates, LTD ("Co-Borrowers" and jointly and severally herein called "Borrower"), and contains certain waivers by the Bank of the Borrower complying with certain provisions of the Agreement as follows: 1. Events of Default: The following Events of Defaults have occurred in the Agreement: A. Pursuant to Section 8.a of the Addendum the Borrower is required to maintain a Tangible Net Worth of at least $2,500,000 at 9/30/98. The Borrower did not meet this covenant. B. Pursuant to Section 8.b of the Addendum the Borrower is required to maintain a ratio of total liabilities to Tangible Net Worth of not greater than 4.00 to 1.00 at 9/30/98. The Borrower did not meet this covenant. 2. Waivers A. The Borrower has asked the Bank to waive compliance by the Borrower of the above covenants for the above period. The Bank hereby waives compliance with the above covenants for the period mentioned above. B. The above waivers are specific as to contents and times, and other than the waivers mentioned above this letter is not a waiver of any other rights or remedies that the Bank may have pursuant to any agreement or law as a result of any other violations past, present, or future of any agreement between the Borrower and the Bank, and the Bank reserves all rights, powers and remedies available to it. 3. The introductory paragraph of the Security and Loan Agreement is hereby amended to read in full as follows: "The Agreement is entered into between The Keith Companies, Inc. ("Companies"), ESI, Engineering Services, Inc. ("ESI"), and John M. Tettemer & Associates, LTD ("Tettemer") (Companies, ESI and Tettemer each a co-borrower hereunder and jointly and severally herein called "Borrower"), each a California corporation, and Imperial Bank ("Bank"). 4. The heading to the Addendum is hereby amended in its entirety to read as follows: "ADDENDUM TO SECURITY AND LOAN AGREEMENT BETWEEN THE KEITH COMPANIES, INC., ESI, Engineering Services, Inc., and John M. Tettemer & Associates, LTD AS CO-BORROWERS, and IMPERIAL BANK 5. The introductory paragraph of the Addendum is hereby amended in its entirety to read as follows: "This Addendum is made and entered into as of February 9, 1998, between THE KEITH COMPANIES, INC. ("Companies"), ESI, Engineering Services, Inc. ("ESI"), and John M. Tettemer & Associates, LTD ("Tettemer") (Companies, ESI, and Tettemer each a co-borrower hereunder and jointly and severally herein called "Borrower") and IMPERIAL BANK ("Bank"). This Addendum amends and supplements the Security and Loan Agreement. In the event of any inconsistency between the terms herein and the terms of the Security and Loan Agreement, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meaning set forth in the Security and Loan Agreement." 6. Paragraph 1 of the Addendum is hereby amended in its entirety to read as follows: 1. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on March 1, 2000, subject to Bank's right to renew said commitment in its sole discretion. Any such renewal of the commitment shall not be binding upon Bank unless it is in writing and signed by an officer of the Bank. 7. Paragraph 3.g of the Addendum is hereby amended effective 12/31/98 in its entirety to read as follows: 9. Capital Expenditures. Make or incur obligations for capital expenditures in excess of $1,650,000 in any one fiscal year. 8. Paragraph 3.h of the Addendum is hereby amended effective 12/31/98 in its entirety to read as follows: h. Lease Liability. Make or incur liability for payments of rent under existing operating and capital leases of real property in excess of $2,150,000 in any one fiscal year or incur obligations for payment under new operating and capital lease obligations in excess of $260,000 in any one fiscal year. 9. Paragraph 8.a of the Addendum is hereby amended effective 12/31/98 in its entirety to read as follows: a. Have and maintain a Minimum Tangible Net Worth (meaning the excess of all assets, excluding any value for goodwill, trademarks, patents, copyrights, organization expense and other similar intangible items, over its liabilities, less subordinated debt) of not less than $2,400,000 from FYE 12/31/98; increasing to no less than $2,600,000 from 3/31/99; increasing to no less than $3,775,000 from 6/30/99; increasing to no less than $4,900,000 from 9/30/99; increasing to $5,900,000 from 12/31/99 and thereafter. 10. Paragraph 8.b of the Addendum is hereby amended effective 12/31/98 in its entirety to read as follows: b. Have and maintain a ratio of total liabilities to Tangible Net Worth ("Leverage Ratio") of not greater than 4.65 to 1.0 from FYE 12/31/98; decreasing to 4.50 to 1.0 from 3/31/99; decreasing to 3.25 to 1.0 from 6/30/99; decreasing to 2.50 to 1.0 from 9/30/99; decreasing to 2.00 to 1.0 from FYE 12/31/99 and thereafter. 11. Paragraph 8.c of the Addendum is hereby amended in its entirety to read as follows: b. Have and maintain a Current Ratio of not less than 1.00 to 1.0 from FYE 12/31/98; increasing to no less than 1.10 to 1.0 from 6/30/99; increasing to no less than 1.20 to 1.0 from 9/30/99 and thereafter. Current Ratio shall mean Current Assets divided by Current Liabilities. 12. Paragraph 8.p of the Addendum is hereby amended in its entirety to read as follows: p. Subordination. Cause the following dollar amounts due to the named note holder(s) to be subordinated to Bank's line of credit by subordination agreement(s) acceptable to Bank: Erica Keith Educational Trust $ 132,000 Ryan Keith Educational Trust $ 11,000 Kimberly Keith Educational Trust $ 33,000 William Scott Larkins Reid Housing Trust $ 48,000 Susan Elizabeth Reid Housing Trust $ 86,000 Ruth Ann. Reid Housing Trust $ 53,000 ---------- Sub-total $ 363,000 Aram H. Keith $1,210,177 Floyd S. Reid $ 127,815 Walter W. Cruttenden III $ 700,000 ---------- Sub-total $2,037,992 Heideman notes $ 266,752 Dysert notes $ 266,752 ---------- Sub-total $ 533,504 Aram Keith note for interest payable $ 131,680 ---------- Total Subordinated Debt $3,066,176 13. A new Paragraph 8.q is hereby added, to read in its entirety as follows: 8.q. If by June 30, 1999 the Borrower's planned initial public offering ("IPO") has not occurred and funded, with minimum net proceeds of $12,000,000, then Borrower is to obtain new equity or subordinated debt by July 31, 1999 in an amount sufficient, after giving effect for the new equity or subordinated debt, to achieve a minimum Tangible Net Worth of $3,775,000, and a Leverage Ratio of no greater than 3.25 to 1.00, retroactive to June 30, 1999. 14. Paragraph 10 of the Addendum is hereby amended in its entirety to read as follows: 10. Fees and Interest: The Line of Credit Loan Account shall bear interest at the rate which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate, plus the Applicable Prime Rate Margin. The Applicable Prime Rate Margin (as set forth below) will be determined by the Bank after review of the Leverage Ratio of the Borrower as follows: Leverage Ratio Applicable Prime Rate Margin - ---------------------------------------------------- 4.65:1 to 3.75:1 P + 2.75% 3.74:1 to 3.00:1 P + 2.50% 2.25:1 to 2.99:1 P + 2.00% 1.50:1 to 2.24:1 P + 1.00% 1.49:1 and under P + .50% Bank will determine the Applicable Prime Rate Margin for each fiscal quarter on the forty-fifth (45 th ) day following the last day of each quarter of the immediately preceding fiscal quarter by reference to the compliance certificate delivered to the Bank pursuant to Paragraph 8.h. with respect to the immediately preceding fiscal quarter, beginning with the quarter ending 12/31/98, A loan fee of $22,750 is due, payable $15,000 upon execution of the Fourth Amendment to this Agreement, and payable $7,750 on September 30, 1999. A documentation fee of $250 shall be due upon execution of documents. A fee of .50% p.a. on the unused portion of the commitment shall be due quarterly in arrears, commencing with the quarter beginning January 1, 1999 and ending March 31, 1999 on the last $500,000 of the commitment. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest computation purposes be considered one year. The default rate shall be five percent per year in excess of the rate otherwise applicable. If any installment payment, interest payment, principal payment or principal balance payment due hereunder is delinquent twenty or more days, Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of Bank to accept payment of any payment past due or less than the total unpaid principal balance after maturity. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. 15. Companies hereby acknowledges and agrees that Keith Engineering, Inc. ("Engineering") has merged into Companies, and Companies has assumed all obligations of Engineering under the Agreement and all other loan documents executed by Engineering in favor of Bank. 16. Except as provided above, the Agreement remains unchanged. 17. This addendum is executed by and on behalf of the parties as of March 5, 1999. THE KEITH COMPANIES, INC. BY: /s/ Aram H. Keith - --------------------------- Aram Keith, President Title ESI, Engineering Services, Inc. JOHN M. TETTEMER & ASSOCIATES, LTD. By: /s/ Aram H. Keith BY: /s/ Aram H. Keith ----------------------- ----------------------- Aram Keith, President Aram Keith, President Title Title IMPERIAL BANK, "BANK" BY: /s/ Denise Pardue ----------------------- Title, Vice President EX-10.8 13 GENERAL SECURITY AGREEMENT EXHIBIT 10.8 IMPERIAL BANK GENERAL SECURITY AGREEMENT (Tangible and Intangible Personal Property) This agreement is executed on February 9, 1998 by ESI ENGINEERING SERVICES, INC. (hereinafter called "Obligor") In consideration of financial accommodations given, to be given or continued, the Obligor grants to IMPERIAL BANK (hereinafter called "Bank") a security interest in (a) all property (i) delivered to Bank by Obligor, (ii) which shall be in Bank's possession of control in any matter or for any purpose, (iii) described below, (iv) now owned or hereafter acquired by Obligor of the type of class described below and/or in any supplementary schedule hereto of in any financing statement filed by Bank and executed by or on behalf of Obligor; (b) all deposits accounts of Obligor at Bank and (c) the proceeds, increase and products of such property, all accessions thereto, and all property which Obligor may receive on account of such collateral which Obligor will immediately deliver to Bank (collectively referred to as "Collateral") to secure payment and performance of all of Obligor's present or future debts or obligations to Bank, whether absolute or contingent (hereafter referred to as "Debt"). Unless otherwise defined, words used herein have the meanings given them in the California Uniform Commercial Code. Collateral: A. VEHICLE, VESSEL, AIRCRAFT: ________________________________________________________________________________ Identification License or New or Year Make/Manufacturer Model and Serial No. Registration No. Used ________________________________________________________________________________ ________________________________________________________________________________ Engine or other equipment:______________________________________________________ (For aircraft original ink signature on copy to FAA) B. DEPOSIT ACCOUNTS: Type _____________________ Accounts Number________________ Amount $ __________ In name of ___________________________ Depository ____________________________ AND ALL EXTENSIONS OR RENEWALS THEREOF. C. ACCOUNTS, INTANGIBLES AND OTHER: (Describe) All personal property, whether presently existing or hereafter Created or acquired, including but not limited to: All accounts, chattel paper, documents, instruments, money, deposit accounts and general intangibles including returns, repossessions, books and records relating thereto, and equipment containing said books and records. All Investment property including securities and securities entitlements. All goods including equipment and inventory. All proceeds including, without limitation, insurance proceeds. All guarantees and other security therefor. The collateral not in Bank's possession will be located at: 370 N. Wiget Lane, Suite 210, Walnut Creek, CA 94596 (if checked, the Obligor is executing this Agreement as an Accommodation Debtor only and the Obligor's liability is limited to the security interest granted in file Collateral described herein. The party being accommodated is The Keith Companies, Inc., and Keith Engineering, Inc. All the terms and provisions on page 2 hereof are incorporated herein as though set forth, and constitute a part of this Agreement. Name Signature Address (indicate title, if applicable) ESI, ENGINEERING By: /s/ Aram H. Keith 370 N Wiget Lane, Suite 210 SERVICES, INC. Aram H. Keith, President Walnut Creek, CA 94596 SECURITY AGREEMENT (CONTINUED) Obligor represents, warrants and agrees: 1. Obligor will immediately pay (a) any Debt when due, (b) Bank's costs of collecting the Debt, of protecting, insuring or realizing Collateral, and any expenditure of Bank pursuant hereto including attorneys' fees and expenses, with interest at the rate of 24% per year, or the rate applicable to the Debt, whichever is less, from the date of expenditure, and (c) any deficiency after realization of Collateral. 2. Obligor will use the proceeds of any loan that becomes Debt hereunder for the purpose indicated on the application therefore, and will promptly contract to purchase and pay the purchase price of any property which becomes Collateral hereunder from the proceed of any loan made for that purpose. 3. As to all Collateral in Obligator's possession (unless specifically otherwise agreed to by Bank in writing), Obligor will: (a) Have, or has, possession of the Collateral at location disclosed to Bank and will not remove the Collateral from the location. (b) Keep the Collateral separate and identifiable. (c) Maintain the Collateral in good and saleable condition, repair it if necessary, clean, feed, shelter, water, Medicate, fertilize, cultivate, irrigate, prune and otherwise deal with the Collateral in all ways as are consideration good practice by Owners of like property, use it lawfully and only as permitted by insurance policies, and permit Batik to inspect the Collateral at any reasonable time. (d) Not sell, contract to sell, lease, encumber or transfer the Collateral (other than inventory Collateral) until the Debt has been paid, even though Bank has a security interest in proceeds of such Collateral. 4. As to Collateral which is inventory and accounts. Obligor: (a) May, until notice from the bank, sell, lease of otherwise dispose of inventory Collateral in the ordinary course, and collect the cash proceeds thereof. (b) Will, upon notice from the Bank, deposit all cash proceeds as received in a demand deposit account with Bank, containing only such proceeds and deliver statements identifying units of inventory disposed of, accounts which gave rise to proceeds, and all acquisitions and returns of inventory as required by Bank. (c) Will receive in trust, schedule on forms satisfactory to the Bank and deliver to Bank all non-cash proceeds other than inventory received in trade. (d) If not in default, may obtain release of Bank's interest in individual units of inventory upon request, therefore, payment to Bank of the release price of such units shown on any collateral schedule supplementary hereto, and compliance herewith as to proceeds thereof. 5. As to Collateral which are accounts, chattel paper, general intangibles and proceeds described in 4(c) above, Obligor warrants, represents and agrees: (a) All such Collateral is genuine enforceable in accordance with its terms free from default, prepayment, defense and conditions precedent (except as disclosed to and accepted by Bank in writing), and is supported by consecutively numbered invoices to, or rights against, the debtors thereon. Obligor will supply Bank with duplicate invoices or other evidence of Obligor's rights on Bank's request; (b) All persons appearing to be obligated on such Collateral have authority and capacity to contract; (c) All chattel paper is in compliance with law as to form, content and manner of preparation and execution and has been properly registered, recorded, and/or filed to protect Obligor's interest thereunder; (d) If an account debtor shall also be indebted to Obligor on another obligation, any payment made by him not specifically designated to be applied on any particular obligation shall be considered to be a payment on the account in which Bank has a security interest. Should any remittance include a payment not on an account, it shall be delivered to Bank and, if no event of default has occurred, Bank shall pay Obligor the amount of such payment; (e) Obligor agrees not to compromise, settle or adjust any account or renew or extend the time of payment thereof without Bank's prior written consent. 6. Obligor owns all Collateral absolutely, and no other person has or claims any interest in any Collateral, except as disclosed to and accepted by Bank in writing. Obligor will defend any proceeding which may affect title to or Bank's security interest in any Collateral, and will indemnify and hold Bank free and harmless from all costs and expenses of Bank's defense. 7. Obligor Will pay when due all existing or future charges, liens or encumbrances on any all taxes and assessments now or hereafter imposed on or affecting the Collateral and, if the Collateral is in Obligor's possession, the realty on which the Collateral is located. 8. Obligor will insure the Collateral with Bank as loss payee in form and amounts with companies, and against risks and liability satisfactory to Bank, and hereby assigns such policies to Bank, agrees to deliver them to Bank at Bank's request, and authorizes Bank to make any claim thereunder, to cancel the insurance on Obligor's default, and to receive payment of and endorse any instrument in payment of any loss or return premium. If Obligor should fail to deliver the required policy or policies to the Bank, Bank may, at Obligor's cost and expense, without any duty to do so, get and pay for insurance naming as the insured, at Bank's option, either both Obligor and Bank, or only Bank, and the cost thereof shall be secured by this Security Agreement, and shall be repayable as provided in Paragraph I above. 9. Obligor will give bank any information it requires. All information at any time supplied to bank by Obligor (including, but not limited to, the value and condition of Collateral, financial statements, financing statements, and statements made in documentary Collateral) is correct and complete, and Obligor will notify Bank of any adverse change in such information. Obligor will promptly notify Bank of any change of Obligor's residence, chief executive office or mailing address. 10. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act which Obligor is obligated hereby to do, to exercise such rights as Obligor may exercise, to use such equipment as Obligor might use, to enter Obligor's premises to give notice of Bank's Security interest and to collect Collateral and proceeds and to execute and file in Obligor's name any financing statements and amendments thereto required to perfect Bank's security interest hereunder, all to protect and preserve the Collateral and Bank's rights hereunder. Bank may: (a) Endorse, collect and receive delivery or payment of instruments and documents constituting Collateral; (b) Make extension agreements with respect to or affecting Collateral, exchange it for other Collateral, release persons liable thereon or take security for the payment thereof, and compromise disputes in connection therewith; (c) Use or operate Collateral for the purpose of preserving Collateral or its value and for preserving or liquidating Collateral. 11. If more than one Obligor signs this Agreement their liability is joint and several. Any Obligor who is married agrees that recourse may be had against separate property for the Debt. Discharge of any Obligor except to full payment, or any extension, forbearance, change of rate of interest, or acceptance, release or substitution of Collateral or any impairment or suspension of Bank's rights against an Obligor, or any transfer of an Obligor's interest to another shall not affect the liability of any other Obligor. Until the Debt shall have been paid or performed in full, Bank's rights shall continue even if the Debt is outlawed. All Obligors waive: (a) any right to require Bank to proceed against any Obligor before any other, or to pursue any other remedy; (b) presentment, protest and notice of protest, demand and notice of nonpayment, demand or performance, notice of sale, and advertisement of sale; (c) any right to the benefit of or to direct the application of any Collateral until tile Debt shall have been paid; (d) and any right of subrogation to Bank until Debt shall have been paid or performed in full. 12. Upon default at Bank's option, without demand of notice, all or any part of the Debt shall immediately become due. Bank shall have all rights given by law, and may sell, in one or more sales, Collateral in any county where Bank has an office. Bank may purchase at such sale. Sales for cash or on credit to a wholesaler, retailer of user of the Collateral, or at public or private auction, are all to be considered commercially reasonable. Bank may require Obligor to assemble the Collateral and make it available to Bank at the entrance to the location of the Collateral, or a place designated by Bank. Defaults shall include: (a) Obligor's failure to pay or perform this or any agreement with Bank or breach of any warranty herein, or Borrower's failure to pay or perform any agreement with Bank. (b) Any change in Obligor's or Borrower's financial condition which in Bank's judgment impairs the prospect of Borrower's payment or performance. (c) Any actual of reasonably anticipated deterioration of the Collateral or in the market price thereof which causes it, in Bank's judgment, to become unsatisfactory as security. (d) Any levy or seizure against Borrower of any of the Collateral. (e) Death, termination of business, assignment for creditors, insolvency, appointment of receiver, or the filing of any petition under bankruptcy or debtor's relief laws of, by or against Obligor of Borrower or any guarantor of the Debt. (f) Any warranty of representation which is false or is believed in good faith by Bank to be false. 13. Bank's acceptance of partial of delinquent payments or the failure of Bank to exercise any right or remedy shall not waive any obligation of Obligor or Borrower or right of Bank to modify this Agreement, or waive any other similar default. 14. On transfer of all or any part of the Debt, Bank may transfer all or any part of the Collateral/ Bank may deliver all or any part of the Collateral to and Obligor at any time. Any such transfer or delivery shall discharge Bank from all liability and responsibility with respect to such Collateral transferred or delivered. This Agreement benefits Bank's successors and assigns and binds Obligor's heirs, legatees, personal representatives, successors and assigns. Obligor agrees not to assert against any assignee of Bank any claim or defense that may exist against Bank. Time is of the essence. This Agreement and supplementary schedules hereto contain the entire security Agreement between Bank and Obligor. Obligor will execute any additional agreements. Assignments or documents reasonably required by Bank to carry this Agreement into effect. 15. This agreement shall be governed by and construed in accordance with the laws of the State of California, to the jurisdiction of whose courts the Obligor hereby agrees to submit. Obligor agrees that service of process may be accomplished by any means authorized by California law. All words used herein in the singular shall be considered to have been used in the plural where the context and construction so require. 16. To the extent that Obligor acquires any trademarks, service marks, trade names and service names and/or the goodwill associated therewith, copyrights, patents and/or patent applications (collectively "Intellectual Property"), Obligor shall give prompt notice thereof to Bank and shall take any and all actions requested from time to time by Bank to perfect Obligor's interest in such Intellectual Property and to perfect Bank's first priority interest therein. Without limiting the generality of the foregoing, the Obligor agrees as follows: upon Obligor creating, writing, producing or acquiring any software, computer source codes or other computer programs (collectively, the "Software"), Obligor shall promptly register such Software with the U.S. Copyright Office and to the extent Obligor's rights therein are acquired from any third party, Obligor shall promptly upon such acquisition file with the U.S. Copyright Office any and all documents necessary to perfect Obligor's rights therein. Upon Obligor creating, writing, producing or otherwise acquiring any Software, Obligor shall give prompt notice thereof to Bank. Obligor shall execute and deliver to Bank any and all copyright mortgages, UCC financing statements and other documents and instruments which Bank may request in connection with the Bank perfecting its first priority security interest in such software. IMPERIAL BANK GENERAL SECURITY AGREEMENT (Tangible and Intangible Personal Property) This agreement is executed on February 9, 1998 by The Keith Companies, Inc. anD Keith Engineering, INC. (hereinafter called "Obligor") In consideration of financial accommodations given, to be given or continued, the Obligor grants to IMPERIAL BANK (hereinafter called "Bank") a security interest in (a) all property (i) delivered to Bank by Obligor, (ii) which shall be in Bank's possession of control in any matter or for any purpose, (iii) described below, (iv) now owned or hereafter acquired by Obligor of the type of class described below and/or in any supplementary schedule hereto of in any financing statement filed by Bank and executed by or on behalf of Obligor; (b) all deposits accounts of Obligor at Bank and (c) the proceeds, increase and products of such property, all accessions thereto, and all property which Obligor may receive on account of such collateral which Obligor will immediately deliver to Bank (collectively referred to as "Collateral") to secure payment and performance of all of Obligor's present or future debts or obligations to Bank, whether absolute or contingent (hereafter referred to as "Debt"). Unless otherwise defined, words used herein have the meanings given them in the California Uniform Commercial Code. Collateral: C. VEHICLE, VESSEL, AIRCRAFT: ________________________________________________________________________________ Identification License or New or Year Make/Manufacturer Model and Serial No. Registration No. Used ________________________________________________________________________________ ________________________________________________________________________________ Engine or other equipment:______________________________________________________ (For aircraft original ink signature on copy to FAA) D. DEPOSIT ACCOUNTS: Type ____________________ Accounts Number ______________ Amount $ ____________ In name of ____________________ Depository ___________________________________ AND ALL EXTENSIONS OR RENEWALS THEREOF. C. ACCOUNTS, INTANGIBLES AND OTHER: (Describe) All personal property, whether presently existing or hereafter Created or acquired, including but not limited to: All accounts, chattel paper, documents, instruments, money, deposit accounts and general intangibles including returns, repossessions, books and records relating thereto, and equipment containing said books and records. All Investment property including securities and securities entitlements. All goods including equipment and inventory. All proceeds including, without limitation, insurance proceeds. All guarantees and other security therefor. The collateral not in Bank's possession will be located at: 2955 Redhill Avenue, Costa Mesa, CA 92626 if checked, the Obligor is executing this Agreement as an Accommodation Debtor only and the Obligor's liability is limited to the security interest granted in file Collateral described herein. The party being accommodated is All the terms and provisions on page 2 hereof are incorporated herein as though set forth, and constitute a part of this Agreement. Name Signature Address (indicate title, if applicable) The Keith Companies, Inc. and By: /s/ Aram H. Keith 2955 Redhill Avenue Keith Engineering, Inc. Aram H. Keith, President Costa Mesa, CA 92626 SECURITY AGREEMENT (CONTINUED) Obligor represents, warrants and agrees: 1. Obligor will immediately pay (a) any Debt when due, (b) Bank's costs of collecting the Debt, of protecting, insuring or realizing Collateral, and any expenditure of Bank pursuant hereto including attorneys' fees and expenses, with interest at the rate of 24% per year, or the rate applicable to the Debt, whichever is less, from the date of expenditure, and (c) any deficiency after realization of Collateral. 2. Obligor will use the proceeds of any loan that becomes Debt hereunder for the purpose indicated on the application therefore, and will promptly contract to purchase and pay the purchase price of any property which becomes Collateral hereunder from the proceed of any loan made for that purpose. 3. As to all Collateral in Obligator's possession (unless specifically otherwise agreed to by Bank in writing), Obligor will: (c) Have, or has, possession of the Collateral at location disclosed to Bank and will not remove the Collateral from the location. (d) Keep the Collateral separate and identifiable. (c) Maintain the Collateral in good and saleable condition, repair it if necessary, clean, feed, shelter, water, Medicate, fertilize, cultivate, irrigate, prune and otherwise deal with the Collateral in all ways as are consideration good practice by Owners of like property, use it lawfully and only as permitted by insurance policies, and permit Batik to inspect the Collateral at any reasonable time. (d) Not sell, contract to sell, lease, encumber or transfer the Collateral (other than inventory Collateral) until the Debt has been paid, even though Bank has a security interest in proceeds of such Collateral. 4. As to Collateral which is inventory and accounts. Obligor: (a) May, until notice from the bank, sell, lease of otherwise dispose of inventory Collateral in the ordinary course, and collect the cash proceeds thereof. (b) Will, upon notice from the Bank, deposit all cash proceeds as received in a demand deposit account with Bank, containing only such proceeds and deliver statements identifying units of inventory disposed of, accounts which gave rise to proceeds, and all acquisitions and returns of inventory as required by Bank. (c) Will receive in trust, schedule on forms satisfactory to the Bank and deliver to Bank all non-cash proceeds other than inventory received in trade. (d) If not in default, may obtain release of Bank's interest in individual units of inventory upon request, therefore, payment to Bank of the release price of such units shown on any collateral schedule supplementary hereto, and compliance herewith as to proceeds thereof. 5. As to Collateral which are accounts, chattel paper, general intangibles and proceeds described in 4(c) above, Obligor warrants, represents and agrees: (f) All such Collateral is genuine enforceable in accordance with its terms free from default, prepayment, defense and conditions precedent (except as disclosed to and accepted by Bank in writing), and is supported by consecutively numbered invoices to, or rights against, the debtors thereon. Obligor will supply Bank with duplicate invoices or other evidence of Obligor's rights on Bank's request; (g) All persons appearing to be obligated on such Collateral have authority and capacity to contract; (h) All chattel paper is in compliance with law as to form, content and manner of preparation and execution and has been properly registered, recorded, and/or filed to protect Obligor's interest thereunder; (i) If an account debtor shall also be indebted to Obligor on another obligation, any payment made by him not specifically designated to be applied on any particular obligation shall be considered to be a payment on the account in which Bank has a security interest. Should any remittance include a payment not on an account, it shall be delivered to Bank and, if no event of default has occurred, Bank shall pay Obligor the amount of such payment; (j) Obligor agrees not to compromise, settle or adjust any account or renew or extend the time of payment thereof without Bank's prior written consent. 6. Obligor owns all Collateral absolutely, and no other person has or claims any interest in any Collateral, except as disclosed to and accepted by Bank in writing. Obligor will defend any proceeding which may affect title to or Bank's security interest in any Collateral, and will indemnify and hold Bank free and harmless from all costs and expenses of Bank's defense. 7. Obligor Will pay when due all existing or future charges, liens or encumbrances on any all taxes and assessments now or hereafter imposed on or affecting the Collateral and, if the Collateral is in Obligor's possession, the realty on which the Collateral is located. 8. Obligor will insure the Collateral with Bank as loss payee in form and amounts with companies, and against risks and liability satisfactory to Bank, and hereby assigns such policies to Bank, agrees to deliver them to Bank at Bank's request, and authorizes Bank to make any claim thereunder, to cancel the insurance on Obligor's default, and to receive payment of and endorse any instrument in payment of any loss or return premium. If Obligor should fail to deliver the required policy or policies to the Bank, Bank may, at Obligor's cost and expense, without any duty to do so, get and pay for insurance naming as the insured, at Bank's option, either both Obligor and Bank, or only Bank, and the cost thereof shall be secured by this Security Agreement, and shall be repayable as provided in Paragraph I above. 9. Obligor will give bank any information it requires. All information at any time supplied to bank by Obligor (including, but not limited to, the value and condition of Collateral, financial statements, financing statements, and statements made in documentary Collateral) is correct and complete, and Obligor will notify Bank of any adverse change in such information. Obligor will promptly notify Bank of any change of Obligor's residence, chief executive office or mailing address. 11. Bank is irrevocably appointed Obligor's attorney-in-fact to do any act which Obligor is obligated hereby to do, to exercise such rights as Obligor may exercise, to use such equipment as Obligor might use, to enter Obligor's premises to give notice of Bank's Security interest and to collect Collateral and proceeds and to execute and file in Obligor's name any financing statements and amendments thereto required to perfect Bank's security interest hereunder, all to protect and preserve the Collateral and Bank's rights hereunder. Bank may: (d) Endorse, collect and receive delivery or payment of instruments and documents constituting Collateral; (e) Make extension agreements with respect to or affecting Collateral, exchange it for other Collateral, release persons liable thereon or take security for the payment thereof, and compromise disputes in connection therewith; (f) Use or operate Collateral for the purpose of preserving Collateral or its value and for preserving or liquidating Collateral. 11. If more than one Obligor signs this Agreement their liability is joint and several. Any Obligor who is married agrees that recourse may be had against separate property for the Debt. Discharge of any Obligor except to full payment, or any extension, forbearance, change of rate of interest, or acceptance, release or substitution of Collateral or any impairment or suspension of Bank's rights against an Obligor, or any transfer of an Obligor's interest to another shall not affect the liability of any other Obligor. Until the Debt shall have been paid or performed in full, Bank's rights shall continue even if the Debt is outlawed. All Obligors waive: (a) any right to require Bank to proceed against any Obligor before any other, or to pursue any other remedy; (b) presentment, protest and notice of protest, demand and notice of nonpayment, demand or performance, notice of sale, and advertisement of sale; (c) any right to the benefit of or to direct the application of any Collateral until tile Debt shall have been paid; (d) and any right of subrogation to Bank until Debt shall have been paid or performed in full. 12, Upon default at Bank's option, without demand of notice, all or any part of the Debt shall immediately become due. Bank shall have all rights given by law, and may sell, in one or more sales, Collateral in any county where Bank has an office. Bank may purchase at such sale. Sales for cash or on credit to a wholesaler, retailer of user of the Collateral, or at public or private auction, are all to be considered commercially reasonable. Bank may require Obligor to assemble the Collateral and make it available to Bank at the entrance to the location of the Collateral, or a place designated by Bank. Defaults shall include: (a) Obligor's failure to pay or perform this or any agreement with Bank or breach of any warranty herein, or Borrower's failure to pay or perform any agreement with Bank. (c) Any change in Obligor's or Borrower's financial condition which in Bank's judgment impairs the prospect of Borrower's payment or performance. (c) Any actual of reasonably anticipated deterioration of the Collateral or in the market price thereof which causes it, in Bank's judgment, to become unsatisfactory as security. (d) Any levy or seizure against Borrower of any of the Collateral. (e) Death, termination of business, assignment for creditors, insolvency, appointment of receiver, or the filing of any petition under bankruptcy or debtor's relief laws of, by or against Obligor of Borrower or any guarantor of the Debt. (f) Any warranty of representation which is false or is believed in good faith by Bank to be false. 15. Bank's acceptance of partial of delinquent payments or the failure of Bank to exercise any right or remedy shall not waive any obligation of Obligor or Borrower or right of Bank to modify this Agreement, or waive any other similar default. 16. On transfer of all or any part of the Debt, Bank may transfer all or any part of the Collateral/ Bank may deliver all or any part of the Collateral to and Obligor at any time. Any such transfer or delivery shall discharge Bank from all liability and responsibility with respect to such Collateral transferred or delivered. This agreement benefits Bank's successors and assigns and binds Obligor's heirs, legatees, personal representatives, successors and assigns. Obligor agrees not to assert against any assignee of Bank any claim or defense that may exist against Bank. Time is of the essence. This Agreement and supplementary schedules hereto contain the entire security agreement between Bank and Obligor. Obligor will execute any additional agreements. Assignments or documents reasonably required by Bank to carry this Agreement into effect. 15. This agreement shall be governed by and construed in accordance with the laws of the State of California, to the jurisdiction of whose courts the Obligor hereby agrees to submit. Obligor agrees that service of process may be accomplished by any means authorized by California law. All words used herein in the singular shall be considered to have been used in the plural where the context and construction so require. 16. To the extent that Obligor acquires any trademarks, service marks, trade names and service names and/or the goodwill associated therewith, copyrights, patents and/or patent applications (collectively "Intellectual Property"), Obligor shall give prompt notice thereof to Bank and shall take any and all actions requested from time to time by Bank to perfect Obligor's interest in such Intellectual Property and to perfect Bank's first priority interest therein. Without limiting the generality of the foregoing, the Obligor agrees as follows: upon Obligor creating, writing, producing or acquiring any software, computer source codes or other computer programs (collectively, the "Software"), Obligor shall promptly register such Software with the U.S. Copyright Office and to the extent Obligor's rights therein are acquired from any third party, Obligor shall promptly upon such acquisition file with the U.S. Copyright Office any and all documents necessary to perfect Obligor's rights therein. Upon Obligor creating, writing, producing or otherwise acquiring any Software, Obligor shall give prompt notice thereof to Bank. Obligor shall execute and deliver to Bank any and all copyright mortgages, UCC financing statements and other documents and instruments which Bank may request in connection with the Bank perfecting its first priority security interest in such Software. EX-10.9 14 COMMERCIAL SECURITY AGREEMENT EXHIBIT 10.9 COMMERCIAL SECURITY AGREEMENT - --------------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS $5,500,000.00 10-07-1998 04-30-1999 0070854442 07-0854442 202 - --------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - --------------------------------------------------------------------------------------------------------------------------- Borrower: THE KEITH COMPANIES, INC.; ET. AL. LENDER: IMPERIAL BANK 2955 REDHILL AVENUE ORANGE COUNTY REGIONAL OFFICE COSTA MESA, CA 92626 695 TOWN CENTER DRIVE, SUITE 100 MESA, CA 92626-1924 GRANTOR: THE KEITH COMPANIES, INC., KEITH ENGINEERING, INC., ESI, ENGINEERING SERVICES, INC. AND JOHN M. TETTEMER & ASSOCIATES, LTD. ===========================================================================================================================
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO AMONG THE KEITH COMPANIES, INC. KEITH ENGINEERING, INC., ESI, ENGINEERING SERVICES, INC. AND JOHN M. TETTEMER & ASSOCIATES, LTD. (REFERRED TO BELOW INDIVIDUALLY AND COLLECTIVELY AS "BORROWER"); THE KEITH COMPANIES, INC., KEITH ENGINEERING, INC., ESI, ENGINEERING SERVICES, INC. AND JOHN M. TETTEMER & ASSOCIATES, LTD. (REFERRED TO BELOW INDIVIDUALLY AND COLLECTIVELY AS "GRANTOR"); AND IMPERIAL BANK (REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Commercial Security Agreement, as this Commercial Security Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Commercial Security Agreement from time to time. BORROWER. The word "Borrower" means each and every person or entity signing the Note, including without limitation THE KEITH COMPANIES, INC., KEITH ENGINEERING, INC., ESI, ENGINEERING SERVICES, INC. and JOHN M. TETTEMER & ASSOCIATES, LTD. COLLATERAL. The word "Collateral" means the following described property of Grantor, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: ALL PERSONAL PROPERTY, WHETHER PRESENTLY EXISTING OR HEREAFTER CREATED OR ACQUIRED, INCLUDING BUT NOT LIMITED TO: ALL ACCOUNTS, CHATTEL PAPER, DOCUMENTS, INSTRUMENTS, MONEY, DEPOSIT ACCOUNTS AND GENERAL INTANGIBLES INCLUDING RETURNS, REPOSSESSIONS, BOOKS AND RECORDS RELATING THERETO, AND EQUIPMENT CONTAINING SAID BOOKS AND RECORDS. ALL INVESTMENT PROPERTY INCLUDING SECURITIES AND SECURITIES ENTITLEMENTS. ALL GOODS INCLUDING EQUIPMENT AND INVENTORY. ALL PROCEEDS INCLUDING, WITHOUT LIMITATION, INSURANCE PROCEEDS. ALL GUARANTEES AND OTHER SECURITY THEREFOR. In addition, the word "Collateral" includes all the following, whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located: (a) All attachments, accessions, accessories, tools, parts, supplies, increases, and additions to and all replacements of and substitutions for any property described above. (b) All products and produce of any of the property described in this Collateral section. (c) All accounts, general intangibles, instruments, rents, monies, payments, and all other rights, arising out of a sale, lease, or other disposition of any of the property described in this Collateral section. (d) All proceeds (including insurance proceeds) from the sale, destruction, loss, or other disposition of any of the property described in this Collateral section. (e) All records and data relating to any of the property described in this Collateral section, whether in the form of a writing, photograph, microfilm, microfiche, or electronic media, together with all of Grantor's right, title, and interest in and to all computer software required to utilize, create, maintain, and process any such records or data on electronic media. EVENT OF DEFAULT. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "Events of Default." GRANTOR. The word "Grantor" means THE KEITH COMPANIES, INC., KEITH ENGINEERING, INC., ESI, ENGINEERING SERVICES, INC. and JOHN M. TETTEMER & ASSOCIATES, LTD.. Any Grantor who signs this Agreement, but does not sign the Note, is signing this Agreement only to grant a security interest in Grantor's interest in the Collateral to, Lender and is not personally liable under the Note except as otherwise provided by contract or law (e.g., personal liability under a guaranty or as a surety). GUARANTOR. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with the indebtedness. INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by the Note, including all principal and interest, together with all other indebtedness and costs and expenses for which Grantor or Borrower is responsible under this Agreement or under any of the Related Documents. In addition, the word "Indebtedness" includes all other obligations, debts and liabilities, plus interest thereon of Borrower, or any one or more of them, to Lender, as well as all claims by Lender against Borrower, or any one or more of them, whether existing now or later; whether they are voluntary or involuntary, due or not due, direct or indirect, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as guarantor, surety, accommodation party or otherwise; whether recovery upon such indebtedness may be or hereafter may become barred by any statute of limitations; and whether such indebtedness may be or hereafter may become otherwise unenforceable. (AHK) INITIALS LENDER. The word "Lender" means Imperial Bank, its successors and assigns. NOTE. The word "Note" means the note or credit agreement dated October 7, 1998, in the principal amount of $5,500,000.00 from Borrower to Lender, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of and substitutions for the note or credit agreement. RELATED DOCUMENTS. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. BORROWER'S WAIVERS AND RESPONSIBILITIES. Except as otherwise required under this Agreement or by applicable law, (a) Borrower agrees that Lender need not tell Borrower about any action or inaction Lender takes in connection with this Agreement; (b) Borrower assumes the responsibility for being and keeping informed about the Collateral; and (c) Borrower waives any defenses that may arise because of any action or inaction of Lender, including without limitation any failure of Lender to realize upon the Collateral or any delay by Lender in realizing upon the Collateral; and Borrower agrees to remain liable under the Note no matter what action Lender takes or fails to take under this Agreement. GRANTOR'S REPRESENTATIONS AND WARRANTIES. Grantor warrants that: (a) this Agreement is executed at Borrower's request and not at the request of Lender; (b) Grantor has the full right, power and authority to enter into this Agreement and to pledge the Collateral to Lender; (c) Grantor has established adequate means of obtaining from Borrower on a continuing basis information about Borrower's financial condition; and (d) Lender has made no representation to Grantor about Borrower or Borrower's creditworthiness. GRANTOR'S WAIVERS. Except as prohibited by applicable law, Grantor waives any right to require Lender to (a) make any presentment, protest, demand, or notice of any kind, including notice of change of any terms of repayment of the Indebtedness, default by Borrower or any other guarantor or surety, any action or nonaction taken by Borrower, Lender, or any other guarantor or surety of Borrower, or the creation of new or additional Indebtedness; 03/04/99 COMMERCIAL SECURITY AGREEMENT PAGE 2 (CONTINUED) - -------------------------------------------------------------------------------- (b) proceed against any person, including Borrower before proceeding against Grantor; (c) proceed against any collateral for the Indebtedness, including borrower's collateral, before proceeding against Grantor; (d) apply any payments or proceeds received against the Indebtedness in any order; (e) give notice of the terms, time, and place of any sale of any collateral pursuant to the Uniform Commercial Code or any other law governing such sale; (f) disclose any information about the Indebtedness, the Borrower, any collateral, or any other guarantor or surety, or about any action or nonaction of Lender; or (g) pursue any remedy or course of action in Lender's power whatsoever. Grantor also waives any and all rights or defenses arising by reason of (h) any disability or other defense of Borrower, any other guarantor or surety or any other person; (i) the cessation from any cause whatsoever, other than payment in full, of the Indebtedness; (j) the application of proceeds of the Indebtedness by Borrower for purposes other than the purposes understood and intended by Grantor and Lender; (k) any act of omission or commission by Lender which directly or indirectly results in or contributes to the discharge of Borrower or any other guarantor or surety, or the Indebtedness, or the loss or release of any collateral by operation of law or otherwise; (l) any statute of limitations in any action under this Agreement or on the Indebtedness; or (m) any modification or change in terms of the Indebtedness, whatsoever, including without limitation, the renewal, extension, acceleration, or other change in the time payment of the Indebtedness is due and any change in the interest rate. Grantor waives all rights and defenses arising out of an election of remedies by Lender, even though that election of remedies, such as nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed Grantor's rights of subrogation and reimbursement against Borrower by the operation of Section 580d of the California Code of Civil Procedure, or otherwise. This waiver includes, without limitation, any loss of rights Grantor may suffer by reason of any rights or protections of Borrower in connection with any anti- deficiency laws, or other laws limiting or discharging the Indebtedness or Borrower's obligations (including, without limitation, Section 726, 580a, 580b, and 580d of the California Code of Civil Procedure). Grantor waives all rights and protections of any kind which Grantor may have for any reason, which would affect or limit the amount of any recovery by Lender from Grantor following a nonjudicial sale or judicial foreclosure of any real or personal property security for the Indebtedness including, but not limited to, the right to any fair market value hearing pursuant to California Code of Civil Procedure Section 580a. Grantor understands and agrees that the foregoing waivers are waivers of substantive rights and defenses to which Grantor might otherwise be entitled under state and federal law. The rights and defenses waived include, without limitation, those provided by California laws of suretyship and guaranty, anti- deficiency laws, and the Uniform Commercial Code. Grantor acknowledges that Grantor has provided these waivers of rights and defenses with the intention that they be fully relied upon by Lender. Until all Indebtedness is paid in full, Grantor waives any right to enforce any remedy Lender may have against Borrower or any other guarantor, surety, or other person, and further, Grantor waives any right to participate in any collateral for the Indebtedness now or hereafter held by Lender. If now or hereafter (a) Borrower shall be or become insolvent, and (b) the Indebtedness shall not at all times until paid be fully secured by collateral pledged by Borrower, Grantor hereby forever waives and relinquishes in favor of Lender and Borrower, and their respective successors, any claim or right to payment Grantor may now have or hereafter have or acquire against Borrower, by subrogation or otherwise, so that at no time shall Grantor be or become a "creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any successor provision of the Federal bankruptcy laws. RIGHT OF SETOFF. Grantor hereby grants Lender a contractual security interest in and hereby assigns, conveys, delivers, pledges, and transfers all of Grantor's right, title and interest in and to Grantor's accounts with Lender (whether checking, savings, or some other account), including all accounts held jointly with someone else and all accounts Grantor may open in the future, excluding, however, all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Grantor authorizes Lender, to the extent permitted by applicable law, to charge or setoff all Indebtedness against any and all such accounts. OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows: ORGANIZATION. Grantor is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California State of California. AUTHORIZATION. The execution, delivery, and performance of this Agreement by Grantor have been duly authorized by all necessary action by Grantor and do not conflict with, result in a violation of, or constitute a default under (a) any provision of any articles or agreements relating to entity incorporation, organization or existence, any agreement or other instrument binding upon Grantor or (b) any law, governmental regulation, court decree, or order applicable to Grantor. PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's security interest in the Collateral. Upon request of Lender, Grantor will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Grantor will note Lender's interest upon any and all chattel paper if not delivered to Lender for possession by Lender. Grantor hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue the security interest granted in this Agreement. Lender may at any time, and without further authorization from Grantor, file a carbon, photographic or other reproduction of any financing statement or of this Agreement for use as a financing statement. Grantor will reimburse Lender for all expenses for the perfection and the continuation of the perfection of Lender's security interest in the Collateral. Grantor promptly will notify Lender before any change in Grantor's name including any change to the assumed business names of Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME BORROWER MAY NOT BE INDEBTED TO LENDER. NO VIOLATION. The execution and delivery of this Agreement will not violate any law or agreement governing Grantor or to which Grantor is a party, and its articles or agreements relating to entity incorporation, organization or existence do not prohibit any term or condition of this Agreement. ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of accounts, chattel paper, or general intangibles, the Collateral is enforceable in accordance with its terms, is genuine, and complies with applicable laws concerning form, content and manner of preparation and execution, and all persons appearing to be obligated on the Collateral have authority and capacity to contract and are in fact obligated as they appear to be on the Collateral. LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver to Lender in form satisfactory to Lender a schedule of real properties and Collateral locations relating to Grantor's operations, including without limitation the following: (a) all real property owned or being purchased by Grantor; (b) all real property being rented or leased by Grantor; (c) all storage facilities owned, rented, leased, or being used by Grantor; and (d) all other properties where Collateral is or may be located. Except in the ordinary course of its business, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent the Collateral consists of intangible property such as accounts, the records concerning the Collateral) at Grantor's address shown above, or at such other locations as are acceptable to Lender. Except in the ordinary course of its business, including the sales of inventory, Grantor shall not remove the Collateral from its existing locations without the prior written consent of Lender. To the extent that the Collateral consists of vehicles, or other titled property, Grantor shall not take or permit any action which would require application for certificates of title for the vehicles outside the State of California, without the prior written consent of Lender. TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement. Unless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender and shall not be commingled with any other funds; provided however, this requirement shall not constitute consent by Lender to any sale or other disposition. Upon receipt, Grantor shall immediately deliver any such proceeds to Lender. TITLE. Grantor represents and warrants to Lender that it holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect 03/04/99 COMMERCIAL SECURITY AGREEMENT PAGE 3 (CONTINUED) - -------------------------------------------------------------------------------- the security interest created by this Agreement or to which Lender has specifically consented. Grantor shall defend Lender's rights in the Collateral against the claims and demands of all other persons. COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists of inventory, Grantor shall deliver to Lender, as often as Lender shall require, such lists, descriptions, and designations of such Collateral as Lender may require to identify the nature, extent, and location of such Collateral. Such information shall be submitted for Grantor and each of its subsidiaries or related companies. MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all tangible Collateral in good condition and repair. Grantor will not commit or permit damage to or destruction of the Collateral or any part of the Collateral. Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral wherever located. Grantor shall immediately notify Lender of all cases involving the return, rejection, repossession, loss or damage of or to any Collateral; of any request for credit or adjustment or of any other dispute arising with respect to the Collateral; and generally of all happenings and events affecting the Collateral or the value or the amount of the Collateral. TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes, assessments and liens upon the Collateral, its use or operation, upon this Agreement, upon any promissory note or notes evidencing the indebtedness, or upon any of the other Related Documents. Grantor may withhold any such payment or may elect to contest any lien if Grantor is in good faith conducting an appropriate proceeding to contest the obligation to pay and so long as Lender's interest in the Collateral is not jeopardized in Lender's sole opinion. If the Collateral is subjected to a lien which is not discharged within fifteen (15) days, Grantor shall deposit with Lender cash, a sufficient corporate surety bond or other security satisfactory to Lender in an amount adequate to provide for the discharge of the lien plus any interest, costs, attorneys' fees or other charges that could accrue as a result of foreclosure or sale of the Collateral. In any contest Grantor shall defend itself and Lender and shall satisfy any final adverse judgment before enforcement against the Collateral. Grantor shall name Lender as an additional obligee under any surety bond furnished in the contest proceedings. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly with all laws, ordinances, rules and regulations of all governmental authorities, now or hereafter in effect, applicable to the ownership, production, disposition, or use of the Collateral. Grantor may contest in good faith any such law, ordinance or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Lender's interest in the Collateral, in Lender's opinion, is not jeopardized. HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral never has been, and never will be so long as this Agreement remains a lien on the Collateral, used for the generation, manufacture, storage, transportation, treatment, disposal, release or threatened release of any hazardous waste or substance, as those terms are defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. The terms "hazardous waste" and "hazardous substance" shall also include, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos. The representations and warranties contained herein are based on Grantor's due diligence in investigating the Collateral for hazardous wastes and substances. Grantor hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Grantor becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims and losses resulting from a breach of this provision of this Agreement. This obligation to indemnify shall survive the payment of the Indebtedness and the satisfaction of this Agreement. MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all risks insurance, including without limitation fire, theft and liability coverage together with such other insurance as Lender may require with respect to the Collateral, in form, amounts, coverages and basis reasonably acceptable to Lender and issued by a company or companies reasonably acceptable to Lender. Grantor, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days' prior written notice to Lender and not including any disclaimer of the insurer's liability for failure to give such a notice. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Grantor or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest, Grantor will provide Lender with such loss payable or other endorsements as Lender may require. In no event shall the insurance be in an amount less than the amount agreed upon in the Agreement to Provide Insurance. If Grantor at any time fails to obtain or maintain any insurance as required under this Agreement, Lender may (but shall not be obligated to) obtain such insurance as Lender deems appropriate, including if it so chooses "single interest insurance," which will cover only Lender's interest in the Collateral. APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of any loss or damage to the Collateral. Lender may make proof of loss if Grantor fails to do so within fifteen (15) days of the casualty. All proceeds of any insurance on the Collateral, including accrued proceeds thereon, shall be held by Lender as part of the Collateral. If Lender consents to repair or replacement of the damaged or destroyed Collateral, Lender shall, upon satisfactory proof of expenditure, pay or reimburse Grantor from the proceeds for the reasonable cost of repair or restoration. If Lender does not consent to repair or replacement of the Collateral, Lender shall retain a sufficient amount of the proceeds to pay all of the Indebtedness, and shall pay the balance to Grantor. Any proceeds which have not been disbursed within six (6) months after their receipt and which Grantor has not committed to the repair or restoration of the Collateral shall be used to prepay the Indebtedness. INSURANCE RESERVES. Lender may require Grantor to maintain with Lender reserves for payment of insurance premiums, which reserves shall be created by monthly payments from Grantor of a sum estimated by Lender to be sufficient to produce, at least fifteen (15) days before the premium due date, amounts at least equal to the insurance premiums to be paid. If fifteen (15) days before payment is due, the reserve funds are insufficient, Grantor shall upon demand pay any deficiency to Lender. The reserve funds shall be held by Lender as a general deposit and shall constitute a non- interest-bearing account which Lender may satisfy by payment of the insurance premiums required to be paid by Grantor as they become due. Lender does not hold the reserve funds in trust for Grantor, and Lender is not the agent of Grantor for payment of the insurance premiums required to be paid by Grantor. The responsibility for the payment of premiums shall remain Grantor's sole responsibility. INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender reports on each existing policy of insurance showing such information as Lender may reasonably request including the following: (a) the name of the insurer; (b) the risks insured; (0) the amount of the policy; (d) the property insured; (e) the then current value on the basis of which insurance has been obtained and the manner of determining that value; and (f) the expiration date of the policy. In addition, Grantor shall upon request by Lender (however not more often than annually) have an independent appraiser satisfactory to Lender determine, as applicable, the cash value or replacement cost of the Collateral. GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the tangible personal property and beneficial use of all the Collateral and may use it in any lawful manner not inconsistent with this Agreement or the Related Documents, provided that Grantor's right to possession and beneficial use shall not apply to any Collateral where possession of the Collateral by Lender is required by law to perfect Lender's security interest in such Collateral. If Lender at any time has possession of any Collateral, whether before or after an Event of Default, Lender shall be deemed to have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action for that purpose as Grantor shall request or as Lender, in Lender's sole discretion, shall deem appropriate under the circumstances, but failure to honor any request by Grantor shall not of itself be deemed to be a failure to exercise reasonable care. Lender shall not be required to take any steps necessary to preserve any rights in the Collateral against prior parties, nor to protect, preserve or maintain any security interest given to secure the Indebtedness. EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but shall not be obligated to) discharge or pay any amounts required to be discharged or paid by Grantor under this Agreement, including without limitation all taxes, liens, security interests, encumbrances, and other claims, at any time levied or placed on the Collateral. Lender also may (but shall not be obligated to) pay all costs for insuring, maintaining and preserving the Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Grantor. All such expenses shall become a part of the Indebtedness and, at Lender's option, will (a) be payable on demand, (b) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (i) the term of any applicable insurance policy or (ii) the remaining term of the Note, or (c) be treated as a balloon payment which will be due and payable at the Note's maturity. This Agreement also will secure payment of these amounts. Such right shall be in addition to all other rights and remedies to which Lender may be entitled upon the occurrence of an Event of Default. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on the Indebtedness. 03/04/99 COMMERCIAL SECURITY AGREEMENT PAGE 4 (CONTINUED) - -------------------------------------------------------------------------------- OTHER DEFAULTS. Failure of Grantor or Borrower to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or failure of Borrower to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by or on behalf of Grantor or Borrower under this Agreement, the Note or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished. DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral documents to create a valid and perfected security interest or lien) at any time and for any reason. INSOLVENCY. The dissolution or termination of Grantor or Borrower's existence as a going business, the insolvency of Grantor or Borrower, the appointment of a receiver for any part of Grantor or Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the Commencement of any proceeding under any bankruptcy or insolvency laws by or against Grantor or Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Grantor or Borrower or by any governmental agency against the Collateral or any other collateral securing the Indebtedness. This includes a garnishment of any of Grantor or Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Grantor or Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Grantor or Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or such Guarantor dies or becomes incompetent. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. INSECURITY. Lender, in good faith, deems itself insecure. RIGHT TO CURE. If any default, other than a Default on Indebtedness, is curable and if Grantor or Borrower has not been given a prior notice of a breach of the same provision of this Agreement, it may be cured (and no Event of Default will have occurred) if Grantor or Borrower, after Lender sends written notice demanding cure of such default, (a) cures the default within ten (10) days; or (b), if the cure requires more than ten (10) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this Agreement, at any time thereafter, Lender shall have all the rights of a secured party under the California Uniform Commercial Code. In addition and without limitation, Lender may exercise any one or more of the following rights and remedies: ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness, including any prepayment penalty which Borrower would be required to pay, immediately due and payable, without notice. ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or any portion of the Collateral and any and all certificates of title and other documents relating to the Collateral. Lender may require Grantor to assemble the Collateral and make it available to Lender at a place to be designated by Lender. Lender also shall have full power to enter upon the property of Grantor to take possession of and remove the Collateral. If the Collateral contains other goods not covered by this Agreement at the time of repossession, Grantor agrees Lender may take such other goods, provided that Lender makes reasonable efforts to return them to Grantor after repossession. SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer, or otherwise deal with the Collateral or proceeds thereof in its own name or that of Grantor. Lender may sell the Collateral at public auction or private sale. Unless the Collateral threatens to decline speedily in value or is of a type customarily sold on a recognized market, Lender will give Grantor reasonable notice of the time after which any private sale or any other intended disposition of the Collateral is to be made. The requirements of reasonable notice shall be met if such notice is given at least ten (10) days, or such lesser time as required by state law, before the time of the sale or disposition. All expenses relating to the disposition of the Collateral, including without limitation the expenses of retaking, holding, insuring, preparing for sale and selling the Collateral, shall become a part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall have the following rights and remedies regarding the appointment of a receiver: (a) Lender may have a receiver appointed as a matter of right, (b) the receiver may be an employee of Lender and may serve without bond, and (c) all fees of the receiver and his or her attorney shall become part of the Indebtedness secured by this Agreement and shall be payable on demand, with interest at the Note rate from date of expenditure until repaid. COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a receiver, may collect the payments, rents, income, and revenues from the Collateral. Lender may at any time in its discretion transfer any Collateral into its own name or that of its nominee and receive the payments, rents, income, and revenues therefrom and hold the same as security for the Indebtedness or apply it to payment of the Indebtedness in such order of preference as Lender may determine. Insofar as the Collateral consists of accounts, general intangibles, insurance policies, instruments, chattel paper, choses in action, or similar property, Lender may demand, collect, receipt for, settle, compromise, adjust, sue for, foreclose, or realize on the Collateral as Lender may determine, whether or not Indebtedness or Collateral is then due. For these purposes, Lender may, on behalf of and in the name of Grantor, receive, open and dispose of mail addressed to Grantor; change any address to which mail and payments are to be sent; and endorse notes, checks, drafts, money orders, documents of title, instruments and items pertaining to payment, shipment, or storage of any Collateral. To facilitate collection, Lender may notify account debtors and obligors on any Collateral to make payments directly to Lender. OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral, Lender may obtain a judgment against Borrower for any deficiency remaining on the Indebtedness due to Lender after application of all amounts received from the exercise of the rights provided in this Agreement. Borrower shall be liable for a deficiency even if the transaction described in this subsection is a sale of accounts or chattel paper. OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of a secured creditor under the provisions of the Uniform Commercial Code, as may be amended from time to time. In addition, Lender shall have and may exercise any or all other rights and remedies it may have available at law, in equity, or otherwise. CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced by this Agreement or the Related Documents or by any other writing, shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Grantor or Borrower under this Agreement, after Grantor or Borrowers failure to perform, shall not affect Lender's right to declare a default and to exercise its remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: AMENDMENTS. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Grantor and Borrower agree upon Lender's request to submit to the jurisdiction of the courts of Los Angeles County, the State of California. Lender, Grantor and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender, Grantor or Borrower against the other. (AHK initialed). This Agreement shall be governed by and construed in accordance with the laws of the State of California. 03/04/99 COMMERCIAL SECURITY AGREEMENT PAGE 5 (CONTINUED) - -------------------------------------------------------------------------------- ATTORNEYS' FEES; EXPENSES. Grantor and Borrower agree to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses, incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Grantor and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Grantor and Borrower also shall pay all court costs and such additional fees as may be directed by the court. CAPTION HEADINGS. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor and Borrower under this Agreement shall be joint and several, and all references to Borrower shall mean each and every Borrower, and all references to Grantor shall mean each and every Grantor. This means that each of the persons signing below is responsible for all obligations in this Agreement. NOTICES. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile (unless otherwise required by law), and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Grantor or Borrower, notice to any Grantor or Borrower will constitute notice to all Grantor and Borrowers. For notice purposes, Grantor and Borrower will keep Lender informed at all times of Grantor and Borrower's current address(es). POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful attorney-in-fact, irrevocably, with full power of substitution to do the following: (a) to demand, collect, receive, receipt for, sue and recover all sums of money or other property which may now or hereafter become due, owing or payable from the Collateral; (b) to execute, sign and endorse any and all claims, instruments, receipts, checks, drafts or warrants issued in payment for the Collateral; (c) to settle or compromise any and all claims arising under the Collateral, and, in the place and stead OF Grantor, to execute and deliver its release and settlement for the claim; and (d) to file any claim or claims or to take any action or institute or take part in any proceedings, either in its own name or in the name of Grantor, or otherwise, which in the discretion of Lender may seem to be necessary or advisable. This power is given as security for the Indebtedness, and the authority hereby conferred is and shall be irrevocable and shall remain in full force and effect until renounced by Lender. PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted preference claim in Borrower's bankruptcy will become a part of the Indebtedness and, at Lender's option, shall be payable by Borrower as provided above in the "EXPENDITURES BY LENDER" paragraph. SEVERABILITY. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer of the Collateral this Agreement shall be binding upon and inure to the benefit of the parties, their successors and assigns. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Grantor, shall constitute a waiver of any of Lender's rights or of any of Grantor's obligations as to any future transactions. Whenever the consent of Lender Is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all claims against such other person which Borrower has or would otherwise have by virtue of payment of the Indebtedness or any part thereof, specifically including but not limited to all rights of indemnity, contribution or exoneration. BORROWER AND GRANTOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY AGREEMENT, AND BORROWER AND GRANTOR AGREE TO ITS TERMS. THIS AGREEMENT IS DATED OCTOBER 7,1998. BORROWER: THE KEITH COMPANIES, INC. BY: /s/ ARAM H. KEITH, PRESIDENT KEITH ENGINEERING, INC., CO-BORROWER BY: /s/ ARAM H. KEITH, PRESIDENT ESI, ENGINEERING SERVICES, INC., CO-BORROWER BY: /s/ ARAM H. KEITH, PRESIDENT JOHN M. TETTEMER & ASSOCIATES, LTD., CO-BORROWER BY: /s/ ARAM H. KEITH, PRESIDENT GRANTOR: THE KEITH COMPANIES, INC. BY: /s/ ARAM H. KEITH, PRESIDENT KEITH ENGINEERING, INC., CO-BORROWER BY: /s/ ARAM H. KEITH, PRESIDENT ESI, ENGINEERING SERVICES, INC., CO-BORROWER BY: /s/ ARAM H. KEITH, PRESIDENT JOHN M. TETTEMER & ASSOCIATES, LTD., CO-BORROWER BY: /s/ ARAM H. KEITH, PRESIDENT EX-10.10 15 WAIVER EXHIBIT 10.10 Waiver ------ The undersigned hereby waives the right of first refusal granted to Cruttenden Roth pursuant to the provisions of Section 9 of that certain Agreement for Advisory Services dated April 10, 1997 by and among Walter W. Cruttenden, III, The Keith Companies, Inc., Keith International, Inc. and Keith Engineering, Inc. IN WITNESS WHEREOF, the undersigned has executed this Waiver this ----- day of July, 1998 /s/ Walter W. Cruttenden -------------------------- Walter W. Cruttenden, III EX-10.11 16 LEASE DATED AUGUST 16, 1989 EXHIBIT 10.11 LEASE BETWEEN Keith Engineering, Inc. ----------------------- TENANT AND Scripps Center Associates ------------------------- LANDLORD FOR SPACE AT Scripps Center -------------- 2995 Red Hill Avenue -------------------- Costa Mesa, CA -------------- August 16, 1989 --------------- DATE 1 TABLE OF CONTENTS -----------------
SECTION PAGE ------- ---- 1.1 Definitions 1.2 Schedules and Addenda 2.1 Lease of Premises 2.2 Prior Occupancy 3.1 Rent 3.2 Base Rent Adjustment 3.3 Deposit; Prepaid Rent 3.4 Operating Costs 3.5 Taxes 4.1 Construction Conditions 4.2 Commencement of Possession 5.1 Project Services 5.2 Interruption of Services 6.1 Use of Leased Premises 6.2 Insurance 6.3 Repairs 6.4 Assignment and Subletting 6.5 Estoppel Certificate 6.6 Brokerage Commissions 7.1 Substitute Premises 7.2 Additional Rights Reserved to Landlord 8.1 Casualty and Untenantability 9.1 Condemnation 10.1 Waiver of Certain Claims 10.2 Waiver of Subrogation 10.3 Limitation of Landlord's Liability 11.1 Tenant's Default 11.2 Remedies of Landlord 12.1 Surrender of Leased Premises 12.2 Hold Over Tenancy 13.1 Quiet Enjoyment 13.2 Accord and Satisfaction 13.3 Severability 13.4 Subordination and Attornment 13.5 Applicable Law 13.6 Binding Effect; Gender 13.7 Time 13.8 Entire Agreement 13.9 Notices Execution
2 LIST OF SCHEDULES ----------------- 1. Description of Premises and Floor Plan 2. Rules and Regulations 3. Utility Services 4. Maintenance Services 5. Parking 6. Work Letter 7. Certificate of Acceptance 8. Boma Standards 9. Sign Program 3 LEASE This Lease made August 16, 1989 between Scripps Center Associates, A California ---------- --------------------------------------- General Partnership ("Landlord") and Keith Engineering, Inc. DBA The Keith - -------------------------------- ------------------------------------- Companies ("Tenant"). - --------- ARTICLE ONE DEFINITIONS, SCHEDULES AND ADDENDA 1.1 DEFINITIONS: a. LEASED PREMISES shall mean 2995 RED HILL AVENUE as described in SCHEDULE 1. -------------------- b. BUILDING shall mean a 2 STORY BUILDING located at 2995 RED HILL AVENUE, ---------------- --------------------- COSTA MESA, CALIFORNIA, SOMETIMES REFERRED TO AS BUILDING C. - ------------------------------------------------------------ c. PROJECT shall mean SCRIPPS CENTER located at THE SOUTHWEST CORNER OF KALMUS -------------- ------------------------------ AND RED HILL AVENUE, COSTA MESA, CALIFORNIA, consisting of 3 buildings. - -------------------------------------------- d. TENANT'S SQUARE FOOTAGE shall mean 70,000 rentable square feet; TOTAL ------ SQUARE FOOTAGE of the Building shall mean 87,722 rentable square feet, and TOTAL ------ SQUARE FOOTAGE of the Project shall mean 230,196 rentable square feet, which may ------- be adjusted pursuant to paragraph 7.2 (iii) below, subject to adherence to BOMA standard as attached hereto in Schedule 8. e. LEASE COMMENCEMENT DATE shall mean 02/01/90, which may be adjusted --------- pursuant to the provisions of this Lease; LEASE EXPIRATION DATE shall mean O1/31/2000; LEASE TERM shall mean the period between Lease Commencement Date and - ----------- Lease Expiration Date. f. BASE RENT shall mean those amounts pursuant to Article 14.1 of the Addendum ------------ -------- payable in monthly installments plus applicable sales tax, if any; the total Base Rent payable over the entire Lease Term is $8,736,000.00. ------------- g. TENANT'S PRO RATA SHARE OF BUILDING OPERATING COSTS shall mean 79.8%, which ----- may be adjusted pursuant to paragraph 7.2 (iii) below. TENANT'S PRO RATA SHARE OF PROJECT OPERATING COSTS shall mean 30.41%, which may be adjusted pursuant to ------ paragraph 7.2 (iii) below. Tenant's Pro Rata Share of Project Operating Costs for the first year of the Lease Term is estimated to be $118,300.00 ($1.69 per ---------- ---- square foot of Tenant's Square Footage) payable in monthly installments of $ - 9,858.33 subject to adjustment pursuant to Article 3.4 b and c below. - -------- h. DEPOSIT shall mean $45,500; PREPAID RENT shall mean $49,000.00, of which -------- ---------- $49,000.00 represents the first monthly installment of Base Rent, and $0 - ---------- -- represents the estimated last monthly installment(s) of Base Rent. i. PERMITTED PURPOSE shall mean GENERAL OFFICE USE. ------------------- 4 j. AUTHORIZED NUMBER OF PARKING SPACES shall mean 280 spaces at a rate of $0. --- -- Which is a ratio of four spaces per 1000 rentable square feet. k. MANAGING AGENT shall mean COLDWELL BANKER MANAGEMENT SERVICES whose address ----------------------------------- is 4040 MACARTHUR BOULEVARD, NEWPORT BEACH, CALIFORNIA 92660. --------------------------------------------------------- l. BROKER OF RECORD shall mean COLDWELL BANKER COMMERCIAL REAL ESTATE -------------------------------------- SERVICES. m. LANDLORD'S MAILING ADDRESS: SCRIPPS CENTER ASSOCIATES C/O ALLSTATE -------------------------------------- INSURANCE COMPANY, ALLSTATE PLAZA, BUILDING E-4, NORTHBROOK, ILLINOIS 60062 - --------------------------------------------------------------------------- ATTEN: REAL ESTATE INVESTMENT DIVISION. - -------------------------------------- n. TENANT'S MAILING ADDRESS: PRIOR TO COMMENCEMENT DATE, 200 BAKER STREET, --------------------------------------------- COSTA MESA CALIFORNIA, 92626. AFTER LEASE COMMENCEMENT DATE 2995 RED HILL - -------------------------------------------------------------------------- AVENUE, COSTA MESA CALIFORNIA, 92626. - ------------------------------------ 1.2 SCHEDULES AND ADDENDA: The schedules and addenda listed below are incorporated into this lease by reference unless lined out. The terms of schedules, exhibits and typewritten addenda, if any, attached or added hereto shall control over any inconsistent provisions in the paragraphs of this Lease. a. Schedule 1: Description of Premises and Floor Plan b. Schedule 2: Rules and Regulations c. Schedule 3: Utility Services d. Schedule 4: Maintenance Services e. Schedule 5: Parking f. Schedule 6: Work Letter g. Schedule 7: Certificate of Acceptance ARTICLE TWO PREMISES 2.1 LEASE OF PREMISES: In consideration of the Rent and the provisions of this Lease, Landlord leases to Tenant and Tenant accepts from Landlord the Leased Premises. Tenant's Square Footage is an amount based on The BOMA standards as attached hereto in Schedule 8. 2.2 PRIOR OCCUPANCY: Tenant shall not occupy the Leased Premises prior to Lease Commencement Date except with the express prior written consent of Landlord. If with Landlord's consent Tenant occupies the Leased Premises, Tenant shall pay Landlord for the period from the first day of such occupancy rent in the amount specified in Article 1.1 to be payable on the first day of such occupancy and thereafter on the first day of every calendar month until the first day of the Lease Term. A prorated monthly installment shall be paid for the fraction of the month if Tenant's occupancy of the Leased Premises commences on any day other than the first day of the month. If Tenant shall occupy the Leased Premises prior to Lease Commencement Date, all covenants 5 and conditions of this Lease shall be binding on the parties commencing at such prior occupancy. ARTICLE THREE PAYMENT OF RENT AND OPERATING COSTS 3.1 RENT: Tenant shall pay each monthly installment of Base Rent in advance on the first calendar day of each month, together with each monthly installment of Tenant's Pro Rata Share of Project Operating Costs. Monthly installments for any fractional calendar month, at the beginning or and of the Lease Term, shall be prorated based on the number of days in such month. Base Rent, Tenant's Pro Rata Share of Building Operating Costs and Tenant's Pro Rata Share of Project Operating Costs, together with all other amounts payable by Tenant to Landlord under this Lease, including, without limitation, any late charges and interest due Landlord for Rent not paid when due, shall be sometimes referred to collectively as "Rent". Tenant shall pay all Rent, without deduction or set-off, to Landlord or Managing Agent at a place specified by Landlord. Rent not paid when due shall bear interest until paid, at the rate of 2% per month from the date when due. Tenant shall also pay a late charge of $50 with each late payment of rent, if rent is not paid within ten days of the due date. 3.3 (Sic.) DEPOSIT; PREPAID RENT: Tenant has paid to Landlord the Deposit and Prepaid Rent as security for performance of Tenant's obligations under this Lease. In the event Tenant fully complies with all the terms and conditions of this Lease, the Deposit shall be refunded to Tenant, without interest unless otherwise required by law, upon expiration of this Lease. Landlord may, but is not obligated to, apply a portion of the Deposit to cure any default hereunder and Tenant shall pay on demand the amount necessary to restore the Deposit in full within 10 days after notice by Landlord. 3.4 OPERATING COSTS: Tenant shall pay Tenant's Pro Rata Share of Building Operating Costs and Project Operating Costs as follows: a. "Building Operating Costs" shall mean all expenses relating to the Leased Premises or the Building not for the exclusive use of the Tenant or for the exclusive use of any other tenant, which are shared in common with other tenants in the Building, including but not limited to: utilities not separately metered to individual tenants; insurance premiums and (to the extent used) deductibles; maintenance, repairs and replacements; refurbishing and repainting; cleaning, janitorial and other services; equipment, tools, materials and supplies; air conditioning, heating and elevator service; security; employees and contractors; resurfacing and restripping of walks, drives and parking areas; signs, directories and markers; landscaping; and snow and rubbish removal. Building Operating Costs shall not include expenses for legal services, real estate brokerage and leasing commissions, Landlord's income taxes, income tax accounting, interest, depreciation, general corporate overhead, or capital improvements to the Building except for capital 6 improvements installed for the purpose of reducing or controlling expenses, or required by any governmental or other authority having or asserting jurisdiction over the Building. If any expense, though paid in one year, relates to more than one calendar year such expenses shall be proportionately allocated among such related calendar years. b. "Project Operating Costs" shall mean all expenses relating to the Project which are shared in common with the Building and other buildings in the Project not for the exclusive use of the Building and not exclusively attributable to the Building or any other building in the Project, including but not limited to: real estate taxes and assessments; gross rents, sales, use, business, corporation, or other taxes (except income taxes); utilities not separately paid by tenants; insurance premiums and (to the extent used) deductibles; maintenance, repairs and replacements; refurbishing and repainting; cleaning, janitorial and other service not exclusively performed for other buildings; equipment, tools, materials and supplies; property management including management fees comparable to those being paid at similar buildings in the Costa Mesa area; security; employees and contractors; resurfacing and restripping of walks, drives and parking areas; signs, directories and markers; landscaping; and snow and rubbish removal. Project Operating Costs shall not include expenses for legal services, real estate brokerage and leasing commissions, Landlord's income taxes, income tax accounting, interest, the depreciation, general corporate overhead, or capital improvements to the Project except for capital improvements installed for the purpose of reducing or controlling expenses, or required by any governmental or other authority having or asserting jurisdiction over the Project. If any expense, though paid in one year, relates to more than one calendar year such expenses shall be proportionately allocated among such related calendar years. c. Tenant shall pay, in equal monthly installments, Tenant's Pro Rata Share of Building Operating Costs and Project Operating Costs pursuant to paragraph 1.1g above for each calendar year which falls (in whole or in part) during the Lease Term (prorated for any partial calendar year at the beginning or end of the Lease Term). Annually, or from time to time, based on actual and good faith projections of Project Operating Cost data, Landlord may adjust its estimate of Operating Costs upward or downward. All monthly installments are due 15 days after notice to Tenant of a revised estimate of Building Operating Costs and Project Operating Costs and shall be in equal monthly amounts sufficient to result in the unpaid balance of Tenant's Pro Rata Share of Building Operating Costs and Project Operating Costs being paid in full by the end of the calendar year in which such adjustment is made, and thereafter shall be in equal amounts sufficient to result in Tenant's Pro Rata Share of Building Operating Costs and Project Operating Costs being paid in full by the end of each succeeding calendar year. In the event that the Project is not 7 fully leased during any calendar year, Landlord may make appropriate adjustments to the Building Operating Costs and Project Operating Costs to adjust such expenses to a 95% leased basis, and such adjusted expenses shall be used for purposes of this paragraph 3.4. d. As soon as possible, each year Landlord shall compute the actual Building Operating Costs and Project Operating Costs for the prior calendar year, and shall give notice thereof to Tenant. Within 30 days after receipt of such notice, Tenant shall pay any deficiency in Tenant's Pro Rata Share of Building Operating Costs and Project Operating Costs for the prior calendar year (prorated for any partial calendar year at the beginning or end of the Lease Term. In the event of overpayment by Tenant, Landlord shall apply the excess to the next payment of Rent when due, until such excess is exhausted or until no further payments of Rent are due, in which case, Landlord shall pay to Tenant the balance of such excess within 30 days thereafter. 3.5 TAXES: In addition to the Base Rent and other sums to be paid by Tenant hereunder, tenant shall reimburse Landlord, as additional Rent, upon demand, any and all taxes payable by Landlord, (a) upon, measured by or reasonably attributable to the cost or value of Tenant's equipment, fixtures and other personal property located in the Leased Premises or by the cost or value of any leasehold improvements made in or to the Leased Premises by Tenant, regardless of whether title to such improvements are in Tenant or Landlord; (b) upon or measured by the monthly rental payable hereunder, including, without limitation, any gross receipts tax or excise tax; (c) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Leased Premises or any portion thereof except for income taxes; (d) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Leased Premises. ARTICLE FOUR IMPROVEMENTS BY LANDLORD 4.1 CONSTRUCTION CONDITIONS: Landlord shall construct the improvements described in the work letter attached hereto as SCHEDULE 6 (the "Improvements"). The expenses to be incurred as between Landlord and Tenant for construction of the Improvements are specified in SCHEDULE 6. If any act, omission or change requested or caused by Tenant increases the cost of work or materials or the time required for completion of construction, Tenant shall reimburse Landlord or such increase in cost at the time the increased cost is incurred and shall reimburse Landlord for any loss in Rent at the time the Rent would have become due. 8 4.2 COMMENCEMENT OF POSSESSION: If the Leased Premises are not substantially complete by the scheduled Lease Commencement Date, subject only to items which do not materially affect the use thereof, then the Lease business Commencement Date shall be extended to the date 5 business days after Landlord shall notify Tenant that the Leased Premises are ready for occupancy. In such an event the Lease Expiration Date shall remain the same. If Landlord fails to cause the Leased Premises to be ready for occupancy at the time of the scheduled Lease Commencement Date, (i)neither Landlord nor Landlord's agents, officers, employees, or contractors shall be liable for any damage, loss, liability or expense caused thereby, (ii) nor shall this Lease become void or voidable unless such failure continues for more than 180 days, in which case Tenant may terminate this Lease upon 20 days written notice to Landlord. Prior to occupying the Leased Premises, Tenant shall execute and deliver to Landlord a letter in the form attached as SCHEDULE 7, acknowledging the Lease Commencement Date and certifying that the Improvements have been substantially completed and that Tenant has examined and accepted the Leased Premises. Tenant hereby authorizes any agent or employee who receives the keys to the Leased Premises on behalf of Tenant to execute and deliver such letter in Tenant's name. If Tenant fails to deliver such letter, Tenant shall conclusively be deemed to have made such acknowledgment and certification by occupying the Leased Premises. ARTICLE FIVE PROJECT SERVICES 5.1 PROJECT SERVICES: Landlord shall furnish (unless other arrangements are agreed to): a. Utility Services: The utility services listed on SCHEDULE 3 ("Utility Services"). Should Tenant, in Landlord's sole judgment, use additional, unusual or excessive Utility Services, Landlord reserves the right to charge for such services as determined either by a separate submeter, installed at Tenant's expense, or by methods specified by an engineer selected by Landlord. b. Maintenance Services: Maintenance of all interior and exterior areas including lighting, landscaping, cleaning, painting, maintenance and repair of the exterior of the Building and its structural portions and roof, including all of the services listed on SCHEDULE 4 ("Maintenance Services"). c. Parking: Parking under the terms and conditions described in SCHEDULE 5 ("Parking") Utility Services, Maintenance Services and Parking described above shall be collectively referred to as "Project Services". The cost of Project Services shall be either billed to and paid for directly by Tenant or shall be part of Building Operating Costs or Project Operating Costs. 9 5.2 INTERRUPTION OF SERVICES: Landlord does not warrant that any of the Project Services will be free from interruption. Any Project Service may be suspended by reason of accident or of necessary repairs, alterations or improvements, or by strikes or lockouts, or by reason of operation of law, or causes beyond the reasonable control of Landlord. Subject to possible rent abatement as may be provided pursuant to the conditions described in Article 8, any such interruption or discontinuance of such Project Services shall never be deemed a disturbance of Tenant's use and possession of the Leased Premises, or render Landlord liable to Tenant for damages by abatement of rent or otherwise, or relieve Tenant from performance of Tenant's obligations under this Lease. However, Landlord shall use its best efforts to cause the Project Services furnished by or through Landlord to be restored promptly. ARTICLE SIX TENANT'S COVENANTS 6.1 USE OF LEASED PREMISES: Tenant agrees to: a. Permitted Usage: Continuously use the Leased Premises for the Permitted Purpose only and for no other purpose. b. Compliance with Laws: Comply with the provisions of all recorded covenants, conditions and restrictions and all building, zoning, fire and other governmental laws, ordinances, regulations or rules applicable to the Leased Premises and all reasonable requirements of the carriers of insurance covering the Project. c. Nuisances or Waste: Not do or permit anything to be done in or about the Leased Premises, or bring or keep anything in the Leased Premises that may unreasonably increase Landlord's fire and extended coverage insurance premium, damage the Building or the Project, constitute waste, constitute an immoral purpose, or be a nuisance, public or private, or menace or other disturbance to tenants of adjoining premises or anyone else, or use or store any toxic chemicals, except for copier toners and developers, and blueprint machine ammonia, wastes, elements or substances in the Leased Premises. d. Alterations and Improvements: Make no alterations or improvements to the Leased Premises without the prior written approval of Landlord and Landlord's mortgagee, if any. Any such alterations or improvements by Tenant shall be done in a good and workmanlike manner, at Tenant's expense, by a licensed contractor approved by Landlord in conformity with plans and specifications approved by Landlord. If requested by Landlord, Tenant will post a bond or other security reasonably satisfactory to Landlord to protect Landlord against liens arising from work performed for Tenant. If alterations or improvements are less than $5,000 Tenant, will not be required to post a bond or other security. 10 e. Liens: Keep the Leased Premises, the Building and the Project free from liens arising but of any work performed, materials furnished or obligations incurred by or for Tenant. If, at any time, a lien or encumbrance is filed against the Leased Premises, the Building or the Project as a result of Tenant's work, materials or obligations*, Tenant shall promptly discharge such lien or encumbrance. If such lien or encumbrance has not been removed within 30 days from the date it is filed, Tenant agrees to deposit with Landlord at Landlord's request cash or a bond in an amount equal to 125% of the amount of the lien, to be held by Landlord as security for the lien being discharged. * (except for those Improvements defined in Schedule 6 of the Lease for initial Tenant Improvements). f. Rules and Regulations: Observe, perform and abide by all the rules and regulations reasonably promulgated by Landlord from time to time. SCHEDULE 2 sets forth Landlord's rules and regulations in effect on the date hereof. g. Signage: **Obtain the prior approval of the Landlord and Landlord's mortgagee, if any, before placing any sign or symbol in doors or windows or elsewhere in or about the Leased Premises, or upon any other part of the Building, or Project including building directories. Any signs or symbols which have been placed without Landlord's approval may be removed by Landlord. Upon expiration or termination of this Lease, all signs installed by Tenant shall be removed and any damage resulting therefrom shall be promptly repaired, or such removal and repair may be done by Landlord and the cost charged to Tenant as Rent. **Tenant shall have the right to display its name on the exterior of the building in accordance with the sign ordinance for the Project an approved by the City of Costa Mesa attached hereto as schedule 9. 6.2 INSURANCE: Tenant shall, at its own expense, procure and maintain during the Lease Term comprehensive general liability insurance with respect to the Leased Premises and Tenant's activities in the Leased Premises and in the Building and the Project, providing bodily injury, broad form property damage with a maximum $1,000 deductible, as follows: a. $1,000,000, with respect to bodily injury or death to any one person; b. $3,000,000, with respect to bodily injury or death arising out of any one occurrence; c. $1,000,000 with respect to property damage or other loss arising out of any one occurrence; d. fire and extended casualty insurance covering Tenant's trade fixtures, merchandise and other personal property in a reasonable amount; and 11 e. worker's compensation insurance in at least the statutory amounts. Nothing in this paragraph 6.2 shall prevent Tenant from obtaining insurance of the kind and in the amounts provided for under this paragraph under a blanket insurance policy covering other properties as well as the Leased Premises, provided, however, that any such policy of blanket insurance (i) shall specify the amounts of the total insurance allocated to the Leased Premises, which amounts shall not be less than the amounts required by sections a. through c. hereof, and (ii) such amounts so specified shall be sufficient to prevent any one of the assureds from becoming a co-insurer within the terms of the applicable policy, and (iii) shall, as to the Leased Premises, otherwise comply as to endorsements and coverage with the provisions of this paragraph. Tenant's insurance shall be with a Best's Insurance Reports A+ rated company (or A rated, if Class XIII or larger or with Design Professional Insurance Company, or its successor). Landlord and Landlord's mortgagee, if any, shall be named as "additional insureds" under Tenant's insurance, and such Tenant's insurance shall be primary and non-contributing with Landlord's insurance. Tenant's insurance policies shall contain endorsements requiring 30 days notice to Landlord and Landlord's mortgagee, if any, prior to any cancellation, lapse or nonrenewal or any reduction in amount of coverage. Tenant shall deliver to Landlord as a condition precedent to its taking occupancy of the Leased Premises a certificate or certificates evidencing such insurance. 6.3 REPAIRS: Tenant, at its sole expense, agrees to maintain the interior of the Leased Premises in a neat, clean and sanitary condition. If Tenant fails to maintain or keep the Leased Premises in good repair and such failure continues for 10 days after written notice from Landlord or if such failure results in a nuisance or health or safety risk, Landlord may perform any such required maintenance and repairs and the cost thereof shall be payable by Tenant as Rent within 10 days of receipt of an invoice from Landlord. Tenant shall also pay to Landlord the costs of any repair ordinary wear and tear excepted to the Building or Project necessitated by any act or neglect of Tenant. Tenant waives the provisions of Sections 1941 of the Civil Code of the State of California and any other statutes or laws permitting repairs by a tenant at the expense of a landlord or to terminate a lease by reason of the condition of the Leased Premises. 6.4 ASSIGNMENT AND SUBLETTING: Tenant shall not assign, mortgage, pledge or encumber this Lease, or permit all or any part of the Leased Premises to be subleased to another, without the prior written consent of Landlord and Landlord's mortgagee, if any. Any transfer of this Lease by merger, consolidation, reorganization or liquidation of Tenant, or by operation of law, or change in ownership of or power to vote the majority of the outstanding voting stock of a 12 corporate Tenant, or by change in ownership of a controlling partnership interest in a partnership Tenant, shall constitute an assignment for the purposes of this paragraph. Tenant may sublet or assign, without Landlord's approval, but with notice to Landlord to any entity in which it holds, or its shareholders hold, at least a 33% interest. Landlord agrees that it will not unreasonably withhold its consent to Tenant's assigning this Lease or subletting the Leased Premises. In addition to other reasonable bases, Tenant hereby agrees that Landlord shall be deemed to be reasonable in withholding its consent, if (a) (Sic.) or (c) to any party who is then a tenant of the Building or the Project if Landlord has comparable area; or (d) Tenant is in default under any of the terms, covenants, conditions, provisions and agreements of this Lease past any period of cure provided for herein at the time of request for consent or on the effective date of such subletting or assigning; or (e) (Sic.) or (f) the proposed subtenant or assignee is, in Landlord's good faith judgment, incompatible with other tenants in the Building, or seeks to use any portion of the Leased Premises for a use not consistent with other uses in the Building, or is financially incapable of assuming the obligations of this Lease. Tenant shall submit to Landlord the name of a proposed assignee or subtenant, the terms of the proposed assignment or subletting, the nature of the proposed subtenant's business and such information as to the assignee's or subtenant's financial responsibility and general reputation as Landlord may reasonably require. No subletting or assignment, even with the consent of Landlord, shall relieve Tenant of its primary obligation to pay the Rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any other person shall not be deemed to be waiver by Landlord of any provision of this Lease or to be a consent to any assignment, subletting or other transfer. Consent to one assignment, subletting or other transfer shall not be deemed to constitute consent to any subsequent assignment, subletting or other transfer. 6.5 ESTOPPEL CERTIFICATE: From time to time and within 10 days after request by Landlord, Tenant shall execute and deliver a certificate to any proposed lender or purchaser, or to Landlord, together with a true and correct copy of this Lease, certifying with any appropriate exceptions, (i) that this Lease is in full force and effect without modification, (ii) the amount, if any, of Prepaid Rent and Deposit paid by Tenant to Landlord, (iii) the nature and kind of concessions, rental or otherwise, if any, which Tenant has received or is entitled to receive, (iv) that Landlord has performed all of its obligations due to be performed under this Lease and that there are no defenses, counterclaims, deductions or offsets outstanding or other excuses for Tenant's performance under this Lease, and (v) any other fact reasonably requested by Landlord or such proposed lender or purchaser. 13 6.6 BROKERAGE COMMISSIONS: Tenant represents to the Landlord that no broker or agent was instrumental in procuring or negotiating or consummating this Lease other than Broker of Record, and Tenant agrees to defend and indemnify Landlord against any loss, expense or liability incurred by Landlord as a result of a claim by any other broker or finder in connection with this Lease or its negotiation. ARTICLE SEVEN LANDLORDS RESERVED RIGHTS 7.2 (Sic.) ADDITIONAL RIGHTS RESERVED TO LANDLORD: Without notice and without liability to Tenant or without effecting an eviction or disturbance of Tenant's use or possession, Landlord shall have the right to (i) grant utility easements or other easements in, or replat, subdivide or make other changes in the legal status of the land underlying the Building or the Project as Landlord shall deem appropriate in its sole discretion, provided such changes do not substantially interfere with Tenant's use of the Leased Premises for the Permitted Purpose; (ii) enter the Leased Premises at reasonable times and at any time in the event of an emergency to inspect, alter or repair the Leased Premises or the Building and to perform any acts related to the safety, protection, reletting, sale or improvement of the Leased Premises or the Building; (iii) (Sic.) (iv) change the name or street address of the Building or the Project; (v) install and maintain signs on and in the Building and the Project; and (vi) make such reasonable rules and regulations as, in the sole judgment of Landlord, may be needed from time to time for the safety of the tenants, the care and cleanliness of the Leased Premises, the Building and the Project and the preservation of good order therein. ARTICLE EIGHT CASUALTY AND UNTENANTABILITY 8.1 CASUALTY AND UNTENANTABILITY: If the Building is made substantially untenantable or if Tenant's use and occupancy of the Leased Premises are substantially interfered with due to damage to the common areas of the Building or the Leased Premises are made wholly or partially untenantable by fire or other casualty, Landlord may, by notice to Tenant within 60 days after the damage, terminate this Lease. Such termination shall become effective as of the date of such casualty. If at any time during the last six months of the term of this Lease, there is damage, which the Leased Premises are made partially untenantable, Landlord may at Landlord's option cancel and terminate this Lease as of the date of occurrence of such damage by giving written notice to Tenant of Landlord's election to do so within 30 days after the date of occurrence of such damage. In the event that Tenant has an option to renew this Lease, and the time within which said option may be exercised has not yet expired, Tenant shall exercise such option, if it is to be exercised at all, no later than 20 days after the occurrence of said damage during the last six months of the term of this Lease. If Tenant duly exercises such option during said 20 day period, Landlord shall repair such damage as 14 soon as reasonably possible and this Lease shall continue in full force and effect. If Tenant fails to exercise such option during said 20 day period, then Landlord may, at Landlord's option, terminate and cancel this Lease as of the expiration of said 20 day period by giving written notice to Tenant of Landlord's election to do so. If the Leased Premises are made partially or wholly untenantable by fire or other casualty and this Lease is not terminated as provided above, Landlord shall restore the Leased Premises to the condition specified in the work letter described in SCHEDULE 6. Tenant waives the provisions of Section 1932 of the Civil Code of the State of California and any other statute or law permitting Tenant to terminate this lease in the event of casualty to the Leased Premises. If the Landlord does not terminate this Lease as provided above, and Landlord fails within 180 days from the date of such casualty to restore the damaged common areas thereby eliminating substantial interference with Tenant's use and occupancy of the Leased Premises, or fails to restore the Leased Premises to the condition specified in the work letter described in SCHEDULE 6, Tenant may terminate this Lease as of the end of such 180 day period. In the event of termination of this Lease pursuant to this article 8, Rent shall be prorated on a per diem basis and paid to the date of the casualty, unless the Leased Premises shall be tenantable, in which case Rent shall be payable to the date of the lease termination. If the Leased Premises are untenantable and this Lease is not terminated, Rent shall abate on a per diem basis from the date of the casualty until the Leased Premises are ready for occupancy by Tenant. If part of the Leased Premises are untenantable, Rent shall be prorated on a per diem basis and apportioned in accordance with the part of the Leased Premises which is usable by Tenant until the damaged part is ready for Tenant's occupancy. Notwithstanding the foregoing, if any damage was proximately caused by an act or omission of Tenant, its employees, agents, contractors, licensees or invitees, then, in such event, Tenant agrees that Rent shall not abate or be diminished during the term of this Lease. ARTICLE NINE CONDEMNATION 9.1 CONDEMNATION: If all or any part of the Leased Premises shall be taken under power of eminent domain or sold under imminent threat to any public authority or private entity having such power, this Lease shall terminate as to the part of the Leased Premises so taken or sold, effective as of the date possession is required to be delivered to such authority. In such event, Base Rent and Tenant's Pro Rata Share of Building Operating Costs or Project Operating Costs shall abate in the ratio that the portion of Tenant's Square Footage taken or sold bears to Tenant's Square Footage. If a partial taking or sale of the Leased Premises, the Building or the Project (i) substantially reduces Tenant's Square Footage resulting in a 15 substantial inability of Tenant to use the Leased Premises for the Permitted Purpose, or (ii) renders the Building or the Project commercially unviable to Landlord in Landlord's sole opinion, either Tenant in the case of (i), or Landlord in the case of (ii), may terminate this Lease by notice to the other party within 30 days after the terminating party receives written notice of the portion to be taken or sold. Such termination shall be effective 180 days after notice thereof, or when the portion is taken or sold, whichever is sooner. All condemnation awards and similar payments shall be paid and belong to Landlord, except any amounts awarded or paid specifically to Tenant for removal and reinstallation of Tenant's trade fixtures, personal property or Tenant's moving costs. ARTICLE TEN WAIVER OF CERTAIN CLAIMS 10.1 WAIVER OF CERTAIN CLAIMS: * Tenant, to the extent permitted by law, waives all claims it may have against Landlord, and against Landlord's agents and employees for any damages sustained by Tenant or by any occupant of the Leased Premises, or by any other person, resulting from any cause arising at any time.* Tenant agrees to hold Landlord harmless and indemnified against claims and liability for injuries to all persons and for damage to or loss of property occurring in or about the Leased Premises, due to any act of negligence or default under this Lease by Tenant, its contractors, agents, employees, licensees and invitees. *Except for those claims arising from the areas negligence or willful misconduct of Landlord. 10.2 WAIVER OF SUBROGATION: Tenant and Landlord release each other and waive any right of recovery against each other for loss or damage to the waiving party or its respective property, which occurs in or about the Leased Premises, whether due to the negligence of either party, their agents, employees, officers, contractors, licensees, invitees or otherwise, to the extent that such loss or damage is insurable against under the terms of standard fire and extended coverage insurance policies. Tenant and Landlord agree that all policies of insurance obtained by either of them in connection with the Leased Premises shall contain appropriate waiver of subrogation clauses. 10.3 LIMITATION OF LANDLORD'S LIABILITY: The obligations of Landlord under this Lease do not constitute personal obligations of the individual partners, shareholders, directors, officers, employees or agents of Landlord, and Tenant shall look solely to Landlord's interest in the Leased Premises and to no other assets of Landlord for satisfaction of any liability in respect of this Lease. Tenant will not seek recourse against the individual partners, shareholders, directors, officers, employees or agents of Landlord or any of their personal assets for such satisfaction. Notwithstanding any other 16 provisions contained herein, Landlord shall not be liable to Tenant, its contractors, agents or employees for any consequential damages or damages for loss of profits. ARTICLE ELEVEN TENANTS DEFAULT AND LANDLORD'S REMEDIES 11.1 TENANT'S DEFAULT: It shall be an "Event of Default" if Tenant shall (i) fail to pay any monthly installment of Base Rent or of Tenant's Pro Rata Share of Building Operating Costs or Project Operating Costs, or any other sum payable hereunder within 10 days after such payment is due and payable; (ii) violate or fail to perform any of the other conditions, covenants or agreements herein made by Tenant, and such violation or failure shall continue for 15 days after written notice thereof to Tenant by Landlord; (iii) make a general assignment for the benefit of its creditors or file a petition for bankruptcy or other reorganization, liquidation, dissolution or similar relief; (iv) have a proceeding filed against Tenant seeking any relief mentioned in (iii) above; (v) have a trustee, receiver or liquidator appointed for Tenant or a substantial part of its property; (vi) abandon or vacate the Leased Premises; (vii) default under any other lease, if any, within the Building or the Project; or (viii) if Tenant is a partnership, if any partner of the partnership is involved in any of the acts or events described in subparagraphs (i) through (vii) above. 11.2 REMEDIES OF LANDLORD: If an Event of Default occurs, Landlord, at any time thereafter and without waiving any other rights available to Landlord, at law or in equity, may: (i) If Landlord does not terminate this Lease or Tenant's right to possession of the Leased Premises, and whether or not Tenant has vacated or abandoned the Leased Premises, and provided that Landlord promptly notifies Tenant in writing that Tenant's right to possession has not been terminated and that Tenant may assign its interest in this lease with the consent of Landlord, which consent shall not unreasonably be withheld (it being understood that Landlord's acts of maintenance or preservation of the Leased Premises or efforts to relet the same, or the appointment of a receiver upon the initiative of Landlord to protect Landlord's interest under this lease shall not constitute a termination of Tenant's right to possession), enforce all of Landlord's rights and remedies under this lease, including the right to recover rent as it becomes due under this lease; or (ii) declare the term hereof ended, peaceably reenter the Leased Premises, upon three days prior notice, and remove all persons therefrom. In this event, Landlord may exercise any of the remedies set forth in California Civil Code Section 1951.2, including, without limitation thereto, the right of Landlord to recover from Tenant an amount equal to the "worth at the time of the award," as such term is defined in such Section, of the then unpaid rent for the balance of the term of this Lease to the extent that it exceeds the amount of any rental loss that Tenant proves could be reasonably avoided. 17 The remedies granted to Landlord herein in an Event of Default by Tenant are nonexclusive of any other legal remedies or rights available in law or equity to Landlord. No act of Landlord shall be deemed an act terminating this lease or declaring the lease term ended unless a written notice is served upon Tenant by Landlord expressly setting forth therein that Landlord elects to terminate this lease or to declare the term ended. ARTICLE TWELVE TERMINATION 12.1 SURRENDER OF LEASED PREMISES: On expiration of this Lease, if no Event of Default exists, Tenant shall surrender the Leased Premises in the same condition as when the Lease Term commenced, ordinary wear and tear excepted. Except for furnishings, trade fixtures and other personal property installed at Tenant's expense, all alterations, additions or improvements, whether temporary or permanent in character, made in or upon the Leased Premises, either by Landlord or Tenant, shall be Landlord's property and at the expiration or earlier termination of the term shall remain on the Leased Premises without compensation to Tenant, except if requested by Landlord, Tenant, at its expense and without delay, shall remove any alterations, additions or improvements made to the Leased Premises by Tenant designated by Landlord to be removed, and repair any damage to the Leased Premises or the Building caused by such removal. If Tenant fails to repair the Leased Premises, Landlord may complete such repairs and Tenant shall reimburse Landlord for such repair and restoration. Landlord shall have the option to require Tenant to remove all its property. If Tenant fails to remove such property as required under this Lease, Landlord may dispose of such property in its sole discretion without any liability to Tenant, and further may charge the cost of any such disposition to Tenant. 12.2 HOLD OVER TENANCY: If Tenant shall hold over after the Lease Expiration Date, Tenant may be deemed, at Landlord's option, to occupy the Leased Premises as a tenant from month to month, which tenancy may be terminated by one month's written notice. During such tenancy, Tenant agrees to pay to Landlord, monthly in advance, an amount equal to 125% of all Rent which would become due (based on Base Rent and Tenant's Pro Rata Share of Building Operating Costs and Project Operating Costs payable for the last month of the Lease Term, together with all other amounts payable by Tenant to Landlord under this Lease), and to be bound by all of the terms, covenants and conditions herein specified. If Landlord relets the Leased Premises or any portion thereof to a new tenant and the term of such new lease commences during the period for which Tenant holds over, Landlord shall be entitled to recover from Tenant all costs and expenses, attorneys fees, damages or loss of profits incurred by Landlord as a result of Tenant's failure to deliver possession of the Leased Premises to Landlord when required under this Lease. ARTICLE THIRTEEN MISCELLANEOUS 18 13.1 QUIET ENJOYMENT: If and so long as Tenant pays all Rent and keeps and performs each and every term, covenant and condition herein contained on the part of Tenant to be kept and performed, Tenant shall quietly enjoy the Leased Premises without hindrance by Landlord. 13.2 ACCORD AND SATISFACTION: No receipt and retention by Landlord of any payment tendered by Tenant in connection with this Lease shall constitute an accord and satisfaction, or a compromise or other settlement, notwithstanding any accompanying statement, instruction or other assertion to the contrary unless Landlord expressly agrees to an accord and satisfaction, or a compromise or other settlement, in a separate writing duly executed by Landlord. Landlord will be entitled to treat any such payments as being received on account of any item or items of Rent, interest, expense or damage due in connection herewith, in such amounts and in such order as Landlord may determine at its sole option. 13.3 SEVERABILITY: The parties intend this Lease to be legally valid and enforceable in accordance with all of its terms to the fullest extent permitted by law. If any term hereof shall be invalid or unenforceable, the parties agree that such term shall be stricken from this Lease to the extent unenforceable, the same as if it never had been contained herein. Such invalidity or unenforceability shall not extend to any other term of this Lease, and the remaining terms hereof shall continue in effect to the fullest extent permitted by law, the same as if such stricken term never had been contained herein. 13.4 SUBORDINATION AND ATTORNMENT: The rights of Tenant under this Lease are and shall be subordinate to the lien of any first mortgage or first deed of trust, now or hereafter in force against the Building or the Project, and to all advances made or hereafter to be made thereunder ("Superior Instruments"). If requested in writing by Landlord or any first mortgagee or ground lessor of Landlord, Tenant agrees to execute a subordination agreement required to further effect the provisions of this paragraph. In the event of any transfer in lieu of foreclosure or termination of a lease in which Landlord is lessee or the foreclosure of any Superior Instrument, or sale of the Property pursuant to any Superior Instrument, Tenant shall attorn to such purchaser, transferee or lessor and recognize such party as landlord under this Lease, provided such party acquires and accepts the Leased Premises subject to this Lease. The agreement of Tenant to attorn contained in the immediately preceding sentence shall survive any such foreclosure sale or transfer. 13.5 APPLICABLE LAW: This Lease shall be construed according to the laws of the state in which the Leased Premises are located. 13.6 BINDING EFFECT; GENDER: This Lease shall be binding upon and inure to the benefit of the parties and their successors and assigns. 19 It is understood and agreed that the terms "Landlord" and "Tenant" and verbs and pronouns in the singular number are uniformly used throughout this Lease regardless of gender, number or fact of incorporation of the parties hereto. 13.7 TIME: Time is of the essence of this Lease. 13.8 ENTIRE AGREEMENT: This Lease and the schedules and addenda attached set forth all the covenants, promises, agreements, representations, conditions, statements and understandings between Landlord and Tenant concerning the Leased Premises and the Building and the Project, and there are no representations, either oral or written between them other than those in this Lease. This Lease shall not be amended or modified except in writing signed by both parties. Failure to exercise any right in one or more instances shall not be construed as a waiver of the right to strict performance or as an amendment to this Lease. 13.9 NOTICES: All notices pursuant to this Lease shall be in writing and shall be effective when received having been mailed or delivered (i) to Landlord or Tenant at the addresses designated in Article 1.1 with a copy to the Managing Agent, or (ii) to such other addresses as may hereafter be designated by either party by written notice. SUBMISSION OF THIS INSTRUMENT FOR EXAMINATION OR SIGNATURE BY TENANT DOES NOT CONSTITUTE A RESERVATION OF OR OPTION FOR LEASE, AND IT IS NOT EFFECTIVE AS A LEASE OR OTHERWISE UNTIL EXECUTION AND DELIVERY BY BOTH LANDLORD AND TENANT. PROVIDED THE LANDLORD DELIVERS A SIGNED COPY OF THE LEASE WITHIN THIRTY DAYS OF THE RECEIPT BY LANDLORD OF A COPY OF THE LEASE SIGNED BY TENANT. This Lease is executed as of the date first written above. WITNESS: LANDLORD: SCRIPPS CENTER ASSOCIATES A California General Partnership /s/ William Bowman - ------------------ /s/ Steven M. Case BY: ALLSTATE INSURANCE COMPANY - ------------------ an Illinois Corporation ----------------------- General Partner, BY: /s/ M.J.Resnick ------------------- BY: Signed (illegible) And BY: ALLSTATE LIFE INSURANCE COMPANY BY: ALLSTATE INSURANCE COMPANY an Illinois Corporation ----------------------- General Partner, BY: /s/ M.J.Resnick ------------------- BY: Signed (illegible) 20 WITNESS: TENANT: Keith Engineering, Inc. /s/ William Bowman By: /s/ Aram Keith - ------------------ ----------------------- Its President (signed) ---------------------- /s/ Steven M. Case - ------------------- By: /s/ Floyd Reid ----------------------- Its Secretary (signed) ----------------------- GUARANTOR: By _______________________ By _______________________ 21 SCHEDULE 1 DESCRIPTION OF THE LEASED PREMISES AND FLOOR PLAN ------------------------------------------------- 22 SCHEDULE 2 RULES AND REGULATIONS --------------------- 1. The sidewalks, entrances, halls, corridors, elevators and stairways of the Building and Project shall not be obstructed or used as a waiting or lounging place by tenant, its agents, servants, employees, invitees, licensees and visitors. All entrance doors leading from any Leased Premises to the hallways are to be kept closed at all times. 2. In case of invasion, riot, public excitement or other commotion, Landlord also reserves the right to prevent access to the Building during the continuance of same. Landlord shall in no case be liable for damages for the admission or exclusion of any person to or from the Building. 3. Landlord will furnish tenant with two keys to each door lock on the Leased Premises, and Landlord may make a reasonable charge for any additional keys and access cards requested by tenant. Tenant shall not alter any lock, or install new or additional locks or bolts, on any door without the prior written approval of Landlord. In the event of such alteration for installation approval by Landlord, tenant shall supply Landlord with a key for any such additional or altered lock or bolt. Tenant, upon the expiration or termination of its tenancy, shall deliver to Landlord all keys and access cards in tenant's possession for all locks and bolts in the Building. 4. Tenant shall not cause any unnecessary labor by reason of tenant's carelessness or indifference in the preservation of good order and cleanliness of the Leased Premises. Tenant will see that (i) the windows are closed, (ii) the doors securely locked, and (iii) all water faucets and other utilities are shut off (so as to prevent waste or damage) each day before leaving the Leased Premises. In the event tenant must dispose of crates, boxes, etc. which will not fit into office waste paper baskets, it will be the responsibility of tenant to dispose of same. In no event shall tenant set such items in the public hallways or other areas of the Building or garage facility, excepting tenant's owned Leased Premises, for disposal. 5. Landlord and Tenant shall mutually agree to prescribe the date, time, method and conditions that any personal property, equipment, trade fixtures, merchandise and other similar items shall be delivered to or removed from the Building for Tenant's initial move in only. No iron safe or other heavy or bulky object shall be delivered to or removed from the Building, except by experienced safe men, movers or riggers approved in writing by Landlord. All damage done to the Building by the delivery or removal of such items, or by reason of their presence in the Building, shall be paid to Landlord, immediately upon demand, by the tenant by, through, or under whom such damage was done. There shall not be used in any space, or in the public halls of the Building, either by tenant or by jobbers or others, in the 23 delivery or receipt of merchandise, any hand trucks, except those equipped with rubber tires. 6. The walls, partitions, skylights, windows, doors and transoms that reflect or admit light into passageways or into any other part of the Building shall not be covered or obstructed by tenant. 7. The toilet rooms, toilets, urinals, wash bowls and water apparatus shall not be used for any purpose other than for those for which they were constructed or installed, and no sweepings, rubbish, chemicals, or other unsuitable substances shall be thrown or placed therein. The expense of any breakage, stoppage or damage resulting from violation(s) of this rule shall be borne by tenant, or by its agents, employees, invitees, licensees or visitors, such breakage, stoppage or damage shall have been caused. 8. No sign, name, placard, advertisement or notice visible from the exterior of any Leased Premises, shall be inscribed, painted or affixed by tenant on any part of the Building or Project without the prior written approval of Landlord. All signs or letterings on doors, or otherwise, approved by Landlord shall be inscribed, painted or affixed at the sole cost and expense of the tenant, by a person approved by Landlord. A directory containing the names of all tenants in the Building shall be provided by Landlord at an appropriate place. Tenant shall have the right to display its name on the exterior of the building in accordance with the sign ordinance for the Project as provided by the City of Costa Mesa pursuant to paragraph 6.1G. 9. No signalling, telegraphic or telephonic instruments or devices, or other wires, instruments or devices, shall be installed In connection with any Leased Premises without the prior written approval of Landlord. Such installations, and the boring or cutting for wires, shall be made at the sole cost and expense of the tenant and under control and direction of Landlord. Landlord retains, in all cases, the right to require (i) the installation and use of such electrical protecting devices that prevent the transmission of excessive currents of electricity into or through the Building, (ii) the changing of wires and of their installation and arrangement underground or otherwise as Landlord may direct, and (iii) compliance on the part of all using or seeking access to such wires with such rules as Landlord may establish relating thereto. All such wires used by tenant must be clearly tagged at the distribution boards and junction boxes and elsewhere in the Building, with (i) the number of the Leased Premises to which said wires lead, (ii) the purpose for which said wires are used, and (iii) the name of the company operating same. 10. Tenant, their agents, servants or employees, shall not (a) go on the roof of the Building, (b) use any additional method of heating or air conditioning the Leased Premises, (c) sweep or throw any dirt or other substance from the Leased Premises into any of the halls, corridors, elevators, or stairways of the Building, (d) bring in or keep in or about the Leased Premises any vehicles except for company vehicles of Tenant brought into the warehouse area for minor repairs 24 or maintenance, or animals of any kind, (e) install any radio or television antennae or any other device or item on the roof, exterior walls, windows or windowsills of the Building, (f) place objects against glass partitions, doors or windows which would be unsightly from the interior or exterior of the Building, (g) use any Leased Premises (i) for lodging or sleeping, (ii) for cooking (except that the use by tenant of Underwriter's Laboratory equipment for brewing coffee, tea and similar beverages or a cafeteria for Tenant's own employees shall be permitted, provided that such use is in compliance with law), (h) cause or permit unusual or objectionable odor to be produced or permeate from the Leased Premises, (including, without limitation, duplicating or printing equipment fumes except for copier and blueprint machines, and (i) (Sic.) Tenant, its agents, servants and employees, invitees, licensees, or visitors shall not permit the operation of any musical or sound producing instruments or device which may be heard outside Leased Premises, Building or garage facility, or which may emit electrical waves which will impair radio or television broadcast or reception from or into the Building and Project. 11. Tenant shall not store or use in any Leased Premises any (a) ether, naptha, phosphorous, benzol, gasoline, benzine, petroleum, crude or refined earth or coal oils, flashlight powder, kerosene or camphene, (b) any other flammable, combustible, explosive or illuminating fluid, gas or material of any kind, and (c) any other fluid, gas or material of any kind having an offensive odor, without the prior written consent of Landlord. 12. No canvassing, soliciting, distribution of hand bills or other written material, or peddling shall be permitted in the Building or the Project, and tenant shall cooperate with Landlord in prevention and elimination of same. 13. Tenant shall give Landlord prompt notice of all accidents to or defects in air conditioning equipment, plumbing, electrical facilities or any part or appurtenances of Leased Premises. 14. If any Leased Premises becomes infested with vermin, tenant, at its sole cost and expense, shall cause its premises to be exterminated from time to time to the satisfaction of the Landlord and shall employ such exterminators as shall be approved by Landlord. 15. No curtains, blinds, shades, screens, awnings or other coverings or projections of any nature shall be attached to or hung in, or used in connection with any door, window or wall of the premises of the building without the prior written consent of Landlord. Landlord will not unreasonably withhold consent. 16. Landlord shall have the right to prohibit any advertising by tenant which, in Landlord's opinion, tends to impair the reputation of Landlord or of the Building, or its desirability as an office building for existing or prospective tenant who require the highest standards 25 of integrity and respectability, and upon written notice from Landlord, tenant shall refrain from or discontinue such advertising. 17. Wherever the word "tenant" occurs, it is understood and agreed that it shall also mean tenant's associates, employees, agents and any other person entering the Building or the Leased Premises under the express or implied invitation of tenant. Tenant shall cooperate with Landlord to assure compliance by all such parties with rules and regulations. 18. Landlord reserves the right to make reasonable amendments, modifications and additions to the rules and regulations heretofore set forth, and to make additional reasonable rules and regulations, as in Landlord's sole judgment may from time to time be needed for the safety, care, cleanliness and preservation of good order of the Building and Project. 26 SCHEDULE 3 UTILITY SERVICES ---------------- The Landlord shall provide, the following services as part of Operating Costs, except as otherwise provided: (1) Air Conditioning and heat for normal purposes at all times. Tenant agrees not to use any apparatus or device, in or upon or about the Leased Premises, and Tenant further agrees not to connect any apparatus or device with the conduits or pipes, or other means by which such services are supplied, for the purpose of using additional or unusual amounts of such services, without written consent of Landlord. Should Tenant use such services under this provision to excess, Landlord reserves the right to charge for such services. The charge shall be payable as additional Rent. Should Tenant refuse to make payment upon demand of Landlord, such excess charge constitutes a breach of the obligation to pay Rent under this Lease and shall entitle Landlord to the rights hereinafter granted for such breach. (2) Electric power for lighting and operating of office machines, air conditioning and heating as may be required for comfortable occupancy of the premises. Electric power furnished by Landlord is intended to be that consumed in normal office use for the lighting, heating, ventilating, air conditioning and small office machines. Landlord reserves the right if consumption of electricity exceeds that required for normal office use as specified, to include a charge to be based upon the average cost per unit of electricity for this Building applied to the excess use as determined by a submeter to be furnished and installed at the option of the Tenant and at its expense. If the Tenant refuses to pay upon demand of Landlord such excess charge, such refusal shall constitute a breach of the obligation to pay rent under this Lease and shall entitle Landlord to the rights hereinafter granted for such breach. (3) Water for drinking, lavatory and toilet purposes from the regular Building supply (at the prevailing temperature) through fixtures installed by Landlord, (or by Tenant with Landlord's written consent). 27 SCHEDULE 4 MAINTENANCE SERVICES -------------------- (1) Subject to the terms of this Lease, Landlord shall supply exterior lamp replacement, exterior window washing with reasonable frequency, and janitorial services to the common areas and Leased Premises during the time and in the manner that such janitorial services are customarily furnished in general office buildings in the area. (2) Landlord agrees to reasonably maintain the exterior and interior of the Leased Premises to include lawn and shrub care, snow removal, maintenance of the structure, roof, mechanical and electrical equipment, architectural finish, and so on, excluding only those items specifically excepted elsewhere in this Lease. 28 SCHEDULE 5 PARKING ------- Landlord hereby grants to Tenant a license to the use during the term of this Lease the spaces described in Article 1.1j. Said parking spaces shall be made available to Tenant on an allocated basis and Tenant agrees to comply with such reasonable rules and regulations as may be made by Landlord from time to time in order to insure the proper operation of the parking facilities. Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other tenants in the use of parking facilities. Landlord reserves the right in its sole discretion to determine whether parking facilities are becoming crowded, and in such event, to allocate specific parking spaces among Tenant and other tenants or to take such other steps necessary to correct such condition, including but not limited to policing and towing, and if Tenant, its agents, officers, employees, contractors, licensees or invitees are deemed by Landlord to be contributing to such condition, to charge to Tenant as Rent that portion of the cost thereof which Landlord reasonably determines to be caused thereby. Landlord may, in its sole discretion, change the location and nature of the parking spaces available to Tenant, provided that after such change, there shall be available to Tenant approximately the same number of spaces as available before such change. Tenant shall have nine (9) reserved parking spaces. The location of the reserved parking spaces are shown in Parking Exhibit 1. 29 SCHEDULE 6 Scripps Center Office Building -------------- Costa Mesa, California City, State ---------------------- Date__________________ WORK LETTER AGREEMENT --------------------- Keith Engineering, Inc. - ----------------------- 200 Baker Street - ---------------- Costa Mesa, California 92626 - ---------------------------- Re: Suite Building C, Scripps Center Office Building -------------- Gentlemen: You (referred to as "Tenant"), and we (referred to as "Landlord,) are executing, simultaneously with this work letter agreement, a written lease (the "Lease") pertaining to the space referred to above (the "Leased Premises"). This work letter agreement is attached to the Lease as Schedule 6 and made a part thereof. To induce Tenant and Landlord, each, to enter into the Lease (which is hereby incorporated by reference to the extent that the provisions of this work letter agreement may apply thereto) and in consideration of the mutual covenants hereinafter contained, Landlord and Tenant mutually agree as follows: 1. Definitions The terms defined in this paragraph, for purposes of this work ----------- letter agreement, shall have the meanings specified herein, and, in addition to the terms defined herein, terms defined in the Lease shall, for purposes of this work letter agreement, have the meanings specified therein. 1.01 "Base Tenant Improvements" means the Building Standard items which ---- are supplied, installed and finished by Landlord, according to Building Standard specifications and which shall be paid for by Landlord (subject to the Allowance) as provided for in paragraph 2.03 below. 1.02 "Building Standard" means the quantity and quality of materials, ---- finishing and workmanship specified by Landlord for the Building, as set forth on Exhibit I attached hereto and made a part hereof. 1.03 "Construction Documents" means the construction drawings, plans and ---- specifications referred to in paragraphs 2.02 and 2.03 below to be attached hereto and made a part hereof. 1.04 "Extraordinary Tenant Improvements" means any work Tenant requests ---- Landlord to do in connection with the Leased Premises, 30 other than Base Tenant Improvements and which exceed the $25.00 per square foot allowance. 1.05 "Leasehold Improvements" means the aggregate of Base Tenant ---- Improvements and Extraordinary Tenant Improvements, as contemplated by the Construction Documents. 1.06 "Substantial Completion" means that the Leasehold Improvements have ---- been substantially completed according to the Construction Documents, except for items which will not materially affect the use of the Leased Premises or which customarily are deemed to be "punchlist work". 2. Construction Documents; Payments -------------------------------- 2.01 The parties have approved a preliminary floor plan for the Leased ---- Premises, a copy of which is attached to the Lease as Schedule 1 (the "Preliminary Plan"). The estimated cost of completing the Leasehold Improvements according to the Preliminary Plan (the "Estimate") is $________. The Estimate represents Landlord's good faith estimate of the cost of completing the Leasehold Improvements. Landlord shall have no liability if the Final Cost (defined in paragraph 2.03 below) is greater than the Estimate. 2.02 Tenant, within 60 days hereof, shall as a part of the allowance for ---- ---- improvement cause the Consultants (defined below) to prepare and submit to Landlord for approval or disapproval all drawings, plans and specifications necessary to construct the Leasehold Improvements. The following companies shall prepare the drawings, plans and specifications which are to comprise the Construction Documents: Architectural ____________________: Mechanical _______________________: Electrical _______________________: Plumbing _________________________: (collectively, the "Consultants"). The fees and expenses of the Consultants for preparing the initial drawings, plans and specifications which are to comprise the Construction Documents shall be included in the Final Cost (defined in paragraph 2.03 below) and allocated accordingly between Base Tenant Improvements and Extraordinary Tenant Improvements. Tenant shall receive an appropriate credit for any advance payments made to the Consultants. 2.03 Upon Landlord's approval of the final form of the drawings, plans and ---- specifications, which when submitted by Tenant and approved by Landlord shall constitute the Construction Documents, 31 Landlord shall prepare a good faith analysis in its sole judgement of the cost of constructing the Leasehold Improvements according to the Construction Documents (the "Final Cost") and submit such analysis to Tenant for its approval. The Final Cost shall be allocated between the costs attributable to the construction of the Base Tenant Improvements and to be paid for by Landlord (subject to the Allowance, the "Landlord's Share") and the costs or to be otherwise paid for by Tenant (the "Tenant's Share") within 7 days of receipt, Tenant shall approve the Final Cost - (including the allocation thereof). If Tenant does not approve the Final Cost, it shall promptly notify Landlord thereof; in which case Tenant and Landlord shall use their best efforts to amend the Construction Documents in a manner reasonably satisfactory to each. If they are unable to do so within 10 days after Tenant notifies Landlord as provided in the preceding -- sentence, either party may thereafter terminate the Lease by delivering written notice to the other. Tenant acknowledges that Landlord's sole obligation is to pay the costs attributable to the construction of the Base Tenant Improvements, up to an aggregate maximum limit of $ 25.00 per square ------- foot of Tenant's Square Footage (the "Allowance"), and Tenant shall pay all other costs of the construction of the Leasehold Improvements as the Tenant's Share. If the construction Documents require the construction or installation of additional improvements beyond those regularly provided by Landlord in the $ 25.00 per square foot allowance for the core of the Building in which the Leased Premises are located (including, without limitation, extra sprinklers, fire hose cabinets and other safety devices.), Tenant agrees to pay all costs and expenses arising from the construction and installation of such additional improvements. All costs attributable to changes and variations from the Construction Documents resulting from acts or omissions of Tenant (including, without limitation, any fees and expenses of the Consultants and any increased costs of construction) shall be paid by Tenant, if they exceed the $25.00 per square foot allowance. 3. Leasehold Improvements ---------------------- 3.01 The following provisions shall apply to the construction of the ---- Leasehold Improvements: (a) All work involved in the completion of the Leasehold Improvements shall be carried out by Landlord and its agents and contractors under the sole direction of Landlord. Tenant shall cooperate with Landlord and its agents and contractors to promote the efficient and expeditious completion of the Leasehold Improvements; and Landlord shall be permitted a reasonable reimbursement for supervision and overhead, but no profit. (b) Landlord agrees to construct the Leasehold Improvements in accordance with the Construction Documents, 32 provided Tenant has complied with all the applicable provisions of this work letter agreement and the Lease. 3.02 If there are any changes in the Leasehold Improvements requested by, ---- or on behalf of, Tenant from the work as reflected in the Construction Documents, each such change must receive the prior written approval of Landlord, and Tenant shall bear the cost of all such changes, if these costs cause the Leasehold Improvements to exceed the Allowance. 3.03 Landlord shall have no obligation to commence construction of any in ---- the Leased Premises until (a) Tenant has submitted and Landlord has approved the Construction Documents and Tenant shall have approved the Final Cost for the construction of the Leasehold Improvements as required by the provisions hereof, and (b) Landlord shall have received Tenant's advance payment in an amount equal to the Tenant's Share. 4. Lease Commencement Date ----------------------- 4.01 Landlord shall notify Tenant when Substantial Completion has been ---- achieved, and thereafter the Lease Commencement Date shall be established as set forth in the Lease. Not withstanding anything to the contrary contained in the Lease or this work letter agreement, the Lease Commencement Date shall not be extended for any delay in Substantial Completion to the extent that such delay is caused by any act or omission attributable to Tenant, including without limitation: (a) Tenant's request for any Extraordinary Tenant Improvements; (b) Tenant's failure to furnish promptly information concerning Tenant's requirements pertaining to construction of the Leasehold improvements or any other information requested by the Consultants as necessary or useful to prepare the initial drawings, plans and specifications which are to comprise the Construction Documents; (c) Tenant's failure to submit promptly the initial drawings, plans and specifications which are to comprise the Construction Documents; (d) Tenant's failure to approve promptly the Final Cost; and (e) Tenant's request for any changes in the Leasehold Improvements from the work as reflected in the Construction Documents 1 4.02 In any event, Rent payable under the Lease shall not abate by reason ---- of any unreasonable delay, expense or other burden arising out of or incurred in connection with the design or 33 construction of the Leasehold Improvements to the extent that such delay, expense or other burden is caused by any act or omission attributable to Tenant (including, without limitation, the acts and omissions referred to in subparagraphs (a) through (e) of paragraph 4.01 above). 5. Tenant's Access To Leased Premises ---------------------------------- 5.01 Landlord, in its sole discretion, may permit Tenant and Tenant's ---- agents or independent contractors to enter the Leased Premises prior to the scheduled Lease Commencement Date in order that Tenant may do Other work as may be required by Tenant to make the Leased Premises ready for Tenant's use and occupancy. Such permission must be in writing prior to entry. If Landlord permits such prior entry, then such license shall be subject to the condition that Tenant and Tenant's agents, contractors, workmen, mechanics, suppliers, and invitees shall work in harmony and not interfere with Landlord and its agents and contractors in doing its work in the Leased Premises or the Building or with other tenants and occupants of the Building or the Project. If at any time such entry shall cause or threaten to cause disharmony or interference, Landlord, in its sole, discretion, shall have the right to withdraw and cancel such license upon notice to Tenant. Tenant agrees that any such entry into the Leased Premises shall be deemed to be under all of the terms, covenants, conditions and provisions of the Lease, except as to the covenant to pay periodic Rent. Tenant further agrees that, to the extent permitted by law, Landlord and its principals shall not be liable in any way for any injury or death to any person or persons, loss or damage to any of the Leasehold Improvements or installations made in the Leased Premises or loss or damage to property placed therein or there about, the same being at Tenant's sole risk. 5.02 In addition to any other conditions or limitations on such license to ---- enter the Leased Premises prior to the Lease Commencement Date, Tenant expressly agrees that none of its agents, contractors, workmen, mechanics, suppliers or invitees shall enter the Leased Premises prior to the Lease Commencement Date unless and until each of them shall furnish Landlord with satisfactory evidence of insurance coverage, financial responsibility and appropriate written releases of mechanics' or materialmen's lien claims. 6. Miscellaneous Provisions Landlord and Tenant further agree as follows: ------------------------ 6.01 Except as herein expressly set forth with respect to the Leasehold ---- improvements in paragraph 3.01 of schedule 6, Landlord has no agreement with Tenant and has no obligation to do any work with respect to the Leased Premises. Any other work in the Leased Premises which may be permitted by Landlord pursuant to the terms and conditions of the Lease, including any alterations 34 or improvements as contemplated by paragraph 6.1d of the Lease, shall be done at Tenant's sole cost and expense and in accordance with the terms and conditions of the Lease. 6.02 This work letter agreement shall not be deemed applicable to: any ---- additional space added to the original Leased Premises at any time, whether by the exercise of any options under the Lease or otherwise, or (b) any portion of the original Leased Premises or any additions thereto in the event of a renewal or extension of the original Lease Term, whether by the exercise of any options under the Lease or any amendment or supplement thereto. The construction of any additions or improvements to the Leased Premises not contemplated by this work letter agreement shall be effected pursuant to a separate work letter agreement, in the form then being used by Landlord and specifically addressed to the allocation of costs relating to such construction. 6.03 Any person signing this work letter agreement on behalf of Tenant ---- warrants and represents he has authority to do so. 6.04 This work letter agreement shall be binding upon and inure to the ---- benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. 6.05 Anything in the Lease to the contrary notwithstanding, notices and ---- other items to be delivered pursuant to this work letter agreement shall be effective upon receipt of same by the party to whom such notice or item is directed. 6.06 Tenant shall have the right to install modular furniture partitions ---- in said Leased Premises. Landlord shall pay for the modular furniture partitions provided that Tenant does not exceed the allowance in paragraph 2.03 herein. The modular furniture partitions purchased by Landlord shall remain in the Building and become property of the Landlord upon termination of the Lease. If Tenant does not use the $25.00 per square foot Allowance, the unused Allowance shall be credited against rent in the first month or months that rent is due. If the foregoing correctly sets forth our understanding, kindly acknowledge your approval in the space provided below for that purpose and return to us two signed counterparts of this work letter agreement. Very truly yours, LANDLORD: SCRIPPS CENTER ASSOCIATES A California General Partnership By: ALLSTATE INSURANCE COMPANY -------------------------- an Illinois Corporation ----------------------- General Partner 35 By: /s/ M.J. Resnick -------------------------- By: signature illegible -------------------------- Authorized Signatory And by: ALLSTATE LIFE INSURANCE COMPANY ------------------------------- an Illinois Corporation --------------------------- General Partner By: /s/ M.J. Resnick ----------------------------- By: signature illegible ------------------- Authorized Signatory AGREED TO AND ACCEPTED this 16th day of August, 1989 ---- ------ -- Keith Engineering, Inc. - ----------------------- A California Corporation - ------------- By: /s/ Aram H. Keith (signed) -------------------------- Its President --------- 36 EXHIBIT 1 TO WORK LETTER AGREEMENT BUILDING STANDARD WORK HEATING, VENTILATING AND AIR CONDITIONING: Supply and install building standard condenser water piping distribution system, heat pump supply unit, ductwork & supply diffusers. ELECTRICAL LIGHT FIXTURES: Supply and install building 2 ft. x 4 ft. fluorescent lay in fixtures containing three tubes and acrylic lenses, based on an allocation of one per 85 square feet of usable area on each floor. CEILING, TO INCLUDE GRID AND LAY-IN TILE: Supply and install building standard 2 ft. x 2 ft. exposed white grid and acoustical tile lay-in ceiling throughout the Leased Premises. Ceiling height shall be approximately 8 ft. 6 in. Cost to drop tile in place will be charged to the allowance. WINDOW COVERINGS: Supply and install building standard Levelor blinds. FIRE PROTECTION: Supply and install the building standard sprinkler protection system based on the sprinkler design depicted on the original or most recent fire protection document. Relocation or additional heads required for approval by insurance and jurisdictional bodies due to Tenant's partition layout will be charged as an extra to Tenant. 37 TENANT ESTOPPEL CERTIFICATE --------------------------- BY LEASE DATED August 16, 1989, as amended by the documents listed in paragraph 7 below ("Lease") between Keith Engineering, Inc., dba: The Keith Companies ("Tenant"), or its predecessor, and Scripps Center Associates ("Landlord"), or its predecessor, Landlord has leased to Tenant 49,413 rentable square feet, as more particularly described in the Lease "Leased Premises"), in the building located at 2955 Redhill Avenue, Suite 200, Costa Mesa, California ("Property"). Landlord, as owner, intends to sell the said Property to ASP Acquisitions, L.L.C. and/or its affiliates or assigns ("Buyer") who, as a condition to the purchase of the Property, has required this Tenant Estoppel Certificate. In consideration of Buyer" (Sic.) agreement to purchase the Property, Tenant agrees and certifies to Landlord and to Buyer as follows: 1. The Lease Premises and possessions thereof are accepted. The Lease is in full force and effect. 2. The Lease term begins on June 1, 1993 and ends on April 20, 2000. 3. All work to be performed for Tenant under the Lease has been performed as required under the Lease and has been accepted by Tenant, except n/a , --------- and all allowances to be paid to Tenant, including allowances for tenant improvements, moving expenses or other items, have been paid. 4. Tenant claims no present charge, lien or claim of offset against rent. 5. Rent is paid for the current month, but is not paid, and will not be paid, more than one month in advance. Base Rent is $53,067.86 per month and is due on the first of each month. Additional rent and any other amounts due under the lease are $18,095.00 per month. A security deposit has been paid to Landlord in the amount of $78,023.20. Tenant's share of Operating Costs, including real estate taxes, are based on one of the following: --- _____Base Year of 19 ; OR _____Operating Cost Stop of $ ____ per square foot; OR _____No pass-through of Operating Costs; OR X Other NNN pro rata share ----- ----------------------- 6. There are no existing defaults by reason of any act or omission of the Landlord except as follows: to the knowledge of tenant as of the date of -------------------------------------------- this certificate there are none. ------------------------------- 7. The Lease has not been modified, except in accordance with the documents dated as follows: Amendment dated November 30, 1989 Amendment dated August 31, 1990 Amendment dated April 15, 1993 Special Limited Guarantee dated June 1, 1993 Amendment dated October 1, 1993 Amendment dated May 28, 1998 8. The Tenant has no rights or options to purchase the property. This certificate may be relied upon by Buyer, its lender from time to time, and their respective successors, assigns, and affiliates. Tenant: KEITH ENGINEERING, INC. dba The Keith Companies By: /s/ Aram H. Keith ----------------- Title: CEO ----------- Date: 7/7/98 ----------- ADDENDUM TO LEASE DATED _______ , 1989 BETWEEN SCRIPPS CENTER ASSOCIATES (LANDLORD) AND KEITH ENGINEERING, INC. (TENANT) 14.1 Base Rent: The Base Rent shall be as follows: ----------
Monthly Base Rent Per Months Payment Square Foot Per Year ------ ------- --------------------- 01-12 $49,000.00 $ 8.40 13-24 $54,600.00 $ 9.36 25-36 $60,200.00 $10.32 37-48 $66,500.00 $11.40 49-60 $73,500.00 $12.60 61-72 $77,000.00 $13.20 73-84 $80,500.00 $13.80 85-96 $84,700.00 $14.52 97-108 $88,900.00 $15.24 109-120 $93,100.00 $15.96
14.2 Right of Refusal: Provided Tenant is not in default under the Lease, at any ----------------- time during the Lease Term and the terms of any renewal option periods, Tenant shall have the following rights: - A right of first refusal to lease additional space in Building C ("First Right - C"). - A right of first refusal for space in Building A only in the event that no rights of first refusal are granted to any current or future tenant leasing space in Building A ("First Right - A"). - A right of second refusal for space in Building A which shall be subject to any rights of first refusal granted to any current or future tenant in Building A ("Second Right - A"). The Above First Right - C, First Right - A and Second Right - A shall sometimes be individually or collectively referred to as "Right" or "Rights". Landlord shall give Tenant written notice that a third party is interested in leasing all or any portion of the space in either Building A or C governed by the Rights. Tenant shall have five (5) working days after receiving notice from Landlord to respond in writing of its intention to exercise any Right. If any Right is exercised during years 1 through 7 of the Lease Term, it shall be at the same terms and conditions as this Lease with base rent being the same amount per rentable square foot as that being paid by Tenant for the Leased Premises under this Lease as of the date any of the Rights are exercised. If any Right is exercised during years 8 through 10 of the Lease Term, it shall be at the same terms and conditions as this Lease except for base rent and lease term which shall be the same as those offered by Landlord to the third party. 14.3 Rental Abatement: The Base Rent for months one (1) through five (5) of the ----------------- Lease Term shall be free. Tenant shall pay its Pro Rata Share of the Project Operating Costs and Building Operating Costs, as defined in paragraph 1.lG., during the free rent period. 14.4 Cancellation Provision: Tenant shall have the right to cancel the Lease for ----------------------- up to 50% of Tenant's square footage anytime after the first year of the Lease Term. The maximum space that Tenant may cancel, however, is 35,000 rentable square feet. Tenant shall have the option to cancel space in amounts not less than 10,000 rentable square feet or larger. The location of the space that Tenant can cancel is outlined in Exhibit ___ attached hereto. Tenant shall provide Landlord six (6) months written notice of its intent to cancel the Lease for a portion of the Leased Premises. Tenant shall reimburse Landlord within 30 days of notice from Landlord for the space cancelled based upon the following schedule:
If Cancelled Cancellation Cost In Year Per Rentable Square Foot Returned ------- --------------------------------- 1 Not cancellable 2 $5.00 3 $4.00 4 $3.00 5 $2.00 6 $1.50 7 $1.50 8 $1.15 9 $ .77 10 $ .38
14.5 Option to Renew: Provided Tenant is not in default, Landlord hereby grants ---------------- Tenant two (2) five (5) year options to renew the term of this Lease. The base rent for the first renewal term shall be 105% of the Base Rent Tenant is paying during the last year of the initial Lease Term. This base rent shall be increased by 5% per year through the first five (5) year option to renew. The second five (5) year option shall be at the fair market rate. Tenant shall give Landlord six (6) months written notice of Tenant's intent to exercise said option to renew. 14.6 Option to Purchase: Provided Tenant is not In default under the Lease, and ------------------- further provided Tenant has not elected to reduce its Leased Premises by more than 10% pursuant to Article 14.4 of this Lease, Tenant shall have the option to purchase the Project on the last business day of the second year of the initial Lease Term. Tenant shall give Landlord six months prior written notice of its Intent to exercise this option. The purchase price for the Project shall be $25,500,000 plus the cost of all tenant improvements installed between the Lease Commencement Date and the end of the second year of the initial Lease Term in the 149,018 square feet of unleased space in the Project (which includes Tenant's Square Footage), less the cost (not including interest) of any amounts paid to Landlord by tenants for such tenant improvements. LEASE AMENDMENT NO. 1 This Amendment is made this 30 day of November 1989 by and between Scripps -- Center Associates, a California general partnership ("Landlord") and Keith Engineering, Inc., d/b/a The Keith Companies ("Tenant"). Whereas, by written Lease dated August 16, 1989 ("Lease"), Landlord did lease 70,000 rentable square feet at Scripps Center (more specifically described in Article l.lb and c of said Lease) to Tenant for a term commencing May 1, 1990 and terminating April 30, 2000. Now, therefore in consideration of the premises and the respective covenants and agreements, herein set forth, the parties hereto agree as follows: 1. Article l.ld shall be changed to read as follows: Tenant's Square Footage shall mean 88,006 rentable square feet; Total square footage of the Building shall mean 88,006 rentable square feet, and total Square Footage of the Project shall mean 229,226 rentable square feet, which may be adjusted pursuant paragraph 7.2 (iii) below, subject to adherence to BOMA standards as attached hereto in Schedule B. 2. The second phrase of Article 1.1f shall be changed to read as follows: The total Base Rent payable over the entire Lease Term is $10,613,523.60. 3. Article 1.1g shall be changed to read as follows: Tenant's Pro Rata Share of Building Operating Costs shall mean 100%, which may be adjusted pursuant to paragraph 7.2 (iii) below. Tenant's Pro Rata Share of Project Operating Costs shall mean 38.39%, which may be adjusted pursuant to paragraph 7.2 (iii) below. Tenant's Pro Rata Share of Project Operating Costs for the first year of the Lease Term is estimated to be $148,730.14 ($1.69 per square foot of Tenant's Square Footage) payable in monthly installments of $12,394.17 subject to adjustment pursuant to Article 3.4b and c below. 4. Article 1.lh shall be changed to read as follows: Deposit shall mean $61,604.20; Prepaid Rent shall mean $61,604.20, of which $61,604.20 represents the first monthly installment of Base Rent. 1 5. Article 1.1j shall be changed to read as follows: Authorized Number of Parking Spaces shall mean 352 spaces at the rate of $0, which is a ratio of four spaces per 1,000 rentable square feet. 6. Article 14.1 shall be changed to read as follows: Base Rent: The Base Rent shall be as follows:
Monthly Base Rent Per Month Payment Square Foot Per Year ----- ------- -------------------- 1-6 $ -0- $ -0- 7-12 61,604.20 8.40 13-24 68,644.68 9.36 25-36 75,685.16 10.32 37-48 83,605.70 11.40 49-60 92,406.30 12.60 61-72 96,806.60 13.20 73-84 101,206.90 13.80 85-96 106,487.26 14.52 97-108 111,767.62 15.24 109-120 117,047.98 15.96
7. Article 14.3 shall be deleted in its entirety. 8. The first two sentences of Article 14.4 shall be changed as follows: Cancellation Provision: Tenant shall have the right to cancel the Lease for up to 35,000 rentable square feet anytime after the first year of the Lease Term. 9. Schedule 4 Paragraph 1 of the lease dated August 16, 1989 shall be deleted and replaced by "subject to the terms of this lease, Landlord shall supply exterior lamp replacement, exterior window washing with reasonable frequency, and janitorial services to the common area". 10. The following paragraph shall be added to Schedule 4: Tenant shall be obligated to maintain all HVAC mechanical equipment servicing the Leased Premises in a manner consistent with comparable office buildings in Orange County. If Tenant fails to maintain or keep in good repair and such failure continues for 15 days after written notice from Landlord, or if such failure results in a nuisance or health or safety risk, Landlord may perform any such required maintenance and repairs 2 and the cost thereof shall be payable by Tenant as Rent within 30 days of receipt of an invoice from Landlord. Except as amended herein, all of the terms and conditions in the above defined Lease shall remain in full force and effect. In witness hereof, Landlord and Tenant have cause their respective names to be affixed by their respective officers or duly authorized signatories. WITNESS: LANDLORD: SCRIPPS CENTER ASSOCIATES, /s/ Marie Viceie a California general partnership - ---------------------------- /s/ June Garby - ---------------------------- By: ALLSTATE INSURANCE COMPANY an Illinois corporation General Partner By: /s/ M.J. Resnick ------------------------------------ By: /s/ H.H. J ------------------------------------ Its Authorized Signatories By: ALLSTATE INSURANCE COMPANY an Illinois corporation General Partner By: /s/ M.J. Resnick ------------------------------------ By: /s/ H.H.J. ------------------------------------ Its Authorized Signatories WITNESS: /s/ William Bowman TENANT: - ---------------------------- KEITH ENGINEERING, INC. d/b/a THE KEITH /s/ Steve M. Case COMPANIES - ---------------------------- By: /s/ Aram H. Keith ------------------------------------ Its President By: /s/ Floyd S. Reid ------------------------------------ Its Secretary 3 LEASE AMENDMENT NO. 2 THIS LEASE AMENDMENT NO. 2 is made and entered into as of August 31 1990, -- by and between SCRIPPS CENTER ASSOCIATES, a California general partnership ("Landlord") and KEITH ENGINEERING, INC., d/b/a THE KEITH COMPANIES ("Tenant.") WHEREAS, Landlord and Tenant entered into a lease dated August 16, 1989, whereby Tenant leased approximately 70,000 square feet of space in an office building known as Building C of Scripps Center located at 2995 Red Hill Avenue, Costa Mesa, California. WHEREAS, the lease was amended by a Lease Amendment No. 1 dated November 30, 1989, whereby among other things, Tenant's Square Footage was increased to 88,006 rentable square feet. The lease, together with Lease Amendment No. 1 are herein collectively referred to as the "Lease." NOW, THEREFORE, in consideration or the foregoing premises and the respective covenants and agreements herein set forth, the parties hereto agree as follows: 1. The final calculation of Tenant's Share (as defined in Schedule 6 of the Lease) of the cost of completing the Leasehold Improvements is $577,878.34. The amount of $544,811.53 is hereby defined as "Amortizable Costs". The amount of $33,066.81 is hereby defined as "Unamortizable Costs" and shall be paid by Tenant to Landlord within 30 days after receipt of invoices from Landlord. The Amortizable Costs shall be paid to Landlord as follows: Tenant shall pay Landlord the Amortizable Costs, plus interest at the rate of ten per cent (10%) per year, in 60 amortized equal monthly installments of $11,575.63. Commencing on the first day of the month following the month in which the actual Lease Commencement Date falls, each monthly installment shall be paid in advance on the first day of each month, together with each monthly installment of Base Rent and Tenant's Pro Rata Share of Excess Operating Costs. The Unamortizable Costs and the Amortizable Costs are hereby deemed to be included within the definition of Rent. By way of clarification and for purposes of calculating the purchase price under paragraph 14.6 of the Lease, (i) the Unamortizable Costs and monthly installments of the Amortized Costs may be deducted from the purchase price only to the extent such payments are actually made by Tenant and received by Landlord with good funds, and (ii) the amortization schedule attached hereto as Exhibit A --------- shall be used to determine the principal and interest portions of monthly installments of the Amortized Costs paid to Landlord. Pursuant to paragraph 14.6 of the Lease, only the principal portions of monthly payments made by Tenant may be deducted from the purchase price. 2. The following are hereby added to the List of Schedules on page 3 of the Lease: 10. Landscape Improvements at Landlord's Cost 11. Landscape Improvements at Tenant's Cost 1 12. Signage Proposal 13. Reserved and Visitor Parking 3. Article 1.1e of the Lease is hereby deleted in its entirety and replaced with the following: e. Lease Commencement Date shall mean May 7, 1990, which may be adjusted pursuant to the provisions of this Lease; Lease Expiration Date shall mean April 20, 2000; Lease Term shall mean the period between Lease Commencement Date and Lease Expiration Date. 4. Article 1.1j of the Lease is hereby deleted in its entirety and replaced with the following: j. Authorized Number of Parking Spaces shall mean 350 spaces at the rate of $ -O-. 350 spaces constitutes a ratio of four spaces per 1,000 rentable square feet less 2 spaces to be used to install a new entrance to the executive entrance on the north side of the Building. 5. The following Schedules attached hereto are hereby made a part of the Lease and added to the list of Schedules in Article 1.2 of the Lease: h. Schedule 10: Landscape Improvements at Landlord's Cost i. Schedule 11: Landscape Improvements at Tenant's Cost j. Schedule 12: Signage Proposal k. Schedule 13: Reserved and Visitor Parking 6. Article 5.lb of the Lease is hereby deleted in its entirety and replaced with the following: b. Maintenance Services: Maintenance of all exterior areas of the Building including lighting, landscaping, cleaning, painting, maintenance and repair of the exterior of the Building and its structural portions and roof, including all of the services listed on Schedule 4 ("Maintenance Services"). 7. The insertion to Article 6.lg marked with an asterisk at the bottom of page 11 of the Lease shall be deleted in its entirety and replaced with the following: **Tenant shall have the right to display its name on the exterior of the Building in accordance with the sign ordinance for the Project, as approved by the City of Costa Mesa, attached to the Lease as Schedule 9, as modified by the letter dated April 13, 1990 which modification is attached hereto as Schedule 12, and as may be further modified by the City of Costa Mesa. The Tenant and Landlord have agreed that the Tenant may 2 submit its signage request to the City of Costa Mesa in accordance with the signage proposal detailed in Schedule 12 to this Lease Amendment No. 2. 8. Schedule 4 of the Lease is hereby deleted in its entirety and replaced with the following: SCHEDULE 4 MAINTENANCE SERVICES -------------------- (1) Subject to the terms of this Lease, Landlord shall supply exterior lamp replacement, exterior window washing with reasonable frequency, and janitorial services to the exterior common areas of the Building only during the time and in the manner that such janitorial services are customarily furnished in similar buildings in the area. Tenant shall be responsible for the janitorial, maintenance and repairs in the interior of the Building. (2) Landlord agrees to reasonably maintain the exterior of the Building to include lawn and shrub care, snow removal, maintenance of the structure, roof, architectural finish, and so on, excluding only those items specifically excepted elsewhere in this Lease. Tenant shall be responsible for the maintenance of the mechanical and electrical equipment within the Building. Tenant shall be obligated to maintain all HVAC mechanical equipment servicing the Leased Premises in a manner consistent with comparable office buildings in Orange County. If Tenant fails to maintain or keep in good repair and such failure continues for 15 days after written notice from Landlord, or if such failure results in a nuisance or health or safety risk, Landlord may perform any such required maintenance and repairs and the cost thereof shall be payable by Tenant as Rent within 30 days or receipt of an invoice from Landlord. 9. The last 2 sentences of Schedule 5 (Parking) are hereby deleted in their entirety and are replaced with the following: Tenant shall have sixteen (16) reserved parking spaces and 15 visitor parking spaces. The location of the reserved and visitor parking spaces are shown on Schedule 13. 10. The following Article is hereby added to the Addendum to Lease as Article 14.7: 14.7 Tenant shall cause landscaping improvements to be installed around the Building as detailed on Schedule 10 attached hereto ("Schedule 10 Landscaping"). Within 30 days after receipt of paid invoices, Landlord shall reimburse to Tenant the cost of all Schedule 10 Improvements up to a total amount of $42,662.00 ("Landscape Allowance"). All costs for Schedule 10 Landscaping in excess of the Landscape Allowance shall be paid by Tenant. Tenant may, at its option, make additional landscape and site improvements as detailed in Schedule 11 attached hereto and solely at Tenant's cost. All landscaping detailed in Schedules 10 and 11 shall be installed by professional landscapes acceptable to Landlord. 3 11. Except as provided in this Lease Amendment No. 2, all other terms, covenants and conditions contained in the Lease shall remain in full force and effect. Initially capitalized terms not otherwise defined herein shall have the same meaning as contained in the Lease. IN WITNESS WHEREOF, the parties have caused their respective names to be subscribed to this LEASE AMENDMENT NO. 2 as of the date first above written, the execution and delivery thereof having been duly authorized. WITNESS: LANDLORD: SCRIPPS CENTER ASSOCIATES, /s/ JUNE GARBY a California general partnership - ------------------------ ________________________ By: ALLSTATE INSURANCE COMPANY an Illinois corporation General Partner By: /s/ M.J. RESNICK ------------------------------------ By: /s/ H.H.J ------------------------------------ Its Authorized Signatories By: ALLSTATE INSURANCE COMPANY an Illinois corporation General Partner By: /s/ M.J. RESNICK ------------------------------------ By: /s/ H.H.J. ------------------------------------ Its Authorized Signatories WITNESS: /s/ WILLIAM BOWMAN TENANT: - ------------------------ ________________________ KEITH ENGINEERING, INC. d/b/a THE KEITH COMPANIES By: /s/ ARAM H. KEITH ------------------------------------ Its President By: /s/ FLOYD S. REID ------------------------------------ Its Secretary 4 LEASE AMENDMENT No. 3 This Lease Amendment No. 3 is made and entered into as of October 24, 1991 by and between Scripps Center Associates, A California General Partnership ("Landlord") and Keith Engineering Inc., DBA THE KEITH COMPANIES ("Tenant.") WHEREAS, Landlord and tenant entered into a lease dated August 16, 1989, whereby tenant leased approximately 70,000 square feet of space in an office building known as Building C of Scripps Center located at 2995 Red Hill Avenue, Costa Mesa, California. WHEREAS, the lease was amended by a Lease Amendment No. 1 dated November 30, 1989, whereby among other things, Tenant's Square Footage was increased to 88,006 rentable square feet. WHEREAS, the lease was amended by Lease Amendment No. 2 dated August 31, 1990, whereby by among other things, the final calculation of tenant's share of Leasehold Improvements was stated as well as additional schedules included in the Lease for landscape improvements, signage and parking. The lease, together with Lease Amendment No. 1 and Lease Amendment No. 2 are hear (Sic.) and collectively referred to as the "Lease". Now, therefore, in consideration of the forgoing premises and the respective covenants and agreements herein set forth, the parties hereto agree as follows: 1. The last two sentences of Schedule 5 "Parking" of the original lease dated August 16, 1989 which was amended by Paragraph 9 of Lease Amendment No. 2, will be deleted and replaced with the following: Tenant shall have 16 reserved parking spaces, 11 visitor spaces, 8 carpool spaces and 2 delivery spaces as specified on Schedule 13 dated October 24, 1991 attached hereto. Except as provided in this Lease Amendment No. 3, all other terms, covenants and conditions contained in the Lease shall remain in full force and effect. Initially capitalized terms not otherwise defined herein shall have the same meaning as contained in the Lease. IN WITNESS WHEREOF, the parties have caused their respective names to be subscribed to this LEASE AMENDMENT NO. 3 as of the date first written above, the execution and delivery thereof having been duly authorized. 1 WITNESS: LANDLORD: SCRIPPS CENTER ASSOCIATES, ________________________ a California general partnership ________________________ By: ALLSTATE INSURANCE COMPANY an Illinois corporation General Partner By: /s/ --------------------------------- By: --------------------------------- Its Authorized Signatories By: ALLSTATE INSURANCE COMPANY an Illinois corporation General Partner By: /s/ --------------------------------- By: --------------------------------- Its Authorized Signatories WITNESS: ________________________ TENANT: KEITH ENGINEERING, INC. d/b/a THE KEITH ________________________ COMPANIES By: /s/ ARAM H. KEITH --------------------------------- Its President By: /s/ FLOYD S. REID --------------------------------- Its Secretary 2 LEASE AMENDMENT NO. 3 THIS LEASE AMENDMENT NO. 3 ("Amendment") is made and entered into as of April 15, 1993, by and between SCRIPPS CENTER ASSOCIATES, a California general -- partnership ("Landlord") and KEITH ENGINEERING, INC., d/b/a THE KEITH COMPANIES ("Tenant") and shall become effective on the Lease Commencement Date as set forth in Paragraph 3 hereof. WHEREAS Landlord and Tenant entered into a lease dated August 16, 1989, whereby Tenant leased approximately 70,000 square feet of space in an office building known as Building C of Scripps Center located at 2995 Red Hill Avenue, Costa Mesa, California (the "Old Leased Premises"). WHEREAS, the lease was amended by Lease Amendment No. 1 dated November 30, 1989 and Lease Amendment No. 2 dated August 31, 1990. The lease, together with Lease Amendments No. 1 and 2 are herein collectively referred to as the "Lease". WHEREAS, Landlord and Tenant now desire to amend the Lease to reflect the relocation of Tenant. NOW, THEREFORE, in consideration of the foregoing premises and the respective covenants and agreements herein set forth, the parties hereto agree as follows: 1. Paragraph 1.1(a) of the Lease shall be deleted in its entirety and replaced with the following: Leased Premises shall mean the second floor and a portion of the first floor in "Building A", which has a common address of at 2955 Red Hill Avenue, and as further described on Exhibit A attached hereto and made a part hereof. 2. Paragraph 1.1(d) of the Lease shall be deleted in its entirety and replaced with the following: Tenant's Square Footage shall mean approximately 30,000 rentable square feet which shall be subject to remeasurement by Landlord in accordance with BOMA standards (and shall specifically exclude in the calculation the center stairwell). Tenant's Square Footage shall be calculated on a rentable basis which includes a pro rata share of common area. Total Square Footage of the Building shall mean 60,042 rentable square feet, and Total Square Footage of the Project shall mean 230,196 rentable square feet, which may be adjusted pursuant to paragraph 7.2(iii) of the Lease. 3. Paragraph 1.1(e) of the Lease shall be deleted in its entirety and replaced with the following: Lease Commencement Date shall mean the date that is 5 business day (Sic.) after the date Landlord notifies Tenant that the Leasehold Improvements as set forth in Exhibit B attached to this Lease Amendment No. 3 have been completed, but in no event later than June 1, 1993. Lease Expiration Date shall mean April 20, 2000. Lease Term shall mean the period between Lease Commencement Date and Lease Expiration Date. Base Rent Adjustment Date shall mean the first day of May in each year of the Lease Term commencing 1995. 1 4. Paragraph 1.1(f) of the Lease shall be deleted in its entirety and replaced with the following: a. Base Rent shall be payable in monthly installments plus applicable sales tax, if any in accordance with the following schedule and adjustments: (i) From the Lease Commencement Date through April 30, 1994, Base Rent shall mean $342,000 ($11.40 per square foot of Tenant's Square Footage) per year, which shall be adjusted pursuant to the remeasurement in Paragraph 2. (ii) From May 1, 1994 through April 30, 1995, Base Rent shall mean $378,000 ($12.60 per square foot of Tenant's Square Footage) per year, which shall be adjusted pursuant to the remeasurement in Paragraph 2. (iii) From May 1, 1995 through April 20, 2000, Base Rent shall be subject to adjustment on each Base Rent Adjustment Date as follows: b. The monthly installment of Base Rent for the month ending immediately prior to the Base Rent Adjustment Date shall be multiplied by a fraction, the numerator of which is the CPI (as defined below) for the month beginning on the date four months prior to the Base Rent Adjustment Date, and the denominator of which is the CPI for the same month one year prior thereto; however, in no event, shall Base Rent be decreased as a result of this calculation nor shall Base Rent be increased by more than 8% on any Base Rent Adjustment Date. c. "CPI" shall mean the Consumer Price Index in the column for "All Items" in the table entitled "Consumer Price Index for All Urban Consumers: Los Angeles-Anaheim-Riverside, California, (1982-84 = 100)," published by the Bureau of Labor Statistics of the United States Department of Labor. If the Bureau of Labor Statistics changes the base period (now 1982-84 = 100), or the composition of the CPI, the new index numbers shall be substituted for the old index numbers in making the above computations. If the CPI is discontinued, the parties shall accept comparable statistics on the purchasing power of the consumer dollar, as published at the time of said discontinuation, by a responsible financial periodical of recognized authority to be chosen by Landlord and reasonably acceptable to Tenant. d. From the Lease Commencement Date through April 30, 1995, Tenant shall pay, as additional rent ("Adjustment Payment") $11,000 per month. Subject to Tenant making all of the Adjustment Payments, from May 1, 1995 through May 30, 1998, Tenant shall be entitled to a credit to or reduction of rent of $6,838 per month ("Adjustment Credit"). 5. Paragraph 1.1(g) of the Lease shall be deleted in its entirety and replaced with the following: Tenant's Pro Rata Share of building Operating Costs shall mean 50%, which -- shall be adjusted pursuant to the remeasurement in Paragraph 2 above and which may be adjusted pursuant to paragraph 7.2(iii) of the Lease. Tenant's Pro Rata Share of Project operating Costs shall mean 13%, which shall be adjusted -- pursuant to the remeasurement in Paragraph 2 above and which may be adjusted pursuant to paragraph 7.2(iii) of the Lease. Tenant's Pro Rata Share of Project Operating Costs for the first calendar year of the Lease Term is estimated to be $68,400.00 ($2.28 per square foot of Tenant's Square Footage 2 payable in Monthly installments of $5,700.00, which shall be adjusted pursuant to the remeasurement in Paragraph 2 above and which is subject to adjustment pursuant to Article 3.4c and d of the Lease. 6. Paragraph 1.1(j) of the Lease shall be deleted in its entirety and replaced with the following: Authorized Number of Parking Spaces shall mean four spaces per 1,000 rentable square feet leased. 7. Paragraph 1.1(m) of the Lease shall be deleted in its entirety and replaced with the following: Landlord's Mailing Address: Scripps Center Associates c/o Allstate Insurance Company, Allstate Plaza G5B, Northbrook, Illinois 60062 Attn: Real Estate Equity Investment Division. 8. Paragraph 1.1(n) of the Lease shall be deleted in its entirety and replaced with the following: Tenant's Mailing Address prior to the Lease Commencement Date shall be 2995 Red Hill Avenue, Costa Mesa, California 92626. After the Lease Commencement Date, it shall be 2955 Red Hill Avenue, Costa Mesa, California 92626. 9. Landlord shall provide up to $250,000.00 ("Relocation Fund") which shall be used by Tenant to pay the actual cost of tenant improvements, interior and exterior signage (as set forth in Paragraph 16 hereof), moving costs, telephone relocation expenses and other costs (but specifically excluding costs of disruption of Tenant's business and space planning) associated with Tenant's relocation to the Leased Premises. In the event Tenant contracts for any goods or services in connection with the relocation (specifically excluding costs of disruption of Tenant's business and space planning), Tenant shall provide Landlord with invoices and lien waivers (if appropriate) and Landlord shall reimburse Tenant within 15 business days of receipt and approval of said invoices and lien waivers. Should Tenant default under the Lease, the Relocation Fund shall immediately become due and payable, less Adjustment Payments paid to the date of default. Tenant shall have no right to collect or receive a set off for any unpaid Adjustment Credits. 10. All tenant improvement construction for the Leased Premises shall be directed by Landlord and paid from the Relocation Fund in accordance with Exhibit B attached hereto and made a part hereof. 11. Landlord and Tenant acknowledge that Tenant owes Landlord an amount of $250,854.15 for unamortized over standard tenant improvement costs ("Unamortized TI") in the Old Leased Premises. Subject to Paragraph 13 hereof, the Unamortized TI shall be a contingent liability of Tenant and thus can only be asserted by Landlord in the event that either Tenant files for protection under the Federal Bankruptcy Act during the Lease Term or if there has been an Event of Default under the Lease and Landlord terminates the Lease by judicial process. In such event, the Unamortized TI shall become immediately due and payable as set forth below and said amount shall bear interest from the date of filing for protection or Event of Default until paid at a rate of 2% per month: 3 Month of Default Unamortized IT ---------------- -------------- 6/1/93 -4/31/94 $ 250,854.15 5/l/94 -4/31/95 215,017.84 5/l/95 -4/31/96 179,181.54 5/l/96 -4/31/97 143,345.23 5/1/97 -4/31/98 107,508.92 5/l/98 -4/31/99 71,672.61 5/l/99 -4/20/00 35,836.31 If there is an Event of Default under the Lease and Landlord does not terminate the Lease by judicial process, the Unamortized TI, as determined above, shall bear interest at the rate of 2% per month from the date of the Event of Default until the default has been cured. Said interest shall be paid monthly with the Base Rent and failure to so pay will be deemed another Event of Default under Paragraph 11.1 of the Lease. The interest paid under this Paragraph shall be in addition to any Interest payable by Tenant to Landlord under any other provision of the Lease or this Lease Amendment No. 3. 12. Landlord and Tenant acknowledge that as of May 31, 1993, Tenant owes Landlord for delinquent rent for the Old Leased Promises in the amount of $661,200.49 plus interest of $152,792.03 for a total of $813,992.52 (such delinquent rent and interest collectively referred to as "Delinquent Rent"). Subject to Paragraph 13 hereof, the Delinquent Rent shall be a contingent liability of Tenant and thus can only be asserted by Landlord in the event that either Tenant files for protection under the Federal Bankruptcy Act during the Lease Term or if there has been an Event of Default under the Lease and Landlord terminates the Lease by judicial process. In such event, the Delinquent Rent shall become immediately due and payable as set forth below and said amount shall bear interest from the date of filing for protection or Event of Default until paid at a rate of 2% per month: Month of Default Delinquent Rent ---------------- --------------- 6/1/93 -4/31/94 $ 853,842.86 5/l/94 -4/31/95 731,865.31 5/l/95 -4/31/96 609,887.76 5/l/96 -4/31/97 487,910.21 5/1/97 -4/31/98 365,932.66 5/l/98 -4/31/99 243,955.11 5/l/99 -4/20/00 121,977.56 If there is an Event of Default under the Lease and Landlord does not terminate the Lease by judicial process, the Delinquent Rent, as determined above, shall bear interest at a rate of 2% per month from the date of the Event of Default until the default has been cured. Said interest shall be paid monthly with the Base Rent and failure to so pay will be deemed another Event of Default under Paragraph 11.1 of the Lease. The interest paid under this Paragraph shall be in addition to any interest payable by Tenant to Landlord under any other provisions of the Lease or Lease Amendment No. 3. 13. There shall be no liability, contingent or otherwise, of Tenant to Landlord related to the Unamortized TI and the Delinquent Rent for the Old Leased Premises, as set forth in Paragraphs 11 and 12 hereof, at any time after the effective date of a registration statement for a public offering of shares of stock in Tenant (or any related entity which is a signatory to the Lease or which becomes a 4 successor to Tenant) provided that at least $5,000,000 of new capital is raised for Tenant by such registration of its securities. This waiver of liability shall not apply to the Relocation fund. In the event less than $5,000,000 of new capital is raised, the Unamortized TI and the Delinquent Rent for the Old Leased Premises shall remain due and payable in accordance with the terms of this Amendment. 14. It is the intent of Landlord to enter into a 10 year lease with Canon Computer Systems, Inc. ("Canon Lease") for all of the Old Leased Premises which shall include an expansion option for space in Building A. Landlord shall have the right to terminate this Lease between the 60th and the 72nd months of the Canon Lease term. Landlord shall provide Tenant with the commencement date of the term of the Canon Lease when available. Landlord shall give six months prior written notice to Tenant of its intent to terminate the Lease pursuant to this Paragraph. In the event Landlord terminates the Lease and Tenant is not in default of the Lease on the date the Lease terminates, the Unamortized TI and Delinquent Rent for the old Leased Premises shall be forgiven. 15. Paragraph 6.1(g) of the Lease shall be deleted in its entirety and replaced with the following: Tenant shall have the non exclusive right to install, at its sole cost and expense, or from the Relocation Fund, its name on the exterior of the Building subject to Landlord's reasonable approval of the size, specifications and location of such sign and in accordance with the sign ordinance for the Project, as approved by the City of Costa Mesa, and any other applicable governmental authorities. Tenant must obtain the prior approval of the Landlord before placing any other sign or symbol in doors or windows or elsewhere in or about the Leased Premises, or upon any other part of the Building, or Project including building directories. Any Signs or symbols which have been placed without Landlord's approval may be removed by Landlord. During the Lease Term, the cost of maintenance and repair of all signage shall be Tenant's cost. Upon expiration or termination of the Lease, all signs installed by Tenant shall be removed and any damage resulting therefrom shall be promptly repaired or such removal and repair may be done by Landlord and the cost charged to Tenant as Rent. 16. The Addendum to Lease, which was incorporated into the original Lease at the time of its execution, and which includes Paragraphs 14.1 Base Rent, 14.2 Right of Refusal, 14.3 Rental Abatement, 14.4 Cancellation Provision, 14.5 Option to Renew and 14.6 Option to Purchase, shall be deleted in its entirety. 17. The last sentence of paragraph (2) and the third paragraph of Schedule 4 "Maintenance Services" (as amended in Lease Amendment No. 2) shall be deleted in their entirety. 18. The last two sentences of Schedule 5 (Parking) (as amended in Lease Amendment No. 2) shall be deleted in their entirety and replaced with the following: Of the Authorized Number of Parking Spaces set forth in Paragraph 7 hereof, Tenant shall have 9 reserved parking spaces the location of which are shown on revised Schedule 13 attached hereto and made a part hereof. 19. Tenant agrees to vacate the Old Leased Premises on or before the Lease Commencement Date as set forth in Paragraph 3 hereof and said vacation shall comply with Paragraph 12.1 of the Lease. Provided Landlord has not inhibited Tenant from occupying the Leased Premises, Tenant's failure to 5 comply with said vacation shall be deemed an Event of Default under Paragraph 11.1 of the Lease; and, in addition to the obligations set forth in Paragraph 21 hereof, Tenant shall be obligated to comply with all the terms and conditions of the Old Lease, as hereinafter defined, except that Tenant shall be deemed to be holding over pursuant to Paragraph 12.2 of the Old Lease and shall be subject to the accelerated Rent, until Tenant vacates and surrenders the Old Leased Premises pursuant to the Old Lease terms. The term "Old Lease" shall mean lease reference in the recitals of this Amendment No. 3. 20. Landlord shall have the right to declare this Lease Amendment No. 3 null and void if Landlord does not enter into the Canon Lease; provided that Landlord reimburses Tenant for all actual reasonable costs paid by Tenant in conjunction with moving to the Leased Premises. 21. The rights and obligations of Landlord and Tenant relating to insurance, indemnification, removal of property, holding-over and brokers shall continue to apply to all claims arising from the period in which Tenant occupied the Old Leased Premises. Except as provided in this Lease Amendment No. 3, all other terms, covenants and conditions contained in the Lease shall remain in full force and effect. Initially capitalized terms not otherwise defined herein shall have the same meaning as contained in the Lease. IN WITNESS WHEREOF, the parties have caused their respective names to be subscribed to this Lease Amendment No. 3 as of the date first above written the execution and delivery thereof having been duly authorized. TENANT: LANDLORD: KEITH ENGINEERING, INC. SCRIPPS CENTER ASSOCIATES d/b/a THE KEITH COMPANIES a California general partnership By: /s/ ARAM H. KEITH By: ALLSTATE INSURANCE COMPANY ------------------- Its President an Illinois corporation general partner By: /s/ FLOYD S. REID ------------------- By: /s/ KS (last name unreadable) Its Secretary ------------------------------- By: /s/ JOHN (last name unreadable) ------------------------------- By: ALLSTATE LIFE INSURANCE COMPANY an Illinois corporation general partner By: /s/ KS (last name unreadable) ------------------------------- By: /s/ JOHN (last name unreadable) ------------------------------- 6 EXHIBIT B --------- 1. Definitions The terms defined In this paragraph, for purposes of this ----------- schedule, shall have the meanings specified below, and, in addition to the terms defined below, terms defined in the Lease and --- Lease Amendment No. 3 shall, for purposes of this Schedule have the --------------------- meanings specified in the Lease and Lease Amendment No. 3. -------------------------- 1.01 "Leasehold Improvements" means those items which are supplied, installed and finished by Landlord, according to and described in the Construction documents (as hereinafter defined) and which shall be paid for by Landlord (subject to the Allowance) as provided for in paragraph 2.03 below. 1.02 "Construction Documents" means the approved construction drawings, plans and specifications referred to in paragraph 2.03. 1.03 "Substantial Completion" means that the Leasehold Improvements have been substantially completed according to the Construction Documents, except for items which will not materially affect the use of the Leased Premises or which customarily are deemed to be "punchlist work". 2. Construction Documents: Payments -------------------------------- 2.01 The Parties have approved a preliminary floor plan for the Leased ---- Premises, a copy of which is attached hereto as Schedule I (the "Preliminary Plan") 2.02 Tenant shall cause to be prepared and submitted to Landlord for ---- approval all drawings, plans and specifications necessary to construct the Leasehold Improvements. The fees and expenses for preparing the drawings, plans and specifications shall the sole responsibility of Tenant. ---------------------------------- 2.03 Tenant acknowledges that Landlord's sole monetary obligation is to ---- pay the costs attributable to the construction of the Leasehold Improvements, up to an aggregate maximum limit of $ 250,000 (the "Allowance"), and Tenant shall ------- pay all other costs of the construction of the Leasehold Improvements ("Tenant's Share"). In addition, all costs attributable to changes and variations from the Construction Documents (including, without limitation, any fees and expenses of the Consultants and any increased costs of construction) shall be paid by Tenant. 3. Leasehold Improvements ---------------------- 3.01 The following provisions shall apply to the construction of the ---- Leasehold Improvements; (a) All work involved in the completion of the Leasehold Improvements shall be carried out by Landlord and its agents and contractors under the sole direction of Landlord. Tenant shall cooperate with Landlord and its agents and contractors to promote the efficient and expeditious completion of the Leasehold Improvements; and 7 (b) Landlord agrees to construct the Leasehold Improvements in accordance with the Construction Documents, provided Tenant has complied with all the applicable provisions of this Schedule, the Lease and Lease Amendment No. 3. 3.02 If there are any changes in the Leasehold improvements requested by, ---- or on behalf of, Tenant from the work as reflected in the Construction Documents, each such change must receive the prior written approval of Landlord, and Tenant shall bear the cost of all such changes. 3.03 Landlord shall have no obligation to commence construction of any ---- work in the Leased Premises until (a) Tenant has submitted the Construction ---------- Documents for the construction of the Leasehold improvements as required by the provisions hereof, and (b) Landlord shall have received Tenant's advance payment in an amount equal to the Tenant's Share, if any. 4. Lease Commencement Date ----------------------- 4.01 Landlord shall notify Tenant when Substantial Completion has been ---- achieved and the Lease Commencement Date shall Completion has established as set forth in the Lease Amendment No. 3. Notwithstanding anything to the contrary contained in the Lease, the Lease Amendment No. 3 or this Schedule, the Lease Commencement Date shall not be extended for any delay in Substantial Completion to the extent that such delay is caused in whole or in part by any act or omission attributable to Tenant, including without limitation: (a) Tenant's request for any Leasehold Improvements which require materials which need to be ordered and are not immediately available; (b) Tenant's failure to furnish promptly information concerning Tenant's requirements pertaining to construction of the Leasehold improvements or any other information requested by the Landlord as necessary or useful to prepare the Construction Documents; (c) Tenant's failure to submit promptly the Construction Documents; and ------ (d) Tenant's request for any changes in the Leasehold Improvements from the work as reflected in the Construction Documents. 4.02 In any event, Rent payable under the Lease and Lease Amendment No. 3 ---- shall not abate by reason of any delay, expense or other burden arising out of or incurred in connection with the design or construction of the Leasehold Improvements to the extent that such delay, expense or other burden is caused in whole or in part by any act or omission attributable to Tenant including, without limitation, the acts and omissions referred to in subparagraphs (a) through (d) of paragraph 4.01 above). 5. Tenant's Access to Leased Premises ---------------------------------- 5.01 Landlord, in its sole discretion, may permit Tenant and Tenant's ---- agents or independent contractors to enter the Leased Premises prior to the scheduled Lease Commencement Date in order that Tenant may do other work as may be required by Tenant to make the Leased Premises ready for Tenant's use and occupancy. Such permission must be in writing prior to entry. If Landlord permits such prior entry, then such license shall be subject to the condition that Tenant and Tenant's agents, contractors, workman, mechanics, suppliers, and invitees shall work in harmony with and not interfere with Landlord 8 and its agents and contractors in doing its work in the Leased Premises or the Building or with other tenants and occupants of the Building or the Project. If at any time such entry shall cause or threaten to cause disharmony or interference, Landlord, in its sole discretion, shall have the right to withdraw and cancel such license upon notice to Tenant. Tenant agrees that any such entry into the Leased Promises shall be deemed to be under all of the terms, covenants, conditions and provisions of the Lease and Lease Amendment No. 3, except as to the covenant to pay periodic Rent. Tenant further agrees that, to the extent permitted by law, Landlord and its principals shall not be liable in any way for any injury or death to any person or persons, loss or damage to any of the Leasehold Improvements or installations made in Leased Premises or loss or damage to property placed therein or there about, the same being at Tenant's risk. 5.02 In addition to any other conditions or limitations on such license to ---- enter the Leased Premises prior to the Lease Commencement Date, Tenant expressly agrees that none of its agents, contractors, workmen, mechanics, suppliers or invitees shall enter the Leased Premises prior to the Lease Commencement Date unless and until each of them shall furnish Landlord with satisfactory evidence of Insurance coverage, financial responsibility and appropriate written releases of mechanics' or materialmen's lien claims. 6. Miscellaneous Provisions Landlord and Tenant further agree as ------------------------ follows: 6.01 Except as herein expressly set forth with respect to the Leasehold ---- Improvements, Landlord has no agreement with Tenant and has no obligation to do any work with respect to the Leased Premises. Any other work in the Leased Premises which may be permitted by Landlord pursuant to the terms and conditions of the Lease and Lease Amendment No. 3 shall be done at Tenant's sole cost and expense and in accordance with the terms and conditions of the Lease and Lease Amendment No. 3. 6.02 This Schedule shall not be deemed applicable to: (a) any additional ---- space added to the original Leased Premises at any time, whether by the exercise of any options under the Lease, Lease Amendment No. 3 or otherwise, or (b) any portion of the original Leased Premises or any additions thereto in the event of a renewal or extension of the original Lease Term, whether by the exercise of any options under the Lease or any amendment or supplement thereto. The construction of any additions or improvements to the Leased Premises not contemplated by this Schedule shall be effected pursuant to a separate work letter agreement or other document, in the form then being used by Landlord and specifically addressed to the allocation of costs relating to such construction. 9 LEASE AMENDMENT NO. 4 THIS LEASE AMENDMENT NO. 4 ("Amendment") is made and entered into as of October 1, 1993, by and between SCRIPPS CENTER ASSOCIATES, a California general - ---------- partnership ("Landlord") and KEITH ENGINEERING, INC., d/b/a THE KEITH COMPANIES ("Tenant"). WHEREAS, Landlord and Tenant entered into a lease dated August 16, 1989, whereby Tenant leased approximately 70,000 square feet of space in an office building known as Building C of Scripps Center located at 2995 Red Hill Avenue, Costa Mesa, California (the "Old Leased Premises"). WHEREAS, the lease was amended by Lease Amendment No. 1 dated November 30, 1989, Lease Amendment No. 2 dated August 31, 1990 and Lease Amendment No. 3 dated April 15, 1993. The lease, together with Lease Amendments No. 1, 2 and 3 are herein collectively referred to as the "Lease". WHEREAS, Landlord and Tenant now desire to amend the Lease to reflect certain economic and other changes to the Lease. NOW, THEREFORE, in consideration of the foregoing premises and the respective covenants and agreements herein set forth, the parties hereto agree as follows: 1. Paragraph 1.1 (d) of the Lease shall be deleted in its entirety and replaced with the following: Tenant's Square Footage shall mean 32,994 rentable square feet which has been measured by Landlord in accordance with BOMA standards (and specifically excludes in the calculation the center stairwell). Tenant's Square Footage is calculated on a rentable basis which includes a pro rata share of common area. Total Square Footage of the Building shall mean 60,165 rentable square feet and Total Square Footage of the Project shall mean 229,349 rentable square feet, which may be adjusted pursuant to paragraph 7.2(iii) of the Lease. 2. Paragraph 1.1 (e) of the Lease shall be deleted in its entirety and replaced with the following: Lease Commencement Date shall mean June 1, 1993; Lease Expiration Date shall mean April 20, 2000; Lease Term shall mean the period between the Lease Commencement Date and the Lease Expiration Date. 1 3. Paragraph 1.1(f)a. of the Lease shall be deleted in its entirety and replaced with the following: a. Base Rent shall be payable in monthly installments Plus applicable sales tax, if any in accordance with the following schedule and adjustments: (i) From the Lease Commencement Date through April 30, 1994, Base Rent shall mean $376,131.60 ($11.40 per square foot of Tenant's Square Footage) per year, payable in monthly installments of $31,344.30. (ii) From May 1, 1994 through April 30, 1995, Base Rent shall mean $415,724.40 ($12.60 per square foot of Tenant's Square Footage) per year, payable in monthly installments of $34,643.70. (iii) From May 1, 1995 through April 20, 2000, Base Rent shall be subject to adjustment on each Base Rent Adjustment Date as follows: 4. The following language shall be added to the end of Paragraph 1.1(f)d of Lease Amendment No. 3: In lieu of Tenant paying the Adjustment Payments to Landlord, Tenant shall guaranty the Adjustment Payments under a separate guaranty document executed by Tenant and Landlord. In the event of default under the Lease, the guaranty shall control. 5. Paragraph 1.1(g) of the Lease shall be deleted in its entirety and replaced with the following: Tenant's Pro Rata Share of Building Operating Costs shall mean 54.8%., which may be adjusted pursuant to paragraph 7.2 (iii) of the Lease. Tenant's Pro Rata Share of Project Operating Costs shall mean 14.4%, which may be adjusted pursuant to paragraph 7.2 (iii) of the Lease. Tenant's Pro Rata Share of Project Operating Costs for the first calendar year of the Lease Term is estimated to be $75,226.32 ($2.28 per square foot of Tenant's Square Footage) payable in monthly installments of $6,268.86, which is subject to adjustment pursuant to Article 3.4c and d of the Lease. Tenant's Pro Rata Share of Building Operating Costs for the first calendar year of the Lease Term is estimated to be $65,328.12 ($1.98 per square foot of Tenant's Square Footage) payable in monthly installments of $5,444.01, which is subject to adjustment pursuant to Article 3.4c and d of the Lease. 2 6. The first paragraph and the Delinquent Rent schedule in Paragraph 12 of Lease Amendment No. 3 shall be deleted in their entirety and replaced with the following: Landlord and Tenant acknowledge that as of May 31, 1993, Tenant owes Landlord for delinquent rent for the Old Leased Premises in the amount of $671,152.16 plus interest of $153,330.66 for a total of $824,482.82 (such delinquent rent and interest collectively referred to as "Delinquent Rent"). Subject to Paragraph 13 hereof, the Delinquent Rent shall be a contingent liability of Tenant and thus can only be asserted by Landlord in the event that either Tenant files for protection under the Federal Bankruptcy Act during the Lease Term or if there has been an Event of Default under the Lease and Landlord terminates the Lease by judicial process. In such event, the Delinquent Rent shall become immediately due and payable as set forth below and said amount shall bear interest from the date of filing for protection or Event of Default until paid at a rate of 2% per month:
Month of Default Delinquent Rent ---------------- ---------------- 6/l/93 - 4/31/94 $824,482.82 5/l/94 - 4/31/95 706,699.56 5/l/95 - 4/31/96 588,916.30 5/l/96 - 4/31/97 471,133.04 5/l/97 - 4/31/98 353,349.78 5/l/98 - 4/31/99 235,566.52 5/l/99 - 4/20/00 117,783.26
7. The last two sentences of Schedule 5 (Parking) (as amended in Lease Amendment Nos. 2 and 3) shall be deleted in their entirety and replaced with the following: Of the Authorized Number of Parking Spaces set forth in Paragraph 6 hereof, Tenant shall have 12 reserved parking spaces and 8 car/van pool reserved parking spaces, the location of which are shown on revised Schedule 13 attached hereto and made a part hereof. 8. Schedule 13 of Lease Amendment No. 3 is hereby deleted in its entirety and replaced with Schedule 13 attached hereto and made a part hereof. Except as provided in this Lease Amendment No. 4, all other terms, covenants and conditions contained in the Lease shall remain in full force and effect. Initially capitalized terms not otherwise defined herein shall have the same meaning as contained in the Lease. 3 IN WITNESS WHEREOF, the parties have caused their respective names to be subscribed to this Lease Amendment No. 4 as of the date first above written the execution and delivery thereof having been duly authorized. TENANT: LANDLORD: KEITH ENGINEERING, INC. SCRIPPS CENTER ASSOCIATES d/b/a THE KEITH COMPANIES a California general partnership By: /s/ Aram H. Keith By: ALLSTATE INSURANCE COMPANY AND ------------------ Its President ALLSTATE LIFE INSURANCE COMPANY both Illinois corporations By: /s/ Floyd S. Reid general partners ------------------ Its Secretary by: Its (2) authorized signers (signatures illegible) 4 FIFTH AMENDMENT TO LEASE This Fifth Amendment to Lease ("Fifth Amendment") is made and entered into as of the ____ day of May, 1998 by and between Scripps Center Associates ("Landlord") and The Keith Companies ("Tenant"). RECITALS A. Landlord and Tenant entered into that certain Lease dated August 16, 1989 ("Lease") for premises in Scripps Center in the facility known as 2995 Redhill Avenue, Costa Mesa, California. Said Lease was modified with Amendments # 1, 2, 3 and 4, which provided for Tenant's relocation to 2955 Redhill Avenue, Costa Mesa (the "Building"'). B. The parties wish to modify the Lease whereby Tenant shall lease an additional 16,419 rentable square feet, on a portion of the ground floor further identified as Suite 100, in the property known as 2955 Redhill Avenue, Costa Mesa, California ("Additional Premises"), in addition to the initial amended Leased Premises. Now, therefore, in consideration of the foregoing recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. LEASED PREMISES: Shall additionally include Suite 100 on a portion of the ground floor of the Building, as of the Lease Commencement Date for the Additional Premises, further described and shown in the attached Exhibit 1. 2. TENANT'S SQUARE FOOTAGE: Shall mean 49,41') rentable square feet for the combined 4th Amendment defined Leased Premises and Additional Premises as of the Lease Commencement Date for the Additional Premises. 3. LEASE COMMENCEMENT DATE: For the Additional Premises shall mean July 1, 1998. 4. LEASE TERM: Shall expire on April 20, 2000 or earlier, if cancelled by Landlord as provided for in the current Lease. 5. BASE RENT: Shall mean for the Additional Premises only, as of the Lease Commencement Date for the Additional Premises on a triple net basis, Sixteen Thousand Four Hundred Nineteen and No/100 Dollars ($16,419.00) monthly for months I - 12 of said Lease Term and Sixteen Thousand Seven Hundred Forty- seven and 38/100 Dollars ($16,747.38) monthly for months 13 -22 of the Lease Term. Tenant shall continue to pay the Base Rent for the Initial Premises as prescribed in the Lease as amended unabated over the remainder of the Lease Term. 6. EARLY OCCUPANCY: Tenant shall have the right, provided it does not interfere with the tenant improvement process, of one (1) month early occupancy prior to the Lease Commencement Date rent free for the purpose of installing furniture, fixtures and equipment. 7. OPERATING EXPENSES: Tenant's Pro Rata Share of Building Operating Costs shall mean 81.7% as of the Lease Commencement Date for the combined 4th Amendment defined Premises and the Additional Premises. Tenant's Pro Rata Share of Project Operating Costs shall mean 21.5% as of the Lease Commencement Date for the combined 4th Amendment defined Premises and the Additional Premises. 8. OPTION TO RENEW: Subject to any existing rights, Tenant shall have one (1) ------------------------------ option to renew ("Option to Renew") this Lease for five (5) years (the "Renewal Period"). If Tenant desires to exercise its Option to Renew, Tenant shall give Landlord written notice ("Renewal Notice") thereof on or before January 20, 2000. During the thirty-(30) day period following Landlord's receipt of the Renewal Notice, Landlord and Tenant shall 2 use reasonable efforts to negotiate a mutually agreeable base rent ("Market Base Rent") for the Renewal Period. The Market Base Rent shall be negotiated in light of then current terms for reviewing tenants for comparable space, including market rents, term of renewal and operating expense pass throughs and the tenant improvement allowance of $5.00 per rentable square foot which Landlord will provide Tenant as part of its renewal. Within fifteen (15) business days of agreement by the parties on the Market Base Rent and other terms of the renewal, Landlord shall deliver to Tenant an amendment to this Lease extending this Lease on such terms. Such amendment shall not contain any further option to renew. Tenant shall execute and deliver the amendment to Landlord within ten (10) business days following receipt of such amendment. The foregoing option and rights are subject to there having been no Event of Default which has not been cured under this Lease, are personal to the original Tenant executing the Lease, may not be assigned, and shall be available to and exercisable by the Tenant only when the original Tenant is in actual possession and physical occupancy of the entire Leased Premises. Time is of the essence in the exercise of Tenant's Option to Renew. Should Tenant fail to exercise such option, execute and deliver any required documents, or perform any of its required obligations under this section, or should the parties be unable to agree on Market Base Rent for the Renewal Period, within the time periods set forth above, then this Option to Renew and any other rights of Tenant under the Lease in the nature of options, shall be null and void, and the Lease shall terminate at the end of the Lease Term. The option to renew shall include annual rent increases based upon the CPI, not to exceed 3% per annum compounded. 9. PARKING: As of the Lease Commencement Date for the Additional premises only, Tenant shall have fifty-nine (59) unreserved and in common parking spaces and five (5) reserved parking spaces in a mutually agreed upon location. 10. SECURITY DEPOSIT: Upon execution of this 5th Amendment to Lease, Tenant shall deposit with Landlord a security deposit equal to the first month's rent for the Additional Premises. 11. PREPAID RENT: Upon execution of this 5th Amendment to Lease, Tenant shall deposit with Landlord' Tenant's first full month's rent for the Additional Premises. 12. RIGHT TO ASSIGN OR SUBLEASE: No consent shall be required for transactions with affiliates or for corporate restructuring (mergers, ----------------------- consolidations, etc.) provided Tenant notifies Landlord within thirty (30) days. All profits on any sublease or assignment transaction shall be shared 50% to Landlord and 50% to Tenant. 13. CONSTRUCTION: The terms defined in this paragraph 14, for the purposes of constructing the improvements within the Additional Premises, shall have the meanings specified below, and in addition to the terms below, other terms identified in the Lease shall, for the purposes of this paragraph 14, have the meaning specified in the Lease. 1. DEFINITIONS: 1.01 "Leasehold Improvements" means those items which are supplied, ------------------------ installed and finished by Tenant, according to and described in the Construction Documents (as hereinafter defined) and which shall be paid for by Tenant (subject to the Allowance) as provided for in paragraph 2.03 below. 1.02 "Construction Documents" means the approved construction drawings, ------------------------ plans and specifications referred to in paragraph 2.03. 1.03 "Substantial Completion" means that the Leasehold Improvements have ------------------------ been substantially completed according to the Construction Documents, except for items which will not materially affect the use of the Leased Premises or which customarily are deemed to be "punchlist work" 3 2. CONSTRUCTION DOCUMENTS; PAYMENTS 2.01 The parties have approved a preliminary- floor plan for the Leased Premises, a copy of which is attached to the Lease as Schedule I (the "Preliminary Plan"). 2.02 Tenant shall cause to be prepared and submitted to Landlord for approval all drawings, plans and specifications necessary to construct the Leasehold improvements. Within five (5) business days from the date the documents are Submitted ("Document Approval Period"), Landlord shall approve or disapprove the documents. Said approval shall not be unreasonably withheld or delayed. If the Landlord disapproves the documents within the Approval Period, then the Landlord and Tenant shall attempt to resolve the objections of Landlord; and if a reasonable resolution cannot he reached within ten (10) days of Landlord's notice of disapproval, then either Tenant or Landlord shall have the right to terminate the Lease by written notice to the other. Tenant shall have sole responsibility for ensuring that the Leasehold Improvements comply with all applicable laws, statues, ordinances and regulations, including without limitation the Americans with Disabilities Act. 2.03 Upon Landlord's approval of the final form of the drawings, plans and specifications, which shall constitute the Construction Documents, Tenant shall prepare an analysis of the cost of constructing the Leasehold Improvements according to the Construction Documents (the "Final Cost") and submit such analysis to Landlord for its approval. Within five (5) business days from the date the Final Cost has been submitted ("Cost Approval Period") Landlord shall approve or disapprove the Final Cost, which shall not be unreasonably withheld or delayed. If Landlord does not approve the Final Cost, it shall promptly notify Tenant; in which case Tenant and Landlord shall use their best efforts to amend the Construction Documents in a manner satisfactory to each. If they are unable to do so within five (5) days after Landlord notifies Tenant as provided in the preceding sentence, either party may terminate the Lease by delivering written notice to the other. Tenant acknowledges that Landlord's sole monetary obligation is to pay the costs attributable to the construction of the Leasehold Improvements, up to an aggregate maximum limit of $2.68 per rentable square foot of Tenant's Additional Premises (the "Allowance"), and Tenant shall pay all other costs of the construction of the Leasehold' Improvements ("Tenant's Share"). In addition, all costs attributable to changes and variations from the Construction Documents in excess of the Final Cost (including, without limitation, any fees and expenses of the Consultants and any increased costs of construction) shall be paid by Tenant. 2.04 After approval of the construction Documents, Tenant shall bid the Leasehold Improvements to at least two (2) general contractors or product vendors applicable approved in advance by Landlord. Tenant shall have the right to select the general contractor who will construct the Leasehold Improvements (the "General Contractor") from the responses to such bids and approve the Cost Estimate. The General Contractor shall execute an industry standard American Institute of Architect's ("AIA") Contract with the Tenant, satisfactory to Landlord in form and substance, which shall include an indemnification of Tenant and Landlord and their successors and assigns from and against any and all claims, damages, losses or expenses suffered or incurred by reason of misfeasance or malfeasance of the General Contractor or any of its employees, agents, contractors, invitees or guests. The contract shall provide for a retainage of not less than ten percent (10%). 2.05 Prior to the commencement of construction, the General Contractor shall deliver to Tenant and to Landlord: 4 (a) evidence that all permits necessary for the construction of the Leasehold Improvements have been obtained: (b) certificates of insurance from companies acceptable to Tenant and Landlord, naming Tenant and Landlord as additional Insureds, and evidencing builder's risk coverage in an amount satisfactory to Tenant and Landlord, along with such other insurance coverages as Tenant and Landlord may reasonably require: (c) at Landlord's request, obtain and deliver to Landlord a bond for payment and performance, in form and amount reasonably satisfactory to Landlord, naming Landlord and Tenant as beneficiaries. 2.06 Payments of portions of the Allowance shall be made from time to time during the course of the construction of the Leasehold Improvements, but not more often than once a month. Disbursements of the requested amounts, subject to Landlord's withholding of the retainage, shall be made upon the Submission to Landlord of the following documents: (a) a draw request from Tenant in form acceptable to Landlord, together with copies of the invoices for which payment is being requested; (b) lien waivers (to the extent available under local law), and sworn statements from the General Contractor, subcontractors, sub- subcontractors, laborers and material suppliers pertaining to the work. If lien waivers are not available for the currently requested disbursement, Tenant shall submit lien waivers for all sums previously advanced; (c) a certificate from Tenant's architect that all work (labor and materials) for which the draw request has been made has been completed and performed in a good and workmanlike manner substantially in accordance with the Construction Drawings and Specifications; (d) such evidence as Landlord may reasonably require certifying that any work requiring inspection by Governmental authorities has been duly inspected and approved; (e) at Landlord's request, title insurance endorsements satisfactory to Landlord at Tenant's expense; and (f) satisfy such other conditions as Landlord may reasonably require in order to establish that the work has been satisfactorily completed and paid for. 2.07 At Landlord's option, payments may be made directly to the invoicing party, to the General Contractor or to Tenant. Landlord shall have no obligation to disburse any sums hereunder if Landlord has received notice that the property is subject to a charge, liability, claim, lien, mechanic's lien, or other encumbrance of whatsoever kind or nature created by Tenant or by reason of the construction of the Leasehold Improvements by the Tenant, unless any such claim or lien is bonded over to the satisfaction of Landlord in Landlord's sole and absolute discretion. 2.08 Landlord shall not be obligated to make the final advance of the Allowance until the Tenant has also delivered to Landlord the following additional items, all satisfactory to Landlord in Landlord's sole discretion. (a) such as-built plans and specifications as Landlord may deem necessary to describe the work; 5 (b) certificates of occupancy and such other evidence as Landlord may reasonably require certifying that any work requiring inspection by governmental authorities has been duly inspected and approved; c) a certificate from Tenant's architect stating that Improvements have been completed substantially in accordance with the Construction Drawings (as they may have been modified from time to time as provided by this agreement); (d) final lien waivers from the General Contractor, subcontractors, laborers and materials suppliers, or evidence satisfactory to Landlord in Landlord's sole discretion that such lien shall be delivered to Landlord immediately upon payment of the final advance by Landlord; and (e) at Landlord's request, title insurance endorsements satisfactory to Landlord at Tenant's expense. 3. LEASEHOLD IMPROVEMENTS 3.01 The following provisions shall apply to the construction of the Leasehold Improvements: (a) All work involved in the completion of the Leasehold Improvements shall be carried out by Tenant and its agents and contractors under the sole direction of Tenant, except that in the event that installation of any of the Leasehold Improvements affects, connects to or impacts the mechanical, electrical or plumbing systems of the Building or any space in the Building outside of the Leased Premises, Landlord's Representative (as described below) shall have full and absolute authority to stop or redirect the work as s/he deems necessary. Landlord shall cooperate with Tenant and its agents and contractors to promote the efficient and expeditious completion of the Leasehold Improvements. (b) Landlord shall be represented during the construction of the Leasehold Improvements by Property Manager ("Landlord's Representative"), who shall be given full and complete access to the Leased Premises and the Construction Documents while the Leasehold Improvements are being constructed. Tenant's agents and contractors shall cooperate fully with all requests of Landlord's representative. (c) Tenant agrees to construct the Leasehold Improvements in accordance with the construction Documents, and in compliance with all applicable building and safety codes. Tenant shall complete the construction of the Leasehold Improvements with as little disruption or interference as possible with the other tenants of the Building. Specifically, without limiting the foregoing, Tenant shall not block access to the Building, obstruct walkways or parking spaces, or tie up passenger elevators, without first receiving Landlord's prior written consent, nor shall Tenant cause any fire or safety hazards during the construction. (d) Tenant hereby indemnifies and holds Landlord and its agents harmless from any and all damages or injury to person and property arising out of or related to the Improvements being performed to the Leased Premises, excluding damage or injury caused by the acts, omissions or gross negligence on the part of the Landlord or its agents. Tenant shall reimburse Landlord for any expenses incurred by Landlord in making repairs to the Leased Premises or other areas of the Project or Building 6 outside the Leased Premises, arising out of or related to the Improvements being performed hereunder. 3.02 If there are any changes in the Leasehold Improvements requested by, or on behalf of, Tenant from the work as reflected in the Construction Documents, each Such change must receive the prior written approval of Landlord, and Tenant shall bear the cost of all such changes. 3.03 Tenant shall not commence construction of any work in the Leased Premises until (a) Landlord has approved the Construction Documents and the Final cost for the construction of the Leasehold Improvements as required by the provisions hereof, and (b) Landlord shall have received Tenant's advance payment in an amount equal to the Tenant's Share, if any. 4. LEASE COMMENCEMENT DATE 4.01 Tenant shall notify Landlord when Substantial Completion has been achieved and the Lease Commencement Date shall be established as set forth in the Lease. Notwithstanding anything to the contrary contained in the Lease or this Schedule, the Lease Commencement Date shall not be extended for any delay in Substantial Completion to the extent that such delay is caused in whole or in party by any act or omission attributable to Tenant, including without limitation: (a) Tenant's request for any Leasehold Improvements which require materials which need to be ordered and are not immediately available; (b) Tenant's failure to furnish promptly information concerning Tenant's requirements pertaining to construction of the Leasehold Improvements or any other information requested by the Landlord as necessary or useful to approve the Construction Documents, (c) Tenant's failure to promptly prepare and submit the Construction Documents and Final Cost; and (d) Tenant's request for any changes in the Leasehold Improvements from the work as reflected in the Construction Documents. 4.02 In any event, Rent payable under the Lease shall not abate by reason of any delay, expense or other burden arising out of or incurred in connection with the design or construction of the Leasehold Improvements to the extent that such delay, expense or other burden is caused in whole or in party by any act or omission attributable to Tenant (including, without limitation, the acts and omissions referred to in subparagraphs (a) through (d) of paragraph 4.01 above). 5. TENANT'S ACCESS TO LEASED PREMISES 5.01 Tenant and Tenant's agents or independent contractors may enter the Leased Premises prior to the scheduled Lease Commencement Date to perform the construction of the Leasehold Improvements and to do such other work as may be required by Tenant to make the Leased Premises ready for Tenant's use and occupancy. Such entry shall be subject to the condition that Tenant and Tenant's agents, contractors, workmen, mechanics, suppliers and invitees shall work in harmony with and not interfere with Landlord and its agents and contractors in doing its work in the Leased Premises or the Building or with other tenants and occupants of the Building or the Project. If at any time such entry shall cause or threaten to cause disharmony or interference, Landlord, in its sole discretion, shall have the right to limit, withdraw or cancel such license upon notice to Tenant and, if necessary, to complete the construction of the Leasehold Improvements on Tenant's behalf. Tenant agrees that any 7 such entry into the Leased Premises shall be deemed to be under all of the terms, covenants, conditions and provisions o (Sic.) the Lease, except as to the covenant to pay periodic Rent. Tenant further agrees that, to the extent permitted by law, Landlord and its principals shall not be liable in any way for any injury or death to any person or person, loss or damage to any of the Leasehold Improvements or installations made in the Leased Premises or loss or damage to property placed therein or thereabout, the same being at Tenant's sole risk. 5.02 In addition to any other conditions or limitations on such license to enter the Leased Premises prior to the Lease Commencement Date, Tenant expressly agrees that none of its agents, contractors, workmen, mechanics suppliers or invitees shall enter the Leased Premises prior to the Lease Commencement Date unless and until each of them shall furnish Landlord with satisfactory evidence of insurance coverage, financial responsibility and appropriate written releases of mechanics' or materialmens' lien claims. 6. MISCELLANEOUS PROVISIONS 6.01 Except as herein expressly set forth with respect to the Leasehold Improvements, Landlord has no agreement with Tenant and has no obligation to do any work with respect to the Leased Premises. Any other work in the Leased Premises which may be permitted by Landlord pursuant to the terms and conditions of the Lease shall be done Tenant's sole cost and expense and in accordance with the terms and conditions of the Lease. 6.02 This paragraph 13 shall not be deemed applicable to: (a) any additional space added to the original Leased Premises at any time, whether by the exercise of any options under the Lease or otherwise, or (b) any portion of the original Leased Premises as amended or any additions thereto in the event of a renewal or extension of the original Lease Term, whether by the exercise of any options under the Lease or any amendment or supplement thereto. The construction of any additions or Improvements to the Leased Premises not contemplated by this paragraph 13 shall be effected pursuant to a separate work letter agreement or other document, in the form then being used by Landlord and specifically addressed to the allocation of costs relating to such construction. Except as modified herein, the Lease as amended shall remain in full force and effect. In witness whereof, the Fifth Amendment has been executed as of the day and year first written above. LANDLORD: TENANT: SCRIPPS CENTER ASSOCIATES THE KEITH COMPANIES By: Allstate Life Insurance Company By: Its: General Partner Its: By: /s/ B.S.B. (signature illegible) By: /s/ Jerry Brickman -------------------------------- ---------------------- Its: Authorized Signatory Its: Authorized Signatory By: Allstate Insurance Company Its: General Partner By: /s/ B.S.B. (signature illegible) -------------------------------- Its: Authorized Signatory 8 EX-10.12 17 LEASE DATED JANUARY 1, 1996 EXHIBIT 10.12 LEASE MORENO CORPORATE CENTER, L.L.C., -------------------------------- a Delaware limited liability company Landlord and THE KEITH COMPANIES, INC., -------------------------- a California corporation, formerly known as The Keith Companies - Inland Empire, Inc., a California corporation Tenant TABLE OF CONTENTS -----------------
Page ---- 1. TERM................................................................................. 2. BASIC ANNUAL RENT AND SECURITY DEPOSIT............................................... 3. ADDITIONAL RENT...................................................................... 4. IMPROVEMENTS AND ALTERATIONS......................................................... 5. REPAIRS.............................................................................. 6. USE OF PREMISES...................................................................... 7. UTILITIES AND SERVICES............................................................... 8. NONLIABILITY AND INDEMNIFICATION OF LANDLORD; INSURANCE.............................. 9. FIRE OR CASUALTY..................................................................... 10. EMINENT DOMAIN....................................................................... 11. ASSIGNMENT AND SUBLETTING............................................................ 12. DEFAULT.............................................................................. 13. ACCESS; CONSTRUCTION................................................................. 14. BANKRUPTCY........................................................................... 15. SUBSTITUTION OF PREMISES............................................................. 16. SUBORDINATION; ATTORNMENT; ESTOPPEL CERTIFICATES..................................... 17. SALE BY LANDLORD; NONRECOURSE LIABILITY.............................................. 18. PARKING; COMMON FACILITIES........................................................... 19. MISCELLANEOUS........................................................................ (a) Attorneys' Fees............................................................ (b) Waiver..................................................................... (c) Notices.................................................................... (d) Labor...................................................................... (e) Security................................................................... (f) Storage.................................................................... (g) Holding Over............................................................... (h) Condition of Premises...................................................... (i) Quiet Possession........................................................... (j) Matters of Record.......................................................... (k) Project Financing.......................................................... (1) Successors and Assigns..................................................... (m) Brokers.................................................................... (n) Name....................................................................... (o) Examination of Lease; Confidentiality...................................... (p) Time....................................................................... (q) Defined Terms and Marginal Headings........................................ (r) Conflict of Laws; Prior Agreements; Separability........................... (s) Authority.................................................................. (t) Common Areas............................................................... (u) Joint and Several Liability................................................ (v) Rental Allocation.......................................................... (w) Rules and Regulations...................................................... (x) Financial Statements....................................................... (y) Termination................................................................
LEASE THIS LEASE ("LEASE") is made and entered into as of the 1st day of January 1, 1996, by and between Moreno Corporate Center, L.L.C., a Delaware limited liability company ("LANDLORD"), and The Keith Companies, Inc., a California corporation ("TENANT"), formerly known as The Keith Companies -Inland Empire, Inc., a California corporation, with regard to the premises located at 22690 Cactus Avenue, Floors 2 and 3, Moreno Valley, California. NOW, THEREFORE, for and in consideration of the foregoing Recitals and the mutual covenants and agreements set forth in this Lease, Landlord and Tenant hereby agree as follows: BASIC LEASE PROVISIONS The following is a summary of lease provisions ("BASIC LEASE PROVISIONS") intended for convenient use by Landlord and Tenant. If the letters N/A appear in the Basic Lease Provisions, they mean that the particular item in the Basic Lease Provision is not applicable to this Lease. Unless expressly modified in this Lease, the following terms, words and figures set forth in the Basic Lease Provisions are part of this Lease wherever reference is made to them in this Lease, whether capitalized or lower case: 1. Tenant: The Keith Companies, Inc., a California corporation ("TENANT") 2. Building: Moreno Valley Corporate Center Address: 22690 Cactus Street Moreno Valley, California 3. Description of Premises: approximately 21,015 square feet located on the third (3rd) floor, together with approximately 6,999 square feet located on the second (2nd) Floor, together with 721 square feet comprising a field office and computer room located on the first (1st) floor Rentable Area: 28,735 square feet (See Exhibit "A") 4. Tenant's Proportionate Share of the Building: 46.18 % 5. Subject to the terms of Section 2 of the Lease, Basic Annual Rent: $572,401.12. Basic Annual Rent shall include the following increases: a. An eight percent (8%) increase in the month following Month Twenty- four (24) of the Term; b. An eight percent (8%) increase in the month following Month Forty- eight (48) of the Term; and c. An eight percent (8%) increase every twenty-four months thereafter for the Term of the Lease and any extensions thereof; PROVIDED, HOWEVER, subject to the terms and conditions herein Landlord hereby covenants and agrees to abate a portion of the Basic Annual Rent ("Abated Rent"), so that the amount of Basic Annual Rent payable under this Lease, after taking into account such rent abatement, shall equal Four Hundred Thirty-one Thousand Twenty-five Dollars ($431,025) so long as Tenant is not in default. Such reduced Basic Annual Rent shall likewise be increased in accordance with the increases set forth in Sections 5a., 5b., and 5c., of these Basic Lease Provisions. If Tenant shall default under the terms of this Lease, Tenant acknowledges and agrees that (i) the Basic Annual Rent shall be payable in full without regard to any such rental abatement and (ii) Tenant shall immediately pay to Landlord an amount equal to the Abated Rent not paid by Tenant plus interest thereon calculated at the Default Rate from the date each sum of Abated Rent would have been payable if not abated hereunder. 6. Initial Monthly Installment of Basic Annual Rent: $47,700 ($1.66 per square foot of Rentable Area), unabated, and $35,918.75 ($1.25 per square foot of Rentable Area) after deducting the Abated Rent. Concurrently upon Tenant's execution of this Lease, Tenant shall cause the delivery to Landlord of a promissory note in the original face amount of $273,892.96 in the form and substance attached as Exhibit "B" to that certain Agreement Regarding Lease entered into currently herewith by and between the parties to this Lease. Said note is payment of rent for the first eight months of the Term. A default under said note shall also constitute a default under this Lease. 7. Security Deposit: None, except as expressly provided in Section 2(c) 8. Base Year: 1995 9. Term: Five (5) years and nine (9) months 10. Commencement Date: January 1, 1996 11. Broker: None 12. Permitted Use: General Office 13. Number of Parking Spaces (See Paragraphs 18): Not more than 94 vehicle parking spaces which includes Tenant's pro rata share of visitor parking spaces for the Building. 14. Addresses for Notices: To: Tenant To: Landlord The Keith Companies, Inc. c/o Oaktree Capital Management, L.L.C. 2955 Red Hill Avenue 550 South Hope Street Costa Mesa, California 92626 22nd Floor Attention: Aram H. Keith Los Angeles, California 90071 Telephone: (714) 540-0800 Attention: W. Gregory Geiger Telephone: (213) 614-0900 Telecopier: (213) 694-1592 With a copy to: Paul, Hastings, Janofsky & Walker 555 South Flower Street 23rd Floor Los Angeles, California 90071 Attention: Philip N. Feder, Esq. Telephone: (213) 683-6298 Telecopier: (213) 627-0705 15. All payments payable under this Lease shall be sent to Landlord at the address specified in Item 14 or to such other address as Landlord may designate. 16. Guarantors: Keith Engineering, Inc., a California corporation dba The Keith Companies The Keith Companies - North Counties, Inc., a California corporation Keith International, Inc., a California corporation The Keith Companies - Hawaii, Inc., a Hawaii corporation [SIGNATURE PAGE TO FOLLOW] IN WITNESS WHEREOF, the parties have executed this Lease, consistent with foregoing Recitals, Basic Lease Provisions, the provisions of the Standard Lease Provisions ("STANDARD PROVISIONS") (consisting of Paragraphs 1 through 19 which follow) and Exhibits "A" through "E", inclusive, all of which are incorporated herein by this reference. In the event of any conflict between the provisions of the Basic Lease Provisions and the provisions of the Standard Lease Provisions, the Standard Lease Provisions shall control. "Landlord" "Tenant" Moreno Corporate Center, L.L.C. The Keith Companies, Inc. a Delaware limited liability company a California corporation By: TCW Asset Management Company, By: /s/ A.H. Keith a California corporation, Its: President its manager By: /s/ Russel S. Bernard By: /s/ Floyd S. Reid Its: Its: Secretary By: /s/ Wm. Gregory Geiger Its: STANDARD LEASE PROVISIONS Landlord hereby leases to Tenant and Tenant hereby hires from Landlord, subject to all of the terms and conditions set forth herein, the Premises, more particularly described in Item 3 of the Basic Lease Provisions. The Premises are located in that certain office building ("BUILDING"), located on that certain land ("LAND") described on Exhibit "A" attached hereto, which is also improved with landscaping, parking facilities and other improvements and appurtenances. The Land, together with all such improvements and appurtenances and the Building, are, subject to Paragraph 18, collectively referred to herein as the "PROJECT". However, Landlord reserves the right to make such changes, additions and/or deletions to the Land, the Building and the Project as it shall determine from time to time. 1. TERM (a) Unless earlier terminated in accordance with the provisions hereof, the initial term of this Lease shall be the period shown in Item 9 of the Basic Lease Provisions. All references to the term of this Lease shall include any extension agreed to in writing by Landlord. (b) This Lease shall be a binding contractual obligation effective upon execution hereof by Landlord and Tenant. 2. BASIC ANNUAL RENT AND SECURITY DEPOSIT (a) Tenant agrees to pay each Lease Year (defined below) of the term of this Lease as Basic Annual Rent ("BASIC ANNUAL RENT") for the Premises the sums shown for such periods in Item 5 of the Basic Lease Provisions. For purposes of this Lease, a "LEASE YEAR" shall be each 12 calendar month period commencing on (i) the Commencement Date (or anniversary thereof) if the Commencement Date occurs on the first day of a month, or otherwise (ii) on of the first day of the calendar month following the Commencement Date (or anniversary thereof). Subject to Tenant's fulfilling all its obligations under this Lease, Landlord has agreed to reduce the rent payable hereunder from $1.66 per square foot to $1.25 per square under this Lease, such difference being referred to herein as the "ABATED RENT". (b) Except as expressly provided to the contrary herein, Basic Annual Rent shall be payable in equal consecutive monthly installments, in advance, without deduction or offset, commencing on the Commencement Date and continuing on the first day of each calendar month thereafter. The Installment payable upon execution, described in Item 6 of the Basic Lease Provisions, and all amounts to be paid to Landlord by Tenant as set forth in Paragraph F of the Agreement above, shall be payable upon Tenant's execution of this Lease. If the Commencement Date is a day other than the first day of a calendar month, then the Rent (defined below) for the Partial Lease Month ("PARTIAL LEASE MONTH RENT") shall be calculated on the per them basis shown therefor in Item 5 of the Basic Lease Provisions for the number of days of such month from and including the Commencement Date. The Partial Lease Month Rent shall be payable by Tenant prior to the date that Tenant takes possession or commences use of the Premises for any business purpose (including moving in). Basic Annual Rent, all forms of additional rent payable hereunder by Tenant and all other amounts, fees, payments or charges payable hereunder by Tenant shall (i) each constitute rent payable hereunder (and shall sometimes collectively be referred to herein as "RENT"), (ii) be payable to Landlord when due without any prior demand therefor in lawful money of the United States and, except as may be expressly provided to the contrary herein, without any offset or deduction whatsoever and (iii) be payable to Landlord at the address of Landlord described in Item 2 of the Basic Lease Provisions or to such other person or to such other place as Landlord may from time to time designate in writing to Landlord. It is expressly understood and agreed that in the event Tenant shall default hereunder the amount of the Abated Rent shall become immediately due and payable. (c) If Tenant shall be in default on three (3) or more occasions with respect to any provision of this Lease, including, without limitation, the provisions relating to the payment of Rent or the cleaning or restoration of the Premises upon the termination of this Lease, Landlord may require that Tenant pay to Landlord as part of Tenant's curing of such default a security deposit ("SECURITY DEPOSIT") in an amount equal to a the amount of Basic Annual Rent and Additional Rent payable by Tenant for the three (3) month prior expiring immediately prior to the date Landlord shall have given Tenant notice of such default. Landlord may, but shall not be required to, use, apply or retain all or any part of the Security Deposit (i) for the payment of any Rent or any other sum in default, (ii) for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default hereunder, or (iii) to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default hereunder, including, without limitation, costs and attorneys' fees incurred by Landlord to recover possession of the Premises following a default by Tenant hereunder. If any portion of the Security Deposit is so used or applied, Tenant shall, upon demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the appropriate amount, as required to be maintained by Tenant hereunder. If Tenant shall fully perform every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest hereunder) within 14 days following the expiration of the term of this Lease; provided, however, that Landlord may retain the Security Deposit until such time as any amount due from Tenant in accordance with Paragraph 3 below has been determined and paid to Landlord in full. (d) The parties agree that for all purposes hereunder the Premises shall be stipulated to contain the number of square feet of Rentable Area (defined in Exhibit "A") described in Item 3 of the Basic Lease Provisions. Upon the request of Landlord, Landlord's Space Planner shall verify the exact number of square feet of Rentable Area in the Premises. In the event there is a variation of 3% or more from the number of square feet specified in Item 3 of the Basic Lease Provisions, Landlord and Tenant shall execute an amendment to this Lease for the purpose of making appropriate adjustments to the Basic Annual Rent, the Security Deposit, Tenant's Proportionate Share (defined below) and such other provisions hereof as shall be appropriate under the circumstances. 3. ADDITIONAL RENT (a) Subject to the provisions of this Lease, if Operating Costs (defined below) for the Project for any calendar year during the term of this Lease exceed Base Operating Costs (defined below), Tenant shall pay to Landlord as additional rent an amount equal to Tenant's Proportionate Share of such excess. (b) "TENANT'S PROPORTIONATE SHARE" is, subject to the provisions of this Paragraph 3, the percentage number described in Item 4 of the Basic Lease Provisions. Tenant's Proportionate Share represents a fraction, the numerator of which is the number of square feet of Rentable Area in the Premises and the denominator of which is the number of square feet of Rentable Area in the Project, as determined by Landlord pursuant to Paragraph 2(d) above. (c) "BASE OPERATING COSTS", during the term of this Lease equals the product of (i) Operating Costs for the Project during Base Year referred to as Item 8 of the Basic Lease Provisions and (ii) the number of square feet of Rentable Area contained in the Project. Operating Costs for the Base Year during which actual occupancy of the Project is less than 95% of the Rentable Area of the Project shall be appropriately adjusted to reflect 95% occupancy of the existing Rentable Area of the Project during such period. (d) "OPERATING COSTS" means all costs, expenses and obligations incurred or payable by Landlord in connection with the operation, ownership, repair, management or maintenance of the Project during or allocable to the term of this Lease, including without limitation, the following: (i) All real property taxes, assessments, license fees, excises, levies, charges or impositions and other similar governmental ad valorem or other charges levied on or attributable to the Project or its ownership, operation or transfer, and all taxes, charges, assessments or similar impositions imposed in lieu of the same (collectively, "REAL ESTATE TAXES"). "Real Estate Taxes" shall also include all taxes, assessments, license fees, excises, levies, charges or similar impositions imposed by any governmental agency, district, authority or political subdivision (A) on any interest of Landlord, any mortgagee of Landlord or any interest of Tenant in the Project, the Premises or in this Lease, or on the occupancy or use of space in the Project or the Premises; (B) on the gross or net rentals or income from the Project, the Rent received hereunder, or on Landlord's "right" or "rights" to any of the foregoing or on Landlord's business of leasing the Premises, the Building or the Project, including, without limitation, any gross income tax or excise tax levied by any federal, state or local governmental entity with respect to the receipt of Rent or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Project or portions thereof; (C) measured by the gross square footage of the Project, the Premises, or any portion thereof, or by the number of actual, estimated or potential occupants of the Project, the number of vehicular trips generated by or associated with the Project, or the number of parking spaces contained within the Project, or for any transportation, arts, housing or environmental plan, fund or system instituted within or for any geographic area in which the Building is located, or any similar measure; (D) on the transfer of or the transaction represented by this Lease or any lease of space in the Project or on any document creating or transferring an interest in this Lease; (E) on the construction, removal or alteration of improvements in the Project; (F) for the provision of amenities, services or rights of use, whether or not exclusive, public, quasi-public or otherwise made available on a shared use basis, including amenities, services or rights of use such as fire protection, police protection, street, sidewalk, lighting, sewer or road maintenance, refuse removal or janitorial services or for any other service, without regard to whether such services were formerly provided by governmental or quasi- governmental agencies to property owners or occupants at no cost or at minimal cost; and (G) related to any transportation plan, fund or system instituted within the geographic area of the Project or otherwise applicable to the Premises, the Project or any portion thereof. "Real Estate Taxes" shall not include any income, capital stock, estate or inheritance tax imposed by the State of California or the federal government; and (ii) The cost of utilities (including taxes and other charges incurred in connection therewith, but, subject to the provisions of Paragraph 7, excluding the cost of Tenant's electrical current usage within its Premises, which usage shall be separately metered pursuant to the provisions of Paragraph 7 below), fuel, supplies, equipment, tools, materials, service contracts, janitorial services, waste and refuse disposal, gardening and landscaping, insurance (including, but not limited to, public liability, fire, property damage, flood, rental loss, rent continuation, boiler machinery, business interruption, contractual indemnification, earthquake and All Risk coverage insurance for up to the full replacement cost of the Project and such other insurance as is customarily carried by operators of other first class buildings in the County in which the Project is located) to the extent carried by Landlord in its discretion (and the deductible portion of any insured loss otherwise covered by such insurance), the cost of compensation, including employment, welfare and social security taxes, paid vacation days, disability, pension, medical and other fringe benefits of all persons (including independent contractors) who perform services connected with the operation, maintenance or repair of the Project, personal property taxes on and maintenance and repair of equipment and other personal property used in connection with the operation, maintenance or repair of the Project, such auditors' fees and legal fees as are incurred in connection with the operation, maintenance or repair of the Project, costs incurred for administration and management of the Project, whether by Landlord or by an independent contractor, administrative expenses, management fees (which shall not exceed management fees customarily charged by first class managers of comparable properties unaffiliated with Landlord), management office operational expenses, rental expenses for or a reasonable allowance for depreciation of, personal property used in the operation, maintenance or repair of the Project, license, permit and inspection fees, all costs and expenses required by any governmental or quasigovernmental authority or by applicable law, for any reason, including capital improvements, whether capitalized or not, the cost of any capital improvements made to the Project by Landlord that improve lifesafety systems or reduce operating expenses (such costs to be amortized over such reasonable periods as Landlord shall determine with a return on capital at such rate as would have been paid by Landlord on funds borrowed for the purpose of constructing such capital improvements), the cost of air conditioning heating, ventilating, plumbing, elevator maintenance and repair, sign maintenance, and Common Area (defined in Paragraph 18) repair, resurfacing, operation and maintenance, the cost of providing security services, if any, deemed appropriate by Landlord, and any other cost or expense incurred or payable by Landlord in connection with the operation, repair, management or maintenance of the Project. Notwithstanding anything to the contrary contained herein, Operating Costs shall not include the following: (i) all items and services for which Tenant or any other tenant in the Building reimburses Landlord directly and not part of Operating Costs; (ii) penalties and charges incurred by Landlord on account of Landlord's failure to comply with applicable law; (iii) the costs of any decorative upgrades to the Common Areas which are not intended to repair or replace a wornout or broken Common Area item, to make the Project and related areas safer, to make the Project more efficient or to comply with any applicable laws; (iv) depreciation except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party where such depreciation would otherwise have been included in the charge for such third party's services; (v) leasing commissions, attorneys' fees, marketing costs, advertising expenses, payments, credits, free rent, lease takeover obligations, other inducements and other costs and expenses incurred in connection with the leasing of space, or negotiations or disputes with present or prospective tenants or other occupants of the Building concerning their particular leased premises; (vi) costs incurred by Landlord as a result of a breach of lease by another tenant; and (vii) expenses for any services or other benefits which are not offered to Tenant or for which Tenant or any other tenant is charged directly; and (viii) any repairs or replacements Landlord makes to the premises of any other tenant which, if made to the Premises, would be the obligation of Tenant at it's sole cost and expense under the terms of this Lease. (e) Operating Costs for any calendar year during which actual occupancy of the Project is less than 95% of the Rentable Area of the Project shall be appropriately adjusted to reflect 95% occupancy of the existing Rentable Area of the Project during such period. In determining Operating Costs, if any services or utilities are separately charged to tenants of the Project or others, Operating Costs shall be adjusted by Landlord to reflect the amount of expense which would have been incurred for such services or utilities on a full time basis for normal Project operating hours. In the event (i) the Commencement Date shall be a date other than January 1, (ii) the date fixed for the expiration of the term shall be a date other than December 31, (iii) of any early termination of this Lease, or (iv) of any increase or decrease in the size of the Premises, then in each such event, an appropriate adjustment in the application of this Paragraph 3 shall, subject to the provisions of this Lease, be made to reflect such event on a basis determined by Landlord to be consistent with the principles underlying the provisions of this Paragraph 3. (f) Prior to the commencement of each calendar year of the term following the Commencement Date, Landlord shall have the right to give to Tenant a written estimate of Tenant's Proportionate Share of the projected excess, if any, of the Operating Costs for the Project for the ensuing year over the Base Operating Costs. Tenant shall pay such estimated amount to Landlord in equal monthly installments, in advance on the first day of each month during such year. Subject to the provisions of this Lease, Landlord shall endeavor to furnish to Tenant within a reasonable period after the end of each calendar year, a statement indicating in reasonable detail the excess of Operating Costs over Base Operating Costs for such period and the parties shall, within 30 days thereafter, make any payment or allowance necessary to adjust Tenant's estimated payments to Tenant's actual share of such excess as indicated by such annual statement. Any payment due Landlord shall be payable by Tenant on demand from Landlord. Any amount due Tenant shall be credited against installments next becoming due under this Paragraph 3 (f). (g) Tenant shall pay 10 days before delinquency, all taxes and assessments (i) levied against any personal property or trade fixtures of Tenant in or about the Premises, (ii) based upon the gross or net Rent payable hereunder and (iii) based upon this Lease or any document to which Tenant is a party creating or transferring an interest in this Lease or an estate in all or any portion of the Premises. If any such taxes or assessments are levied against Landlord or Landlord's property or if the assessed value of the Project is increased by the inclusion therein of a value placed upon such personal property or trade fixtures, Tenant shall upon demand reimburse Landlord for the taxes and assessments so levied against Landlord, or such taxes, levies and assessments resulting from such increase in assessed value. (h) Any delay or failure of Landlord in (i) delivering any estimate or statement described in this Paragraph 3, or (ii) computing or billing Tenant' s Proportionate Share of excess Operating Costs shall not constitute a waiver of its right to require an increase in Rent, or in any way impair, the continuing obligations of Tenant under this Paragraph 3. Without limiting the generality of the foregoing, Landlord may at any time during the terms hereof recalculate and correct the amount of Tenant's Proportionate Share of excess Operating Costs, and Tenant shall pay any amount due on demand by Landlord. In the event of any dispute as to any Rent due under this Paragraph 3, Tenant shall have the right after reasonable notice and at reasonable times to inspect Landlord's accounting records at the accounting office of Landlord's management company. If after such inspection, Tenant still disputes such additional rental, upon Tenant's written request therefor, a certification as to the proper amount of Operating Costs and the amount due to or payable by Tenant shall be made by Landlord's independent certified public accountant. Such certification shall be final and conclusive as to all parties. Tenant agrees to pay the cost of such certification and the investigation with respect thereto and no adjustments in Tenant's favor shall be made unless it is determined that Landlord's original statement was in error in Landlord's favor by more than 5%. Tenant waives the right to dispute any matter relating to the calculation of Operating Costs or other forms of Rent under this Paragraph 3 if any claim or dispute is not asserted by Tenant in writing to Landlord within one (1) year of delivery to Tenant of the original billing statement with respect thereto. (i) Subject to the provisions of this Paragraph 3, the rights and obligations of Landlord and Tenant with respect to payments to be made hereunder in regard to excess Operating Costs incurred or allocable to periods prior to the expiration or sooner termination of this Lease shall survive such expiration or termination. 4. IMROVEMENTS (Sic.) AND ALTERATIONS (a) Tenant has accepted the Premises demised under the Lease, and Landlord has completed all construction and improvements required under the terms of the Lease to be completed by Landlord. Tenant understands, acknowledges and agrees that Landlord has absolutely no obligations with respect to any improvements for the Premises, except as may be specifically set forth in this Lease. To the best of Tenant's knowledge, Tenant does not have any claim or demand for additional sums from Landlord in connection with the installation of Tenant's improvements. (b) Tenant shall not make any alterations, additions or improvements to the Premises (collectively, "ALTERATIONS") without (i) the prior written consent of Landlord (unless such Alterations (a) do not affect the structural portions of the Building or the electrical, mechanical, plumping (Sic.), telecommunications or other utility systems of the Building (b) do not affect any other occupant in the Building, (c) are not visible from the exterior of the Premises and (d) do not exceed $5,000 in the aggregate, and Tenant nevertheless provides Landlord with at least ten (10) days written notice prior to the commencement of the making such Alterations) and (ii) compliance with such nondiscriminatory requirements concerning such Alterations as may be imposed by Landlord from time to time. Without limiting the foregoing, Landlord may require, at a minimum, compliance with the requirements set forth in Exhibit "C" attached hereto. All Alterations shall be made by Tenant at Tenants sole cost and shall be diligently prosecuted to completion. The cost of any modifications of Project improvements outside or inside of the Premises required by any governmental agency as a condition or the result of Tenant's Alterations shall be borne by Tenant. Any contractor or person making such Alterations shall first be approved in writing by Landlord. Upon the expiration or earlier termination of this Lease, Landlord may elect to have Tenant either (i) surrender with the Premises any or all of such Alterations as Landlord shall determine (except trade fixtures not attached to the Premises), in which case such Alterations shall become the property of Landlord, or (ii) promptly remove any or all of such Alterations designated by Landlord to be removed, in which case, Tenant shall repair and restore the Premises to its original condition as of the date of this Lease, reasonable wear and tear excepted. Notwithstanding the foregoing, upon the expiration or earlier termination of this Lease, Tenant may remove all Hermann Miller panels from the Premises, provided Tenant repairs all damage to the Premises resulting therefrom. (c) Tenant shall keep the Premises, the Building and the Project free from any and all liens arising out of any work performed, materials furnished, or obligations incurred by or for Tenant. In the event that Tenant shall not, within 10 days following the imposition of any such lien, cause the same to be released of record by payment or posting of a bond in a form and issued by a surety acceptable to Landlord, Landlord shall have the right, but not the obligation, to cause such lien to be released by such means as it shall deem proper (including payment of or defense against the claim giving rise to such lien); in such case, Tenant shall reimburse Landlord for all amounts so paid by Landlord in connection therewith, together with all of Landlord's costs and expenses, with interest thereon at the Default Rate (defined below). Such rights of Landlord shall be in addition to all other remedies provided herein or by law. 5. REPAIRS (a) Landlord shall use commercially reasonable efforts to keep the Common Areas of the Building and the Project in a clean and neat condition. Subject to subparagraph (b) below, Landlord shall make all necessary repairs, within a reasonable period following receipt of notice of the need therefor from Tenant, to the exterior walls, exterior doors and windows of the Building, and to public corridors and other public areas of the Project not constituting a portion of any tenant's premises, and shall use commercially reasonable efforts to keep all Building standard equipment used by Tenant in common with other tenants in good condition and repair, reasonable wear and tear excepted. Landlord shall, however, provide janitorial services to the Premises. Except as provided in Paragraph 9, there shall be no abatement of Rent and Landlord shall not be liable for any injury to, or damage suffered by Tenant, including without limitation, interference with Tenant's business arising from the making of any repairs, alterations or improvements in or to any portion of the Premises, the Building or the Project. Tenant waives the right to make repairs at Landlord's expense under Sections 1941 and 1942 of the California Civil Code, and under all other similar laws, statutes or ordinances now or hereafter in effect. (b) Tenant, at its expense shall keep the Premises and all fixtures contained therein in a safe, clean and neat condition, reasonable wear and tear excepted. In that regard, Tenant shall be responsible for making at Tenant's sole cost and expense all repairs and replacements to the Premises, except as otherwise provided herein. In connection with any work required to be performed at the expense of Tenant, Tenant shall use contractors selected by Landlord of all facilities located in the Premises, including, without limitation, lavatory, shower, toilet, wash basin and kitchen facilities, and heating and air conditioning systems (including all plumbing connected to said facilities or systems installed by or on behalf of tenant or existing in the Premises at the time of Landlord's delivery of the Premises to Tenant). Tenant shall make all repairs and replacements to the Premises using materials of equal or better quality than that repaired or replaced. Tenant shall do all decorating, remodeling, alteration and painting required by Tenant during the term of this Lease. (c) Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Premises in a safe, clean and neat condition reasonable wear and tear excepted; in the event that Tenant defaults with respect to this provision, in addition to any and all other remedies of Landlord, Landlord may use, apply or retain all or any part of any Security Deposit with respect to such default. Tenant shall remove from the Premises all trade fixtures (which are not required to be surrendered with the Premises pursuant to the provisions of Paragraph 4(b) hereof), furnishings and other personal property of Tenant, shall repair all damage caused by such removal, and shall restore the Premises to its original condition, reasonable wear and tear excepted. In addition to all other rights Landlord may have, in the event Tenant does not so remove any such fixtures, furnishings or personal property, Tenant shall be deemed to have abandoned the same, in which case Landlord may store the same at Tenant's expense, appropriate the same for itself, and/or sell the same in its discretion. 6. USE OF PREMISES (a) Tenant shall use the Premises only for the purposes set forth in Item 12 of the Basic Lease Provisions and shall not use the Premises or permit the Premises to be used for any other purpose. (b) Tenant shall not at any time use or occupy the Premises, or permit any act or omission in or about the Premises in violation of any law, statute, ordinance or any governmental rule, regulation or order (collectively, "LAW") and Tenant shall, upon written notice from Landlord, discontinue any use of the Premises which is a violation of Law. If any Law shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to (i) modification, operation or other maintenance of the Premises, the Building or the Project, or (ii) the use, alteration or occupancy thereof, Tenant shall comply in full at its expense with such Law. (c) Tenant shall not at any time use or occupy the Premises in violation of the certificates of occupancy issued for the Building or the Premises, and in the event that any department of the State of California or the city or county in which the Project is located shall at any time contend or declare that the Premises are used or occupied in violation of such certificate or certificates of occupancy, any Law or any recorded covenants, conditions and restrictions affecting the Project, Tenant shall, upon five days' notice from Landlord or any such governmental agency, immediately discontinue such use of the Premises (and otherwise immediately remedy such violation). The failure by Tenant to discontinue such use shall be considered a default under this Lease and Landlord shall have the right to exercise any and all rights and remedies provided herein or by Law. The statement in this Lease of the nature of the business to be conducted by Tenant in the Premises shall not be deemed or construed to constitute a representation or guaranty by Landlord that such business will continue to be lawful or permissible under any certificate of occupancy issued for the Building or the Premises, or otherwise permitted by Law. (d) Tenant shall not do or permit to be done anything which may invalidate or increase the cost of any All Risk, property damage, liability or other insurance policy covering the Building, the Project and/or property located therein and shall comply with all rules, orders, regulations and requirements of the Pacific Fire Rating Bureau or any other organization performing a similar function. In addition to all other remedies of Landlord, Landlord may require Tenant, promptly upon demand, to reimburse Landlord for the full amount of any additional premiums charged for such policy or policies by reason of Tenant's failure to comply with the provisions of this Paragraph 6. (e) Tenant shall not in any way interfere with the rights or quiet enjoyment of other tenants or occupants of the Premises, the Building or the Project. Tenant shall not use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain, or permit any nuisance in, on or about the Premises, the Building or the Project. Tenant shall not place a load upon any portion of the Premises exceeding the structural floor load (per square foot of area) which such area was designated (and is permitted by Law) to carry or otherwise use any Building system in excess of its capacity or in any other manner which may damage such system or the Building. Business machines and mechanical equipment shall be placed and maintained by Tenant, at Tenant's expense, in locations and in settings sufficient in Landlord's reasonable judgment to absorb and prevent vibration, noise and annoyance. Tenant shall not commit or suffer to be committed any waste in, on, upon or about the Premises, the Building or the Project. (f) As used herein, the term "HAZARDOUS MATERIAL" means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the State of California or the United States Government, including, without limitation, (i) any material or substance which is defined or listed as a "hazardous waste," "extremely hazardous waste," "restricted hazardous waste," "hazardous substance" or "hazardous material" under any federal, state or local law, statute, ordinance or any governmental rule, regulation or order governing or in any way relating to the release, use generation, handling, leakage, dumping, discharge or disposal of any of the above (collectively, "HAZARDOUS MATERIAL LAWS") (ii) petroleum or any petroleum derivative, (iii) any flammable explosive or radioactive material, (iv) any polychlorinated biphenal and (v) asbestos or any asbestos containing material or derivative. Tenant hereby agrees that (i) Tenant and each of its Affiliates (defined below), assignees, subtenants, and their respective agents, servants, employees, representatives and contractors shall not bring onto the Premises or the Project any Hazardous Material (other than customary amounts of Hazardous Materials used for office supplies and cleaning materials brought into the Premises by Tenant in the normal course of its tenancy and in full compliance with all Hazardous Material Laws), (ii) Tenant shall immediately notify Landlord in writing in the event Tenant becomes aware of or suspects that there has been any release of any Hazardous Materials in, on or about the Premises or the Project or that any person has stored or otherwise brought onto the Project or any portion thereof any Hazardous Material (other than customary amounts of office supplies and cleaning materials). Tenant agrees to indemnify, defend (with counsel reasonably selected by Landlord), protect and hold Landlord and each of its Affiliates harmless from and against any and all claims, actions, administrative proceedings (including informal proceedings), judgments, damages, punitive damages, penalties, fines, costs, liabilities, interest or losses, including reasonable attorneys' fees and expenses, consultant fees, and expert fees, together with all other costs and expenses of any kind or nature that arise during or after the term of this Lease directly or indirectly from or in connection with the presence, handling, storage, release or discharge of any Hazardous Material in or into the air, soil, surface water or groundwater at, on, about, under or within the Premises or the Project, or any portion thereof, generated, released, discharged or otherwise brought onto, under, or about the Project by Tenant or any Affiliate thereof. Each of the covenants and agreements of Tenant set forth in this Paragraph 6(f) shall survive the expiration or earlier termination of this Lease. 7. UTILITIES AND SERVICES (a) Provided that Tenant is not in default hereunder, Landlord shall furnish, or cause to be furnished to the Premises, the utility service and other services described in Exhibit "D" attached hereto, subject to the conditions and in accordance with the standards set forth therein and in this Lease. (b) Tenant agrees to cooperate fully at all times with Landlord and to comply with all regulations and requirements which Landlord may from time to time prescribe for the use of the utilities and services described herein and in Exhibit "D". Landlord shall not be liable to Tenant for the failure of any other tenant, or its assignees, subtenants, employees, or their respective invitees, licensees, agents or other representatives to comply with such regulations and requirements; provided, however, Landlord shall non-discriminately pursue violations of said regulations and requirements. (c) If Tenant requires utility service or other services in quantities greater than, at times other than or of a type or quality different than that generally furnished by Landlord pursuant to Exhibit "D," Tenant shall pay to Landlord, upon receipt of a written statement therefor, Landlord's charge for such additional or different utility service or services; provided, however, if, in Landlord's judgment, such excess or different service cannot be furnished unless additional risers, conduits, feeders, switchboards and/or other facilities are installed in the Building, or otherwise are not then being provided to other tenants in the Project (at the rate or level requested by Tenant), the provision of such additional or different services shall be subject to Landlord's nondiscriminatory requirements and conditions, provided, further however, that in no case shall Landlord have any obligation to provide such additional or different utility or other services if (i) the same is not generally available in first class office buildings in the area of the Project, (ii) in the case where additional risers, conduits, feeders, switchboards and/or other appurtenances would be required to be installed in the Building to provide such service, (A) the installation, maintenance or use of such facilities is not permitted under applicable Project financing documents, Law or insurance regulations, could result in permanent damage or injury to the Building or Building systems, could create a dangerous or hazardous condition or disturb or interfere with the use, occupancy or quiet enjoyment of other tenants or otherwise adversely affect the income stream, financeability, reputation or value of the Project, (B) Tenant shall not commit in advance to bear the cost (and to provide security satisfactory to Landlord for performance of such obligation) of installation, use, maintenance, repair and removal of such facilities, or (C) Landlord determines in good faith that installation, operation, maintenance and/or removal of such facilities is otherwise infeasible under the circumstances. Subject to the foregoing, Landlord shall, upon reasonable prior notice by Tenant, furnish to the Premises additional elevator, heating, air conditioning and/or cleaning services upon such terms and conditions as shall be reasonably determined by Landlord, including payment of Landlord's charge therefor. In the case of any additional utilities or services to be provided hereunder, Landlord may require a switch and metering system to be installed so as to measure the amount of such additional utilities or services. The cost of installation, maintenance and repair of such system shall be paid by Tenant upon demand. (d) Landlord shall not be liable for, and Tenant shall not be entitled to, any damages, abatement (except as expressly provided in subparagraph (f) below) or reduction of Rent, or other liability by reason of any failure to furnish any services or utilities described herein or in Exhibit "D" for any reason, including, without limitation, when caused by accident, breakage, repairs, Alterations or other improvements to the Project, strikes, lockouts or other labor disturbances or labor disputes of any character, governmental regulation, moratorium or other governmental action, inability to obtain electricity, water or fuel, or any other cause beyond Landlord's reasonable control. Landlord shall be entitled to cooperate with the energy conservation efforts of governmental agencies or utility suppliers. No such failure, stoppage or interruption of any such utility or service shall be construed as an eviction of Tenant, nor shall the same relieve Tenant from any obligation to perform any covenant or agreement under this Lease. In the event of any failure, stoppage or interruption thereof, Landlord shall use reasonable efforts to attempt to restore all services promptly. No representation is made by Landlord with respect to the adequacy or fitness of the Building's ventilating, air conditioning or other systems to maintain temperatures as may be required for the operation of any computer, data processing or other special equipment of Tenant or for any other purpose. (e) Landlord reserves the right from time to time to make reasonable and nondiscriminatory modifications to the above standards (including, without limitation, those described in Exhibit "D") for utilities and services. (f) In the event that Tenant is prevented from using the Premises or any portion thereof, as a result of any failure of Landlord to provide services or access to the Premises for fifteen (15) consecutive days during the Lease term ("Eligibility Period"), then Tenant's rent shall be abated or reduced, as the case may be, in the proportion that the rentable area of the portion of the Premises that Tenant is prevented from using bears to the total rentable area of the Premises during the period Tenant is prevented from conducting its business from the Premises or a portion of the Premises; provided, however, that if Tenant reoccupies and conducts its business from any portion of the Premises during such period, or the Premises are restored such that business may be conducted therein, the rent allocable to such reoccupied portion, based upon the proportion which the rentable area of such reoccupied portion of the Premises bears to the total rentable area of the Premises, shall be payable by Tenant from the date such business operations commence or could be commenced. 8. NONLIABILITY AND INDEMNIFICATION OF LANDLORD; INSURANCE (a) Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord, its partners, shareholders, officers, trustees, affiliates, directors, employees, contractors, agents and representatives (collectively, "AFFILIATES") for any injury or damage to any person or property occurring or incurred in connection with or in any way relating to the Premises, the Building or the Project from any cause, except damage to persons or personal property in the Common Areas caused by the active or gross negligence of Landlord or its agents, employees or contractors in the Common Areas unless such damage is covered (or would be covered if Tenant obtained 100% casualty insurance coverage) by insurance Tenant is required to have under this Lease or otherwise has obtained. Without limiting the foregoing, except as provided in subparagraph 7(f) above, neither Landlord nor any of its Affiliates shall be liable for and there shall be no abatement of Rent for (i) any damage to Tenant's property stored with or entrusted to Affiliates of Landlord, (ii) loss of or damage to any property by theft or any other wrongful or illegal act, or (iii) any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or the Project or from the pipes, appliances, appurtenances or plumbing works therein or from the roof, street or sub-surface or from any other place or resulting from dampness or any other cause whatsoever or from the acts or omissions of other tenants, occupants or other visitors to the Building or the Project or from any other cause whatsoever, (iv) any diminution or shutting off of light, air or view by any structure which may be erected on lands adjacent to the Building, whether within or outside of the Project, or (v) any latent or other defect in the Premises, the Building or the Project. In addition and without limitation to the other provisions of subparagraphs (a) and (b) of this Paragraph 8, Tenant agrees that in no case shall Landlord ever be responsible or liable on any theory for any injury to Tenant's business, loss of profits, loss of income or any other form of consequential damage. Tenant shall give prompt notice to Landlord in the event of (A) the occurrence of a fire or accident in the Premises or in the Building, or (B) the discovery of any defect therein or in the fixtures or equipment thereof. (b) Tenant shall indemnify, defend (with legal counsel reasonably selected by Landlord), protect and hold Landlord and its Affiliates (including without limitation Oaktree Capital Management, L.L.C.) harmless from and against any and all claims, suits, judgments, losses, costs, obligations, damages, expenses, interest and liabilities, including, without limitation, reasonable attorneys' fees, for any injury or damage to any person or property whatsoever arising out of or in connection with this Lease, the Premises or Tenant' s activities in the Project, including, without limitation, when such injury or damage has been caused in whole or in part by the act, negligence, fault or omission of Tenant, its agents, servants, contractors, employees, representatives, licensees or invitees, except for injury or damage sustained to Tenant or Tenant's agents, servants, employees, representatives, licensee or invitees in the Common Areas by reason of the active or gross negligence of Landlord or its agents, employees or contractors in the Common Areas, unless such damage is covered (or would be covered if Tenant obtained 100% insurance coverage) by insurance Tenant is required to have under this Lease or otherwise has obtained. Without limiting the foregoing, Tenant shall reimburse Landlord and its Affiliates for all expenses, damages and fines incurred or suffered by Landlord by reason of any breach, violation or non- performance by Tenant, its agents, servants or employees, of any covenant as provision of this Lease, or by reason of damage to persons or property caused by moving property of or for Tenant in or out of the Building, or by the installation or removal of furniture or other property, or by reason of carelessness, negligence or improper conduct of Tenant or its agents, employees or servants in the use or occupancy of the Premises. The provisions of this subparagraph (b) shall survive the expiration or earlier termination of this Lease. (c) Tenant hereby agrees to maintain in full force and effect at all times during the term of this Lease, at its own expense, for the protection of Tenant and Landlord, as their interests may appear, policies of insurance issued by a responsible carrier or carriers, qualified to do business in the State of California, with a financial class rating of not less than X and a policy holder rating of not less than A in the most recent Best's Key Rating Guide and otherwise acceptable to Landlord, which afford the following coverages: (i) Comprehensive general liability insurance (or commercial general liability insurance) or such successor comparable form of coverage including blanket contractual liability, broad form property damage, independent contractor's coverage, personal injury, completed operations, products liability, cross liability and severability of interest clauses, and fire damage, written on an "occurrence" basis with coverage of not less than $2,000,000 combined single limit per occurrence for both bodily injury (including death) and property damage; (ii) All Risk Insurance, including, without limitation, insurance covering loss or damage resulting or arising from sprinkler leakage, in an amount sufficient to cover 90% of replacement of all improvements to the Premises (other than Building Standard Installations) and all of Tenant's fixtures and other personal property, and subject to commercially reasonable deductibles. The proceeds of such insurance shall be devoted exclusively to the replacement of the same unless this Lease shall cease and terminate pursuant to the provisions of Paragraph 9 hereof, and (iii) Worker's Compensation and Employer's Liability insurance (as required by Law). (d) Tenant may, with the prior written consent of Landlord, elect to have reasonable deductibles (not to exceed $10,000) under the policy required pursuant to subparagraph (c)(ii). (e) Tenant shall deliver to Landlord at least 30 days prior to the time such insurance is first required to be carried by Tenant, and thereafter at least 30 days prior to expiration of each such policy, certificates of insurance evidencing the coverage required hereunder with limits not less than those specified above. Such policies of insurance shall be written as primary policies, not contributing with, and not in excess of coverage which Landlord may carry. The certificate of insurance with respect to the coverage described in subparagraph (c) (i) above shall specifically reflect insurance of Tenant's obligations under subparagraph (b) above. Such certificates shall name Landlord as an additional insured and shall expressly provide that the interest of the same therein shall not be affected by any breach by Tenant of any policy provision for which such certificates evidence coverage. Further, all certificates shall expressly provide that not less than 30 days' prior written notice shall be given Landlord in the event of material alteration to or cancellation of the coverages evidenced by such certificates. If on account of the failure of Tenant to comply with the provisions of this Paragraph 8, Landlord is adjudged a co-insurer by its insurance carrier, then, in addition to all other remedies available to Landlord, any loss or damage Landlord shall sustain by reason thereof shall be borne by Tenant and shall be immediately paid by Tenant upon receipt of a bill therefor and evidence of such loss. (f) Upon demand, Tenant shall provide Landlord, at Tenant's expense, with such increased amount of existing insurance and such other insurance with such limits as Landlord may require and such other hazard insurance as the nature and condition of the Premises may require, in the opinion of Landlord, to afford Landlord adequate protection for such risks. However, in all cases such adjustments shall be based upon the requirements of an institutional lender of Landlord or otherwise reasonable and consistent with the requirements of other first class office projects in the County in which the Project is located. (g) Landlord makes no representation that the insurance coverage specified to be carried by Tenant pursuant to this Paragraph 8 is adequate to protect Tenant against Tenant's undertaking under the terms of this Lease or otherwise, and in the event Tenant believes that any such insurance coverage called for under this Lease is insufficient, Tenant shall provide, at its own expense, such additional insurance as Tenant deems adequate. Tenant's Proportionate Share of earthquake insurance (which shall, if purchased by Landlord, be passed through to Tenant as part of Operating Costs only) shall not exceed $5,000 annually as increased by Proportionate increases in the Consumer Price Index, All Urban Consumers, All Items, Los Angeles - Anaheim - Riverside, California (1982-84 equals 100), as published by the United States Department of Labor's Bureau of Labor Statistics, or, if unavailable, such substitute index as reasonably approximates said index. (h) If Moreno Corporate Center, L.L.C., a Delaware limited liability company, shall convey the Building to an unaffiliated third party landlord, such successor Landlord (and its successors and assigns) shall agree to maintain in full force and effect at all times during the Term, as an Operating Cost, unless such Landlord has a tangible net worth of Five Million Dollars ($5,000,000), as determined under generally accepted accounting principles (exclusive of goodwill): (i) All Risk Insurance (exclusive of damage resulting or arising from sprinkler leakage, earthquake or floor (Sic.), unless Landlord in its sole discretion shall elect to carry such coverage) in an amount sufficient to cover the replacement the Building exclusive of Tenant's Alterations, improvements and personal property; and (ii) Comprehensive general liability insurance (or commercial general liability insurance) or such successor comparable form of coverage with coverage of not less than $1,000,000 combined single limit per occurrence for both bodily injury and property damage. Notwithstanding any contribution by Tenant to the cost of insurance premiums, Tenant acknowledges that it has no right to receive any proceeds from any insurance policies carried by Landlord. (i) Notwithstanding any provision of this Paragraph 8 to the contrary, in the event that Landlord's insurance policies with respect to the Premises, the Building or the Project permit a waiver of subrogation, Landlord hereby waives any and all rights of recovery against Tenant for or arising out of damage to, or destruction of, the Premises, the Building or the Project, from causes then included under standard fire and All Risk insurance policies or endorsements; provided, however, that such waiver of subrogation shall be limited exclusively to insurance proceeds actually received by Landlord for such damage or destruction. In the event that Tenant's insurance policies with respect to the Premises permit a waiver of subrogation, Tenant waives any and all rights of recovery against Landlord for or arising out of damage to or destruction of, any property of Tenant, from causes then included under standard fire and All Risk insurance policies or endorsements. Tenant represents that its present insurance policies now in force permit such waiver. If at any time during the term of this Lease (i) either party shall give less than five days' prior written notice to the other party certifying that any insurance carrier which has issued any such policy shall refuse to consent to the aforesaid waiver of subrogation, or (ii) such insurance carrier shall consent to such waiver only upon the payment of an additional premium (and such additional premium is not paid by the other party hereto), or (iii) such insurance carrier shall revoke a consent previously given or shall cancel or threaten to cancel any policy previously issued and then in force and effect, because of such waiver of subrogation, then, in any of such events, the waiver of subrogation contained herein shall thereupon be of no further force or effect as to the loss, damage or destruction covered by such policy. If, however, at any time thereafter, a consent to such waiver of subrogation shall be obtained without an additional premium from any existing or substitute insurance carrier, the waiver hereinabove provided for shall again become effective. (j) Tenant shall not keep, use, sell or offer for sale in or upon the Premises any article which may be prohibited by any insurance policy periodically in force covering the Premises, the Building or the Project. If any of Landlord's insurance policies shall be cancelled or cancellation shall be threatened or the coverage thereunder reduced or threatened to be reduced in any way because of the use of the Premises or any part thereof by Tenant or any assignee, subtenant, licensee or invitee of Tenant and, if Tenant fails to remedy the condition giving rise to such cancellation, threatened cancellation, reduction of coverage, or threatened reduction of coverage, within two (2) business days after notice thereof, Landlord may, at its option, either terminate this Lease or enter upon the Premises and attempt to remedy such condition, and Tenant shall promptly pay the cost thereof to Landlord as additional Rent. Landlord shall not be liable for any damage or injury caused to any property of Tenant or of others located on the Premises resulting from such entry. If Landlord is unable, or elects not to remedy such condition, then Landlord shall have all of the remedies provided for in this Lease in the event of a default by Tenant. (k) Tenant shall not do or permit to be done any act or things upon or about the Premises or the Building, which will (i) result in the assertion of any defense by the insurer to any claim under, (ii) invalidate or (iii) be in conflict with, the insurance policies of Landlord or Tenant covering the Building, the Premises or fixtures and property therein, or which would increase the rate of fire insurance applicable to the Building to an amount higher than it otherwise would be; and Tenant shall neither do nor permit to be done any act or thing upon or about the Premises or the Building which shall or might subject Landlord to any liability or responsibility for injury to any person or persons or to property; provided that nothing in this Paragraph 8(j) shall prevent Tenant's use of the Premises for the purposes stated in Paragraph 6 hereof. (l) If, as a result of any act or omission by or on the part of Tenant or violation of this Lease, whether or not Landlord has consented to the same, the rate of "All Risk" or other type of insurance maintained by Landlord on the Building and fixtures and property therein, shall be increased to an amount higher than it otherwise would be, Tenant shall reimburse Landlord for all increases of Landlord's fire insurance premiums so caused; such reimbursement to be Additional Rent payable within 5 days after demand therefor by Landlord. If, due to abandonment of, or failure to occupy the demised premises by Tenant, any such insurance shall be canceled by the insurance carrier, then Tenant hereby indemnifies Landlord against liability which would have been covered by such insurance. In any action or proceeding wherein Landlord and Tenant are parties, a schedule or "make-up" of rates for the Building or the Premises issued by the body making fire insurance rates or established by insurance carrier providing coverage for the Building or demised premises shall be presumptive evidence of the facts stated therein including the items and charges taken into consideration in fixing the "All Risk" insurance rate then applicable to the Building or the Premises. 9. FIRE OR CASUALTY (a) Subject to the provisions of this Paragraph 9, in the event the Premises, or access thereto, is wholly or partially destroyed by fire or other casualty, Landlord shall (to the extent permitted by Law and covenants, conditions and restrictions then applicable to the Project) rebuild, repair or restore the Premises and access thereto to substantially the same condition as existing immediately prior to such destruction and this Lease shall continue in full force and effect. Notwithstanding the foregoing, (i) Landlord's obligation to rebuild, repair or restore the Premises shall not apply to any personal property, tenant improvements or other items installed or contained in the Premises which are not Building Standard Installations, and (ii) Landlord shall have no obligation whatsoever to rebuild, repair or restore the Premises with respect to any damage or destruction occurring during the last 12 months of the term of this Lease. (b) Landlord may elect to terminate this Lease in any of the following cases of damage or destruction to the Premises, the Building or the Project: (i) where the cost of rebuilding, repairing and restoring (collectively, "RESTORATION") the Building or the Project, would, regardless of the lack of damage to the Premises or access thereto, in the opinion of Landlord, exceed 20% of the then replacement cost of the Building; (ii) where, in the case of any damage or destruction to any portion of the Building or the Project by uninsured casualty, the cost of Restoration of the Building or the Project, in the opinion of Landlord, exceeds $500,000; or (iii) where, in the case of any damage or destruction to the Premises or access thereto by uninsured casualty, the cost of Restoration of the Premises or access thereto, in the opinion of Landlord, exceeds 20% of the replacement cost of the Premises. Any such termination shall be made by 30 days' prior written notice to Tenant given within 60 days of the date of such damage or destruction. If this Lease is not terminated by Landlord and as the result of any damage or destruction, the Premises, or a portion thereof, are rendered untenantable, the Basic Annual Rent shall abate reasonably during the period of Restoration (based upon the extent to which such damage and Restoration materially interfere with Tenant's business in the Premises) unless such damage or destruction shall have resulted from the wilful misconduct, fault or neglect of Tenant, its agents, servants, contractors, representatives, employees, licensees or invitees. This Lease shall be considered an express agreement governing any case of damage to or destruction of the Premises, the Building or the Project. Tenant hereby waives the provisions of California Civil Code Sections 1932(2) and 1933(4) and the provisions of any successor or other law of like import. (c) Tenant may elect to terminate this Lease if (i) the Premises have been damaged or destroyed by a casualty not caused by Tenant or Tenant's agents, employees or contractors and (ii) the Premises have not been substantially repaired or restored to a condition that is commercially usable for general office use within a period of 270 days from and after the date of such casualty, unless Landlord has provided Tenant with other space in the Project that is comparable in size, rent and area to the Premises for general office use. In the event of such a casualty whereby Tenant is required to vacate the Premises, Landlord covenants to use its good faith efforts to provide Tenant with any available vacant space in the Building that is comparable in size and area as the Premises on terms comparable to that then being agreed to by Landlord. 10. EMINENT DOMAIN In the event the whole of the Premises, the Building or the Project shall be taken under the power of eminent domain, or sold to prevent the exercise thereof (collectively, a "TAKING"), this Lease shall automatically terminate as of the date of such Taking. In the event of a Taking of such portion of the Project, the Building or the Premises as shall, in the opinion of Landlord, substantially interfere with Landlord's operation thereof, Landlord may terminate this Lease upon 30 days' written notice to Tenant given at any time within 60 days following the date of such Taking. For purposes of this Lease, the date of Taking shall be the earlier of the date of transfer of title resulting from such Taking or the date of transfer of possession resulting from such Taking. In the event that a portion of the Premises is so taken and this Lease is not terminated, Landlord shall, with reasonable diligence, proceed to restore (to the extent permitted by Law and covenants, conditions and restrictions then applicable to the Project) the Premises (other than Tenant' s personal property and fixtures, and tenant improvements not constituting Building Standard Installations) to a complete, functioning unit. In such case, the Basic Annual Rent shall be reduced proportionately based on the portion of the Premises so taken. If all or any portion of the Premises is the subject of a temporary Taking, this Lease shall remain in full force and effect and Tenant shall continue to perform each of its obligations under this Lease; in such case, Tenant shall be entitled to receive the entire award allocable to the temporary Taking of the Premises. Except as provided herein, Tenant shall not assert any claim against Landlord or the condemning authority for, and hereby assigns to Landlord, any compensation in connection with any such Taking, and Landlord shall be entitled to receive the entire amount of any award therefor without deduction for any estate or interest of Tenant. Nothing contained in this Paragraph 10 shall be deemed to give Landlord any interest in, or prevent Tenant from seeking any award against the condemning authority for the Taking of personal property or fixtures of Tenant or for relocation or business interruption expenses recoverable by Tenant from the condemning authority. This Paragraph 10 shall be Tenant' s sole and exclusive remedy in the event of a Taking. Each party hereby waives the provisions of Sections 1265.130 and 1265.150 of the California Code of Civil Procedure and the provisions of any successor or other law of like import. 11. ASSIGNMENT AND SUBLETTING (a) Tenant shall not directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, assign, sublet, mortgage, hypothecate or otherwise encumber all or any portion of its interest in this Lease or in the Premises or grant any license in or suffer any person other than Tenant or its employees to use or occupy the Premises or any part thereof without obtaining the prior written consent of Landlord, which consent shall, subject to subparagraphs (d), (e), (f), and (g) below, not be unreasonably withheld. Any such attempted assignment, subletting, license, mortgage, hypothecation, other encumbrance or other use or occupancy without the consent of Landlord shall be null and void and of no effect. For purposes of application of subparagraphs (b), (c), (d), (e), (f), and (g) below, any mortgage, hypothecation or encumbrance of all or any portion of Tenant's interest in this Lease or in the Premises and any grant of a license or sufferance of any person other than Tenant or its employees to use or occupy the Premises or any part thereof shall be deemed to be an "assignment" of this Lease. In addition, as used in this Paragraph 11, the term "Tenant" shall also mean any entity that has guaranteed Tenant's obligations under this Lease, and the restrictions applicable to Tenant contained herein shall also be applicable to such guarantor. (b) No permitted assignment or subletting shall relieve Tenant of its obligation to pay the Rent and to perform all of the other obligations to be performed by Tenant hereunder. The acceptance of Rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any subletting or assignment. Consent by Landlord to one subletting or assignment shall not be deemed to constitute a consent to any other or subsequent attempted subletting or assignment. (c) If Tenant desires at any time to assign this Lease or to sublet the Premises or any portion thereof, it shall first notify Landlord of its desire to do so and shall submit in writing to Landlord (i) the name of the proposed assignee or subtenant; (ii) the nature of the proposed assignee's or subtenant's business to be carried on in the Premises; (iii) the terms and provisions of the proposed assignment or sublease, which shall be expressly subject to the provisions of this Lease; (iv) in the case of a sublease, the portion of the Premises proposed to be sublet; and (v) such financial and other information as Landlord may reasonably request concerning the proposed assignee or subtenant. (d) At any time within 30 days after Landlord's receipt of the information specified in subparagraph (c) above, Landlord may by written notice to Tenant elect (i) to sublease from Tenant the Premises or the portion thereof so proposed to be subleased by Tenant, or to take an assignment of Tenants leasehold estate hereunder, or such part thereof as shall be specified in said notice, upon the same terms as those offered to the proposed subtenant or assignee, as the case may be, except that the Rent payable by Landlord in the case of a sublease to Landlord shall be the same Rent per square foot as is payable by Tenant hereunder for the same period; or (ii) to terminate this Lease as to the portion of the Premises so proposed to be subleased or assigned (which may include all of the Premises), with a proportionate abatement in the Rent payable hereunder. In the case where Landlord elects to sublease space, receive an assignment from Tenant or terminate all or any portion of this Lease pursuant to this subparagraph (d), Landlord may thereafter lease the space affected to Tenant's proposed assignee or subtenant, without liability to Tenant. If Landlord does not exercise any option set forth in this subparagraph (d) within said 30 day period, Tenant may within 90 days thereafter enter into a valid assignment or sublease of the Premises or portion thereof, upon the terms and conditions set forth in the information furnished by Tenant to Landlord pursuant to subparagraph (c) above, subject, however, in each instance, to (i) Landlord's consent under subparagraph (a) above, and (ii) Landlord's receipt of a fully executed counterpart of such assignment or sublease. If Landlord elects to exercise its option to sublet or receive an assignment from Tenant (or terminate this Lease) as to any portion of the Premises, (i) Landlord and its subtenants shall have the right to use in common with Tenant all lavatories, corridors and lobbies within the Premises the use of which is reasonably required for the use of such sublet, assigned or terminated space, and (ii) Tenant shall have no right of setoff or right to assert a default hereunder by reason of a default by Landlord under such sublease. (e) Tenant acknowledges that it shall be reasonable for Landlord to withhold its consent to a proposed assignment or sublease if (i) the use to be made of the Premises by the proposed assignee or subtenant is (A) not generally consistent with the character and nature of other tenants in the Building or the Project or would result in a heavier burden (in comparison to that resulting from Tenant's use of such portion of the Premises) on the Building, the Project, the systems, the structures or the Common Areas thereof, (B) in conflict with any "exclusive" or similar use or signage rights of another Project tenant, or (C) prohibited by any provision of this Lease, including, without limitation, the rules and regulations then in effect; (ii) the character, moral stability, reputation or financial responsibility of the proposed assignee or subtenant are not reasonably satisfactory to Landlord; (iii) in the case of a proposed mortgage hypothecation or other encumbrance of Tenant s leasehold estate, (A) the proposed assignee or subtenant requests relief from any provision of this Paragraph 11 or this Lease, including, without limitation, those provisions requiring assumption of this Lease by each assignee or subtenant and continuous occupancy of the Premises, (B) the proposed mortgage, hypothecation or encumbrance is of less than the entire leasehold estate, or (C) the proposed assignee or subtenant cannot reasonably demonstrate to Landlord that such mortgage, hypothecation or encumbrance will not impair or adversely affect any of Landlord's rights hereunder; (iv) in the case of a sublease, (A) the portion of the Premises proposed to be sublet is not a single, self-contained unit of space with access to restrooms and exits in conformance with applicable Law or otherwise cannot be the subject of a valid certificate of occupancy or (B) the proposed transaction is a sublease of a subleasehold interest; or (v) the proposed assignee or subtenant is an existing tenant or subtenant in the Project. (f) The voluntary or other surrender of this Lease by Tenant or a mutual cancellation hereof shall not work a merger, and shall at the option of Landlord, either terminate all or any existing subleases or subtenancies or shall operate as an assignment to Landlord of such subleases or subtenancies. If Tenant is a corporation which is not the issuer of any security registered under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, or is an unincorporated association, trust or partnership, the transfer, assignment or hypothecation of any stock or interest in such corporation, association, trust or partnership in excess of 25% in the aggregate during the term hereof of the total stock or interest in such corporation, association, trust or partnership shall be deemed an assignment within the meaning of this Paragraph 11; provided, however, that Landlord shall not withhold its consent and the provisions of subparagraphs (d) and (g) of this Paragraph 11 shall not apply to transactions described in the foregoing sentence with a corporation (i) into or with which Tenant is merged or consolidated, (ii) to which substantially all of Tenant's assets are transferred, (iii) that controls, is controlled by or is under common control with Tenant or (iv) of which Aram Keith owns and controls at least 51%, so long as in each such case, (A) the successor of Tenant has a tangible net worth, calculated in accordance with generally accepted accounting principles (and evidenced by financial statements in form reasonably satisfactory to Landlord) equal to the greater of the net worth of Tenant immediately prior to such transaction or the net worth of the original Tenant hereunder as of the date of this Lease, (B) all provisions of this Paragraph 11, other than subparagraphs (d), (g) and the consent requirements of subparagraph (a), shall apply to such transactions, and (C) Tenant shall present proof reasonably satisfactory to Landlord that the parties to the transaction were not attempting to avoid the application of subparagraphs (d) and (g) of this Paragraph 11. If Tenant consists of more than one person, a purported transfer, assignment, mortgage, hypothecation or other encumbrance, voluntary, involuntary or by operation of law, by any one of the persons executing this Lease of all or part of such person's interest to this Lease shall be deemed an assignment within the meaning of this Paragraph 11. Each assignee, sublessee, licensee, mortgagee or other transferee, other than Landlord, shall assume in a writing satisfactory to Landlord, all obligations of Tenant under this Lease and shall be jointly and severally liable for the performance of all of the provisions hereof. Notwithstanding the foregoing and without prejudice to Landlord's right to require a written assumption from each assignee, any person or entity to whom this Lease is assigned, including, without limitation, assignees pursuant to the provisions of the Bankruptcy Code, 11 U.S.C.(SS) 101 et seq. (THE "BANKRUPTCY Code"), shall automatically be deemed to have assumed all obligations of Tenant arising under this Lease. Tenant agrees to reimburse Landlord for Landlord's reasonable costs and attorneys' fees incurred in connection with the processing, investigation and documentation of any requested assignment or sublease subject to this Paragraph 11. (g) If Landlord shall give its consent to any assignment of this Lease or to any sublease of all or any portion of the Premises, Tenant shall pay to Landlord as Additional Rent hereunder: (i) In the case of an assignment, fifty percent (50%) of an amount equal to all sums and other consideration paid to the assignor Tenant by the assignee for, or by reason of, such assignment, in excess of Rent accruing hereunder, but deducting from such sums and consideration all brokerage commissions actually paid to independent brokers in connection with such transaction and any tenant improvement allowance granted to the assignee to the extent actually devoted exclusively to the installation of leasehold improvements in the Premises (such commissions and allowance being referred to herein as "TRANSACTION INDUCEMENTS"); and (ii) In the case of a sublease, fifty percent (50%) of all sums, rents, additional charges, key money and other consideration payable under the sublease by the subtenant to Tenant in excess of Rent accruing during the term of the sublease with respect to the subleased portion of the Premises (at the rate per square foot of Rentable Area payable by Tenant). Tenant shall be entitled to deduct all Transaction Inducements related to such sublease, provided the same are amortized over the entire term of the sublease. The obligation to make the payments described in this subparagraph (g) shall be a joint and several obligation of the Tenant and the assignee or sublessee, as the case may be. The amounts payable under subparagraph (g) (i) shall be paid to Landlord on the effective date of the assignment, as a condition of the effectiveness of Landlord's consent. The amounts payable under subparagraph (g) (ii) shall be paid to Landlord as and when payable by the sublessee to Tenant. Within 15 days after written request therefor by Landlord, Tenant shall furnish evidence to Landlord of the amount of consideration received or expected to be received from such assignment or sublease. (h) Notwithstanding any provision of this Lease to the contrary, in the event this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute the property of Tenant or Tenant' s estate within the meaning of the Bankruptcy Code. All such money and other consideration not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and shall be promptly paid or delivered to Landlord. (i) Notwithstanding any provision of this Lease to the contrary, Tenant shall have the right, without obtaining Landlord's consent, to permit a portion of the Premises, not to exceed a total of 7,000 square feet of Rentable Area in the aggregate, to be used for so-called "Executive Suites", provided that Tenant shall first obtain from each occupant of such Executive Suites an agreement that states that such occupant shall not take any action that will violate the terms of this Lease and that such occupant shall pay all of Landlord's costs and expenses (including reasonable attorneys' fees and costs) that Landlord may incur as a result of any such default or such occupant's failure to vacate its portion of the Premises when its rights of occupancy have expired. Tenant shall be entitled to all so-called amounts paid by the occupant of the Executive Suites to Tenant, provided Tenant is not in default under this Lease. 12. DEFAULT (a) The occurrence of any of the following shall constitute a default by Tenant: (i) Any failure by Tenant to pay any installment of Basic Annual Rent or to make any other payment required to be made by Tenant hereunder when due, where such failures continues for 3 business days after delivery of written notice of such failure by Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under Section 1161 et seq., of the California Code of Civil Procedure; -------- (ii) The abandonment or vacation of the Premises by Tenant; (iii) Any failure by Tenant to execute and deliver any statement described in Paragraph 16 requested by Landlord, where such failure continues for 3 business days after delivery of written notice of such failure by Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under Section 1161 et seq., of the California Code of Civil Procedure; (iv) Any failure by Tenant to observe and perform any other provision of this Lease, including, without limitation, any provision of the Exhibits attached hereto, as they may exist from time to time, to be observed or performed by Tenant, where such failure continues for 30 days (except where a different period of time is specified in this Lease, in which case such different time period shall apply) after delivery of written notice of such failure by Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under Section 1161 et seq., of the California Code of Civil Procedure. If the nature of such default is such that the same cannot reasonably be cured within such 30 day period, Tenant shall not be deemed to be in default if Tenant shall, within 10 days of receipt of such notice, both deliver to Landlord its written agreement to cure such default and commence such cure, and thereafter diligently prosecute such cure to completion; (v) The making or furnishing by Tenant of any warranty, representation or statement to Landlord in connection with this Lease, or any other agreement to which Tenant and Landlord are parties, which is false or misleading in any material respect when made or furnished; (vi) Any transfer of a substantial portion of the assets of Tenant (except transfers among Tenant and any guarantor of this Lease), or the incurrance of any material obligation of Tenant, unless such transfer or obligation is undertaken or incurred in the ordinary course of Tenant's business or in good faith for fair equivalent consideration, or with Landlord's consent; (vii) Any instance whereby Tenant or any general partner of Tenant shall cease doing business as a going concern, make an assignment for the benefit of creditors, generally not pay its debts as they become due or admit in writing its inability to pay its debts as they become due, file a petition commencing a voluntary case under any chapter of the Bankruptcy Code, be adjudicated an insolvent, file a petition seeking for itself any reorganization, composition, readjustment, liquidation, dissolution or similar arrangement under the Bankruptcy Code or any other present or future similar statute, law, rule or regulation, or file an answer admitting the material allegations of a petition filed against it in any such proceeding, consent to the filing of such a petition or acquiesce in the appointment of a trustee, receiver, custodian or other similar official for it or of all or any substantial part of its assets or properties, or take any action looking to its dissolution or liquidation; (viii) Any instance whereby a case, proceeding or other action shall be instituted against Tenant or any general partner of Tenant seeking the entry of an order for relief against Tenant or any general partner thereof as debtor, to adjudicate Tenant or any general partner thereof as a bankrupt or insolvent, or seeking reorganization, arrangement, readjustment, liquidation, dissolution or similar relief against Tenant or any general partner thereof under the Bankruptcy Code or any other present or future similar statute, law, rule or regulation, which case, proceeding or other action either results in such entry, adjudication or issuance or entry of any other order or judgment having a similar effect, or remains undismissed for 60 days, or within 60 days after the appointment (without Tenant's or such general partner's consent) of any trustee, receiver, custodian or other similar official for it or such general partner, or of all or any substantial part of its or such general partner's assets and properties, such appointment shall not be vacated; (ix) The appointment of a receiver, trustee or custodian to take possession of all or any substantial portion of the assets of Tenant, or the formation of any committee of Tenant's creditors, or any class thereof, for the purpose of monitoring or investigating the financial affairs of Tenant or enforcing such creditors' rights; or (x) The default of any guarantor of Tenant's obligations hereunder under any guaranty of this Lease, the attempted repudiation or revocation of any such guaranty or the participation by any such guarantor in any other event described in this subparagraph (a) (as if this subparagraph (a) referred to such guarantor in place of Tenant). (b) In the event of any such default by Tenant, then in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such termination. In the event that Landlord shall elect to so terminate this Lease, then Landlord may recover from Tenant: (i) The worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus (ii) The worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves reasonably could have been avoided; plus (iii) The worth at the time of award of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves reasonably could be avoided; (iv) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant' s failure to perform its obligations under this Lease or which in the ordinary course would be likely to result therefrom, and (v) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable California Law. (c) As used in subparagraphs (b) (i) and (b) (ii) above, the "worth at the time of award" is computed by allowing interest at the rate specified in subparagraph (i) below. As used in subparagraph (b) (iii) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus 1%. (d) In the event of any such default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost and risk of and for the account of Tenant. (e) In the event of the vacation or abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in subparagraph (d) or shall take possession of the Premises pursuant to legal proceedings, or pursuant to any notice provided by Law, then if Landlord does not elect to terminate this Lease as provided in this Paragraph 12, Landlord may from time to time, without terminating this Lease, either recover all rentals as they become due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole and absolute discretion may deem advisable, with the right to make alterations and repairs to the Premises. (f) In the event that Landlord shall elect to relet, then rentals received by Landlord from such reletting shall be applied: first, to the payment of any indebtedness (other than Rent) due hereunder from Tenant to Landlord; second, to the payment of any cost of such reletting (including brokerage commissions); third, to the payment of the cost of any alterations and repairs to the Premises; fourth, to the payment of Rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future Rent as the same may become due and payable hereunder. Should reletting, during any month to which such Rent is applied, result in the actual payment of rentals at less than the Rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand therefor by Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. (g) No re-entry or taking of possession of the Premises by Landlord pursuant to this Paragraph 12 shall be construed as an election to terminate this Lease unless a written notice of such election shall be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord, Landlord may, at any time after such reletting, elect to terminate this Lease for any such default. Upon the occurrence of a default by Tenant under subparagraph (a), if the Premises or any portion thereof are sublet, Landlord in addition and without prejudice to any other remedies herein provided or provided by Law, may, at its option, collect directly from the sublessee all rentals becoming due to the Tenant and apply such rentals against other sums due hereunder to Landlord. (h) Except as otherwise specifically provided in this Lease, in addition and without prejudice to any other right or remedy of Landlord, if Tenant shall be in default under this Lease, Landlord may cure the same at the expense of Tenant (i) immediately and without notice in the case (A) of emergency, (B) where such default unreasonably interferes with any other tenant in the Project, or (C) where such default will result in the violation of Law or the cancellation of any insurance policy maintained by Landlord and (ii) in any other case if such default continues for 10 days from the receipt by Tenant of notice of such default from Landlord and Tenant is not diligently prosecuting the cure of such default. All costs incurred by Landlord in curing such default(s), including, without limitation, attorneys' fees, shall be reimbursable by Tenant as additional Rent hereunder upon demand, together with interest thereon, from the date such costs were incurred by Landlord, at the rate specified in subparagraph (i) below. (i) The performance by Landlord of any agreement, concession or grant for "free rent," Rent abatement, a "credit fund" to be applied against Rent otherwise payable hereunder or any grant or payment by Landlord to or for the benefit of Tenant of any cash or other bonus, allowance or other payment or inducement or any assumption of obligations by Landlord to or for the benefit of Tenant given or granted to or for the benefit of Tenant as consideration for execution and delivery of this Lease by Tenant (all such agreements, concessions, grants, payments and assumptions are collectively referred to herein as "TENANT INDUCEMENTS") shall be continuously conditional upon Tenant's full and complete performance of its obligations under this Lease, as this Lease may be amended or extended. Effective immediately upon the occurrence of a default (A) any provision of this Lease providing for performance of a Tenant Inducement shall be automatically deemed terminated and of no further force or effect and (B) any Tenant Inducement previously granted, issued, paid or given to or for the benefit of Tenant shall be immediately due and payable by Tenant to Landlord as Rent hereunder. (j) Tenant acknowledges and agrees that any late payment by Tenant of Rent or any other amount payable by Tenant hereunder will result in damage to Landlord, the exact amount of which will be extremely difficult to ascertain. Such damage includes, without limitation, administrative expenses, accounting and processing costs and late charges which may be payable by Landlord on mortgage financing or other obligations of Landlord relating to the Property. As a result, Landlord and Tenant agree that in the event Tenant is more than 10 days late in paying any amount of Rent or any other payment due under this Lease, then provided Tenant does not pay the outstanding Rent or other payment within 3 business days of written notice by Landlord of the late payment, Tenant shall pay Landlord a late charge equal to 5% of the delinquent amount. Landlord and Tenant agree that such late charge is a fair and reasonable estimate of the damage Landlord will incur by reason of such delinquent payment. Following the occurrence of three instances of payment of Rent more than 10 days late in any twelve month period, Landlord may, without prejudice to any other rights or remedies available to it, upon written notice to Tenant, (i) require that all remaining monthly installments of Rent shall be payable three months in advance; and in addition or in the alternative at Landlord's election, (ii) require that Tenant increase the amount of the Security Deposit (if any) by an amount equal to one month's Rent. In addition, any amount due from Tenant to Landlord hereunder which is not paid within 30 days of the date due shall bear interest at an annual rate (the "DEFAULT RATE") equal to 4% in excess of the discount rate being charged by the Federal Reserve Bank of San Francisco on advances to member banks pursuant to Sections 13 and 13(a) of the Federal Reserve Act, as amended, as of the 25th day of the month preceding the date hereof (or such lesser amount as shall be the maximum rate then permitted by applicable Law). The payment of such interest by Tenant shall not constitute a waiver of any default by Tenant hereunder. (k) Tenant hereby waives for Tenant and for all those claiming under Tenant all right now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant's right of occupancy of the Premises after any termination of this Lease. Notwithstanding any provision of this Lease to the contrary, the expiration or termination of this Lease and/or the termination of Tenant' s rights to possession of the Premises shall not discharge, relieve or release Tenant from any obligation or liability whatsoever under any indemnity provision of this Lease, including without limitation the provisions of Paragraphs 6 and 8 hereof. 13. ACCESS; CONSTRUCTION Landlord reserves the right to use the roof and exterior walls of the Premises and the area beneath, adjacent to and above the Premises, together with the right to install, use, maintain, repair, replace and relocate equipment, machinery, meters, pipes, ducts, plumbing, conduits and wiring through the Premises, which serve other portions of the Building or the Project in a manner and in locations which do not unreasonably interfere with Tenant's use of the Premises. In addition, Landlord shall have free access to any and all mechanical installations of Landlord or Tenant, including, without limitation, machine rooms, telephone rooms and electrical closets. Tenant agrees that there shall be no construction of partitions or other obstructions which interfere with or which threaten to interfere with Landlord's free access thereto, or interfere with the moving of Landlord's equipment to or from the enclosures containing said installations. Landlord reserves and shall at any time and all times have the right to enter the Premises to inspect the same, to supply janitorial service and any other service to be provided by Landlord to Tenant hereunder, to exhibit the Premises to prospective purchasers, lenders or tenants, to post notices of non- responsibility, to alter, improve, restore, rebuild or repair the Premises or any other portion of the Building, or to do any other act permitted or contemplated to be done by Landlord hereunder, all without being deemed guilty of an eviction of Tenant and without liability for abatement of Rent or otherwise. For such purposes, Landlord may also erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed. Landlord shall conduct all such inspections and/or improvements, alterations and repairs so as to minimize, to the extent reasonably practical and without additional expense to Landlord, any interruption of or interference with the business of Tenant. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of such purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Premises (excluding Tenant's vaults and safes, access to which shall be provided by Tenant upon Landlord's reasonable request). Landlord shall have the right to use any and all means which Landlord may deem proper in an emergency in order to obtain entry to the Premises or any portion thereof. Any entry into the Premises obtained by Landlord by any of such means shall not under any circumstances be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant from the Premises or any portion thereof. No provision of this Lease shall be construed as obligating Landlord to perform any repairs, Alterations or decorations to the Premises or the Project except as otherwise expressly agreed to be performed by Landlord pursuant to the provisions of this Lease. 14. BANKRUPTCY (a) If at any time on or before the Commencement Date there shall be filed by or against Tenant in any court, tribunal, administrative agency or any other forum having jurisdiction, pursuant to any applicable law, either of the United States or of any state, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver, trustee or conservator of all or a portion of Tenant's property, or if Tenant makes an assignment for the benefit of creditors, this Lease shall ipso facto be cancelled and terminated ---------- and in such event neither Tenant nor any person claiming through or under Tenant or by virtue of any applicable law or by an order of any court, tribunal, administrative agency or any other forum having jurisdiction, shall be entitled to possession of the Premises and Landlord, in addition to the other rights and remedies given by Paragraph 12 hereof or by virtue of any other provision contained in this Lease or by virtue of any applicable law, may retain as damages any Rent, Security Deposit or moneys received by it from Tenant or others on behalf of Tenant. (b) If, after the Commencement Date, or if at any time during the term of this Lease, there shall be filed against Tenant in any court, tribunal, administrative agency or any other forum having jurisdiction, pursuant to any applicable law, either of the United States or of any state, a petition in bankruptcy or insolvency or for reorganization or for the appointment of a receiver, trustee or conservator of all or a portion of Tenant' s property, and the same is not dismissed after sixty (60) calendar days, or if Tenant makes an assignment for the benefit of creditors, this Lease, at the option of Landlord exercised within a reasonable time after notice of the happening of any one or more of such events, may be cancelled and terminated and in such event neither Tenant nor any person claiming through or under Tenant or by virtue of any statute or of an order of any court shall be entitled to possession or to remain in possession of the Premises, but shall forthwith quit and surrender the Premises, and Landlord, in addition to the other rights and remedies granted by Paragraph 12 hereof or by virtue of any other provision contained in this Lease or by virtue of any applicable law, may retain as damages any Rent, Security Deposit or moneys received by it from Tenant or others on behalf of Tenant. (c) In the event of the occurrence of any of those events specified in this Paragraph 14, if Landlord shall not choose to exercise, or by applicable law shall not be able to exercise, its rights hereunder to terminate this Lease upon the occurrence of such events, then, in addition to any other rights of Landlord hereunder or by virtue of applicable law, (i) Landlord shall not be obligated to provide Tenant with any of the utilities or services specified in Paragraph 7, unless Landlord has received compensation in advance for such utilities or services, and the parties agree that Landlord's reasonable estimate of the compensation required with respect to such services shall control, and (ii) neither Tenant, as debtor-in-possession, nor any trustee or other person (hereinafter collectively referred to as the "ASSUMING TENANT") shall be entitled to assume this Lease unless on or before the date of such assumption, the Assuming Tenant (x) cures, or provides adequate assurance that the latter will promptly cure, any existing default under this Lease, (y) compensates, or provides adequate assurance that the Assuming Tenant will promptly compensate Landlord for any pecuniary loss (including, without limitation, attorneys' fees and disbursements) resulting from such default, and (z) provides adequate assurance of future performance under this Lease, it being covenanted and agreed by the parties that, for such purposes, any cure or compensation shall be effected by the immediate payment of any monetary default or any required compensation, or the immediate correction or bonding of any nonmonetary default. For purposes of this Lease, (i) any "adequate assurance" of such cure or compensation shall be effected by the establishment of an escrow fund for the amount at issue or by bonding, and (ii) "adequate assurance" of future performance shall be effected by the establishment of an escrow fund for the amount at issue or by bonding. 15. SUBSTITUTION OF PREMISES - INTENTIONALLY LEFT BLANK. 16. SUBORDINATION; ATTORNMENT; ESTOPPEL CERTIFICATES (a) Tenant agrees that this Lease and the rights of Tenant hereunder shall be subject and subordinate to any and all deeds of trust, security interests, mortgages, master leases, ground leases or other security documents and any and all modifications, renewals, extensions, consolidations and replacements thereof (collectively, "SECURITY DOCUMENTS") which now or hereafter constitute a lien upon or affect the Project, the Building or the Premises. Such subordination shall be effective without the necessity of the execution by Tenant of any additional document for the purpose of evidencing or effecting such subordination. In addition, Landlord shall have the right to subordinate or cause to be subordinated any such Security Documents to this Lease and in such case, in the event of the termination or transfer of Landlord's estate or interest in the Project by reason of any termination or foreclosure of any such Security Documents, Tenant shall, notwithstanding such subordination, attorn to and become the Tenant of the successor in interest to Landlord at the option of such successor in interest. Furthermore, Tenant shall within five days of demand therefor execute any instruments or other documents which may be required by Landlord or the holder of any Security Document and specifically shall execute, acknowledge and deliver within five days of demand therefor a subordination of lease or subordination of deed of trust, in the form required by the holder of the Security Document requesting the document; the failure to do so by Tenant within such time period shall be a material default hereunder. Landlord is hereby irrevocably appointed and authorized as agent and attorney-in-fact of Tenant to execute and deliver all such subordination instruments in the event that Tenant fails to execute and deliver said instruments within five days after notice from Landlord requesting execution and delivery thereof. Notwithstanding any provision of this Lease to the contrary, the subordination of this Lease and the rights of Tenant to any Security Documents which are executed or entered into after the date of this Lease (and Tenant's duty hereunder to execute any documents evidencing such subordination) shall be subject to the holder of such Security Document agreeing pursuant to such holder's standard form for such purpose or otherwise pursuant to any other form in common use by institutional lenders) that Tenant's possession and this Lease shall not be disturbed by such holder so long as no default hereunder shall occur and Tenant shall attorn to the record owner of the Project. (b) If any proceeding is brought for default under any ground or master lease to which this Lease is subject or in the event of foreclosure or the exercise of the power of sale under any mortgage, deed of trust or other Security Document made by Landlord covering the Premises, at the election of such ground lessor, master lessor or purchaser at foreclosure, Tenant shall attorn to and recognize the same as Landlord under this Lease, provided such successor expressly agrees in writing to be bound to all future obligations by the terms of this Lease, and if so requested, Tenant shall enter into a new lease with that successor on the same terms and conditions as are contained in this Lease (for the unexpired term of this Lease then remaining); provided, however, in no case shall such ground lessor, master lessor or purchaser (i) be liable or responsible for any acts or omissions of any predecessor owner or with respect to events prior to its ownership, (ii) be subject to any offsets or defenses Tenant may have against any predecessor or (iii) be bound by prepayment of more than one month's rent. (c) Tenant shall, upon not less than five days' prior notice by Landlord, execute, acknowledge and deliver to Landlord a statement in writing certifying to those facts for which certification has been requested by Landlord or any current or prospective purchaser, holder of any Security Document, ground lessor or master lessor, including, but without limitation, that (i) this Lease is unmodified and in full force and effect (or if there have been modifications, that the same is in full force and effect as modified and stating the modifications), (ii) the dates to which the Basic Annual Rent, Rent and other charges hereunder have been paid, if any, and (iii) whether or not to the best knowledge of Tenant, Landlord is in default in the performance of any covenant, agreement or condition contained in this Lease and, if so, specifying each such default of which Tenant may have knowledge. The form of the statement attached hereto as Exhibit "F" is hereby approved by Tenant for use pursuant to this subparagraph (c); however, at Landlord's option, Landlord shall have the right to use other forms for such purpose. Tenants failure to execute and deliver such statement within 10 days shall, at the option of Landlord, constitute a material default under this Lease and, in any event, shall be conclusive upon Tenant that this Lease is in full force and effect without modification except as may be represented by Landlord in any such certificate prepared by Landlord and delivered to Tenant for execution. In addition, Landlord is hereby irrevocably appointed and authorized as agent and attorney-in-fact of Tenant to execute and deliver such statement in the event that Tenant fails to execute and deliver such statement within five days after notice from Landlord requesting execution and delivery thereof Any statement delivered pursuant to this Paragraph 16 may be relied upon by any prospective purchaser of the fee of the Building or the Project or any mortgagee, ground lessor or other like encumbrancer thereof or any assignee of any such encumbrance upon the Building or the Project. (d) In addition, and not in lieu of the foregoing, as a condition of Landlord's obligation to deliver the Premises to Tenant hereunder, on or before the date that Tenant takes possession or commences use of the Premises for any business purpose (including moving in), Tenant shall execute and deliver to Landlord a certificate substantially in the form of Exhibit "G" attached hereto, indicating thereon any exceptions thereto which Tenant claims to exist at that time. 17. SALE BY LANDLORD; NONRECOURSE LIABILITY (a) In the event of a sale or conveyance by Landlord of the Building or the Project, Landlord shall be released (i) from any and all liability accruing thereafter, and (ii), if Tenant has been presented with an estoppel certificate for Tenant's execution in connection with such sale or conveyance, Landlord shall also be released from any and all liability accruing prior to such sale or conveyance, except for any default of Landlord set forth in such estoppel certificate signed by Tenant. If the Security Deposit has been made by Tenant prior to such sale or conveyance, Landlord shall transfer the Security Deposit to the purchaser, and upon delivery to Tenant of notice thereof pursuant to the provisions of Section 1950.7 of the California Civil Code, Landlord shall be discharged from any further liability in reference thereto. (b) Landlord and each of its officers, directors, Affiliates, shareholders and constituent shareholders shall in no event or at any time be personally liable for the payment or performance of any obligation required or permitted of the Landlord under this Lease or under any document executed in connection herewith. In the event of any actual or alleged failure, breach or default by Landlord under this Lease or any such document, the sole recourse of Tenant shall be against the interest of Landlord in the Project. No attachment, execution, writ or other process shall be sought or obtained, and no judicial proceeding shall be initiated by or on behalf of Tenant, against Landlord (or any of Landlord's officers, directors, Affiliates or constituent partners or shareholders) personally or Landlord's assets (other than Landlord's interest in the Project) as a result of any such failure, breach or default. (c) Landlord shall not be in default of any obligation of Landlord hereunder unless and until it has failed to perform such obligation within 30 days after receipt of written notice of such failure from Tenant, provided, however, that if the nature of Landlord's obligation is such that more than 30 days are required for its performance, Landlord shall not be in default if Landlord commences to cure such default within the 30 day period and thereafter diligently prosecutes the same to completion. Tenants sole remedy for breach of this Lease by Landlord shall be an action for damages, injunction or specific performance; Tenant shall have no right to terminate this Lease on account of any breach or default by Landlord. Notwithstanding any provision of this Lease, all liability of Landlord under this Lease or otherwise with respect to any acts or omissions of Landlord or events which occur during the term of this Lease and which in any way relate to Tenant's tenancy hereunder or occupancy of the Premises shall terminate two years following the expiration or sooner termination of this Lease other than as to those claims, if any, asserted in reasonable detail in a writing delivered by Tenant to Landlord prior to the expiration of such two-year period. (d) As a condition to the effectiveness of any notice of default given by Tenant to Landlord, Tenant shall also concurrently give such notice under the provisions of Paragraph 17(c) to each beneficiary under a deed of trust encumbering the Project of whom Tenant has received written notice (such notice to specify the address of the beneficiary). In the event Landlord shall fail to cure any breach or default within the time period specified in subparagraph (c), then prior to the pursuit of any remedy therefor by Tenant, each such beneficiary shall have an additional 30 days within which to cure such default, or if such default cannot reasonably be cured within such period, then each such beneficiary shall have such additional time as shall be necessary to cure such default, provided that within such 30 day period, such beneficiary has commenced and is diligently pursuing the remedies available to it which are necessary to cure such default (including, without limitation, as appropriate, commencement of foreclosure proceedings). 18. PARKING; COMMON FACILITIES (a) Tenant shall have the right to the nonexclusive use of the number of parking spaces located in the parking facilities of the Project specified in Item 13 of the Basic Lease Provisions for the parking of motor vehicles used by Tenant, its officers, employees and invitees only. Landlord reserves the right, at any time upon written notice to Tenant, to change the location of Tenant's parking spaces within the parking facility originally designated for such use, if any, as determined by Landlord in its reasonable discretion. The use of such spaces shall be subject to the rules and regulations adopted by Landlord from time to time for the use of such facilities. Landlord further reserves the right to make such changes to the parking system as Landlord may deem necessary or reasonable from time to time (i.e., Landlord may provide for one or a combination of parking systems, including, without limitation, self-parking, single or double stall parking spaces, and valet assist parking). Tenant agrees that Tenant, its officers and employees shall not be entitled to park in any reserved or specially assigned areas designated by Landlord from time to time in the Project's parking facilities. Landlord may require execution of an agreement with respect to the use of such parking facilities by Tenant and/or its officers and employees in form satisfactory to Landlord as a condition of any such use by Tenant, its officers and employees. A default by Tenant, its officers or employees in the payment of such charges, the compliance with such rules and regulations, or the performance of such agreement(s) shall constitute a material default by Tenant hereunder. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's officers, employees, suppliers, shippers, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described in this Paragraph, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Tenant, which cost shall be immediately payable upon demand by Landlord. (b) Subject to subparagraphs (c) and (d) below and the remaining provisions of this Lease, Tenant shall have the nonexclusive right, in common with others, to the use of such entrances, lobbies, restrooms, elevators, ramps, drives, stairs, and similar access ways and service ways and other common areas and facilities in and adjacent to the Building and the Project as are designated from time to time by Landlord for the general nonexclusive use of Landlord, Tenant and the other tenants of the Project and their respective employees, agents, representatives, licensees and invitees ("COMMON AREAS"). The use of such Common Areas shall be subject to the rules and regulations contained herein and the provisions of any covenants, conditions and restrictions affecting the Project. Landlord reserves the right to make such changes, alterations, additions, deletions, improvements, repairs or replacements in or to the Building, the Project (including the Premises) and the Common Areas as Landlord may deem necessary or desirable, including, without limitation, constructing new buildings and making changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading areas, landscaped areas and walkways; provided, however, that there shall be no unreasonable permanent obstruction of access to or use of the Premises resulting therefrom. In the event that the Building or the Project is not completed on the date of execution of this Lease, Landlord shall have the sole judgment and discretion to determine the architecture, design, appearance, construction, workmanship, materials and equipment with respect to construction of the Building and the Project. Notwithstanding any provision of this Lease to the contrary, the Common Areas shall not in any event be deemed to be a portion of or included within the Premises leased to Tenant and the Premises shall not be deemed to be a portion of the Common Areas. (c) Landlord reserves the right (i) to change the configuration, size and dimensions of the Project and its Common Areas, (ii) to add or sever from its ownership any portion of the Project at any time, and (iii) to exclude from the rights of use granted to Tenant any rights of passage over or use of any portion of the Project; provided, however, Landlord shall not unreasonably interfere with access to or use of the Premises. 19. MISCELLANEOUS (a) Attorneys' Fees. In the event of any legal action or proceeding --------------- brought by either party against the other arising out of this Lease, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs incurred in such action. Such amounts shall be included in any judgment rendered in any such action or proceeding. (b) Waiver. No waiver by Landlord of any provision of this Lease or of ------ any breach by Tenant hereunder shall be deemed to be a waiver of any other provision hereof, or of any subseqsequent breach by Tenant. Landlord's consent to or approval of any act by Tenant requiring Landlord's consent or approval under this Lease shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act of Tenant. No act or thing done by Landlord or Landlord's agents during the term of this Lease shall be deemed an acceptance of a surrender of the Premises, unless in writing signed by Landlord. The delivery of the keys to any employee or agent of Landlord shall not operate as a termination of the Lease or a surrender of the Premises. The acceptance of any Rent by Landlord following a breach of this Lease by Tenant shall not constitute a waiver by Landlord of such breach or any other breach unless such waiver is expressly stated in a writing signed by Landlord. (c) Notices. All notices which Landlord or Tenant may be required, or ------- may desire, to serve on the other must be in writing and may be served by personal service, or as an alternative to personal service, by mailing the same by registered or certified mail, postage prepaid, addressed as set forth in Item 14 of the Basic Lease Provisions, or addressed to such other address or addresses as either Landlord or Tenant may from time to time designate to the other in writing. However, any notice (including a summons and complaint) which Landlord may be required or may desire to serve on Tenant shall be deemed sufficiently served and given if personally served or sent by registered or certified mail, postage prepaid, to Tenant at the Premises address set forth in Item 14 of the Basic Lease Provisions. In addition, any bill, statement, consent or other communication which Landlord may desire or is required to give to Tenant shall be deemed sufficiently given or rendered if in writing, hand delivered to the Premises or sent to Tenant at the Premises by registered or certified mail, postage prepaid. (d) Labor. Tenant shall not at any time prior to or during the term ----- hereof, either directly or indirectly, use any contractors, labor or materials whose use would create any difficulty with other contractors or labor engaged by Tenant, Landlord or by others in the construction, maintenance or operation of the Premises, the Building or the Project. (e) Security. Landlord shall be the sole determinant of the type and -------- amount of security services to be provided to the Project, if any. In all events, Landlord shall not be liable to Tenant, and Tenant hereby waives any claim against Landlord, for, and expressly assumes the risk of (i) any unauthorized or criminal entry of third parties into the Premises, the Building or the Project, (ii) any damage to persons, or (iii) any loss of property in and about the Premises, the Building or the Project, by or from any unauthorized or criminal acts of third parties, regardless of any action, inaction, failure, breakdown, malfunction and/or insufficiency of the security services provided by Landlord or any actual or alleged passive or active negligence of Landlord. (f) Storage. Any storage space at any time demised to Tenant hereunder ------- shall be used exclusively for storage. Notwithstanding any other provision of this Lease to the contrary, (i) Landlord shall have no obligation to provide heating, cleaning, water or air conditioning therefor, and (ii) Landlord shall be obligated to provide to such storage space only such electricity as will, in Landlord's judgment, be adequate to light said space as storage space. (g) Holding Over. Tenant shall have no right to holdover or retain ------------ possession of any portion of the Premises after the expiration or sooner termination of this Lease. If Tenant holds over after the expiration or earlier termination of the term hereof, with or without the express or implied consent of Landlord, Tenant shall become and be only a month to month tenant at a Rent equal to the greater of (i) the then prevailing market rate as determined by Landlord in its sole and absolute discretion (subject to adjustments as provided in Paragraphs 2 and 3 hereof and prorated on a daily basis) or (ii) 125% of the Basic Annual Rent payable by Tenant immediately prior to such expiration or termination, and otherwise upon the terms, covenants and conditions herein specified, so far as applicable. Neither any provision hereof nor acceptance by Landlord of Rent after such expiration or earlier termination shall be deemed a consent to a holdover hereunder or result in a renewal of this Lease or an extension of the term. Notwithstanding any provision to the contrary contained herein, (i) Landlord expressly reserves the right to require Tenant to surrender possession of the Premises upon the expiration of the term of this Lease or upon the earlier termination hereof, the right to reenter the Premises, and the right to assert any remedy at law or in equity to evict Tenant and/or collect damages in connection with any such holding over, and (ii) Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, demands, actions, losses, damages, obligations, costs and expenses, including, without limitation, attorneys' fees incurred or suffered by Landlord by reason of Tenant's failure to surrender the Premises on the expiration or earlier termination of this Lease in accordance with the provisions of this Lease. (h) Condition of Premises. Tenant acknowledges that neither Landlord --------------------- nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building or the Project, or with respect to the suitability of any part of the Project for the conduct of Tenant's business. Tenant agrees that the Premises, the Building and the Project are in good and sanitary order, condition and repair without defect. (i) Quiet Possession. Upon Tenant's paying the Rent reserved hereunder ---------------- and observing and performing all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall have quiet possession of the Premises for the term hereof without hindrance or ejection by any person lawfully claiming under Landlord, subject to the provisions of this Lease and to the provisions of any (i) covenants, conditions and restrictions, (ii) master lease, or (iii) deed of trust to which this Lease is subordinate or may be subordinated. (j) Matters of Record. Except as otherwise provided herein, this Lease ----------------- and Tenant's rights hereunder are subject and subordinate to all matters affecting Landlord's title to the Project recorded in the official records of the County in which the Project is located prior to and subsequent to the date hereof, including, without limitation, all covenants, conditions and restrictions and the provisions of all loan documents relating to each loan secured by a mortgage or deed of trust encumbering the Project. Tenant agrees for itself and all persons in possession or holding under it that it will comply with and not violate any such covenants, conditions and restrictions, loan documents, or other matters of record. Landlord reserves the right, from time to time, to grant such easements, rights and dedications as Landlord deems necessary or desirable, and to cause the recordation of parcel maps and covenants, conditions and restrictions affecting the Premises, the Building or the Project, as long as such easements, rights, dedications, maps, and covenants, conditions and restrictions do not materially interfere with the use of the Premises by Tenant. At Landlord's request, Tenant shall join in the execution of any of the aforementioned documents. (k) Project Financing. Tenant acknowledges that as a material ----------------- inducement to Landlord to execute this Lease, (i) Tenant shall timely acknowledge and deliver to Landlord all such documents and instruments as may be customarily required by any lender providing financing to Landlord from time to time during the term hereof, including, without limitation, those documents and instruments which may be required under Paragraph 16 and (ii) if any prospective lender to Landlord shall request or require in connection with the placement of any financing to Landlord or pursuant to the provisions of any Security Document any modification of this Lease Tenant shall not delay or withhold its agreement to such proposed modification provided the same shall not modify the Basic Annual Rent payable hereunder nor materially and adversely affect the obligations of Tenant hereunder. Tenant shall be responsible for any and all liability, loss, cost, damage and expense, including, without limitation, attorneys' fees, which Landlord shall incur in connection with Tenant's failure or delay in executing, acknowledging and delivering such documents and instruments or Tenant's breach of any other covenant or agreement embodied in this Lease that results in the delay, impairment or cancellation of such financing. (l) Successors and Assigns. Except as otherwise provided in this ---------------------- Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. Tenant shall attorn to each purchaser, successor or assignee of Landlord. (m) Brokers. Tenant warrants that it has had no dealings with any real ------- estate broker or agent in connection with the negotiation of this Lease, excepting only the broker named in Item 11 of the Basic Lease Provisions and that it knows of no other real estate broker or agent who is or might be entitled to a commission in connection with this Lease. Landlord covenants and agrees to pay all real estate commissions due in connection with this Lease to the broker described in Item 11 of the Basic Lease Provisions. (n) Name. Tenant shall not, without the prior written consent of ---- Landlord (which consent shall not be unreasonably withheld) use the name, insignia or logotype of the Building or the Project for any purpose, and in no event shall Tenant acquire any rights in or to such names. Tenant shall not use any picture of the Building or of the Project in its advertising, stationery or in any other manner. Landlord expressly reserves the right at any time to change the name, number, designation or logotype of the Building or the Project or the exterior or interior signage thereon and therein without the consent of Tenant without in any manner being liable to Tenant therefor. (o) Examination of Lease; Confidentiality. Submission of this ------------------------------------- instrument for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. Tenant agrees that (i) the terms and provisions of this Lease are confidential and constitute proprietary information of Landlord and (ii) it shall not disclose, and it shall cause its partners, officers, directors, shareholders, employees, brokers and attorneys to not disclose any term or provision of this Lease to any other person without first obtaining the prior written consent of Landlord. (p) Time. Time is of the essence of this Lease and each and all of ---- its provisions. (q) Defined Terms and Marginal Headings. The words "Landlord" and ----------------------------------- "Tenant" as used herein shall include the plural as well as the singular. If more than one person is named as Tenant the obligations of such persons are joint and several. The marginal headings and titles to the articles of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. (r) Conflict of Laws; Prior Agreements; Separability. This Lease shall ------------------------------------------------ be governed by and construed pursuant to the laws of the State of California. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease. No prior agreement, understanding or representation pertaining to any such matter shall be effective for any purpose. No provision of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. The illegality, invalidity or unenforceability of any provision of this Lease shall in no way impair or invalidate any other provision of this Lease, and such remaining provisions shall remain in full force and effect. (s) Authority. If Tenant is a corporation, each individual executing --------- this Lease on behalf of Tenant hereby covenants and warrants that Tenant is a duly authorized and existing corporation, that Tenant has and is qualified to do business in California, that the corporation has full right and authority to enter into this Lease, and that each person signing on behalf of the corporation is authorized to do so. If Tenant is a partnership or trust, each individual executing this Lease on behalf of Tenant hereby covenants and warrants that he is duly authorized to execute and deliver this Lease on behalf of Tenant in accordance with the terms of such entity's partnership or trust agreement. Tenant shall provide Landlord on demand with such evidence of such authority as Landlord shall reasonably request, including, without limitation, resolutions, certificates and opinions of counsel. (t) Common Areas. The rights of Tenant hereunder in and to the Common ------------ Areas shall at all times be nonexclusive with the rights of Landlord and other tenants of Landlord who use the same in common with Tenant, and it shall be the duty of Tenant to keep all of the Common Areas free and clear of any obstructions created or permitted by Tenant or resulting from Tenant's operations, and to use the Common Areas only for normal activities, parking and ingress and egress by Tenant and its employees, agents, representatives, licensees and invitees to and from the Premises, the Building or the Project. If, in the opinion of Landlord, unauthorized persons are using the Common Areas by reason of the presence of Tenant in the Premises, Tenant, upon demand of Landlord, shall correct such situation by appropriate action or proceedings against all such unauthorized persons. Nothing herein shall affect the rights of Landlord at any time to remove any such unauthorized persons from said areas or to prevent the use of any of said areas by unauthorized persons. (u) Joint and Several Liability. If two or more individuals, --------------------------- corporations, partnerships or other business associations (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each such individual, corporation, partnership or other business association to pay Rent and perform all other obligations hereunder shall be deemed to be joint and several, and all notices, payments and agreements given or made by, with or to any one of such individuals, corporations, partnerships or other business associations shall be deemed to have been given or made by, with or to all of them. In like manner, if Tenant shall be a partnership or other business association, the members of which are, by virtue of statute or federal law, subject to personal liability, then the liability of each such member shall be joint and several. (v) Rental Allocation. For purposes of Section 467 of the Internal ----------------- Revenue Code of 1986, as amended from time to time, Landlord and Tenant hereby agree to allocate all Rent to the period in which payment is due, or if later, the period in which Rent is paid. (w) Rules and Regulations. Tenant agrees to comply with all rules and --------------------- regulations of the Building and the Project imposed by Landlord as set forth on Exhibit "D" attached hereto, as the same may be changed from time to time upon reasonable notice to Tenant. Landlord shall not be liable to Tenant for the failure of any other tenant or any of its assignees, subtenants, or their respective agents, employees, representatives, invitees or licensees to conform to such rules and regulations. (x) Financial Statements. Upon Landlord's written request, Tenant shall promptly furnish, and cause each guarantor of this Lease to furnish, Landlord from time to time, with financial statements compiled by a certified public accountant in accordance with generally accepted accounting principles (without footnotes) certified by an officer of Tenant stating that such financial statements present fairly Tenant's then current financial condition and contain no material misstatements or omissions. (y) Termination. If Landlord decides to alter, demolish or close the ----------- Project, or any portion thereof, in connection with Landlord's expansion, reduction, removal, renovation or construction of new or existing improvements in any portion of the Project, then Landlord may, in its sole discretion, terminate this Lease, provided Landlord gives Tenant at least one hundred eighty (180) days' written notice prior to the date that Tenant is required to remove itself and all personal property from the Premises ("VACATION DATE"). The Lease shall remain in full force and effect until the Vacation Date. Tenant shall (a) remove itself and all personal property from the Premises prior to the Vacation Date, (b) surrender the Premises to Landlord as required in Section 5 (c) of this Lease, and (c) execute a quitclaim deed prepared by Landlord. If Tenant performs such terms (a), (b) and (c) by the Vacation Date, Landlord shall pay Tenant an amount not to exceed the sum of Five Hundred Dollars ($500) toward the costs of Tenants expenses in connection with or resulting from the termination of this Lease, such as change of stationary, business cards and advertising. Landlord shall have no further obligation or responsibility to Tenant. FIRST AMENDMENT TO LEASE ------------------------ This FIRST AMENDMENT TO LEASE ("AMENDMENT") is effective as of December 1, 1997, and is entered into by and between MORENO CORPORATE CENTER, L.L.C., a Delaware limited liability company ("LANDLORD"), and THE KEITH COMPANIES, INC., a California corporation ("TENANT"). R E C I T A L S - - - - - - - - A. Landlord and Tenant previously entered into that certain Lease dated January 1, 1996 ("LEASE"), with regard to certain premises referred to as "Floors 2 and 3" ("EXISTING PREMISES") located on certain property at 22690 Cactus Avenue, Moreno Valley, California and more commonly known as "Moreno Corporate Center" ("PROPERTY"). All initially capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Lease. All references to "Lease" shall mean the Lease as amended by this Amendment. B. Upon the terms and conditions set forth below, Landlord and Tenant desire to amend the Lease to add to the Premises under the Lease that certain additional space commonly known as "Suites 117-119" ("ADDITIONAL PREMISES") located at 14300 Elsworth Street, Moreno Valley, California. The Additional Premises contain approximately 3,279 square feet. The Additional Premises and the Existing Premises are sometimes collectively hereinafter referred to as the "TOTAL PREMISES". In consideration of the facts recited above, the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. Additional Premises. In addition to the Existing Premises, ------------------- Landlord hereby leases to Tenant the Additional Premises as more particularly described on Exhibit "A" attached hereto, and in accordance with the terms of ------------ this Amendment and the Lease. 2. Additional Premises Term. The Term of the Lease with respect to ------------------------ the Additional Premises shall commence on December 1, 1997 ("ADDITIONAL PREMISES COMMENCEMENT DATE"), and shall be a periodic month-to-month tenancy ("ADDITIONAL PREMISES TERM"). The Additional Premises Term may be terminated by Landlord or Tenant upon thirty (30) days prior written notice to the other. Any termination of the Additional Premises Term shall not in any way affect the term of the Lease with respect to the Existing Premises. 3. Rent. The Base Monthly Rent for the Additional Premises shall be ---- $819.75 per month, payable pursuant to the terms and conditions set forth in the Lease; provided, however, that any provisions in the Lease regarding Abated Rent shall not affect the amount payable by Tenant hereunder as Base Monthly Rent for the Additional Premises. Tenant's obligation to pay Base Monthly Rent and any and all other amounts due under this Amendment and the Lease with respect to the Additional Premises shall commence on the Additional Premises Commencement Date. Such Base Monthly Rent for the initial month of the Additional Premises Term shall be prorated as of the Additional Premises Commencement Date. In addition to Base Monthly Rent, Tenant shall be required to pay, with respect to the Additional Premises, any and all other sums, money or charges of whatsoever nature required to be paid under the Lease. Notwithstanding the foregoing, Tenant shall have no obligation to pay additional rent with respect to the Additional Premises which is attributable to Landlord's operating expenses or common area maintenance charges for the Property. 4. Additional Security Deposit. Concurrently with the execution of --------------------------- this Amendment by Tenant, Tenant shall deliver to Landlord the sum of $819.75 as an additional security deposit which shall be held by Landlord in accordance with and subject to any and all terms of the Lease relating to security deposits. 5. Condition of Additional Premises. Tenant hereby accepts the -------------------------------- Additional Premises in its current " AS-IS " condition. Tenant acknowledges and agrees that Landlord shall not be obligated to make any improvements to the Additional Premises, that Landlord has not made any representations or warranties as to the Additional Premises and that after the Additional Premises Commencement Date, Tenant shall make all improvements to the Additional Premises thereafter required by applicable law. 6. Use. Item No. 12 of the Basic Lease Provisions is hereby amended --- to provide that Tenant shall use the Additional Premises for storage and warehouse purposes only. The use by Tenant of the Total Premises, including the Additional Premises, shall be in accordance with Item No. 12 of the Basic Lease Provisions, as amended above, and any and all additional use provisions contained in the Lease. 7. Waiver and Release. Tenant hereby expressly waives, and releases ------------------ Landlord from, any and all claims, obligations, liabilities, acts, omissions, causes of action, damages, costs, losses and expenses, whether now existing or hereafter arising, known or unknown, which arise out of, are connected with or relate to any acts, omissions, events, or circumstances arising prior to the date of execution of this Amendment. Tenant hereby agrees, represents and warrants that the matters released herein are not limited to matters that are known or disclosed, and Tenant hereby waives any and all rights and benefits that it now has, or in the future may have, conferred upon it by virtue of the provisions of Section 1542 of the Civil Code of the State of California, which provides as follows: A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS THAT THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR. Tenant hereby agrees, represents and warrants that it realizes and acknowledges that factual matters now unknown to it may have given or may hereafter give rise to causes of action, claims, demands, debts, controversies, damages, costs, losses and expenses that are presently unknown, unanticipated and unsuspected, and it further agrees, represents and warrants that the release set forth above has been negotiated and agreed upon in light of that realization and that it nevertheless hereby intends to release, discharge and acquit the parties set forth hereinabove from any such unknown causes of action, claims, damages, costs, losses and expenses that are in any way related to the matters referred to hereinabove. 8. Effect of Amendment of Lease. Except to the extent the Lease is ---------------------------- modified by this Amendment, the terms and provisions of the Lease shall remain unmodified and in full force and effect. 9. Construction. In the event of a conflict between the terms of ------------ the Lease and the terms of this Amendment, the terms of this Amendment shall govern and prevail. The language of this Amendment shall not be construed against any party since all parties have participated in the negotiation and drafting of this Amendment. 10. Governing Law. This Amendment shall be construed in accordance ------------- with and governed by the laws of the State of California. 11. Successors and Assigns. Subject to the provisions of the Lease ---------------------- relating to assignment, mortgaging, pledging and subletting, the Lease, as amended by this Amendment, shall bind the heirs, executors, administrators, successors and assigns of any and all of the parties hereto. 12. Attorneys' Fees. If either party commences an action or --------------- proceeding to enforce or interpret this Amendment, the prevailing party (as determined by the trier of fact and confirmed on appeal, if any) shall be entitled to collect its attorneys' fees and costs incurred in connection with such action or proceeding (including any appeals) from the other party, and the prevailing party's rights and the other party's obligations hereunder shall be severable from, and shall survive and not merge into, any judgment. 13. Brokerage Commission. Tenant has incurred no liability for any -------------------- brokerage commission or finder's fee arising from or relating to the transactions contemplated by this Amendment or the Lease. Tenant hereby indemnifies and agrees to protect, defend and hold harmless Landlord from and against all liability, cost, damage or expense (including, without limitation, attorneys' fees and costs incurred in connection therewith) on account of any brokerage commission or finder's fee in connection with this transaction. This indemnification is intended to be solely for the benefit of Landlord and its successors and assigns and is not intended to benefit, nor may it be relied upon by, any other person or entity. 14. Counterparts. This Amendment may be executed in one or more ------------ counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. 15. Entire Agreement. This Amendment constitutes the entire ---------------- agreement of Landlord and Tenant with respect to the specific subject matter hereof. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date and year first written above. "LANDLORD": MORENO CORPORATE CENTER, L.L.C., a Delaware limited liability company By: TCW Asset Management Company, a California corporation Its Manager By: /s/ RUSSEL S. BERNARD Name: RUSSEL S. BERNARD Its: AUTHORIZED SIGNATORY By: /s/ KENNETH LIANG Its: Authorized Signatory "TENANT": THE KEITH COMPANIES, INC. a California corporation By: /s/ Jerry Brickman Jerry Brickman Its: Chief Operating Officer 4 EX-10.13 18 AGREEMENT REGARDING LEASE AND ASSIGNMENT EXHIBIT 10.13 AGREEMENT REGARDING LEASE AND ASSIGNMENT OF LEASES AND RELEASE THIS AGREEMENT REGARDING LEASE AND ASSIGNMENT OF LEASES AND RELEASE ("AGREEMENT") is made and entered into as of the 1st day of January, 1996, by and between Moreno Corporate Center, L.L.C., a Delaware limited liability company ("LANDLORD"), and The Keith Companies, Inc., a California corporation ("TENANT"), formerly known as The Keith Companies - Inland Empire, Inc., a California corporation ("ORIGINAL TENANT"), with regard to the premises located at 22690 Cactus Avenue, Floors 2 and 3, Moreno Valley, California, with respect to that certain written lease dated April 26, 1990 ("ORIGINAL LEASE") between Koll Moreno Partners, a California limited partnership ("ORIGINAL LANDLORD"), and Tenant and the following facts: RECITALS A. Under the terms of the Original Lease, Original Landlord leased to Original Tenant the real property located in the City of Moreno Valley, County of Riverside, State of California more particularly described as 22690 Cactus Avenue, a portion of floor 1 and floors 2 and 3, Moreno Valley, California ("ORIGINAL PREMISES"). The Original Lease was modified pursuant to that certain Assignment and Assumption dated May 31, 1990, First Amendment to Lease dated August 14, 1991, Second Amendment to Lease dated September 23, 1991, Third Amendment to Lease executed in January, 1992, Fourth Amendment to Lease dated June 30, 1992, Fifth Amendment to Lease dated June 25, 1993, Sixth Amendment to Lease dated December 1, 1993, Seventh Amendment to Lease dated March 31, 1994 and Agreement dated November 9, 1994. The Original Lease, as so modified, is hereinafter referred to as the "AMENDED LEASE." B. Prior to the date hereof, Landlord acquired the interest of Original Landlord in the Original Premises, including, without limitation, any and all rights of the landlord/lessor under the Amended Lease. C. Original Tenant and MMC - West Insurance Services, Inc., a California corporation ("MMC"), entered into that certain sublease dated September 22, 1994, as amended by that certain First Amendment to Sublease dated November 23, 1994 (as amended, "MMC SUBLEASE"), wherein Original Tenant subleased to MMC a portion of the original Premises located more particularly at 22690 Cactus Avenue, Suite 150, Moreno Valley, California ("MMC PREMISES"). Tenant now desires to reconvey its leasehold interest in the MMC Premises to Landlord. A copy of the MMC Sublease is attached hereto as EXHIBIT "A." D. Tenant and Associated Construction Services, Inc. dba Aggregate Consulting Services ("ACS") entered into that certain sublease dated August 28, 1995, as may have been amended from time to time (as amended, "ACS SUBLEASE"), wherein Tenant subleased to ACS a portion of the Original Premises located more particularly at 22690 Cactus Avenue, Suite 155, Moreno Valley, California ("ACS PREMISES"). Tenant now desires to reconvey its leasehold interest in the ACS Premises to Landlord. Landlord and ACS have prior to the date of this Agreement executed a new Lease for the ACS Premises ("ACS LEASE"). The Original Premises, less the MMC Premises and the ACS Premises, is hereinafter referred to as the "PREMISES". E. Tenant is in arrears and delinquent under the Amended Lease in rent and other charges payable to Landlord. F. The parties desire to terminate the Amended Lease, subject to Paragraph 4A below, and assign to Landlord all Tenant's interest in the MMC Sublease and release Aram Keith from its obligations under the Personal Guaranty (defined below). NOW, THEREFORE, for and in consideration of the foregoing Recitals and the mutual covenants and agreements set forth below, Landlord and Tenant hereby agree as follows: 1. RECONVEYANCE. Tenant hereby reconveys its leasehold interest in the MMC Premises and the ACS Premises to Landlord. Landlord and Tenant hereby acknowledge and agree that, as of the date of this Lease, Tenant shall have no further rights with regard to the MMC Premises and/or the ACS Premises, including, without limitation, any rights to possession, quiet enjoyment, collect rents from any tenant or subtenant thereon or receive any credits with respect to the MMC Premises or ACS Premises. In addition, Tenant hereby quitclaims to Landlord any right, title or interest Tenant may have in any portion of the original Premises leased by the United States of America, General Services Administration ("DOT"), and United States of America, General Services administration ("FHA") and their respective leases and leasehold estates. 2. ASSIGNMENT. Tenant hereby assigns, grants, transfers and conveys to Landlord all of Tenant's right, title and interest existing or arising in and to the MMC Sublease, and Tenant hereby gives to, confers upon and assigns to Landlord the right to collect all income, rents, issues, profits and proceeds from the MMC Sublease. Tenant shall remain solely liable under the MMC Sublease arising thereunder prior to the date of this Agreement. Tenant reserves the right of indemnification against MMC or ACS as set forth in the MMC Sublease, the ACS Sublease or as otherwise permitted by law on account of any claims, liabilities or losses Tenant may suffer which were caused in whole or in part by MMC or ACS. Except as hereinafter provided, Landlord agrees to assume the obligations of Tenant under the MMC Sublease to the extent such obligations first arise following the date of this Agreement, and are not the result of or any continuation of any failure of performance an the part of Tenant prior to the date of this Assignment. Further, Landlord is not assuming, and Tenant shall remain obligated and responsible for, any obligation of Tenant under or with respect to the MMC Sublease to the extent the substance of Tenant's representations below are incorrect (disregarding any limitation of such representations being to Tenant's actual knowledge). Tenant shall at its expense defend, indemnify, and hold Landlord harmless from and against any and all claims arising out of or in connection with the MMC Sublease that relate to the period prior to the date of this Assignment, or any activity, work or things done, permitted or allowed by Tenant in or about any of the MMC Premises prior to the date of this Assignment. Landlord shall at its expense defend, indemnify, and hold Tenant harmless from and against any and all claims arising out of or in connection with the MMC Sublease that relate to the period from and after the date of this Assignment, or any activity, work or things done, permitted or allowed by Landlord in or about any of the MMC Premises from and after the date of this Assignment, except as provided below, and are not the result of or any continuation of any failure of performance on the part of Tenant prior to the date of this Assignment. Notwithstanding any of the foregoing, except to the extent provided in Paragraph 3 below, nothing herein is requiring that Landlord or Tenant be obligated to the other for the return of any security deposit to ACS or MMC. In addition, the parties acknowledge that Landlord is not taking an assignment of, nor assuming any obligation of Tenant under, the ACS Sublease (except to the extent provided in Paragraph 3 below) because Landlord and ACS have executed the ACS Lease with respect to the ACS Premises. 3. SECURITY DEPOSITS. Upon execution of this Agreement, Tenant shall deliver to Landlord in immediately available federal funds the sum of (i) One Thousand Five Hundred Seventy-four Dollars ($1,574.00) previously delivered to Tenant from ACS as security for ACS's faithful performance of ACS's obligations under the ACS Sublease ("ACS SECURITY DEPOSIT") and (ii) Four Thousand Seven Hundred Twenty-two Dollars ($4,722.00) previously delivered to Tenant from ACS as Minimum Rent (as such term is defined under the ACS Sublease) under the ACS Sublease for the months of January, February and March, 1996. If Tenant has delivered the ACS Security Deposit to Landlord, Landlord shall be responsible for returning the ACS Security Deposit to ACS when due by applicable law. Tenant represents that Tenant had previously delivered to the Original Landlord the sum of Six Thousand Nine Hundred Eight Dollars ($6,908.00) as security for MMC's faithful performance of MMC's obligations under the MMC Sublease. 4. REPRESENTATIONS AND WARRANTIES. Tenant hereby represents and warrants ------------------------------ to Landlord that to Tenant's actual knowledge: (a) except for the Subleases and executive suites currently being leased by Tenant, and any leasehold transfers made by Tenant to facilitate the leases to DOT and FHA, Tenant has not transferred, assigned or sublet its interest in or to the Original Premises, nor has Tenant assigned or otherwise transferred its interest in any of the Subleases or the right to any rent, profit, income, charges, fees or reimbursements thereunder or in any deposits; (b) the documents attached hereto and incorporated herein by this reference represent the MMC Sublease, and there are no further amendments, modifications or supplements to the MMC Sublease; (c) and no rent or other charge under the MMC Sublease has been paid for more than thirty (30) days in advance of its due date; (d) any all work required to be performed by Tenant under the MMC Sublease has been completed; (e) there are no defaults on the part of Tenant or MMC under the MMC Sublease; (f) MMC has no defense to its obligations under the MMC Sublease, and there are no rights or claims of offset, deduction or rent abatement; and (g) MMC has not delivered to Tenant any promissory notes, letters of credit or the like in connection with the MMC Sublease. 5. RELEASES. A. Tenant and Landlord hereby acknowledge and agree that Tenant has been leasing the Original Premises (subject to occupancy and rights of MMC and ACS under their respective subleases) pursuant to the terms of the Amended Lease, which Amended Lease is hereby terminated and of no further force or effect. Accordingly, notwithstanding the termination of the Amended Lease and the release of Tenant's obligations thereunder as provided in this Paragraph, with respect to matters arising and accruing prior to January 1, 1996, except to the extent that Landlord is proven negligent, Tenant shall indemnify, defend and hold Landlord harmless from all claims, damages, liabilities, costs and expenses (including reasonable attorneys' fees) arising (a) from Tenant's use of the Original Premises or the conduct of its business or from any activity, work or thing done, permitted or suffered by Tenant or its agents, employees, contractors or invitees (including without limitation, any subtenants of Tenant), in or about the Original Premises, the Building or the Common Areas, or (b) from any breach or default in the performance of any obligation to be performed by Tenant under the terms of the Amended Lease or arising from any act, neglect, fault or omission of Tenant or of its agents, employees, contractors or invitees in or about the Original Premises, the Building or the Common Areas; provided, however, that Landlord hereby acknowledges and agrees that Tenant is released with respect to the payment of basic rent, operating expenses or any other periodic payment obligation of Tenant under the Amended Lease (collectively, "Rent Payments"). B. Landlord on behalf of itself and its employees, officers, directors, shareholders, representatives, agents, servants, attorneys, affiliates, parents, subsidiaries, successors, predecessors (to the extent allowable by law) and assigns, and all persons, firms, corporations and organizations in its behalf (collectively, "Releasing Parties") hereby agrees that certain Personal Guaranty of Lease date April 26, 1990 ("Personal Guaranty"), in favor of Koll Moreno Partners is hereby terminated, and Releasing Parties hereby waive their rights to recover from and fully irrevocably release (i) Aram H. Keith from its obligations arising out of the Personal Guaranty and (ii) Tenant with respect to the Rent Payments. This release includes, without limitation, claims of which the Releasing Parties are presently unaware or which the Releasing Parties do not presently suspect to exist which, if known by the Releasing Parties, would materially affect the Releasing Parties' release of Aram H. Keith and Tenant with respect to the Rent Payments. The Releasing Parties specifically waive the provision of California Civil Code Section 1542, which provides as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED THE SETTLEMENT WITH THE DEBTOR." In this connection and to the extent permitted by law, each of the Releasing Parties hereby agrees, represents and warrants that it realizes and acknowledges that factual matters now unknown to it may have given or may hereafter give rise to causes of action, claims, demands, debts, controversies, damages, costs, losses and expenses which are presently unknown, unanticipated and unsuspected, and each of the Releasing Parties further agrees, represents and warrants that the waivers and releases herein have been negotiated and agreed upon in light of that realization and that it nevertheless hereby intends to release, discharge and acquit (i) Aram H. Keith from its obligations arising out of the Personal Guaranty, and (ii) Tenant with respect to the Rent Payments, from any such unknown causes of action, claims, demands, debts, controversies, damages, costs, losses and expenses. Nothing herein is intended to release Aram H. Keith from its obligations under the promissory note described below. 6. NOTE. Concurrently herewith, Tenant shall deliver to Landlord a promissory note in the form and substance of EXHIBIT "B" attached hereto and incorporated herein by this reference. 7. ATTORNEYS' FEES. In the event of any legal action or proceeding brought by either party against the other arising out of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs incurred in such action. Such amounts shall be included in any judgment rendered in any such action or proceeding. 8. BENEFICIARY. Only the parties hereto, and their successors and assigns, are intended to benefit from this Agreement, and there are no third party beneficiaries to this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. "Landlord" Moreno Corporate Center, L.,L.C., a Delaware limited liability company By: TCW Asset Management Company, a California corporation, its manager By: /s/ RUSSEL S. BERNARD Its: By: (signature illegible) Its: "Tenant" The Keith Companies, Inc. a California corporation By: /s/ ARAM H. KEITH Its: President By: /s/ FLOYD S. REID Its: Secretary EX-10.14 19 AGREEMENT FOR ADVISORY SERVICES EXHIBIT 10.14 WALTER W. CRUTTENDEN, III - -------------------------------------------------------------------------------- 18301 Von Karman, Suite 100 Phone: (714) 757-5700 Irvine, California 92612 Fax: (714) 852-9603 - -------------------------------------------------------------------------------- April 10, 1997 The Keith Companies, Inc. Keith International, Inc. Attn: Aram Keith Attn: Aram Keith 2955 Redhill, Suite 201 2955 Redhill, Suite 201 Costa Mesa, CA 92626 Costa Mesa, CA 92626 Keith Engineering, Inc. Aram Keith Attn: Aram Keith 2955 Redhill, Suite 201 2955 Redhill, Suite 201 Costa Mesa, CA 92626 Costa Mesa, CA 92626 Re: Agreement for Advisory Services Dear Aram: I am pleased to have the opportunity to consult with The Keith Companies, Inc., Keith International, Inc. and Keith Engineering, Inc. (individually, a "Company" and collectively, the "Companies") and Aram Keith ("Keith") to assist the Companies in their strategic planning. This letter is to confirm our understanding as to our relationship. 1.0 Services. During the term of this Agreement for Advisory Services --------- ("Agreement"), I will provide the Companies advice concerning each Company's strategic planning and make myself available to the Companies for periodic Board of Director or other meetings. I (or a designee selected by me, initially Jim Gregory) will also serve as a Director of each of the Companies. 2.0 Term. The term of this Agreement shall be for a period of one (1) year ----- commencing as of the date of this letter, which term may be extended for an additional one (1) year at my option. I may terminate this Agreement immediately upon the occurrence of an Event of Default as provided in that certain Secured Promissory Note Line of Credit of even date herewith (the "Note") which is not corrected during the cure periods set forth therein, or any breach or violation of this Agreement which remains uncured five (5) days after delivery of written notice by me to you at the above address. 3.0 Fees. In consideration for this Agreement, the Companies shall pay me ----- Twenty-Five Hundred Dollars ($2,500.00) per calendar quarter or portion thereof, due at the commencement of each such quarter (January 1, April 1, July 1, October 1), during the term of this agreement, starting with the payment due July 1, 1997. 4.0 Stock Options. -------------- 4.1 Options. Each Company and Affiliate (as defined in Section 4.6 -------- hereof) hereby grants me an option, exercisable upon my written notice from the date hereof until April 10, 2003, to purchase seven percent (7%) of the Companies and Affiliate's currently outstanding common stock (calculated after the option purchase) for total consideration of Sixty Thousand Dollars ($60,000). If the amount of the "Third Advance" under the Note is made to the Companies, the option shall be increased to ten percent (10%) of the Companies' and Affiliate's currently outstanding stock (calculated after the option purchase) for an additional total consideration of $28,000. In consideration for the option quoted in this Section 4.1, I will pay the Company Ten Thousand Dollars ($10,000), payable on or before December 31, 1997, as option consideration, which sum shall not be applied against the exercise price of the options granted herein. 4.2 Equitable Adjustment. If any Company's or Affiliate's issued and -------------------- outstanding capital stock is modified or increased due to a stock split, stock dividend, reorganization, recapitalization, issuance of additional shares for less than full and adequate consideration or other event (but excluding stock issuances pursuant to the exercise of employee stock options granted to any Company employee other than Aram Keith or Floyd Reid), the shares subject to each option hereunder shall be equitably adjusted so as to maintain the same ownership of the Companies and Affiliate's outstanding stock as if I had fully exercised my options prior to any of the events listed in this Section 4.2. 4.3 Dilution; Exercise Price Adjustment. For purposes of determining the ------------------------------------ number of shares and exercise price under the option granted hereunder, all shares of each Company's and any Affiliate's capital stock which are issuable upon the exercise of any outstanding option, warrants or other rights in favor of any third party or upon the conversion of any convertible indebtedness of such entity shall be deemed to be outstanding as if such option, warrant and right has been exercised or such indebtedness converted. However, such adjustment shall not be made with respect to i) employee stock purchases or stock options granted to any Company employee other than Aram Keith or Floyd Reid, or ii) any stock issued in any acquisition by any Company or Affiliate of other businesses if such acquisitions are undertaken in good faith and reflect arm's-length terms. If, under applicable law, the exercise price stated in Section 4.1 is insufficient to serve as adequate consideration for the issuance of stock subject to the related option, the exercise price shall be deemed to be increased to the minimum amount necessary to serve as such consideration. 4.4 Exercise Provisions. The options provided for herein as to each -------------------- Company's and Affiliate's capital stock may be exercised independently from each other and may be exercised in full or in part. In the event of any partial exercise, the exercise price shall be proportionately adjusted. 4.5 S Corporations. During such period that any of the Companies or --------------- Affiliates are an "S Corporation" for Federal or state income tax purposes, and I am a stockholder of such entity, such entity shall distribute to its shareholders a minimum of fifty percent (50%) of each shareholders pro rata share of taxable income. Such distributions shall be made by April 10 of the first year following the date hereof in which there is taxable income, and thereafter on a quarterly basis. 4.6 Affiliates. The option shall apply to any corporation or entity which ----------- is controlled by, or under common control of any of the Companies and which is engaged in the business of civil engineering and related services, and/or the operations of which were reflected in those financial projections included as an exhibit to the Note (collectively, "Affiliate"). 4.7 Repurchase Rights. At any time prior to my exercise of the options, ------------------ the Companies (if then legally permitted to do so under applicable law) or Aram Keith and Floyd Reid (in proportion to their then existing ownership of the Companies) may repurchase the entire option from me for Six Hundred Thousand Dollars ($600,000) cash (Eight Hundred Eighty Thousand Dollars ($880,000) if the option increases to ten percent (10%) due to the Third Advance as provided in Section 4.1). To exercise such rights, the Companies and/or Aram Keith and Floyd Reid, as the case may be, shall deliver written notice to me of their intent to repurchase the options no earlier than ten (10) business days from the date on which notice is actually delivered to me to repurchase the options. At any time prior to the period set forth in such written notice, I may exercise any or all of the options upon the terms set forth herein, and upon such exercise, the repurchase rights set forth in this Section 4.7 shall terminate and be of no further force and effect. Further, the repurchase rights quoted herein shall automatically expire upon any acquisition set forth in Section 4.8(ii) below. 4.8 Right of First Refusal on Exercise. If I exercise my options, I agree ----------------------------------- that all of the shares which I purchase pursuant to said exercise shall be subject to a right of first refusal in favor of the Companies, Aram Keith, and/or Floyd Reid. If I wish to sell any of such shares, I shall provide you with written notice of the proposed purchaser (whose identity you agree to keep completely confidential), the purchase price and terms, and the closing date of any proposed sale. You will have ten (10) business days following delivery of this written notice to satisfy all terms and conditions of the proposed sale. If you do not do so, any rights of first refusal with respect to the sale described in the written notice shall automatically terminate and be of no further force or effect, and I shall be free to complete the sale to the purchaser set forth in the notice on the terms and conditions set forth therein. I will be entitled to make such sale at any time within sixty (60) days of the expiration of the ten (10) business day notice period set forth above. If I do not complete the sale within that period, any further transaction affecting such shares must again comply with the notice requirements set forth in this Section 4.8. The right of first refusal shall not apply to any transfers (whether or not made for consideration) to (i) any members of my family, or trusts for their benefit or (ii) transfers to any entities which I control, specifically including Cruttenden Roth. Further, this right of first refusal shall expire upon the earlier of any public offering of the Companies' stock, upon the acquisition of more than fifty percent (50%) of any of the Companies' or Affiliate's stock by any unrelated third parties, whether in a single transaction or otherwise, or upon the sale of more than fifty percent (50%) of any of the Companies' or Affiliate's assets to any unrelated third parties, whether in a single transaction or otherwise. 4.9 Agreement to Cooperate. Each of Company, Affiliate, Keith, and Floyd ----------------------- Reid agree to cooperate in any action reasonably requested by me to give effect to the options granted herein, including but not limited to documenting the options granted hereunder in a separate document, and making any necessary amendments to any of the Company's or Affiliate's Articles of Incorporation, Bylaws, or any shareholders agreement (if applicable) to give effect to the terms of this Agreement. 5.0 Limitations. This agreement shall not be deemed to obligate me to provide ------------ a certain minimum amount of time or services to the Companies, it being agreed that the value of my service is not related to such factors. 6.0 No Guaranty. My provision of services to the Companies shall not be in any ------------ way construed to be a guaranty or commitment by myself or Cruttenden Roth as to the accomplishment of any financial or strategic objectives or goals of any of the Companies or the consummation of a public offering, merger, private placement or other capital transaction involving the Companies. 7.0 Separate Engagements. The provision of services to the Companies pursuant --------------------- to this Agreement shall be performed solely by me (except as otherwise provided in Section 1.0 with respect to any designee to the Companies' Boards of Directors), and shall in no manner be deemed to obligate Cruttenden Roth or any other investment bank or other financial services firm with which I am affiliated to provide services to the Companies. Any provision of services by Cruttenden Roth or such other firms to the Companies shall be the subject of separate agreements between the Companies and such firms, and the payment or other consideration for such services provided by such firms shall not be affected in any manner by the payments or other consideration provided to me by the Companies under this Agreement. 8.0 Indemnification. The Companies and Keith, jointly and severally, shall ---------------- indemnify, defend and hold me harmless from any and all claims, demands, liabilities, losses, actions, suits, proceedings, costs or expenses (including, without limitation, reasonable attorneys fees and costs) (collectively "claims") asserted against or incurred by me or my affiliates arising out of or relating to this Agreement, the services provided by me or any other person pursuant to this Agreement, or the business, operations, financial condition or affairs of the Companies, other than to the extent such claims directly arise from my willful misconduct. The indemnification provided for in this Agreement shall be supplemental and additional to any indemnification available to me under the Companies' articles of organization or bylaws, other agreements (including, without limitation, the Note), or applicable law. 9.0 Offerings/Underwritings. If any of the Companies ever elects or desires ------------------------ to undertake a private placement or public offering, it is agreed that Cruttenden Roth shall have a right of first refusal to serve as the managing underwriter or agent for the foregoing provided that the terms of such placement or underwriting are comparable to those offered Companies by other investment banks and Cruttenden Roth's compensation for such items is no greater. 10.0 Attorneys' Fees. If a lawsuit, arbitration or other proceedings are ---------------- instituted by any party to enforce any of the terms or conditions of this Agreement against any other parties hereto, the prevailing party in such litigation, arbitration or proceedings shall be entitled, as an additional item of damages, to such reasonable attorneys' and other professional fees and costs (including but not limited to witness fees), court costs, arbitrators' fees, arbitration administrative fees, travel expenses, and other out-of-pocket expenses or costs of such other proceedings, as may be fixed by any court of competent jurisdiction, arbitrator or other judicial or quasi-judicial body having jurisdiction thereof, whether or not such litigation or proceedings proceed to a final judgment or award. For the purposes of this section, any party receiving an arbitration award or a judgment for damages or other amounts shall be deemed to be the prevailing party, regardless of amount of the damage awarded or whether the award or judgment was based on all or some of such party's claims or causes of action. 11.0 Miscellaneous. This Agreement is entered into in the City of Irvine, -------------- State of California, and shall be governed by the laws of the State of California. Any action or proceeding pertaining to any dispute arising out of or relating to this Agreement shall be commenced and prosecuted solely in federal or state courts of competent jurisdiction located in the County of Orange, California. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the remainder of this Agreement or any other provision of this Agreement. This Agreement embodies the entire agreement and understanding between the parties relating to the subject matter of this Agreement and neither this Agreement nor any provision of this Agreement may be amended, waived or discharged, except by an instrument in writing executed by the party against which enforcement of such amendment, waiver or discharge is sought. This Agreement may be executed in counterparts each of which, taken together, shall constitute a complete agreement. If the foregoing provisions reflects our agreement with respect to the provision of my services, kindly execute a counterpart to this Letter Agreement and return it to the undersigned. Very truly Yours. /s/ Walter W. Cruttenden, III WALTER W. CRUTTENDEN, III Accepted and agreed to this 10 day of April, 1997: - -- THE KEITH COMPANIES, INC., a California corporation By: /s/ Aram H. Keith Date: /s/ April 10, 1997 Its: KEITH INTERNATIONAL, INC., a California corporation By: /s/ Aram H. Keith Date: /s/ April 10, 1997 Its: KEITH ENGINEERING, INC., a California corporation By: /s/ Aram H. Keith Date: /s/ April 10, 1997 Its: /s/ Aram H. Keith ARAM KEITH, individually EX-10.15 20 SECURITY AGREEMENT DATED APRIL 10, 1997 EXHIBIT 10.15 SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT ("Security Agreement") is effective as of April 10, 1997 ("Effective Date"), by and among THE KEITH COMPANIES, INC., a California corporation, KEITH INTERNATIONAL, INC., a California corporation, and KEITH ENGINEERING, INC., a California corporation (individually referred to as a "Debtor" and collectively referred to as "Debtors") and WALTER W. CRUTTENDEN, III, an individual ("Secured Party"). Debtors and Secured Party are collectively referred to as the "Parties." 1.0 RECITALS -------- 1.1 Secured Party has agreed to make loans to Debtors from time to time in accordance with the terms and conditions of the Note. 1.2 Contemporaneous with the execution of this Security Agreement, Debtors and Keith have executed the Note. 1.3 Debtors have agreed to grant, for the purpose of securing payments under the Note and the other obligations described herein, a security interest to the Secured Party in all of the property of Debtors as more fully described below. 1.4 Secured Party would not have agreed to consider making loans to Debtors absent the security therefor provided by this Security Agreement. In consideration for the mutual covenants and agreements contained herein, and for other good and valuable consideration, the receipt and adequacy of which is hereby admitted and acknowledged, the Parties agree as follows. 2.0 DEFINITIONS. As used herein, the following capitalized terms shall ----------- have the following meanings: 2.1 "Code" shall mean the California Commercial Code and to the ---- extent applicable, the Uniform Commercial Code of any other jurisdiction in which the Secured Assets are located. 2.2 "Debtor" shall mean The Keith Companies, Inc., a California ----- corporation, Keith International, Inc., a California corporation or Keith Engineering, Inc., a California corporation. "Debtors" shall mean one or more Debtor. 2.3 "Effective Date" shall mean April 10, 1997. -------------- 2.4 "Event of Default" shall have the meaning specified in Section ---------------- 7.1 of the Note. 2.5 "Keith" shall mean Aram Keith, an individual. ----- 2.6 "Loan Documents" shall mean the Note, this Security Agreement, or ----------------- any other loan agreement, instrument, or document now or hereafter executed by any Debtor or Keith in favor of Secured Party, whether relating to the Note or otherwise. 2.7 "Note" means the Secured Promissory Note Revolving Line of ---- Credit, dated of even date herewith, of Debtors and Keith payable to the order of Secured Party, in the original principal amount of up to SEVEN HUNDRED THOUSAND DOLLARS ($700,000.00), and all extensions, modifications, amendments or replacements thereto. 2.8 "Property" shall have the meaning set forth in Section 3.1 of -------- this Security Agreement. 2.9 "Secured Assets" shall mean the property of Debtor more -------------- particularly described in Section 3.0 herein. 2.10 "Secured Party'' means Walter W. Cruttenden, III, an individual, ------------- and his legal representatives, heirs, successors and assigns. 2.11 "Security Agreement" shall mean this Security Agreement dated ------------------ as of the Effective Date. 3.0 SECURED ASSETS. The Secured Assets subject to this Security --------------- Agreement shall include all of each Debtor's right, title, and interest in the following property: 3.1 Assets. ------- (a) All present and future goods, equipment and inventory, as those terms are defined in the Code, and all other present and future personal property of each Debtor of any kind or nature whatsoever, now or hereafter located at, upon or about any real property owned, leased, or used by any Debtor (the "Property"), or used or to be used in connection with or relating or arising with respect to the Property and/or the use thereof or any improvements thereto, including without limitation all present and future furniture, cubicles, furnishings, fixtures, goods, machinery, plumbing and plumbing material and supplies, concrete, lumber, hardware, electrical wiring and electrical material and supplies, heating and air conditioning material and supplies, roofing material and supplies, window material and supplies, doors, paint, drywall, insulation, cabinets, ceramic material and supplies, flooring, carpeting, appliances, fencing, landscaping and all other materials, supplies and property of every kind and nature. (b) All accounts, accounts receivable and all other rights of each Debtor to the payment of money, all income, rents, issues, profits and revenues, rentals and payments, instruments, notes, drafts, chattel paper, acceptances, letters of credit, general intangibles, contract rights, documents, negotiable instruments, warehouse receipts, policies and certificates of insurance, guaranties, leases, leasehold interests, rental agreements, security or subscription agreements and debts secured thereby or relating thereto, money, certificates of deposit, deposits, deposit accounts, reserves, deferred payments, refunds, all refunds and deposits returned by utility companies and governmental agencies, cost savings, water stock, insurance proceeds, premium refunds, condemnation or eminent domain proceeds and awards, licenses, choses and things in action, all governmental, utility and other permits and approvals relating to construction on or use of the Property or otherwise relating to any Debtor, all licenses, all franchises, all subdivision maps and applications therefor, all subdivision public reports and applications therefor, all architectural and engineering drawings, plans and specifications, blueprints, soil tests, feasibility studies, engineering reports, environmental, building foundation, grading and other permits, all construction, management, franchise, reservation, development and other contracts and agreements, all names under or by which any Debtor or the Property, or any present or future improvements on the Property may at any time be operated or known, and all rights to carry on business under any such names, or any variant thereof, all trademarks, trade names, patents and applications therefor and goodwill in any way relating to any Debtor or the Property, and all other personal property of every nature whatsoever, whether now owned or in existence or hereafter arising or acquired, arising from, used or held in connection with, or otherwise relating to any Debtor or the Property or the ownership, use, occupancy, enjoyment, operation, management, development or improvement thereof. (c) Without limiting the generality of the foregoing, all computers, computer hardware, computer accessories, computer desks, disk hard drive, monitors, keyboards, computer software, computer files, tape, backup tape, scanners, and computer disks, and all additions, substitutions, and replacements thereof, together with all attachments, accessories, components, parts and equipment installed thereon or affixed thereto, as any of the same may be defined in the Code and in each Debtor's right to acquire any of the foregoing, whether by exercise of purchase options or otherwise, and in the proceeds of all of the foregoing including without limitation rentals payable to any Debtor by any lessee of any such property. (d) All cash and noncash proceeds and products of any and all of the foregoing, including without limitation, all monies, deposit accounts, insurance proceeds and other tangible or intangible property received upon a sale or other disposition of any of the foregoing, whether voluntary or involuntary. 4.0 GRANT. Each Debtor hereby grants to Secured Party, its successors ----- and assigns, a security interest in all of the Secured Assets to secure the indebtedness and other obligations due to Secured Party under the Note, the Loan Documents, and any other promissory note or instrument of any Debtor or Keith (and all extensions, modifications, amendments, or replacements thereof) now or hereafter existing payable to Secured Party or its order. This security interest shall be subject to the terms and conditions of this Security Agreement. 5.0 LIMITATIONS ON SECURED ASSETS AND SECURITY AGREEMENT. ----------------------------------------------------- 5.1 No Assignment. No Debtor shall sell, encumber, assign, dispose -------------- of, grant a security interest in, hypothecate, permit or suffer any lien or encumbrance upon, or transfer any interest in the Secured Assets, except in the ordinary course of such Debtor's business, without the written consent of Secured Party. 5.2 Subordination. Notwithstanding any provision herein to the -------------- contrary, Secured Party's rights and secured interest hereunder shall be subordinate in priority to any security interest granted by any Debtor in favor of any bank or institutional lender prior to the Effective date or to any security interest granted by any Debtor to a bank or institutional lender after the Effective Date to secure any loan consented to in writing by Lender. 6.0 PERFECTION. The security interest granted herein shall be perfected ----------- by the filing one or more financing statements with the Secretary of State of California and any other governmental agency as Secured Party deems appropriate, and such further assignments, filings, and actions as the Secured Party deems to be necessary or appropriate. Each Debtor agrees to execute financing statements or other documents and to take such further actions as Secured Party may reasonably request in order to perfect and maintain and continue the interest of Secured Party in the Secured Assets. 7.0 POWER OF ATTORNEY. ----------------- 7.1 General Purposes. Each Debtor does hereby constitute and ----------------- appoint the Secured Party as its true and lawful agent and attorney-in-fact, in its name, place and stead, and at Debtors' expense to perfect, maintain, protect and enforce the security interest granted hereunder and the Secured Assets, including but not limited to: (a) Taxes. Pay taxes due on the Secured Assets; ----- (b) Insurance. Maintain insurance coverage on the Secured --------- Assets; (c) Collection. Compromise, settle, collect, and endorse items ---------- of the Secured Assets such as accounts and instruments; (d) Note. Execute, endorse, assign, all notes, instruments, ---- deeds of trust, leases, bills of sale, receipts, and other similar documents on the Debtor's behalf; (e) Repair. Operate, repair, and maintain the collateral; and ------ (f) Financing Statements and Amendments. Execute and file ----------------------------------- financing statements, continuation statements, assignments, and other documents and amendments thereto; provided that Secured Party shall not take any action described --------- inclauses (a) through (e) prior to the occurrence of an Event of Default. 7.2 Irrevocable. This power of attorney shall be irrevocable and is ----------- part of the grant of security interest by Debtors to Secured Party. 7.3 Optional. The power of attorney is exercisable at the option -------- of Secured Party, and any failure to exercise such powers shall not relieve Debtors of their obligations under this Security Agreement or subject Secured Party to any liability. 8.0 OTHER ENCUMBRANCES. Debtors jointly and severally, hereby ------------ represent and warrant to the Secured Party that, except as otherwise expressly identified in this Agreement or disclosed in writing to Lender, the Secured Assets are not encumbered with liens, pledges, encumbrances, or rights of others. 9.0 REMEDIES. -------- 9.1 Event of Default. Should an Event of Default occur, Secured ---------------- Party shall have all rights and remedies provided by law to enforce its security interest hereunder, including those of a secured party under the Code, in addition to the rights and remedies provided herein or in any other agreement executed by any Debtor or Keith, including but not limited to: (a) Entering any Debtor's premises to assemble and take possession of Secured Assets. (b) Require any Debtor to assemble Secured Assets and make such Secured Assets available to Secured Party at a placed designated by Secured Party. (c) Sell, lease, transfer, assign, or otherwise dispose of any Secured Assets, or any interest therein, upon the terms and in such manner as Secured Party may determine in compliance with the Code and applicable law, and Secured Party may purchase the same at any sale. (d) Enter any Debtor's premises, render the Secured Assets, if equipment, unusable and dispose of it in the manner provided by the C Commercial Code on any Debtor's premises. (e) Apply the proceeds received from the sale or other disposition of the Secured Assets following an Event of Default, in addition to the items specified in the Uniform Commercial Code or other applicable law, to the payment of all costs of assembling, maintaining, preserving, marketing, selling, and disposing the Secured Assets and enforcing Secured Party's rights and remedies hereunder (including, without limitation, reasonable attorneys' fees and expenses including outside counsel fees and the allocable costs of in- house counsel) incurred by Secured Party as a result of Debtors' default. (f) Exercise any and all other rights and remedies afforded under the California Commercial Code or other applicable law. 9.2 Reasonable Notice. If notice to any Debtor of intended ----------------- disposition of the Secured Assets is required by law, five (5) days notice shall constitute reasonable notification. 9.3 Assumption of Leases. Subject to the consent of any third party --------------------- lessor, if required in any lease by any Debtor of any Secured Assets, Secured Party shall have the right, in its sole discretion, to assume the lessee's rental and other obligations under the lease and to exercise any option or right to purchase or acquire title to the Secured Assets covered by the lease. 9.4 Cumulative Rights. All of Secured Party's rights and remedies ------------------ shall be cumulative and none are exclusive. 10.0 LOCATION OF SECURED ASSETS. Immediately upon request therefore by -------------------------- Secured Party, Debtors will inform Secured Party of the precise location of the Secured Assets and every part or item thereof. 11.0 REPAIR OF SECURED ASSETS. Debtors will maintain the Secured Assets, ------------------------- and each part or item of the Secured Assets, in good order and repair at Debtors' own cost and expense and will never use the Secured Assets, or any part or item of the Secured Assets, in a manner resulting, or likely to result, in waste or unreasonable deterioration of the Secured Assets. 12.0 INSURANCE. Debtors, at Debtors' own costs and expense, will keep the ---------- Secured Assets, and all parts and items of the Secured Assets, insured for the full replacement cost thereof against damage or loss resulting from any and all risks to which it might foreseeably be exposed and risks designated by Secured Party to the extent insurance coverage for such risks is commercially available. Each such policy of insurance will be issued by an insurance company reasonably acceptable to Secured Party and will provide for the loss payable under it being paid to Secured Party and at least thirty (30) days prior written notice to Secured Party of any termination or expiration of such policy. A duplicate copy of each such policy will be delivered by Debtors to Secured Party. 13.0 TAXES AND ASSESSMENTS. Debtors will pay from their own funds, as --------------------- they become due, all taxes and assessments levied or assessed against the Secured Assets, or any part or item of the Secured Assets, prior to the final termination of this Security Agreement. 14.0 INSPECTION RIGHTS. Secured Party, either in person or by agent, has ----------------- the right at any and all reasonable times and at reasonable intervals to enter the premises where the Secured Assets is located and inspect the Secured Assets. 15.0 ASSIGNMENT BY SECURED PARTY. Secured Party may assign its rights --------------------------- under this Security Agreement and the security interest created by this Security Agreement. Should Secured Party assign its rights under this Security Agreement or the security interest created by this Security Agreement, Secured Party's assignee will be entitled, on written notice of the assignment being given by Secured Party to Debtors, to all performance required of Debtors by this Security Agreement and all payments and monies secured by this Security Agreement. 16.0 NO MODIFICATIONS OR WAIVERS. --------------------------- 16. 1 MUST BE WRITTEN. Waivers or modifications of this Security --------------- Agreement, or of any covenant, condition, or limitation contained herein, are valid only if in writing that is separately signed or initialed by the Parties. 16.2 NO USE AS EVIDENCE. One or more waivers or modifications of any ------------------ covenant, term or condition in this Security Agreement by any Party shall not be construed by any other Party as a waiver or modification applicable to any subsequent breach of the same covenant, term or condition. Evidence of any such waiver or modification may not be offered or received in evidence in any proceeding, arbitration, or litigation between the Parties arising out of or affecting this Security Agreement, or a Party's rights or obligations under it. This limitation does not apply if the waiver or modification is in writing and duly executed as provided above. 17.0 COOPERATION AND FURTHER ACTIONS. The Parties agree to perform any -------------------------------- and all acts and to execute and deliver any and all documents necessary or convenient to carry out the terms of this Security Agreement. 18.0 PROFESSIONAL FEES. If a lawsuit, arbitration or other proceedings ------------------ are instituted by any Party to enforce any of the terms or conditions of this Security Agreement against any other Party, the prevailing Party in such litigation, arbitration or proceeding shall be entitled, as an additional item of damages, to such reasonable attorneys' and other professional fees and costs (including but not limited to witness fees), court costs, arbitrators' fees, arbitration administrative fees, travel expenses, and other out-of-pocket expenses or costs of such other proceedings, as may be fixed by any court of competent jurisdiction, arbitrator or other judicial or quasi-judicial body having jurisdiction thereof, whether or not such litigation or proceedings proceed to a final judgment or award. For the purposes of this Section, any Party receiving an arbitration award or a judgment for damages or other amounts shall be deemed to be the prevailing Party, regardless of amount of the damage awarded or whether the award or judgment was based on all or some of such Party's claims or causes of action. 19.0 COUNTERPARTS. This Security Agreement may be executed in several ------------- counterparts, each of which so executed shall be deemed to be an original, but such counterparts shall together constitute and be one and the same instrument. 20.0 SEVERABILITY. If any part, clause, or condition of this Security ------------ Agreement is held to be partially or wholly invalid, unenforceable, or inoperative for any reason whatsoever, such shall not affect any other provision or portion hereof, which shall continue to be effective as though such invalid, inoperative, or unenforceable part, clause or condition had not been made. 21.0 JOINT AND SEVERAL OBLIGATIONS; BINDING UPON SUCCESSORS. The ------------------------------------------------------- obligations of Debtors under this Security Agreement shall be joint and several. This Security Agreement shall be binding upon and inure to the benefit of the Parties and their respective heirs, legal representatives, successors and assigns. 22.0 GOVERNING LAW. All questions concerning this Security Agreement, its ------------- construction, and the rights and liabilities of the Parties hereto shall be interpreted and enforced in accordance with the laws of the State of California as applied to contracts which are executed and performed entirely within the state. 23.0 INTERPRETATION. --------------- 23.1 SECTION HEADINGS. The section headings of this Security ---------------- Agreement are included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. 23.2 CAPITALIZED TERMS. Except as otherwise expressly provided ----------------- herein, all capitalized terms defined in this Agreement shall have the meaning ascribed to them herein. 23.3 GENDER AND NUMBER. Whenever required by the context, the ----------------- singular shall include the plural, the plural shall include the singular, and the masculine gender shall include the neuter and feminine genders and vice versa. 24.0 NOTICES. For purposes hereof, delivery of written notice shall be -------- deemed given and complete upon personal delivery, or three (3) business days following mailing via United States registered or certified mail, return receipt requested, postage prepaid. Notice may also be given by, and shall be deemed complete upon receipt of, electronic facsimile, provided that any facsimile notice shall only be deemed received if (a) the transmission thereof is confirmed, and (b) facsimile notice is followed by written notice, made either by (i) personal delivery thereof, or (ii) via deposit in registered or certified mail, return receipt required, postage prepaid, within three (3) business days following the facsimile notice. Notice shall be deemed given on the date it is sent via facsimile in accordance with the foregoing provisions. Notices shall be addressed to the Parties as follows: Debtors: The Keith Companies, Inc. Keith Engineering, Inc. Keith International, Inc. Attn: Aram Keith 2855 Redhill Avenue, Suite 201 Costa Mesa, California 92626 Telephone No. (714) 668-7001 Facsimile No. (714) 668-7026 Secured Party: Walter W. Cruttenden, III. c/o Cruttenden Roth 18301 Von Karman, Suite 100 Irvine, California 92612 Telephone No. (714) 757-5700 Facsimile No. (714) 582-9603 With a copy to: David L. Keligian THE BUSCH FIRM 2532 Dupont Drive Irvine, California 92612-1254 Telephone: (714) 474-7368 Facsimile: (714) 474-7732 Any Party may change the address to which to send notices by notifying the other Party of such change of address in writing in accordance with this Section.. 25.0 TIME OF ESSENCE. The Parties acknowledge and agree that time is --------------- strictly of the essence with respect to each and every term, condition, obligation and provision hereof. Failure to timely perform any of the terms, conditions, obligations or provisions hereof by any Party shall constitute a material breach of this Security Agreement by the Party so failing to perform. 26.0 RELATIONSHIP CREATED. Nothing combined herein or in any schedule, ---------------------- attachment, or exhibit hereto shall create any partnership, joint venture or other agreement between the Parties. The Parties have executed this Security Agreement as of the Effective Date. THE KEITH COMPANIES, INC., a California corporation By: /s/ Aram H. Keith ----------------------------- Aram Keith Its: President KEITH INTERNATIONAL INC., A California corporation By: /s/ Aram H. Keith ----------------------------- Aram Keith Its: President KEITH ENGINEERING INC., a California corporation By: /s/ Aram H. Keith ----------------------------- Aram Keith Its: President "Debtors" By: /s/ Walter W. Cruttenden, III ----------------------------- WALTER W. CRUTTENDEN, III "SECURED PARTY" EX-10.16 21 PROMISSORY NOTE DATED AUGUST 1, 1996 EXHIBIT 10.16 PROMISSORY NOTE $273,892.96 August 1, 1996 Los Angeles, California 1. FOR VALUE RECEIVED, THE KEITH COMPANIES, INC., a California corporation, KEITH INTERNATIONAL, INC., a California corporation, THE KEITH COMPANIES - NORTH COUNTIES, INC., a California corporation, KEITH ENGINEERING, INC., a California corporation, THE KEITH COMPANIES HAWAII, INC., a Hawaii corporation, and ARAM H. KEITH, an individual (collectively, jointly and severally, "Maker"), promise to pay to MORENO CORPORATE CENTER, L.L.C., a Delaware limited liability company, or order ("Holder") at c/o Oaktree Capital Management L.L.C., 550 South Hope Street, 22nd Floor, Los Angeles, California 90071, Attention: Mr. Gregory Geiger, or at such other place as Holder may from time to time designate, the principal sum of TWO HUNDRED SEVENTY-THREE THOUSAND EIGHT HUNDRED NINETY TWO DOLLARS AND NINETY-SIX CENTS ($273,892.96) plus interest as specified in this Note. 2. The principal sum outstanding from time to time on this Note shall bear interest at the rate of 8.25% per annum ("Note Rate"). Interest shall be calculated on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used. Interest shall be payable on the first day of each month in arrears. 3. All principal and all accrued and unpaid interest shall be due and payable as follows: a. by December 31, 1996, Maker shall deliver to Holder One Hundred Thousand Dollars ($100,000); and b. by March 1, 1997, all principal and all accrued and unpaid interest due under this Note shall be due and payable. 4. Maker may prepay some or all of the principal of this Note, without any penalty or premium. All payments under this Note shall be credited first to accrued interest then due and thereafter to unpaid principal. 5. If Maker fails to pay any amounts when due under this Note, then, in addition to all other rights and remedies Holder shall have, Maker shall pay additional interest on the amount due at an annual rate (the "Default Rate") of three percent (3%) in excess of the Note Rate or the maximum rate permitted by law, whichever is less, from the date the payment becomes due until Maker pays in full all accrued and unpaid interest due under this Note. Such additional interest payment shall be in addition to and not a limitation of such other rights and remedies of Holder. 6. From and after maturity of this Note, whether by acceleration or otherwise, all sums then due and payable under this Note, including all principal and all accrued and unpaid interest, shall bear interest until paid in full at the Default Rate. 7. All amounts payable under this Note are payable in lawful money of the United States, in immediately available funds of the United States. Checks constitute payment only when collected. 8. Maker agrees to pay or reimburse Holder immediately upon demand for all costs incurred in enforcing or collecting on this Note, including all attorneys' fees, including without limitation attorneys' fees incurred in connection with any action or proceeding in any appellate court or bankruptcy proceeding. 9. If any lawsuit is commenced which arises out of, or which relates to, this Note, the prevailing party shall be entitled to recover from each other party such sums as the court, referee or arbitrator may adjudge to be reasonable attorneys' fees in the action, reference or arbitration, in addition to costs and expenses otherwise allowed by law. 10. This Note is governed by California law. 11. This Note inures to and binds the heirs, successors and assigns of Maker and Holder. Holder may assign its rights under this Note. However, Maker may not assign any rights under this Note without Holder's prior written consent. 12. If Holder delays in exercising or fails to exercise any of its rights under this Note, that delay or failure shall not constitute a waiver of any of Holder's rights, or of any breach of this Note, or any default or failure of condition under this Note. No waiver by Holder of any of its rights, or of any breach of this Note, or any default or failure of condition under this Note shall be effective, unless the waiver is expressly stated in a writing signed by Holder. All of Holder's remedies in connection with this Note or under applicable law shall be cumulative, and Holder's exercise of any one or more of those remedies shall not constitute an election of remedies. 13. Maker understands that Holder may transfer this Note, or sell or grant participations in some or all of Maker's indebtedness outstanding under this Note. In connection with any such transaction, Holder may disclose to each prospective and actual transferee, purchaser or participant all documents and information relating to the Loan. If Holder so requests, Maker shall sign and deliver a new note to be issued in exchange for this Note. 14. If more than one person or entity are signing this Note as Maker, their obligations under this Note are joint and several between and among such persons and entities, such that each such person or entity shall be fully responsible for the full performance of Maker's obligations. "MAKER" Aram H. Keith, An Individual KEITH ENGINEERING, INC. A California Corporation By: Aram H. Keith, President By: Floyd S. Reid, Secretary THE KEITH COMPANIES, INC. A California Corporation By: Aram H. Keith, President By: Floyd S. Reid, Secretary THE KEITH COMPANIES, INC. A California Corporation By: Aram H. Keith, President By: Floyd S. Reid, Secretary KEITH INTERNATIONAL, INC. A California Corporation By: Aram H. Keith, President By: Floyd S. Reid, Secretary THE KEITH COMPANIES-NORTH COUNTIES, INC. A California Corporation By: Aram H. Keith, President By: Floyd S. Reid, Secretary THE KEITH COMPANIES-HAWAII, INC. A California Corporation By: Aram H. Keith, President By: Floyd S. Reid, Secretary EX-10.17 22 AMENDMENT TO PROMISSORY NOTE EXHIBIT 10.17 AMENDMENT TO PROMISSORY NOTE This AMENDMENT TO PROMISSORY NOTE (this "Amendment") is made as of 29th day of April, 1997 (the "Effective Date") by and between THE KEITH COMPANIES, INC., a California corporation, KEITH INTERNATIONAL, INC., a California corporation, THE KEITH COMPANIES - NORTH COUNTIES, INC., a California corporation, KEITH ENGINEERING, INC., a California corporation, THE KEITH COMPANIES - HAWAII, INC., a Hawaii corporation, and ARAM H. KEITH, an individual (collectively, jointly and severally, "Maker"), and MORENO CORPORATE CENTER, L.L.C., a Delaware limited liability company ("Holder"). RECITALS -------- A. Maker and Holder have entered into that certain Promissory Note dated as of August 1, 1996 (the "Note") whereby Maker promised to pay Holder the principal sum of Two Hundred Seventy-Three Thousand Eight Hundred Ninety-Two and 96/100 Dollars ($273,892.96) plus interest as specified in the Note. B. Maker and Holder desire to extend the time for repayment under the Note and further amend the Note as provided herein. AGREEMENT --------- NOW, THEREFORE, with respect to the foregoing facts and in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Principal Sum. Maker currently owes Holder Two Hundred Fifty- ------------- Three Thousand Eight Hundred Ninety-Two and 96/100 Dollars ($253,892.96) under the Note (the "Principal Sum"). 2. Interest Rate. The Principal Sum outstanding from time to time ------------- shall bear interest on a per annum basis at the Bank of America "reference rate" (as announced from time to time) plus three percent (3%) ("Note Rate"). Interest shall be calculated on the basis of a 360-day year and actual days elapsed, which results in more interest than if a 365-day year were used. As used here, "reference rate" means the per annum rate of interest publicly announced from time to time by Bank of America at San Francisco, California, as its "Reference Rate." Any change in the reference rate shall take effect on the day specified in the public announcement of such change. 3. Payment of Principal and Interest. The Principal Sum and all ----------------------------------- accrued and unpaid interest shall be due and payable as follows: a. Commencing on May 1, 1997, and continuing on the first (lst) day of each calendar month thereafter, through and including the payment due April 1, 1998, Maker shall pay to Holder the amount of Ten Thousand and 00/100 Dollars ($10,000.00); and b. by May 1, 1998, all principal and all accrued and unpaid interest due under the Note as amended hereby shall be due and payable. 4. Prepayment. Maker may prepay some or all of the principal of ---------- the Note, as amended hereby, without any penalty or premium. All payments under the Note, as amended hereby, shall be credited first to accrued interest then due and thereafter to unpaid principal. 5. Confirmation of Existing Note. Except as expressly modified ----------------------------- herein, the Note shall remain as originally stated. Maker and Holder hereby confirm and ratify each of the provisions of the Note as amended herein. 6. Counterparts. This Amendment may be executed in one or more ------------- counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. [Signatures continued on next page.] IN WITNESS WHEREOF, Maker and Holder do hereby execute this Amendment as of the date first written above. "MAKER" ARAM H. KEITH, an individual KEITH INTERNATIONAL, INC., a California corporation KEITH ENGINEERING, INC., a By: /s/ Aram H. Keith California corporation Its: By: /s/ Aram H. Keith By: Its: Its: By: Its: THE KEITH COMPANIES, INC., THE KEITH COMPANIES-HAWAII, INC., a California corporation a Hawaii corporation By: /s/ Aram H. Keith By: /s/ Aram H. Keith Its: Its: By: By: Its: Its: THE KEITH COMPANIES, INC., THE KEITH COMPANIES-NORTH COUNTIES, INC., a California corporation a California corporation By: /s/ Aram H. Keith By: /s/ Aram H. Keith Its: Its: By: By: Its Its: "HOLDER" MORENO CORPORATE CENTER, L.L.C., a Delaware limited liability company By: It EX-10.18 23 SECOND AMENDMENT TO PROMISSORY NOTE EXHIBIT 10.18 SECOND AMENDMENT TO PROMISSORY NOTE This SECOND AMENDMENT TO PROMISSORY NOTE (this "Second Amendment") is made as of the 4th day of February, 1998 (the "Effective Date") by and between THE KEITH COMPANIES, INC., a California corporation, KEITH INTERNATIONAL, INC., a California corporation, THE KEITH COMPANIES-NORTH COUNTIES, INC., a California corporation, KEITH ENGINEERING, INC., a California corporation, THE KEITH COMPANIES-HAWAII, INC., a Hawaii corporation, and ARAM H. KEITH, an individual (collectively, jointly and severally, "Maker"), and MORENO CORPORATE CENTER, L.L.C., a Delaware limited liability company ("Holder"). RECITALS A. Maker and Holder have entered into that certain Promissory Note dated as of August 1, 1996 (the "Original Note") whereby Maker promised to pay Holder the principal sum of Two Hundred Seventy-Three Thousand Eight Hundred Ninety-Two and 96/100 Dollars ($273,892.96) plus interest as specified in the Original Note, and that certain First Amendment to the Original Promissory Note dated April 29th, 1997 (the "First Amendment"). The Original Note, as amended by the First Amendment and now amended by this Second Amendment, shall be referred to herein as the "Note". B. Maker and Holder desire to extend the time for repayment under the First Amendment and further amend the First Amendment and Original Note as provided herein. AGREEMENT NOW, THEREFORE, with respect to the foregoing facts and in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Principal Sum. Due to certain accrued and unpaid interest under the ------------- Original Note and First Amendment, Maker currently owes Holder Two Hundred Four Thousand Three Hundred Eighty-nine and 21/100 Dollars ($204,389.21), as of January 31, 1998, under the Note (the "Principal Sum"). 2. Interest Rate. The Principal Sum outstanding from time to time shall bear ------------- interest on a per annum basis at the Bank of America "reference rate" (as announced from time to time) plus three percent (3%) ("Note Rate"). As used here, "reference rate" means the per annum rate of interest publicly announced from time to time by Bank of America at San Francisco, California, as its "Reference Rate." See paragraph 4.a. of this Second Amendment for additional details. 3. Term. All unpaid principal and interest shall be due under the Note by ---- February 1, 2000. 4. Payment of Principal and Interest. The Principal Sum and all accrued and --------------------------------- unpaid interest shall be due and payable in arrears as follows: a. Commencing on March 1, 1998, and continuing on the first (1st) day of each calendar month thereafter, through and including the payment due February 1, 2000, Maker shall pay to Holder monthly principal and interest payments totaling Nine Thousand Five Hundred Seventy-three and 66/100 Dollars ($9,573.66). This monthly principal and interest payment of Nine Thousand Five Hundred Sevety-three (sic.) and 66/100 Dollars ($9,573.66) is based upon a Note Rate of Eleven and One-half Percent (11.5%) determined in accordance with paragraph 2 of this Second Amendment. This principal and interest amount can increase/decrease during the term of this Note. If the Note Rate changes, a new monthly payment of principal and interest shall be calculated by re-amortizing the then principal amount outstanding at the new Note Rate over the remaining term of the Note. The Note Rate can only change once a month and the Note Rate to be utilized in determining the monthly principal and interest payment shall be the Note Rate that exists on the First (1st) day of the previous calendar month that a payment is due; and b. An amortization schedule is attached as Exhibit "A", based upon the monthly principal and interest payment of Nine Thousand Five Hundred Seventy-three and 66/100 Dollars ($9,573.66). This amortization schedule may change depending upon the Note Rate and is mainly intended to serve as an example. 5. Prepayment. Maker may prepay some or all of the principal of the Note, as ---------- amended hereby, without any penalty or premium. All payments under the Note, as amended hereby, shall be credited first to accrued interest then due and thereafter to unpaid principal. 6. Confirmation of Existing Note. Except as expressly modified herein, the ----------------------------- Note shall remain as originally stated. Maker and Holder hereby confirm and ratify each of the provisions of the Note as amended herein. 7. Counterparts. This Second Amendment may be executed in one or more ------------ counterparts, each of which shall be an original, but all of which shall constitute one and the same instrument. IN WITNESS WHEREOF, Maker and Holder do hereby execute this Second Amendment as of the date first written above. "MAKER" Aram H. Keith, an individual KEITH ENGINEERING, INC. a California corporation by: /s/ Aram H. Keith its: President KEITH INTERNATIONAL, INC., a California corporation by: /s/ Aram H. Keith its: President THE KEITH COMPANIES, INC. a California corporation by: /s/ Aram H. Keith its: President THE KEITH COMPANIES-NORTH COUNTIES, INC. a California corporation by: /s/ Aram H. Keith its: President THE KEITH COMPANIES-HAWAII, INC. a Hawaii Corporation by: /s/ Aram H. Keith its: President HOLDER: MORENO CORPORATE CENTER, L.L.C.; a Delaware limited liability company by: TCW Asset Management Company, its manager by: /s/ Russel S. Bernard by: Marc Porosoff its: Authorized Signatory its: Authorized Signatory EX-10.19 24 UNSECURED PROMISSORY NOTE EXHIBIT 10.19 UNSECURED PROMISSORY NOTE ========================= $132,000.00 DATE: October 31, 1998_ ----------- Costa Mesa, California - ----------------------- For value received, the undersigned promises to pay in lawful money to Ruth Ann -------- Fallon, as trustee for the Erica Keith Educational Trust at her office at 2955 - --------------------------------------------------------- Redhill Avenue, Costa Mesa, California 92626, the sum of ***One hundred thirty- two thousand dollars (132,000.00), plus interest. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence October 31, 1998. All principal and accrued interest shall be paid in full by October 30, 2000. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Revised and executed February 1, 1999. Restated for subordination clause, March 9, 1999. by: The Keith Companies, Inc. /s/ ARAM H. KEITH - ------------------------------ Aram H. Keith, CEO PAYMENT OF THIS NOTE IS SUBORDINATED TO THE PAYMENT OF ALL OBLIGATIONS OF THE MAKER HEREOF TO IMPERIAL BANK PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED FEBRUARY 9, 1998, AND ANY AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. Accepted and Agreed: By: /s/ RUTH ANN FALLON, Trustee / March 15, 1999 ---------------------------- -------------- Ruth Ann Fallon, Trustee / Date Page 1 of 3 IMPERIAL BANK - SUBORDINATION AGREEMENT (Payment Authorized) To: Imperial Bank The undersigned ("We") are interested in the financial success of The Keith --------- Companies, Inc., ("Borrower"), and agree that financial accommodation from - ---------------- IMPERIAL BANK ("Bank" or "You") to Borrower is necessary, and we accordingly request that you grant to or renew for Borrower such financial accommodation as you may deem proper, and for the purpose of inducing you to grant, renew or extend such financial accommodation, we hereby severally agree as follows: All claims of each of the undersigned against Borrower now or hereafter existing, whether matured or not (subject to the maximum if specified below), are and shall be at all times subordinate and subject to any and all claims on your part against Borrower now or hereafter existing, whether matured or not, so long as any such claim on your part against Borrower shall remain unpaid, in whole or in part, and each of the undersigned agrees not to sue upon, or to collect, or to receive payment upon, by setoff or in any other manner, any claim or claims on his/hers or its part against Borrower now or hereafter existing, nor to sell, assign, transfer, pledge, or give a security interest in the same (except subject expressly to this Agreement), nor to enforce or apply any security now or hereafter existing, nor to join in any petition in bankruptcy or any assignment for the benefit of creditors or any creditors agreement, nor to take any lien or security on any of Borrower's property, real or personal, nor to incur any obligation to nor receive any loans, advances or gifts from Borrower, so long as any such claim on your part against Borrower shall exist or so long as you are committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. All claims on your part against borrower now or hereafter existing shall be first paid by Borrower before any payment shall be made by Borrower to any of the undersigned. Borrower may make regularly schedule payment(s) of interest only on the claims so long as no default exists on its obligations to Bank. Said priority of payment shall apply during the ordinary course of Borrower's business and in case of any assignment by Borrower for the benefit of Borrower's creditors, and in case of any bankruptcy proceedings instituted by or against Borrower, and in case of the appointment of any receiver for Borrower or Borrower's business or assets, and in case of any dissolution or other winding up of the affairs of Borrower, or of Borrower's business, and in all such cases respectively, the officers of Borrower and any assignee, trustee in bankruptcy, receiver, and other person or persons in charge, are hereby directed to pay to you the full amount of your claims against Borrower before making any payment to any of the undersigned, and so far as may be necessary for that purpose, each of the undersigned hereby transfers and assigns to you all of his/her or its rights to any payment or distribution which might otherwise be coming to him/her or it. You are hereby irrevocably constituted and appointed the attorney-in-fact of each of the undersigned to file any and all proofs of claim and any other documents and to take all other action, either in your name, or in the name of the undersigned, or any of them, which in your opinion is necessary or desirable to enable you to obtain all such payments. Each of the undersigned agrees that if part or all of any claim of the undersigned shall be evidenced by a promissory note or other instrument, the undersigned shall cause to be placed thereon a legend stating that the payment thereof is subordinate to the payment of all claims on your part against Borrower pursuant to the terms of this Subordination Agreement, and each of the undersigned agrees to mark all books of account in such manner to indicate that payment thereof is subordinated pursuant to the terms of this Subordination Agreement. Page 2 of 3 Each of the undersigned further agrees that in case he, she or it should take or receive any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of Borrower, or should take or join in any other measure or advantage contrary to this Agreement, while any claim exists on your part against Borrower, you shall be entitled to have the same vacated, dissolved and set aside by such proceedings at law, or otherwise, as you may deem proper, and this Agreement shall be and constitute full and sufficient ground therefor and shall entitle you to be and become a party to any proceedings at law, or otherwise, initiated by you or by any other party, in or by which you may deem it proper to protect your interest hereunder; and the party so violating this Agreement shall be liable to you for all loss and damage sustained by you by reason of such breach, including attorney's fees in any such legal action. If the undersigned, or any of them, shall receive any payment or property in violation of this Agreement, such payment or property shall be received by such undersigned in trust for you and forthwith will be delivered and transferred to you. No subordinations of obligations of Borrower to the undersigned have previously been executed by the undersigned for the benefit of anyone else, and any such subordinations hereafter executed will be, and shall be expressed to be subject and subordinate to the effect hereof. This Agreement shall be continuing in effect, it shall not be cancelled or otherwise rendered ineffective by the payment or discharge at any time of all of Borrower's obligations to you, and it shall apply to any and all financial accommodations subsequently granted, renewed or extended by you for Borrower, unless the undersigned shall deliver to you a written notice of revocation as to future transactions, at a time when Borrower is no longer obligated to you in any way, and while you are not committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. Maximum _________________________ Dated ___________________________ /s/ RUTH ANN FALLON, Trustee By: ____________________________ Ruth Ann Fallon, Trustee of the Erica Keith Educational Trust - -------------------------------------------------------------------------------- ACCEPTANCE OF SUBORDINATION AGREEMENT BY BORROWER The undersigned, being the Borrower named in the foregoing Subordination Agreement, hereby accepts and consents thereto and agrees to be bound by all of the provisions thereof and to recognize all priorities and other rights granted thereby to IMPERIAL BANK, and to pay said Bank in accordance therewith. Dated: THE KEITH COMPANIES, INC. /s/ ARAM H. KEITH By: _____________________________ Aram H. Keith, CEO Page 3 of 3 EX-10.20 25 UNSECURED PROMISSORY NOTE EXHIBIT 10.20 UNSECURED PROMISSORY NOTE ========================= $33,000.00 DATE: October 31, 1998_ --------- Costa Mesa, California - ----------------------- For value received, the undersigned promises to pay in lawful money to Ruth Ann -------- Fallon, as trustee for the Kimberly Keith Educational Trust at her office at - ------------------------------------------------------------ 2955 Redhill Avenue, Costa Mesa, California 92626, the sum of Thirty-three thousand dollars ($33,000.00), plus interest. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence October 31, 1998. All principal and accrued interest shall be paid in full by October 30, 2000. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Revised and executed February 1, 1999. Restated for subordination clause, March 9, 1999. By: The Keith Companies, Inc. /s/ Aram H Keith ______________________________ Aram H. Keith, CEO PAYMENT OF THIS NOTE IS SUBORDINATED TO THE PAYMENT OF ALL OBLIGATIONS OF THE MAKER HEREOF TO IMPERIAL BANK PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED FEBRUARY 9, 1998, AND ANY AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. Accepted and Agreed: By: /s/ RUTH ANN FALLON, Trustee / March 15, 1999 ---------------------------- ---------------- Ruth Ann Fallon, Trustee / Date Page 1 of 3 IMPERIAL BANK - SUBORDINATION AGREEMENT (Payment Authorized) - -------------------------------------------------------------------------------- To: Imperial Bank The undersigned ("We") are interested in the financial success of The Keith --------- Companies, Inc., ("Borrower"), and agree that financial accommodation from - ---------------- IMPERIAL BANK ("Bank" or "You") to Borrower is necessary, and we accordingly request that you grant to or renew for Borrower such financial accommodation as you may deem proper, and for the purpose of inducing you to grant, renew or extend such financial accommodation, we hereby severally agree as follows: All claims of each of the undersigned against Borrower now or hereafter existing, whether matured or not (subject to the maximum if specified below), are and shall be at all times subordinate and subject to any and all claims on your part against Borrower now or hereafter existing, whether matured or not, so long as any such claim on your part against Borrower shall remain unpaid, in whole or in part, and each of the undersigned agrees not to sue upon, or to collect, or to receive payment upon, by setoff or in any other manner, any claim or claims on his/hers or its part against Borrower now or hereafter existing, nor to sell, assign, transfer, pledge, or give a security interest in the same (except subject expressly to this Agreement), nor to enforce or apply any security now or hereafter existing, nor to join in any petition in bankruptcy or any assignment for the benefit of creditors or any creditors agreement, nor to take any lien or security on any of Borrower's property, real or personal, nor to incur any obligation to nor receive any loans, advances or gifts from Borrower, so long as any such claim on your part against Borrower shall exist or so long as you are committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. All claims on your part against borrower now or hereafter existing shall be first paid by Borrower before any payment shall be made by Borrower to any of the undersigned. Borrower may make regularly schedule payment(s) of interest only on the claims so long as no default exists on its obligations to Bank. Said priority of payment shall apply during the ordinary course of Borrower's business and in case of any assignment by Borrower for the benefit of Borrower's creditors, and in case of any bankruptcy proceedings instituted by or against Borrower, and in case of the appointment of any receiver for Borrower or Borrower's business or assets, and in case of any dissolution or other winding up of the affairs of Borrower, or of Borrower's business, and in all such cases respectively, the officers of Borrower and any assignee, trustee in bankruptcy, receiver, and other person or persons in charge, are hereby directed to pay to you the full amount of your claims against Borrower before making any payment to any of the undersigned, and so far as may be necessary for that purpose, each of the undersigned hereby transfers and assigns to you all of his/her or its rights to any payment or distribution which might otherwise be coming to him/her or it. You are hereby irrevocably constituted and appointed the attorney-in-fact of each of the undersigned to file any and all proofs of claim and any other documents and to take all other action, either in your name, or in the name of the undersigned, or any of them, which in your opinion is necessary or desirable to enable you to obtain all such payments. Each of the undersigned agrees that if part or all of any claim of the undersigned shall be evidenced by a promissory note or other instrument, the undersigned shall cause to be placed thereon a legend stating that the payment thereof is subordinate to the payment of all claims on your part against Borrower pursuant to the terms of this Subordination Agreement, and each of the undersigned agrees to mark all books of account in such manner to indicate that payment thereof is subordinated pursuant to the terms of this Subordination Agreement. Each of the undersigned further agrees that in case he, she or it should take or receive any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of Borrower, or should take or join in any other measure or advantage contrary to this Page 2 of 3 Agreement, while any claim exists on your part against Borrower, you shall be entitled to have the same vacated, dissolved and set aside by such proceedings at law, or otherwise, as you may deem proper, and this Agreement shall be and constitute full and sufficient ground therefor and shall entitle you to be and become a party to any proceedings at law, or otherwise, initiated by you or by any other party, in or by which you may deem it proper to protect your interest hereunder; and the party so violating this Agreement shall be liable to you for all loss and damage sustained by you by reason of such breach, including attorney's fees in any such legal action. If the undersigned, or any of them, shall receive any payment or property in violation of this Agreement, such payment or property shall be received by such undersigned in trust for you and forthwith will be delivered and transferred to you. No subordinations of obligations of Borrower to the undersigned have previously been executed by the undersigned for the benefit of anyone else, and any such subordinations hereafter executed will be, and shall be expressed to be subject and subordinate to the effect hereof. This Agreement shall be continuing in effect, it shall not be cancelled or otherwise rendered ineffective by the payment or discharge at any time of all of Borrower's obligations to you, and it shall apply to any and all financial accommodations subsequently granted, renewed or extended by you for Borrower, unless the undersigned shall deliver to you a written notice of revocation as to future transactions, at a time when Borrower is no longer obligated to you in any way, and while you are not committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. Maximum _________________________ Dated ___________________________ By: /s/ RUTH ANN FALLON, Trustee ------------------------------ Ruth Ann Fallon, Trustee of the Kimberly Keith Educational Trust - -------------------------------------------------------------------------------- ACCEPTANCE OF SUBORDINATION AGREEMENT BY BORROWER The undersigned, being the Borrower named in the foregoing Subordination Agreement, hereby accepts and consents thereto and agrees to be bound by all of the provisions thereof and to recognize all priorities and other rights granted thereby to IMPERIAL BANK, and to pay said Bank in accordance therewith. Dated: _________ THE KEITH COMPANIES, INC. By: /s/ ARAM H. KEITH --------------------- Aram H. Keith, CEO Page 3 of 3 EX-10.21 26 UNSECURED PROMISSORY NOTE EXHIBIT 10.21 UNSECURED PROMISSORY NOTE ========================= $11,000.00 DATE: October 31, 1998_ ---------- Costa Mesa, California - ----------------------- For value received, the undersigned promises to pay in lawful money to Ruth Ann -------- Fallon, as trustee for the Ryan Keith Educational Trust at her office at 2955 - -------------------------------------------------------- Redhill Avenue, Costa Mesa, California 92626, the sum of Eleven thousand dollars ($11,000.00), plus interest. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence October 31, 1998. All principal and accrued interest shall be paid in full by October 30, 2000. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Revised and executed February 1, 1999. Restated for subordination clause, March 9, 1999. by: The Keith Companies, Inc. /s/ ARAM H. KEITH ______________________________ Aram H. Keith, CEO PAYMENT OF THIS NOTE IS SUBORDINATED TO THE PAYMENT OF ALL OBLIGATIONS OF THE MAKER HEREOF TO IMPERIAL BANK PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED FEBRUARY 9, 1998, AND ANY AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. Accepted and Agreed: By: /s/ RUTH ANN FALLON Trustee / March 15, 1999 ---------------------------- -------------- Ruth Ann Fallon, Trustee / Date Page 1 of 3 IMPERIAL BANK - SUBORDINATION AGREEMENT (Payment Authorized) - -------------------------------------------------------------------------------- To: Imperial Bank The undersigned ("We") are interested in the financial success of The Keith --------- Companies, Inc., ("Borrower"), and agree that financial accommodation from - ---------------- IMPERIAL BANK ("Bank" or "You") to Borrower is necessary, and we accordingly request that you grant to or renew for Borrower such financial accommodation as you may deem proper, and for the purpose of inducing you to grant, renew or extend such financial accommodation, we hereby severally agree as follows: All claims of each of the undersigned against Borrower now or hereafter existing, whether matured or not (subject to the maximum if specified below), are and shall be at all times subordinate and subject to any and all claims on your part against Borrower now or hereafter existing, whether matured or not, so long as any such claim on your part against Borrower shall remain unpaid, in whole or in part, and each of the undersigned agrees not to sue upon, or to collect, or to receive payment upon, by setoff or in any other manner, any claim or claims on his/hers or its part against Borrower now or hereafter existing, nor to sell, assign, transfer, pledge, or give a security interest in the same (except subject expressly to this Agreement), nor to enforce or apply any security now or hereafter existing, nor to join in any petition in bankruptcy or any assignment for the benefit of creditors or any creditors agreement, nor to take any lien or security on any of Borrower's property, real or personal, nor to incur any obligation to nor receive any loans, advances or gifts from Borrower, so long as any such claim on your part against Borrower shall exist or so long as you are committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. All claims on your part against borrower now or hereafter existing shall be first paid by Borrower before any payment shall be made by Borrower to any of the undersigned. Borrower may make regularly schedule payment(s) on the claims so long as no default exists on its obligations to Bank. Said priority of payment shall apply during the ordinary course of Borrower's business and in case of any assignment by Borrower for the benefit of Borrower's creditors, and in case of any bankruptcy proceedings instituted by or against Borrower, and in case of the appointment of any receiver for Borrower or Borrower's business or assets, and in case of any dissolution or other winding up of the affairs of Borrower, or of receiver, and other person or persons in charge, are hereby directed to pay to you the full amount of your claims against Borrower before making any payment to any of the undersigned, and so far as may be necessary for that purpose, each of the undersigned hereby transfers and assigns to you all of his/her or its rights to any payment or distribution which might otherwise be coming to him/her or it. You are hereby irrevocably constituted and appointed the attorney-in-fact of each of the undersigned to file any and all proofs of claim and any other documents and to take all other action, either in your name, or in the name of the undersigned, or any of them, which in your opinion is necessary or desirable to enable you to obtain all such payments. Each of the undersigned agrees that if part or all of any claim of the undersigned shall be evidenced by a promissory note or other instrument, the undersigned shall cause to be placed thereon a legend stating that the payment thereof is subordinate to the payment of all claims on your part against Borrower pursuant to the terms of this Subordination Agreement, and each of the undersigned agrees to mark all books of account in such manner to indicate that payment thereof is subordinated pursuant to the terms of this Subordination Agreement. Page 2 of 3 Each of the undersigned further agrees that in case he, she or it should take or received any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of Borrower, or should take or join in any other measure or advantage contrary to this Agreement, while any claim exists on your part against Borrower, you shall be entitled to have the same vacated, dissolved and set aside by such proceedings at law, or otherwise, as you may deem proper, and this Agreement shall be and constitute full and sufficient ground therefore and shall entitle you to be and become a party to any proceedings at law, or otherwise, initiated by you or by any other party, in or by which you may deem it proper to protect your interest hereunder; and the party so violating this Agreement shall be liable to you for all loss and damage sustained by you by reason of such breach, including attorney's fees in any such legal action. If the undersigned, or any of them, shall receive any payment or property in violation of this Agreement, such payment or property shall be received by such undersigned in trust for you and forthwith will be delivered and transferred to you. No subordinations of obligations of Borrower to the undersigned have previously been executed by the undersigned for the benefit of anyone else, and any such subordinations hereafter executed will be, and shall be expressed to be subject and subordinate to the effect hereof. This Agreement shall be continuing in effect, it shall not be cancelled or otherwise rendered ineffective by the payment or discharge at any time of all of Borrower's obligations to you, and it shall apply to any and all financial accommodations subsequently granted, renewed or extended by you for Borrower, unless the undersigned shall deliver to you a written notice of revocation as to future transactions, at a time when Borrower is no longer obligated to you in any way, and while you are not committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. Maximum _________________________ Dated ___________________________ By: /s/ RUTH ANN FALLON, TRUSTEE ---------------------------- Ruth Ann Fallon, Trustee of the Ryan D. Keith Educational Trust ACCEPTANCE OF SUBORDINATION AGREEMENT BY BORROWER The undersigned, being the Borrower named in the foregoing Subordination Agreement, hereby accepts and consents thereto and agrees to be bound by all of the provisions thereof and to recognize all priorities and other rights granted thereby to IMPERIAL BANK, and to pay said Bank in accordance therewith. Dated: THE KEITH COMPANIES, INC. By: /s/ ARAM H. KEITH ------------------ Aram H. Keith, CEO Page 3 of 3 EX-10.22 27 UNSECURED PROMISSORY NOTE EXHIBIT 10.22 UNSECURED PROMISSORY NOTE ========================= $86,000.00 DATE: October 31, 1998_ ---------- Costa Mesa, California - ----------------------- For value received, the undersigned promises to pay in lawful money to Aram H. ------- Keith, as trustee for Susan Reid Housing Trust at his office at 2955 Redhill - ---------------------------------------------- Avenue, Costa Mesa, California 92626, the sum of Eighty-six thousand dollars ($86,000.00), plus interest. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence October 31, 1998. All principal and accrued interest shall be paid in full by October 30, 2000. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Revised and executed February 1, 1999. Restated for subordination clause, March 9, 1999. by: The Keith Companies, Inc. /s/ ARAM H. KEITH ______________________________ Aram H. Keith, CEO PAYMENT OF THIS NOTE IS SUBORDINATED TO THE PAYMENT OF ALL OBLIGATIONS OF THE MAKER HEREOF TO IMPERIAL BANK PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED FEBRUARY 9, 1998, AND ANY AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. Accepted and Agreed: By: /s/ ARAM H. KEITH / 3/9/99 ---------------------- -------- Aram H. Keith, Trustee / Date Page 1 of 3 IMPERIAL BANK - SUBORDINATION AGREEMENT (Payment Authorized) - -------------------------------------------------------------------------------- To: Imperial Bank The undersigned ("We") are interested in the financial success of The Keith --------- Companies, Inc., ("Borrower"), and agree that financial accommodation from - ---------------- IMPERIAL BANK ("Bank" or "You") to Borrower is necessary, and we accordingly request that you grant to or renew for Borrower such financial accommodation as you may deem proper, and for the purpose of inducing you to grant, renew or extend such financial accommodation, we hereby severally agree as follows: All claims of each of the undersigned against Borrower now or hereafter existing, whether matured or not (subject to the maximum if specified below), are and shall be at all times subordinate and subject to any and all claims on your part against Borrower now or hereafter existing, whether matured or not, so long as any such claim on your part against Borrower shall remain unpaid, in whole or in part, and each of the undersigned agrees not to sue upon, or to collect, or to receive payment upon, by setoff or in any other manner, any claim or claims on his/hers or its part against Borrower now or hereafter existing, nor to sell, assign, transfer, pledge, or give a security interest in the same (except subject expressly to this Agreement), nor to enforce or apply any security now or hereafter existing, nor to join in any petition in bankruptcy or any assignment for the benefit of creditors or any creditors agreement, nor to take any lien or security on any of Borrower's property, real or personal, nor to incur any obligation to nor receive any loans, advances or gifts from Borrower, so long as any such claim on your part against Borrower shall exist or so long as you are committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. All claims on your part against borrower now or hereafter existing shall be first paid by Borrower before any payment shall be made by Borrower to any of the undersigned. Borrower may make regularly schedule payment(s) of interest only on the claims so long as no default exists on its obligations to Bank. Said priority of payment shall apply during the ordinary course of Borrower's business and in case of any assignment by Borrower for the benefit of Borrower's creditors, and in case of any bankruptcy proceedings instituted by or against Borrower, and in case of the appointment of any receiver for Borrower or Borrower's business or assets, and in case of any dissolution or other winding up of the affairs of Borrower, or of Borrower's business, and in all such cases respectively, the officers of Borrower and any assignee, trustee in bankruptcy, receiver, and other person or persons in charge, are hereby directed to pay to you the full amount of your claims against Borrower before making any payment to any of the undersigned, and so far as may be necessary for that purpose, each of the undersigned hereby transfers and assigns to you all of his/her or its rights to any payment or distribution which might otherwise be coming to him/her or it. You are hereby irrevocably constituted and appointed the attorney-in-fact of each of the undersigned to file any and all proofs of claim and any other documents and to take all other action, either in your name, or in the name of the undersigned, or any of them, which in your opinion is necessary or desirable to enable you to obtain all such payments. Each of the undersigned agrees that if part or all of any claim of the undersigned shall be evidenced by a promissory note or other instrument, the undersigned shall cause to be placed thereon a legend stating that the payment thereof is subordinate to the payment of all claims on your part against Borrower pursuant to the terms of this Subordination Agreement, and each of the undersigned agrees to mark all books of account in such manner to indicate that payment thereof is subordinated pursuant to the terms of this Subordination Agreement. Page 2 of 3 Each of the undersigned further agrees that in case he, she or it should take or receive any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of Borrower, or should take or join in any other measure or advantage contrary to this Agreement, while any claim exists on your part against Borrower, you shall be entitled to have the same vacated, dissolved and set aside by such proceedings at law, or otherwise, as you may deem proper, and this Agreement shall be and constitute full and sufficient ground therefor and shall entitle you to be and become a party to any proceedings at law, or otherwise, initiated by you or by any other party, in or by which you may deem it proper to protect your interest hereunder; and the party so violating this Agreement shall be liable to you for all loss and damage sustained by you by reason of such breach, including attorney's fees in any such legal action. If the undersigned, or any of them, shall receive any payment or property in violation of this Agreement, such payment or property shall be received by such undersigned in trust for you and forthwith will be delivered and transferred to you. No subordinations of obligations of Borrower to the undersigned have previously been executed by the undersigned for the benefit of anyone else, and any such subordinations hereafter executed will be, and shall be expressed to be subject and subordinate to the effect hereof. This Agreement shall be continuing in effect, it shall not be cancelled or otherwise rendered ineffective by the payment or discharge at any time of all of Borrower's obligations to you, and it shall apply to any and all financial accommodations subsequently granted, renewed or extended by you for Borrower, unless the undersigned shall deliver to you a written notice of revocation as to future transactions, at a time when Borrower is no longer obligated to you in any way, and while you are not committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. Maximum _________________________ Dated ___________________________ By: /s/ ARAM H. KEITH ---------------------------- Aram H. Keith, Trustee of the Susan Elizabeth Reid Housing Trust - -------------------------------------------------------------------------------- ACCEPTANCE OF SUBORDINATION AGREEMENT BY BORROWER The undersigned, being the Borrower named in the foregoing Subordination Agreement, hereby accepts and consents thereto and agrees to be bound by all of the provisions thereof and to recognize all priorities and other rights granted thereby to IMPERIAL BANK, and to pay said Bank in accordance therewith. Dated: THE KEITH COMPANIES, INC. By: /s/ ARAM H. KEITH --------------------- Aram H. Keith, CEO Page 3 of 3 EX-10.23 28 UNSECURED PROMISSORY NOTE EXHIBIT 10.23 UNSECURED PROMISSORY NOTE ========================= $53,000.00 DATE: October 31, 1998_ ---------- Costa Mesa, California - ----------------------- For value received, the undersigned promises to pay in lawful money Aram H. ------- Keith, as trustee for the Ruth Reid Housing Trust at his office at 2955 Redhill - -------------------------------------------------- Avenue, Costa Mesa, California 92626, the sum of Fifty-three thousand dollars ($53,000.00), plus interest. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence October 31, 1998. All principal and accrued interest shall be paid in full by October 30, 2000. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Revised and executed February 1, 1999. Restated for subordination clause, March 9, 1999. by: The Keith Companies, Inc. /s/ Aram H. Keith - ------------------------------ Aram H. Keith, CEO PAYMENT OF THIS NOTE IS SUBORDINATED TO THE PAYMENT OF ALL OBLIGATIONS OF THE MAKER HEREOF TO IMPERIAL BANK PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED FEBRUARY 9, 1998, AND ANY AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. Accepted and Agreed: By: /s/ Aram H. Keith / 3/9/99 ---------------------- -------- Aram H. Keith, Trustee / Date Page 1 of 3 IMPERIAL BANK - SUBORDINATION AGREEMENT (Payment Authorized) - -------------------------------------------------------------------------------- To: Imperial Bank The undersigned ("We") are interested in the financial success of The Keith --------- Companies, Inc., ("Borrower"), and agree that financial accommodation from - ---------------- IMPERIAL BANK ("Bank" or "You") to Borrower is necessary, and we accordingly request that you grant to or renew for Borrower such financial accommodation as you may deem proper, and for the purpose of inducing you to grant, renew or extend such financial accommodation, we hereby severally agree as follows: All claims of each of the undersigned against Borrower now or hereafter existing, whether matured or not (subject to the maximum if specified below), are and shall be at all times subordinate and subject to any and all claims on your part against Borrower now or hereafter existing, whether matured or not, so long as any such claim on your part against Borrower shall remain unpaid, in whole or in part, and each of the undersigned agrees not to sue upon, or to collect, or to receive payment upon, by setoff or in any other manner, any claim or claims on his/hers or its part against Borrower now or hereafter existing, nor to sell, assign, transfer, pledge, or give a security interest in the same (except subject expressly to this Agreement), nor to enforce or apply any security now or hereafter existing, nor to join in any petition in bankruptcy or any assignment for the benefit of creditors or any creditors agreement, nor to take any lien or security on any of Borrower's property, real or personal, nor to incur any obligation to nor receive any loans, advances or gifts from Borrower, so long as any such claim on your part against Borrower shall exist or so long as you are committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. All claims on your part against borrower now or hereafter existing shall be first paid by Borrower before any payment shall be made by Borrower to any of the undersigned. Borrower may make regularly schedule payment(s) of interest only on the claims so long as no default exists on its obligations to Bank. Said priority of payment shall apply during the ordinary course of Borrower's business and in case of any assignment by Borrower for the benefit of Borrower's creditors, and in case of any bankruptcy proceedings instituted by or against Borrower, and in case of the appointment of any receiver for Borrower or Borrower's business or assets, and in case of any dissolution or other winding up of the affairs of Borrower, or of Borrower's business, and in all such cases respectively, the officers of Borrower and any assignee, trustee in bankruptcy, receiver, and other person or persons in charge, are hereby directed to pay to you the full amount of your claims against Borrower before making any payment to any of the undersigned, and so far as may be necessary for that purpose, each of the undersigned hereby transfers and assigns to you all of his/her or its rights to any payment or distribution which might otherwise be coming to him/her or it. You are hereby irrevocably constituted and appointed the attorney-in-fact of each of the undersigned to file any and all proofs of claim and any other documents and to take all other action, either in your name, or in the name of the undersigned, or any of them, which in your opinion is necessary or desirable to enable you to obtain all such payments. Each of the undersigned agrees that if part or all of any claim of the undersigned shall be evidenced by a promissory note or other instrument, the undersigned shall cause to be placed thereon a legend stating that the payment thereof is subordinate to the payment of all claims on your part against Borrower pursuant to the terms of this Subordination Agreement, and each of the undersigned agrees to mark all books of account in such manner to indicate that payment thereof is subordinated pursuant to the terms of this Subordination Agreement. Page 2 of 3 Each of the undersigned further agrees that in case he, she or it should take or receive any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of Borrower, or should take or join in any other measure or advantage contrary to this Agreement, while any claim exists on your part against Borrower, you shall be entitled to have the same vacated, dissolved and set aside by such proceedings at law, or otherwise, as you may deem proper, and this Agreement shall be and constitute full and sufficient ground therefor and shall entitle you to be and become a party to any proceedings at law, or otherwise, initiated by you or by any other party, in or by which you may deem it proper to protect your interest hereunder; and the party so violating this Agreement shall be liable to you for all loss and damage sustained by you by reason of such breach, including attorney's fees in any such legal action. If the undersigned, or any of them, shall receive any payment or property in violation of this Agreement, such payment or property shall be received by such undersigned in trust for you and forthwith will be delivered and transferred to you. No subordinations of obligations of Borrower to the undersigned have previously been executed by the undersigned for the benefit of anyone else, and any such subordinations hereafter executed will be, and shall be expressed to be subject and subordinate to the effect hereof. This Agreement shall be continuing in effect, it shall not be cancelled or otherwise rendered ineffective by the payment or discharge at any time of all of Borrower's obligations to you, and it shall apply to any and all financial accommodations subsequently granted, renewed or extended by you for Borrower, unless the undersigned shall deliver to you a written notice of revocation as to future transactions, at a time when Borrower is no longer obligated to you in any way, and while you are not committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. Maximum _________________________ Dated ___________________________ By: /s/ Aram H. Keith ---------------------------- Aram H. Keith, Trustee of the Ruth Ann Reid (Fallon) Housing Trust - -------------------------------------------------------------------------------- ACCEPTANCE OF SUBORDINATION AGREEMENT BY BORROWER The undersigned, being the Borrower named in the foregoing Subordination Agreement, hereby accepts and consents thereto and agrees to be bound by all of the provisions thereof and to recognize all priorities and other rights granted thereby to IMPERIAL BANK, and to pay said Bank in accordance therewith. Dated: THE KEITH COMPANIES, INC. By: /s/ Aram H. Keith ---------------------------- Aram H. Keith, CEO Page 3 of 3 EX-10.24 29 UNSECURED PROMISSORY NOTE EXHIBIT 10.24 UNSECURED PROMISSORY NOTE ========================= $48,000.00 DATE: October 31, 1998_ ---------- Costa Mesa, California - ---------------------- For value received, the undersigned promises to pay in lawful money to Aram H. ------- Keith, as trustee for the Wm. Scott Reid Housing Trust at his office at 2955 - ------------------------------------------------------- Redhill Avenue, Costa Mesa, California 92626, the sum of Forty-eight thousand dollars ($48,000.00), plus interest. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence October 31, 1998. All principal and accrued interest shall be paid in full by October 30, 2000. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Revised and executed February 1, 1999. Restated for subordination clause, March 9, 1999. by: The Keith Companies, Inc. /s/ Aram H. Keith - ------------------------------ Aram H. Keith, CEO PAYMENT OF THIS NOTE IS SUBORDINATED TO THE PAYMENT OF ALL OBLIGATIONS OF THE MAKER HEREOF TO IMPERIAL BANK PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED FEBRUARY 9, 1998, AND ANY AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. Accepted and Agreed: By: /s/ Aram H. Keith / 3/9/99 ---------------------- ------------- Aram H. Keith, Trustee / Date Page 1 of 3 IMPERIAL BANK - SUBORDINATION AGREEMENT (Payment Authorized) - -------------------------------------------------------------------------------- To: Imperial Bank The undersigned ("We") are interested in the financial success of The Keith --------- Companies, Inc., ("Borrower"), and agree that financial accommodation from - ---------------- IMPERIAL BANK ("Bank" or "You") to Borrower is necessary, and we accordingly request that you grant to or renew for Borrower such financial accommodation as you may deem proper, and for the purpose of inducing you to grant, renew or extend such financial accommodation, we hereby severally agree as follows: All claims of each of the undersigned against Borrower now or hereafter existing, whether matured or not (subject to the maximum if specified below), are and shall be at all times subordinate and subject to any and all claims on your part against Borrower now or hereafter existing, whether matured or not, so long as any such claim on your part against Borrower shall remain unpaid, in whole or in part, and each of the undersigned agrees not to sue upon, or to collect, or to receive payment upon, by setoff or in any other manner, any claim or claims on his/hers or its part against Borrower now or hereafter existing, nor to sell, assign, transfer, pledge, or give a security interest in the same (except subject expressly to this Agreement), nor to enforce or apply any security now or hereafter existing, nor to join in any petition in bankruptcy or any assignment for the benefit of creditors or any creditors agreement, nor to take any lien or security on any of Borrower's property, real or personal, nor to incur any obligation to nor receive any loans, advances or gifts from Borrower, so long as any such claim on your part against Borrower shall exist or so long as you are committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. All claims on your part against borrower now or hereafter existing shall be first paid by Borrower before any payment shall be made by Borrower to any of the undersigned. Borrower may make regularly schedule payment(s) of interest only on the claims so long as no default exists on its obligations to Bank. Said priority of payment shall apply during the ordinary course of Borrower's business and in case of any assignment by Borrower for the benefit of Borrower's creditors, and in case of any bankruptcy proceedings instituted by or against Borrower, and in case of the appointment of any receiver for Borrower or Borrower's business or assets, and in case of any dissolution or other winding up of the affairs of Borrower, or of Borrower's business, and in all such cases respectively, the officers of Borrower and any assignee, trustee in bankruptcy, receiver, and other person or persons in charge, are hereby directed to pay to you the full amount of your claims against Borrower before making any payment to any of the undersigned, and so far as may be necessary for that purpose, each of the undersigned hereby transfers and assigns to you all of his/her or its rights to any payment or distribution which might otherwise be coming to him/her or it. You are hereby irrevocably constituted and appointed the attorney-in-fact of each of the undersigned to file any and all proofs of claim and any other documents and to take all other action, either in your name, or in the name of the undersigned, or any of them, which in your opinion is necessary or desirable to enable you to obtain all such payments. Each of the undersigned agrees that if part or all of any claim of the undersigned shall be evidenced by a promissory note or other instrument, the undersigned shall cause to be placed thereon a legend stating that the payment thereof is subordinate to the payment of all claims on your part against Borrower pursuant to the terms of this Subordination Agreement, and each of the undersigned agrees to mark all books of account in such manner to indicate that payment thereof is subordinated pursuant to the terms of this Subordination Agreement. Page 2 of 3 Each of the undersigned further agrees that in case he, she or it should take or receive any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of Borrower, or should take or join in any other measure or advantage contrary to this Agreement, while any claim exists on your part against Borrower, you shall be entitled to have the same vacated, dissolved and set aside by such proceedings at law, or otherwise, as you may deem proper, and this Agreement shall be and constitute full and sufficient ground therefor and shall entitle you to be and become a party to any proceedings at law, or otherwise, initiated by you or by any other party, in or by which you may deem it proper to protect your interest hereunder; and the party so violating this Agreement shall be liable to you for all loss and damage sustained by you by reason of such breach, including attorney's fees in any such legal action. If the undersigned, or any of them, shall receive any payment or property in violation of this Agreement, such payment or property shall be received by such undersigned in trust for you and forthwith will be delivered and transferred to you. No subordinations of obligations of Borrower to the undersigned have previously been executed by the undersigned for the benefit of anyone else, and any such subordinations hereafter executed will be, and shall be expressed to be subject and subordinate to the effect hereof. This Agreement shall be continuing in effect, it shall not be cancelled or otherwise rendered ineffective by the payment or discharge at any time of all of Borrower's obligations to you, and it shall apply to any and all financial accommodations subsequently granted, renewed or extended by you for Borrower, unless the undersigned shall deliver to you a written notice of revocation as to future transactions, at a time when Borrower is no longer obligated to you in any way, and while you are not committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. Maximum _______________________ Dated ___________________________ By: /s/ Aram H. Keith ---------------------------- Aram H. Keith, Trustee of the William Scott Reid Housing Trust - -------------------------------------------------------------------------------- ACCEPTANCE OF SUBORDINATION AGREEMENT BY BORROWER The undersigned, being the Borrower named in the foregoing Subordination Agreement, hereby accepts and consents thereto and agrees to be bound by all of the provisions thereof and to recognize all priorities and other rights granted thereby to IMPERIAL BANK, and to pay said Bank in accordance therewith. Dated: THE KEITH COMPANIES, INC. By: /s/ Aram H. Keith ---------------------------- Aram H. Keith, CEO Page 3 of 3 EX-10.25 30 AMENDED AND RESTATED PROMISSORY NOTE EXHIBIT 10.25 AMENDED AND RESTATED PROMISSORY NOTE ------------------------------------ $ 700,000.00 DATE: 2/25/99 - ------------ COSTA MESA, CALIFORNIA - ---------------------- For value received, the undersigned promises to pay in lawful money to WALTER W. CRUTTENDEN, III, at his office at Cruttenden Partners , 4600 Campus Drive, Newport Beach, CA 92660, the sum of SEVEN HUNDRED THOUSAND DOLLARS ------------------------------ ($700,000.00), plus interest. The within note arises from the renewal and - ------------ restatement of that certain secured promissory note dated December 31, 1997, which evidenced a $700,000 loan by the Payee hereof to the Maker. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence January 1, 1998. All accrued interest shall be paid quarterly on each January 1, April 1, July 1, and October 1. The principal amount of the within note, all accrued, unpaid interest, and all other amounts due hereunder shall be paid in full on July 1, 2000. The within promissory note is being issued by the Maker hereof, The Keith Companies, Inc., concurrently with a promissory note in the amount of $910,176.96 payable to Aram H. Keith and a promissory note in the amount of $127,814.78 payable to Floyd S. Reid, both of whom are shareholders of the Maker. It is agreed that the within note will be paid in full before any principal payments are made to either of said shareholders. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Revised and executed this 25th day of February, 1999. MAKER: THE KEITH COMPANIES, INC. 2955 Redhill Avenue, Costa Mesa, CA 92626 By: /s/ Aram H. Keith By: /s/ Gary Campanaro ------------------------------ ----------------------------------- Aram H. Keith, President Gary Campanaro, Chief Financial Officer PAYMENT OF THIS NOTE IS SUBORDINATED TO THE PAYMENT OF ALL OBLIGATIONS OF THE MAKER HEREOF TO IMPERIAL BANK PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED FEBRUARY 9, 1998, AND ANY AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. ACKNOWLEDGED AND AGREED: By: /s/ Walter W. Cruttenden, III / Date: 3-19-99 ------------------------------ ----------- Walter W. Cruttenden, III IMPERIAL BANK - SUBORDINATION AGREEMENT (PAYMENT AUTHORIZED) - -------------------------------------------------------------------------------- To: Imperial Bank The undersigned ("We") are interested in the financial success of The Keith --------- Companies, Inc., ("Borrower"), and agree that financial accommodation from - ---------------- IMPERIAL BANK ("Bank" or "You") to Borrower is necessary, and we accordingly request that you grant to or renew for Borrower such financial accommodation as you may deem proper, and for the purpose of inducing you to grant, renew or extend such financial accommodation, we hereby severally agree as follows: All claims of each of the undersigned against Borrower now or hereafter existing, whether matured or not (subject to the maximum if specified below), are and shall be at all times subordinate and subject to any and all claims on your part against Borrower now or hereafter existing, whether matured or not, so long as any such claim on your part against Borrower shall remain unpaid, in whole or in part, and each of the undersigned agrees not to sue upon, or to collect, or to receive payment upon, by setoff or in any other manner, any claim or claims on his/hers or its part against Borrower now or hereafter existing, nor to sell, assign, transfer, pledge, or give a security interest in the same (except subject expressly to this Agreement), nor to enforce or apply any security now or hereafter existing, nor to join in any petition in bankruptcy or any assignment for the benefit of creditors or any creditors agreement, nor to take any lien or security on any of Borrower's property, real or personal, nor to incur any obligation to nor receive any loans, advances or gifts from Borrower, so long as any such claim on your part against Borrower shall exist or so long as you are committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. All claims on your part against borrower now or hereafter existing shall be first paid by Borrower before any payment shall be made by Borrower to any of the undersigned. Borrower may make regularly schedule payment(s) of interest only on the claims so long as no default exists on its obligations to Bank. Said priority of payment shall apply during the ordinary course of Borrower's business and in case of any assignment by Borrower for the benefit of Borrower's creditors, and in case of any bankruptcy proceedings instituted by or against Borrower, and in case of the appointment of any receiver for Borrower or Borrower's business or assets, and in case of any dissolution or other winding up of the affairs of Borrower, or of Borrower's business, and in all such cases respectively, the officers of Borrower and any assignee, trustee in bankruptcy, receiver, and other person or persons in charge, are hereby directed to pay to you the full amount of your claims against Borrower before making any payment to any of the undersigned, and so far as may be necessary for that purpose, each of the undersigned hereby transfers and assigns to you all of his/her or its rights to any payment or distribution which might otherwise be coming to him/her or it. You are hereby irrevocably constituted and appointed the attorney-in-fact of each of the undersigned to file any and all proofs of claim and any other documents and to take all other action, either in your name, or in the name of the undersigned, or any of them, which in your opinion is necessary or desirable to enable you to obtain all such payments. Each of the undersigned agrees that if part or all of any claim of the undersigned shall be evidenced by a promissory note or other instrument, the undersigned shall cause to be placed thereon a legend stating that the payment thereof is subordinate to the payment of all claims on your part against Borrower pursuant to the terms of this Subordination Agreement, and each of the undersigned agrees to mark all books of account in such manner to indicate that payment thereof is subordinated pursuant to the terms of this Subordination Agreement. Each of the undersigned further agrees that in case he, she or it should take or receive any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of Borrower, or should take or join in any other measure or advantage contrary to this Agreement, while any claim exists on your part against Borrower, you shall be entitled to have the same vacated, dissolved and set aside by such proceedings at law, or otherwise, as you may deem proper, and this Agreement shall be and constitute full and sufficient ground therefor and shall entitle you to be and become a party to any proceedings at law, or otherwise, initiated by you or by any other party, in or by which you may deem it proper to protect your interest hereunder; and the party so violating this Agreement shall be liable to you for all loss and damage sustained by you by reason of such breach, including attorney's fees in any such legal action. If the undersigned, or any of them, shall receive any payment or property in violation of this Agreement, such payment or property shall be received by such undersigned in trust for you and forthwith will be delivered and transferred to you. No subordinations of obligations of Borrower to the undersigned have previously been executed by the undersigned for the benefit of anyone else, and any such subordinations hereafter executed will be, and shall be expressed to be subject and subordinate to the effect hereof. This Agreement shall be continuing in effect, it shall not be cancelled or otherwise rendered ineffective by the payment or discharge at any time of all of Borrower's obligations to you, and it shall apply to any and all financial accommodations subsequently granted, renewed or extended by you for Borrower, unless the undersigned shall deliver to you a written notice of revocation as to future transactions, at a time when Borrower is no longer obligated to you in any way, and while you are not committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. Maximum _______________________ Dated _________________________ By: /s/ Walter W. Cruttenden, III ----------------------------- Walter W. Cruttenden, III ACCEPTANCE OF SUBORDINATION AGREEMENT BY BORROWER The undersigned, being the Borrower named in the foregoing Subordination Agreement, hereby accepts and consents thereto and agrees to be bound by all of the provisions thereof and to recognize all priorities and other rights granted thereby to IMPERIAL BANK, and to pay said Bank in accordance therewith. Dated: THE KEITH COMPANIES, INC. By: /s/ Aram H. Keith ----------------------------- Aram H. Keith, CEO EX-10.26 31 AMENDED AND RESTATED PROMISSORY NOTE EXHIBIT 10.26 AMENDED AND RESTATED PROMISSORY NOTE =============== $ 1,210,177.00 DATE: 2/25/99 - --------------- COSTA MESA, CALIFORNIA - ---------------------- (location where signed) For value received, the undersigned promises to pay in lawful money to ARAM H. KEITH at his office at 2955 Redhill Avenue, Costa Mesa, California 92626, the sum of ONE MILLION, TWO HUNDRED TEN THOUSAND, ONE HUNDRED SEVENTY-SEVEN AND -------------------------------------------------------------------- 00/100 DOLLARS ($1,210,177.00), plus interest. The within Note arises from the - ------------------------------ renewal, restatement and combination of all previous promissory notes ($910,176.96 and $300,000), loans and advances by the Payee hereof to the Maker. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence January 1, 1998. All accrued interest shall be paid quarterly on each January 1, April 1, July 1, and October 1. The principal amount of the within note, all accrued, unpaid interest, and all other amounts due hereunder shall be paid in full on July 1, 2000. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Revised and executed this 25th day of February, 1999. MAKER: THE KEITH COMPANIES, INC. 2955 Redhill Avenue Costa Mesa, CA 92626 BY: /s/ Floyd S. Reid /Floyd S. Reid, Secretary ---------------------------- By: /s/ Jerry Brickman /Jerry Brickman, Chief Operating Officer ---------------------------- PAYMENT OF THIS NOTE AND THE ACCRUED INTEREST AS OF 12/31/98 OF $131,680 THEREON IS SUBORDINATED TO THE PAYMENT OF ALL OBLIGATIONS OF THE MAKER HEREOF TO IMPERIAL BANK PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED FEBRUARY 9, 1998, AND ANY AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. ACKNOWLEDGED AND AGREED: By: /s/ Aram H. Keith / Date: ---------------------------- ------------- Aram H. Keith IMPERIAL BANK - SUBORDINATION AGREEMENT (PAYMENT AUTHORIZED) - -------------------------------------------------------------------------------- To: Imperial Bank The undersigned ("We") are interested in the financial success of The Keith --------- Companies, Inc., ("Borrower"), and agree that financial accommodation from - ---------------- IMPERIAL BANK ("Bank" or "You") to Borrower is necessary, and we accordingly request that you grant to or renew for Borrower such financial accommodation as you may deem proper, and for the purpose of inducing you to grant, renew or extend such financial accommodation, we hereby severally agree as follows: All claims of each of the undersigned against Borrower now or hereafter existing, whether matured or not (subject to the maximum if specified below), are and shall be at all times subordinate and subject to any and all claims on your part against Borrower now or hereafter existing, whether matured or not, so long as any such claim on your part against Borrower shall remain unpaid, in whole or in part, and each of the undersigned agrees not to sue upon, or to collect, or to receive payment upon, by setoff or in any other manner, any claim or claims on his/hers or its part against Borrower now or hereafter existing, nor to sell, assign, transfer, pledge, or give a security interest in the same (except subject expressly to this Agreement), nor to enforce or apply any security now or hereafter existing, nor to join in any petition in bankruptcy or any assignment for the benefit of creditors or any creditors agreement, nor to take any lien or security on any of Borrower's property, real or personal, nor to incur any obligation to nor receive any loans, advances or gifts from Borrower, so long as any such claim on your part against Borrower shall exist or so long as you are committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. All claims on your part against borrower now or hereafter existing shall be first paid by Borrower before any payment shall be made by Borrower to any of the undersigned. Borrower may make regularly schedule payment(s) of interest only on the claims so long as no default exists on its obligations to Bank. Said priority of payment shall apply during the ordinary course of Borrower's business and in case of any assignment by Borrower for the benefit of Borrower's creditors, and in case of any bankruptcy proceedings instituted by or against Borrower, and in case of the appointment of any receiver for Borrower or Borrower's business or assets, and in case of any dissolution or other winding up of the affairs of Borrower, or of Borrower's business, and in all such cases respectively, the officers of Borrower and any assignee, trustee in bankruptcy, receiver, and other person or persons in charge, are hereby directed to pay to you the full amount of your claims against Borrower before making any payment to any of the undersigned, and so far as may be necessary for that purpose, each of the undersigned hereby transfers and assigns to you all of his/her or its rights to any payment or distribution which might otherwise be coming to him/her or it. You are hereby irrevocably constituted and appointed the attorney-in-fact of each of the undersigned to file any and all proofs of claim and any other documents and to take all other action, either in your name, or in the name of the undersigned, or any of them, which in your opinion is necessary or desirable to enable you to obtain all such payments. Each of the undersigned agrees that if part or all of any claim of the undersigned shall be evidenced by a promissory note or other instrument, the undersigned shall cause to be placed thereon a legend stating that the payment thereof is subordinate to the payment of all claims on your part against Borrower pursuant to the terms of this Subordination Agreement, and each of the undersigned agrees to mark all books of account in such manner to indicate that payment thereof is subordinated pursuant to the terms of this Subordination Agreement. Each of the undersigned further agrees that in case he, she or it should take or receive any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of Borrower, or should take or join in any other measure or advantage contrary to this Agreement, while any claim exists on your part against Borrower, you shall be entitled to have the same vacated, dissolved and set aside by such proceedings at law, or otherwise, as you may deem proper, and this Agreement shall be and constitute full and sufficient ground therefor and shall entitle you to be and become a party to any proceedings at law, or otherwise, initiated by you or by any other party, in or by which you may deem it proper to protect your interest hereunder; and the party so violating this Agreement shall be liable to you for all loss and damage sustained by you by reason of such breach, including attorney's fees in any such legal action. If the undersigned, or any of them, shall receive any payment or property in violation of this Agreement, such payment or property shall be received by such undersigned in trust for you and forthwith will be delivered and transferred to you. No subordinations of obligations of Borrower to the undersigned have previously been executed by the undersigned for the benefit of anyone else, and any such subordinations hereafter executed will be, and shall be expressed to be subject and subordinate to the effect hereof. This Agreement shall be continuing in effect, it shall not be cancelled or otherwise rendered ineffective by the payment or discharge at any time of all of Borrower's obligations to you, and it shall apply to any and all financial accommodations subsequently granted, renewed or extended by you for Borrower, unless the undersigned shall deliver to you a written notice of revocation as to future transactions, at a time when Borrower is no longer obligated to you in any way, and while you are not committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. Maximum _________________________ Dated ___________________________ By: /s/ Aram H. Keith ---------------------------- Aram H. Keith, an individual ACCEPTANCE OF SUBORDINATION AGREEMENT BY BORROWER The undersigned, being the Borrower named in the foregoing Subordination Agreement, hereby accepts and consents thereto and agrees to be bound by all of the provisions thereof and to recognize all priorities and other rights granted thereby to IMPERIAL BANK, and to pay said Bank in accordance therewith. Dated: THE KEITH COMPANIES, INC. By: /s/ Aram H. Keith ---------------------------- Aram H. Keith, CEO EX-10.27 32 RESTATED AND AMENDED PROMISSORY NOTE EXHIBIT 10.27 RESTATED AND AMENDED ==================== PROMISSORY NOTE =============== $ 127,814.78 DATE: 2/25/99 - ------------ COSTA MESA, CALIFORNIA - ---------------------- (location where signed) For value received, the undersigned promises to pay in lawful money to FLOYD S. REID at his office at 2955 Redhill Avenue, Costa Mesa, California 92626, the sum of ONE HUNDRED TWENTY-SEVEN THOUSAND, EIGHT HUNDRED FOURTEEN AND 78/100 DOLLARS ---------------------------------------------------------------------------- ($127,814.78), plus interest. The within note arises from the renewal and - ------------ restatement of all previous promissory notes, loans and advances by the Payee hereof to the Maker. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence January 1, 1998. All accrued interest shall be paid quarterly on each January 1, April 1, July 1, and October 1. In addition to the principal amount owed, as of January 31, 1999, maker also owes $31,163 in accrued interest. The principal amount of the within note, all accrued, unpaid interest, and all other amounts due hereunder shall be paid in full on July 1, 2000. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Revised and executed this 25th day of February, 1999. MAKER: THE KEITH COMPANIES, INC. 2955 Redhill Avenue Costa Mesa, CA 92626 By: /s/ Aram H. Keith By: /s/ Jerry Brickman ------------------------------- ---------------------------------- Aram H. Keith, President Jerry Brickman, Chief Operating Officer PAYMENT OF THIS NOTE IS SUBORDINATED TO THE PAYMENT OF ALL OBLIGATIONS OF THE MAKER HEREOF TO IMPERIAL BANK PURSUANT TO THE TERMS OF A SUBORDINATION AGREEMENT DATED FEBRUARY 9, 1998, AND ANY AMENDMENTS THERETO AND REPLACEMENTS THEREFOR. ACKNOWLEDGED AND AGREED: By: /s/ Floyd S. Reid / Date: March 16, 1999 ------------------------------ -------------- Floyd S. Reid IMPERIAL BANK - SUBORDINATION AGREEMENT (PAYMENT AUTHORIZED) - -------------------------------------------------------------------------------- To: Imperial Bank The undersigned ("We") are interested in the financial success of The Keith --------- Companies, Inc., ("Borrower"), and agree that financial accommodation from - ---------------- IMPERIAL BANK ("Bank" or "You") to Borrower is necessary, and we accordingly request that you grant to or renew for Borrower such financial accommodation as you may deem proper, and for the purpose of inducing you to grant, renew or extend such financial accommodation, we hereby severally agree as follows: All claims of each of the undersigned against Borrower now or hereafter existing, whether matured or not (subject to the maximum if specified below), are and shall be at all times subordinate and subject to any and all claims on your part against Borrower now or hereafter existing, whether matured or not, so long as any such claim on your part against Borrower shall remain unpaid, in whole or in part, and each of the undersigned agrees not to sue upon, or to collect, or to receive payment upon, by setoff or in any other manner, any claim or claims on his/hers or its part against Borrower now or hereafter existing, nor to sell, assign, transfer, pledge, or give a security interest in the same (except subject expressly to this Agreement), nor to enforce or apply any security now or hereafter existing, nor to join in any petition in bankruptcy or any assignment for the benefit of creditors or any creditors agreement, nor to take any lien or security on any of Borrower's property, real or personal, nor to incur any obligation to nor receive any loans, advances or gifts from Borrower, so long as any such claim on your part against Borrower shall exist or so long as you are committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. All claims on your part against borrower now or hereafter existing shall be first paid by Borrower before any payment shall be made by Borrower to any of the undersigned. Borrower may make regularly schedule payment(s) of interest only on the claims so long as no default exists on its obligations to Bank. Said priority of payment shall apply during the ordinary course of Borrower's business and in case of any assignment by Borrower for the benefit of Borrower's creditors, and in case of any bankruptcy proceedings instituted by or against Borrower, and in case of the appointment of any receiver for Borrower or Borrower's business or assets, and in case of any dissolution or other winding up of the affairs of Borrower, or of Borrower's business, and in all such cases respectively, the officers of Borrower and any assignee, trustee in bankruptcy, receiver, and other person or persons in charge, are hereby directed to pay to you the full amount of your claims against Borrower before making any payment to any of the undersigned, and so far as may be necessary for that purpose, each of the undersigned hereby transfers and assigns to you all of his/her or its rights to any payment or distribution which might otherwise be coming to him/her or it. You are hereby irrevocably constituted and appointed the attorney-in-fact of each of the undersigned to file any and all proofs of claim and any other documents and to take all other action, either in your name, or in the name of the undersigned, or any of them, which in your opinion is necessary or desirable to enable you to obtain all such payments. Each of the undersigned agrees that if part or all of any claim of the undersigned shall be evidenced by a promissory note or other instrument, the undersigned shall cause to be placed thereon a legend stating that the payment thereof is subordinate to the payment of all claims on your part against Borrower pursuant to the terms of this Subordination Agreement, and each of the undersigned agrees to mark all books of account in such manner to indicate that payment thereof is subordinated pursuant to the terms of this Subordination Agreement. Each of the undersigned further agrees that in case he, she or it should take or receive any security interest in, or lien by way of attachment, execution, or otherwise on any of the property, real or personal, of Borrower, or should take or join in any other measure or advantage contrary to this Agreement, while any claim exists on your part against Borrower, you shall be entitled to have the same vacated, dissolved and set aside by such proceedings at law, or otherwise, as you may deem proper, and this Agreement shall be and constitute full and sufficient ground therefor and shall entitle you to be and become a party to any proceedings at law, or otherwise, initiated by you or by any other party, in or by which you may deem it proper to protect your interest hereunder; and the party so violating this Agreement shall be liable to you for all loss and damage sustained by you by reason of such breach, including attorney's fees in any such legal action. If the undersigned, or any of them, shall receive any payment or property in violation of this Agreement, such payment or property shall be received by such undersigned in trust for you and forthwith will be delivered and transferred to you. No subordinations of obligations of Borrower to the undersigned have previously been executed by the undersigned for the benefit of anyone else, and any such subordinations hereafter executed will be, and shall be expressed to be subject and subordinate to the effect hereof. This Agreement shall be continuing in effect, it shall not be cancelled or otherwise rendered ineffective by the payment or discharge at any time of all of Borrower's obligations to you, and it shall apply to any and all financial accommodations subsequently granted, renewed or extended by you for Borrower, unless the undersigned shall deliver to you a written notice of revocation as to future transactions, at a time when Borrower is no longer obligated to you in any way, and while you are not committed or otherwise obligated to make any loans to, or grant any credit to, Borrower. Maximum 127,814.78 ------------------------- Dated March 18, 1994 --------------------------- By: /s/ Floyd S. Reid ---------------------------- Floyd S. Reid ACCEPTANCE OF SUBORDINATION AGREEMENT BY BORROWER The undersigned, being the Borrower named in the foregoing Subordination Agreement, hereby accepts and consents thereto and agrees to be bound by all of the provisions thereof and to recognize all priorities and other rights granted thereby to IMPERIAL BANK, and to pay said Bank in accordance therewith. Dated: THE KEITH COMPANIES, INC. By: /s/ Aram H. Keith ---------------------------- Aram H. Keith, CEO EX-10.28 33 EMPLOYMENT AGREEMENT EXHIBIT 10.28 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 1st day of October, 1997, between ESI, ENGINEERING SERVICES, INC. ( a wholly owned subsidiary of The KEITH COMPANIES, Inc. a California Corporation) ("Employer" or "ESI") and Lynn C. Cannady ("Employee"), in contemplation of the following facts: A. Employer is engaged in the highly specialized business of designing, developing, conducting, managing and implementing all of the facilities, policies, procedures, plans and programs for the conduct of a fully operational consulting engineering business which specializes in the design of (1) processing systems for various manufacturers, (2) electrical engineering, (3) instrumentation and (4) systems to dispose of contaminated waste. B. Employee is being employed by Employer because of his intellectual capabilities, character and the extraordinary ability and expertise which Employee possesses in resolving complex process and chemical engineering challenges, and his exceptional management capabilities. Employee has been employed by Employer for more than seventeen years, however, concurrent with the execution of this Agreement, Employer is being acquired by The Keith Companies, Inc. ("Keith"), and Employee is a selling shareholder. C. Said employment is primarily of a highly confidential nature involving duties which require Employer to confide in Employee and to entrust Employee with the highest degree of faith, trust and confidence. NOW, THEREFORE, in consideration of the initiation of said employment, of other good and valuable consideration received by Employee (the receipt of which is hereby acknowledged) and of the mutual promises and covenants herein, THE PARTIES HERETO AGREE AS FOLLOWS: 1. Incorporation of Recitals by Reference. --------------------------------------- The recitals hereinbefore set forth as Paragraphs A through C, inclusive, are hereby incorporated by this reference as part of the agreement made between Employer and Employee, as though said recitals were again set forth at length herein. Employer and employee hereby acknowledge and confirm to each other the truth and correctness of each said recital. 2. Nature of Employment. --------------------- Employer hereby employs Employee as a Senior Vice President - Instrumentation and Controls Engineering of Employer initially with the primary responsibility and authority for the 1 management of ESI's Instrumentation and Controls Engineering Division. As manager of said division, Employee's duties include, among others, supervision of his division's staff, developing billable work for current and prospective clients, and the day to day management of the Instrumentation and Controls Engineering Division segment of ESI's business, and programs related thereto. During the term of this Agreement, Employee shall undertake and discharge in a competent and professional manner at all times and for the exclusive benefit of Employer all of Employer's assigned work as delegated to Employee from time to time, and shall implement such procedures and plans as are prudent to accomplish such assignments, including without limitation all processes, policies and procedures, and work product relating thereto or in any way connected therewith. Employee shall during the term hereof also supervise and discharge in a like competent and professional manner at all times and for the exclusive benefit of Employer all managerial responsibilities and duties relating to the maintenance, improvement and advancement on all levels of Employer's Instrumentation and Controls Engineering division. With the concurrence of Employee, Employer may direct that Employee's duties hereunder be performed for any of Employer's affiliated engineering offices and Employer may assign this Agreement in its entirety to any one or more of Employer's divisions, subsidiaries or affiliates, as they may exist from time to time. However, Employee shall not be required to change his place of full time employment from the general area of Walnut Creek without Employee's voluntary concurrence. During the term of this Agreement, which may be extended as hereinafter provided, Employee shall devote Employee's full time, energies and skills to the management and conduct of Employer's business. Except for his ownership interest in Design Services, Inc., which business is expected to be sold during 1997 or early 1998, Employee agrees that he will not without Employer's prior written consent either directly or indirectly, alone or as a member of a partnership or other association, or as an officer, director or shareholder of any corporation, be engaged in or concerned with any other duties or pursuits in a business activity which competes in any manner whatsoever with the business and activities of Employer. It is agreed that during some or all of the term of this Agreement, Employee may deem it necessary or advisable to devote a small amount of time to the management of his outside, personal investments unrelated to Employer's business. Such time devoted to such investments shall not exceed an average of ten hours per month. 3. Term of Employment. ------------------ Said employment shall be for an initial period of five (5) years, commencing as of the date hereof, subject to earlier termination as hereinafter provided. It is contemplated that the term of this Agreement may be extended in one year supplements after the end of the initial term hereof by mutual agreement of the parties hereto, provided that the terms and conditions of any such extension shall be evidenced by a writing signed by each of the parties hereto, In the event that a new agreement is not executed among the parties, Employee shall become an employee at will of Employer. 2 4. Salary. ------ Employer shall pay to Employee a salary of ONE HUNDRED SIX THOUSAND DOLLARS ($106,000.00) per twelve month period during the first twelve months of this Agreement, payable in bi-weekly installments or on such payroll dates established from time to time for Employer's senior management level employees. As of each October 1, commencing October 1, 1998, Employer shall fairly consider increases in Employee's base pay rate commensurate with his demonstrated capabilities both technically and considering new business opportunities developed by Employee. It is anticipated that, as a minimum, the percentage by which Employee's base salary rate shall be increased as of each October 1st will be reflective of increases in the Consumer Price Index or some similar measure of inflation's impact on purchasing power in the geographic area in which Employee resides. In the unlikely event that ESI fails to earn Net Income After Provision for State and Federal Taxes on Income of ten percent of the average book value of ESI's Shareholders' Equity during any year, Employee's salary may be adjusted downward, but in no event below Eighty Five Thousand Dollars per annum. The average book value of Shareholders' Equity for any fiscal year shall be determined in accordance with generally accepted accounting principals ("GAAP") by calculating the average of the book value at the beginning of the fiscal year, the book value at the end of each subsequent three month period during that fiscal year, and the book value at the end of the fiscal year (the five amounts are added together, and that result is divided by five). In the event of a reduction in the salary of Employee due to ESI's failure to achieve the net income levels required by the preceding paragraph, such reduction in base salary shall not extend past the end of the fiscal quarter which immediately follows the fiscal quarter during which the required net income goals are once again attained. All salary payments to Employee shall be subject to deduction therefrom of all payroll taxes, withholdings and assessments as are required by law and by such voluntary payroll deductions as Employee authorizes in writing, all as established from time to time pursuant to Employer's payroll policy. Anything set forth herein to the contrary notwithstanding, said salary shall be prorated to the actual period of Employee's employment hereunder. 5. Incentive Stock Option Plan of Employer --------------------------------------- During the period of Employee's employment he shall participate in Employer's Incentive Stock Option Plan. Initially Employer shall grant Employee options on 40,000 shares, each with an exercise price of one dollar per share. The terms of the Incentive Stock Option Plan (this explanation is merely a summary, thus the Plan itself should be examined for specific terms and conditions, it is agreed that in the event of any conflict, the terms of the Plan shall prevail) provide for vesting of 20% of the total shares granted during each of the first five years of an employee's employment, and allow up to ten years for an employee to exercise his vested options. Irrespective of any provision of the Stock Option Agreement to the contrary, in the 3 event of Employee's death or permanent disability (as certified by a licensed physician) while employed by Employer, all shares granted in Employee's stock option described in the preceding paragraph shall vest immediately, and Employee's estate, representative or the Employee, as the case may be, shall have one year from the date of such event in which to exercise any or all of the unexercised option. 6. Expenses -------- Employer will reimburse Employee from time to time for all necessary expenses incurred in connection with the performance of Employee's duties under this Agreement but only upon submission to Employer of good and sufficient supporting vouchers, receipts and the like for all such expenses for which Employee desires to receive reimbursement from Employer, and on forms utilized by Employer. Employee's right to reimbursement shall be subject to such policies as Employer establishes from time to time for its management employees. In the event that any applicable federal or state taxing authority denies for any reason the deduction by Employer for any reimbursed expense (except the portion of meals and entertainment expense which is not deductible under then applicable income tax law, currently 50% is not deductible) paid to Employee hereunder then, upon demand of Employer, Employee shall repay to Employer the full amount of all such disallowed reimbursed expense, as the case may be. 7. Termination of Employment. ------------------------- Anything set forth herein to the contrary notwithstanding, this Agreement shall terminate and shall be of no further force or effect whatsoever (except with respect to those provisions set forth in Sections 9 and 10 hereof which are hereby expressly intended to survive the termination of this Agreement) immediately upon the occurrence of any of the following events: (a) The expiration of the term of employment hereunder as provided for in Section 3 hereof; (b) The death of Employee; (c) At the sole option of Employer, if Employee is unable to unwilling to perform his assigned duties for any reason, including but not limited to sickness, accident or disability, beyond the period of Employee's accumulated sick leave, or beyond the time of such other leave of absence as the Employer customarily grants to its employees under similar circumstances, if any, or upon the total disability of Employee, as the case may be. (d) If Employee fails to carry out his duties faithfully, conscientiously and competently and does not correct any such failure to Employer's reasonable satisfaction within ten (10) days after written notice from Employer to Employee thereof; (e) At the sole option of Employer, if Employee accepts any employment by or for any other person, firm or corporation without Employer's prior written consent. (f) At sole option of Employer, if Employee should do any act offensive to decency, morality or social propriety tending to result in scandal, hatred, proved or admitted 4 allegations of sexual harassment, ridicule or contempt or if Employee should violate or be charged with a violation of any law which subjects Employee or Employer to any scandal, hatred, ridicule or contempt, or a judgment of a court of competent jurisdiction of monetary damages in excess of $50,000 for sexual harassment or job discrimination, or either pleads or is found guilty of any felony. (g) At the sole option of Employer, in the event that Employer ceases for any reason to conduct its business and activities in the State of California. Anything set forth herein to the contrary notwithstanding, Employee (or Employee's heirs, personal representatives, guardians or conservators, as the case may be) shall be entitled to receive from Employer any prorated salary, or other benefit which has accrued to Employee hereunder prior to any such termination of Employee's employment hereunder. 8. Vacation and Fringe Benefits ---------------------------- Employee shall be entitled to paid vacations, sick leave and other benefits as may be established by Employer from time to time as standard for comparable employees. For purposes of seniority in connection with vacation privileges and for length of service awards, Employee's hire date shall be considered to be October 1, 1990. In addition, Employee shall also be entitled to participate in such fringe benefit programs, if any, as may be provided for by Employer from time to time for the benefit of comparable employees during the terms of this Agreement and in which Employee is designated as a participant therein or beneficiary thereof. All of such programs and policies are hereby expressly made subject to adjustment, modification or cancellation by Employer from time to time in order to conform with Employer's managerial policies. 9. Nondisclosure of Information. ----------------------------- Employee acknowledges that during the course of his employment hereunder he will be acquiring, making use of and adding to confidential information of special and unique value to Employer and relating to such matters (by way of example only and without limitation thereto) as lists of Employer's and its affiliates' clients and their projects, Employer's pricing of client's projects and the compensation rates and professional abilities of fellow employees. Employee agrees that during the term of this Agreement and for the twenty four (24) month period next following the term hereof (without the prior written consent of the President of Keith, its successors or assigns), he will not as an individual or as a stockholder, partner, agent, employee, servant or representative of any person, firm corporation or association, either directly or indirectly divulge, disclose or communicate to any person, firm, corporation (other than Employer and its affiliates) or association in any manner whatsoever or take advantage of for his own economic gain or for the economic gain of others any information of any kind, nature or description concerning any matters affecting or relating to Employer's business or affairs, including without limitation the names 5 of any of its customers, its relations with its employees, including salaries, job classification and skill levels, its manner of operation, its copyrights, plans, processes or other data of any kind, nature or description, or any other information, of, about or concerning Employer's confidential business and affairs. All of such information is hereby determined and declared to be important, material, highly confidential, in the nature of trade secrets and vitally important to the successful conduct of Employer's business and the maintenance of its goodwill among its clients and employees. As a separate and distinct covenant hereby made by Employee to Employer, during the term hereof and within the period of twelve (12) calendar months thereafter, Employee shall not (as an individual or as a stockholder, partner, agent, employee or representative of any person, firm, corporation or association) engage in or have any direct or indirect interest in any business in competition with one or more of the businesses carried on by Employer or by any of its affiliates (whether subsequently carried on by the same organization or by any successors thereto) as presently conducted or as conducted at any time during the term of this Agreement or within said twelve (12) calendar month period thereafter in any geographical area within thirty miles of an Engineering office then operated by ESI or by any affiliate of the Keith Group of Companies, provided, however, that this paragraph shall not prevent Employee from acquiring and holding not to exceed two percent (2%) of the outstanding shares of any corporation engaged in such competitive business if such shares are available to the general public on a national or regional securities exchange or on the over the counter market. Employee acknowledges that concurrent with the execution of this Agreement, Keith is acquiring all of ESI's issued and outstanding capital stock from ESI's three owners, one of whom is Employee, and that Keith would not acquire said stock without the agreements not to compete and not to divulge trade secrets as set forth in this and the preceding two paragraphs. The various restrictions set forth in this Section 9 shall be deemed severable and the invalidity of any such restrictions shall not affect the validity of the remaining such restrictions. In the event of any breach by Employee of the terms and conditions hereof, Employer shall have the right, among other rights, to sue Employee for damages sustained thereby and to seek injunctive relief to restrain Employee from continuing with such breach. Employee agrees that this Section 9 shall survive the termination of his employment for any reason and Employee shall be bound by all of the terms and conditions hereof subsequent to the termination of his employment and for so long a period thereafter during said twelve (12) calendar month period as Employer or its affiliates (or their respective successors in interest or assigns, as the case may be) continue to conduct the same or substantially the same business at some or all of the places and locations within the continental United States where such business is or will during such period be conducted. Nothing herein contained shall in any way be deemed to limit, derogate from, modify or exclude any or all other rights granted by law or in equity to Employer as against Employee in the event of Employee's breach hereunder. 6 10. Possible Cash Bonus ------------------- Employee, who has been one of ESI's executives for many years, has been informed that ESI may have Net Operating Loss Carryforwards for Federal and/ or California Income Tax purposes ("NOL's") as of June 30, 1997 which may be available in future tax years to offset taxable income earned in such future years. To the extent that the NOL's achieve savings in either Federal or California Income Taxes that would otherwise be payable, and as reflected on the appropriate Federal Form 1120 and California Form 100 (or successors to such forms, if any), Employee shall be paid a cash bonus of 16.6% of said tax benefit. The cash bonus shall be paid within sixty days of the filing of the corporate income tax return, and it shall be subject to normal payroll tax withholdings and deductions which are then applicable to a normal cash bonus. 11. Miscellaneous ------------- (a) Partial Invalidity. If any term or provision of this Agreement ------------------- or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons and or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each such term and provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. (b) Waivers. No waiver of any breach of any covenant or provision -------- herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed an extension of the time for performance of any other obligation or act. (c) Assignment. Neither party shall assign, transfer or convey, ----------- voluntarily or involuntarily, it's rights and obligations under this Agreement without the prior written consent of the other property, which consent may be withheld in such party's sole discretion. (d) Successors and Assigns. This Agreement shall be binding upon and ----------------------- shall inure to the benefit of the permitted successors and assigns of the parties hereto. (e) Professional Fees. In the event of the bringing of any action or ------------------- suit by a party hereto against another party hereunder by reason of any breach of any of the covenants, agreements or provisions on the part of the other party arising out of this Agreement, then in that event the prevailing party shall be entitled to have and recover of and from the other party all costs and expenses of the action of suit, including actual attorneys', accounting and engineering fees, and any other professional fees resulting therefrom. (f) Entire Agreement. This Agreement (including all Exhibits ----------------- attached hereto) is the final expression of, and contains the entire agreement between the parties with 7 respect to the subject matter hereof and supersedes all prior understandings with respect thereto. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waiver, except by a written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. The parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. (g) Time of Essence. The parties hereby acknowledge and agree that ---------------- time is strictly of the essence with respect to each and every term, condition, obligation and provision hereof and that failure to timely perform any of the terms, conditions, obligations or provisions hereof by either party shall constitute a material breach of and a non-curable (but waivable) default under this Agreement by the party so failing to perform. (h) Construction. Headings at the beginning of each paragraph and ------------- subparagraph or section are solely for the convenience of the parties and are not a part of the Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and the masculine shall include the feminine and vice versa. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. Unless otherwise indicated, all references to paragraphs, sections and subparagraphs are to this Agreement. All exhibits referred to in this Agreement are attached and exhibits referred to in this Agreement are attached and incorporated by this reference. In the event the last date on which any party is required to take any action under the terms of this Agreement is not a business day, the action may be taken on the next succeeding business day. (i) Governing Law. The parties hereto acknowledge that this -------------- Agreement has been negotiated and entered into in the State of California. The parties hereto expressly agree that this Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of California, and by the Superior Courts of Orange County. "EMPLOYER" ESI, ENGINEERING SERVICES, INC. A wholly owned subsidiary of THE KEITH COMPANIES, Inc. a California Corporation /s/ ARAM H. KEITH by________________________ Aram H. Keith, President /s/ FLOYD S. REID by________________________ Floyd S. Reid, Secretary 8 "EMPLOYEE" /s/ LYNN C. CANNADY by________________________ Lynn C. Cannady 9 EX-10.29 34 EMPLOYMENT AGREEMENT EXHIBIT 10.29 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 1st day of October, 1997, between ESI, ENGINEERING SERVICES, INC. ( a wholly owned subsidiary of The KEITH COMPANIES, Inc. a California Corporation) ("Employer") and Glenn I. Chase ("Employee"), in contemplation of the following facts: A. Employer is engaged in the highly specialized business of designing, developing, conducting, managing and implementing all of the facilities, policies, procedures, plans and programs for the conduct of a fully operational consulting engineering business which specializes in the design of (1) processing systems for various manufacturers, (2) electrical engineering, (3) instrumentation and (4) systems to dispose of contaminated waste. B. Employee is being employed by Employer because of his intellectual capabilities, character and the extraordinary ability and expertise which Employee possesses in resolving complex process engineering challenges, and his exceptional management capabilities. Employee has been employed by Employer for more than seventeen years, however, concurrent with the execution of this Agreement, Employer is being acquired by The Keith Companies, Inc. ("Keith"), and Employee is a selling shareholder. C. Said employment is primarily of a highly confidential nature involving duties which require Employer to confide in Employee and to entrust Employee with the highest degree of faith, trust and confidence. NOW, THEREFORE, in consideration of the initiation of said employment, of other good and valuable consideration received by Employee (the receipt of which is hereby acknowledged) and of the mutual promises and covenants herein, THE PARTIES HERETO AGREE AS FOLLOWS: 1. Incorporation of Recitals by Reference. --------------------------------------- The recitals hereinbefore set forth as Paragraphs A through C, inclusive, are hereby incorporated by this reference as part of the agreement made between Employer and Employee, as though said recitals were again set forth at length herein. Employer and employee hereby acknowledge and confirm to each other the truth and correctness of each said recital. 2. Nature of Employment. --------------------- Employer hereby employs Employee as a Senior Vice President - Process Engineering of Employer initially with the primary responsibility and authority for the 1 management of ESI's Process Engineering Division, and also as the business manager of ESI, which duties entail, among others, the design and implementation of the planning, business management and administrative functions of ESI and the oversight of the Process Engineering segment of ESI's business, and programs related thereto. In his capacity as business manager of ESI, Employee shall report to the Chief Financial Officer of Keith. During the term of this Agreement, Employee shall undertake and discharge in a competent and professional manner at all times and for the exclusive benefit of Employer all of Employer's assigned work as delegated to Employee from time to time, and shall implement such procedures and plans as are prudent to accomplish such assignments, including without limitation all processes, policies and procedures, and work product relating thereto or in any way connected therewith. Employee shall during the term hereof also supervise and discharge in a like competent and professional manner at all times and for the exclusive benefit of Employer all managerial responsibilities and duties relating to the maintenance, improvement and advancement on all levels of Employer's engineering business. With the concurrence of Employee, Employer may direct that Employee's duties hereunder be performed for any of Employer's affiliated engineering offices and Employer may assign this Agreement in its entirety to any one or more of Employer's divisions, subsidiaries or affiliates, as they may exist from time to time. However, Employee shall not be required to change his place of full time employment from the general area of Walnut Creek without Employee's voluntary concurrence. During the term of this Agreement, which may be extended as hereinafter provided, Employee shall devote Employee's full time, energies and skills to the management and conduct of Employer's business. Except for his ownership interest in Design Services, Inc., which business is expected to be sold during 1997 or early 1998, Employee agrees that he will not without Employer's prior written consent either directly or indirectly, alone or as a member of a partnership or other association, or as an officer, director or shareholder of any corporation, be engaged in or concerned with any other duties or pursuits in a business activity which competes in any manner whatsoever with the business and activities of Employer. It is agreed that during some or all of the term of this Agreement, Employee may deem it necessary or advisable to devote a small amount of time to the management of his outside, personal investments unrelated to Employer's business. Such time devoted to such investments shall not exceed an average of ten hours per month. 3. Term of Employment. ------------------ Said employment shall be for an initial period of five (5) years, commencing as of the date hereof, subject to earlier termination as hereinafter provided. It is contemplated that the term of this Agreement may be extended in one year supplements after the end of the initial term hereof by mutual agreement of the parties hereto, provided that the terms and conditions of any such extension shall be evidenced by a writing signed by each of the parties hereto, In the event that a new agreement is not executed among the parties, Employee shall become an employee at will of Employer. It is further agreed, that upon the request of Employee, after October 1, 2000, Employee may wish to be employed as a part 2 time consultant, available to Employer for no less than 1,500 hours per year (including any vacation, holiday and sick pay hours available and utilized by Employee), with an appropriate adjustment in compensation and benefits based upon such hours, or based upon Employee's termination of full time employment and subsequent retention as a consultant. 4. Salary. ------ Employer shall pay to Employee a salary of ONE HUNDRED SIX THOUSAND DOLLARS ($106,000.00) per twelve month period during the first twelve months of this Agreement, payable in bi-weekly installments or on such payroll dates established from time to time for Employer's senior management level employees. As of each October 1, commencing October 1, 1998, Employer shall fairly consider increases in Employee's base pay rate commensurate with his demonstrated capabilities both technically and considering new business opportunities developed by Employee. It is anticipated that, as a minimum, the percentage by which Employee's base salary rate shall be increased as of each October 1st will be reflective of increases in the Consumer Price Index or some similar measure of inflation's impact on purchasing power in the geographic area in which Employee resides. In the unlikely event that ESI fails to earn Net Income After Provision for State and Federal Taxes on Income of ten percent of the average book value of ESI's Shareholders' Equity during any year, Employee's salary may be adjusted downward, but in no event below Eighty Five Thousand Dollars per annum. The average book value of Shareholders' Equity for any fiscal year shall be determined in accordance with generally accepted accounting principals ("GAAP") by calculating the average of the book value at the beginning of the fiscal year, the book value at the end of each subsequent three month period during that fiscal year, and the book value at the end of the fiscal year (the five amounts are added together, and that result is divided by five). In the event of a reduction in the salary of Employee due to ESI's failure to achieve the net income levels required by the preceding paragraph, such reduction in base salary shall not extend past the end of the fiscal quarter which immediately follows the fiscal quarter during which the required net income goals are once again attained. All salary payments to Employee shall be subject to deduction therefrom of all payroll taxes, withholdings and assessments as are required by law and by such voluntary payroll deductions as Employee authorizes in writing, all as established from time to time pursuant to Employer's payroll policy. Anything set forth herein to the contrary notwithstanding, said salary shall be prorated to the actual period of Employee's employment hereunder. 5. Incentive Stock Option Plan of Employer --------------------------------------- During the period of Employee's employment he shall participate in Employer's Incentive Stock Option Plan. Initially Employer shall grant Employee options on 40,000 shares, each with an exercise price of one dollar per share. The terms of the Incentive Stock Option Plan (this explanation is merely a summary, thus the Plan itself should be examined 3 for specific terms and conditions, it is agreed that in the event of any conflict, the terms of the Plan shall prevail) provide for vesting of 20% of the total shares granted during each of the first five years of an employee's employment, and allow up to ten years for an employee to exercise his vested options . Should Employee become a Consultant to Employer after September, 2000 as provided in Section 3 of this Agreement, Options granted prior to that date shall continue to vest as if Employee was still a full time employee of Employer. Irrespective of any provision of the Stock Option Agreement to the contrary, in the event of Employee's death or permanent disability (as certified by a licensed physician) while employed by Employer, all shares granted in Employee's stock option described in the preceding paragraph shall vest immediately, and Employee's estate, representative or the Employee, as the case may be, shall have one year from the date of such event in which to exercise any or all of the unexercised option. 6. Expenses -------- Employer will reimburse Employee from time to time for all necessary expenses incurred in connection with the performance of Employee's duties under this Agreement but only upon submission to Employer of good and sufficient supporting vouchers, receipts and the like for all such expenses for which Employee desires to receive reimbursement from Employer, and on forms utilized by Employer. Employee's right to reimbursement shall be subject to such policies as Employer establishes from time to time for its management employees. In the event that any applicable federal or state taxing authority denies for any reason the deduction by Employer for any reimbursed expense (except the portion of meals and entertainment expense which is not deductible under then applicable income tax law, currently 50% is not deductible) paid to Employee hereunder then, upon demand of Employer, Employee shall repay to Employer the full amount of all such disallowed reimbursed expense, as the case may be. 7. Termination of Employment. ------------------------- Anything set forth herein to the contrary notwithstanding, this Agreement shall terminate and shall be of no further force or effect whatsoever (except with respect to those provisions set forth in Sections 9 and 10 hereof which are hereby expressly intended to survive the termination of this Agreement) immediately upon the occurrence of any of the following events: (a) The expiration of the term of employment hereunder as provided for in Section 3 hereof; (b) The death of Employee; (c) At the sole option of Employer, if Employee is unable to unwilling to perform his assigned duties for any reason, including but not limited to sickness, accident or disability, beyond the period of Employee's accumulated sick leave, or beyond the time of such other leave of absence as the Employer customarily grants to its employees under similar circumstances, if any, or upon the total disability of Employee, as the case may be. 4 (d) If Employee fails to carry out his duties faithfully, conscientiously and competently and does not correct any such failure to Employer's reasonable satisfaction within ten (10) days after written notice from Employer to Employee thereof; (e) At the sole option of Employer, if Employee accepts any employment by or for any other person, firm or corporation without Employer's prior written consent. (f) At sole option of Employer, if Employee should do any act offensive to decency, morality or social propriety tending to result in scandal, hatred, proved or admitted allegations of sexual harassment, ridicule or contempt or if Employee should violate or be charged with a violation of any law which subjects Employee or Employer to any scandal, hatred, ridicule or contempt, or a judgment of a court of competent jurisdiction of monetary damages in excess of $50,000 for sexual harassment or job discrimination, or either pleads or is found guilty of any felony. (g) At the sole option of Employer, in the event that Employer ceases for any reason to conduct its business and activities in the State of California. Anything set forth herein to the contrary notwithstanding, Employee (or Employee's heirs, personal representatives, guardians or conservators, as the case may be) shall be entitled to receive from Employer any prorated salary, or other benefit which has accrued to Employee hereunder prior to any such termination of Employee's employment hereunder. 8. Vacation and Fringe Benefits ---------------------------- Employee shall be entitled to paid vacations, sick leave and other benefits as may be established by Employer from time to time as standard for comparable employees. For purposes of seniority in connection with vacation privileges and for length of service awards, Employee's hire date shall be considered to be October 1, 1990. In addition, Employee shall also be entitled to participate in such fringe benefit programs, if any, as may be provided for by Employer from time to time for the benefit of comparable employees during the terms of this Agreement and in which Employee is designated as a participant therein or beneficiary thereof. All of such programs and policies are hereby expressly made subject to adjustment, modification or cancellation by Employer from time to time in order to conform with Employer's managerial policies. 9. Nondisclosure of Information. ----------------------------- Employee acknowledges that during the course of his employment hereunder he will be acquiring, making use of and adding to confidential information of special and unique value to Employer and relating to such matters (by way of example only and without limitation thereto) as lists of Employer's and its affiliates' clients and their projects, Employer's pricing of client's projects and the compensation rates and professional abilities of fellow employees. Employee agrees that during the term of this Agreement and for the twenty four (24) month period next following the term hereof (without the prior written consent of the 5 President of Keith, its successors or assigns), he will not as an individual or as a stockholder, partner, agent, employee, servant or representative of any person, firm corporation or association, either directly or indirectly divulge, disclose or communicate to any person, firm, corporation (other than Employer and its affiliates) or association in any manner whatsoever or take advantage of for his own economic gain or for the economic gain of others any information of any kind, nature or description concerning any matters affecting or relating to Employer's business or affairs, including without limitation the names of any of its customers, its relations with its employees, including salaries, job classification and skill levels, its manner of operation, its copyrights, plans, processes or other data of any kind, nature or description, or any other information, of, about or concerning Employer's confidential business and affairs. All of such information is hereby determined and declared to be important, material, highly confidential, in the nature of trade secrets and vitally important to the successful conduct of Employer's business and the maintenance of its goodwill among its clients and employees. As a separate and distinct covenant hereby made by Employee to Employer, during the term hereof and within the period of twelve (12) calendar months thereafter, Employee shall not (as an individual or as a stockholder, partner, agent, employee or representative of any person, firm, corporation or association) engage in or have any direct or indirect interest in any business in competition with one or more of the businesses carried on by Employer or by any of its affiliates (whether subsequently carried on by the same organization or by any successors thereto) as presently conducted or as conducted at any time during the term of this Agreement or within said twelve (12) calendar month period thereafter in any geographical area within thirty miles of an Engineering office then operated by ESI or by any affiliate of the Keith Group of Companies, provided, however, that this paragraph shall not prevent Employee from acquiring and holding not to exceed two percent (2%) of the outstanding shares of any corporation engaged in such competitive business if such shares are available to the general public on a national or regional securities exchange or on the over the counter market. Employee acknowledges that concurrent with the execution of this Agreement, Keith is acquiring all of ESI's issued and outstanding capital stock from ESI's three owners, one of whom is Employee, and that Keith would not acquire said stock without the agreements not to compete and not to divulge trade secrets as set forth in this and the preceding two paragraphs. The various restrictions set forth in this Section 9 shall be deemed severable and the invalidity of any such restrictions shall not affect the validity of the remaining such restrictions. In the event of any breach by Employee of the terms and conditions hereof, Employer shall have the right, among other rights, to sue Employee for damages sustained thereby and to seek injunctive relief to restrain Employee from continuing with such breach. Employee agrees that this Section 9 shall survive the termination of his employment for any reason and Employee shall be bound by all of the terms and conditions hereof subsequent to the termination of his employment and for so long a period thereafter during said twelve (12) calendar month period as Employer or its affiliates (or their respective successors in interest 6 or assigns, as the case may be) continue to conduct the same or substantially the same business at some or all of the places and locations within the continental United States where such business is or will during such period be conducted. Nothing herein contained shall in any way be deemed to limit, derogate from, modify or exclude any or all other rights granted by law or in equity to Employer as against Employee in the event of Employee's breach hereunder. 10. Possible Cash Bonus ------------------- Employee, who has been one of ESI's executives for many years, has been informed that ESI may have Net Operating Loss Carryforwards for Federal and/ or California Income Tax purposes ("NOL's") as of June 30, 1997 which may be available in future tax years to offset taxable income earned in such future years. To the extent that the NOL's achieve savings in either Federal or California Income Taxes that would otherwise be payable, and as reflected on the appropriate Federal Form 1120 and California Form 100 (or successors to such forms, if any), Employee shall be paid a cash bonus of 16.6% of said tax benefit. The cash bonus shall be paid within sixty days of the filing of the corporate income tax return, and it shall be subject to normal payroll tax withholdings and deductions which are then applicable to a normal cash bonus. 11. Miscellaneous ------------- (a) Partial Invalidity. If any term or provision of this Agreement ------------------- or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons and or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each such term and provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. (b) Waivers. No waiver of any breach of any covenant or provision -------- herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed an extension of the time for performance of any other obligation or act. (c) Assignment. Neither party shall assign, transfer or convey, ----------- voluntarily or involuntarily, it's rights and obligations under this Agreement without the prior written consent of the other property, which consent may be withheld in such party's sole discretion. (d) Successors and Assigns. This Agreement shall be binding upon and ----------------------- shall inure to the benefit of the permitted successors and assigns of the parties hereto. (e) Professional Fees. In the event of the bringing of any action or ------------------ suit by a party hereto against another party hereunder by reason of any breach of any of the covenants, agreements or provisions on the part of the other party arising out of this 7 Agreement, then in that event the prevailing party shall be entitled to have and recover of and from the other party all costs and expenses of the action of suit, including actual attorneys', accounting and engineering fees, and any other professional fees resulting therefrom. (f) Entire Agreement. This Agreement (including all Exhibits ----------------- attached hereto) is the final expression of, and contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior understandings with respect thereto. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waiver, except by a written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. The parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. (g) Time of Essence. The parties hereby acknowledge and agree that ---------------- time is strictly of the essence with respect to each and every term, condition obligation and provision hereof and that failure to timely perform any of the terms, conditions, obligations or provisions hereof by either party shall constitute a material breach of and a non-curable (but waivable) default under this Agreement by the party so failing to perform. (h) Construction. Headings at the beginning of each paragraph and ------------- subparagraph or section are solely for the convenience of the parties and are not a part of the Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and the masculine shall include the feminine and vice versa. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. Unless otherwise indicated, all references to paragraphs, sections and subparagraphs are to this Agreement. All exhibits referred to in this Agreement are attached and exhibits referred to in this Agreement are attached and incorporated by this reference. In the event the last date on which any party is required to take any action under the terms of this Agreement is not a business day, the action may be taken on the next succeeding business day. (i) Governing Law. The parties hereto acknowledge that this -------------- Agreement has been negotiated and entered into in the State of California. The parties hereto expressly agree that this Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of California, and by the Superior Courts of Orange County. "EMPLOYER" ESI, ENGINEERING SERVICES, INC. A wholly owned subsidiary of THE KEITH COMPANIES, Inc. 8 a California Corporation by /s/ ARAM H. KEITH ------------------------ Aram H. Keith, President by /s/ FLOYD S. REID ------------------------ Floyd S. Reid, Secretary "EMPLOYEE" by /s/ GLENN I. CHASE ------------------------ Glenn I. Chase 9 EX-10.30 35 EMPLOYMENT AGREEMENT EXHIBIT 10.30 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 1st day of October, 1997, between ESI, ENGINEERING SERVICES, INC. ( a wholly owned subsidiary of The KEITH COMPANIES, Inc. a California Corporation) ("Employer" or "ESI") and Stephen J. Lane ("Employee"), in contemplation of the following facts: A. Employer is engaged in the highly specialized business of designing, developing, conducting, managing and implementing all of the facilities, policies, procedures, plans and programs for the conduct of a fully operational consulting engineering business which specializes in the design of (1) processing systems for various manufacturers, (2) electrical engineering, (3) instrumentation and (4) systems to dispose of contaminated waste. B. Employee is being employed by Employer because of his intellectual capabilities, character and the extraordinary ability and expertise which Employee possesses in resolving complex process and chemical engineering challenges, and his exceptional management capabilities. Employee has been employed by Employer for more than seventeen years, however, concurrent with the execution of this Agreement, Employer is being acquired by The Keith Companies, Inc. ("Keith"), and Employee is a selling shareholder. C. Said employment is primarily of a highly confidential nature involving duties which require Employer to confide in Employee and to entrust Employee with the highest degree of faith, trust and confidence. NOW, THEREFORE, in consideration of the initiation of said employment, of other good and valuable consideration received by Employee (the receipt of which is hereby acknowledged) and of the mutual promises and covenants herein, THE PARTIES HERETO AGREE AS FOLLOWS: 1. Incorporation of Recitals by Reference. --------------------------------------- The recitals hereinbefore set forth as Paragraphs A through C, inclusive, are hereby incorporated by this reference as part of the agreement made between Employer and Employee, as though said recitals were again set forth at length herein. Employer and employee hereby acknowledge and confirm to each other the truth and correctness of each said recital. 2. Nature of Employment. --------------------- Employer hereby employs Employee as a Senior Vice President - Electrical Engineering of Employer initially with the primary responsibility and authority for the 1 management of ESI's Electrical Engineering Division, and also as the manager of ESI's staff. In such capacities, Employee's duties entail, among others, supervision of ESI's staff, developing billable work for current and prospective clients, and the day to day management of the Electrical Engineering Division segment of ESI's business, and programs related thereto. In his capacity as manager of ESI's staff, Employee shall report to the President of Keith. During the term of this Agreement, Employee shall undertake and discharge in a competent and professional manner at all times and for the exclusive benefit of Employer all of Employer's assigned work as delegated to Employee from time to time, and shall implement such procedures and plans as are prudent to accomplish such assignments, including without limitation all processes, policies and procedures, and work product relating thereto or in any way connected therewith. Employee shall during the term hereof also supervise and discharge in a like competent and professional manner at all times and for the exclusive benefit of Employer all managerial responsibilities and duties relating to the maintenance, improvement and advancement on all levels of Employer's Instrumentation and Controls Engineering division. With the concurrence of Employee, Employer may direct that Employee's duties hereunder be performed for any of Employer's affiliated engineering offices and Employer may assign this Agreement in its entirety to any one or more of Employer's divisions, subsidiaries or affiliates, as they may exist from time to time. However, Employee shall not be required to change his place of full time employment from the general area of Walnut Creek without Employee's voluntary concurrence. During the term of this Agreement, which may be extended as hereinafter provided, Employee shall devote Employee's full time, energies and skills to the management and conduct of Employer's business. Except for his ownership interest in Design Services, Inc., which business is expected to be sold during 1997 or early 1998, Employee agrees that he will not without Employer's prior written consent either directly or indirectly, alone or as a member of a partnership or other association, or as an officer, director or shareholder of any corporation, be engaged in or concerned with any other duties or pursuits in a business activity which competes in any manner whatsoever with the business and activities of Employer. It is agreed that during some or all of the term of this Agreement, Employee may deem it necessary or advisable to devote a small amount of time to the management of his outside, personal investments unrelated to Employer's business. Such time devoted to such investments shall not exceed an average of ten hours per month. 3. Term of Employment. ------------------ Said employment shall be for an initial period of five (5) years, commencing as of the date hereof, subject to earlier termination as hereinafter provided. It is contemplated that the term of this Agreement may be extended in one year supplements after the end of the initial term hereof by mutual agreement of the parties hereto, provided that the terms and conditions of any such extension shall be evidenced by a writing signed by each of the parties hereto, In the event that a new agreement is not executed among the parties, Employee shall become an employee at will of Employer. 2 4. Salary. ------ Employer shall pay to Employee a salary of ONE HUNDRED SIX THOUSAND DOLLARS ($106,000.00) per twelve month period during the first twelve months of this Agreement, payable in bi-weekly installments or on such payroll dates established from time to time for Employer's senior management level employees. As of each October 1, commencing October 1, 1998, Employer shall fairly consider increases in Employee's base pay rate commensurate with his demonstrated capabilities both technically and considering new business opportunities developed by Employee. It is anticipated that, as a minimum, the percentage by which Employee's base salary rate shall be increased as of each October 1st will be reflective of increases in the Consumer Price Index or some similar measure of inflation's impact on purchasing power in the geographic area in which Employee resides. In the unlikely event that ESI fails to earn Net Income After Provision for State and Federal Taxes on Income of ten percent of the average book value of ESI's Shareholders' Equity during any year, Employee's salary may be adjusted downward, but in no event below Eighty Five Thousand Dollars per annum. The average book value of Shareholders' Equity for any fiscal year shall be determined in accordance with generally accepted accounting principals ("GAAP") by calculating the average of the book value at the beginning of the fiscal year, the book value at the end of each subsequent three month period during that fiscal year, and the book value at the end of the fiscal year (the five amounts are added together, and that result is divided by five). In the event of a reduction in the salary of Employee due to ESI's failure to achieve the net income levels required by the preceding paragraph, such reduction in base salary shall not extend past the end of the fiscal quarter which immediately follows the fiscal quarter during which the required net income goals are once again attained. All salary payments to Employee shall be subject to deduction therefrom of all payroll taxes, withholdings and assessments as are required by law and by such voluntary payroll deductions as Employee authorizes in writing, all as established from time to time pursuant to Employer's payroll policy. Anything set forth herein to the contrary notwithstanding, said salary shall be prorated to the actual period of Employee's employment hereunder. 5. Incentive Stock Option Plan of Employer --------------------------------------- During the period of Employee's employment he shall participate in Employer's Incentive Stock Option Plan. Initially Employer shall grant Employee options on 40,000 shares, each with an exercise price of one dollar per share. The terms of the Incentive Stock Option Plan (this explanation is merely a summary, thus the Plan itself should be examined for specific terms and conditions, it is agreed that in the event of any conflict, the terms of the Plan shall prevail) provide for vesting of 20% of the total shares granted during each of the first five years of an employee's employment, and allow up to ten years for an employee to exercise his vested options. 3 Irrespective of any provision of the Stock Option Agreement to the contrary, in the event of Employee's death or permanent disability (as certified by a licensed physician) while employed by Employer, all shares granted in Employee's stock option described in the preceding paragraph shall vest immediately, and Employee's estate, representative or the Employee, as the case may be, shall have one year from the date of such event in which to exercise any or all of the unexercised option. 6. Expenses -------- Employer will reimburse Employee from time to time for all necessary expenses incurred in connection with the performance of Employee's duties under this Agreement but only upon submission to Employer of good and sufficient supporting vouchers, receipts and the like for all such expenses for which Employee desires to receive reimbursement from Employer, and on forms utilized by Employer. Employee's right to reimbursement shall be subject to such policies as Employer establishes from time to time for its management employees. In the event that any applicable federal or state taxing authority denies for any reason the deduction by Employer for any reimbursed expense (except the portion of meals and entertainment expense which is not deductible under then applicable income tax law, currently 50% is not deductible) paid to Employee hereunder then, upon demand of Employer, Employee shall repay to Employer the full amount of all such disallowed reimbursed expense, as the case may be. 7. Termination of Employment. ------------------------- Anything set forth herein to the contrary notwithstanding, this Agreement shall terminate and shall be of no further force or effect whatsoever (except with respect to those provisions set forth in Sections 9 and 10 hereof which are hereby expressly intended to survive the termination of this Agreement) immediately upon the occurrence of any of the following events: (a) The expiration of the term of employment hereunder as provided for in Section 3 hereof; (b) The death of Employee; (c) At the sole option of Employer, if Employee is unable to unwilling to perform his assigned duties for any reason, including but not limited to sickness, accident or disability, beyond the period of Employee's accumulated sick leave, or beyond the time of such other leave of absence as the Employer customarily grants to its employees under similar circumstances, if any, or upon the total disability of Employee, as the case may be. (d) If Employee fails to carry out his duties faithfully, conscientiously and competently and does not correct any such failure to Employer's reasonable satisfaction within ten (10) days after written notice from Employer to Employee thereof; (e) At the sole option of Employer, if Employee accepts any employment by or for any other person, firm or corporation without Employer's prior written consent. (f) At sole option of Employer, if Employee should do any act offensive to 4 decency, morality or social propriety tending to result in scandal, hatred, proved or admitted allegations of sexual harassment, ridicule or contempt or if Employee should violate or be charged with a violation of any law which subjects Employee or Employer to any scandal, hatred, ridicule or contempt, or a judgment of a court of competent jurisdiction of monetary damages in excess of $50,000 for sexual harassment or job discrimination, or either pleads or is found guilty of any felony. (g) At the sole option of Employer, in the event that Employer ceases for any reason to conduct its business and activities in the State of California. Anything set forth herein to the contrary notwithstanding, Employee (or Employee's heirs, personal representatives, guardians or conservators, as the case may be) shall be entitled to receive from Employer any prorated salary, or other benefit which has accrued to Employee hereunder prior to any such termination of Employee's employment hereunder. 8. Vacation and Fringe Benefits ---------------------------- Employee shall be entitled to paid vacations, sick leave and other benefits as may be established by Employer from time to time as standard for comparable employees. For purposes of seniority in connection with vacation privileges and for length of service awards, Employee's hire date shall be considered to be October 1, 1990. In addition, Employee shall also be entitled to participate in such fringe benefit programs, if any, as may be provided for by Employer from time to time for the benefit of comparable employees during the terms of this Agreement and in which Employee is designated as a participant therein or beneficiary thereof. All of such programs and policies are hereby expressly made subject to adjustment, modification or cancellation by Employer from time to time in order to conform with Employer's managerial policies. 9. Nondisclosure of Information. ----------------------------- Employee acknowledges that during the course of his employment hereunder he will be acquiring, making use of and adding to confidential information of special and unique value to Employer and relating to such matters (by way of example only and without limitation thereto) as lists of Employer's and its affiliates' clients and their projects, Employer's pricing of client's projects and the compensation rates and professional abilities of fellow employees. Employee agrees that during the term of this Agreement and for the twenty four (24) month period next following the term hereof (without the prior written consent of the President of Keith, its successors or assigns), he will not as an individual or as a stockholder, partner, agent, employee, servant or representative of any person, firm corporation or association, either directly or indirectly divulge, disclose or communicate to any person, firm, corporation (other than Employer and its affiliates) or association in any manner whatsoever or take advantage of for his own economic gain or for the economic gain of others any information of any kind, nature or description concerning any matters 5 affecting or relating to Employer's business or affairs, including without limitation the names of any of its customers, its relations with its employees, including salaries, job classification and skill levels, its manner of operation, its copyrights, plans, processes or other data of any kind, nature or description, or any other information, of, about or concerning Employer's confidential business and affairs. All of such information is hereby determined and declared to be important, material, highly confidential, in the nature of trade secrets and vitally important to the successful conduct of Employer's business and the maintenance of its goodwill among its clients and employees. As a separate and distinct covenant hereby made by Employee to Employer, during the term hereof and within the period of twelve (12) calendar months thereafter, Employee shall not (as an individual or as a stockholder, partner, agent, employee or representative of any person, firm, corporation or association) engage in or have any direct or indirect interest in any business in competition with one or more of the businesses carried on by Employer or by any of its affiliates (whether subsequently carried on by the same organization or by any successors thereto) as presently conducted or as conducted at any time during the term of this Agreement or within said twelve (12) calendar month period thereafter in any geographical area within thirty miles of an Engineering office then operated by ESI or by any affiliate of the Keith Group of Companies, provided, however, that this paragraph shall not prevent Employee from acquiring and holding not to exceed two percent (2%) of the outstanding shares of any corporation engaged in such competitive business if such shares are available to the general public on a national or regional securities exchange or on the over the counter market. Employee acknowledges that concurrent with the execution of this Agreement, Keith is acquiring all of ESI's issued and outstanding capital stock from ESI's three owners, one of whom is Employee, and that Keith would not acquire said stock without the agreements not to compete and not to divulge trade secrets as set forth in this and the preceding two paragraphs. The various restrictions set forth in this Section 9 shall be deemed severable and the invalidity of any such restrictions shall not affect the validity of the remaining such restrictions. In the event of any breach by Employee of the terms and conditions hereof, Employer shall have the right, among other rights, to sue Employee for damages sustained thereby and to seek injunctive relief to restrain Employee from continuing with such breach. Employee agrees that this Section 9 shall survive the termination of his employment for any reason and Employee shall be bound by all of the terms and conditions hereof subsequent to the termination of his employment and for so long a period thereafter during said twelve (12) calendar month period as Employer or its affiliates (or their respective successors in interest or assigns, as the case may be) continue to conduct the same or substantially the same business at some or all of the places and locations within the continental United States where such business is or will during such period be conducted. Nothing herein contained shall in any way be deemed to limit, derogate from, modify or exclude any or all other rights granted by law or in equity to Employer as against Employee in the event of Employee's breach hereunder. 6 10. Possible Cash Bonus ------------------- Employee, who has been one of ESI's executives for many years, has been informed that ESI may have Net Operating Loss Carryforwards for Federal and/ or California Income Tax purposes ("NOL's") as of June 30, 1997 which may be available in future tax years to offset taxable income earned in such future years. To the extent that the NOL's achieve savings in either Federal or California Income Taxes that would otherwise be payable, and as reflected on the appropriate Federal Form 1120 and California Form 100 (or successors to such forms, if any), Employee shall be paid a cash bonus of 16.6% of said tax benefit. The cash bonus shall be paid within sixty days of the filing of the corporate income tax return, and it shall be subject to normal payroll tax withholdings and deductions which are then applicable to a normal cash bonus. 11. Miscellaneous ------------- (a) Partial Invalidity. If any term or provision of this Agreement ------------------- or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term or provision to persons and or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each such term and provision of this Agreement shall be valid and enforced to the fullest extent permitted by law. (b) Waivers. No waiver of any breach of any covenant or provision -------- herein contained shall be deemed a waiver of any preceding or succeeding breach thereof, or of any other covenant or provision herein contained. No extension of time for performance of any obligation or act shall be deemed an extension of the time for performance of any other obligation or act. (c) Assignment. Neither party shall assign, transfer or convey, ----------- voluntarily or involuntarily, it's rights and obligations under this Agreement without the prior written consent of the other property, which consent may be withheld in such party's sole discretion. (d) Successors and Assigns. This Agreement shall be binding upon and ----------------------- shall inure to the benefit of the permitted successors and assigns of the parties hereto. (e) Professional Fees. In the event of the bringing of any action ------------------ or suit by a party hereto against another party hereunder by reason of any breach of any of the covenants, agreements or provisions on the part of the other party arising out of this Agreement, then in that event the prevailing party shall be entitled to have and recover of and from the other party all costs and expenses of the action of suit, including actual attorneys', accounting and engineering fees, and any other professional fees resulting therefrom. (f) Entire Agreement. This Agreement (including all Exhibits ----------------- attached hereto) 7 is the final expression of, and contains the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior understandings with respect thereto. This Agreement may not be modified, changed, supplemented or terminated, nor may any obligations hereunder be waiver, except by a written instrument signed by the party to be charged or by its agent duly authorized in writing or as otherwise expressly permitted herein. The parties do not intend to confer any benefit hereunder on any person, firm or corporation other than the parties hereto. (g) Time of Essence. The parties hereby acknowledge and agree ---------------- that time is strictly of the essence with respect to each and every term, condition, obligation and provision hereof and that failure to timely perform any of the terms, conditions, obligations or provisions hereof by either party shall constitute a material breach of and a non-curable (but waivable) default under this Agreement by the party so failing to perform. (h) Construction. Headings at the beginning of each paragraph and ------------- subparagraph or section are solely for the convenience of the parties and are not a part of the Agreement. Whenever required by the context of this Agreement, the singular shall include the plural and the masculine shall include the feminine and vice versa. This Agreement shall not be construed as if it had been prepared by one of the parties, but rather as if both parties had prepared the same. Unless otherwise indicated, all references to paragraphs, sections and subparagraphs are to this Agreement. All exhibits referred to in this Agreement are attached and exhibits referred to in this Agreement are attached and incorporated by this reference. In the event the last date on which any party is required to take any action under the terms of this Agreement is not a business day, the action may be taken on the next succeeding business day. (i) Governing Law. The parties hereto acknowledge that this -------------- Agreement has been negotiated and entered into in the State of California. The parties hereto expressly agree that this Agreement shall be governed by, interpreted under, and construed and enforced in accordance with the laws of the State of California, and by the Superior Courts of Orange County. "EMPLOYER" ESI, ENGINEERING SERVICES, INC. A wholly owned subsidiary of THE KEITH COMPANIES, Inc. a California Corporation by /s/ Aram H. Keith ------------------------ Aram H. Keith, President by /s/ Floyd S. Reid ------------------------ Floyd S. Reid, Secretary 8 "EMPLOYEE" by /s/ Stephen J. Lane ------------------- Stephen J. Lane 9 EX-10.31 36 PROMISSORY NOTE DATED 2/21/1997 EXHIBIT 10.31 PROMISSORY NOTE =============== $ 100,000.00 DATE: February 21, 1997 ------------ ---------------------- Costa Mesa, California - ----------------------- (location where signed) For value received, the undersigned promises to pay in lawful money to Doug Travato at his offices at 31112 Via Limon, San Juan Capistrano, CA 92675, the sum of One hundred thousand dollars, ($100,000), plus interest. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence February 21, 1997. All principal and accrued interest shall be paid in full by January 1, 1998. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Executed this 6th day of March, 1997. by: /s/ ARAM H. KEITH - ------------------------------------------ Aram H. Keith for Keith International, Inc. 2955 Redhill Avenue Costa Mesa, CA 92626 EX-10.32 37 PROMISSORY NOTE DATED 2/26/1997 EXHIBIT 10.32 PROMISSORY NOTE $50,000 Costa Mesa, California February 26, 1997; Extension dated 8/26/97 For Value received, the undersigned Keith Engineering, Inc., a California Corporation, promises to pay in lawful money to Wycoff Company Money Purchase Pension Plan at their offices at 31571 Peppertree Bend, San Juan Capistrano, CA 92675, the sum of Fifty Thousand Dollars ($50,000 ) plus interest. This amount represents an additional six month extension of the original maturity date of a cash advance made on February 26, 1996 to the Maker hereof. The original maturity of the loan was August 26, 1996, which was extended to February 26, 1997, and is again extended to August 26, 1997 by the within Note, and is again extended to February 26, 1998. Interest at the rate of ten percent (10%) per annum on the unpaid balance of the within note shall be payable quarterly. All principal and accrued interest shall be paid in full by February 26, 1998. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The maker hereby waives extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Executed as of this 26th day of August, 1997. MAKER: KEITH ENGINEERING, INC. BY /s/ ARAM H. KEITH ----------------------------- Aram H. Keith, President EX-10.33 38 PROMISSORY NOTE DATED 2/10/1998 EXHIBIT 10.33 PROMISSORY NOTE =============== $150,000.00 DATE: 2/10/98 Costa Mesa, California For value received, the undersigned promises to pay in lawful money to Aram H. Keith. at his office at 2955 Redhill Avenue, Costa Mesa, California 92626, the sum of One Hundred Fifty Thousand dollars ($150,000.00), plus interest. This note arises from the assignment, as of this date, from the following: 1. That certain Promissory Note dated February 26, 1997, extended as of August 26, 1997, to a new maturity date of February 26, 1998, in the amount of $50,000 payable to the Wyckoff Company Money Purchase Pension Plan and 2. That certain Promissory note in the amount of $100,000, dated February 21, 1997 payable to Douglas and Ilene Trovato, which evidences a cash loan of $50,000 on February 21, 1997 and an additional cash loan of $50,000 on February 24, 1997. The above described Promissory Notes were assigned to Aram H. Keith in consideration for the transfer by him of certain shares of stock which he had owned in The Keith Companies, Inc. Interest shall be payable at the rate of ten percent (10%) per annum on the unpaid balance of the within note. Such interest shall commence February 10, 1998. Notwithstanding any other provision of this note, the undersigned agrees to pay interest on all sums of interest and principal at the rate of ten percent (10%) per annum from the date when due (whether or not such maturity results from the exercise of any option of the holder of this note) to date of payment. In the event of commencement of suit to enforce payment of this note, the undersigned agrees to pay such additional sum as attorney fees as the court may adjudge reasonable. The makers hereby waive extension of time payment, presentment and demand for payment, protest and notice of demand, protest non-payment or dishonor of this note. Executed as of the 10th day of February, 1998. KEITH ENGINEERING, INC. /s/ FLOYD S. REID By: Floyd S. Reid Secretary/Treasurer EX-23.1 39 CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors The Keith Companies, Inc. We consent to the use of our reports included herein and to the references to our firm under the heading "Experts" in the prospectus. KPMG LLP Orange County, California April 26, 1999 EX-27 40 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND MARCH 31, 1999 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS 3-MOS DEC-31-1998 DEC-31-1999 JAN-01-1998 JAN-01-1999 DEC-31-1998 MAR-31-1999 457 144 0 0 5,946 6,500 (364) (376) 0 0 10,917 11,887 6,040 6,312 (3,178) (3,338) 14,530 15,689 5,737 11,320 0 0 0 0 0 0 1,085 1,085 0 0 14,530 15,689 0 0 29,182 8,969 19,287 5,914 19,287 5,914 5,858 1,896 0 0 967 260 3,004 918 1,350 389 1,654 529 0 0 0 0 0 0 1,654 529 0 0 0 0
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