10-Q 1 0001.txt KEITH COMPANIES FORM 10-Q FOR PERIOD ENDED 6/30/00 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 Commission File Number 0-19655 THE KEITH COMPANIES, INC. -------------------------------------- (Exact name of registrant as specified in its charter) California 33-0203193 --------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2955 REDHILL AVENUE, COSTA MESA, CALIFORNIA 92626 --------------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (714) 540-0800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares outstanding of the registrant's common stock as of July 31, 2000 was 5,078,450. THE KEITH COMPANIES, INC. AND SUBSIDIARY INDEX PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 2 Consolidated Statements of Income 3 Condensed Consolidated Statements of Cash Flows 4 Notes to the Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Qualitative and Quantitative Disclosures about Market Risk 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities and Use of Proceeds 12 Item 3. Defaults Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 14 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE KEITH COMPANIES, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets
June 30, December 31, 2000 1999 ------------- -------------- (Unaudited) Assets Current assets: Cash and cash equivalents $ 736,000 $ 1,569,000 Contracts and trade receivables, net of allowance for doubtful accounts of $921,000 and $612,000 at June 30, 2000 and December 31, 1999, respectively 8,914,000 7,176,000 Costs and estimated earnings in excess of billings 5,683,000 5,037,000 Prepaid expenses and other current assets 552,000 501,000 ------------ -------------- Total current assets 15,885,000 14,283,000 Equipment and leasehold improvements, net 4,372,000 4,536,000 Goodwill, net of accumulated amortization of $205,000 and $109,000 at June 30, 2000 and December 31, 1999, respectively 4,582,000 4,678,000 Other assets 160,000 164,000 ------------ -------------- Total assets $24,999,000 $23,661,000 ============ ============== Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt and capital lease obligations $ 961,000 $ 1,292,000 Trade accounts payable 1,333,000 1,048,000 Accrued employee compensation 2,713,000 2,342,000 Current portion of deferred tax liabilities 1,102,000 1,102,000 Other accrued liabilities 1,297,000 734,000 Billings in excess of costs and estimated earnings 747,000 552,000 ------------ -------------- Total current liabilities 8,153,000 7,070,000 Long-term debt and capital lease obligations, less current portion 2,094,000 3,543,000 Other liabilities 201,000 212,000 ------------ -------------- Total liabilities 10,448,000 10,825,000 ------------ -------------- Shareholders' equity: Preferred stock, $0.001 par value. Authorized 5,000,000 shares; no shares issued or outstanding - - Common stock, $0.001 par value. Authorized 100,000,000 shares at June 30, 2000 and December 31, 1999; issued and outstanding 5,078,450 and 5,070,224 shares at June 30, 2000 and December 31, 1999, respectively, including shares held in treasury 5,000 5,000 Additional paid-in capital 12,339,000 12,317,000 Retained earnings 2,890,000 1,061,000 ------------ -------------- 15,234,000 13,383,000 Less treasury stock, at cost of 124,600 and 97,600 shares at June 30, 2000 and December 31, 1999, respectively 683,000 547,000 ------------ -------------- Total shareholders' equity 14,551,000 12,836,000 ------------ -------------- Commitments and contingencies (Note 3) Total liabilities and shareholders' equity $24,999,000 $23,661,000 ============ ==============
See accompanying notes to the condensed consolidated financial statements. 2 THE KEITH COMPANIES, INC. AND SUBSIDIARY Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended ------------------------------- --------------------------- June 30, June 30, June 30, June 30, 2000 1999 2000 1999 ------------- ------------ -------------- ------------ Gross revenue $13,567,000 $9,471,000 $26,674,000 $19,470,000 Subcontractor costs 886,000 828,000 1,574,000 1,857,000 ------------- ------------ -------------- ------------ Net revenue 12,681,000 8,643,000 25,100,000 17,613,000 Costs of revenue 8,307,000 5,786,000 16,689,000 11,701,000 ------------- ------------ -------------- ------------ Gross profit 4,374,000 2,857,000 8,411,000 5,912,000 Selling, general and administrative expenses 2,486,000 1,797,000 5,136,000 3,693,000 ------------- ------------ -------------- ------------ Income from operations 1,888,000 1,060,000 3,275,000 2,219,000 Interest expense 88,000 268,000 195,000 529,000 Other expense (income), net 22,000 (10,000) 32,000 (30,000) ------------- ------------ -------------- ------------ Income before provision for income taxes 1,778,000 802,000 3,048,000 1,720,000 Provision for income taxes 711,000 340,000 1,219,000 729,000 ------------- ------------ -------------- ------------ Net income 1,067,000 462,000 1,829,000 991,000 Accretion of redeemable securities to redemption value - (57,000) - (114,000) ------------- ------------ -------------- ------------ Net income available to common shareholders $ 1,067,000 $ 405,000 $ 1,829,000 $ 877,000 ============= ============ ============== ============ Earnings per share data: Basic $ 0.22 $ 0.12 $ 0.37 $ 0.25 ============= ============ ============== ============ Diluted $ 0.20 $ 0.11 $ 0.35 $ 0.23 ============= ============ ============== ============ Weighted average number of shares outstanding: Basic 4,956,942 3,485,634 4,958,025 3,485,634 ============= ============ ============== ============ Diluted 5,238,537 3,750,627 5,254,864 3,750,613 ============= ============ ============== ============
See accompanying notes to the condensed consolidated financial statements. 3 THE KEITH COMPANIES, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended -------------------------- June 30, June 30, 2000 1999 ----------- ---------- Cash flows from operating activities: Net income $ 1,829,000 $ 991,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 740,000 381,000 Changes in operating assets and liabilities: Contracts and trade receivables (1,738,000) (24,000) Costs and estimated earnings in excess of billings (646,000) (849,000) Prepaid expenses and other current assets 12,000 (32,000) Deferred tax assets - 375,000 Other assets 4,000 (157,000) Trade accounts payable and accrued liabilities 1,219,000 111,000 Billings in excess of costs and estimated earnings 195,000 (61,000) Other liabilities (11,000) (2,000) Accrued liabilities to related parties - 49,000 ----------- --------- Net cash provided by operating activities 1,604,000 782,000 ----------- --------- Cash flows from investing activities - additions to equipment and leasehold improvements (480,000) (415,000) ----------- --------- Cash flows from financing activities: (Payments on) proceeds from line of credit, net (1,125,000) 204,000 Principal payments on long-term debt and capital lease obligations, including current portion (718,000) (624,000) Purchase of common stock for treasury (136,000) - Proceeds from issuance of common stock 22,000 - Payment of deferred offering costs - (330,000) ----------- --------- Net cash used in financing activities (1,957,000) (750,000) ----------- --------- Net decrease in cash and cash equivalents (833,000) (383,000) Cash and cash equivalents, beginning of period 1,569,000 457,000 ----------- --------- Cash and cash equivalents, end of period $ 736,000 $ 74,000 =========== =========
See supplemental cash flow information at Note 6 See accompanying notes to the condensed consolidated financial statements. 4 THE KEITH COMPANIES, INC. AND SUBSIDIARY Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying condensed consolidated balance sheet as of June 30, 2000, the consolidated statements of income for the three and six months ended June 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the six months ended June 30, 2000 and 1999, are unaudited and in the opinion of management include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. The results of operations for these interim periods are not necessarily indicative of results for the full year. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K of The Keith Companies, Inc. ("TKCI" and together with its subsidiary, the "Company") for the fiscal year ended December 31, 1999 as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report. 2. Treasury Stock Purchased During the six months ended June 30, 2000, the Company acquired 27,000 shares of its common stock at a cost of $136,000. There were no such purchases during the six months ended June 30, 1999. As of June 30, 2000, the Company has acquired 124,600 shares of its common stock at a cost of $683,000. 3. Per Share Data Basic EPS is computed by dividing earnings available to common shareholders 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 shareholders 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. Net income available to common shareholders is used in the basic and diluted EPS calculations as the assumed impact of the redeemable securities would be anti-dilutive.
Three Months Ended Six Months Ended --------------------- -------------------- June 30, June 30, June 30, June 30, 2000 1999 2000 1999 --------- --------- --------- --------- Weighted average shares used for the basic EPS computation (deemed outstanding the entire period) 4,956,942 3,485,634 4,958,025 3,485,634 Incremental shares from the assumed exercise of dilutive stock options and stock warrants 133,595 264,993 148,839 264,979 Contingently issuable shares 148,000 - 148,000 - --------- --------- --------- --------- Weighted average shares used for the diluted EPS computation 5,238,537 3,750,627 5,254,864 3,750,613 ========= ========= ========= =========
In conjunction with the acquisition of substantially all of the assets and the assumption of substantially all of the liabilities of Thompson-Hysell, Inc. ("Thompson-Hysell") in July 1999, the Company agreed to pay contingent consideration consisting of shares of its common stock, which may be issuable in 2000 based on certain 1999 financial targets being met. As of June 30, 2000, the contingent consideration to be issued has not been finalized, therefore, the Company estimated and included 148,000 contingently issuable shares in its weighted average shares used for the diluted EPS computation. Anti-dilutive potential common shares excluded from the above calculations were 663,736 and 633,461 for the three and six months ended June 30, 2000, respectively and 2,192 and 1,102 for the three and six months ended June 30, 1999, respectively. 5 THE KEITH COMPANIES, INC. AND SUBSIDIARY Notes to the Condensed Consolidated Financial Statements (Unaudited) 4. Indebtedness On September 1, 1999, the Company entered into a new line of credit agreement with a bank to fund working capital needs and acquisitions of equipment. As of June 30, 2000, there were no outstanding borrowings on the equipment component of the line of credit and the working capital component had outstanding borrowings of $175,000 bearing interest at prime (9.5%). 5. 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 Telecommunications ("REPWT") segment includes engineering and consulting services for the development of both private projects, like residential communities, commercial and industrial properties and recreational projects; and public works projects, such as transportation and water/sewage facilities; and site acquisition and construction management services for wireless telecommunications. The Industrial, Process and Manufacturing ("IPM") segment provides the technical expertise and management required to design and test manufacturing facilities and processes. The following tables set forth certain information regarding the Company's operating segments for the three and six months ended June 30, 2000 and 1999:
Three Months Ended June 30, 2000 ----------------------------------------------------------------------------------------------------------- Corporate REPWT IPM Costs Consolidated ----------- ---------- ----------- ------------ Net revenue $11,585,000 $1,096,000 $ - $12,681,000 Income (loss) from operations $ 2,945,000 $ 132,000 $(1,189,000) $ 1,888,000 Identifiable assets $23,714,000 $1,285,000 $ - $24,999,000 Three Months Ended June 30, 1999 ----------------------------------------------------------------------------------------------------------- Corporate REPWT IPM Costs Consolidated ----------- ---------- ----------- ------------ Net revenue $ 7,776,000 $ 867,000 $ - $ 8,643,000 Income (loss) from operations $ 1,899,000 $ 8,000 $ (847,000) $ 1,060,000 Identifiable assets $14,068,000 $1,760,000 $ - $15,828,000 Six Months Ended June 30, 2000 ----------------------------------------------------------------------------------------------------------- Corporate REPWT IPM Costs Consolidated ----------- ---------- ----------- ------------ Net revenue $22,866,000 $2,234,000 $ - $25,100,000 Income (loss) from operations $ 5,322,000 $ 343,000 $(2,390,000) $ 3,275,000 Six Months Ended June 30, 1999 ----------------------------------------------------------------------------------------------------------- Corporate REPWT IPM Costs Consolidated ----------- ---------- ----------- ------------ Net revenue $15,770,000 $1,843,000 $ - $17,613,000 Income (loss) from operations $ 3,873,000 $ 40,000 $(1,694,000) $ 2,219,000
6 THE KEITH COMPANIES, INC. AND SUBSIDIARY Notes to the Condensed Consolidated Financial Statements (Unaudited) 6. Supplemental Cash Flow Information
Six Months Ended June 30, ------------------------------- 2000 1999 ----------- ----------- Supplemental disclosure of cash flow information: Cash paid for interest $234,000 $472,000 =========== =========== Cash paid for income taxes $455,000 $ 2,000 =========== =========== Noncash financing and investing activities: Capital lease obligations recorded in connection with equipment acquisitions $ - $ 72,000 =========== =========== Purchase price adjustment $ - $ 60,000 =========== =========== Accretion of redeemable securities $ - $114,000 =========== =========== Insurance financing $ 63,000 $ - =========== =========== Accrued deferred offering costs $ - $513,000 =========== ===========
7. Subsequent Events On July 27, 2000, TKCI signed a non-binding letter of intent to acquire a company based in southern California with approximately 65 employees. The company's services include land development design, infrastructure design, and landscape architecture. TKCI anticipates closing the acquisition in the fourth quarter of 2000. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the condensed consolidated financial statements of TKCI and its subsidiary and the related notes included elsewhere in this Form 10-Q and the Annual Report on Form 10-K for the fiscal year ended December 31, 1999 filed by the Company. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under "Risk Factors" and elsewhere in the Annual Report on Form 10-K filed by the Company. In this Management's Discussion and Analysis of Financial Condition and Results of Operations section, references to "TKCI", "we", "our" and "us" mean TKCI and its subsidiary. Overview In December 1997, TKCI purchased ESI and its wholly-owned subsidiary ESII, Engineered Systems Integration, Inc., which was subsequently merged into ESI. In August 1998, TKCI purchased John M. Tettemer and Associates. In July 1999, we acquired substantially all of the assets and assumed substantially all of the liabilities of Thompson-Hysell. We derive most of our revenue from professional service activities. The majority of these activities are billed under various types of contracts with our clients, including fixed fee and time and material contracts. Most of our time and material contracts have not-to-exceed provisions. Revenue is recognized on the percentage of completion method of accounting based on the proportion of actual direct contract costs incurred to total estimated direct contract costs. We believe that costs incurred are the best available measure of progress towards completion on the contracts. In the course of providing services, we sometimes subcontract for various services. These costs are included in billings to clients and, in accordance with industry practice, are included in our gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, we also report net revenue, which is gross revenue less subcontractor costs. Our revenue is generated from a large number of relatively small contracts. For the periods presented, a substantial portion of our net revenue was derived from services rendered in connection with commercial and residential real estate development projects. The real estate market has historically experienced 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. A majority of our net revenue for the periods presented, was 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 in southern California may decline. Costs of revenue include labor, non-reimbursable subcontract costs, materials and various direct and indirect overhead costs including rent, utilities and depreciation. Selling, general, and administrative expenses consist primarily of corporate costs related to finance and accounting, information technology, business development and marketing, contract proposal, executive salaries, amortization of goodwill, provisions for doubtful accounts and other indirect overhead costs. 8 Results of Operations The following table sets forth unaudited historical consolidated operating results for each of the periods presented as a percentage of net revenue.
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2000 1999 2000 1999 -------- -------- -------- -------- Gross revenue 107% 110% 106% 111% Subcontractor costs 7% 10% 6% 11% ---- ---- ---- ---- Net revenue 100% 100% 100% 100% Costs of revenue 66% 67% 66% 66% ---- ---- ---- ---- Gross profit 34% 33% 34% 34% Selling, general and administrative expenses 20% 21% 20% 21% ---- ---- ---- ---- Income from operations 14% 12% 14% 13% Interest expense - 3% 2% 3% ---- ---- ---- ---- Income before provision for income taxes 14% 9% 12% 10% Provision for income taxes 6% 4% 5% 4% ---- ---- ---- ---- Net income 8% 5% 7% 6% Accretion of redeemable securities to redemption value - - - (1%) ---- ---- ---- ---- Net income available to common shareholders 8% 5% 7% 5% ==== ===== ==== ====
Three and Six Months Ended June 30, 2000 and June 30, 1999 Revenue. Net revenue for the three months ended June 30, 2000 was $12.7 million compared to $8.6 million for the three months ended June 30, 1999, an increase of $4.0 million, or 47%. Net revenue for the six months ended June 30, 2000 was $25.1 million compared to $17.6 million for the six months ended June 30, 1999, an increase of $7.5 million, or 43%. Net revenue increased by $3.1 million and $5.8 million for the three and six months ended June 30, 2000, respectively, as a result of our acquisition of Thompson-Hysell in July 1999. Excluding the revenue as a result of the acquisition, our net revenue grew $937,000 or 11%, and $1.7 million or 10% for the three and six months ended June 30, 2000, respectively, compared to the three and six months ended June 30, 1999. The net revenue growth resulted primarily from the continued demand for housing in California and Nevada, and water resource and industrial, process and manufacturing projects in California. Subcontractor costs, as a percentage of net revenue, declined to 7% and 6% for three and six months ended June 30, 2000, respectively, compared to 10% and 11% for the three and six months ended June 30, 1999. The percentage decline in subcontractor costs resulted primarily from a significant reduction in subcontract services for a large contract in our industrial, process and manufacturing segment. Gross Profit. Gross profit for the three months ended June 30, 2000 was $4.4 million compared to $2.9 million for the three months ended June 30, 1999, an increase of $1.5 million, or 53%. Gross profit for the six months ended June 30, 2000 was $8.4 million compared to $5.9 million for the six months ended June 30, 1999, an increase of $2.5 million, or 42%. The gross profit growth is attributable to both our acquisition of Thompson-Hysell and certain other revenue increases. As a percentage of net revenue, gross profit increased to 34% for the three months ended June 30, 2000 compared to 33% for the three months ended June 30, 1999. For the six months ended June 30, 2000, gross profit, as a percentage of net revenue, remained at 34% compared to the six months ended June 30, 1999. During the three and six months ended June 30, 2000, the gross profit percentage increased as a result of higher profit margins generated through our acquisition of Thompson-Hysell and higher profit margins in our industrial, process and manufacturing segment, partially offset by an increase in the employer matching contribution of our 401(K) plan in 2000. In addition, the six months ended June 30, 2000 was negatively impacted by lower margins on two large projects discussed in our previous quarterly filing. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30, 2000 were $2.5 million compared to $1.8 million for the three months ended June 30, 1999, an increase of $689,000, or 38%. Selling, general and administrative expenses for the six months ended June 30, 2000 were $5.1 million compared to $3.7 million for the six months ended June 30, 1999, an increase of $1.4 million or 39%. The increases in selling, general and administrative expenses resulted primarily from our acquisition of Thompson-Hysell, including the amortization of 9 goodwill; employee recruiting costs; and other costs associated with operating as a public company. As a percentage of net revenue, selling, general and administrative expenses decreased to 20% for the three and six months ended June 30, 2000 from 21% for the three and six months ended June 30, 1999. The percentage decreases were due principally to economies of scale associated with our acquisition of Thompson-Hysell, which has resulted in lower administrative costs in comparison to revenue generated. Interest Expense. Interest expense for the three months ended June 30, 2000 was $88,000 compared to $268,000 for the three months ended June 30, 1999, a decrease of $180,000, or 67%. Interest expense for the six months ended June 30, 2000 was $195,000 compared to $529,000 for the six months ended June 30, 1999, a decrease of $334,000, or 63%. The lower interest expense resulted largely from repayment of our previous line of credit and various related party notes payable with a portion of the net proceeds from our initial public offering in July 1999. Income Taxes. For the three months ended June 30, 2000, the provision for income taxes was $711,000 compared to $340,000 for the three months ended June 30, 1999. The provision for income taxes for the six months ended June 30, 2000 was $1.2 million compared to $729,000 for the six months ended June 30, 1999. The increase in income tax expense was due primarily to a higher taxable income base, mitigated by a lower effective income tax rate. Liquidity and Capital Resources We have financed our working capital needs and capital expenditure requirements primarily through a combination of internally generated funds and bank borrowings. Working capital as of June 30, 2000 was $7.7 million compared to $7.2 million as of December 31, 1999, an increase of $519,000 or 7%, primarily due to an increase in contract and trade receivables, offset by an increase in income tax payable, which is included in other accrued liabilities. The debt to equity ratio as of June 30, 2000 was 0.21 to 1 compared to 0.38 to 1 as of December 31, 1999, an improvement of 45%. Net cash provided by operating activities increased $822,000 to $1.6 million for the six months ended June 30, 2000, compared to $782,000 for the six months ended June 30, 1999. The growth in operating cash flow resulted primarily from higher income before the effects of depreciation and amortization. The growth in cash generated from operating activities was used primarily to substantially payoff our line of credit, make principal payments on long-term and short-term debt and capital leases, fund capital expenditures and to purchase 27,000 treasury shares at a cost of $136,000. Our line of credit agreement has a working capital component with a maximum outstanding principal balance of $6,000,000 and an equipment component with a maximum outstanding principal balance of $3,500,000. The aggregate outstanding principal balance of working capital advances and equipment advances may not exceed $8,500,000. As of June 30, 2000, there were no outstanding borrowings on the equipment component of the line of credit and the working capital component had outstanding borrowings of $175,000 bearing interest at prime (9.5%). We believe existing cash balances, internally generated funds, and availability under credit facilities 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. Due to the short-term nature of most of our contracts, if costs of revenue increase, we attempt to pass these increases onto our clients. Impact of the Year 2000 Issue To date, we have not experienced any significant disruptions to our financial or operating activities caused by failure of our computerized systems resulting from Year 2000 issues. We do not expect Year 2000 issues to have a material adverse effect on our operations or financial results in 2000. In addition, we have no information that indicates a significant vendor or service provider may be unable to sell goods or provide services to us or that any significant customer may be unable to purchase from us because of Year 2000 issues. Further, we have not received any notifications from lenders or regulatory agencies to which we are subject indicating that (1) a lender considers or may consider us to be in violation of a loan agreement; or (2) significant regulatory action is being or may be taken against us as a result of Year 2000 issues. 10 Item 3: Quantitative and Qualitative Disclosures About Market Risk We are exposed to interest rate changes primarily as a result of our line of credit and long-term debt, which are used to maintain liquidity and to fund capital expenditures and our expansion. To help limit the impact of interest rate changes on earnings and cash flows, we have borrowed at fixed rates where possible. Our bank line of credit is based on variable interest rates and is therefore affected by changes in market rates. We do not enter into derivative or interest rate transactions. The table below presents the principal amounts of debt (excluding capital lease obligations of $953,000), weighted average interest rates, fair values and other items required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of June 30, 2000. Fair 2000 2001 2002 2003 2004 Total Value(/1/) -------- ---------- -------- ------- ------- ------------ ---------- Fixed rate debt (/2/) $138,000 $1,473,000 $110,000 $70,000 $15,000 $1,806,000 $1,806,000 Average interest rate 8.1% 9.8% 8.3% 8.3% 8.5% 9.5% 9.5% Variable rate debt - $ 175,000 - - - $ 175,000 $ 175,000 Average interest rate - 9.5% - - - 9.5% 9.5%
----------------------- (/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 $121,000 as there is no established market for these notes. As the table incorporates only those exposures that existed as of June 30, 2000, it does not consider those exposures or positions which could arise after that date. Moreover, because firm commitments are not presented in the table above, the information presented in the table has limited predictive value. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on those exposures or positions that arise during the period and interest rates. 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings On August 13, 1999, a complaint was filed in the Stanislaus County, California Superior Court against Thompson-Hysell, four shareholders of Thompson-Hysell (the "Defendant Shareholders"), Thompson-Hysell Liquidation Corporation, Thompson-Hysell Engineers, Inc. and us. This complaint was filed by Phillip Kirk Delamare and his wife Catherine A. Delamare who are shareholders of a corporation named Thompson-Hysell Engineers, Inc. ("T-H Engineers"), in which the Defendant Shareholders were majority shareholders and directors. The complaint alleges, among other things, that Thompson-Hysell was an alter ego of T-H Engineers and as such, when we acquired substantially all of the assets and assumed substantially all of the liabilities of Thompson-Hysell, the plaintiffs were fraudulently deprived of any benefit derived from their ownership interest in the shares of T-H Engineers. The complaint further alleges that the Defendant Shareholders breached their fiduciary duties as directors and majority shareholders of T-H Engineers and that they conspired with Thompson-Hysell and us to defraud T-H Engineers of its assets and to exclude plaintiffs from any benefit derived from the acquisition. The plaintiffs in this action are seeking injunctive relief and general monetary damages in an unspecified amount, special damages in the amount of $600,000, interest, costs and punitive and exemplary damages. The trial, which was previously set to occur on April 17, 2000, was continued until July 17, 2000. A motion to have TKCI dismissed as defendants in this litigation was sustained with leave to amend. In light of this ruling, the July 17, 2000 trial date was vacated and the plaintiff is expected to file a first amended complaint at which point a new trial date will be set. We believe that the claim made against us is completely without merit and intend to vigorously defend ourselves in this action. Item 2. Changes In Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On May 15, 2000, at the annual meeting of the shareholders of the Company, the shareholders were asked to vote on the election of a new board of directors for the next year or until their successors are elected. The result of said voting is as follows: Individual For Withheld -------------------------- ----------------- ----------------- Aram H. Keith 4,134,581 26,757 Gary C. Campanaro 4,134,581 26,757 Walter W. Cruttenden, III 4,134,581 26,757 George Deukmejian 4,134,211 27,127 Christine Diemer Iger 4,134,581 26,757 In addition, the shareholders were asked to ratify the appointment of KPMG LLP as our independent auditors for fiscal 2000 and to transact such other business as may properly come before the meeting or any adjournments and postponements thereof. The results of the ratification of the appointment of KPMG LLP as our independent auditors for fiscal 2000 were: for 4,115,712; against 24,552; and abstain 21,074. No other matters were submitted to a vote of the shareholders during the period covered by this report. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibits 12 Number Description ------ ----------- 27 Financial Data Schedule (b) Reports on Form 8-K None 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 11, 2000 THE KEITH COMPANIES, INC. By: /s/ Aram H. Keith ----------------------------------- Aram H. Keith Chairman of the Board of Directors and Chief Executive Officer By: /s/ Gary C. Campanaro ----------------------------------- Gary C. Campanaro Chief Financial Officer and Secretary 14