-----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, I5/5hbNEQisKEn2wgP3CqYpBFTQ0JwhdLReURVyoeXnDJUIoFJy4zwp2jylcHwW8 vlbF25ItHFb4b10IMz5PZg== /in/edgar/work/0001017062-00-002274/0001017062-00-002274.txt : 20001114 0001017062-00-002274.hdr.sgml : 20001114 ACCESSION NUMBER: 0001017062-00-002274 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEITH COMPANIES INC CENTRAL INDEX KEY: 0001080922 STANDARD INDUSTRIAL CLASSIFICATION: [8711 ] IRS NUMBER: 330203193 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26561 FILM NUMBER: 761619 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 10-Q 1 0001.txt FORM 10-Q FOR THE KEITH COMPANIES, INC. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 Commission File Number 0-26561 THE KEITH COMPANIES, INC. ------------------------ (Exact name of registrant as specified in its charter) California 33-0203193 - --------------------------------- ----------------------------------- (State or other jurisdiction 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 October 31, 2000 was 5,200,707. 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. Quantitative and Qualitative 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 13 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE KEITH COMPANIES, INC. AND SUBSIDIARY Condensed Consolidated Balance Sheets
September 30, December 31, 2000 1999 ------------- ------------ (Unaudited) Assets Current assets: Cash and cash equivalents $ 1,241,000 $ 1,569,000 Contracts and trade receivables, net of allowance for doubtful accounts of $1,102,000 and $612,000 at September 30, 2000 and December 31, 1999, respectively 8,819,000 7,176,000 Costs and estimated earnings in excess of billings 6,193,000 5,037,000 Prepaid expenses and other current assets 417,000 501,000 ----------- ----------- Total current assets 16,670,000 14,283,000 Equipment and leasehold improvements, net 4,625,000 4,536,000 Goodwill, net of accumulated amortization of $253,000 and $109,000 at September 30, 2000 and December 31, 1999, respectively 5,165,000 4,678,000 Other assets 154,000 164,000 ----------- ----------- Total assets $26,614,000 $23,661,000 =========== =========== Liabilities And Shareholders' Equity Current liabilities: Issuable common stock $ 631,000 $ -- Current portion of long-term debt and capital lease obligations 2,003,000 1,292,000 Trade accounts payable 1,592,000 1,048,000 Current portion of deferred tax liabilities 1,102,000 1,102,000 Billings in excess of costs and estimated earnings 804,000 552,000 Other accrued liabilities 3,812,000 3,076,000 ----------- ----------- Total current liabilities 9,944,000 7,070,000 Long-term debt and capital lease obligations, less current portion 429,000 3,543,000 Other liabilities 196,000 212,000 ----------- ----------- Total liabilities 10,569,000 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 September 30, 2000 and December 31, 1999; issued and outstanding 5,080,544 and 5,070,224 shares at September 30, 2000 and December 31, 1999, respectively, including shares held in treasury 5,000 5,000 Additional paid-in capital 12,345,000 12,317,000 Retained earnings 4,378,000 1,061,000 ----------- ----------- 16,728,000 13,383,000 Less treasury stock, at cost of 124,600 and 97,600 shares at September 30, 2000 and December 31, 1999, respectively 683,000 547,000 ----------- ----------- Total shareholders' equity 16,045,000 12,836,000 ----------- ---------- Total liabilities and shareholders' equity $26,614,000 $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 Nine Months Ended ------------------------------ ----------------------------- September 30, September 30, September 30, September 30, 2000 1999 2000 1999 ------------- -------------- ------------- ------------- Gross revenue $ 14,541,000 $ 11,397,000 $ 41,215,000 $ 30,867,000 Subcontractor costs 903,000 739,000 2,477,000 2,596,000 ------------ ------------ ------------ ------------ Net revenue 13,638,000 10,658,000 38,738,000 28,271,000 Costs of revenue 8,448,000 7,350,000 25,137,000 19,051,000 ------------ ------------ ------------ ------------ Gross profit 5,190,000 3,308,000 13,601,000 9,220,000 Selling, general and administrative expenses 2,756,000 2,211,000 7,892,000 5,904,000 ------------ ------------ ------------ ------------ Income from operations 2,434,000 1,097,000 5,709,000 3,316,000 Interest expense 65,000 149,000 260,000 678,000 Other (income) expense, net (111,000) 132,000 (79,000) 102,000 ------------ ------------ ------------ ------------ Income before provision for income taxes 2,480,000 816,000 5,528,000 2,536,000 Provision for income taxes 992,000 347,000 2,211,000 1,076,000 ------------ ------------ ------------ ------------ Net income 1,488,000 469,000 3,317,000 1,460,000 Reversal of redeemable securities to redemption value, net -- 344,000 -- 230,000 ------------ ------------ ------------ ------------ Net income available to common shareholders $ 1,488,000 $ 813,000 $ 3,317,000 $ 1,690,000 ============ ============ ============ ============ Earnings per share data: Basic $ 0.30 $ 0.17 $ 0.67 $ 0.43 ============ ============ ============ ============ Diluted $ 0.29 $ 0.16 $ 0.63 $ 0.40 ============ ============ ============ ============ Weighted average number of shares outstanding: Basic 4,954,639 4,807,300 4,956,827 3,931,030 ============ ============ ============ ============ Diluted 5,220,775 5,063,349 5,224,293 4,213,751 ============ ============ ============ ============
See accompanying notes to the condensed consolidated financial statements. 3 THE KEITH COMPANIES, INC. AND SUBSIDIARY Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended ----------------------------- September 30, September 30, 2000 1999 ------------ ------------- Cash flows from operating activities: Net income $ 3,317,000 $ 1,460,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,119,000 652,000 Changes in operating assets and liabilities, net of effects from acquisitions: Contracts and trade receivables, net (1,643,000) 564,000 Costs and estimated earnings in excess of billings (1,156,000) (1,945,000) Prepaid expenses and other current assets 112,000 95,000 Deferred tax assets -- 375,000 Other assets 10,000 (30,000) Trade accounts payable and accrued liabilities 1,280,000 989,000 Billings in excess of costs and estimated earnings 252,000 (19,000) Other liabilities (16,000) 3,000 Accrued liabilities to related parties -- (185,000) ------------ ------------ Net cash provided by operating activities 3,275,000 1,959,000 ------------ ------------ Cash flows from investing activities: Net cash expended in connection with acquisitions -- (3,659,000) Additions to equipment and leasehold improvements, net (1,064,000) (840,000) ------------ ------------ Net cash used in investing activities (1,064,000) (4,499,000) ------------ ------------ Cash flows from financing activities: Payments on line of credit, net (1,300,000) (4,527,000) Principal payments on long-term debt and capital lease obligations, including current portion (1,131,000) (989,000) Payments on notes payable to related parties -- (2,401,000) Purchase of common stock for treasury (136,000) -- Proceeds from issuance of common stock, net 28,000 12,447,000 Payment of deferred offering costs -- (1,101,000) ------------ ------------ Net cash (used in) provided by financing activities (2,539,000) 3,429,000 ------------ ------------ Net (decrease) increase in cash and cash equivalents (328,000) 889,000 Cash and cash equivalents, beginning of period 1,569,000 457,000 ------------ ------------ Cash and cash equivalents, end of period $ 1,241,000 $ 1,346,000 ============ ============
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 September 30, 2000, the consolidated statements of income for the three and nine months ended September 30, 2000 and 1999, and the condensed consolidated statements of cash flows for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 1999. As of September 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 Nine Months Ended --------------------- --------------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2000 1999 2000 1999 --------- --------- --------- --------- Weighted average shares used for the basic EPS computation (deemed outstanding the entire period) 4,954,639 4,807,300 4,956,827 3,931,030 Incremental shares from the assumed exercise of dilutive stock options and stock warrants 145,979 256,049 147,309 282,721 Issuable common stock 120,157 -- 120,157 -- --------- --------- --------- --------- Weighted average shares used for the diluted EPS computation 5,220,775 5,063,349 5,224,293 4,213,751 ========= ========= ========= =========
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 based on certain 1999 financial targets being met. During the three months ended September 30, 2000, this contingent consideration was finalized, therefore, the Company included 120,157 issuable shares in its weighted average shares used for the diluted EPS computation. On October 31, 2000, the Company issued the 120,157 shares of its common stock. Anti-dilutive weighted potential common shares excluded from the above calculations were 657,773 and 641,624 for the three and nine months ended September 30, 2000, respectively and 336,902 and 147,115 for the three and nine months ended September 30, 1999, respectively. On September 30, 2000, 304,267 anti-dilutive potential 5 THE KEITH COMPANIES, INC. AND SUBSIDIARY Notes to the Condensed Consolidated Financial Statements (Unaudited) common shares were cancelled. On April 2, 2001, approximately the same number of potential common shares will be granted to employees with an option price equal to the fair market value at that date. 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 September 30, 2000, there were no outstanding borrowings on the working capital component or equipment component of the line of credit. 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 and to facilitate the construction of alternative electrical power systems that supplement public power supply and large scale power consumers. The following tables set forth certain information regarding the Company's operating segments for the three and nine months ended September 30, 2000 and 1999:
Three Months Ended September 30, 2000 --------------------------------------------------------------------------------------- Corporate REPWT IPM Costs Consolidated ----------- ----------- ----------- ------------ Net revenue $12,576,000 $ 1,062,000 $ -- $13,638,000 Income (loss) from operations $ 3,546,000 $ 139,000 $(1,251,000) $ 2,434,000 Identifiable assets $24,891,000 $ 1,723,000 $ -- $26,614,000
Three Months Ended September 30, 1999 --------------------------------------------------------------------------------------- Corporate REPWT IPM Costs Consolidated ----------- ----------- ----------- ------------ Net revenue $ 9,715,000 $ 943,000 $ -- $10,658,000 Income (loss) from operations $ 1,809,000 $ 135,000 $ (847,000) $ 1,097,000 Identifiable assets $22,827,000 $ 1,340,000 $ -- $24,167,000
Nine Months Ended September 30, 2000 --------------------------------------------------------------------------------------- Corporate REPWT IPM Costs Consolidated ----------- ----------- ----------- ------------ Net revenue $35,443,000 $ 3,295,000 $ -- $38,738,000 Income (loss) from operations $ 8,869,000 $ 483,000 $(3,643,000) $ 5,709,000
Nine Months Ended September 30, 1999 --------------------------------------------------------------------------------------- Corporate REPWT IPM Costs Consolidated ----------- ----------- ----------- ------------ Net revenue $25,485,000 $ 2,786,000 -- $28,271,000 Income (loss) from operations $ 5,682,000 $ 175,000 $(2,541,000) $ 3,316,000
6 THE KEITH COMPANIES, INC. AND SUBSIDIARY Notes to the Condensed Consolidated Financial Statements (Unaudited) 6. Supplemental Cash Flow Information
Nine Months Ended September 30, ------------------------ 2000 1999 ------------ --------- Supplemental disclosure of cash flow information: Cash paid for interest $ 299,000 $ 856,000 ============ ========= Cash paid for income taxes $ 2,306,000 $ 124,000 ============ ========= Noncash financing and investing activities: Capital lease obligations recorded in connection with equipment acquisitions $ -- $ 258,000 ============ ========= Purchase price adjustment $ 631,000 $ 60,000 ============ ========= Accretion of redeemable securities $ -- $(230,000) ============ ========= Insurance financing $ 28,000 $ -- ============ ========= Accrued deferred offering costs $ -- $(291,000) ============ =========
In September 2000, the Company finalized certain of the contingent consideration associated with the acquisition of substantially all of the assets and the assumption of substantially all of the liabilities of Thompson-Hysell. A purchase price adjustment of $631,000 was recorded to goodwill and current liabilities to account for the 120,157 shares of issuable common stock (see note 3). On October 31, 2000, the Company issued the 120,157 shares of its common stock, resulting in the reclassification of the issuable common stock out of current liabilities and into common stock and additional paid-in capital subsequent to September 30, 2000. 7. Subsequent Event On October 13, 2000, TKCI acquired all of the outstanding common stock of Crosby Mead Benton & Associates ("CMB"). The purchase price was approximately $2.2 million, consisting of cash of $1.2 million and common stock of $1.0 million, which is subject to adjustment based on various items related to the CMB September 30, 2000 balance sheet, as stipulated in the purchase agreement. The common stock is issuable in two increments of $500,000 on October 13, 2001 and 2002. The acquisition was accounted for using the purchase method of accounting. CMB is an engineering firm specializing in land development design, infrastructure design and landscape architecture. CMB is mainly located in the Los Angeles and San Diego counties and employs approximately 65 people. 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 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 Nine Months Ended Ended September 30, September 30, ------------- ------------ 2000 1999 2000 1999 ---- ---- ---- ---- Gross revenue 107% 107% 106% 109% Subcontractor costs 7% 7% 6% 9% ---- ---- ---- ---- Net revenue 100% 100% 100% 100% Costs of revenue 62% 69% 65% 67% ---- ---- ---- ---- Gross profit 38% 31% 35% 33% Selling, general and administrative expenses 20% 21% 20% 21% ---- ---- ---- ---- Income from operations 18% 10% 15% 12% Interest expense 1% 1% -- 3% Other (income) expense, net (1%) 1% -- -- ---- ---- ---- ---- Income before provision for income taxes 18% 8% 15% 9% Provision for income taxes 7% 3% 6% 4% ---- ---- ---- ---- Net income 11% 5% 9% 5% Reversal of redeemable securities to redemption value, net -- 3% -- 1% ---- ---- ---- ---- Net income available to common shareholders 11% 8% 9% 6% ==== ==== ==== ====
Three and Nine Months Ended September 30, 2000 and September 30, 1999 Revenue. Net revenue for the three months ended September 30, 2000 was $13.6 million compared to $10.7 million for the three months ended September 30, 1999, an increase of $3.0 million, or 28%. Net revenue for the nine months ended September 30, 2000 was $38.7 million compared to $28.3 million for the nine months ended September 30, 1999, an increase of $10.5 million, or 37%. Net revenue growth for the three and nine months ended September 30, 2000 resulted primarily from the acquisition of Thompson-Hysell in July 1999, which contributed an additional $7.1 million to revenue for the nine months ended September 30, 2000 compared to 1999; growth in the Company's surveying and mapping services, resulting primarily from the strong demand for housing in California and Nevada; and changes to the estimated direct contract costs expected to be incurred on several large projects in the third quarter of 2000 and the third quarter of 1999. These changes in estimated direct contract costs resulted in changes to the estimated percentage of completion on these projects and consequently an approximate $200,000 increase in net revenue for the three and nine months ended September 30, 2000 and an approximate $600,000 reduction in net revenue for the three and nine months ended September 30, 1999. Excluding the 2000 and 1999 net revenue adjustments, net revenue grew $2.2 million, or 19% for the three months ended September 30, 2000 and $9.7 million, or 33% for the nine months ended September 30, 2000. Subcontractor costs, as a percentage of net revenue, remained flat at 7% for the three months ended September 30, 2000 compared to the previous year period and declined to 6% for the nine months ended September 30, 2000 compared to 9% for the nine months ended September 30, 1999. The percentage decline in subcontractor costs for the nine months ended, 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 September 30, 2000 was $5.2 million compared to $3.3 million for the three months ended September 30, 1999, an increase of $1.9 million, or 57%. Gross profit for the nine months ended September 30, 2000 was $13.6 million compared to $9.2 million for the nine months ended September 30, 1999, an increase of $4.4 million, or 48%. As a percentage of net revenue, gross profit increased to 38% for the three months ended September 30, 2000 compared to 31% for the three months ended September 30, 1999. For the nine months ended September 30, 2000, gross profit, as a percentage of net revenue, increased to 35% compared to 33% for the nine months ended September 30, 1999. The increase in gross profit and gross profit percentage for the three and nine months ended September 30, 2000, resulted primarily from higher net revenue and profit margins generated through our acquisition of Thompson-Hysell, improved utilization of our professionals, an increased focus on contracts with higher profit margins, and the 2000 and 1999 net revenue adjustments. Higher profit margins in our industrial, process and manufacturing segment also contributed to the increase in the gross profit percentage for the nine months ended September 30, 2000. These gross profit increases were partially offset 9 by an increase in the employer matching contribution of our 401(K) plan in 2000. Excluding the 2000 and 1999 net revenue adjustments, the gross profit percentage increased to 37% for the three months ended September 30, 2000 compared to 35% for the prior year three months ended and increased to 35% for the nine months ended September 30, 2000 compared to 34% for the prior year nine months ended. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended September 30, 2000 were $2.8 million compared to $2.2 million for the three months ended September 30, 1999, an increase of $545,000, or 25%. Selling, general and administrative expenses for the nine months ended September 30, 2000 were $7.9 million compared to $5.9 million for the nine months ended September 30, 1999, an increase of $2.0 million or 34%. The increases in selling, general and administrative expenses resulted primarily from our acquisition of Thompson-Hysell, including the amortization of 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 nine months ended September 30, 2000 from 21% for the three and nine months ended September 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, and the 2000 and 1999 net revenue adjustments. Interest Expense. Interest expense for the three months ended September 30, 2000 was $65,000 compared to $149,000 for the three months ended September 30, 1999, a decrease of $84,000, or 56%. Interest expense for the nine months ended September 30, 2000 was $260,000 compared to $678,000 for the nine months ended September 30, 1999, a decrease of $418,000, or 62%. 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. In addition, certain capital leases were repaid during the three months ended September 30, 2000. Other (Income) Expense, net. Other (income) expense, net for the three months ended September 30, 2000 was income of $111,000 compared to expense of $132,000 for the three months ended September 30, 1999, a decrease of $243,000 or 184%. Other (income) expense, net for the nine months ended September 30, 2000 was income of $79,000 compared to expense of $102,000 for the nine months ended September 30, 1999, a decrease of $181,000 or 177%. The decrease related primarily to $130,000 of expense recorded during the previous year period for a guaranty of our common stock price against a market decline in connection with the acquisition of ESI combined with the collection during the third quarter of 2000, of accounts receivable previously written off. Income Taxes. For the three months ended September 30, 2000, the provision for income taxes was $992,000 compared to $347,000 for the three months ended September 30, 1999. The provision for income taxes for the nine months ended September 30, 2000 was $2.2 million compared to $1.1 million for the nine months ended September 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, bank borrowings and the initial public offering of our common stock. Working capital as of September 30, 2000 was $7.4 million, excluding the issuable common stock liability, compared to $7.2 million as of December 31, 1999, a slight increase of $144,000 or 2%. The growth resulted primarily from an increase in contract and trade receivables and costs and estimated earnings in excess of billings partially offset by an increase in the current portion of long-term debt and capital lease obligations as a certain note was reclassified from long-term based on its maturity date. The debt to equity ratio as of September 30, 2000 was 0.15 to 1 compared to 0.38 to 1 as of December 31, 1999, an improvement of 61%. Net cash provided by operating activities increased $1.3 million to $3.3 million for the nine months ended September 30, 2000, compared to $2.0 million for the nine months ended September 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 payoff our line of credit, make principal payments on long-term and short-term debt and capital leases, payoff certain 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 September 30, 2000, there were no outstanding borrowings on the working capital component or equipment component of the line of credit. On September 3, 2000 and November 3, 2000, the line of credit was amended to ultimately extend the maturity on the equipment component to January 3, 2001. 10 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. 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 $742,000), weighted average interest rates, fair values and other items required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of September 30, 2000.
Fair 2000 2001 2002 2003 2004 Total Value (1) ---- ---- ---- ---- ---- ----- --------- Fixed rate debt $ 36,000 $ 1,491,000 $ 90,000 $ 58,000 $ 15,000 $ 1,690,000 $ 1,690,000 Weighted average interest rate 8.4% 9.9% 8.2% 8.2% 8.5% 9.7% 9.7% Variable rate debt -- -- -- -- -- -- -- Weighted average interest rate -- -- -- -- -- -- --
- ---------- (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. As the table incorporates only those exposures that existed as of September 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. ("T-H Engineers") and us. This complaint was filed by Phillip Kirk Delamare and his wife Catherine A. Delamare who are shareholders of T-H Engineers, along with the Defendant Shareholders who are majority shareholders and directors. The complaint alleges, among other things, that Thompson-Hysell is or 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. Our position from the inception of this litigation has been that the complaint against us was completely without merit. Consequently, we brought a motion before the Court asking that we be dismissed from the action. In response to this motion, on October 27, 2000, the Court ruled that we were entitled to a dismissal with prejudice. A formal order is pending. With the dismissal, our involvement as a party is over, subject to the plaintiffs' right to appeal. We remain confident that even in the event of an appeal, we will be exonerated from any wrongdoing. To date, all of our costs and expenses associated with this defense have been, and management believes will continue to be, covered by certain indemnification agreements between the Defendant Shareholders and us. Item 2. Changes In Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibits Number Description ------ ----------- 10.15 First Amendment to Wells Fargo Bank Credit Agreement dated September 3, 2000 between The Keith Companies, Inc., John M. Tettemer & Associates, LTD and Wells Fargo Bank, National Association. 27 Financial Data Schedule (b) Reports on Form 8-K None 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 10, 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 13 EX-10.15 2 0002.txt FIRST AMEND. TO WELLS FARGO BANK CREDIT AGREEMENT EXHIBIT 10.15 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of September 3, 2000, by and between THE KEITH COMPANIES, INC., a California Corporation, JOHN M. TETTEMER & ASSOCIATES, LTD., a California Corporation, (individually and collectively "Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of September 1, 1999, as amended from time to time ("Credit Agreement"). WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes, NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: Section 1. 1 (a) is hereby deleted in its entirety, and the following substituted therefor: "(a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank -------------- hereby agrees to make advances to Borrower from time to time (the "Line of Credit"), the proceeds of which up to a maximum outstanding principal balance of $6,000,000.00 shall be used to finance working capital requirements (the "Working Capital Advances", which shall be available until September 3, 2001), and which up to a maximum outstanding principal balance of $3,500,000.00 (less the amount of Lease Obligations) shall be used for equipment purchases ("Equipment Advances", which shall be available until November 3, 2000), provided, however, that the aggregate outstanding principal balance of Working - ----------------- Capital Advances and Equipment Advances shall not any time exceed $8,500,000.00. Borrower's obligation to repay Working Capital Advances and Equipment Advances shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. The term "Lease Obligations" means the aggregate ----------------- amount of all lease obligations under leases entered into between Bank's equipment leasing affiliate or division as lessor and Borrower as lessee during the period when Equipment Advances are available." 2. Section 1.1(b) is hereby deleted in its entirety, and the following substituted therefor: "(b) Borrowing and Repayment. Borrower may from time to time during the term of ----------------------- the Line of Credit with respect to Working Capital Advances borrow, partially or wholly repay its outstanding borrowings, and reborrow and, with respect to Equipment Advances, borrow, partially or wholly repay its outstanding borrowings, but not reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. As of and after November 3, 2000, (i) no new Equipment Advances shall be available, and (ii) the availability for Working Capital Advances shall be limited to the lesser of (I) $6,000,000.00, or (II) an amount equal to $8,500,000.00 less the outstanding principal balance of Equipment Advances from time to time. Repayments of principal received by Bank shall be applied, prior to November 3, 2000 (unless Bank receives written instructions to the contrary prior to each payment), first to outstanding Working Capital Advances and then to outstanding Equipment Advances, and after November 3, 2000, first to the scheduled installment of the Equipment Advances if such an installment is then due and payable, second to outstanding Working Capital Advances and then as a prepayment of Equipment Advances (subject to the prepayment provisions set forth in the Line of Credit Note)." 3. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 4. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. THE KEITH COMPANIES, INC. WELLS FARGO BANK, NATIONAL ASSOCIATION By: s/Gary Campanaro By: s/Stephanie Juneau Title: CFO Assistant Vice President JOHN M. TETTEMER & ASSOCIATES, LTD. By: s/Gary Campanaro Title: CFO EX-27 3 0003.txt FINANCIAL DATA SCHEDULE - ARTICLE 5
5 9-MOS 9-MOS DEC-31-2000 DEC-31-1999 JAN-01-2000 JAN-01-1999 SEP-30-2000 SEP-30-1999 1,241,000 1,569,000 0 0 9,921,000 7,788,000 (1,102,000) (612,000) 0 0 16,670,000 14,283,000 9,342,000 8,456,000 (4,717,000) (3,920,000) 26,614,000 23,661,000 9,944,000 7,020,000 0 0 0 0 0 0 12,350,000 12,322,000 3,695,000 514,000 26,614,000 23,661,000 38,738,000 28,271,000 38,738,000 28,271,000 25,137,000 19,051,000 25,137,000 19,051,000 7,813,000 6,006,000 0 0 260,000 678,000 5,528,000 2,536,000 2,211,000 1,076,000 3,317,000 1,460,000 0 0 0 0 0 0 3,317,000 1,690,000 0.67 0.43 0.63 0.40
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