-----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, AmBD5DeSo9Vkfx+G1guynTBw9wiGB0MUiJnkiXPtunG1CcS7UpqSU9L8kY5QkU4t cU0qbOdBtHdQnNNCIJlnXw== 0001095811-01-002017.txt : 20010409 0001095811-01-002017.hdr.sgml : 20010409 ACCESSION NUMBER: 0001095811-01-002017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEITH COMPANIES INC CENTRAL INDEX KEY: 0001080922 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 330203193 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26561 FILM NUMBER: 1589297 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-K 1 a70823e10-k.txt FORM 10-K PERIOD END DECEMBER 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER 0-26561 THE KEITH COMPANIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CALIFORNIA 33-0203193 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.) OF INCORPORATION OR ORGANIZATION)
2955 RED HILL AVENUE, COSTA MESA, CALIFORNIA 92626 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 668-7001 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The number of shares outstanding of the registrant's common stock as of March 23, 2001 was 5,369,997 shares. Based on the closing sale price on the Nasdaq National Market on March 27, 2001, the aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $74,161,000.(1) DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the registrant's definitive proxy statement for the Annual Meeting of Shareholders scheduled to be held on May 16, 2001. - --------------- (1) For purposes of this calculation, shares owned by officers, directors and 10% shareholders known to the registrant have been deemed to be owned by affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE KEITH COMPANIES, INC. ANNUAL REPORT ON FORM 10-K ------------------------ TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 18 Item 3. Legal Proceedings........................................... 18 Item 4. Submission of Matters to a Vote of Security Holders......... 19 PART II Item 5. Market for Our Common Equity and Related Stockholder Matters..................................................... 20 Item 6. Selected Financial Data..................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 27 Item 8. Consolidated Financial Statements and Supplementary Data.... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 52 PART III Item 10. Directors and Executive Officers............................ 52 Item 11. Executive Compensation...................................... 52 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 52 Item 13. Certain Relationships and Related Transactions.............. 52 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 52 (a) 1. Consolidated Financial Statements........................ 52 2. Financial Statement Schedules............................ 52 3. Exhibits................................................. 53 (b) Reports on Form 8-K......................................... 54 Signatures............................................................ 55
i 3 PART I ITEM 1. BUSINESS GENERAL We are a full service engineering and consulting services firm providing professional services on a wide range of projects to both the real estate development, public works/infrastructure and communications industry and the industrial/energy industry. We provide a full range of services from initial site acquisition studies to construction management and electrical, mechanical and chemical/process engineering services. We benefit from a diverse public and private client base including real estate developers, residential and commercial builders, architects, cities, counties, water districts, state and federal agencies, land owners, commercial retailers, energy providers and various manufacturers. Our professional staff provides a comprehensive menu of services that are needed to effectively manage, engineer and design infrastructure and state-of-the-art facilities. The following illustrates the range of services that we offer: Graphic depicting: (1) the following services: civil engineering, surveying & mapping, planning, site acquisition, environmental, archaeology, construction management, water resources engineering, instrumentation/control systems integration engineering, fire protection engineering, electrical engineering, mechanical engineering and chemical/process engineering; and (2) the following industries served: real estate development, public works/infrastructure and communications industry and the industrial/energy industry. From fiscal 1996 through fiscal 2000, our net revenue has grown by a compounded annual growth rate of 42% and our net income has grown at a compounded annual growth rate of 59%. We have accomplished this through both internal growth and through our acquisition strategy to diversify the scope of our services and our geographic presence. We have acquired five companies in the past four years and now operate from 13 offices (including 15 operating divisions) in 6 states; California, Nevada, Utah, Arizona, Colorado and Wyoming. INDUSTRIES SERVED We serve both the real estate development, public works/infrastructure and communications industry and the industrial/energy industry. 1 4 REAL ESTATE DEVELOPMENT, PUBLIC WORKS/INFRASTRUCTURE AND COMMUNICATIONS Real Estate Development Residential, commercial, golf, and other recreational developers use technical consultants to provide planning and environmental services to create land use plans, write the supporting planning and environmental documents and process entitlements and permits through governmental authorities. Technical consultants also assist clients with obtaining approvals and permits from federal, state and local agencies. After projects are approved by governmental agencies, developers need surveying, mapping, and civil engineering services to survey development sites, create accurate boundary and base maps, and provide engineering designs for grading, streets, sewer and water pipelines and facilities, utilities and drainage facilities. Upon completion of the design phase, surveyors provide construction staking services to identify the precise locations of streets, utilities, pipelines, and other facilities. In culturally sensitive areas, developers may also require environmental and archaeology services for planning and assistance with environmental approvals as well as construction and post-construction phase monitoring services. Residential development includes large-scale communities, senior citizen and retirement communities, single family homes, condominiums and apartments. Commercial development includes the development and construction of retail, office, hotel and industrial facilities. Golf and recreational facility development includes golf courses, driving ranges, parks, clubhouses, theme parks, resorts and lakes. There are generally two types of real estate development projects and clients: the land developer and the builder. Some take on characteristics of both. Developers generally must look long-term, utilize longer-term investment financing and evaluate the performance of projects across multiple business cycles. The developer pursues land development rights and implements the process of designing and constructing infrastructure utility, roadway and landform grading improvements. A developer's projects often span several years or even decades. The builder, on the other hand, generally provides an end-user product, including homes, retail stores, restaurants or clubhouses. The builder's approach is generally based upon current and relatively short-term economic conditions. Financing for a builder's work is often construction-oriented and anticipates short-term returns. The builder often buys property that has already been zoned, graded and otherwise improved by the land developer. Public Works/Infrastructure Transportation, water resources, and other public works projects provide ongoing, more reliable sources of revenue for engineering firms and consultants when private real estate development activities decline during unfavorable economic periods. These public projects are often long-term and have historically provided more determinable and consistent revenue streams than non-publicly funded projects. Transportation. Highway and interchange projects require engineering designs for roadways and interchanges for the placement or relocation of sewer and water pipelines and utility lines and for rainfall run-off management. They also include surveying services for establishment of proper rights of way for these facilities. Engineers develop street, major arterial and highway designs in cooperation with federal, state and local agencies to improve transportation networks. Highly experienced transportation planners, engineers, and designers provide the entire spectrum of resources necessary to effectively engineer and design state-of-the-art transportation infrastructure. Water Resources. Water resource services encompass the study and analysis of rainfall, water collection and distribution, use of water for cleanliness, nourishment and irrigation and the treatment and disposal of used or contaminated water. Due to the multiple demands for municipal, environmental and agricultural uses, water is a limited resource in the Western United States. As populations continue to grow and higher standards are placed on protecting the environment without sacrificing the supply and quality of water, water districts, public agencies, agricultural users and municipalities are faced with the challenge of managing their water supplies more efficiently. 2 5 Protecting communities from natural disasters such as flood and mudflows, cleaning natural waterways, eliminating pollution from storm runoff flowing into the ocean and protecting and enhancing natural riparian resources are some of the missions of public water-managing agencies. Private developers also address these issues as part of their land development projects. Communications Communications projects include the development, expansion and construction of wireless and land-based data and communications systems. The infrastructure for these systems includes wireless transmission base stations, switching centers, cable systems, fiber optic networks and microwave link networks. With the rapid growth of the communications services industry, the demand for communications infrastructure has expanded dramatically. Service providers and developers of communications infrastructure generally hire outside experts to meet their design, site acquisition and lease arrangement, land planning, civil engineering, purchasing and construction management needs. INDUSTRIAL/ENERGY The industrial/energy industry consists of manufacturing facilities, processing facilities, power generation and distribution, and production/refining methods and systems. Power plants, machines, assembly lines, factories and refineries require mechanical, electrical and process engineering services to enable utilization of new processes and to improve efficiency and reliability of their production effort. Comprehensive engineering services that are required include: - the design or redesign of electrical, heating, ventilation and air conditioning systems; - mechanical equipment design; - equipment selection and purchasing; - the design of integrated computer and monitoring device systems to control manufacturing and process equipment; - chemical/process engineering; - energy generation and usage consulting; - fire protection engineering; - material handling and process flow planning; - automation and robotics design; - construction management and installation supervision; - project management; and - computer programming. Projects that utilize mechanical, electrical and process engineering and consulting services include: - Energy/Power Generation and Management: power plants, natural gas/electrical systems and distribution systems; - High Tech Facilities: biotechnology, pharmaceutical and laboratory facilities, computer centers, control rooms and research and development facilities; - Consumer Product Facilities: automotive assembly, household products and packaging facilities; - Food and Beverage Facilities: bottling/packaging facilities, material handling facilities, process controls and food and beverage manufacturing facilities; 3 6 - Educational Facilities: school and university buildings and campuses; and - Public Facilities/Utilities: commercial and medical buildings. We believe there is a continued trend in the manufacturing and assembly industries toward automation and increased efficiency. As these industries grow, so does their need for engineering, design and consulting services to automate and increase the efficiency of new and existing facilities. THE TKCI ADVANTAGE The engineering and consulting services industries are highly fragmented, ranging from a large number of relatively small local firms to large, multi-national firms. We estimate that there are over 500 firms providing engineering and consulting services to the industries we serve in our principal operating areas. Management believes that in the areas in which we are located, we are among the leading engineering and consulting services firms serving the industries that we serve. We believe that we can further enhance our position in the industries which we serve for the following reasons: Reputation We have a reputation for providing high quality services, which is strengthened due to the personal relationships developed between our staff and representatives of clients and agencies. We have been awarded many projects either due to our expertise in working with an agency or project type or because a particular client desires to work with, and can count on, specific project managers. In addition, we have received numerous awards for technical excellence including: - Award of Excellence from the California Council of Civil Engineers and Land Surveyors; - Certificate of Recognition from the County of San Bernardino Board of Supervisors; - Letter of Appreciation from the State of California Department of General Services; - Project of the Year from the American Society of Civil Engineers; - Outstanding Environmental Analysis Document from the Association of Environmental Professionals; and - Outstanding Planning Award from the American Planning Association. Industry and Professional Experience We believe that our senior management has the proven ability to execute our business plan and capitalize on new opportunities. Over the past four years, management has successfully closed and integrated five acquisitions, enabling us to diversify both our revenue base and our geographic scope. This is a crucial point, as acquisitions will continue to be a key component in our business plan. In all acquisitions to date, we have retained the management teams of the acquired companies and provided the financial and management controls to promote sustainable growth. This enables the acquired management team to run their business as they know best. In addition, the entire management team, from project manager to senior executive manager, is particularly adept at the relationship side of the business that plays a critical role in the world of engineering and consulting services. We recognize that our employees are our most valuable resource for providing continuing quality service and for obtaining new work. During employee selection and as part of the acquisition criteria, we require that the personnel which we add to our team have significant experience in the industries that we serve. We supplement this industry experience by providing in-house continuing education seminars, design forums and training programs. 4 7 Full Service Approach We provide a full complement of engineering and consulting services. Since many consulting and engineering services firms specialize in only one or a few services, a project owner may often be required to engage several engineering and/or consulting firms during the various phases of a project. The phases range from identifying and evaluating whether to acquire a parcel of land to designing, engineering and managing the construction of the finished project. We believe that clients realize significant cost and time savings and maintain consistent quality by concentrating their engineering and consulting services in as few firms as practicable. Cross-Marketing Due to our reputation within our industries and our technical expertise, we have frequently increased the scope of services provided to a client from an initial engagement, such as land planning, to include other services, such as mapping and surveying. When we expand into new geographic regions, we have successfully cross-sold and intend to continue to cross-sell the services we offer. Because our professionals provide many of the preliminary services for planning, civil engineering and surveying and mapping projects, we are frequently asked to provide additional services as a project progresses. In performing the preliminary services during the initial phases of a project, we obtain background information and data relating to the project that may be inefficient and costly for another firm to compile. Consequently, we are often more knowledgeable about a project, and, as a result, are often engaged to perform additional engineering and consulting services as the project progresses. Effective Organizational Structure We believe that our organizational structure allows us to compete effectively with small- and mid-sized local firms as well as with large regional, national and international firms. Our organizational structure combines the efficiencies associated with centralization and the flexibility of decentralization. When appropriate, our primary administrative functions are centralized in our corporate headquarters in Costa Mesa, California allowing us to reduce duplicative functions and personnel at our divisional offices. We believe that this centralization allows the management at our divisional offices the freedom to focus on identifying new business opportunities and overseeing the services they provide, and allows our project managers the flexibility to focus on being responsive to client needs. Since our divisions are managed by technical professionals with excellent client relationships and industry reputations, we promote decentralization of those aspects of our business which involve technical and client relationships. BUSINESS STRATEGY Our objective is to strengthen our position as a leading provider of engineering and consulting services while growing our geographic presence and enhancing the services we offer. To achieve this objective, we have developed a strategy with the following key elements: - Maintain High Quality Service. To maintain high quality service, we focus on being responsive to customers and working diligently and responsibly to maintain schedules and budgets. As a result of our focus on quality and timely service, we believe that we have established an excellent reputation in the markets we serve. We intend to continue providing high quality services as we expand our geographic presence and our service offerings. - Continue to Recruit and Retain Highly Qualified Personnel. We believe that recruiting and retaining skilled professionals is crucial to our success and growth. As a result, we intend to continue to recruit experienced and talented individuals who can provide quality services and innovative solutions. - Enhance and Strengthen Existing Client Relationships. By maintaining strong relationships with existing clients and promoting the entire cross section of services we provide to all clients, we believe that we can enhance our reputation. By focusing our efforts in this area, we can utilize the time that we spend with our clients on active work to promote additional services to them and gain additional 5 8 contract opportunities for us. We believe that our existing relationships between our clients and employees is our greatest business development asset. - Expand Services in Both the Public Works/Infrastructure and Communications Industry and the Industrial/Energy Industry. To diminish our susceptibility to the economic cycles affecting any particular industry, we intend to continue expanding our work in the public works/infrastructure and communications and industrial/energy industries. Much of our technical expertise, including, CAD technicians, certain engineering specialists and administrative support, can provide support across industries in the event that a particular industry segment experiences economic downturns. We believe that by expanding our services into industries which follow different economic cycles, we are able to reassign talented employees to other project types and help provide stability for our core staff, management and profit levels. - Expand Geographically. To diminish the impact of regional economic cycles, we intend to continue to expand our geographic presence through acquisitions, opening additional divisional offices and marketing our services to clients with national and international needs. Our geographic growth may provide us with broader access to employee pools, work sharing between regions and new business opportunities. We believe that our acquisitions of Thompson-Hysell and Crosby, Mead, Benton & Associates have enabled us to more effectively sell additional services in California and Utah and that our acquisition of Hook & Associates Engineering, Inc. has enabled us to broaden our service offerings in Arizona, Colorado and Wyoming. - Expand and Enhance Technical Capabilities. We intend to build upon our reputation as a quality provider of engineering and consulting services as we diversify our services to meet demands of our clients and new markets. As part of our effort to continue diversifying the scope of our services, we intend to pursue strategic partnering relationships and acquisitions. ACQUISITION STRATEGY We intend to continue to pursue acquisitions that complement our business strategy and enhance our range of services, geographic presence and/or client base. We believe that strategic acquisitions will enable us to more efficiently serve the diverse technical and geographic needs of, and secure additional business from, national and international clients. Upon the successful completion of this offering, we may increase the pace and size of our acquisitions. In general, the key criteria we consider when evaluating potential acquisitions include services offered, reputation, corporate culture, price, profitability and geographic location. The following table sets forth information regarding our five acquisitions since late 1997.
- ---------------------------------------------------------------------------------------------------- ACQUISITION PRIMARY DATE COMPANY ACQUIRED MARKETS SERVED SERVICES OFFERED - ---------------------------------------------------------------------------------------------------- December 1997 ESI, Engineering Northern California Industrial/energy Services Incorporated services - ---------------------------------------------------------------------------------------------------- August 1998 John M. Tettemer and Southern California Water resources Associates, Ltd. engineering and services - ---------------------------------------------------------------------------------------------------- July 1999 Thompson-Hysell, Inc. Northern and Central Water resources and California; Utah other engineering services - ---------------------------------------------------------------------------------------------------- October 2000 Crosby, Mead, Benton & Southern California Land development design, Associates infrastructure design and landscape architecture - ---------------------------------------------------------------------------------------------------- January 2001 Hook & Associates Arizona; Colorado; Land development, Engineering, Inc. Wyoming transportation, and communications services - ----------------------------------------------------------------------------------------------------
6 9 Consideration for the companies we have acquired has included cash, shares of our common stock, promissory notes, or a combination of these forms of consideration. The consideration is sometimes subject to earn-out or adjustment provisions. Additionally, in connection with these acquisitions, we have entered into noncompetition agreements with principals or key employees of an acquired company. SERVICES PROVIDED We provide a broad range of services, including civil engineering, surveying and mapping, planning, environmental, archaeology, construction management, site acquisition, water resources engineering, and other services needed by the industrial/energy industry, including instrumentation/control systems integration engineering, fire protection engineering, electrical engineering, mechanical engineering and chemical/process engineering. Civil Engineering Services General civil engineering is often referred to as everything "designed from the ground down" because most of the constructed improvements involved lie on the surface of, or below the ground. Our civil engineering services include, project feasibility and due diligence analysis; development cost projections; access and circulation analysis; infrastructure design and analysis; pro forma cost studies; project management; construction documents; tentative mapping; flood plain studies; sewer, water and drainage design; street and highway design; site and subdivision design; and grading design. We are the master engineer of a master-planned residential resort community located in the central valley region of California. This 30,000-acre site is comprised of five villages, and consists of 10,000 residential units, six golf courses, a hotel and convention center, two wineries, a swim and tennis club and 85 acres of retail and commercial development. Our responsibilities on this project include the civil engineering design of all onsite and offsite improvements, such as roadways, water, sewer and drainage systems and grading. We are also providing surveying and mapping services; coordinating with the environmental consultants; providing construction management services; and providing bid and finance administration services. We anticipate that this project will have a duration of more than 20 years. Surveying and Mapping Services Surveying and mapping services include, among other things, the establishment of boundaries for preliminary engineering, construction layout, as-built surveys and the identification of features of a parcel of land that directly affect a project's design. It is common for our surveying and mapping teams to be "the first in and the last out" for a construction project. We provide surveying and mapping services through teams of skilled professionals that utilize sophisticated technology, including global positioning systems that utilize satellite technology to survey and navigate land, geographic information systems, and field-to-office digital and electronic data capture to produce information that will serve as the foundation for a variety of planning and engineering analysis and design endeavors. We believe that we were among the first engineering and surveying consultants to utilize global positioning systems with geographic information systems to perform precise ground surveys. We utilized our expertise by providing surveying, mapping, charting, imagery intelligence and photogrammetic services for an on-going multi-year, task order contract with a United States federal agency. This includes providing surveying and mapping services on air bases worldwide as part of a geospatial information and imagery intelligence program. As a subconsultant to the program manager, we assisted in developing their specifications and statement of work for safety of navigation surveys on Department of Defense airfields. We have also developed detailed ground survey and photogrammetric mapping plans and cost breakdowns for the survey of multiple airfields in Washington, California and Utah. This effort coordinates tasks to be performed by at least half a dozen firms throughout the Western United States. 7 10 Planning Services Planning services include both physical planning and policy planning. Physical planning is graphical and includes conceptual drawings, sketches and layouts of communities and identifies land uses and residential and commercial neighborhoods. The resulting plan often becomes the basis for the preparation of engineering plans. To complement a physical plan, policy planning entails the preparation of supporting text and documents that establish procedures, requirements and guidelines for visual appearance or detailed permitting approvals under which the physical plan may be implemented. Our planning services are designed to assist clients with maximizing the potential uses of real estate and other limited resources. We provide plans that take into account government regulations, effective and creative use of land assets, and the expectations and needs of the community. An example of our planning services is the preparation and processing of a Specific Plan document for a master-planned golf course community in the County of San Bernardino, California. This community is approximately 460 acres in size and contains more than 500 luxury homes surrounding a full-length 18-hole golf course. We created the land use plan and developed the supporting Specific Plan and Environmental Impact Report documents. These documents specify uses of land such as residential, golf and open space. They also identify environmental concerns and how to mitigate them. Additional services for which we are responsible on this project include environmental, civil engineering and surveying and mapping. Environmental Services Our environmental services include biology, permit processing, environmental document preparation and mitigation monitoring. We assist clients with the complex federal, state, and local permitting process enabling them to successfully implement private and public projects. Our environmental staff offers the technical proficiency to provide one-stop preparation of environmental documents that conform to current regulatory requirements. Our staff is experienced with the preparation of complex and challenging environmental planning documents such as Environmental Impact Reports, Environmental Impact Statements, initial studies and environmental assessments. Our experience includes the preparation of documents that comply with the California Environmental Quality Act (CEQA) and the National Environmental Policy Act. Our environmental staff has been instrumental in developing permit strategy consensus among federal agencies such as the Army Corps of Engineers, U.S. Fish and Wildlife, the Environmental Protection Agency and the State of California. Our award winning services on a recent project involved the preparation of a master plan and Environmental Impact Report for a major sports complex, two schools, an active park and a community center. The major issues surrounding the project included the preservation of the habitat for the California gnatcatcher and Quino checkerspot butterfly, potential land use impacts to the nearby Los Alamos Historic District and securing water service. We successfully designed and processed all of the necessary plans and received the "Outstanding Planning Award, Planning Implementation, Small Jurisdiction" award from the American Planning Association. Archaeology Services We perform archaeological studies that range from site review and records analysis to a discussion of measures to protect sensitive or valuable archaeological resources. Further, we conduct field sampling and testing to establish or verify findings of a site review, and previously documented information to determine both the quantity and quality of archaeological materials for a given site. Many environmental impact analyses require protection of significant archaeological resources that may exist on a property, such as native American community settings, artifacts, and burial sites. We have provided monitoring of construction activities on numerous projects and have also completed complex archaeological excavations in coordination with state and federal agencies and native American representatives. 8 11 Construction Management Services Construction management services are an efficient "bundling" of some of the other services that we provide. During construction management assignments, we direct development and construction tasks, including the preparation of cost projections, entitlement and feasibility analysis, professional consultant selection and supervision, contractor bidding and construction supervision. We provide these services in discrete components or as a comprehensive package for private development, public works and communications clients. One of our active construction management projects is a 650 acre master planned, hillside golf course community with an 18-hole championship golf course that is surrounded by approximately 200 estate residential lots and a high quality country club facility. Our construction management efforts include the coordination and scheduling of all construction activities at the project, monitoring the performance of the contractors, confirming adherence to plans and specifications and coordinating permits and approvals. We also provided planning, civil engineering, archaeology, landscape architecture and surveying and mapping services for this project. Site Acquisition Services Site acquisition services include the selection of prospective properties that fit defined criteria, identifying and overcoming restrictions against intended use of properties, negotiating agreements for the acquisition and implementing the acquisition and final use of properties. We provide site acquisition services to assist clients with obtaining the most appropriate real estate for their particular needs. For example, a property intended for the development of multi-family housing will have characteristics which vary greatly from that of a property intended for the siting of a heavy industrial facility. We have provided site acquisition services for wireless communications sites in Riverside, San Bernardino, Ventura, Los Angeles and San Diego counties in California for a national wireless services provider. Water Resources Engineering Services Our water resources engineering services consist of financial planning, feasibility studies, demand forecasting, hydraulic analysis and water flow studies to develop system master plans in addition to designing conventional systems of pipes, channels and dams. Examples of the water resources engineering services that we provide include: the performance of a study in which we evaluated the anticipated amount of rainfall water in a 23 square-mile watershed in Riverside County, California; the development of a concept report and preliminary design for a 2,000 acre-feet, 50-foot high water quality dam, a major sediment detention basin facility and the relocation of approximately 1.5 miles of roadway, all incidental to the construction of the dam and related structures; and the design of a 3.2 mgd (million gallons per day) water reclamation facility in Central California. This facility will include a wastewater treatment facility and a reclaimed effluent water reuse area comprised of a winter reuse water storage pond and a spray irrigation disposal site. On this project, our primary scope of services include performing field investigations; establishing survey controls for topographic mapping; establishing a concept level layout for the facility; assisting with the CEQA permit acquisition; developing the preliminary design for the facility; preparing the technical specifications and final plans for the civil, architectural, structural, mechanical, and heating, ventilation and air conditioning (HVAC) system; and preparing a cost estimate and performing inspections. Instrumentation/Control Systems Integration Engineering Services. Our professionals integrate equipment selection, maintenance requirements and spare parts inventory by designing, selecting and reviewing mechanical, piping and electrical layouts, and operating maintenance, training, start-up and emergency procedures during the design of contemporary processes or the automation of outdated manufacturing processes. These services are essential to creating an efficient operating facility. Our engineers designed control systems for major assembly lines for a large automotive manufacturing facility. One system, the passenger Paint Line Monitoring System, monitors equipment alarms signaling 9 12 problems on the assembling line. This system tracks 51 separate processors throughout multiple networks for a total of approximately 12,000 data points. Another system that we were responsible for was the RF Automatic Vehicle Identification system which tracks vehicle/carrier movement throughout the painting assembly line by reading RF tags affixed to the carrier. RF tags store vehicle information including make, model and color, which is transmitted to the processing equipment systems to ensure that the proper operations are performed automatically on each vehicle, such as paint color and trim detail. This information is then automatically transmitted to the historical database on the paint shop server. Fire Protection Engineering Services. We provide fire protection engineering services in connection with both new construction and the renovation or modification of existing facilities to assist clients in defining and providing an acceptable level of fire safety in a cost-effective manner. One of our recent fire protection services projects entailed detailed engineering and design to upgrade and expand the fire protection and life safety systems for a large building complex at a University of California campus in Northern California. The primary systems included advanced fire sprinkler and fire alarm facilities. We also provided engineering field support and construction management services for the installation of these systems. Electrical Engineering Services. These services include the design of electrical power systems for buildings, manufacturing plants and miscellaneous facilities; design of lighting systems; and selection of other equipment that delivers or uses electrical power. We are currently engaged in the design of peak power usage generating stations (peaker projects). These stations augment the power grid in times of high energy usage and have the benefit of being relatively small-scale, efficient to construct and suitable in more densely improved areas. We are also providing cogeneration and backup emergency power supply designs for university campuses and multiple building commercial facilities. For example, our electrical and mechanical engineers have been working very closely with a major energy provider to design and build power generation plants, called "peaker projects," in multiple states to provide power during periods of peak demand. Our scope of services includes providing engineering, design and field support services including site selection, surveying, licensing, permitting and coordinating high voltage electrical connections to the local utilities. Our engineers are also responsible for equipment specification and procurement, emissions control, layout drawings and piping drawings for water, wastewater and natural gas lines. Mechanical Engineering Services. These services are required to design energy systems, HVAC systems, plumbing systems, water distribution systems and fire protection systems for facilities and buildings. We are currently providing mechanical engineering and construction management services for a major aerospace company. The project involves a large satellite testing facility encompassing multiple buildings for which we are designing mechanical systems and facilities, including, new boiler, chilled water, compressed air and HVAC systems as well as large, proprietary space system equipment. Design and construction are ongoing and we have a full staff of construction management personnel on-site to oversee the installation and start-up of these new mechanical systems. Chemical/Process Engineering Services. Our chemical/process engineers design systems for a variety of manufacturing and industrial facilities and processes. These services are necessary for the design of chemical/processing operations in businesses like food and beverage, pharmaceutical, chemical and petroleum. As an example, we designed a specialty chemical processing and drying facility. Our scope of work entailed conceptual design, project planning, permitting and detailed design for this facility. Our engineers designed a new facility which improved the existing facilities by increasing the processing and drying speeds and reducing the operational costs. 10 13 BUSINESS DEVELOPMENT AND MARKETING Our business development and marketing activities consist of identifying target markets, developing strategies for pursuing these targets and supporting marketing activities company-wide by coordinating corporate promotional and professional activities. We use a client service value-added approach to our business development and marketing efforts by employing a variety of techniques to obtain contracts with new clients, repeat business with existing clients, and maintain a positive reputation. Additionally, our business development and marketing efforts assist our management and clients in assuring quality performance and client satisfaction. To accomplish this, we provide our clients with referrals for project partners and financing sources, assist with legislative matters and monitor in-house performance. Finally, we identify new projects and clients in each of the markets in which we are active. This is achieved through the use of many resources including: geographic information systems and aerial maps, project and contact databases, the Internet and lead tracking publications. We pursue the companies, agencies, projects and markets that we believe have financial strength, long-term growth potential and established reputations. Our growing list of services provides us with the opportunity to cross-market and sell additional services to our clients. We intend to leverage our broad service capabilities and continue to take advantage of our ability to increase our revenue by cross-selling services to existing clients and to build new client relationships. One of the keys to being successful in cross-marketing our services is to ensure that all of our managers understand the complete capabilities of our company, including our full range of services and the geographic locations and industries in which we offer and provide our services. We give formal presentations to our staff to educate them on our full capabilities and to encourage them to identify cross-marketing opportunities. In addition, we are in the process of implementing a more formal cross-marketing program. We are producing "Cross-Marketing Notebooks" which highlight all the pertinent information on each division company-wide. These will be given to all managers in each division as part of a formal presentation geared to facilitate easy "lead sharing" between divisions and to maximize the effectiveness of our cross-marketing efforts. Our business development staff has been trained to identify and pursue these types of opportunities. They report all such opportunities to the corporate office where a spreadsheet report is used to track all proposals and contracts. This cross-marketing approach has resulted in several new contracts for our various divisions. For example, our ESI division (industrial/energy) was awarded a contract for engineering services for multiple power plants. Through our cross-marketing efforts, we were able to expand the contracts to include planning, civil engineering and surveying and mapping services for the benefit of both the client and us. Likewise, one of our business development managers in Southern California provided a lead to our Thompson-Hysell division in Central California which resulted in a contract for that office to provide planning and civil engineering services for a large golf course and residential community. One of our most effective methods of developing client relationships and winning new contracts has been our Executive Land Search Program. We have developed "map rooms" containing computerized geographic information systems maps, aerial maps and city and county maps. We use these maps along with corresponding data spreadsheets to identify and track a multitude of existing and potential projects. We meet with existing and prospective clients and refer available projects to them. For example, upon referring a large undeveloped parcel of land in Southern California to a land development company that was not an existing client, we were awarded multiple contracts to provide planning, civil engineering and mapping and surveying services. As the project progressed, we received multiple additional contracts from home builders who bought parcels of land from our client. By March 15, 2001, we had received over $2,600,000 in contract authorizations on this project. 11 14 CLIENTS Our primary private sector clients consist of real estate developers, builders, communications providers, major manufacturers and energy providers. Our public sector clients include water and school districts, metropolitan planning organizations, transportation authorities and local, state and federal agencies.
REAL ESTATE PUBLIC WORKS/INFRASTRUCTURE ----------- --------------------------- Centex Homes City of Rancho Mirage Del Webb Coachella Valley Water District Pulte Home Corporation Central Utah Water Conservation District ProLogis Orange County Transportation Authority Shea Homes Colorado Department of Transportation The Irvine Company Arizona Department of Transportation Thomas & Mack Development Company Metropolitan Water District of Southern California INDUSTRIAL/ENERGY COMMUNICATIONS - --------------------------------------------- --------------------------------------------- California Energy Commission Mountain Union Telecom Clorox Products Company Sprint PCS Enron Energy Services Velocitel, Inc. Ernest & Julio Gallo Whalen & Company Kellogg U.S.A. Inc. ATI PG&E National Energy Group Delta Group New United Motors Manufacturing, Inc. Scientech, Inc. (NUMMI -- GM & Toyota)
No individual client accounted for more than 10% of our net revenue in 1998, 1999 and 2000. BACKLOG At December 31, 2000, our gross revenue backlog was approximately $29 million as compared to $22 million at December 31, 1999. Our backlog represents an estimate of the remaining future gross revenues from existing signed contracts, and contracts which have been awarded with a defined scope of work and contract value and on which we have begun work with oral client approval. We do not believe that backlog is indicative of the amount of future revenues that we may achieve because of the short-term nature of the contracts under which we generally provide our services compared to the long-term nature of the projects. COMPETITION The market for our services is highly competitive. We compete with a variety of firms ranging from small, local firms to national firms. We perform engineering and consulting services for a broad spectrum of markets including energy, residential, commercial, recreational, public works, communications and industrial, process and manufacturing. We believe that our competitive advantages include our multiple industries and services, reputation, organizational structure and business strategy. We believe that the principal factors in the engineering and consulting services selection criteria include: - quality of service; - relevant experience; - staffing capabilities; - reputation; - geographic presence; - stability; and - price. 12 15 EMPLOYEES We have approximately 650 employees, of which over 525 are technicians and technical professionals. Believing that our success depends significantly upon attracting and retaining talented, innovative and experienced professionals, we are comprised of highly skilled personnel with significant industry experience and strong client relationships. We employ licensed civil engineers, mechanical engineers, electrical engineers, land surveyors, landscape architects, certified planners, information technology specialists, geodesists and doctoral archaeologists. Our field survey employees in our Southern California offices are covered by a Master Labor Agreement between the International Union of Operating Engineers Local Union No. 12 and the Southern California Association of Civil Engineers and Land Surveyors. The agreement applies to civil engineering and land surveying work, including global positioning system surveys, and covers our employees in Imperial, Inyo, Kern, Los Angeles, Mono, Orange, Riverside, San Bernardino, San Diego, San Luis Obispo, Santa Barbara and Ventura counties. Our field survey employees in our Northern California offices are covered by a Master Agreement between the Bay Counties Civil and Land Surveyors Association and Operating Engineers Local Union No. 3. Our other employees are not represented by any labor union and we have never experienced a work stoppage from union actions. We believe that our relationship with our employees is good. 13 16 RISK FACTORS The following discussion summarizes material risks which you should carefully consider before you decide to invest in our common stock or to maintain or increase your investment. Any of the following risks, if they actually occur, would likely harm our business. The trading price of our common stock could then decline, and you may lose all or part of the money you paid to buy our common stock. RISKS RELATED TO OUR INDUSTRIES OUR BUSINESS COULD SUFFER IF THERE IS A DOWNTURN IN THE REAL ESTATE MARKET We estimate that during 2000, 80% of our services were rendered in connection with commercial and residential real estate development projects. Reduced demand in the real estate market would likely decrease the demand for our services. A decrease in the demand for our services could result in cash flow difficulties and operating losses for our company. The real estate market and, therefore, our business, may be impacted by a number of factors, which may include: - changes in employment levels and other national and local economic conditions; - changes in interest rates and in the availability, cost and terms of financing; - the impact of present or future environmental, zoning or other laws and regulations; - changes in real estate tax rates and assessments and other operating expenses; - changes in levels of government spending and fiscal policies; and - earthquakes and other natural or manmade disasters and other factors which are beyond our control. WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING QUALIFIED PROFESSIONALS, WHICH MAY HARM OUR REPUTATION IN THE MARKETPLACE AND RESTRICT OUR ABILITY TO IMPLEMENT OUR BUSINESS STRATEGY We derive our revenues almost exclusively from services performed by our professionals. We may not be able to attract and retain the desired number of professionals over the short- or long-term. There is significant competition for professionals with the skills necessary for the provision of our services from major and boutique consulting, engineering, research and other professional service firms. Our inability to attract and retain qualified professionals could impede our ability to secure and complete engagements which would reduce our revenues and could also limit our ability to expand our service offerings in the future. IF OUR EMPLOYEES LEAVE OUR COMPANY AND JOIN A COMPETITOR, WE MAY LOSE BUSINESS Our employees might leave our company and become competitors of ours. If this happens, we may lose some of our existing clients that have formed relationships with our former employees. In addition, we may lose future clients to a former employee as a new competitor. In either event, we would lose clients and revenues. RISKS RELATED TO OUR BUSINESS OUR REVENUE, INCOME AND CASH FLOW COULD DECLINE IF THERE IS A DOWNTURN IN THE CALIFORNIA ECONOMY OR REAL ESTATE MARKET We estimate that during 2000, 86% of our net revenue was derived from services rendered in California. Poor economic conditions in California may significantly reduce the demand for our services and decrease our revenues and profits. From 1991 to 1996, our business was negatively impacted during the real estate market downturn in Southern California, and we experienced cash flow difficulties and substantial operating losses. 14 17 IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE COULD INCUR UNFORESEEN COSTS OR DELAYS AND OUR REPUTATION AND RELIABILITY IN THE MARKETPLACE COULD BE DAMAGED We have grown rapidly and intend to pursue further growth, through acquisitions and otherwise, as part of our business strategy but we may not be able to manage our growth effectively and efficiently. Our inability to manage our growth effectively and efficiently could cause us to incur unforeseen costs, time delays or otherwise adversely impact our business. Our rapid growth has presented and will continue to present numerous administrative and operational challenges, including the management of an expanding array of engineering and consulting services, the assimilation of financial reporting systems, increased pressure on our senior management and increased demand on our systems and internal controls. IF WE ARE UNABLE TO OBTAIN ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO FULLY IMPLEMENT OUR ACQUISITION STRATEGY We may need to raise additional equity or debt financing in the future to implement our acquisition strategy (which may include an increase in the number and/or size of acquisitions). If we are unable to raise additional equity or debt financing, we may not be able to fully implement our acquisition strategy. IF WE ARE UNABLE TO SUCCESSFULLY IMPLEMENT OUR ACQUISITION STRATEGY, CURRENT EXPECTATIONS OF OUR GROWTH OR OPERATING RESULTS MAY NOT BE MET Our growth strategy includes the strategic acquisition of companies that expand our service offerings and geographic presence, including acquisitions that may be larger than our historic acquisitions. If we are unsuccessful in implementing our acquisition strategy, we could fail to achieve the revenue and profitability growth that we currently expect. We may not be successful in implementing our acquisition strategy for a number of reasons, including the following: - As the engineering industry consolidates, suitable acquisition candidates are expected to become more difficult to locate and may only be available at an increased price or under terms that are less favorable than are presently available; - We may not be able to locate suitable financing to consummate an acquisition; - We may not be successful in integrating an acquired company's professionals, clientele and culture into ours; - We may not be successful in generating the same level of operating performance as an acquired company experienced prior to the acquisition; - As we expand our service offerings and geographic presence, we may not be able to maintain the current level of quality of services; - We may not be able to maintain our reputation in an acquired entity's geographic area or service offerings and as a consequence, our ability to attract and retain clients in those or other areas may be negatively impacted; - An acquired company may be less profitable than us resulting in reduced profit margins; and - The acquisition and subsequent integration of an acquired company may require a significant amount of management's time diverting their attention from our existing operations and clients, which could result in the loss of key employees or clients. WE COULD LOSE MONEY IF WE FAIL TO ACCURATELY ESTIMATE OUR COSTS ON FIXED-PRICE CONTRACTS OR CONTRACTS WITH NOT-TO-EXCEED PROVISIONS In 2000, approximately 40%, 41% and 19% of our net revenue was derived from fixed-price, time-and-materials with not-to-exceed provisions and time-and-materials contracts, respectively. 15 18 We expect to perform services under contracts that may limit our profitability. Under fixed-price contracts we perform services at a stipulated price. Under time-and-materials contracts with not-to-exceed provisions, we are reimbursed for the number of labor hours expended at an established hourly rate plus the cost of materials incurred, however, there is a stated maximum dollar amount for the services to be provided under the contract. In both of these types of contracts, we agree to provide our services based on our estimate of the costs a particular project will involve. Our estimates are not always accurate. Underestimation of costs for these types of contracts may cause us to incur losses or result in a project not being as profitable as we expected. We may fail to estimate costs accurately for a number of reasons, including: - problems with new technologies; - delays beyond our control; and - changes in the costs of goods and services that may occur during the contract period. THE LOSS OF MR. KEITH COULD ADVERSELY AFFECT OUR BUSINESS, INCLUDING OUR ABILITY TO SECURE AND COMPLETE ENGAGEMENTS AND ATTRACT AND RETAIN EMPLOYEES We do not have an employment agreement with, or maintain key man life insurance on Aram H. Keith, our chief executive officer. If we lose the services of Mr. Keith, we may be less likely to secure or complete contracts and to attract and retain additional employees. The efforts, abilities, business generation capabilities and name recognition of Mr. Keith are important to our success in those activities. OUR SERVICES MAY EXPOSE US TO PROFESSIONAL LIABILITY IN EXCESS OF OUR CURRENT INSURANCE COVERAGE We are exposed to potential liabilities to clients for errors or omissions in the services we perform. Such liabilities could exceed our current insurance coverage and the fees we derive from those services. We cannot always predict the magnitude of these potential liabilities but due to the large size of the projects on which we typically provide services, claims could be millions of dollars. A partially or completely uninsured claim, if successful and of significant magnitude, could result in substantial losses. We currently maintain general liability insurance, umbrella and professional liability insurance. Claims may be made against us which exceed the limits of these policies, in which case we would be liable to pay these claims from our assets. These policies are "claims made" policies and only claims made during the term of the policy are covered. If we terminate our policies and do not obtain retroactive coverage, we would be uninsured for claims made after termination even if these claims are based on events or acts that occurred during the term of the policy. Our insurance policies typically have various exceptions to the claims covered and also require us to assume some costs of the claim even though a portion of the claim may be covered, resulting in potential liability to us. Further, our expansion into new services or geographic areas could result in our failure to obtain coverage for these services or areas, or the coverage being offered at a higher cost than our current coverage. IF WE ARE UNABLE TO ENGAGE QUALIFIED SUBCONTRACTORS, WE MAY LOSE PROJECTS, REVENUES AND CLIENTS We often contract with outside companies to perform designated portions of the services we perform for our clients. If we are unable to engage subcontractors, our ability to perform under some of our contracts may be impeded and the quality of our service may decline. As a consequence, we may lose projects, revenues and clients. In 2000, subcontractor costs accounted for approximately 8% of our net revenue. RISKS RELATED TO OWNERSHIP OF OUR STOCK OUR STOCK PRICE MAY DECREASE, WHICH COULD RESULT IN SIGNIFICANT LOSSES FOR INVESTORS OR ADVERSELY AFFECT OUR BUSINESS For a majority of the time since our initial public offering in July 1999, our common stock has traded at a market price significantly less than the current market price. 16 19 The following factors could cause the market price of our common stock to decrease, perhaps substantially: - the failure of our quarterly operating results to meet expectations; - adverse developments in the financial markets, the real estate market, the engineering and consulting services market and the worldwide economy; - interest rates; - our failure to meet securities analysts' expectations; - changes in accounting principles; - sales of common stock by existing shareholders or holders of options; - announcements of key developments by our competitors; and - the reaction of markets and securities analysts to announcements and developments involving our company. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future, be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. INSIDERS HAVE SUBSTANTIAL CONTROL OVER US, WHICH COULD LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF KEY TRANSACTIONS Our executive officers, directors and one other significant shareholder, in the aggregate, hold approximately 46% of our outstanding common stock. These shareholders, if they act together, can have significant influence over most matters requiring approval by our shareholders, including the election of directors and the approval of mergers or other business combination transactions. IF WE NEED TO SELL OR ISSUE ADDITIONAL SHARES OF COMMON STOCK AND/OR INCUR ADDITIONAL DEBT TO FINANCE FUTURE ACQUISITIONS, YOUR STOCK OWNERSHIP COULD BE DILUTED Our business strategy is to expand into new markets and enhance our position in existing markets through the acquisition of complementary businesses. In order to successfully complete targeted acquisitions or to fund our other activities, we may issue additional equity securities that could dilute your stock ownership. We may also incur additional debt and amortize expenses related to goodwill and other tangible assets if we acquire another company, and this could negatively impact our results of operations. OUR BOARD OF DIRECTORS HAS THE ABILITY TO DISCOURAGE TAKEOVER ATTEMPTS, WHICH MAY REDUCE OR ELIMINATE YOUR ABILITY TO SELL YOUR SHARES FOR A PREMIUM IN A CHANGE OF CONTROL TRANSACTION Our amended and restated articles of incorporation provide us with the ability to issue "blank check" preferred stock without consulting our shareholders. As a result, our board of directors may frustrate a takeover attempt by issuing shares to a friendly shareholder or acquiror, implementing a "poison pill" or otherwise due to features of newly issued preferred stock. SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE COULD CAUSE THE MARKET PRICE OF OUR STOCK TO DROP, EVEN IF OUR BUSINESS IS DOING WELL We have outstanding 5,369,997 shares of common stock. Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales could occur, could adversely affect the market price for our common stock. Certain shareholders hold large amounts of shares which they are able to sell in the public market. Although some of the shares held by these shareholders are subject to restrictions on resale under Rule 144 of the Securities Act of 1933, as amended, or the Securities Act, or because they are subject to lock-up agreements, as these restrictions end, significant resales of these shares could cause the market price of our common stock to decline regardless of the performance of our business. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. 17 20 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains certain forward-looking statements, including among others: - anticipated growth in the real estate development, public works/infrastructure and communications industry and the industrial/energy industry; - anticipated growth and economic expansion in the Western United States; - our business strategy for expanding our presence in these industries; - anticipated trends in our financial condition and results of operations; - anticipated growth in the pace and size of our acquisitions; - anticipated impact of future acquisitions on the condition of our business by industry and geographic location; - the long-term nature of our projects; - our ability to attract and retain employees; - our business strategy for integrating businesses that we acquire; and - our ability to distinguish ourselves from our current and future competitors. You can identify forward-looking statements generally by the use of forward-looking terminology such as "believes," "expects," "may," "will," "intends," "plans," "should," "could," "seeks," "pro forma," "anticipates," "estimates," "continues," or other variations thereof, including their use in the negative, or by discussions of strategies, opportunities, plans or intentions. You may find these forward-looking statements under the captions "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," as well as under other captions elsewhere in this Annual Report on Form 10-K. A number of factors could cause results to differ materially from those anticipated by such forward-looking statements, including those discussed under "Risk Factors" and "Business." These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements contained in this Annual Report on Form 10-K are reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements. ITEM 2. PROPERTIES We occupy offices and facilities in various locations in California, Nevada, Utah, Arizona, Colorado and Wyoming. Our corporate headquarters are located in Costa Mesa, California and consist of approximately 60,000 square feet of space. Our corporate headquarters lease, which consists of separate leases for the two floors that we occupy, extends until October 2003. We also maintain offices in the California cities of Walnut Creek, Moreno Valley, Modesto, Palm Desert, Encino, Carlsbad and Thousand Oaks. Outside of California, we have offices in each of the following locations: Las Vegas, Nevada; Salt Lake City, Utah; Phoenix, Arizona; Denver, Colorado; and Cheyenne, Wyoming. We believe that our existing office space is adequate to meet our current and foreseeable future requirements. ITEM 3. LEGAL PROCEEDINGS In March 2000, Clayton Engineering filed a claim against The Irvine Company alleging that The Irvine Company failed to pay Clayton Engineering for the removal of 30,000 cubic yards of dirt in the Peters Wash located in Irvine, California. JMTA had provided engineering design services for The Irvine Company in connection with this project. JMTA was a wholly-owned subsidiary of ours at the time the claim by Clayton was filed. In January 2001, The Irvine Company filed a claim against JMTA for indemnity. Clayton Engineering is demanding damages in the sum of $2 million against The Irvine Company for construction 18 21 services rendered and $10 million as a result of consequential loss of business opportunity. Clayton Engineering has made the allegation that plans prepared by JMTA were inaccurate as to the elevation of the bottom of the Peters Wash. The Irvine Company has not stated that JMTA violated the standard of care, but has filed an equitable indemnity cross-complaint against JMTA. No demand for settlement has been made against JMTA. In December 2000, JMTA was merged into us. We believe that the claim made against us is without merit and intend to defend ourselves vigorously in this action. We are also involved in other non-material legal proceedings, claims and litigation arising in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 2000. 19 22 PART II ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock has been traded on the Nasdaq National Market since July 13, 1999 under the symbol "TKCI." Prior to July 13, 1999, there was no public market for our common stock. The following table sets forth for each calendar quarter indicated the low and high closing sale prices per share of our common stock as reported on the Nasdaq National Market.
LOW HIGH ----- ------ YEAR ENDED DECEMBER 31, 1999 Third Quarter (beginning July 13)......................... $5.25 $ 9.00 Fourth Quarter............................................ 3.75 6.44 YEAR ENDED DECEMBER 31, 2000 First Quarter............................................. $3.88 $ 5.56 Second Quarter............................................ 3.19 4.88 Third Quarter............................................. 3.94 5.63 Fourth Quarter............................................ 4.94 8.56
At March 23, 2001, there were approximately 56 holders of record and 4,536 beneficial holders of our outstanding shares of common stock and the last reported sale price of our common stock on the Nasdaq National Market was $22.31 per share. We have not declared or paid any cash dividends on our capital stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. In addition, our credit agreement with our bank restricts the payment of dividends without the bank's consent. In connection with our acquisition of Crosby, Mead, Benton & Associates in October 2000, we are obligated to issue to the former shareholders of that company, $1,000,000 in unregistered shares of our common stock payable in two installments on October 13, 2001 and October 21, 2002, subject to adjustment. The issuance of these shares will be exempt from registration under Section 4(2) of the Securities Act of 1933, as amended. The former shareholders of Crosby, Mead, Benton & Associates were provided with full access to the kind of information that would be disclosed if we had registered these shares. Additionally, the former shareholders represented to us that they were acquiring the shares for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends will be affixed to the certificates representing these shares when issued. ITEM 6. SELECTED FINANCIAL DATA The selected financial data includes both consolidated and combined financial statement data for the periods presented. See Note 1 of the "Notes to Consolidated Financial Statements" for a description of which periods reflect consolidated or combined financial statements. All financial statement data is referred to as consolidated. The historical statements of income data for the years ended December 31, 1998, 1999 and 2000, and the historical balance sheet data as of December 31, 1999 and 2000, have been derived from our historical consolidated financial statements audited by KPMG LLP, independent auditors, which consolidated financial statements and independent auditors' report are included elsewhere in this Annual Report on Form 10-K. The historical statements of income data for the years ended December 31, 1996 and 1997, and the historical balance sheet data as of December 31, 1996, 1997 and 1998, have been derived from our audited historical consolidated financial statements which are not included in this Annual Report on Form 10-K. The pro forma statements of income data for the years ended December 31, 1996, 1997 and 1998 are unaudited and reflect pro forma adjustments for provisions for federal and state income taxes at an assumed annual effective income tax rate of approximately 42%. The pro forma statements of income data for the years ended December 31, 1999 and 2000, represents historical amounts at the actual annual effective income tax rates of 42.1% and 40.4%, respectively, and are shown for comparative purposes only. 20 23 The following information should be read in conjunction with our consolidated financial statements and the related notes and our "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are included elsewhere in this Annual Report on Form 10-K.
YEARS ENDED DECEMBER 31, -------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) HISTORICAL STATEMENTS OF INCOME DATA(1) Gross revenue.......................................... $ 14,344 $ 22,585 $ 34,021 $ 43,084 $ 57,835 ---------- ---------- ---------- ---------- ---------- Net revenue........................................ 12,966 18,592 29,182 39,636 53,381 Costs of revenue....................................... 9,229 11,871 19,287 26,987 34,362 ---------- ---------- ---------- ---------- ---------- Gross profit....................................... 3,737 6,721 9,895 12,649 19,019 Selling, general and administrative expenses........... 4,960 4,485 5,858 8,343 10,834 ---------- ---------- ---------- ---------- ---------- Income (loss) from operations...................... (1,223) 2,236 4,037 4,306 8,185 Interest expense....................................... 720 852 967 807 341 Other expenses (income), net........................... 5 83 66 16 (75) ---------- ---------- ---------- ---------- ---------- Income (loss) before provision (benefit) for income taxes and extraordinary gain..................... (1,948) 1,301 3,004 3,483 7,919 Provision (benefit) for income taxes(1)................ 3 (1,397) 1,350 1,466 3,199 ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary gain............ (1,951) 2,698 1,654 2,017 4,720 Extraordinary gain on forgiveness of liability, net of income taxes(2)...................................... 2,686 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Net income......................................... 735 2,698 1,654 2,017 4,720 Reversal (accretion) of redeemable securities to redemption value, net................................ -- -- (230) 230 -- ---------- ---------- ---------- ---------- ---------- Net income available to common shareholders........ $ 735 $ 2,698 $ 1,424 $ 2,247 $ 4,720 ========== ========== ========== ========== ========== Earnings per share -- diluted.......................... $ 0.25 $ 0.87 $ 0.39 $ 0.50 $ 0.89 ========== ========== ========== ========== ========== Weighted average shares outstanding -- diluted......... 2,962,963 3,104,588 3,635,474 4,515,033 5,299,679 ========== ========== ========== ========== ========== EBITDA(3).............................................. $ (934) $ 2,521 $ 4,562 $ 5,314 $ 9,787 ========== ========== ========== ========== ========== PRO FORMA STATEMENTS OF INCOME DATA: Historical income (loss) before provision (benefit) for income taxes and extraordinary gain.................. $ (1,948) $ 1,301 $ 3,004 $ 3,483 $ 7,919 Pro forma provision (benefit) for income taxes......... (818) 546 1,262 1,466 3,199 ---------- ---------- ---------- ---------- ---------- Pro forma income (loss) before extraordinary gain............................................. (1,130) 755 1,742 2,017 4,720 Extraordinary gain on forgiveness of liability, net of income taxes......................................... 1,558 -- -- -- -- ---------- ---------- ---------- ---------- ---------- Pro forma net income............................... 428 755 1,742 2,017 4,720 Reversal (accretion) of redeemable securities to redemption value, net................................ -- -- (230) 230 -- ---------- ---------- ---------- ---------- ---------- Pro forma net income available to common shareholders..................................... $ 428 $ 755 $ 1,512 $ 2,247 $ 4,720 ========== ========== ========== ========== ========== Pro forma earnings per share data-diluted.............. $ 0.14 $ 0.24 $ 0.42 $ 0.50 $ 0.89 ========== ========== ========== ========== ========== Weighted average number of shares outstanding-diluted.................................. 2,962,963 3,104,588 3,635,474 4,515,033 5,299,679 ========== ========== ========== ========== ==========
AS OF DECEMBER 31, -------------------------------------------------------------- 1996 1997 1998 1999 2000 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital (deficit).............................. $ (3,548) $ 2,016 $ 5,180 $ 7,213 $ 7,343 Total assets........................................... 4,677 11,733 14,530 23,661 33,312 Total debt............................................. 6,597 8,087 9,667 4,835 5,745 Total shareholders' equity (deficit)................... (5,227) (1,725) (301) 12,836 18,239
- ------------------------- (1) Prior to August 1, 1998, Keith Engineering, which is included in TKCI's consolidated financial statements, elected to be taxed as an S corporation. (2) In 1994, we accrued $2.0 million relating to excessive lease space in one of our facilities. In 1996, amounts owed under the lease through December 31, 1995 were forgiven, resulting in an extraordinary gain on the forgiveness of the liability and accrued but unpaid rent of $2.7 million, net of income taxes. (3) EBITDA refers to income (loss) before provision (benefit) for income taxes and extraordinary gain plus interest expense and depreciation and amortization expense less interest income. Because all companies do not calculate EBITDA or similarly titled financial measures in the same manner, other companies' disclosures of EBITDA may not be comparable with EBITDA as used here. EBITDA should not be considered as an alternative to net income or loss (as an indicator of operating performance) or as an alternative to cash flow (as a measure of liquidity or ability to service debt obligations) and is not a measure of performance or financial condition under accounting principles generally accepted in the United States of America. EBITDA is intended to provide additional information for evaluating the ability of an entity to meet its financial conditions. 21 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements of TKCI and its subsidiaries and the related notes and the other financial information included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under "Risk Factors" and under other captions contained elsewhere in this Annual Report on Form 10-K. OVERVIEW We derive most of our revenue from professional service activities. The majority of these activities are billed under various types of contracts with our clients, including fixed price and time-and-materials contracts. Most of our time-and-material contracts have not-to-exceed provisions. Revenue is recognized on the percentage of completion method of accounting based on the proportion of actual direct contract costs incurred to total estimated direct contract costs. We believe that costs incurred are the best available measure of progress towards completion on these contracts. In the course of providing services, we sometimes subcontract for various services. These costs are included in billings to clients and, in accordance with industry practice, are included in our gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, we also report net revenue, which is gross revenue less reimbursable subcontractor costs. Our revenue is generated from a large number of relatively small contracts. Costs of revenue include labor, non-reimbursable subcontractor costs, materials and various direct and indirect overhead costs including rent, utilities and depreciation. Direct labor employees work predominantly at our offices and at the clients' job sites. The number of direct labor employees assigned to a contract will vary according to the size, complexity, duration and demands of the project. Contract terminations, completions and scheduling delays may result in periods when direct labor employees are not fully utilized. As we continue to grow, we anticipate that we will continue to add professional and administrative staff to support our growth. These professionals are in great demand and are likely to remain a limited resource for the foreseeable future. The significant competition for employees with the skills we require creates wage pressures on professional compensation. We attempt to increase our billing rates to customers to compensate for wage increases, however, there can be a lag before wage increases can be incorporated into our existing contracts. Some expenses, primarily long-term leases, are fixed and cannot be adjusted in reaction to an economic downturn. Selling, general and administrative expenses consist primarily of corporate costs related to finance and accounting, information technology, business development and marketing, contract proposal, executive salaries, provisions for doubtful accounts, amortization of goodwill and other indirect overhead costs. On August 1, 1998, we were reorganized so that Keith Engineering, an entity under common control with TKCI, became a wholly-owned subsidiary of TKCI. In August 1998, we purchased John M. Tettemer & Associates, Ltd., or JMTA, which provides services relating to flood control and drainage engineering, environmental permitting, and biological surveys and studies. On July 15, 1999, we acquired substantially all of the assets and assumed substantially all of the liabilities of Thompson-Hysell, Inc., or Thompson-Hysell. Further, in July 1999, we completed an initial public offering of 1,500,000 shares of our common stock, resulting in net proceeds of approximately $11,015,000. In October 2000, we acquired Crosby, Mead, Benton & Associates which provides engineering and design services for master planned communities in Southern California. In January 2001, we acquired substantially all of the assets and assumed substantially all of the liabilities of Hook & Associates Engineering, Inc., an engineering and consulting services firm with offices located in Phoenix, Arizona, Denver, Colorado and Cheyenne, Wyoming, providing a full range of services to clients in an array of industries including real estate development, public works/infrastructure and communications. 22 25 RESULTS OF OPERATIONS The following table sets forth supplemental consolidated operating results for each of the periods presented as a percentage of net revenue.
YEARS ENDED DECEMBER 31, ------------------------- 1998 1999 2000 ----- ----- ----- Gross revenue............................................... 117% 109% 108% Subcontractor costs......................................... 17 9 8 ---- ---- ---- Net revenue............................................... 100 100 100 Costs of revenue............................................ 66 68 64 ---- ---- ---- Gross profit.............................................. 34 32 36 Selling, general and administrative expenses................ 20 21 20 ---- ---- ---- Income from operations.................................... 14 11 16 Interest expense............................................ 3 2 1 ---- ---- ---- Income before provision for income taxes.................. 11 9 15 Provision for income taxes.................................. 5 4 6 ---- ---- ---- Net income............................................. 6 5 9 Reversal (accretion) of redeemable securities to redemption value, net................................................ (1) 1 -- ---- ---- ---- Net income available to common shareholders............... 5% 6% 9% ==== ==== ====
YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999 Revenue. Net revenue for 2000 was $53.4 million compared to $39.6 million for 1999, an increase of $13.7 million, or 35%. Net revenue growth for 2000 compared to 1999 resulted primarily from our acquisitions of Thompson-Hysell in July 1999 and Crosby, Mead, Benton & Associates in October 2000, which contributed $14.2 million to net revenue for 2000, compared to $6.3 million in 1999; growth in our surveying and mapping services, resulting primarily from the strong demand for housing in California and Nevada; and from growth in our industrial/energy segment, partially as a result of the need to design and construct backup and new power generation systems needed by individual power users and power providers. Subcontractor costs, as a percentage of net revenue, declined slightly to 8% for 2000 compared to 9% for 1999, resulting largely from a reduction in subcontractor services for several large contracts in our real estate development, public works/infrastructure and communications segment. Gross Profit. Gross profit for 2000 was $19.0 million compared to $12.6 million for 1999, an increase of $6.4 million, or 50%. As a percentage of net revenue, gross profit increased to 36% for 2000 compared to 32% for 1999. The increase in gross profit and gross profit percentage for 2000 compared to 1999, resulted primarily from higher net revenue and profit margins generated through our acquisition of Thompson-Hysell, improved profit margins in our industrial/energy segment, improved utilization of our professionals and an increased focus on contracts with higher profit margins. These gross profit increases were partially offset by an increase in the employer matching contribution of our 401(k) plan in 2000. In addition, gross profit margins in 1999 were negatively impacted by operating results on two large projects, resulting in a less favorable comparison with the 2000 gross profit margin which was not similarly impacted. Costs of revenue for 2000 was $34.4 million compared to $27.0 million for 1999, an increase of $7.4 million, or 27%. Costs of revenue increases resulted primarily from increased expenses associated with the growth in our total employee base from 473 in 1999 to 540 in 2000, an increase of 67, or 14%. Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2000 were $10.8 million compared to $8.3 million for 1999, an increase of $2.5 million, or 30%. As a percentage of net revenue, selling, general and administrative expenses decreased to 20% for 2000 from 21% for 1999. The increases in selling, general and administrative expenses resulted primarily from our acquisitions of Thompson-Hysell in July 1999 and Crosby, Mead, Benton & Associates in October 2000, including the amortization of goodwill; employee recruiting costs; and a full year of other costs associated with operating as a public company. The percentage decrease was due principally to economies of scale associated with our acquisitions, which has resulted in lower administrative costs in comparison to revenue generated. 23 26 Interest Expense. Interest expense for 2000 was $341,000 compared to $807,000 for 1999, a decrease of $466,000, or 58%. As a percentage of net revenue, interest expense was 1% for 2000 compared to 2% for 1999. The percentage decrease resulted largely from the repayment of our previous line of credit and various related party notes payable with a portion of our net proceeds from our initial public offering in July 1999 and the repayment of certain capital leases in 2000. Income Taxes. The provision for income taxes for 2000 was $3.2 million compared to $1.5 million in 1999, an increase of $1.7 million, or 118%. This increase in income tax expense was due primarily to a higher taxable income base, mitigated by a lower effective income tax rate. Our effective income tax rate was approximately 40.4% for 2000 compared to 42.1% for 1999. YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998 Revenue. Net revenue for 1999 was $39.6 million compared to $29.2 million for 1998, an increase of $10.5 million, or 36%. Net revenue increased by $6.2 million as a result of the acquisitions of JMTA in August 1998 and Thompson-Hysell in July 1999. Excluding the revenue from acquisitions, our 1999 net revenue grew $4.2 million, or 15%, compared to 1998, resulting primarily from the continued overall strengthening of the California economy. Subcontractor costs, as a percentage of net revenue, declined to 9% for 1999 compared to 17% for 1998, resulting largely from a decrease of $1.9 million relating to our primary telecommunications contract which came to substantial completion in 1998. Gross Profit. Gross profit for 1999 was $12.6 million compared to $9.9 million for 1998, an increase of $2.8 million, or 28%. Gross profit growth is attributable to both our internal revenue increases as well as the acquisitions of JMTA and Thompson-Hysell. As a percentage of net revenue, gross profit decreased slightly to 32% for 1999 compared to 34% for 1998. The decline in the gross profit percentage is attributable primarily to an increase in the estimated direct contract costs expected to be incurred on two large projects resulting in a reduction to the estimated percentage of completion on these contracts and consequently a $900,000 reduction in gross profit. Excluding this impact, gross profit as a percentage of net revenue was 34% for 1999. The gross profit percentage was further reduced by a decline in the profitability in the industrial, process and manufacturing operations of ESI and our increase in the employer matching contribution of our 401(k) plan in 1999, resulting from the continued need to attract and retain quality professionals. Costs of revenue for 1999 was $27.0 million compared to $19.3 million for 1998, an increase of $7.7 million, or 40%. Costs of revenue increases resulted primarily from growth in our total employee base from 356 in 1998 to 473 in 1999, an increase of 117, or 33%. Excluding our acquisition of Thompson-Hysell in July 1999, the number of total employees increased by 17, or 5%. Selling, General and Administrative Expenses. Selling, general and administrative expenses for 1999 were $8.3 million compared to $5.9 million for 1998, an increase of $2.5 million, or 42%. As a percentage of net revenue, selling, general and administrative expenses increased to 21% for 1999 from 20% for 1998. The percentage increase resulted primarily from the collection in 1998 of approximately $390,000 of accounts receivables written off in prior years. Interest Expense. Interest expense for 1999 was $807,000 compared to $967,000 for 1998, a decrease of $160,000, or 17%. As a percentage of net revenue, interest expense was 2% for 1999 compared to 3% for 1998. The percentage decrease resulted primarily from the repayment of our previous line of credit, notes payable and related party notes payable totaling $7.4 million with the net proceeds from the July 15, 1999 initial public offering. Income Taxes. The provision for income taxes for 1999 was $1.5 million compared to $1.4 million in 1998, an increase of $116,000, or 9%. This increase in tax expense was due primarily to a higher taxable income base partially offset by a higher effective tax rate in 1998 as a result of the conversion of Keith Engineering from an S corporation to a C corporation in August 1998. Our effective income tax rate was approximately 42% for 1999 compared to 45% for 1998. The 1998 effective income tax rate would have been approximately 42% had Keith Engineering been a C corporation at the beginning of 1998. 24 27 QUARTERLY RESULTS The following tables set forth unaudited selected quarterly consolidated financial data for each of our last two fiscal years ended December 31, 1999 and 2000. This data is also expressed as a percentage of net revenue for the respective quarters. This information has been derived from our unaudited consolidated financial statements, which, in the opinion of management, include all adjustments necessary for a fair presentation of the quarterly information. Consolidated results of operations for any one or more quarters are not necessarily indicative of results for an entire year or the results to be expected for any future period.
QUARTERLY RESULTS --------------------------------------------------------------------------------------- THREE MONTHS ENDED --------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1999 1999 1999 1999 2000 2000 2000 2000 -------- -------- --------- -------- -------- -------- --------- -------- CONSOLIDATED STATEMENTS OF INCOME DATA: Gross revenue........................... $9,999 $9,471 $11,397 $12,217 $13,107 $13,567 $14,541 $16,620 ------ ------ ------- ------- ------- ------- ------- ------- Net revenue........................... 8,969 8,643 10,658 11,366 12,419 12,681 13,638 14,643 Costs of revenue........................ 5,914 5,786 7,350 7,937 8,382 8,307 8,448 9,225 ------ ------ ------- ------- ------- ------- ------- ------- Gross profit.......................... 3,055 2,857 3,308 3,429 4,037 4,374 5,190 5,418 Selling, general and administrative expenses.............................. 1,896 1,797 2,211 2,439 2,650 2,486 2,756 2,942 ------ ------ ------- ------- ------- ------- ------- ------- Income from operations................ 1,159 1,060 1,097 990 1,387 1,888 2,434 2,476 Interest expense........................ 260 268 149 130 107 88 65 81 Other expenses (income), net............ (19) (10) 132 (87) 10 22 (111) 4 ------ ------ ------- ------- ------- ------- ------- ------- Income before provision for income taxes............................... 918 802 816 947 1,270 1,778 2,480 2,391 Provision for income taxes.............. 389 340 347 390 508 711 992 988 ------ ------ ------- ------- ------- ------- ------- ------- Net income............................ 529 462 469 557 762 1,067 1,488 1,403 Reversal (accretion) of redeemable securities to redemption value, net... (57) (57) 344 -- -- -- -- -- ------ ------ ------- ------- ------- ------- ------- ------- Net income available to common shareholders........................ $ 472 $ 405 $ 813 $ 557 $ 762 $ 1,067 $ 1,488 $ 1,403 ====== ====== ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUE --------------------------------------------------------------------------------------- THREE MONTHS ENDED --------------------------------------------------------------------------------------- MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, 1999 1999 1999 1999 2000 2000 2000 2000 -------- -------- --------- -------- -------- -------- --------- -------- CONSOLIDATED STATEMENTS OF INCOME DATA: Gross revenue........................... 111% 110% 107% 107% 106% 107% 107% 114% ---- ---- ---- ---- ---- ---- ---- ---- Net revenue........................... 100 100 100 100 100 100 100 100 Costs of revenue........................ 66 67 69 70 67 66 62 63 ---- ---- ---- ---- ---- ---- ---- ---- Gross profit.......................... 34 33 31 30 33 34 38 37 Selling, general and administrative expenses.............................. 21 21 21 21 21 20 20 20 ---- ---- ---- ---- ---- ---- ---- ---- Income from operations................ 13 12 10 9 12 14 18 17 Interest expense........................ 3 3 1 1 2 -- 1 1 Other expenses (income), net............ -- -- 1 -- -- -- (1) -- ---- ---- ---- ---- ---- ---- ---- ---- Income before provision for income taxes............................... 10 9 8 8 10 14 18 16 Provision for income taxes.............. 4 4 3 3 4 6 7 6 ---- ---- ---- ---- ---- ---- ---- ---- Net income............................ 6 5 5 5 6 8 11 10 Reversal (accretion) of redeemable securities to redemption value, net... (1) -- 3 -- -- -- -- -- ---- ---- ---- ---- ---- ---- ---- ---- Net income available to common shareholders........................ 5% 5% 8% 5% 6% 8% 11% 10% ==== ==== ==== ==== ==== ==== ==== ====
Our quarterly revenue and operating results fluctuate primarily as a result of: - client engagements commenced and completed during a quarter; - seasonality; - the number of business days in a quarter; - the number of work days lost as a result of adverse weather conditions or delays caused by third parties; - employee hiring, billing and utilization rates; - the consummation of acquisitions; - the length of the sales cycle on new business; 25 28 - the ability of clients to terminate engagements without penalty; - our ability to efficiently shift our employees from project to project; - the size and scope of assignments; and - general economic conditions. LIQUIDITY AND CAPITAL RESOURCES We have financed our working capital needs and capital expenditure requirements through a combination of internally generated funds, bank borrowings, leases and the sale of our common stock. Cash and cash equivalents as of December 31, 2000, were $1.0 million compared to $1.6 million as of December 31, 1999. Working capital as of December 31, 2000 was $7.3 million compared to $7.2 million as of December 31, 1999, an increase of $130,000, or 2%, resulting primarily from the growth in contracts and trade receivables and costs and estimated earnings in excess of billings, primarily due to our acquisition of Crosby, Mead, Benton & Associates and higher revenue levels. This was offset by an increase in the current portion of long-term debt and capital lease obligations as a note payable with a principal balance of $2.4 million as of December 31, 2000 was reclassified from long-term to short-term based on its maturity date. In addition, our line of credit was reclassified to current based on its September 2001 maturity date. The debt to equity ratio as of December 31, 2000 was 0.31 to 1 compared to 0.38 to 1 as of December 31, 1999. Net cash provided by operating activities decreased $462,000 or 13%, to $3.0 million in 2000 compared to $3.5 million in 1999. The decrease in net cash provided by operating activities was a result of an increase in contracts and trade receivables and costs and estimated earnings in excess of billings and the reduction of trade accounts payable and accrued liabilities, primarily due to the paydown of employee accrued vacation and sick time accumulated in prior years. These decreases were partially offset by higher income before the effects of depreciation and amortization. The 2000 cash generated from operating activities was used primarily to make principal payments on long-term and short-term debt and capital leases, to pay off certain capital leases, to fund capital expenditures, and to partially fund our acquisition of Crosby, Mead, Benton & Associates in October 2000. Capital expenditures for 2000 were $1.3 million compared to $1.2 million in 1999. The 2000 capital expenditures consisted primarily of computer equipment and upgrades to our information systems. We expect to maintain capital expenditures in fiscal 2001 at approximately the 2000 level, before consideration for future acquisitions, to support technology investments. In September 1999, we entered into a new line of credit agreement with a bank, which allows us to borrow up to an aggregate of $8.5 million. The line of credit consists of a working capital component with a maximum outstanding principal balance of $6.0 million, maturing on September 3, 2001, and an equipment component with a maximum outstanding principal balance of $3.5 million, which matured on September 3, 2000. On September 3, 2000 and November 3, 2000, the line of credit was amended to extend the maturity of the equipment component to January 3, 2001. The equipment component ultimately matured on January 3, 2001 and we elected not to amend or extend this component. We plan on reestablishing the equipment component when we renew the working capital component as a result of negotiations with the bank in 2001. The working capital component bears interest at either the prime rate or at approximately 1 3/4% above LIBOR and the equipment component bore interest at either the prime rate or at approximately 2% above LIBOR. At December 31, 2000, the outstanding borrowings under the working capital component of the line of credit was $2.0 million bearing interest at 9.5%. The borrowings on the line of credit agreement were used primarily to fund our acquisition of Crosby, Mead, Benton & Associates and for other working capital needs. Net proceeds of $11,015,000 from our initial public offering in July 1999 were used primarily to repay related party notes payable and accrued interest, to repay notes payable, to repay our previous bank line of credit and to acquire Thompson-Hysell. In 2001, our primary expected sources of liquidity are existing cash balances, cash generated by operations and availability under our credit facility. Our primary cash requirements are expected to include capital expenditures estimated to be approximately $1.5 million and scheduled reductions of principal on outstanding indebtedness of approximately $5.4 million. Assuming our credit facility is renewed at maturity in 26 29 September 2001, or we are able to arrange for a replacement credit facility with a similar availability, we will have sufficient cash resources to fund our anticipated operations and planned capital expenditures and debt reductions for the next 12 months. INFLATION Although our operations can be influenced by general economic trends, we do not believe that inflation had a significant impact on our results of operations for the periods presented. Due to the short-term nature of most of our contracts, if costs of revenue increase, we attempt to pass these increases to our clients. IMPACT OF ISSUED BUT NOT YET ADOPTED ACCOUNTING PRINCIPLES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS Nos. 137 and 138, describes the accounting for derivative instruments and hedging activities. SFAS No. 133, as amended, is effective for the first fiscal quarter of the first fiscal year beginning after June 15, 2000. We do not believe that the implementation of SFAS No. 133, as amended, will have an impact on our financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to interest rate changes primarily as a result of our line of credit and long-term debt, which are used to maintain liquidity and to fund capital expenditures and our expansion. Due to the relatively immaterial levels of our current borrowings, our earnings and cash flows are not materially impacted by changes in interest rates. Promissory notes delivered in connection with our acquisitions have generally been at fixed rates. Our bank line of credit is based on variable interest rates and is therefore affected by changes in market rates. We do not enter into derivative or interest rate transactions for speculative purposes. The table below presents the principal amounts of debt (excluding capital lease obligations of $634,000 and a note payable of $2,372,000), 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 December 31, 2000. Dollars are expressed in thousands.
FAIR 2001 2002 2003 2004 TOTAL VALUE(1) ------ ----- ----- ----- ------ -------- Fixed rate debt(2)................... $ 551 $ 90 $ 57 $ 16 $ 714 $ 714 Average interest rate................ 8.47% 8.21% 8.22% 8.50% 8.41% 8.41% Variable rate debt................... $2,025 -- -- -- $2,025 $2,025 Average interest rate................ 9.50% -- -- -- 9.50% 9.50%
- ------------------------- (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 a note payable with a carrying amount of $2,372,000 due to the nature of this financing. As the table incorporates only those exposures that existed as of December 31, 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. 27 30 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ---- Independent Auditors' Report................................ 29 Consolidated Balance Sheets as of December 31, 1999 and 2000...................................................... 30 Consolidated Statements of Income for the years ended December 31, 1998, 1999 and 2000.......................... 31 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1999 and 2000...... 32 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000.......................... 33 Notes to Consolidated Financial Statements.................. 34
28 31 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders 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, 1999 and 2000, and the related consolidated statements of income, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 1999 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Orange County, California February 14, 2001, except as to the second paragraph of Note 17, which is as of March 22, 2001, and as to the fourth paragraph of Note 9, which is as of April 2, 2001 29 32 THE KEITH COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------- 1999 2000 ----------- ----------- ASSETS Current assets: Cash and cash equivalents................................. $ 1,569,000 $ 1,043,000 Contracts and trade receivables, net of allowance for doubtful accounts of $612,000 and $1,166,000 at December 31, 1999 and 2000, respectively............... 7,176,000 12,089,000 Other receivables......................................... 86,000 211,000 Costs and estimated earnings in excess of billings........ 5,037,000 6,334,000 Prepaid expenses and other current assets................. 415,000 555,000 ----------- ----------- Total current assets.............................. 14,283,000 20,232,000 Equipment and leasehold improvements, net................... 4,536,000 4,713,000 Goodwill, net of accumulated amortization of $109,000 and $329,000 at December 31, 1999 and 2000, respectively...... 4,678,000 8,128,000 Other assets................................................ 164,000 239,000 ----------- ----------- Total assets...................................... $23,661,000 $33,312,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit............................................ $ -- $ 2,025,000 Current portion of long-term debt and capital lease obligations............................................ 1,292,000 3,359,000 Trade accounts payable.................................... 1,048,000 1,689,000 Accrued employee compensation............................. 2,342,000 2,467,000 Current portion of deferred tax liabilities............... 1,102,000 1,541,000 Other accrued liabilities................................. 734,000 807,000 Billings in excess of costs and estimated earnings........ 552,000 1,001,000 ----------- ----------- Total current liabilities......................... 7,070,000 12,889,000 Long-term debt, line of credit and capital lease obligations, less current portion......................... 3,543,000 361,000 Issuable common stock....................................... -- 1,000,000 Deferred tax liabilities.................................... 64,000 719,000 Accrued rent................................................ 148,000 104,000 ----------- ----------- Total liabilities................................. 10,825,000 15,073,000 ----------- ----------- Shareholders' equity: Preferred stock, $0.001 par value. Authorized 5,000,000 shares; no shares issued or outstanding................ -- -- Common stock, $0.001 par value. Authorized 100,000,000 shares in 1999 and 2000; issued and outstanding 4,972,624 and 5,115,882 shares in 1999 and 2000, respectively........................................... 5,000 5,000 Additional paid-in capital................................ 11,770,000 12,453,000 Retained earnings......................................... 1,061,000 5,781,000 ----------- ----------- Total shareholders' equity........................ 12,836,000 18,239,000 ----------- ----------- Commitments and contingencies (Notes 4, 7, 9, and 16) Total liabilities and shareholders' equity........ $23,661,000 $33,312,000 =========== ===========
See accompanying notes to consolidated financial statements. 30 33 THE KEITH COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (NOTE 1)
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1999 2000 ----------- ----------- ----------- Gross revenue....................................... $34,021,000 $43,084,000 $57,835,000 Subcontractor costs................................. 4,839,000 3,448,000 4,454,000 ----------- ----------- ----------- Net revenue....................................... 29,182,000 39,636,000 53,381,000 Costs of revenue.................................... 19,287,000 26,987,000 34,362,000 ----------- ----------- ----------- Gross profit...................................... 9,895,000 12,649,000 19,019,000 Selling, general and administrative expenses........ 5,858,000 8,343,000 10,834,000 ----------- ----------- ----------- Income from operations............................ 4,037,000 4,306,000 8,185,000 Interest expense.................................... 967,000 807,000 341,000 Other expenses (income), net........................ 66,000 16,000 (75,000) ----------- ----------- ----------- Income before provision for income taxes.......... 3,004,000 3,483,000 7,919,000 Provision for income taxes.......................... 1,350,000 1,466,000 3,199,000 ----------- ----------- ----------- Net income........................................ 1,654,000 2,017,000 4,720,000 Reversal (accretion) of redeemable securities to redemption value, net............................. (230,000) 230,000 -- ----------- ----------- ----------- Net income available to common shareholders....... $ 1,424,000 $ 2,247,000 $ 4,720,000 =========== =========== =========== Earnings per share data: Basic............................................. $ 0.41 $ 0.53 $ 0.95 =========== =========== =========== Diluted........................................... $ 0.39 $ 0.50 $ 0.89 =========== =========== =========== Weighted average number of shares outstanding: Basic............................................. 3,485,634 4,211,318 4,983,692 =========== =========== =========== Diluted........................................... 3,635,474 4,515,033 5,299,679 =========== =========== ===========
See accompanying notes to consolidated financial statements. 31 34 THE KEITH COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (NOTE 1)
RETAINED ADDITIONAL EARNINGS SHARES COMMON PAID-IN (ACCUMULATED OUTSTANDING STOCK CAPITAL DEFICIT) TOTAL ----------- ------ ----------- ------------ ----------- Balance at December 31, 1997.... 3,485,634 $3,000 $ 882,000 $(2,610,000) $(1,725,000) Net income...................... -- -- -- 1,654,000 1,654,000 Accretion of redeemable securities.................... -- -- (230,000) -- (230,000) --------- ------ ----------- ----------- ----------- Balance at December 31, 1998.... 3,485,634 3,000 652,000 (956,000) (301,000) Issuance of common stock........ 1,584,590 2,000 11,435,000 -- 11,437,000 Net income...................... -- -- -- 2,017,000 2,017,000 Repurchase of common stock...... (97,600) -- (547,000) -- (547,000) Reversal of accretion of redeemable securities to redemption value, net......... -- -- 230,000 -- 230,000 --------- ------ ----------- ----------- ----------- Balance at December 31, 1999.... 4,972,624 5,000 11,770,000 1,061,000 12,836,000 Issuance of common stock........ 170,258 -- 819,000 -- 819,000 Net income...................... -- -- -- 4,720,000 4,720,000 Repurchase of common stock...... (27,000) -- (136,000) -- (136,000) --------- ------ ----------- ----------- ----------- Balance at December 31, 2000.... 5,115,882 $5,000 $12,453,000 $ 5,781,000 $18,239,000 ========= ====== =========== =========== ===========
See accompanying notes to consolidated financial statements. 32 35 THE KEITH COMPANIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................................. $ 1,654,000 $ 2,017,000 $ 4,720,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 595,000 1,037,000 1,558,000 Loss (gain) on sale of equipment...................... (29,000) 6,000 37,000 Changes in operating assets and liabilities, net of effects from acquisitions: Contracts and trade receivables, net............. (1,597,000) 659,000 (2,271,000) Other receivables................................ (134,000) 197,000 (107,000) Costs and estimated earnings in excess of billings...................................... (423,000) (1,254,000) (1,297,000) Prepaid expenses and other current assets........ 250,000 (337,000) 38,000 Deferred tax assets.............................. 1,224,000 270,000 -- Other assets..................................... 32,000 (29,000) (4,000) Trade accounts payable and accrued liabilities... (1,116,000) 308,000 (540,000) Accrued liabilities to related parties........... 69,000 (185,000) -- Billings in excess of costs and estimated earnings...................................... (187,000) (33,000) 249,000 Deferred tax liabilities......................... 348,000 818,000 629,000 ----------- ----------- ----------- Net cash provided by operating activities..... 686,000 3,474,000 3,012,000 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net cash expended for acquisitions.................... (77,000) (4,636,000) (1,383,000) Additions to equipment and leasehold improvements..... (835,000) (1,225,000) (1,341,000) Proceeds from sales of equipment...................... 126,000 12,000 3,000 ----------- ----------- ----------- Net cash used in investing activities......... (786,000) (5,849,000) (2,721,000) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds (payments) from line of credit, net.......... 1,534,000 (3,730,000) 651,000 Principal payments on long-term debt and capital lease obligations, including current portion............. (1,598,000) (1,171,000) (1,520,000) Borrowings on notes payable to related parties........ 300,000 -- -- Payments on notes payable to related parties.......... (144,000) (2,401,000) -- Repurchase of common stock............................ -- (547,000) (136,000) Payment of deferred offering costs.................... (122,000) (1,114,000) -- Proceeds from issuance of common stock, net........... -- 12,450,000 188,000 ----------- ----------- ----------- Net cash (used in) provided by financing activities.................................. (30,000) 3,487,000 (817,000) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents........................................ (130,000) 1,112,000 (526,000) Cash and cash equivalents, beginning of year.......... 587,000 457,000 1,569,000 ----------- ----------- ----------- Cash and cash equivalents, end of year................ $ 457,000 $ 1,569,000 $ 1,043,000 =========== =========== ===========
See supplemental cash flow information at Note 14. See accompanying notes to consolidated financial statements. 33 36 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (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. 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 December 1999, ESI, a wholly owned subsidiary of TKCI, was merged with and into TKCI. In August 1998, TKCI acquired John M. Tettemer and Associates, Inc. ("JMTA") which was subsequently merged with and into TKCI in December 2000. In July 1999, TKCI acquired substantially all of the assets and assumed substantially all of the liabilities of Thompson-Hysell, Inc. ("Thompson-Hysell"). In October 2000, TKCI acquired Crosby Mead Benton & Associates ("CMB"). TKCI and KEI have been under common management since inception. TKCI and KEI were under common control as a result of a contemporaneous written agreement dated July 1992 between their majority shareholders. This agreement provided for the shareholders to vote in concert and thus the majority shareholders became a common control group. On August 1, 1998, TKCI acquired all of the outstanding common stock of KEI (the "Reorganization") by a contribution to capital of TKCI by KEI's shareholders of all of the outstanding stock of KEI in exchange for the issuance by TKCI of an equal number of shares of its stock. On November 30, 1998, KEI, a wholly owned subsidiary of TKCI, was merged with and into TKCI, and its outstanding shares, all of which were then owned by TKCI, were cancelled as a result of the merger. 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 of TKCI and KEI were carried over at their historical book values and their operations prior to the Reorganization 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. As a result of the Reorganization, the accompanying financial statements include the consolidated assets, liabilities, equity and results of operations of TKCI, KEI, ESI and JMTA effective August 1, 1998 (see Note 2). TKCI and its wholly-owned subsidiaries (the "Company") is a full service engineering and consulting services firm providing professional services on a wide range of projects pursuant to short- and long-term construction type contracts to both the real estate development, public works/infrastructure and communications industry and the industrial/energy industry. These services are rendered principally in California, Nevada and Utah. The Company provides a full range of services from initial site acquisition studies through construction support services to clients operating in a variety of market sectors. The Company benefits from a diverse public and private client base including real estate developers, residential and commercial builders, architects, cities, counties, water districts, state and federal agencies, land owners, commercial retailers, energy providers and various manufacturers. The Company's professional staff provides a comprehensive menu of services that are needed to effectively manage, engineer and design infrastructure and state-of-the-art facilities. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of TKCI, KEI, ESI, JMTA and CMB (see Note 1). All material intercompany transactions and balances have been eliminated in consolidation. 34 37 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 CASH AND CASH EQUIVALENTS Cash equivalents are comprised of highly liquid debt instruments with maturities of three months or less when purchased. The Company invests its excess cash in a money market mutual fund, which consists of a portfolio of short-term money market instruments. All of the Company's excess cash is with one financial institution and, therefore, may be subject to certain concentration of credit risks. 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, many 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 like 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 some direct and indirect overhead costs like 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 the 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 revenue 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. At December 31, 1999 and 2000, 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.............................................. 3 to 10 years Leasehold improvements................................. 1 to 10 years
35 38 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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, net in the accompanying consolidated statements of income. INCOME TAXES Prior to August 1, 1998, KEI, with the consent of its shareholders, elected to be taxed as an S corporation under the Internal Revenue Code of 1986, as amended. As an S corporation, corporate income or loss flowed through to the shareholders who were 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 was 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. The Company accounts 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. 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, $99,000 and $220,000 for the years ended December 31, 1998, 1999 and 2000, 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. 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. 36 39 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 STOCK SPLIT On April 23, 1999, the board of directors authorized a 2.70-for-1 reverse split of TKCI's common stock, effective April 26, 1999. All share amounts in the accompanying consolidated financial statements (except for shares of authorized common stock) have been restated to give effect to the stock split. PAR VALUE On June 22, 1999, TKCI established a par value for its common and preferred stock of $0.001 per share. Prior to this date, the Company's common and preferred stock had no par value. All amounts in the accompanying consolidated financial statements have been restated to give effect to the $0.001 per share par value. EARNINGS PER SHARE Basic earnings per share ("EPS") is computed by dividing net income 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 net income 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.
YEARS ENDED DECEMBER 31, --------------------------------- 1998 1999 2000 --------- --------- --------- Weighted average shares used for the basic EPS computation......................................... 3,485,634 4,211,318 4,983,692 Incremental shares from the assumed exercise of dilutive stock options and stock warrants, issuable shares and contingently issuable shares............. 149,840 303,715 315,987 --------- --------- --------- Weighted average shares used for the diluted EPS computation......................................... 3,635,474 4,515,033 5,299,679 ========= ========= =========
In conjunction with certain acquisitions, the Company agreed to pay consideration consisting of shares of its common stock (see Note 4). As a result, the Company estimated and included 55,562 and 138,219 weighted average contingently issuable and issuable shares in its weighted average shares used for the diluted EPS computation for the years ended December 31, 1999 and 2000, respectively. These estimates are based upon the number of shares that are issuable at December 31, 2000 and that would have been issuable at December 31, 1999 and through the date of issuance in 2000, weighted for the assumed period the shares were outstanding (commencing the later of the date of acquisition or the beginning of the fiscal year). There were 236,296, 211,233 and 475,248 anti-dilutive weighted potential common shares excluded from the above calculation in 1998, 1999 and 2000, respectively. USE OF ESTIMATES IN THE PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS The preparation of these consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions 37 40 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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. RISKS AND UNCERTAINTIES As of December 31, 2000, approximately 10% of the Company's work force is covered by collective bargaining agreements that expire during 2001. RECLASSIFICATIONS Certain 1999 balances have been reclassified to conform to the presentation used in 2000. (3) INITIAL PUBLIC OFFERING OF COMMON STOCK On July 15, 1999, the Company completed an initial public offering of 1,500,000 shares of its common stock. The offering price was $9.00 per share resulting in proceeds of approximately $11,015,000 to TKCI, net of underwriters' discount and offering costs. The Company's common stock is traded on the NASDAQ National Market under the symbol "TKCI." The Company primarily used proceeds of the initial public offering to repay related party notes payable and accrued interest of $2,647,000, to repay notes payable and accrued interest of $251,000, to repay the previous bank line of credit of $4,731,000 and to acquire substantially all of the assets of and assume substantially all of the liabilities of Thompson-Hysell. (4) ACQUISITIONS CROSBY, MEAD, BENTON & ASSOCIATES On October 13, 2000, TKCI acquired all of the outstanding shares of common stock of CMB. The purchase price was $2,455,000, consisting of cash of $1,216,000, $239,000 of other acquisition related costs and $500,000 in shares of common stock issuable in each of 2001 and 2002. The common stock issuable is subject to adjustments extending up to one year from the date of acquisition related to the book values of net assets acquired, accounts receivable, costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings that existed at the date of acquisition. The acquisition of CMB was accounted for using the purchase method of accounting and, accordingly, the accompanying consolidated financial statements include the assets, liabilities and results of operations of CMB since the date of the acquisition. The excess of the purchase price over the estimated fair market value of the net identified assets acquired of $2,040,000 was recorded as goodwill and will be amortized over a period of 25 years. THOMPSON-HYSELL, INC. In conjunction with its initial public offering, on July 15, 1999, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Thompson-Hysell. The Company paid cash in the amount of $4,636,000, which consisted of $4,310,000 to Thompson-Hysell and $326,000 of other acquisition related costs. In addition, contingent consideration consisted of (i) shares of common stock with a value at the initial public offering equal to $1,333,000, and (ii) a promissory note in the original principal amount of $1,333,000, payable in 2001. The issuance of common stock and the principal balance of the promissory note were contingent upon earnings for the years ended December 31, 1998, 1999 and 2000. In October 2000, the Company issued 120,157 shares of its common stock valued at $631,000 based on the attainment of 1999 38 41 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 earnings and increased goodwill by this amount. In December 2000, the Company increased goodwill and the principal balance on the promissory note by $1,039,000 based on the attainment of 2000 earnings before interest and taxes, as defined. The acquisition was accounted for using the purchase method of accounting. Goodwill, which represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed, in the amount of $5,846,000 is being amortized over a period of 25 years. The following unaudited pro forma data presents information as if the acquisition of Thompson-Hysell had occurred on January 1, 1998, and the acquisition of CMB had occurred on January 1, 1999. The pro forma data is provided for informational purposes only and is based on historical information. The pro forma data does not necessarily reflect the actual results of operations that would have occurred had Thompson-Hysell, CMB and TKCI comprised a single entity during the periods presented, nor is it necessarily indicative of future results of operations of the combined entities.
PRO FORMA FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1999 2000 ----------- ----------- ----------- (UNAUDITED) Net revenue................................... $37,648,000 $51,455,000 $58,428,000 Net income available to common shareholders... $ 2,467,000 $ 2,893,000 $ 4,764,000 Basic earnings per share...................... $ 0.71 $ 0.69 $ 0.96
JOHN M. TETTEMER & ASSOCIATES, INC. On August 1, 1998, TKCI acquired all of the outstanding common stock of JMTA for $740,000, which consisted of cash of $150,000; $240,000 in amortizing notes bearing interest at 8% payable in 60 monthly payments; $250,000 in interest only notes bearing interest at 8% payable quarterly, which were paid in conjunction with the initial public offering; warrants to purchase 55,555 shares of TKCI common stock, exercisable immediately at a purchase price of $4.73 per share, expiring July 31, 2003; and $100,000 of other acquisition related costs. The fair value of the warrants, calculated using the Black-Scholes option pricing model assuming an estimated fair value of common stock at issue date of $3.78 per share, a risk free interest rate of 5% and no stock dividend yield, was immaterial and therefore excluded from the purchase price. The amortizing notes include the principal stockholder of TKCI as co-maker. 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 totaled $571,000 and has been recorded as goodwill in the accompanying consolidated balance sheets and is being amortized over a period of 25 years. During 1999, goodwill and the principal balance of the amortizing notes were reduced by $60,000 to reflect an adjustment to JMTA's book value at August 1, 1998. (5) EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements at December 31, 1999 and 2000 consist of the following:
1999 2000 ----------- ----------- Equipment......................................... $ 8,026,000 $ 9,361,000 Leasehold improvements............................ 430,000 438,000 Accumulated depreciation and amortization......... (3,920,000) (5,086,000) ----------- ----------- Equipment and leasehold improvements, net....... $ 4,536,000 $ 4,713,000 =========== ===========
39 42 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 At December 31, 1999 and 2000, the cost of computer equipment, vehicles and office furniture and fixtures recorded under capital leases, net of the related accumulated amortization, were $2,109,000 and $1,036,000, respectively. (6) INDEBTEDNESS LINE OF CREDIT, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
DECEMBER 31, ------------------------- 1999 2000 ----------- ----------- Line of credit (see (a) below).............................. $ 1,300,000 $ 2,025,000 Note payable; no stated interest rate; interest imputed at an annual rate of 10.75%; payable in monthly installments of $12,000, including interest, repaid in September 2000 (see (b) below)........................................... 253,000 -- Notes payable; interest ranging from 0.90% to 13.22%; payable in monthly installments ranging from $1,000 to $26,000, including interest, through 2004 (see (b) below).................................................... 353,000 517,000 Notes payable; bearing interest at 8%; each payable in monthly installments of $2,000, including interest, through August 2003....................................... 177,000 132,000 Note payable; bearing interest at 10%; interest only payable quarterly; principal and unpaid interest due April 2001 (see (c) below)........................................... 1,333,000 2,372,000 Capital lease obligations; interest ranging from 4.98% to 19%; payable in monthly installments ranging from $1,000 to $6,000, including interest, through 2005 (see (b) below).................................................... 1,382,000 634,000 Other....................................................... 37,000 65,000 ----------- ----------- 4,835,000 5,745,000 Less current portion........................................ (1,292,000) (5,384,000) ----------- ----------- $ 3,543,000 $ 361,000 =========== ===========
(a) On September 1, 1999, the Company entered into a line of credit agreement with a bank to fund working capital needs and the acquisitions of equipment. The line of credit has a working capital component with a maximum outstanding principal balance of $6,000,000 which matures on September 3, 2001 and an equipment component with a maximum outstanding principal balance of $3,500,000, which matured on September 3, 2000. On September 3, 2000 and November 3, 2000, the line of credit was amended to extend the maturity on the equipment component to January 3, 2001. The equipment component matured on January 3, 2001 and the Company elected not to formally amend or extend this component. The Company plans on reestablishing the equipment component when it renews the working capital component during negotiations with the bank in 2001. The working capital component bears interest at either the prime rate or approximately one and three-quarters percent above LIBOR, and the equipment component bore interest at either the prime rate or at approximately two percent above LIBOR. The aggregate outstanding principal balance of working capital advances and equipment advances can not exceed $8,500,000. Subsequent to the maturity of the equipment component, the aggregate outstanding principal balance can not exceed $6,000,000. The line of credit is subject to various restrictions and contains certain financial and nonfinancial related covenants. In addition, the line of credit is collateralized by a first-priority security interest in all accounts receivable and other rights to payment, general intangibles and equipment. As of December 2000, there were no outstanding borrowings on the equipment component of the line of credit and the working capital component had outstanding borrowings of $2,025,000 bearing interest at 9.5% (the prime rate). 40 43 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 The Board of Directors authorized the Company to repurchase its common stock and on October 13, 1999, the Company requested and was granted a waiver from the bank to repurchase or otherwise acquire any shares of any class of its stock up to $700,000 through the period ending October 13, 2000. As of December 31, 2000, the Company purchased 124,600 shares of its common stock at a cost of $683,000. (b) The notes payable and capital lease obligations are secured by certain assets of the Company. (c) An unsecured promissory note was executed in conjunction with the Asset Purchase Agreement dated April 9, 1999 between the Company and Thompson-Hysell related to the acquisition of substantially all of the assets and the assumption of substantially all of the liabilities of Thompson-Hysell (see Note 4). In accordance with the terms of the note, the principal balance has been increased by $1,039,000 based upon the attainment of performance criteria tied to December 31, 2000 earnings before interest and taxes, as defined in the note. Future annual principal maturities of indebtedness as of December 31, 2000 are as follows: YEARS ENDING DECEMBER 31: 2001................................................... $5,384,000 2002................................................... 264,000 2003................................................... 78,000 2004................................................... 17,000 2005................................................... 2,000 ---------- $5,745,000 ==========
In connection with the initial public offering in July 1999, the Company repaid debts, including accrued interest, to related parties totaling $2,647,000. There were no outstanding borrowings to related parties as of December 31, 1999 and 2000. (7) LEASES The Company leases equipment and vehicles under capital lease agreements that expire at various dates through 2005. The Company also has several noncancelable operating leases, primarily for office facilities, that expire through 2008. These leases generally contain renewal options for periods ranging from one to five years and require the Company to pay costs, including common area maintenance and insurance charges. Rental expense for operating leases during 1998, 1999 and 2000 totaled $1,671,000, $2,216,000 and $2,409,000, respectively. 41 44 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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 $64,000, $22,000 and $11,000 for the years ended December 31, 1998, 1999 and 2000, respectively. Future minimum lease payments as of December 31, 2000 are as follows:
OPERATING CAPITAL LEASES LEASES ---------- --------- YEARS ENDING DECEMBER 31: 2001............................................. $2,779,000 $ 482,000 2002............................................. 2,209,000 183,000 2003............................................. 1,638,000 22,000 2004............................................. 699,000 3,000 2005............................................. 634,000 2,000 Thereafter....................................... 396,000 -- ---------- --------- Total future minimum lease payments................... $8,355,000 692,000 ========== Less amounts representing interest.................... (58,000) --------- Total obligations under capital leases................ 634,000 Less current portion.................................. (437,000) --------- Long-term capital lease obligations................... $ 197,000 =========
(8) REDEEMABLE SECURITIES AND STOCK INDEMNIFICATION RIGHTS In connection with the acquisition of ESI in December 1997, TKCI issued to the sellers 74,074 shares of common stock, redeemable at the discretion of any seller at a price of $6.75 per share, if the Company did not complete an initial public offering by October 31, 1999. This right of the sellers expired November 15, 1999. The redeemable common stock was valued at $2.70 per share on the date of the acquisition of ESI. The difference between the redemption value of $6.75 per share and the initial valuation of $2.70 per share was accreted over the period from the acquisition, December 30, 1997, through the date of the initial public offering, July 15, 1999, through charges to additional paid-in capital. In connection with the acquisition of ESI, TKCI also issued to the sellers stock options to purchase 44,444 shares of common stock with redemption provisions. The redemption provisions provided that in the event that the underlying shares did not have a fair market value of at least $8.10 per share at some time during the period between the date of the Company's initial public offering and October 1, 2002, the holders were entitled to receive $5.40 in cash for each unexercised vested option (or $8.10 for each share of common stock issued upon exercise of a stock option). The $5.40 redemption value was accreted over the period from the acquisition, December 30, 1997 through the date of the initial public offering, July 15, 1999, through charges to additional paid-in capital. As a result of the Company's completion of its initial public offering at $9.00 per share in July 1999, the redeemable securities were no longer redeemable and, accordingly, $353,000 of accumulated accretion on redeemable securities was reclassified to common stock and additional paid-in capital. Subsequent to the acquisition of ESI, TKCI agreed to indemnify certain holders of 40,000 shares of common stock issued in connection with the acquisition of ESI against a market decline in TKCI's common stock after the initial public offering of TKCI's common stock. The excess of the guarantee price over the market value of the 40,000 shares of common stock of $100,000 on November 11, 1999 was paid and is recorded as a component of other expenses in the accompanying consolidated statement of income for the year ended December 31, 1999. 42 45 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (9) COMMON STOCK AND STOCK PLANS The following stock options and stock warrants are authorized for issuance at December 31, 2000: Stock options............................................. 1,111,111 Stock warrants related to acquisitions.................... 150,000 --------- 1,261,111 =========
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, key employees and directors. The Plans, as amended in 1997, authorized grants of options to purchase 555,556 shares each of authorized but unissued common stock in TKCI and KEI. Stock options have been 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 that vest and become exercisable ratably each year for a period of up to 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"). On April 23, 1999, the stock option plan was amended to increase the number of options authorized for grant to 1,111,111. In September 2000, the Company made an offer to option holders which gave them a one-time election to have the Company cancel their options as of September 30, 2000 and to receive new options covering the same number of shares at an option exercise price equal to market value on a date six months and one day later. Prior to the expiration of the six month and one day period, the Securities and Exchange Commission stated its position regarding the regulatory treatment of such offers. Based on that position and consultation with legal counsel, the Company concluded that the attempt by the Company to cancel the options was ineffective and the participants continue to hold their original options. At December 31, 2000, there were options to acquire 198,034 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, ------------------------- 1998 1999 2000 ----- ----- ----- Weighted average estimated fair value per share of common stock at grant date........................... $3.40 $5.60 $5.50 Average exercise price per option granted.............. $3.40 $5.60 $5.50 Expected volatility.................................... 0.0% 29.4% 51.5% Risk-free interest rate................................ 5.0% 6.5% 5.0% Option term (years).................................... 10 10 10 Stock dividend yield................................... 0.0% 0.0% 0.0%
In accounting for its Plan, 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 43 46 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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, -------------------------------------- 1998 1999 2000 ---------- ---------- ---------- Net income available to common shareholders: As reported.................................. $1,424,000 $2,247,000 $4,720,000 Pro forma.................................... $1,371,000 $2,077,000 $4,481,000 Basic earnings per share: As reported.................................. $ 0.41 $ 0.53 $ 0.95 Pro forma.................................... $ 0.39 $ 0.49 $ 0.90
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 WEIGHTED- SHARES AVERAGE UNDERLYING EXERCISE OPTIONS PRICE ---------- --------- Balance at December 31, 1997........................ 344,074 Granted........................................... 142,593 $5.13 Forfeited......................................... (1,111) $2.70 -------- Balance at December 31, 1998........................ 485,556 Granted........................................... 317,414 $8.91 Exercised......................................... (10,523) $2.83 Forfeited......................................... (26,165) $6.95 -------- Balance at December 31, 1999........................ 766,282 Granted........................................... 178,150 $4.95 Exercised......................................... (30,095) $3.09 Forfeited......................................... (41,878) $6.69 -------- Balance at December 31, 2000........................ 872,459 ========
The weighted average remaining contractual life and weighted average exercise price of options outstanding and of options exercisable as of December 31, 2000, were as follows:
OUTSTANDING ----------------------------------------- EXERCISABLE NUMBER OF WEIGHTED ---------------------- SHARES AVERAGE WEIGHTED SHARES WEIGHTED UNDERLYING REMAINING AVERAGE UNDERLYING AVERAGE RANGE OF OPTIONS CONTRACTUAL LIFE EXERCISE OPTIONS EXERCISE EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE PRICE --------------- ----------- ---------------- -------- ----------- -------- $2.70.............................. 353,079 5.55 $2.70 267,357 $2.70 $3.38 to $7.44..................... 204,911 8.96 $4.99 13,714 $5.40 $8.06 to $9.90..................... 314,469 8.46 $9.00 82,739 $8.92
At December 31, 1998, 1999 and 2000, the number of shares of common stock subject to exercisable options were 158,889, 284,806 and 363,810, respectively, and the weighted-average exercise prices of those options were $2.70, $3.26 and $4.22, respectively. 44 47 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 In 1998, 1999 and 2000, in connection with acquisitions, TKCI reserved for grant options to purchase 179,630 shares of its common stock to employees of the acquired companies under the Plan. As of December 31, 2000, options to purchase 141,248 shares of common stock reserved for grant have been granted subject to the Plan. STOCK WARRANTS The Company issued stock warrants to purchase common stock in connection with the acquisitions of Thompson-Hysell, JMTA and ESI. The terms of stock warrants to acquire shares of common stock are as follows at December 31, 2000:
REMAINING GRANT DATE GRANTED EXERCISED EXERCISABLE EXERCISE PRICE EXPIRATION DATE ---------- ------- --------- ----------- -------------- --------------- August 3, 1998.................... 55,555 20,000 35,555 $4.73 July 31, 2003 September 15, 1998................ 27,778 -- 27,778 $6.75 September 18, 2001 July 15, 1999..................... 66,667 -- 66,667 $6.75 July 15, 2002 ------- ------ ------- 150,000 20,000 130,000 ======= ====== =======
Warrants are generally granted with an exercise price equal to or greater than the underlying stock's estimated fair market value at the date of grant, vest immediately and may be exercised at any time until the expiration date. During 1999, 66,667 warrants were issued with an exercise price less than the stock's estimated fair market value at the date of grant. The $150,000 difference between the fair market value of the stock at the date of grant and the exercise price was included as a component of the purchase price of Thompson-Hysell (see Note 4). COMMON STOCK All issued and outstanding shares of KEI stock prior to the Reorganization were exchanged into an equivalent number of shares of TKCI stock and all of the shares of KEI stock were subsequently cancelled. The outstanding shares of TKCI stock prior to the Reorganization remained outstanding and were not affected by the Reorganization. (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 on a tax-deferred basis through a "salary reduction" arrangement. In 1998, the Company implemented a discretionary employer matching contribution program, with a five-year vesting schedule, whereby the Company matched 50% of the first 1% of employee contributions for the year. 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. Effective January 1, 2000, the Company increased the employer contribution percentage to 100% of the first 3%, plus 50% of the next 2% of employee contributions, vesting immediately. During 1998, 1999 and 2000, the Company incurred $55,000, $336,000 and $851,000, respectively, related to its 401(k) plans, which represented the Company's entire obligations under the employer matching contribution program for the years ended December 31, 1998, 1999 and 2000. 45 48 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (11) INCOME TAXES Income tax expense (benefit) consists of the following:
YEARS ENDED DECEMBER 31, ------------------------------------ 1998 1999 2000 ---------- ---------- ---------- Current: Federal.......................................... $ (29,000) $ 260,000 $2,036,000 State............................................ (99,000) 118,000 534,000 ---------- ---------- ---------- Subtotal...................................... (128,000) 378,000 2,570,000 ---------- ---------- ---------- Deferred: Federal.......................................... 1,262,000 999,000 514,000 State............................................ 216,000 89,000 115,000 ---------- ---------- ---------- Subtotal...................................... 1,478,000 1,088,000 629,000 ---------- ---------- ---------- Total......................................... $1,350,000 $1,466,000 $3,199,000 ========== ========== ==========
A reconciliation of income tax at the federal statutory rate of 34% to the Company's provision for income taxes is as follows:
YEARS ENDED DECEMBER 31, ------------------------------------ 1998 1999 2000 ---------- ---------- ---------- Computed "expected" federal income tax expense..... $1,021,000 $1,184,000 $2,692,000 State income tax expense, net of federal income tax benefit.......................................... 77,000 167,000 451,000 Tax effect of earnings not subject to federal income tax due to S corporation election......... (513,000) -- -- Tax effect of S to C corporation conversion........ 595,000 -- -- Change in federal deferred tax valuation allowance........................................ 35,000 (35,000) -- Other.............................................. 135,000 150,000 56,000 ---------- ---------- ---------- $1,350,000 $1,466,000 $3,199,000 ========== ========== ==========
46 49 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 The tax effects of temporary differences that give rise to significant portions of deferred tax assets and liabilities are as follows:
DECEMBER 31, ----------------------- 1999 2000 ---------- ---------- Deferred tax assets: Accrued liabilities and employee compensation....... $ 355,000 $ 289,000 Billings in excess of costs and estimated earnings......................................... 216,000 392,000 Allowance for doubtful accounts..................... 203,000 617,000 Settlement obligations.............................. 99,000 -- Other............................................... 170,000 249,000 Net operating loss carryforwards.................... 271,000 -- ---------- ---------- Total deferred tax assets........................ 1,314,000 1,547,000 ---------- ---------- Deferred tax liabilities: Equipment and improvements, net..................... 117,000 284,000 Section 481, change from cash to accrual............ 262,000 622,000 Costs and estimated earnings in excess of billings......................................... 1,972,000 2,643,000 Other............................................... 129,000 258,000 ---------- ---------- Total deferred tax liabilities................... 2,480,000 3,807,000 ---------- ---------- Net deferred tax liabilities..................... $1,166,000 $2,260,000 ========== ==========
The net change in the valuation allowance for the years ended December 31, 1998, 1999 and 2000 was an increase of $31,000, a decrease of $62,000, and no increase or decrease, 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. As of December 31, 2000, the Company had no federal or state net operating loss carryforwards available to offset future taxable income. (12) 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/Infrastructure and Communications ("REPWIC") segment includes engineering and consulting services for the development of both private projects, like residential communities, commercial and industrial properties and recreational projects; public works/infrastructure projects, such as transportation and water/sewage facilities; and site acquisition and construction management services for wireless telecommunications. The Industrial/Energy ("IE") segment, which consists of the division of ESI, provides the technical expertise and management required to design and test manufacturing facilities and processes and to facilitate the construction of alternate electrical power systems that supplement public power supply and large scale power consumers. The accounting policies of the segments are the same as those described in Note 2. 47 50 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 The following tables set forth information regarding the Company's operating segments as of and for the years ended December 31, 1998, 1999 and 2000.
YEAR ENDED DECEMBER 31, 1998 ----------------------------------------------------- CORPORATE REPWIC IE COSTS CONSOLIDATED ----------- ---------- ----------- ------------ Net revenue.................................. $25,330,000 $3,852,000 $ -- $29,182,000 Income from operations....................... $ 6,491,000 $ 244,000 $(2,698,000) $ 4,037,000 Identifiable assets.......................... $13,068,000 $1,462,000 $ -- $14,530,000
YEAR ENDED DECEMBER 31, 1999 ----------------------------------------------------- CORPORATE REPWIC IE COSTS CONSOLIDATED ----------- ---------- ----------- ------------ Net revenue.................................. $36,009,000 $3,627,000 $ -- $39,636,000 Income from operations....................... $ 7,877,000 $ 172,000 $(3,743,000) $ 4,306,000 Identifiable assets.......................... $22,497,000 $1,164,000 $ -- $23,661,000
YEAR ENDED DECEMBER 31, 2000 ----------------------------------------------------- CORPORATE REPWIC IE COSTS CONSOLIDATED ----------- ---------- ----------- ------------ Net revenue.................................. $48,939,000 $4,442,000 $ -- $53,381,000 Income from operations....................... $12,433,000 $ 733,000 $(4,981,000) $ 8,185,000 Identifiable assets.......................... $31,294,000 $2,018,000 $ -- $33,312,000
BUSINESS CONCENTRATIONS In 1998, 1999 and 2000, the Company had no customers which represented greater than 10% of consolidated net revenue. No customers represented greater than 10% of net contract and trade receivables at December 31, 1999 and 2000. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's financial instruments reported in the accompanying consolidated balance sheets for cash and cash equivalents, contracts and trade receivables, other receivables, line of credit, trade accounts payable, accrued employee compensation, and other accrued liabilities approximate their fair values due to the short maturity of these instruments. At December 31, 2000, notes payable with a carrying amount of $714,000 approximate fair value, determined using estimates for similar debt instruments (see Note 6). At December 31, 2000, the fair value of a note payable with a carrying amount of $2,372,000 was not determinable due to the nature of this financing (see Note 6). 48 51 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (14) SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31, ----------------------------------- 1998 1999 2000 ---------- --------- ---------- Supplemental disclosure of cash flow information: Cash paid during the year for interest................. $1,024,000 $ 975,000 $ 377,000 ========== ========= ========== Cash paid during the year for income taxes............. $ 144,000 $ 124,000 $2,602,000 ========== ========= ========== Noncash financing and investing activities: Capital lease obligations recorded in connection with equipment acquisitions.............................. $ 788,000 $ 258,000 $ -- ========== ========= ========== Purchase price adjustment to goodwill and notes payable............................................. $ -- $ 60,000 $1,039,000 ========== ========= ========== Purchase price adjustment to equipment and leasehold improvements and additional paid-in capital......... $ 26,000 $ 42,000 $ -- ========== ========= ========== Purchase price adjustment to goodwill, common stock and additional paid-in-capital.......................... $ -- $ -- $ 631,000 ========== ========= ========== Accretion (reversal) of redeemable securities to redemption value, net............................... $ 230,000 $(230,000) $ -- ========== ========= ========== Insurance financing...................................... $ 202,000 $ 174,000 $ 163,000 ========== ========= ==========
The acquisition of JMTA, Thompson-Hysell and CMB resulted in the following increases:
YEARS ENDED DECEMBER 31, ------------------------------------- 1998 1999 2000 --------- ----------- ----------- Contracts and trade receivables........................ $(309,000) $(2,253,000) $(2,642,000) Costs and estimated earnings in excess of billings..... (201,000) -- -- Other receivables and prepaid expenses................. -- (1,000) (33,000) Goodwill............................................... (571,000) (4,216,000) (2,000,000) Equipment and leasehold improvements................... (56,000) (1,105,000) (214,000) Other assets........................................... (29,000) (5,000) (71,000) Line of credit......................................... -- -- 74,000 Billings in excess of costs and estimated earnings..... -- 150,000 200,000 Long-term debt, including current portion.............. 640,000 2,446,000 503,000 Accounts payable, accrued expenses and other liabilities.......................................... 449,000 198,000 1,335,000 Deferred tax liabilities............................... -- -- 465,000 Issuable common stock.................................. -- -- 1,000,000 Common stock........................................... -- 150,000 -- --------- ----------- ----------- Net cash expended for acquisitions................... $ (77,000) $(4,636,000) $(1,383,000) ========= =========== ===========
49 52 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (15) VALUATION AND QUALIFYING ACCOUNTS For the years ending December 31, 1998, 1999 and 2000, the following is supplementary information regarding valuation and qualifying accounts:
BALANCE AT PROVISIONS FOR BEGINNING OF DOUBTFUL BALANCE AT END PERIOD ACCOUNTS DEDUCTIONS OF PERIOD ------------ -------------- ---------- -------------- Allowance for doubtful accounts: 1998.......................................... $348,000 $300,000 $284,000 $ 364,000 1999.......................................... $364,000 $614,000 $366,000 $ 612,000 2000.......................................... $612,000 $671,000 $117,000 $1,166,000
(16) COMMITMENTS AND CONTINGENCIES In March 2000, Clayton Engineering filed a claim against The Irvine Company alleging that The Irvine Company failed to pay Clayton Engineering for the removal of 30,000 cubic yards of dirt in the Peters Wash located in Irvine, California. JMTA had provided engineering design services for The Irvine Company in connection with this project. JMTA was a wholly-owned subsidiary at the time the claim by Clayton was filed. In January 2001, The Irvine Company filed a claim against JMTA for indemnity. Clayton Engineering is demanding damages in the sum of $2,000,000 against The Irvine Company for construction services rendered and $10,000,000 as a result of consequential loss of business opportunity. Clayton Engineering has made the allegation that plans prepared by JMTA were inaccurate as to the elevation of the bottom of the Peters Wash. The Irvine Company has not stated that JMTA violated the standard of care, but has filed an equitable indemnity cross-complaint against JMTA. No demand for settlement has been made against JMTA. The Company believes that the claim made against it is without merit and intends to defend itself vigorously in this action. The Company is also 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 should not have a material adverse effect on the Company's financial position, liquidity and results of operations. (17) SUBSEQUENT EVENTS On January 31, 2001, HEA Acquisition, Inc., a wholly owned subsidiary of the Company, acquired substantially all of the assets and assumed substantially all of the liabilities of Hook & Associates Engineering, Inc. ("Hook"). The purchase price consisted of $1,530,000 in cash at closing, the issuance of $500,000 and $700,000 of common stock issuable in 2001 and 2002, respectively, and a subordinated promissory note in the original principal amount of $1,300,000. The issuance of common stock and the amount of the subordinated promissory note are subject to certain adjustments extending up to one year from the date of acquisition related to the book values of net assets acquired, cash, accounts receivable, costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings as of December 31 2000. In addition, the Company agreed to pay cash related to the income tax effects to the sellers. Hook is a consulting engineering firm providing a full range of services to clients in an array of industries including communications, public works/transportation and real estate development. Hook employs approximately 100 people and has offices in Arizona, Colorado and Wyoming. The Company was a party to a certain agreement which contained an antidilution provision whereby the Company was restricted from issuing additional shares of common stock, except as may have been required for certain circumstances. Effective March 22, 2001, this agreement was amended to delete this antidilution provision. 50 53 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (18) SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) The following is unaudited supplementary financial information for 1999 and 2000:
FOR THE QUARTERS ENDED 1999 -------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ----------- ----------- ------------- ------------ Net revenue................................. $ 8,969,000 $ 8,643,000 $10,658,000 $11,366,000 Gross profit................................ $ 3,055,000 $ 2,857,000 $ 3,308,000 $ 3,429,000 Income from operations...................... $ 1,159,000 $ 1,060,000 $ 1,097,000 $ 990,000 Net income.................................. $ 529,000 $ 462,000 $ 469,000 $ 557,000 Net income available to common shareholders.............................. $ 472,000 $ 405,000 $ 813,000 $ 557,000 Basic earnings per share.................... $ 0.14 $ 0.12 $ 0.17 $ 0.11
FOR THE QUARTERS ENDED 2000 -------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, ----------- ----------- ------------- ------------ Net revenue................................. $12,419,000 $12,681,000 $13,638,000 $14,643,000 Gross profit................................ $ 4,037,000 $ 4,374,000 $ 5,190,000 $ 5,418,000 Income from operations...................... $ 1,387,000 $ 1,888,000 $ 2,434,000 $ 2,476,000 Net income and net income available to common shareholders....................... $ 762,000 $ 1,067,000 $ 1,488,000 $ 1,403,000 Basic earnings per share.................... $ 0.15 $ 0.22 $ 0.30 $ 0.28
51 54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have had no disagreements on accounting or financial disclosure matters with our independent auditors. PART III The information required by Items 10 through 13 of this report is set forth in the sections entitled "Directors and Executive Officers," "Executive Compensation," "Security Ownership of Certain Beneficial Owners and Management," and "Certain Relationships and Related Transactions" in our Proxy Statement for our 2001 Annual Meeting of Shareholders. Such information is incorporated in this Annual Report on Form 10-K and made a part hereof by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1)Consolidated Financial Statements. The following Consolidated Financial Statements and the Independent Auditors' Report are on pages 29 through 51 hereof. Independent Auditors' Report. Consolidated Balance Sheets as of December 31, 1999 and 2000 Consolidated Statements of Income for the years ended December 31, 1998, 1999 and 2000 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1999 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000 Notes to Consolidated Financial Statements (2) Financial Statement Schedules. All Financial Statement Schedules have been omitted because they are not applicable or because the applicable disclosures have been included in the Consolidated Financial Statements or in the Notes thereto. 52 55 (3) Exhibits.
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Stock Purchase Agreement dated October 13, 2000 by and among the registrant, Crosby, Mead Benton & Associates and the shareholders named therein.* 2.2 Asset Purchase Agreement dated January 31, 2001 among Hook & Associates Engineering, Inc., the shareholders of Hook & Associates Engineering, Inc., HEA Acquisition, Inc. and the registrant (incorporated herein by this reference to Exhibit 2.1 to the registrant's current report on Form 8-K filed with the Commission on February 15, 2001). 2.3 Certificate of Ownership of John M. Tettemer & Associates, Ltd. by the registrant effective as of December 31, 2000.* 3.1 Amended and Restated Articles of Incorporation of the registrant (incorporated herein by this reference to Exhibit 3.1 to the registrant's registration statement of Form S-1, registration number 333-77273). 3.2 Amended and Restated Bylaws of the registrant (incorporated herein by this reference to Exhibit 3.2 to the registrant's registration statement on Form S-1, registration number 333-77273). 4.1 Specimen Stock Certificate (incorporated herein by this reference to Exhibit 4.1 to the registrant's registration statement on Form S-1, registration number 333-77273). 10.1 Amended and Restated 1994 Stock Incentive Plan.* 10.2 Form of Indemnification Agreement (incorporated by this reference to Exhibit 10.2 to the registrant's registration statement of Form S-1, registration number 333-77273). 10.3 Wells Fargo Bank Line of Credit Note dated September 1, 1999 between the registrant and Wells Fargo Bank, National Association (incorporated herein by this reference to Exhibit 10.35 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.4 Wells Fargo Bank Credit Agreement dated September 1, 1999 between the registrant and Wells Fargo Bank, National Association (incorporated herein by this reference to Exhibit 10.36 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.5 First Amendment to Credit Agreement dated September 3, 2000 by and between the registrant, John M. Tettemer & Associates, Ltd and Wells Fargo Bank, National Association.* 10.6 Second Amendment to Credit Agreement dated October 2, 2000 by and between the registrant, John M. Tettemer & Associates, Ltd and Wells Fargo Bank, National Association.* 10.7 Third Amendment to Credit Agreement dated November 3, 2000 by and between the registrant, John M. Tettemer & Associates, Ltd and Wells Fargo Bank, National Association.* 10.8 Facility Lease dated July 29, 1999 between ASP Scripps, L.L.C. and the registrant (incorporated herein by this reference to Exhibit 10.37 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.9 Addendum to Facility Lease dated July 29, 1999 between ASP Scripps, L.L.C. and the registrant (incorporated herein by this reference to Exhibit 10.38 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.10 Sublease Agreement dated July 29, 1999 between Canon Computer Systems, Inc. and the registrant (incorporated herein by this reference to Exhibit 10.39 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.11 Agreement of Non-Disturbance and Attornment dated July 28, 1999 between ASP Scripps, L.L.C. and the registrant (incorporated herein by this reference to Exhibit 10.4 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.12 Consent to Sublease Agreement dated July 28, 1999 between ASP Scripps, L.L.C., Canon Computer Systems, Inc. and the registrant (incorporated herein by this reference to Exhibit 10.41 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.13 Sublease Agreement dated September 26, 2000 between the registrant and Canon Computer Systems, Inc.*
53 56
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.14 Severance Agreement between the registrant and Aram H. Keith.* 10.15 Severance Agreement between the registrant and Eric C. Nielsen.* 10.16 Severance Agreement between the registrant and Gary C. Campanaro.* 21 List of Subsidiaries.* 23 Consent of Independent Auditors.* 24 Power of Attorney (included on signature page hereof).*
- --------------- * Filed herewith. (b) Reports on Form 8-K. On October 27, 2000, we filed a Current Report on Form 8-K, relating to the announcement of the acquisition of all the outstanding shares of common stock of Crosby, Mead, Benton & Associates. 54 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Keith Companies, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE KEITH COMPANIES, INC. By: /s/ ARAM H. KEITH ------------------------------------ Aram H. Keith Chief Executive Officer April 2, 2001 POWER OF ATTORNEY We, the undersigned officers and directors of The Keith Companies, Inc., do hereby constitute and appoint Aram H. Keith, and Gary C. Campanaro, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby, ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ ARAM H. KEITH Chief Executive Officer, April 2, 2001 - ----------------------------------------------------- Chairman of the Board and Aram H. Keith Director (Principal Executive Officer) /s/ ERIC C. NIELSEN President and Chief Operating April 2, 2001 - ----------------------------------------------------- Officer Eric C. Nielsen /s/ GARY C. CAMPANARO Chief Financial Officer, April 2, 2001 - ----------------------------------------------------- Secretary and Director Gary C. Campanaro (Principal Financial and Accounting Officer) /s/ WALTER W. CRUTTENDEN, III Director April 2, 2001 - ----------------------------------------------------- Walter W. Cruttenden, III /s/ GEORGE DEUKMEJIAN Director April 2, 2001 - ----------------------------------------------------- George Deukmejian /s/ CHRISTINE DIEMER IGER Director April 2, 2001 - ----------------------------------------------------- Christine Diemer Iger
55 58 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Stock Purchase Agreement dated October 13, 2000 by and among the registrant, Crosby, Mead Benton & Associates and the shareholders named therein.* 2.2 Asset Purchase Agreement dated January 31, 2001 among Hook & Associates Engineering, Inc., the shareholders of Hook & Associates Engineering, Inc., HEA Acquisition, Inc. and the registrant (incorporated herein by this reference to Exhibit 2.1 to the registrant's current report on Form 8-K filed with the Commission on February 15, 2001). 2.3 Certificate of Ownership of John M. Tettemer & Associates, Ltd. by the registrant effective as of December 31, 2000.* 3.1 Amended and Restated Articles of Incorporation of the registrant (incorporated herein by this reference to Exhibit 3.1 to the registrant's registration statement of Form S-1, registration number 333-77273). 3.2 Amended and Restated Bylaws of the registrant (incorporated herein by this reference to Exhibit 3.2 to the registrant's registration statement on Form S-1, registration number 333-77273). 4.1 Specimen Stock Certificate (incorporated herein by this reference to Exhibit 4.1 to the registrant's registration statement on Form S-1, registration number 333-77273). 10.1 Amended and Restated 1994 Stock Incentive Plan.* 10.2 Form of Indemnification Agreement (incorporated by this reference to Exhibit 10.2 to the registrant's registration statement of Form S-1, registration number 333-77273). 10.3 Wells Fargo Bank Line of Credit Note dated September 1, 1999 between the registrant and Wells Fargo Bank, National Association (incorporated herein by this reference to Exhibit 10.35 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.4 Wells Fargo Bank Credit Agreement dated September 1, 1999 between the registrant and Wells Fargo Bank, National Association (incorporated herein by this reference to Exhibit 10.36 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.5 First Amendment to Credit Agreement dated September 3, 2000 by and between the registrant, John M. Tettemer & Associates, Ltd and Wells Fargo Bank, National Association.* 10.6 Second Amendment to Credit Agreement dated October 2, 2000 by and between the registrant, John M. Tettemer & Associates, Ltd and Wells Fargo Bank, National Association.* 10.7 Third Amendment to Credit Agreement dated November 3, 2000 by and between the registrant, John M. Tettemer & Associates, Ltd and Wells Fargo Bank, National Association.* 10.8 Facility Lease dated July 29, 1999 between ASP Scripps, L.L.C. and the registrant (incorporated herein by this reference to Exhibit 10.37 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.9 Addendum to Facility Lease dated July 29, 1999 between ASP Scripps, L.L.C. and the registrant (incorporated herein by this reference to Exhibit 10.38 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.10 Sublease Agreement dated July 29, 1999 between Canon Computer Systems, Inc. and the registrant (incorporated herein by this reference to Exhibit 10.39 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.11 Agreement of Non-Disturbance and Attornment dated July 28, 1999 between ASP Scripps, L.L.C. and the registrant (incorporated herein by this reference to Exhibit 10.4 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.12 Consent to Sublease Agreement dated July 28, 1999 between ASP Scripps, L.L.C., Canon Computer Systems, Inc. and the registrant (incorporated herein by this reference to Exhibit 10.41 to the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999). 10.13 Sublease Agreement dated September 26, 2000 between the registrant and Canon Computer Systems, Inc.* 10.14 Severance Agreement between the registrant and Aram H. Keith.* 10.15 Severance Agreement between the registrant and Eric C. Nielsen.* 10.16 Severance Agreement between the registrant and Gary C. Campanaro.* 21 List of Subsidiaries.* 23 Consent of Independent Auditors.* 24 Power of Attorney (included on signature page hereof).*
- --------------- * Filed herewith. EX-2.1 2 a70823ex2-1.txt EXHIBIT 2.1 1 EXHIBIT 2.1 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT (this "Agreement") dated as of October 13, 2000, by and among THE KEITH COMPANIES, INC., a California corporation ("Buyer"), CROSBY, MEAD, BENTON & ASSOCIATES, a California corporation ("Company"), and GEORGE BENTON, ALAN C. MEAD, KEITH ANDERSON, CHRISTINE COOLEY, DALE MITCHELL, RICHARD MANSAKER, BRUNO CALLU, FREDRIC CUNNINGHAM, EDWARD ALAN WAGSTAFF, STEVE GOODE, and BRUCE KIRBY (individually "Shareholder" and together the "Shareholders"). R E C I T A L S A. Company is engaged in the business of providing engineering, land development design, infrastructure design and landscape architecture (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 as set forth on Schedule 3.12(c) attached hereto (the "Facilities"). C. Buyer is engaged in the business of fully integrated multidisciplined engineering and consulting services firm as more specifically described in its periodic reports as filed with the Securities and Exchange Commission. 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) $1,216,000, cash payable on the Closing Date; and (b) $1,000,000 in the form of shares of Buyer's unregistered Common Stock ("Buyer Stock") payable as follows: 2 (i) on the first anniversary of the Closing Date, Buyer shall issue to Shareholder $500,000 of Buyer Stock. For purposes of this Section 2.1(b)(i), each share of the Buyer Stock shall be valued equal to the average of the closing ask price of the Buyer's Common Stock on the NASDAQ National Market System during the twenty consecutive trading days ending on the tenth trading day after the Closing Date; and (ii) on October 21, 2002, Buyer shall issue to Shareholder $500,000 of Buyer Stock. For purposes of this Section 2.1(b)(ii), each share of the Buyer Stock shall be valued equal to the average of the last five closing ask prices of Buyer's Common Stock on the NASDAQ National Market System for the period ending on and including October 11, 2002. The Buyer Stock will have a $10 per share value. If, as a result of the calculation set forth in this Section 2.1(b)(ii), the Buyer Stock has a value of less than $10 per share, Buyer shall issue to the Shareholders such number of shares of Buyer Stock such that the aggregate value of all shares of Buyer Stock issued to Shareholders pursuant to this Section 2.1(b)(ii) is equal to $500,000, and if the Buyer Stock has a value of greater than $10 per share, Buyer shall issue to the Shareholders such number of shares of Buyer Stock such that the aggregate value of all shares of Buyer Stock issued to Shareholders pursuant to this Section 2.1(b)(ii) is equal to $500,000. (c) The Purchase Price shall be adjusted as follows: (i) The Purchase Price shall be adjusted by adding or subtracting (as described below) the "Book Value Adjustment" (defined below). (ii) The "Book Value Adjustment" shall mean an adjustment reducing or increasing the Purchase Price in an amount equal to $1.00 multiplied by subsection (A) minus subsection (B) below: (A) on the one hand, the amount obtained by taking (x) the total assets of the Company, excluding intangible assets minus (y) the total liabilities of the Company on the balance sheet of the Company dated September 30, 2000 (the "Closing Balance Sheet"), all as calculated in accordance with United States Generally Accepted Accounting Principles ("GAAP"), particularly with regard to revenue recognition, and (B) on the other hand, $750,000; If the calculation of the value of subsection (c)(ii)(A) minus (c)(ii)(B) as described above results in a negative amount, the Book Value Adjustment shall cause a reduction in the payment of Buyer Stock (as described in Section 2.1(d) below) and, if required, shall permit Buyer to recover from the Shareholders, the Purchase Price previously paid, or such other amounts which may be owing, to the Shareholders hereunder. If the difference is a positive amount, the Book Value Adjustment shall be paid in cash (as described in Section 2.1(d) below) up to a maximum of $50,000 as the maximum additional Purchase Price cash paid by -2- 3 Buyer, regardless of the amount of such positive difference in excess of $50,000, provided, however, (i) accounts receivable, and (ii) costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings, adjustments beyond those to the September 30, 2000 financial statements shall not be subject to such $50,000 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. The calculation of the Book Value Adjustment and delivery of the Closing Balance Sheet shall be completed by Buyer within one hundred eighty (180) days after the Closing Date. (d) Any additional payment due from Buyer to Shareholders as a result of the Book Value Adjustment having a positive value shall be paid in cash within thirty (30) days of the Book Value Adjustment calculation subject to the limitation on the amount of such positive adjustment set forth in Section 2.1(c). Any amount due from Shareholders as a result of the Book Value Adjustment having a negative value shall cause a reduction of the aggregate Dollar value of Buyer Stock to be issued (on an equal Dollar value basis) (i) first, as payable to Shareholders on the first anniversary of the Closing Date and, if required thereafter, (ii) as payable to Shareholders on October 21, 2002. (e) In addition to the Book Value Adjustment, the Purchase Price shall be subject to a right of set-off by Buyer as described in Section 8. 2.2 PAYMENT. All cash 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 reasonably in advance of the Closing Date (as hereinafter defined). Any payments in Buyer Stock shall be rounded to the nearest whole share (0.5 share being rounded up). 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. -3- 4 (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 certified copies of the Articles of Incorporation and Bylaws of the Company, including any amendments thereto, have been delivered by Shareholders to Buyer, and are true, correct and complete copies of such instruments as presently in effect. The corporate minute book and stock records of the Company have been furnished to Buyer for inspection, and are true, correct and 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 Company is authorized to issue 200,000 shares of common stock, consisting of 100,000 shares of voting common stock, no par value and 100,000 shares of nonvoting 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, -4- 5 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 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 July 31, 2000, and the related statements of income for the ten (10) months then ended (if applicable, including the notes and schedules contained therein or annexed thereto if applicable) (the "Recent GAAP Financial Statements"), and, (iii) a balance sheet of Company as of September 30, 1999, and related statements of income for the year then ended (if applicable, including the notes contained therein or annexed thereto if applicable) (the "GAAP Financial Statements"). The Recent GAAP Financial Statements have been prepared (or restated) in conformity with GAAP (except for notes and schedules that might ordinarily be required by GAAP). Except as set forth on Schedule 3.4, the Recent GAAP Financial 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 in accordance with GAAP as of the date indicated and for the periods indicated. All of such financial statements (if applicable, including all notes and schedules contained therein or annexed thereto if applicable) are true, complete and accurate. The Recent GAAP Financial Statements, and the GAAP Financial Statements shall be prepared by Company on an accrual basis and shall incorporate SFAS #109 (Accounting for Income Taxes) as if Company were an accrual basis taxpayer, SOP 81-1 (Accounting for Performance of Construction Type and Certain Production - Type Contracts) and all other appropriate accounting pronouncements and standards (all such GAAP Financial Statements shall have been produced at Company's expense). -5- 6 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 taxes incurred in the ordinary course of business consistent in type and amount with past practices of Company. (b) TAX RETURNS FILED. 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. 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 AND COSTS IN EXCESS OF BILLINGS. Except as disclosed in Schedule 3.6-1, all accounts receivable of Company reflected on the Closing Balance Sheet ("Closing Receivables"), 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 -6- 7 accounts ("Closing Reserve")) in the ordinary course of business without the necessity of commencing legal proceedings; are subject to no counterclaim or set-off; and are not in dispute. Schedule 3.6-1 contains an aged schedule of accounts receivable included in the Closing Balance Sheet. The entire amount shown on the Closing Balance Sheet as "Costs in Excess of Billings" represents costs incurred by the Company which is, or will become billable, and when billed, will be collectible in the ordinary course of business without the necessity of commencing legal proceedings; is subject to no counterclaim or set-off; and is not in dispute. The amount of any Costs in Excess of Billings as of the Closing Date as set forth on Schedule 3.6-2 which remain uncollected as of the first anniversary of the Closing Date shall be set-off against the Purchase Price. The amount of Closing Receivables which exceed the Closing Reserve, as of the first anniversary of the Closing Date, shall be conclusively deemed to be uncollectible and shall provide Buyer a right of set-off in such amount against the Purchase Price. The amount of Closing Reserve which exceeds the Closing Receivables as of the first anniversary of the Closing Date, shall be paid to the Shareholders in cash within thirty (30) days after the first anniversary of the Closing Date. 3.7 WORK-IN-PROCESS. Except as disclosed in Schedule 3.7 or as set forth in this Section 3.7, (i) all work-in-process and contracts underway ("Work-In-Process") constitute work performed pursuant to fully executed written 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 fully executed written 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 the date of the Recent GAAP Financials, shall be updated to include the schedules supporting the Closing Balance Sheet) could be completed in compliance with the contracts to which each such Work-In-Process relates if managed consistently with the past practices of the Company (and in compliance with industry standards and good practices) without adversely effecting, in the aggregate when complete, the profitability of the Company. With respect to any oral agreements identified on Schedule 3.7 ("Oral Agreements"): (i) all Work-In-Process pursuant to such Oral Agreements constitute work performed pursuant thereto or oral 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 fully in accordance with and pursuant to such Oral Agreements, oral or written orders and oral or written 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 pursuant to Oral Agreements set forth on Schedule 3.7 (which as of the date hereof reflects Work-In-Process as of the -7- 8 date of the Recent GAAP Financials, shall be updated to include the schedules supporting the Closing Balance Sheet) could be completed in compliance with the Oral Agreements to which each such Work-In-Process relates if managed consistently with the past practices of the Company (and in compliance with industry standards and good practices) without adversely effecting, in the aggregate when complete, the profitability of the Company. 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 OR LOSS OF KEY EMPLOYEES. Any labor dispute, disturbance or organizing activity, other than routine individual grievances which are not material to the business, financial condition or results of operations of Company or any loss of any employee deemed "key" or "material" to the operation of the 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; -8- 9 (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 (m) NO UNUSUAL EVENTS. Any other event or condition not in the ordinary course of business of Company that is likely to have a material adverse impact on the financial condition of the Company taken as a whole. 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 to the best knowledge of Company, threatened against Company, its directors (in such capacity), its business or any of its assets, nor is there any basis (past or present) 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. With respect -9- 10 to that action identified on Schedule 3.10 as Hodges Golf Improvement Center, LLC v. Crosby, Mead, Benton and Associates, Case Number GIC740010 (the "Hodges Action"): (i) the Hodges Action has been fully and finally settled, and a dismissal with prejudice of the entire action will be filed by October 21, 2000; (ii) any and all monies to be paid pursuant to the settlement and/or the Hodges Action (including all attorneys' fees, costs and expenses) have and will be funded entirely by the Company's insurer (except for the Company's insurance deductible which has been paid in full as of the Closing Date) who had already accepted defense and indemnity obligations with respect to the Hodges Action; and (iii) there are no other actual or potential claims or liabilities which have or shall accrue in connection with the Hodges Action, including its settlement and/or the facts and circumstances which gave rise to the Hodges Action. 3.11 COMPLIANCE WITH LAWS. (a) COMPLIANCE. Except as set forth on Schedule 3.11, 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, sexual harassment, 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, chemicals or industrial, toxic, hazardous or petroleum or petroleum-based substances or wastes into the environment. 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. Except as set forth on Schedule 3.12(a), 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 -10- 11 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 and ordinary wear and tear as do not interfere with the use thereof in the conduct of the normal operations of Company), have been maintained consistent 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. 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 -11- 12 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. 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, (a) all errors and omissions policies maintained by or for the benefit of Company have been "claims made" policies and not "occurrence" policies, and (b) all general liability policies maintained by or for the benefit of the Company have been "occurrence" 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. 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. -12- 13 (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. Except as set forth in Schedule 3.14(c), Company has no purchase commitments for inventory, equipment 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. Except as set forth in Schedule 3.14(e), 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 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 or result in a material loss to the 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 -13- 14 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. 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, sexual harassment, 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 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 -14- 15 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 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; -15- 16 (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, 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 -16- 17 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 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 -17- 18 (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. (v) 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 (such as auto allowances, company supplied autos, life insurance and other benefits), 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 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 -18- 19 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 10 largest suppliers of services and goods (including major subcontractors) 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. There are no agreements between the Company and any subcontractor or supplier requiring Company to use the services or goods of such subcontractor or supplier with respect to any further Company business. 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 malpractice claims, 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 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 -19- 20 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. 3.25 INVESTMENT REPRESENTATION. The representations and warranties contained in the Investment Representation Certificate (the "Investor Certificate"), in the form attached hereto as Exhibit 3.25, are true and correct and shall be true and correct on the Closing Date. 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. 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. -20- 21 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. 4.6 SEC FILINGS AND FINANCIAL STATEMENTS. Buyer has timely made all required filings with the Securities and Exchange Commission ("SEC") and such filings do not contain any untrue statements by Buyer of a material fact concerning Buyer or omit any material fact concerning Buyer necessary to make the statements in such filings not misleading. Each of the financial statements concerning Buyer contained within such SEC filings by Buyer were prepared in accordance with GAAP and fairly present the financial position of Buyer as of the respective date of such financial statements. True and correct copies of all of Buyer's SEC filings since August 26, 1999, have been delivered to Shareholders or made available to Shareholders (such filings are available online at the SEC website for review). There has been no material adverse change in Buyer's financial condition, assets, liabilities, business, prospects or operations since the date of the most recent financial statement made available to Shareholders (June 30, 2000). Buyer is not aware of any event, other than the transaction contemplated hereby, which would require Buyer to file a report of Form 8-K with the SEC. 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. -21- 22 5.2 EMPLOYEE OPTIONS. Buyer shall reserve up to fifty thousand (50,000) options to purchase its common stock for grant to current and future employees of the Company. The recipients of such options shall be subject to the approval of Buyer. 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, each Shareholder shall, on or before the Closing Date and in accordance with the requirements of Exhibit 5.3-1, enter into either that certain (i) Noncompetition Agreement (Primary) substantially in the form of Exhibit 5.3-2 attached hereto, or (ii) Noncompetition Agreement (Other) substantially in the form of Exhibit 5.3-3 attached hereto. 5.4 CONFIDENTIALITY. 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. 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. -22- 23 5.7 ACCESS TO INFORMATION AND RECORDS. Subject to the existing March 31, 2000, Confidentiality Agreement between Buyer and Company, 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) upon Company's consent (not unreasonably withheld), 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. (d) NO MATERIAL CONTRACTS. Without the prior written consent of Buyer, no contract or commitment will be entered into, and no purchase of supplies, equipment 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. -23- 24 (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 (as of calendar month-end) 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. 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. -24- 25 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. 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. Buyer shall have obtained all approvals, consents and waivers from its banks and other third parties from whom such consents, approvals or waivers are required. 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 TERMINATION OF QUALIFIED PLANS. The Board of Directors of the Company shall have executed a unanimous written consent substantially in the form of Exhibit 6.9-1 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 6.9-2 hereto. -25- 26 6.8 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. 6.9 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. 6.10 BANK LIEN. Company's credit line and lien in favor of Wells Fargo Bank shall have been terminated. 6.11 INVESTOR CERTIFICATE. Each of the Shareholders shall have executed and delivered to the Buyer the Investor Certificate. 6.12 INSURANCE. Company shall have obtained a policy of multi-year "run-off" insurance in form and content satisfactory to Buyer, naming Buyer as an additional insured, a description of which is contained in a copy of the insurance binder attached hereto as Exhibit 6.12. 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, Company or any of the affiliates, officers or directors of any of them, with respect to the transactions contemplated hereby. 7.4 SHARE PRICE. The closing ask price of the Buyer's common stock on the NASDAQ National Market shall have been $3.00 or greater during the period commencing on the date of this Agreement and ending on the date immediately preceding the Closing Date. -26- 27 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" 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, Shareholders shall have no liability under this Section 8.1 until the total liability under this Section 8.1 for all Claims considered together exceeds $20,000 (and then only to the excess) (such $20,000 threshold amount referred to herein as the "Liability Basket"). Notwithstanding the foregoing, any Claims pursuant to Section 3.1, Section 3.2, Section 3.4, Section 3.5, Section 3.6, Section 3.7 and Section 3.12, shall have no Liability Basket threshold and shall give rise to a right of indemnity commencing with the "first Dollar" of Claims. In addition Shareholders shall have no liability under this Section 8.1 in excess of the Purchase Price, provided, however, that the Shareholders shall have liability in excess of the Purchase Price for breaches concerning Section 3.1, Section 3.2, Section 3.5, Section 3.10, Section 3.11(a), Section 3.16 and Section 3.20. 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. Buyer may, at its sole and absolute discretion, elect to set-off the amount or value or any such Claim against any payments otherwise due to Shareholders hereunder, whether in cash, Buyer Stock, or otherwise as described in Section 8.4. 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: (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. -27- 28 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 (or, where required hereby, binding and final decision by arbitration pursuant to the requirements of Section 11.5) 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. 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. -28- 29 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 and 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 three (3) years following the Closing: (a) 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. The representations and warranties contained in Section 3.10 and Section 3.16 shall survive for a period of five (5) years following the Closing. (b) 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). (c) 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). (d) 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. (e) 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 3:00 P.M. on October 13, 2000, 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." -29- 30 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 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 George Benton, Alan C. Mead and Fredric Cunningham as officers and directors of the Company, effective as of the Closing Date and in form satisfactory to Buyer's counsel. (h) NONCOMPETITION AGREEMENT. The Noncompetition Agreement in the form of Exhibit 5.3 attached hereto executed by each of the Shareholders. (i) 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 (or confirmation of wire transfer) as required by Section 2.1(a) hereof. -30- 31 (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. (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) 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. (e) 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; (b) by Shareholders if the Closing shall not have occurred on or before October 31, 2000 as a result of Buyer's breach of a representation, warranty or covenant contained herein; or (c) by either Buyer or Shareholders if the Closing shall not have occurred on or before November 30, 2000, 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 -31- 32 attempt is continuing, terminate this Agreement with the effect set forth in Section 10.2(c) hereof. (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 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. -32- 33 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; VENUE. 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. All claims, disputes and other matters in controversy (collectively, "Dispute") arising, directly or indirectly out of or related to this Agreement, or the breach thereof, whether contractual or noncontractual, and whether during the term or after the termination of this Agreement, shall be resolved exclusively according to the procedures set forth in this Section 11.5. Any Dispute shall be resolved by arbitration before a single arbitrator appointed by the American Arbitration Association or its successor in Orange County, California. The determination of the arbitrator shall be final and absolute. The arbitrator shall be governed by the duly promulgated rules and regulations of the American Arbitration Association or its successor then in effect, and the pertinent provisions of the laws of the State of California relating to arbitration. The decision of the arbitrator may be entered as a final judgment in any court of the State of California or elsewhere. The prevailing party in any such arbitration shall also be entitled to recover reasonable attorneys', accountants' and experts' fees and costs of suit in addition to any other relief awarded such prevailing party. 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 -33- 34 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: 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. If to Shareholders, to: c/o George Benton 2024 Cordoba Place Carlsbad, CA 92008 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: (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. All fees and expenses of their own and Company's legal, accounting, tax, investment banking and other professional counsel in connection with the transactions contemplated hereby; provided, -34- 35 however, that Buyer shall pay fifty percent (50%) of Company's fees owing to its accountants, up to a maximum of $7,500 payable by Buyer, with respect to such accountants' services rendered in the preparation of the schedules to this Agreement. (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. 11.12 PRIVATE OFFERING. The Shares of Buyer Stock to be issued by Buyer in connection with this Agreement have not, and as of the Closing will not, be registered under the Securities Act of 1933, as amended (the "Securities Act"). Such Buyer Stock will be issued pursuant to an exemption from registration under the Securities Act in reliance on, among other things, the Shareholders' responses in their respective Investor Certificates. Consequently, the Buyer Stock issued in connection with this Agreement may not be sold or otherwise transferred unless a registration statement under the Securities Act is in effect with respect to such securities, or in the alternative, an exemption from registration under the Securities Act is found to be available to the reasonable satisfaction of Buyer. 11.13 FORM 8-K AND SECURITIES LAW FILINGS. The Shareholders shall cooperate with and assist the Buyer to the extent reasonably requested by the Buyer, in providing information for the preparation of the Report on Form 8-K which may be filed by Buyer in connection with this transaction. 11.14 LEGEND. The Buyer Stock issued in connection with this Agreement shall bear substantially the following legend: -35- 36 "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT, OR UNLESS THE CORPORATION HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION, THAT SUCH REGISTRATION IS NOT REQUIRED." -36- 37 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/ Aram H. Keith ----------------------------------------- Printed Name: Aram H. Keith ------------------------------- Title: CEO -------------------------------------- COMPANY: CROSBY, MEAD, BENTON & ASSOCIATES, a California corporation By: /s/ George L. Benton ----------------------------------------- Printed Name: George L. Benton ------------------------------- Title: CEO -------------------------------------- -37- 38 SHAREHOLDERS: /s/ George Benton ---------------------------------------------- GEORGE BENTON /s/ Alan C. Mead ---------------------------------------------- ALAN C. MEAD /s/ Keith Anderson ---------------------------------------------- KEITH ANDERSON /s/ Christine Cooley ---------------------------------------------- CHRISTINE COOLEY /s/ Dale Mitchell ---------------------------------------------- DALE MITCHELL /s/ Richard Mansaker ---------------------------------------------- RICHARD MANSAKER /s/ Bruno Callu ---------------------------------------------- BRUNO CALLU /s/ Fredric Cunningham ---------------------------------------------- FREDRIC CUNNINGHAM /s/ Edward Alan Wagstaff ---------------------------------------------- EDWARD ALAN WAGSTAFF /s/ Steve Goode ---------------------------------------------- STEVE GOODE /s/ Bruce Kirby ---------------------------------------------- BRUCE KIRBY -38- EX-2.3 3 a70823ex2-3.txt EXHIBIT 2.3 1 EXHIBIT 2.3 CERTIFICATE OF OWNERSHIP THE KEITH COMPANIES, INC. Eric C. Nielsen and Gary Campanaro certify that: 1. They are the duly elected and acting President and Secretary, respectively, of THE KEITH COMPANIES, INC., a California corporation (this "Corporation"). 2. This Corporation owns all of the outstanding shares of JOHN M. TETTEMER & ASSOCIATES, LTD., a California corporation (the "Subsidiary"). 3. The Board of Directors of this Corporation duly adopted the following resolution: RESOLVED, that this Corporation merge JOHN M. TETTEMER & ASSOCIATES, LTD., its wholly-owned subsidiary corporation, into itself (with this Corporation as the surviving corporation), and assume all liabilities and obligations of the Subsidiary pursuant to Section 1110 of the California Corporations Code. 4. The merger of the Subsidiary with and into this Corporation is to be effective as of December 31, 2000. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Date: November 13, 2000 /s/ Eric C. Nielsen ------------------------------------ Eric C. Nielsen President Date: November 13, 2000 /s/ Gary Campanaro ------------------------------------ Gary Campanaro Secretary EX-10.1 4 a70823ex10-1.txt EXHIBIT 10.1 1 EXHIBIT 10.1 THE KEITH COMPANIES, INC. AMENDED AND RESTATED 1994 STOCK INCENTIVE PLAN ARTICLE 1 PURPOSES OF THE PLAN The purposes of the Plan are (a) to enhance the Company's ability to attract and retain the services of qualified employees, officers and directors (including non-employee officers and directors), and consultants and other service providers upon whose judgment, initiative and efforts the successful conduct and development of the Company's business largely depends, and (b) to provide additional incentives to such persons to devote their utmost effort and skill to the advancement and betterment of the Company, by providing them an opportunity to participate in the ownership of the Company and thereby have an interest in the success and increased value of the Company. ARTICLE 2 DEFINITIONS For purposes of this Plan, the following terms shall have the meanings indicated: 2.1 ADMINISTRATOR. "Administrator" means the Board or, if the Board delegates responsibility for any matter to the Committee, the term Administrator shall mean the Committee. 2.2 AFFILIATED COMPANY. "Affiliated Company" means any "parent corporation" or "subsidiary corporation" of the Company, whether now existing or hereafter created or acquired, as those terms are defined in Sections 424(e) and 424(f) of the Code, respectively. 2.3 BOARD. "Board" means the Board of Directors of the Company. 2.4 CODE. "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.5 COMMITTEE. "Committee" means a committee of two or more members of the Board appointed to administer the Plan, as set forth in Section 7.1 hereof. 2.6 COMMON STOCK. "Common Stock" means the Common Stock, $.001 par value per share, of the Company, subject to adjustment pursuant to Section 4.2 hereof. 2.7 DISABILITY. "Disability" means permanent and total disability as defined in Section 22(e)(3) of the Code. The Administrator's determination of Disability or the absence thereof shall be conclusive and binding on all interested parties. 2.8 EFFECTIVE DATE. "Effective Date" means the date on which the Plan is adopted by the Board, as set forth on the first page hereof. 2 2.9 EXERCISE PRICE. "Exercise Price" means the purchase price per share of Common Stock payable upon exercise of an Option. 2.10 FAIR MARKET VALUE. "Fair Market Value" on any given date means the value of one share of Common Stock, determined as follows: (a) If the Common Stock is then listed or admitted to trading on the Nasdaq National Market or a stock exchange which reports closing sale prices, the Fair Market Value shall be the closing sale price on the date of valuation on the Nasdaq National Market or principal stock exchange on which the Common Stock is then listed or admitted to trading, or, if no closing sale price is quoted or no sale takes place on such day, then the Fair Market Value shall be the closing price of the Common Stock on the Nasdaq National Market or such exchange on the next preceding day on which a sale occurred. (b) If the Common Stock is not then listed or admitted to trading on the Nasdaq National Market or a stock exchange which reports closing sale prices, the Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock in the over-the-counter market on the date of valuation. (c) If neither (a) nor (b) is applicable as of the date of valuation, then the Fair Market Value shall be determined by the Administrator in good faith using any reasonable method of valuation, which determination shall be conclusive and binding on all interested parties. 2.11 INCENTIVE OPTION. "Incentive Option" means any Option designated and qualified as an "incentive stock option" as defined in Section 422 of the Code. 2.12 INCENTIVE OPTION AGREEMENT. "Incentive Option Agreement" means an Option Agreement with respect to an Incentive Option. 2.13 NASD DEALER. "NASD Dealer" means a broker-dealer that is a member of the National Association of Securities Dealers, Inc. 2.14 NONQUALIFIED OPTION. "Nonqualified Option" means any Option that is not an Incentive Option. To the extent that any Option designated as an Incentive Option fails in whole or in part to qualify as an Incentive Option, it shall to that extent constitute a Nonqualified Option. 2.15 NONQUALIFIED OPTION AGREEMENT. "Nonqualified Option Agreement" means an Option Agreement with respect to a Nonqualified Option. 2.16 OFFEREE. "Offeree" means a Participant who has received a Right to Purchase or who has acquired Restricted Stock under the Plan. 2.17 OPTION. "Option" means any option to purchase Common Stock granted pursuant to the Plan. -2- 3 2.18 OPTION AGREEMENT. "Option Agreement" means the written agreement entered into between the Company and the Optionee with respect to an Option granted under the Plan. 2.19 OPTIONEE. "Optionee" means a Participant who holds an Option. 2.20 PARTICIPANT. "Participant" means an individual who holds an Option, a Right to Purchase or Restricted Stock under the Plan. 2.21 PURCHASE PRICE. "Purchase Price" means the price per share of Restricted Stock purchased pursuant to the Right to Purchase. 2.22 RESTRICTED STOCK. "Restricted Stock" means shares of Common Stock issued subject to such restrictions and conditions as are established pursuant to Article 6 hereof. 2.23 RIGHT TO PURCHASE. "Right to Purchase" means a right to purchase Restricted Stock granted to an Offeree pursuant to Article 6 hereof. 2.24 SERVICE PROVIDER. "Service Provider" means a consultant or other person who provides services to the Company or an Affiliated Company who the Administrator authorizes to become a Participant in the Plan. 2.25 STOCK PURCHASE AGREEMENT. "Stock Purchase Agreement" means the written agreement entered into between the Company and the Offeree with respect to a Right to Purchase offered under the Plan. 2.26 10% SHAREHOLDER. "10% Shareholder" means a person who, as of a relevant date, owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of an Affiliated Company. ARTICLE 3 ELIGIBILITY 3.1 INCENTIVE OPTIONS. Officers and other key employees of the Company or of an Affiliated Company (including members of the Board if they are employees of the Company or of an Affiliated Company) are eligible to receive Incentive Options under the Plan. 3.2 NONQUALIFIED OPTIONS AND RIGHTS TO PURCHASE. Officers and other key employees of the Company or of an Affiliated Company, members of the Board (whether or not employed by the Company or an Affiliated Company), and Service Providers are eligible to receive Nonqualified Options or Rights to Purchase under the Plan. ARTICLE 4 PLAN SHARES 4.1 SHARES SUBJECT TO THE PLAN. A total of 1,600,000 shares of Common Stock may be issued under the Plan, including shares issued under the similar 1994 Stock Incentive Plan adopted by Keith Engineering, Inc. (formerly an Affiliate of the Company), as previously -3- 4 amended and restated on April 26, 1999, all subject to future adjustment as to the number and type of shares pursuant to Section 4.2 hereof. For purposes of this limitation, in the event that (a) all or any portion of any Option or Right to Purchase granted or offered under the Plan can no longer under any circumstances be exercised, or (b) any shares of Restricted Stock are reacquired by the Company under the Plan, the shares of Common Stock allocable to the unexercised portion of such Option or such Right to Purchase, or the shares so reacquired, shall again be available for grant or issuance under the Plan. 4.2 CHANGES IN CAPITAL STRUCTURE. In the event that the outstanding shares of Common Stock are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, stock split, combination of shares, reclassification, stock dividend, or other change in the capital structure of the Company, then appropriate adjustments shall be made by the Administrator to the aggregate number and kind of shares subject to this Plan, and the number and kind of shares and the price per share subject to outstanding Options, Rights to Purchase and Stock Purchase Agreements in order to preserve as nearly as practicable, but not to increase, the benefits of Participants. ARTICLE 5 OPTIONS 5.1 OPTION AGREEMENT. Each Option granted pursuant to this Plan shall be evidenced by an Option Agreement which shall specify the number of shares subject thereto, the Exercise Price per share, and whether the Option is an Incentive Option or Nonqualified Option. As soon as is practical following the grant of an Option, an Option Agreement shall be duly executed and delivered by or on behalf of the Company to the Optionee to whom such Option was granted. Each Option Agreement shall be in such form and contain such additional terms and conditions, not inconsistent with the provisions of this Plan, as the Administrator shall, from time to time, deem desirable. 5.2 EXERCISE PRICE. The Exercise Price per share of Common Stock covered by each Option shall be determined by the Administrator, subject to the following: (a) the Exercise Price of an Incentive Option shall not be less than 100% of Fair Market Value on the date the Incentive Option is granted, (b) the Exercise Price of a Nonqualified Option shall not be less than 85% of Fair Market Value on the date the Nonqualified Option is granted, and (c) if the person to whom an Incentive Option is granted is a 10% Shareholder on the date of grant, the Exercise Price shall not be less than 110% of Fair Market Value on the date the Option is granted. 5.3 PAYMENT OF EXERCISE PRICE. Subject to any legal restrictions, payment of the Exercise Price upon exercise of an Option may be made, in the discretion of the Administrator, by: (a) cash; (b) check; (c) the surrender of shares of Common Stock owned by the Optionee that have been held by the Optionee for at least six (6) months, which surrendered shares shall be valued at Fair Market Value as of the date of such exercise; (d) the Optionee's promissory note in a form and on terms acceptable to the Administrator; (e) the cancellation of indebtedness of the Company to the Optionee; (f) the waiver of compensation due or accrued to the Optionee for services rendered; (g) provided that a public market for the Common Stock exists, a "same day sale" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably -4- 5 elects to exercise the Option and to sell a portion of the shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to the Company; (h) provided that a public market for the Common Stock exists, a "margin" commitment from the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to exercise the Option and to pledge the shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such shares to forward the Exercise Price directly to the Company; or (i) any combination of the foregoing methods of payment or any other consideration or method of payment as shall be permitted by applicable corporate law. 5.4 TERM OF OPTIONS. The term of each Option shall be fixed by the Administrator at the time of grant, but no Incentive Option may be exercisable more than ten (10) years after the date it is granted. An Incentive Option granted to a person who is a 10% Shareholder on the date of grant shall not be exercisable more than five (5) years after the date it is granted. 5.5 VESTING OF OPTIONS. Each Option shall vest and be exercisable in one or more installments at such time or times and subject to such conditions, including without limitation the achievement of specified performance goals or objectives, as shall be determined by the Administrator. 5.6 ANNUAL LIMIT ON INCENTIVE OPTIONS. To the extent required for "incentive stock option" treatment under Section 422 of the Code, if the aggregate Fair Market Value (determined as of the time of grant) of the Common Stock with respect to which Incentive Options granted under this Plan and any other plan of the Company or any Affiliated Company become exercisable for the first time by an Optionee during any calendar year exceeds $100,000, such Incentive Option shall be treated as a Nonqualified Option with respect to such excess. 5.7 NONTRANSFERABILITY OF OPTIONS. No Option shall be assignable or transferable except by will or the laws of decent and distribution, and during the life of the Optionee, shall be exercisable only by such Optionee; provided, however, that a Nonqualified Option may, in the discretion of the Administrator, be transferred pursuant to a "qualified domestic relations order" (as defined in the Code). 5.8 RIGHTS AS SHAREHOLDER. An Optionee or permitted transferee of an Option shall have no rights or privileges as a shareholder with respect to any shares covered by an Option until such Option has been duly exercised and certificates representing shares purchased upon such exercise have been issued to such person. ARTICLE 6 RIGHTS TO PURCHASE 6.1 NATURE OF RIGHT TO PURCHASE. A Right to Purchase granted to an Offeree entitles the Offeree to purchase, for a Purchase Price determined by the Administrator, shares of Common Stock subject to such restrictions and conditions as the Administrator may determine at the time of grant ("Restricted Stock"). Such conditions may include, but are not limited to, continued employment or the achievement of specified performance goals or objectives. -5- 6 6.2 ACCEPTANCE OF RIGHT TO PURCHASE. An Offeree shall have no rights with respect to the Restricted Stock subject to a Right to Purchase unless the Offeree shall have accepted, or exercised, the Right to Purchase within thirty (30) days (or such shorter period as the Administrator may specify) following the grant of the Right to Purchase by making payment of the full Purchase Price to the Company in the manner set forth in Section 6.3 hereof and by executing and delivering to the Company a Stock Purchase Agreement. Each Stock Purchase Agreement shall be in such form, and shall set forth the Purchase Price and such other terms, conditions and restrictions of the Restricted Stock, not inconsistent with the provisions of this Plan, as the Administrator shall, from time to time, deem desirable. 6.3 PAYMENT OF PURCHASE PRICE. Subject to any legal restrictions, payment of the Purchase Price upon exercise of a Right to Purchase Restricted Stock may be made, in the discretion of the Administrator, by: (a) cash; (b) check; (c) the surrender of shares of Common Stock owned by the Offeree that have been held by the Offeree for at least six (6) months, which surrendered shares shall be valued at Fair Market Value as of the date of such exercise; (d) the Offeree's promissory note in a form and on terms acceptable to the Administrator; (e) the cancellation of indebtedness of the Company to the Offeree; (f) the waiver of compensation due or accrued to the Offeree for services rendered; or (g) any combination of the foregoing methods of payment or any other consideration or method of payment as shall be permitted by applicable corporate law. 6.4 RIGHTS AS SHAREHOLDER. Upon complying with the provisions of Section 6.2 hereof, an Offeree shall have the rights of a shareholder with respect to the Restricted Stock purchased pursuant to the Right to Purchase, including voting and dividend rights, subject to nontransferability restrictions and Company repurchase rights described in this Article 6 and subject to such other conditions as are set forth in the Stock Purchase Agreement. Unless the Administrator shall determine otherwise, certificates evidencing shares of Restricted Stock shall remain in the possession of the Company until such shares are vested as provided in Section 6.6 hereof. 6.5 RESTRICTIONS. Shares of Restricted stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of except as specifically provided herein or in the Stock Purchase Agreement. In the event of termination of a Participant's employment, service as a director of the Company or Service Provider status for any reason whatsoever (including death or Disability), the Company shall have the right, at the discretion of the Administrator, to repurchase at the original Purchase Price any shares of Restricted Stock which have not vested as of the date of termination. 6.6 VESTING OF RESTRICTED STOCK. The Stock Purchase Agreement shall specify the date or dates, the performance goals or objectives which must be achieved, and any other conditions on which the nontransferability of the Restricted Stock and the Company's right of repurchase shall lapse. Subsequent to such date or dates or the attainment of such specified performance goals or objectives or other conditions, the shares as to which all restrictions have lapsed shall no longer be Restricted Stock and shall be deemed "vested." -6- 7 6.7 DIVIDENDS. If payment for shares of Restricted Stock is made by promissory note, any cash dividends paid with respect to the Restricted Stock may be applied, in the discretion of the Administrator, to repayment of such note. 6.8 NONASSIGNABILITY OF RIGHTS. No Right to Purchase shall be assignable or transferable except by will or the laws of decent and distribution. During the life of an Offeree, a Right to Purchase may be exercised only by the Offeree. ARTICLE 7 ADMINISTRATION OF THE PLAN 7.1 ADMINISTRATOR. Authority to control and manage the operation and administration of the Plan shall be vested in the Board, which may delegate such responsibilities in whole or in part to a committee consisting of two (2) or more members of the Board (the "Committee"). To the extent such laws or regulations are applicable, the Committee shall consist of individuals that satisfy Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Section 162(m) of the Code. Members of the Committee may be appointed from time to time by, and shall serve at the pleasure of, the Board. The Committee may delegate all or any part of its authority under this Plan to the Chief Executive Officer or other executive officer of the Company for purposes of granting Options or Rights to Purchase to persons, except for (a) the grant of Options or Rights to Purchase to persons who are then subject to the reporting requirements of Section 16 of the Exchange Act, and (b) the grant of Options or Rights to Purchase intended to satisfy Section 162(m) of the Code. As used herein, the term "Administrator" means the Board or, with respect to any matter as to which responsibility has been delegated to the Committee, the term Administrator shall mean the Committee. Notwithstanding anything herein to the contrary, any action which may be taken by the Committee may also be taken by the Board. 7.2 POWERS OF THE ADMINISTRATOR. In addition to any other powers or authority conferred upon the Administrator elsewhere in the Plan or by law, the Administrator shall have full power and authority: (a) to determine the persons to whom, and the time or times at which, Incentive Options or Nonqualified Options shall be granted and Rights to Purchase shall be offered, the number of shares to be represented by each Option and Right to Purchase and the consideration to be received by the Company upon exercise thereof; (b) to interpret the Plan; (c) to create, amend or rescind rules and regulations relating to the Plan; (d) to determine the terms, conditions and restrictions contained in, and the form of, Option Agreements and Stock Purchase Agreements; (e) to determine the identity or capacity of any persons who may be entitled to exercise a participant's rights under any Option or Right to Purchase under the Plan; (f) to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Option Agreement or Stock Purchase Agreement; (g) to amend outstanding Option Agreements and Stock Purchase Agreements; and (h) to make all other determinations necessary or advisable for the administration of the Plan, but only to the extent not contrary to the express provisions of the Plan. Any action, decision, interpretation or determination made in good faith by the Administrator in the exercise of its authority conferred upon it under the Plan shall be final and binding on the Company and all Participants. -7- 8 7.3 LIMITATION ON LIABILITY. No employee or the Company or member of the Board or Committee shall be subject to any liability with respect to duties under the Plan unless the person acts fraudulently or in bad faith. To the extent permitted by law, the Company shall indemnify each member of the Board or Committee, and any employee of the Company with duties under the Plan, who was or is a party, or is threatened to be made a party, to any threatened, pending or completed proceeding, whether civil, criminal, administrative or investigative, by reason of such person's conduct in the performance of duties under the Plan. ARTICLE 8 MERGERS, REORGANIZATIONS, ETC. In the event that the Company at any time proposes to sell substantially all of its assets, merge into, consolidate with or to enter into any other reorganization in which the Company is not the surviving corporation, or if the Company is the surviving corporation and the ownership of the voting power of the Company's capital stock changes by more than 50% as a result of such transaction, the Plan and all unexercised Options and Rights to Purchase shall terminate upon the effective date of such transaction unless provision is made in writing in connection with such transaction for (a) the continuance of the Plan and for the assumption of outstanding Options or Rights to Purchase, or the substitution of such Options and Rights to Purchase with new options and new rights to purchase of comparable value covering shares of a successor corporation, with appropriate adjustments as to the number and kind of shares and prices, in which event the Plan and such Options and Rights to Purchase, or the new options and rights to purchase substituted therefor, shall continue in the manner and under the terms so provided, or (b) the substitution for the Plan and outstanding Options and Rights to Purchase of a program or plan to provide rights to the Participants to receive on exercise of such rights, the type and amount of consideration they would have received had they exercised all Options or Rights to Purchase prior to such transaction and less the aggregate Exercise Price or Purchase Price therefor. If such provision is not made in such transaction, then the Administrator shall cause written notice of the proposed transaction to be given to all Participants no less than fifteen (15) days prior to the anticipated effective date of the proposed transaction. ARTICLE 9 AMENDMENT AND TERMINATION OF THE PLAN 9.1 AMENDMENTS. The Board may from time to time alter, amend, suspend or terminate the Plan in such respects as the Board may deem advisable. No such alteration, amendment, suspension or termination shall be made which shall substantially affect or impair the rights of any Participant under an outstanding Option or Right to Purchase without such Participant's consent. The Board may alter or amend the Plan to comply with requirements under the Code relating to Incentive Options or other types of options which give Optionees more favorable tax treatment than that applicable to Options granted under this Plan as of the date of its adoption. Upon any such alteration or amendment, any outstanding Option granted hereunder may, if the Administrator so determines and if permitted by applicable law, be subject to the more favorable tax treatment afforded to an Optionee pursuant to such terms and conditions. However, the Board shall not, without the approval of the Corporation's shareholders (a) increase the maximum number of shares issuable under the Plan, except for permissible adjustments under Article 4, (b) materially modify the eligibility requirements for grants of -8- 9 Options, or (c) materially increase the benefits accruing to Option holders. In addition, the Board shall also obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with applicable laws, rules or regulations. 9.2 PLAN TERMINATION. Unless the Plan shall theretofore have been terminated by the Board, the Plan shall terminate on March 13, 2011 and no Options or Rights to Purchase may be granted under the Plan thereafter, but Options and Rights to Purchase then outstanding shall continue in effect in accordance with their respective terms. ARTICLE 10 TAX WITHHOLDING The Company shall have the power to withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy any applicable Federal, State, and local tax withholding requirements with respect to any Options exercised or Restricted Stock issued under the Plan. To the extent permissible under applicable tax, securities and other laws, the Administrator may, in its sole discretion and upon such terms and conditions as it may deem appropriate, permit a Participant to satisfy his or her obligation to pay any such tax, in whole or in part, up to an amount determined on the basis of the highest marginal tax rate applicable to such Participant, by (a) directing the Company to apply shares of Common Stock to which the Participant is entitled as a result of the exercise of an Option or as a result of the lapse of restrictions on Restricted Stock, or (b) delivering to the Company shares of Common Stock owned by the Participant. The shares of Common Stock so applied or delivered in satisfaction of the Participant's tax withholding obligation shall be valued at their Fair Market Value as of the date of measurement of the amount of income subject to withholding. ARTICLE 11 MISCELLANEOUS 11.1 BENEFITS NOT ALIENABLE. Other than as provided above, benefits under the Plan may not be assigned or alienated, whether voluntarily or involuntarily. Any unauthorized attempt at assignment, transfer, pledge or other disposition shall be without effect. 11.2 NO ENLARGEMENT OF EMPLOYEE RIGHTS. This Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company and any Participant to be consideration for, or an inducement to, or a condition of, the employment of any Participant. Nothing contained in the Plan shall be deemed to give the right to any Participant to be retained as an employee of the Company or any Affiliated Company or to interfere with the right of the Company or any Affiliated Company to discharge any Participant at any time. 11.3 APPLICATION OF FUNDS. The proceeds received by the Company from the sale of Common Stock pursuant to Option Agreements and Stock Purchase Agreements, except as otherwise provided herein, will be used for general corporate purposes. -9- EX-10.5 5 a70823ex10-5.txt EXHIBIT 10.5 1 EXHIBIT 10.5 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: 1. 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. -1- 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. By: /s/ Gary Campanaro By: /s/ Stephanie Juneau ------------------- ------------------------ Title: CFO Assistant Vice President JOHN M. TETTEMER & ASSOCIATES, LTD. By: /s/ Gary Campanaro ------------------- Title: CFO -2- EX-10.6 6 a70823ex10-6.txt EXHIBIT 10.6 1 EXHIBIT 10.6 SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of October 2, 2000, by and among THE KEITH COMPANIES, INC., a California corporation, and 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: 1. ESI Engineering Services, Inc. a California corporation ("ESI ") is a party to and named as a Borrower under the Credit Agreement. ESI is no longer separate legal entity, but rather a division of The Keith Companies, Inc.("Keith"). Accordingly, all references in the Agreement and in the other Loan Documents to ESI as a Borrower are hereby deleted; and all references in the Agreement and in the other Loan Documents to Keith as a Borrower, include, without limitation, ESI, as a division of Keith. 2. Notwithstanding any provision to the contrary in the Credit Agreement, proceeds of Working Capital Advances under the Line of Credit in a principal amount not to exceed $1,500,000.00 may be used to finance the acquisition of Crosby Mead Benton & Associates in accordance with a Stock Purchase Agreement dated October 13, 2000, a final executed copy of which has been delivered to Bank. 3. Section 5.5 is hereby amended by deleting the word "and" between clauses (a) and (b), deleting the period at the end and replacing it with a comma, and adding thereto the following: "and (c) the purchase of stock from Crosby Mead Benton & Associates in accordance with a Stock Purchase Agreement dated October 13, 2000, a final executed copy of which has been delivered to Bank;". 4. 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. 5. 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. -1- 2 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 Title: Vice President JOHN M. TETTEMER & ASSOCIATES, LTD. By: /s/ Gary Campanaro ------------------- Title: CFO -2- EX-10.7 7 a70823ex10-7.txt EXHIBIT 10.7 1 EXHIBIT 10.7 THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of November 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: 1. 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 January 3, 2001), 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 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 January 3, 2001, (i) no new Equipment Advances shall be available, and (ii) the availability for Working Capital Advances shall be limited to the lesser of (1) $6,000,000.00, or (11) 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 January 3, 2001 (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 January 3, 2001, 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. -1- 2 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 Title: Vice President JOHN M. TETTEMER & ASSOCIATES, LTD. By: /s/ Gary Campanaro ------------------- Title: CFO -2- EX-10.13 8 a70823ex10-13.txt EXHIBIT 10.13 1 EXHIBIT 10.13 SUBLEASE THIS SUBLEASE (the "Sublease") is made as of September 26, 2000, by CANON COMPUTER SYSTEMS, INC., a California corporation (the "Sublandlord") and THE KEITH COMPANIES, INC., a California corporation (the "Subtenant"). BACKGROUND: A. SCRIPPS REDHILL ASSOCIATES, LLC, a Delaware limited liability company, as successor in interest to ASP SCRIPPS, LLC, a California limited liability company as Landlord ("Landlord"), and Sublandlord, as Tenant, have entered into that certain Lease dated as of May 21, 1993, as amended, (the "Prime Lease"), regarding certain premises ("Prime Lease Premises") in the building known as 2955 Red Hill Avenue, Costa Mesa, California 92626 (the Building"), all as described in the Prime Lease. B. Sublandlord and Subtenant have agreed to enter into a sublease for 27,171 rentable square feet of the Prime Lease Premises on the First Floor of the Building as described on attached Exhibit A ("Sublease Premises"), upon the terms and conditions set forth below. 1. SUBLEASE. Subtenant agrees to sublease from Sublandlord, and Sublandlord agrees to sublease to Subtenant, the Sublease Premises upon the terms and conditions set forth below. Notwithstanding any provision contained in the Lease, the Second Amendment to Lease dated September 26, 2000, or this Sublease, upon delivery to Subtenant of any portion of the Sublease Premises, Subtenant shall immediately accept and begin paying rent for those portions of the Sublease Premises delivered to Subtenant even if the entire Sublease Premises has not yet been delivered to Subtenant. 2. SUBLEASE TERM. The term of this Sublease ("Sublease Term") will commence on October 1, 2000 (the "Commencement Date"), and will continue until October 30, 2003. 3. USE. Subtenant shall use the Sublease Premises for general office and other permitted purposes under the Prime Lease, and for no other purpose. 4. "AS IS" SUBLEASE; ALTERATIONS; CONSTRUCTION ALLOWANCE. Subtenant agrees to accept the Sublease Premises in "as is" condition, "with all faults". Sublandlord and Subtenant acknowledge that Subtenant is currently occupying the Sublease Premises pursuant to a lease between Subtenant and Landlord set to expire September 30, 2000. Subtenant shall be responsible for the installation and cost of any and all improvements, alterations or other work (the " Subtenant Improvements") required in order to accommodate Subtenant's use of the -1- 2 Subleased Premises or required on or to the Sublease Premises by the Americans With Disabilities Act of 1990 or any other applicable law, rule or regulation as a result of Subtenant's use of the Sublease Premises. Subtenant shall directly employ the general contractor and shall oversee the construction of the Subtenant Improvements. Prior to the commencement of construction of the Subtenant Improvements, Subtenant shall secure the written approval of the plans for the Subtenant Improvements from both Landlord and Sublandlord, which consent shall not be unreasonably withheld or delayed by either Landlord or Sublandlord. All construction work, including the selection of the space planner, general contractor and subcontractors, shall be subject to Landlord's prior approval, which approval shall not be unreasonably withheld or delayed. Subtenant shall make or install no other improvements, alterations or work on or to the Sublease Premises or on or to the property and/or Building of which the Sublease Premises are a part without the prior written consent of Sublandlord and Landlord, which consent may be withheld by either Landlord or Sublandlord in the reasonable discretion of Landlord or Sublandlord; provided, however, that Subtenant may make any nonstructural improvement costing less than Fifty Thousand Dollars ($50,000.00) and no consent shall be required, but Subtenant shall give Sublandlord and Landlord at least twenty (20) days prior written notice of Subtenant's intention to make any such improvement, which notice shall include a reasonable description of the improvement, including marked floor plans where appropriate. Sublandlord shall provide Subtenant with a tenant improvement allowance (the Tenant Improvement Allowance") to a maximum of $83,508.00 as a contribution towards the costs incurred by Subtenant in the completion of the build out of the Sublease Premises. Subtenant shall be entitled to apply the Tenant Improvement Allowance toward reimbursement of its architectural fees, engineering and design fees, demolition costs, city permits and construction costs. The Tenant Improvement Allowance shall be disbursed by Sublandlord to Subtenant in accordance with the terms and schedule set forth on the Work Letter attached as Exhibit B to the First Amendment to Lease between Landlord and Sublandlord dated July 30, 1999. Sublandlord shall not be allowed to charge Subtenant for profit, overhead expenses, supervisory expenses, plan review fees or any similar charge in connection with the construction of the Subtenant Improvements, nor shall Subtenant be charged by Landlord for parking, elevator use, or staging areas required by Subtenant's contractor or subcontractors for completion of the Subtenant Improvements. 5. RENT. Subtenant will pay monthly base rent ("Subrent") for the Sublease Premises in advance, without abatement, deduction or setoff, on the Commencement Date and on the first day of each calendar month thereafter during the Sublease Term, in accordance with the terms set forth on Exhibit B attached hereto (the "Subrent Schedule"). Subtenant will also pay, as additional rent, Subtenant's Proportionate Share of the Building and Subtenant's Proportionate Share of the Project (as defined below) of all other payments due the Landlord under the Prime Lease, including, without limitation, insurance, real estate taxes, and all other Project Operating Costs and Building Operating Costs (the "Triple Net Expenses"), as and when they shall become due in accordance with Section 3.2 of the Prime Lease. For purposes of this Sublease, -2- 3 "Subtenant's Proportionate Share of the Building" means the ratio of the rentable area (determined by Sublandlord's architect in accordance with BOMA standards) of the Sublease Premises to the rentable area of the Building, expressed as a percentage rounded to the second decimal point. "Subtenant's Proportionate Share of the Project" means the ratio of the rentable area (27,171 square feet) of the Sublease Premises to the rentable area of the Project, expressed as a percentage rounded to the second decimal point. 6. BUILDING REAL ESTATE TAXES. In addition to Subtenant's obligation to pay Subtenant's share of Subtenant's Proportionate Share of real estate taxes, and in accordance with Section 3.2(a) of the Prime Lease, Subtenant agrees that it will pay to Sublandlord fifty percent (50%) of the increase in any real estate taxes which result from the sale or transfer of the Building or the Project (as defined in the Prime Lease) during the term of this Sublease. 7. PARKING. Subtenant shall be entitled to four (4) parking spaces for every 1000 rentable square feet of space subleased by Subtenant. All parking shall remain free of charge during the Sublease Tenn. 8. PERFORMANCE OF PRIME LEASE BY SUBTENANT. Except as otherwise set forth in this Sublease, Subtenant assumes and agrees to keep, obey and perform all of the terms, covenants and conditions of Sublandlord as Tenant under the Prime Lease with respect to the Sublease Premises, and except for Sections 13.17, 13.18, 13.19, and 13.21 of the Prime Lease, and as otherwise provided herein, shall enjoy all of the rights and privileges of Sublandlord under the Prime Lease. 9. SUBTENANT'S RIGHTS AS TO PRIME LANDLORD. Sublandlord shall not be liable for any nonperformance of or noncompliance with or breach or failure to observe any term, covenant or condition of the Prime Lease upon Landlord's part to be kept, observed, performed or complied with, or for any delay or interruption in Landlord's performing its obligations thereunder, provided that Sublandlord shall cooperate with Subtenant in assisting Subtenant in enforcing the terms of the Prime Lease, to the extent provided below. Sublandlord agrees to exercise commercially reasonable diligence in attempting to cause Landlord to perform its obligations under the Prime Lease for the benefit of Subtenant. 10. INSURANCE; WAIVERS. Subtenant will, during the Sublease Term, continuously maintain commercial general liability insurance as required under the Prime Lease, which insurance policy shall name Sublandlord as an additional insured party, and a certificate thereof acceptable to Sublandlord shall be delivered to Sublandlord prior to the delivery of the Sublease Premises to Subtenant. Subtenant hereby agrees to indemnify and hold harmless Sublandlord from, and shall reimburse Sublandlord for, all costs and expenses, including reasonable attorneys' fees, incurred by Sublandlord in connection with the defense of all claims and demands of third persons, including but not limited to those for death, personal injuries, or property damage, arising out of any default of Subtenant in performing or observing any term, covenant, condition or provision of this Sublease, or out of the use or occupancy of the Sublease Premises by Subtenant, or out of any of the acts or omissions of the Subtenant, its agents, -3- 4 representatives, employees, customers, guests, invitees or other persons who are doing business with Subtenant or who are at the Sublease Premises with Subtenant's consent. Subtenant, for itself and its insurers, hereby further expressly waives all claims against Sublandlord for any and all damages to persons or property caused by or resulting from any thing or circumstance, excepting any claims arising due to the willful misconduct of Sublandlord, its agents, representatives, employees, contractors or invitees. 11. ASSIGNMENT AND SUBLETTING. Subtenant shall be allowed to assign or sublease all or a part of the Sublease Premises subject to and in accordance with the terms set forth in Section 6.4 of the Prime Lease. In the event Subtenant assigns or sublets the Sublease Premises for a rental rate which exceeds the Subrent Schedule set forth on Schedule B, in accordance with the terms and conditions set forth in Section 6.4 of the Prime Lease Landlord and Sublandlord shall share equally any rental profit resulting from such further sublease. Subtenant may not, without the prior written consent of Sublandlord (which may be withheld in Sublandlord's sole discretion), allow any liens to be placed on this Sublease or the Sublease Premises, or suffer this Sublease or the Sublease Premises or any portion thereof to be attached or taken upon execution without posting a bond in the statutory amount required to remove the lien or otherwise providing adequate security to Sublandlord and Landlord if Subtenant disputes or contests the amount or validity of such lien. Sublandlord may assign its interest under this Sublease at any time, and in such case Sublandlord shall be released from any liability arising under this Sublease after the effective date of such assignment. 12. TERMINATION. This Sublease shall terminate at the end of the Sublease Term hereof. Subtenant will peacefully and quietly vacate and surrender the Sublease Premises to Sublandlord at the expiration of the Sublease Term, in the condition called for under the Prime Lease. The existence of this Sublease is dependent and conditioned upon the continued existence of the Prime Lease, and in the event of the cancellation or termination of the Prime Lease, this Sublease automatically shall be terminated, except to the extent provided in the Agreement of Non-Disturbance and Attornment attached hereto, if any; provided, however, that this provision shall not be deemed to release Sublandlord of liability if the Prime Lease is canceled or terminated due to a default by Sublandlord as Tenant under the Prime Lease, which default did not result, in whole or in part, from a default by Subtenant under this Sublease. Sublandlord agrees not to amend, alter or modify any of the provisions of the Prime Lease affecting Subtenant, or to surrender the Prime Lease, without Subtenant's consent, which consent will not be unreasonably withheld or delayed. Sublandlord shall have no liability to Subtenant due to the termination of the Prime Lease by reason of any default by Subtenant under this Lease, or by reason of any condemnation or destruction of the Prime Lease Premises, unless such destruction is due to the gross negligence or willful misconduct of Sublandlord, its agents, representatives, employees, contractors or invitees. In accordance with the terms set forth in the Prime Lease, in the event Subtenant fails to surrender possession of the Sublease Premises at the end of the Sublease Term, Subtenant shall at Sublandlord's option, be deemed to occupy the Sublease Premises as a tenant from month to month, which tenancy may be terminated by one month's written notice. During such tenancy, Subtenant agrees to pay to Sublandlord, monthly in -4- 5 advance, an amount equal to 200% of all Subrent (based on the Subrent and Subtenant's pro rata share of Operating Costs payable for the last month of the Sublease Term, together with all other amounts payable by Subtenant to Sublandlord under this Sublease), and to be bound by all of the terms, covenants and conditions herein specified. 13. DEFAULT. If Subtenant defaults in its obligations under this Sublease, Sublandlord shall have all of the same rights and remedies against Subtenant as would be available to the Landlord against Sublandlord if Sublandlord were in default under the Prime Lease, as fully as if such rights and remedies were set forth in this Sublease. 14. INTENTIONALLY DELETED 15. NOTICES. Any notice or demand permitted or required hereunder shall be deemed given or made if, and shall not be deemed to have been given or made unless, it is in writing and deposited in the United States mails certified, return receipt requested, postage prepaid, addressed as follows: If to Sublandlord: Canon Computer Systems, Inc. 2995 Redhill Avenue Costa Mesa, California 92626 Attn: General Counsel With a copy to: Dorsey & Whitney LLP 370 17' Street, Suite 4400 Denver, Colorado 80202 Attn: Kevin P. Hein, Esq. If to Subtenant: 2955 Redhill Avenue Costa Mesa, California 92626 With a copy to: Rutan & Tucker, LLP 611 Anton Boulevard Suite 1400 Costa Mesa, California 92626 Attn: Adam N. Volkert, Esq. The foregoing addresses may be changed from time to time by notice as above provided, which change shall be effective 10 days after notice is given. 16. SECURITY DEPOSIT; SUBMISSION OF SUBTENANT'S FINANCIALS. Upon execution of this Sublease, Subtenant shall pay to Sublandlord a security deposit equal to $41,212.50. Within five business days of the execution of this Sublease, Subtenant shall submit current audited financials for review by Landlord and Sublandlord. -5- 6 17. DIRECTORY BOARD LISTING. Subject to Landlord's prior approval, as provided in the Prime Lease, Subtenant shall be allowed to place an appropriate listing in the Building directory board. 18. ENTIRE AGREEMENT. This Sublease contains the entire agreement between Sublandlord and Subtenant regarding the Sublease Premises. Subtenant agrees that it has not relied on any statement, representation or warranty of any person except as set out in this Sublease. This Sublease may be modified only by an agreement in writing signed by Sublandlord and Subtenant. No surrender of the Sublease Premises, or of the remainder of the Sublease Term, will be valid unless accepted by Sublandlord in writing. 19. SUCCESSORS AND ASSIGNS. All provisions of this Sublease will be binding on and for the benefit of the successors and assigns of Sublandlord and Subtenant, except that no person or entity holding under or through Subtenant in violation of any provision of this Sublease will have any right or interest in this Sublease or the Sublease Premises. 20. COMMISSIONS. Sublandlord shall pay any commissions due CB Richard Ellis, Inc. regarding this Sublease. Sublandlord and Subtenant shall each indemnify and hold the other harmless from and against any claims, losses, costs or liability arising from any other parties who may claim a brokerage commission as a result of the indemnifying party's actions or agreements in connection with this Sublease. 21. INTENTIONALLY DELETED The remainder of this page has been intentionally left blank -6- 7 EXECUTION: Sublandlord and Subtenant have executed this Sublease as of the date first stated above. SUBLANDLORD: CANON COMPUTER SYSTEMS, INC., a California corporation /s/ MICHEAL RUSERT - ----------------------- Its: VP SUBTENANT: THE KEITH COMPANIES, INC., a California corporation /s/ ERIC. C. NIELSEN - --------------------- By: ERIC. C. NIELSEN Its: President /s/ GARY C. CAMPANARO - ---------------------------- By: GARY C. CAMPANARO Its: Chief Financial Officer -7- 8 EXHIBIT B Subrent Schedule Months Monthly Subrent ------ --------------- 10/1/00 - 7/31/01 $36,680.85 8/1/01 - 7/31/02 $38,039.40 8/1/02 - 7/31/03 $39,397.95 8/1/03 - 10/30/03 $40,756.50 -8- EX-10.14 9 a70823ex10-14.txt EXHIBIT 10.14 1 EXHIBIT 10.14 March 22, 2001 Mr. Aram H. Keith c/o The Keith Companies, Inc. 2955 Red Hill Avenue Costa Mesa, CA 92626 Dear Mr. Keith: The Keith Companies, Inc., for itself, its successors and assigns (collectively, the "Company") considers it essential to the best interests of its shareholders to foster the continued employment of key management personnel, particularly if there should develop uncertainty regarding the business climate surrounding Company's future. In this regard, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as defined below) of the Company's ownership may exist now or in the future and that such possibility, and the uncertainty and questions which it necessarily raises among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders in a period when their undivided attention and commitment to the best interests of the Company and its shareholders would be particularly important. Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control of the Company. This Agreement is not intended to alter materially the compensation and benefits that you could reasonably expect in the absence of a Change in Control of the Company or your "at will" employment status and, accordingly, this Agreement, though taking effect upon execution hereof, will be operative only upon a Change in Control of the Company. 1. In order to induce you to remain in the employ of the Company, the Company agrees that you shall receive the benefits set forth in this letter agreement (the "Agreement") in the event you are involuntarily or constructively terminated from your position with the Company at any time during a two year period (a "Termination") following the date of a Change in Control of the Company (as defined in Section 3 hereof) under the circumstances described below. For the purposes of this Agreement, involuntary or constructive Termination shall include, without limitation: (a) A reduction by the Company in your base salary, bonus computation or title, or a substantial reduction in your responsibilities as in effect immediately prior to the Change in Control or as the same may be increased from time to time or a change in 2 Mr. Aram H. Keith March 22, 2001 Page 2 employment conditions materially adverse from those in effect immediately prior to the Change in Control; (b) A failure by the Company to continue any bonus plans in effect as of the date of a Change in Control (the "Bonus Plans") or a failure by the Company to continue you as a participant in the Bonus Plans on at least the same basis as you presently participate in accordance with the Bonus Plans as of the date immediately prior to the Change in Control; (c) Without your express written consent, the Company's requiring you to be based anywhere other than within 25 miles of your present office location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (d) The failure by the Company to continue in effect any stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which you are participating at the time of a Change in Control of the Company (or plans providing you with substantially similar benefits), or the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any of such plans; (e) The taking of any action by the Company which would deprive you of any material fringe benefit (including, by way of example and without limitation, auto allowance) enjoyed by you at the time of the Change in Control or the failure by the Company to provide you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy in effect on the date of the Change in Control; (f) The failure by the Company to obtain the assumption or the agreement to perform this Agreement by any successor of the Company; and (g) Any other involuntary Termination which is not otherwise a result of (i) an act or acts of dishonesty by you constituting a felony for which you are convicted concerning your personal enrichment at the Company's expense, or (ii) a deliberate and intentional refusal by you (except by reason of incapacity due to illness or accident) to comply with the provisions of any confidentiality agreement between you and the Company, and such breach results in demonstrably material injury to the Company. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through March 22, 2003. At the end of each full two year term of this Agreement, this Agreement shall be automatically renewed for an additional two year period, unless the Company, at its sole and absolute discretion, notifies you of nonrenewal, such notice to be delivered in writing at least ninety (90) days prior to the end of the two year period. Upon 3 Mr. Aram H. Keith March 22, 2001 Page 3 notice of nonrenewal, you will be entitled to the protection afforded under this Agreement for the remaining term of this Agreement. 3. Change in Control. All benefits set forth hereunder shall be payable to you in the event (i) a Change in Control of the Company (as defined below) shall take place during the term of this Agreement, and (ii) a Termination shall occur at any time within the two year period immediately following the Change in Control. For purposes of this Agreement a Change in Control of the Company shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act), other than (A) Aram Keith (or his family members or affiliates) or (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding voting securities; (ii) there is a merger or consolidation of the Company in which the Company does not survive as an independent public company; (iii) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise; or (iv) during any period of two (2) consecutive years during the term of this Agreement, individuals who, at the beginning of such period constitute the Board, cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. 4. Compensation Following Termination. (a) Subject to the terms and conditions of this Agreement, after a Change in Control of the Company which occurs during the term of this Agreement, followed by your termination of employment at any time during the two-year period immediately following the Change in Control, and if such termination is a "Termination" as defined in Section 1 above, you shall be entitled to (i) a lump sum payment, within fifteen (15) days following your Termination, in an amount equal to two times the highest annual level of total cash compensation (including any and all bonus amounts) paid to you by the Company (as reported on Form W-2) during any one of the three consecutive calendar years inclusive of the year of your Termination and using, for the year of your Termination, the stated level of annual cash compensation (including any and all bonus amounts) in effect on the date of your Termination (i.e., the two calendar years before the year of your Termination and your stated annual cash compensation, including bonus amounts for the calendar year during which your Termination occurs, treating, as earned, 4 Mr. Aram H. Keith March 22, 2001 Page 4 the amount of any bonus for which you are eligible during the year of your Termination), (ii) the immediate vesting of all previously granted but unvested stock options to acquire securities from the Company and outstanding on the date of the Termination, (iii) continuing health coverage for a period of twenty-four (24) months, at a level commensurate with that which you enjoyed with the Company immediately prior to such Change in Control or, if such coverage is not available to the Company, payment in an amount to enable you to obtain substantially equivalent coverage for such period, (iv) for a period of twenty-four (24) months, all other benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, any other medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide you with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for you at any time during the 120-day period immediately preceding the date of a Change of Control or, if more favorable to you, those provided generally at any time after the date of a Change of Control through the date of your Termination, to other peer executives of the Company and its affiliated companies, (v) for a period of twenty-four (24) months fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and automobile allowance and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for you at any time during the 120-day period immediately preceding the date of a Change of Control, or, if more favorable to you, as in effect generally at any time thereafter until the date of your Termination with respect to other peer executive of the Company and its affiliated companies, and (vi) for a period of twenty-four (24) months a reasonable level of outplacement services the scope and provider of which shall be selected by you in your sole discretion. (b) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against you or others. In no event shall you be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to you under any of the provisions of this Agreement and such amounts shall not be reduced whether or not you obtain other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which you may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, you or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by you about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal 5 Mr. Aram H. Keith March 22, 2001 Page 5 rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of you (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 5(a), if it shall be determined that you are entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to you such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to you and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 5(c), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm as may be designated by you (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and you within 15 business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, you shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to you within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made 6 Mr. Aram H. Keith March 22, 2001 Page 6 ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(c) and you thereafter are required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of you. (c) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue 7 Mr. Aram H. Keith March 22, 2001 Page 7 for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of you with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by you of an amount advanced by the Company pursuant to Section 5(c), you become entitled to receive any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of Section 5(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by you of an amount advanced by the Company pursuant to Section 5(c), a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 6. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree in writing to perform this Agreement. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall require the Company to pay to you compensation from the Company in the same amount and on the same terms as you would be entitled hereunder following a Change in Control of the Company immediately coupled with a Termination, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date on which you shall receive such compensation from the Company. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisee and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided 8 Mr. Aram H. Keith March 22, 2001 Page 8 herein, shall be paid in accordance with the terms of this Agreement to your devises, legatee or other designee or, if there is no such designee to your estate. 7. Notice. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States Registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of a change of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California and the venue for any legal action shall be the Superior Courts of Orange County, California. 9. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. Entire Agreement. This Agreement constitutes the entire agreement of the Parties with respect to the subject matter hereof and supersedes any prior or contemporaneous agreements or understandings relating to the subject matter hereof. 12. Headings. The headings of the Articles and Paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 13. Severability. The provisions of this Agreement are severable. The invalidity, in whole or in part, of any provision of this Agreement shall not affect the validity or enforceability of any other of its provisions. If one or more provisions hereof shall be so declared invalid or unenforceable, the remaining provisions shall remain in full force and effect and shall be 9 Mr. Aram H. Keith March 22, 2001 Page 9 construed in the broadest possible manner to effectuate the purposes hereof. The parties further agree to replace such void or unenforceable provisions with provisions which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provisions. 14. Attorneys' Fees. In the event any party to this Agreement initiates any action, suit, motion, application, arbitration or other proceeding which concerns the interpretation or enforcement of this Agreement, the prevailing party in such action, suit, motion, application, arbitration or other proceeding, or judgment creditor, shall be entitled to recover its costs and attorneys' fees from the nonprevailing party or judgment debtor, including costs and fees on appeal, if any. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, THE KEITH COMPANIES, INC. a California corporation By: /s/ GARY C. CAMPANARO --------------------------------- Its: Chief Financial Officer and Secretary AGREED TO this 22nd day of March, 2001 /s/ ARAM H. KEITH - ----------------------------------- Aram H. Keith Approved by the Board of Directors of The Keith Companies, Inc. on March 20, 2001. EX-10.15 10 a70823ex10-15.txt EXHIBIT 10.15 1 EXHIBIT 10.15 March 22, 2001 Mr. Eric C. Nielsen c/o The Keith Companies, Inc. 2955 Red Hill Avenue Costa Mesa, CA 92626 Dear Mr. Nielsen: The Keith Companies, Inc., for itself, its successors and assigns (collectively, the "Company") considers it essential to the best interests of its shareholders to foster the continued employment of key management personnel, particularly if there should develop uncertainty regarding the business climate surrounding Company's future. In this regard, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as defined below) of the Company's ownership may exist now or in the future and that such possibility, and the uncertainty and questions which it necessarily raises among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders in a period when their undivided attention and commitment to the best interests of the Company and its shareholders would be particularly important. Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control of the Company. This Agreement is not intended to alter materially the compensation and benefits that you could reasonably expect in the absence of a Change in Control of the Company or your "at will" employment status and, accordingly, this Agreement, though taking effect upon execution hereof, will be operative only upon a Change in Control of the Company. 1. In order to induce you to remain in the employ of the Company, the Company agrees that you shall receive the benefits set forth in this letter agreement (the "Agreement") in the event you are involuntarily or constructively terminated from your position with the Company at any time during a two year period (a "Termination") following the date of a Change in Control of the Company (as defined in Section 3 hereof) under the circumstances described below. For the purposes of this Agreement, involuntary or constructive Termination shall include, without limitation: (a) A reduction by the Company in your base salary, bonus computation or title, or a substantial reduction in your responsibilities as in effect immediately prior to the Change in Control or as the same may be increased from time to time or a change in 2 Mr. Eric C. Nielsen March 22, 2001 Page 1 employment conditions materially adverse from those in effect immediately prior to the Change in Control; (b) A failure by the Company to continue any bonus plans in effect as of the date of a Change in Control (the "Bonus Plans") or a failure by the Company to continue you as a participant in the Bonus Plans on at least the same basis as you presently participate in accordance with the Bonus Plans as of the date immediately prior to the Change in Control; (c) Without your express written consent, the Company's requiring you to be based anywhere other than within 25 miles of your present office location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (d) The failure by the Company to continue in effect any stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which you are participating at the time of a Change in Control of the Company (or plans providing you with substantially similar benefits), or the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any of such plans; (e) The taking of any action by the Company which would deprive you of any material fringe benefit (including, by way of example and without limitation, auto allowance) enjoyed by you at the time of the Change in Control or the failure by the Company to provide you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy in effect on the date of the Change in Control; (f) The failure by the Company to obtain the assumption or the agreement to perform this Agreement by any successor of the Company; and (g) Any other involuntary Termination which is not otherwise a result of (i) an act or acts of dishonesty by you constituting a felony for which you are convicted concerning your personal enrichment at the Company's expense, or (ii) a deliberate and intentional refusal by you (except by reason of incapacity due to illness or accident) to comply with the provisions of any confidentiality agreement between you and the Company, and such breach results in demonstrably material injury to the Company. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through March 22, 2003. At the end of each full two year term of this Agreement, this Agreement shall be automatically renewed for an additional two year period, unless the Company, at its sole and absolute discretion, notifies you of nonrenewal, such notice to be delivered in writing at least ninety (90) days prior to the end of the two year period. Upon 3 Mr. Eric C. Nielsen March 22, 2001 Page 3 notice of nonrenewal, you will be entitled to the protection afforded under this Agreement for the remaining term of this Agreement. 3. Change in Control. All benefits set forth hereunder shall be payable to you in the event (i) a Change in Control of the Company (as defined below) shall take place during the term of this Agreement, and (ii) a Termination shall occur at any time within the two year period immediately following the Change in Control. For purposes of this Agreement a Change in Control of the Company shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act), other than (A) Aram Keith (or his family members or affiliates) or (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding voting securities; (ii) there is a merger or consolidation of the Company in which the Company does not survive as an independent public company; (iii) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise; or (iv) during any period of two (2) consecutive years during the term of this Agreement, individuals who, at the beginning of such period constitute the Board, cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. 4. Compensation Following Termination. (a) Subject to the terms and conditions of this Agreement, after a Change in Control of the Company which occurs during the term of this Agreement, followed by your termination of employment at any time during the two-year period immediately following the Change in Control, and if such termination is a "Termination" as defined in Section 1 above, you shall be entitled to (i) a lump sum payment, within fifteen (15) days following your Termination, in an amount equal to two times the highest annual level of total cash compensation (including any and all bonus amounts) paid to you by the Company (as reported on Form W-2) during any one of the three consecutive calendar years inclusive of the year of your Termination and using, for the year of your Termination, the stated level of annual cash compensation (including any and all bonus amounts) in effect on the date of your Termination (i.e., the two calendar years before the year of your Termination and your stated annual cash compensation, including bonus amounts for the calendar year during which your Termination occurs, treating, as earned, 4 Mr. Eric C. Nielsen March 22, 2001 Page 4 the amount of any bonus for which you are eligible during the year of your Termination), (ii) the immediate vesting of all previously granted but unvested stock options to acquire securities from the Company and outstanding on the date of the Termination, (iii) continuing health coverage for a period of twenty-four (24) months, at a level commensurate with that which you enjoyed with the Company immediately prior to such Change in Control or, if such coverage is not available to the Company, payment in an amount to enable you to obtain substantially equivalent coverage for such period, (iv) for a period of twenty-four (24) months, all other benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, any other medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide you with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for you at any time during the 120-day period immediately preceding the date of a Change of Control or, if more favorable to you, those provided generally at any time after the date of a Change of Control through the date of your Termination, to other peer executives of the Company and its affiliated companies, (v) for a period of twenty-four (24) months fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and automobile allowance and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for you at any time during the 120-day period immediately preceding the date of a Change of Control, or, if more favorable to you, as in effect generally at any time thereafter until the date of your Termination with respect to other peer executive of the Company and its affiliated companies, and (vi) for a period of twenty-four (24) months a reasonable level of outplacement services the scope and provider of which shall be selected by you in your sole discretion. (b) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against you or others. In no event shall you be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to you under any of the provisions of this Agreement and such amounts shall not be reduced whether or not you obtain other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which you may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, you or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by you about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal 5 Mr. Eric C. Nielsen March 22, 2001 Page 5 rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of you (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 5(a), if it shall be determined that you are entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to you such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to you and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 5(c), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm as may be designated by you (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and you within 15 business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, you shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to you within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made 6 Mr. Eric C. Nielsen March 22, 2001 Page 6 ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(c) and you thereafter are required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of you. (c) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue 7 Mr. Eric C. Nielsen March 22, 2001 Page 7 for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of you with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by you of an amount advanced by the Company pursuant to Section 5(c), you become entitled to receive any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of Section 5(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by you of an amount advanced by the Company pursuant to Section 5(c), a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 6. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree in writing to perform this Agreement. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall require the Company to pay to you compensation from the Company in the same amount and on the same terms as you would be entitled hereunder following a Change in Control of the Company immediately coupled with a Termination, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date on which you shall receive such compensation from the Company. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisee and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided 8 Mr. Eric C. Nielsen March 22, 2001 Page 8 herein, shall be paid in accordance with the terms of this Agreement to your devises, legatee or other designee or, if there is no such designee to your estate. 7. Notice. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States Registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of a change of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California and the venue for any legal action shall be the Superior Courts of Orange County, California. 9. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. Entire Agreement. This Agreement constitutes the entire agreement of the Parties with respect to the subject matter hereof and supersedes any prior or contemporaneous agreements or understandings relating to the subject matter hereof. 12. Headings. The headings of the Articles and Paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 13. Severability. The provisions of this Agreement are severable. The invalidity, in whole or in part, of any provision of this Agreement shall not affect the validity or enforceability of any other of its provisions. If one or more provisions hereof shall be so declared invalid or unenforceable, the remaining provisions shall remain in full force and effect and shall be 9 Mr. Eric C. Nielsen March 22, 2001 Page 9 construed in the broadest possible manner to effectuate the purposes hereof. The parties further agree to replace such void or unenforceable provisions with provisions which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provisions. 14. Attorneys' Fees. In the event any party to this Agreement initiates any action, suit, motion, application, arbitration or other proceeding which concerns the interpretation or enforcement of this Agreement, the prevailing party in such action, suit, motion, application, arbitration or other proceeding, or judgment creditor, shall be entitled to recover its costs and attorneys' fees from the nonprevailing party or judgment debtor, including costs and fees on appeal, if any. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, THE KEITH COMPANIES, INC. a California corporation By: /s/ ARAM H. KEITH -------------------------------- Its: Chief Executive Officer AGREED TO this 22nd day of March, 2001 /s/ ERIC C. NIELSEN - ---------------------------------- Eric C. Nielsen Approved by the Board of Directors of The Keith Companies, Inc. on March 20, 2001. EX-10.16 11 a70823ex10-16.txt EXHIBIT 10.16 1 EXHIBIT 10.16 March 22, 2001 Mr. Gary C. Campanaro c/o The Keith Companies, Inc. 2955 Red Hill Avenue Costa Mesa, CA 92626 Dear Mr. Campanaro: The Keith Companies, Inc., for itself, its successors and assigns (collectively, the "Company") considers it essential to the best interests of its shareholders to foster the continued employment of key management personnel, particularly if there should develop uncertainty regarding the business climate surrounding Company's future. In this regard, the Board of Directors of the Company (the "Board") recognizes that the possibility of a Change in Control (as defined below) of the Company's ownership may exist now or in the future and that such possibility, and the uncertainty and questions which it necessarily raises among management, may result in the departure or distraction of management personnel to the detriment of the Company and its shareholders in a period when their undivided attention and commitment to the best interests of the Company and its shareholders would be particularly important. Accordingly, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control of the Company. This Agreement is not intended to alter materially the compensation and benefits that you could reasonably expect in the absence of a Change in Control of the Company or your "at will" employment status and, accordingly, this Agreement, though taking effect upon execution hereof, will be operative only upon a Change in Control of the Company. 1. In order to induce you to remain in the employ of the Company, the Company agrees that you shall receive the benefits set forth in this letter agreement (the "Agreement") in the event you are involuntarily or constructively terminated from your position with the Company at any time during a two year period (a "Termination") following the date of a Change in Control of the Company (as defined in Section 3 hereof) under the circumstances described below. For the purposes of this Agreement, involuntary or constructive Termination shall include, without limitation: (a) A reduction by the Company in your base salary, bonus computation or title, or a substantial reduction in your responsibilities as in effect immediately prior to the Change in Control or as the same may be increased from time to time or a change in 2 Mr., Gary C. Campanaro March 22, 2001 Page 2 employment conditions materially adverse from those in effect immediately prior to the Change in Control; (b) A failure by the Company to continue any bonus plans in effect as of the date of a Change in Control (the "Bonus Plans") or a failure by the Company to continue you as a participant in the Bonus Plans on at least the same basis as you presently participate in accordance with the Bonus Plans as of the date immediately prior to the Change in Control; (c) Without your express written consent, the Company's requiring you to be based anywhere other than within 25 miles of your present office location, except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (d) The failure by the Company to continue in effect any stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which you are participating at the time of a Change in Control of the Company (or plans providing you with substantially similar benefits), or the taking of any action by the Company which would adversely affect your participation in or materially reduce your benefits under any of such plans; (e) The taking of any action by the Company which would deprive you of any material fringe benefit (including, by way of example and without limitation, auto allowance) enjoyed by you at the time of the Change in Control or the failure by the Company to provide you with the number of paid vacation days to which you are then entitled in accordance with the Company's normal vacation policy in effect on the date of the Change in Control; (f) The failure by the Company to obtain the assumption or the agreement to perform this Agreement by any successor of the Company; and (g) Any other involuntary Termination which is not otherwise a result of (i) an act or acts of dishonesty by you constituting a felony for which you are convicted concerning your personal enrichment at the Company's expense, or (ii) a deliberate and intentional refusal by you (except by reason of incapacity due to illness or accident) to comply with the provisions of any confidentiality agreement between you and the Company, and such breach results in demonstrably material injury to the Company. 2. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through March 22, 2003. At the end of each full two year term of this Agreement, this Agreement shall be automatically renewed for an additional two year period, unless the Company, at its sole and absolute discretion, notifies you of nonrenewal, such notice to be delivered in writing at least ninety (90) days prior to the end of the two year period. Upon 3 Mr., Gary C. Campanaro March 22, 2001 Page 3 notice of nonrenewal, you will be entitled to the protection afforded under this Agreement for the remaining term of this Agreement. 3. Change in Control. All benefits set forth hereunder shall be payable to you in the event (i) a Change in Control of the Company (as defined below) shall take place during the term of this Agreement, and (ii) a Termination shall occur at any time within the two year period immediately following the Change in Control. For purposes of this Agreement a Change in Control of the Company shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is then subject to such reporting requirement; provided that, without limitation, such a Change in Control shall be deemed to have occurred if (i) any "person" (as such term is used in Section 13(d) and 14(d) of the Exchange Act), other than (A) Aram Keith (or his family members or affiliates) or (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty percent (20%) or more of the combined voting power of the Company's then outstanding voting securities; (ii) there is a merger or consolidation of the Company in which the Company does not survive as an independent public company; (iii) the business or businesses of the Company for which your services are principally performed are disposed of by the Company pursuant to a partial or complete liquidation of the Company, a sale of assets (including stock of a subsidiary) of the Company, or otherwise; or (iv) during any period of two (2) consecutive years during the term of this Agreement, individuals who, at the beginning of such period constitute the Board, cease for any reason to constitute at least a majority thereof, unless the election of each director who was not a director at the beginning of such period has been approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. 4. Compensation Following Termination. (a) Subject to the terms and conditions of this Agreement, after a Change in Control of the Company which occurs during the term of this Agreement, followed by your termination of employment at any time during the two-year period immediately following the Change in Control, and if such termination is a "Termination" as defined in Section 1 above, you shall be entitled to (i) a lump sum payment, within fifteen (15) days following your Termination, in an amount equal to two times the highest annual level of total cash compensation (including any and all bonus amounts) paid to you by the Company (as reported on Form W-2) during any one of the three consecutive calendar years inclusive of the year of your Termination and using, for the year of your Termination, the stated level of annual cash compensation (including any and all bonus amounts) in effect on the date of your Termination (i.e., the two calendar years before the year of your Termination and your stated annual cash compensation, including bonus amounts for the calendar year during which your Termination occurs, treating, as earned, 4 Mr., Gary C. Campanaro March 22, 2001 Page 4 the amount of any bonus for which you are eligible during the year of your Termination), (ii) the immediate vesting of all previously granted but unvested stock options to acquire securities from the Company and outstanding on the date of the Termination, (iii) continuing health coverage for a period of twenty-four (24) months, at a level commensurate with that which you enjoyed with the Company immediately prior to such Change in Control or, if such coverage is not available to the Company, payment in an amount to enable you to obtain substantially equivalent coverage for such period, (iv) for a period of twenty-four (24) months, all other benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, any other medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide you with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for you at any time during the 120-day period immediately preceding the date of a Change of Control or, if more favorable to you, those provided generally at any time after the date of a Change of Control through the date of your Termination, to other peer executives of the Company and its affiliated companies, (v) for a period of twenty-four (24) months fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and automobile allowance and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for you at any time during the 120-day period immediately preceding the date of a Change of Control, or, if more favorable to you, as in effect generally at any time thereafter until the date of your Termination with respect to other peer executive of the Company and its affiliated companies, and (vi) for a period of twenty-four (24) months a reasonable level of outplacement services the scope and provider of which shall be selected by you in your sole discretion. (b) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against you or others. In no event shall you be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to you under any of the provisions of this Agreement and such amounts shall not be reduced whether or not you obtain other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which you may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, you or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by you about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal 5 Mr., Gary C. Campanaro March 22, 2001 Page 5 rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 5. CERTAIN ADDITIONAL PAYMENTS BY THE COMPANY. (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of you (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 5) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by you with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then you shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by you of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 5(a), if it shall be determined that you are entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to you such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to you and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 5(c), all determinations required to be made under this Section 5, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by a certified public accounting firm as may be designated by you (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and you within 15 business days of the receipt of notice from you that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, you shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 5, shall be paid by the Company to you within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made 6 Mr., Gary C. Campanaro March 22, 2001 Page 6 ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 5(c) and you thereafter are required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of you. (c) You shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after you are informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. You shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies you in writing prior to the expiration of such period that it desires to contest such claim, you shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company; (iii) cooperate with the Company in good faith in order effectively to contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold you harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 5(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct you to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and you agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs you to pay such claim and sue 7 Mr., Gary C. Campanaro March 22, 2001 Page 7 for a refund, the Company shall advance the amount of such payment to you, on an interest-free basis and shall indemnify and hold you harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of you with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and you shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by you of an amount advanced by the Company pursuant to Section 5(c), you become entitled to receive any refund with respect to such claim, you shall (subject to the Company's complying with the requirements of Section 5(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by you of an amount advanced by the Company pursuant to Section 5(c), a determination is made that you shall not be entitled to any refund with respect to such claim and the Company does not notify you in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 6. Successors; Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree in writing to perform this Agreement. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall require the Company to pay to you compensation from the Company in the same amount and on the same terms as you would be entitled hereunder following a Change in Control of the Company immediately coupled with a Termination, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date on which you shall receive such compensation from the Company. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (b) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisee and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided 8 Mr., Gary C. Campanaro March 22, 2001 Page 8 herein, shall be paid in accordance with the terms of this Agreement to your devises, legatee or other designee or, if there is no such designee to your estate. 7. Notice. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States Registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of a change of address shall be effective only upon receipt. 8. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California and the venue for any legal action shall be the Superior Courts of Orange County, California. 9. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 10. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 11. Entire Agreement. This Agreement constitutes the entire agreement of the Parties with respect to the subject matter hereof and supersedes any prior or contemporaneous agreements or understandings relating to the subject matter hereof. 12. Headings. The headings of the Articles and Paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof. 13. Severability. The provisions of this Agreement are severable. The invalidity, in whole or in part, of any provision of this Agreement shall not affect the validity or enforceability of any other of its provisions. If one or more provisions hereof shall be so declared invalid or unenforceable, the remaining provisions shall remain in full force and effect and shall be 9 Mr., Gary C. Campanaro March 22, 2001 Page 8 construed in the broadest possible manner to effectuate the purposes hereof. The parties further agree to replace such void or unenforceable provisions with provisions which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provisions. 14. Attorneys' Fees. In the event any party to this Agreement initiates any action, suit, motion, application, arbitration or other proceeding which concerns the interpretation or enforcement of this Agreement, the prevailing party in such action, suit, motion, application, arbitration or other proceeding, or judgment creditor, shall be entitled to recover its costs and attorneys' fees from the nonprevailing party or judgment debtor, including costs and fees on appeal, if any. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, THE KEITH COMPANIES, INC. a California corporation By: /s/ ARAM H. KEITH --------------------------------- Its: Chief Executive Officer AGREED TO this 22nd day of March, 2001 /s/ GARY C. CAMPANARO - ---------------------------------- Gary C. Campanaro Approved by the Board of Directors of The Keith Companies, Inc. on March 20, 2001. EX-21 12 a70823ex21.txt EXHIBIT 21 1 EXHIBIT 21 Subsidiaries of the Registrant Crosby, Mead, Benton & Associates, a California corporation, is a wholly-owned subsidiary of our Company. Hook Engineering, Inc., a California corporation, is a wholly-owned subsidiary of our Company. Neither Crosby, Mead, Benton & Associates nor Hook Engineering, Inc. does business under any other name. EX-23 13 a70823ex23.txt EXHIBIT 23 1 EXHIBIT 23.0 CONSENT OF INDEPENDENT AUDITORS The Board of Directors The Keith Companies, Inc.: We consent to incorporation by reference in the registration statement (No. 33-83097) on Form S-8 of The Keith Companies, Inc. of our report dated February 14, 2001, relating to the consolidated balance sheets of The Keith Companies, Inc. and subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of income, shareholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000, annual report on Form 10-K of The Keith Companies, Inc. /s/ KPMG LLP -------------- KPMG LLP Orange County, California April 2, 2001 -----END PRIVACY-ENHANCED MESSAGE-----