-----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, Uh1xBkVelPtbJciMf8pLwqMYW/AhWYKk3mriUzuGiYF1L191QfsE3QUyKSYXPtgq YUWBqIs+odqcU/wmINHKMg== 0001095811-01-002026.txt : 20010409 0001095811-01-002026.hdr.sgml : 20010409 ACCESSION NUMBER: 0001095811-01-002026 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 4 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: S-1 SEC ACT: SEC FILE NUMBER: 333-58088 FILM NUMBER: 1589704 BUSINESS ADDRESS: STREET 1: 2955 RED HILL AVENUE CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7146687001 MAIL ADDRESS: STREET 1: 2955 RED HILL AVENUE CITY: COSTA MESA STATE: CA ZIP: 92626 S-1 1 a70932s-1.txt FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 2, 2001. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ THE KEITH COMPANIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) CALIFORNIA 8711 33-0203193 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------ 2955 RED HILL AVENUE COSTA MESA, CALIFORNIA 92626 (714) 668-7001 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ARAM H. KEITH CHIEF EXECUTIVE OFFICER THE KEITH COMPANIES, INC. 2955 RED HILL AVENUE COSTA MESA, CALIFORNIA 92626 (714) 668-7001 (714) 668-7026 (FAX) (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: THOMAS J. CRANE, ESQ. C.N. FRANKLIN REDDICK III, ESQ. RUTAN & TUCKER, LLP V. JOSEPH STUBBS, ESQ. 611 ANTON BOULEVARD, 14TH FLOOR AKIN, GUMP, STRAUSS, HAUER & FELD, LLP COSTA MESA, CALIFORNIA 92626 2029 CENTURY PARK EAST, SUITE 2400 (714) 641-5100 (714) 546-9035 (FAX) LOS ANGELES, CALIFORNIA 90067 (310) 229-1000 (310) 229-1001 (FAX)
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the registration statement becomes effective. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------------- Common stock, $.001 par value 2,300,000 $22.15 $50,945,000.00 $12,736.25 - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
(1) Includes 300,000 shares of common stock issuable upon exercise of the underwriters' over-allotment option. In the event of a stock split, stock dividend, anti-dilution adjustment or similar transaction involving common stock of the registrant, in order to prevent dilution, the number of shares registered shall be automatically increased to cover the additional shares in accordance with Rule 416(a) under the Securities Act. (2) Estimated solely for the purpose of calculating the registration fee. Calculated pursuant to Rule 457(c) under the Securities Act of 1933, on the basis of the average of the high and low prices per share of our common stock as reported on the Nasdaq National Market on March 27, 2001. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED APRIL 2, 2001 2,000,000 SHARES KEITH COMPANY LOGO COMMON STOCK ------------------------ This a public offering of 2,000,000 shares of our common stock. We are offering 1,750,000 shares and the selling shareholders are offering 250,000 shares. We will not receive any of the proceeds from the sale of shares by the selling shareholders. Our common stock is quoted on the Nasdaq National Market under the symbol "TKCI." On March 27, 2001, the last reported sale price of our common stock on the Nasdaq National Market was $22.00 per share. ------------------------ INVESTING IN OUR SHARES INVOLVES RISKS. PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------------------
PER SHARE TOTAL Price to public............................................. $ $ Underwriting discounts and commissions...................... $ $ Proceeds to us.............................................. $ $ Proceeds to selling shareholders............................ $ $
We and the selling shareholders have granted the underwriters a 45-day option to purchase up to an additional 300,000 shares of our common stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. WEDBUSH MORGAN SECURITIES INC. JANNEY MONTGOMERY SCOTT LLC THE DATE OF THIS PROSPECTUS IS , 2001. 3 On Inside Front Cover -- Graphics consisting of photographs of projects on which we have performed services, or representative of those on which we have performed services. 4 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 6 Special Note Regarding Forward-Looking Statements........... 12 Use of Proceeds............................................. 13 Dividend Policy............................................. 13 Price Range of Common Stock................................. 14 Capitalization.............................................. 15 Selected Consolidated Financial Data........................ 16 Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 19 Quantitative and Qualitative Disclosures About Market Risk..................................................... 27 Business.................................................... 28 Management.................................................. 45 Principal and Selling Shareholders.......................... 54 Description of Capital Stock................................ 55 Shares Eligible for Future Sale............................. 56 Underwriting................................................ 58 Legal Matters............................................... 62 Experts..................................................... 62 Where You Can Find More Information......................... 62
------------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THE INFORMATION IN THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS, OR ANY SALE OF OUR COMMON STOCK, IS ACCURATE ONLY ON THE DATE OF THIS PROSPECTUS. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF OUR COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR, AND PURCHASE, SHARES OF OUR COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING." The trademark or trade names referred to in this prospectus are the property of their respective owners. 5 PROSPECTUS SUMMARY To fully understand this offering and its consequences to you, you should read the following summary together with the more detailed information and our consolidated financial statements and the notes to those statements appearing elsewhere in this prospectus. THE KEITH COMPANIES, INC. We are an 18 year old engineering and consulting services firm located in the Western United States. We have achieved strong growth in both our net revenue and net income. From fiscal 1996 through fiscal 2000, our net revenue has grown at a compounded annual growth rate of 42% and our net income has grown at a compounded annual growth rate of 59%. We have achieved this growth through our own internal efforts and through acquisitions. We believe that our success is due to a number of factors, including: - our well-established reputation for providing timely and high quality services to our clients; - our experienced professional staff, established systems and seasoned management team; - our ability to identify, consummate and integrate acquisitions; - our full range of services that allow us to provide our clients comprehensive, integrated and cost-effective solutions; and - our ability to expand and build on our client relationships due to our reputation within our industries and our technical expertise. The geographic regions in which we operate in the Western United States are experiencing economic expansion. We believe that the historical and projected growth in population, personal income and employment in these areas are all combining to support the continued long-term demand for our services. We believe that we are well-positioned in the following industries: - real estate development, public works/infrastructure and communications; and - industrial/energy. We believe that these industries will continue to experience significant growth. Land development and real estate engineering services, which formed the early foundation of our company's success, continue to grow with many long-term projects now underway. In addition, we are experiencing strong growth in industrial engineering work and, in particular, in power/energy engineering projects. We also continue to benefit from what we believe is an increasing demand for public works/infrastructure projects from both the public and private sector. The clients we serve are primarily large, well-established firms and large public entities, many of which seek our services for significant long-term projects. Many have been our 1 6 clients for five years or more and in some cases, more than a decade. We remain dedicated to providing the highest quality services and offering the most cost-effective solutions to these valued clients. The acquisitions that we have completed and successfully integrated have strengthened our geographic presence and the breadth of our service offerings. We have often been able to apply our systems and years of experience to enhance the quality of the acquired operations, which may yield increased sales and profitability. We have, through our acquisitions and internal growth, diversified our services and geographic presence and we believe that we are well-positioned to take advantage of future opportunities in the industries which we serve. We plan on continuing to execute our successful business strategy which includes the following: - maintain the high quality of our services; - continue to recruit and retain highly qualified personnel; - expand and strengthen the geographic scope of our operations; - strengthen our engineering service offerings; - continue to strengthen our position in the industries we serve; and - continue to acquire and effectively integrate new businesses which expand our geographic presence, strengthen the diversity of our services and enhance our position in the markets we serve. In January 2001, we acquired Hook & Associates Engineering, Inc., our fifth acquisition since late 1997. Our acquisitions have enabled us to expand our service offerings to include process engineering design, mechanical, chemical/process and electrical engineering, environmental waste processing systems design, petrochemical design, services relating to flood control and have expanded water resources engineering, environmental permitting, and biological surveys and studies. In addition, we have expanded geographically from our original base in Southern California and Nevada, into Central and Northern California, Utah, Arizona, Colorado and Wyoming and we intend to continue to expand throughout the United States to better service our clients. We employ approximately 650 professionals in 13 offices located in 6 states. Our clients include major national and regional real estate development firms including The Irvine Company, Centex Homes and Pulte Home Corporation. We also serve architects, water districts, federal, state and local governments, including Orange County Transportation Authority, Metropolitan Water District of Southern California and Central Utah Water Conservation District. In addition, we serve cellular telephone service providers, universities and manufacturers of a wide variety of products, including Clorox Products Company, New United Motors Manufacturing, Inc. (NUMMI -- GM and Toyota) and Enron Energy Services. 2 7 RECENT DEVELOPMENTS In January 2001, a wholly-owned subsidiary of ours acquired substantially all of the assets and assumed substantially all of the liabilities of privately-held Hook & Associates Engineering, Inc. Hook & Associates Engineering, Inc. is an engineering and consulting services firm with its headquarters located in Phoenix, Arizona and additional offices in Denver, Colorado and Cheyenne, Wyoming. Hook & Associates Engineering, Inc. provides a full range of services to clients in an array of industries including communications, public works/transportation and real estate development. 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, we agreed to pay cash related to the income tax effects to the sellers. We guaranteed the contractual obligations of our subsidiary to Hook & Associates Engineering, Inc. in this transaction. The acquisition expands our pool of professionals, broadens our geographic operations into three additional western states and enhances our expertise in the fulfillment of contracts in high growth sectors such as the public works/infrastructure and communications industry. CORPORATE INFORMATION Our principal executive offices are located at 2955 Red Hill Avenue, Costa Mesa, California 92626, and our telephone number is (714) 668-7001. Our Internet address is http://www.keithco.com. Information contained on our web site or that is accessible through our web site should not be considered to be part of this prospectus. 3 8 THE OFFERING Common stock offered by us.... 1,750,000 shares Common stock offered by the selling shareholders....... 250,000 shares Total......................... 2,000,000 shares Common stock to be outstanding after this offering........ 7,138,997 shares Use of proceeds............... General corporate purposes, including working capital, possible acquisitions and repayment of debt. See "Use of Proceeds." Nasdaq National Market symbol........................ TKCI The number of shares of common stock outstanding after this offering is based on the 5,369,997 shares outstanding as of March 23, 2001, and excludes the following: - 1,600,000 shares reserved for issuance under our Amended and Restated 1994 Stock Incentive Plan. Options to purchase 755,083 shares are outstanding under this plan. - Shares of common stock issuable by us in the future with a market value of $1,700,000, subject to adjustment, in connection with our acquisitions of Crosby, Mead, Benton & Associates and Hook & Associates Engineering, Inc. - Up to 300,000 shares of common stock that the underwriters may purchase from us and the selling shareholders if they exercise their over-allotment option. The number of shares of common stock outstanding after this offering includes 19,000 shares underlying options held by one selling shareholder who we anticipate will exercise these options prior to the offering. 4 9 SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following summary financial information is derived from our consolidated financial statements. You should read this summary financial information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our "Consolidated Financial Statements" and related notes.
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1999 2000 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED STATEMENTS OF INCOME DATA(1): Net revenue....................................... $ 29,182 $ 39,636 $ 53,381 Gross profit...................................... 9,895 12,649 19,019 Income from operations............................ 4,037 4,306 8,185 Interest expense.................................. 967 807 341 Income before provision for income taxes.......... 3,004 3,483 7,919 Net income........................................ 1,654(2) 2,017 4,720 Net income available to common shareholders....... 1,424(2) 2,247 4,720 Earnings per share -- diluted..................... $ 0.39(2) $ 0.50 $ 0.89 ========== ========== ========== Weighted average shares outstanding -- diluted.... 3,635,474 4,515,033 5,299,679 ========== ========== ========== EBITDA(3)......................................... $ 4,562 $ 5,314 $ 9,787 ========== ========== ==========
AS OF DECEMBER 31, 2000 ------------------------ ACTUAL AS ADJUSTED -------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................. $ 1,043 $36,596 Working capital........................................... 7,343 42,896 Total assets.............................................. 33,312 68,865 Total debt................................................ 5,745 5,745 Total shareholders' equity................................ 18,239 53,792
- ------------------------- (1) Prior to August 1, 1998, Keith Engineering, Inc., which is included in our consolidated financial statements, elected to be taxed as an S corporation. (2) The following amounts reflect pro forma adjustments for provisions for federal and state income taxes at an assumed effective income tax rate of 42%: net income: $1,742,000; net income available to common shareholders: $1,512,000; and earnings per share -- diluted: $0.42. (3) EBITDA refers to income before provision for income taxes 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. The as adjusted consolidated balance sheet data as of December 31, 2000 has been adjusted to give effect to the sale of 1,750,000 shares of our common stock by us assuming an offering price of $22.00 per share and the application of the estimated net proceeds from this offering. 5 10 RISK FACTORS The following discussion summarizes material risks which you should carefully consider before you decide to buy our common stock. 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. 6 11 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. 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 intend to use a portion of the proceeds of this offering to implement our acquisition strategy (which may include an increase in the number and/or size of acquisitions). If we are unable to consummate this offering or 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. 7 12 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. 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. 8 13 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. 9 14 RISKS RELATED TO THIS OFFERING OUR STOCK PRICE MAY DECREASE, WHICH COULD RESULT IN SIGNIFICANT LOSSES FOR INVESTORS PURCHASING SHARES IN THIS OFFERING 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 offering price per share in this offering. 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. Our offering price may not be indicative of the price of our stock that will prevail in the trading market. You may be unable to sell your shares of common stock at or above the offering price, which may result in substantial losses to you. Moreover, 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 Shareholders purchasing shares of our common stock in public markets will have only a limited ability to influence matters requiring shareholder approval. Our executive officers, directors and one other significant shareholder, in the aggregate, will hold approximately 31% of our outstanding common stock after this offering. 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. 10 15 WE HAVE SUBSTANTIAL DISCRETION AS TO HOW TO USE THE PROCEEDS WE RECEIVE FROM THIS OFFERING, SO WE MAY SPEND THE PROCEEDS IN WAYS THAT DO NOT IMPROVE OUR OPERATING RESULTS OR INCREASE THE VALUE OF YOUR INVESTMENT Our management has broad discretion as to how to spend the proceeds we receive from this offering and may spend the proceeds in ways with which our shareholders may not agree. We cannot guarantee that investment of the proceeds will yield a favorable, or any, return. See "Use of Proceeds." 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 AFTER THIS OFFERING COULD CAUSE THE MARKET PRICE OF OUR STOCK TO DROP, EVEN IF OUR BUSINESS IS DOING WELL After this offering, we will have outstanding 7,138,997 shares of common stock. This includes the 2,000,000 shares being sold in this offering and the 1,500,000 shares sold in our initial public offering. 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. 11 16 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus 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 "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," as well as under other captions elsewhere in this prospectus. 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 prospectus 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. 12 17 USE OF PROCEEDS We estimate the net proceeds from the sale of shares of common stock we are offering to be approximately $35,553,000, or $38,648,000 if the underwriters exercise their over-allotment option in full, at an assumed offering price of $22.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses. We will not receive any of the proceeds from the sale of shares of our common stock by the selling shareholders. We intend to use the net proceeds from this offering for general corporate purposes, including working capital. We may use a portion of the net proceeds of this offering to repay any balance on our line of credit. The line of credit bears interest at the prime rate of interest and matures on September 3, 2001. During the 12 months prior to the date of this prospectus, we have used this line of credit to fund working capital, capital acquisitions and acquisitions of complementary businesses. Management will have broad discretion in the application of the net proceeds allocated to working capital and other general corporate purposes. We may use a portion of the net proceeds of this offering to acquire other businesses. From time to time, we evaluate potential acquisitions and expect that we will undertake one or more acquisitions during 2001. As of the date of this prospectus, we have no understandings, commitments or agreements relating to any additional acquisition. Pending these uses, we intend to invest the net proceeds of this offering in short-term, high-grade interest-bearing securities, certificates of deposit or direct or guaranteed obligations of the U.S. Government. DIVIDEND POLICY 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. 13 18 PRICE RANGE OF COMMON STOCK 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 YEAR ENDING DECEMBER 31, 2001 First Quarter (through March 27).......................... $8.94 $25.63
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. 14 19 CAPITALIZATION The following table sets forth our capitalization as of December 31, 2000 and as adjusted to reflect our sale of 1,750,000 shares of common stock in this offering and the application of the estimated net proceeds assuming an offering price of $22.00 per share, after deducting underwriting discounts and estimated offering expenses. In addition, the as adjusted capitalization data in the following table reflects the exercise of options to purchase 19,000 shares of our common stock at an exercise price of $2.70 per share and the sale of those shares by one selling shareholder in this offering.
DECEMBER 31, 2000 --------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Long-term debt and capital lease obligations, less current portion................................................... $ 361 $ 361 Issuable common stock....................................... 1,000 1,000 Shareholders' equity: Preferred stock, $0.001 par value per share, 5,000,000 shares authorized; no shares issued and outstanding, actual; and no shares issued and outstanding, as adjusted............................................... -- -- Common stock, $0.001 par value per share, 100,000,000 shares authorized; 5,115,882 shares issued and outstanding, actual; and 6,884,882 shares issued and outstanding, as adjusted............................... 5 7 Additional paid-in capital................................ 12,453 48,055 Retained earnings......................................... 5,781 5,781 ------- ------- Total shareholders' equity........................ 18,239 53,843 ------- ------- Total capitalization.............................. $19,600 $55,204 ======= =======
The 5,115,882 shares listed above exclude: - 1,600,000 shares of common stock reserved for issuance under our Amended and Restated 1994 Stock Incentive Plan as of March 23, 2001. Options to purchase 755,083 shares are outstanding under this plan. - Shares of common stock issuable by us in the future with a market value of $2,200,000, subject to adjustment. $1,000,000 of issuable common stock relates to our acquisition of Crosby, Mead, Benton & Associates in October 2000 and $1,200,000 of issuable common stock (of which 34,188 shares with a market value of $500,000 were issued in February 2001) relates to our acquisition of Hook & Associates Engineering, Inc. in January 2001. 15 20 SELECTED CONSOLIDATED 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 prospectus. 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 prospectus. 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. 16 21 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 prospectus.
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 ========== ========== ========== ========== ==========
17 22
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. 18 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the consolidated financial statements of TKCI and its subsidiaries and the related notes and the other financial information included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under "Risk Factors" and under other captions contained elsewhere in this prospectus. 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 19 24 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. 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 20 25 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. 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 21 26 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. 22 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% ==== ==== ==== ==== ==== ==== ==== ====
23 28 Our quarterly revenue and operating results fluctuate primarily as a result of: - client engagements commenced and completed during a quarter; - seasonality; - the number of business days in a quarter; - the number of work days lost as a result of adverse weather conditions or delays caused by third parties; - employee hiring, billing and utilization rates; - the consummation of acquisitions; - the length of the sales cycle on new business; - the ability of clients to terminate engagements without penalty; - our ability to efficiently shift our employees from project to project; - the size and scope of assignments; 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, 24 29 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 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. 25 30 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. 26 31 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 32 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. 28 33 INDUSTRIES SERVED We serve both the real estate development, public works/infrastructure and communications industry and the industrial/energy industry. 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 29 34 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. 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 30 35 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; - 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 31 36 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 32 37 experience by providing in-house continuing education seminars, design forums and training programs. 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. 33 38 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 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 34 39 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 - ----------------------------------------------------------------------------------------------------
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, 35 40 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 36 41 and Utah. This effort coordinates tasks to be performed by at least half a dozen firms throughout the Western United States. 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 37 42 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. 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 38 43 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 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. 39 44 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 40 45 facilities by increasing the processing and drying speeds and reducing the operational costs. 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 41 46 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. 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 42 47 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. 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. 43 48 FACILITIES 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. 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 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. 44 49 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information with respect to our executive officers and directors.
NAME AGE POSITION WITH OUR COMPANY ---- --- ------------------------- Aram H. Keith........................ 56 Chief Executive Officer and Chairman of the Board Eric C. Nielsen...................... 40 President and Chief Operating Officer Gary C. Campanaro.................... 40 Chief Financial Officer, Secretary and Director Walter W. Cruttenden, III............ 50 Director(1)(2) George Deukmejian.................... 72 Director(3) Christine Diemer Iger................ 48 Director(1)(3)
- ------------------------- (1) Member of the compensation committee. (2) Mr. Cruttenden has been appointed to our audit committee effective as of June 1, 2001. (3) Member of the audit committee. All directors hold office until the next annual meeting of shareholders or the election and qualification of their successors. Our executive officers are elected annually by our board of directors and serve at its discretion. Aram H. Keith co-founded our company in March 1983 and has served as our chief executive officer and chairman of the board since that time. Mr. Keith also served as our president from 1983 to 1999. Mr. Keith is the president and sole director of our subsidiaries, Crosby, Mead, Benton & Associates and Hook Engineering, Inc. Mr. Keith has been a California licensed civil engineer since 1972. He also holds civil engineering licenses in the states of Arizona, Colorado, Nevada and Texas. Mr. Keith received a B.S. in Civil Engineering from California State University at Fresno. Eric C. Nielsen has served as our president since July 1999 and as our chief operating officer since March 2001. Prior to July 1999, Mr. Nielsen served as the president of our Costa Mesa division since November 1994. Mr. Nielsen joined us in November 1985 as senior designer and became a vice president, engineering and mapping in July 1990. Mr. Nielsen received a B.S. in Civil Engineering from California Polytechnic State University and is a registered engineer in the states of California, Colorado and Hawaii. Gary C. Campanaro has served as our chief financial officer since joining our company in January 1998, as a director since July 1998, and as our secretary since April 1999. Mr. Campanaro is also the chief financial officer and secretary of each of our subsidiaries, Crosby, Mead, Benton & Associates and Hook Engineering, Inc. Mr. Campanaro joined CB Commercial Real Estate Group, Inc. (now CB Richard Ellis), a commercial real estate brokerage firm, in November 1992 as a vice president of the financial consulting group and became senior vice president, managing officer of the financial consulting group in February 1995 and also began serving on the operation management board of CB Commercial Real Estate Group Inc. Mr. Campanaro served in those positions until he joined our company. From July 1988 to November 1992, he held various accounting, finance and real estate positions with CKE Restaurants, Inc., an owner and operator of a restaurant chain. Mr. Campanaro began his professional career with KPMG LLP and is licensed by the State of California as a certified public 45 50 accountant and as a real estate broker. He is a member of the American Institute of Certified Public Accountants. Mr. Campanaro received a B.S. in Accounting from the University of Utah. Walter W. Cruttenden, III joined our board of directors in July 1997. Mr. Cruttenden is the chief executive officer of Cruttenden Partners, an investment company. Mr. Cruttenden served as chairman of the board of directors and chief executive officer of E*OFFERING Corp. from December 1998 until January 2000. In 1986, he founded Cruttenden Roth Inc. and served as the chairman of the board and chief executive officer until November 1997 and chairman of the board until September 1998. E*OFFERING Corp. and Cruttenden Roth Inc. are both investment banking institutions. Mr. Cruttenden also serves on the board of directors of Cubic Technologies, Electronic Monitoring Systems, Inc., NetChemistry, PrisMedical Inc. and The Yogananda Foundation. George Deukmejian joined our board of directors in July 1999. Mr. Deukmejian was the Governor of the State of California, serving in that office from January 1983 until January 1991. Following his departure from the Governor's office, he joined the law firm of Sidley & Austin in its Los Angeles office where he practiced as a partner until July 1999 and where he practiced as Senior Counsel from July 1999 until his retirement in July 2000. Prior to his election as Governor, Mr. Deukmejian served from 1979 to 1982, as the Attorney General of the State of California and from 1963 to 1978, served in the California State Legislature. Mr. Deukmejian currently serves on the boards of directors of Burlington Northern Santa Fe Corp. and Health Net, Inc. He also serves as a Deputy Trustee of the Golden Eagle Insurance Trust in Liquidation and on the Senior Advisory Council of the Industrial Bank of Japan's Los Angeles office. Mr. Deukmejian received a B.A. in Sociology from Siena College and a J.D. from St. Johns University Law School. Christine Diemer Iger joined our board of directors in July 1999. Ms. Diemer Iger is the current chief executive officer of the Building Industry Association of Southern California, Orange County chapter which she joined in July 1989. Prior to joining that organization, she was an appellate lawyer for the Attorney General of the State of California from 1981 to 1983, and served as the director of the California Department of Housing and Community Development from 1983 to 1989. Ms. Diemer Iger is a former board member of the Federal National Mortgage Association (Fannie Mae) and the California Housing Finance Agency (CHFA). Ms. Diemer Iger received a B.A. in English from California State University at San Diego and a J.D. from Western State University, College of Law. DIRECTOR COMPENSATION Our nonemployee directors receive $1,500 per day for any day during which the member has personally attended any shareholders', board and/or committee meeting. Effective January 2001, our nonemployee directors will also receive $20,000 per year as compensation for their services as a director of our company. In addition, our 46 51 nonemployee directors are reimbursed for out-of-pocket expenses incurred in connection with attendance at shareholders', board and committee meetings. We may also periodically award options or purchase rights to our directors under our existing stock option plan and otherwise. In fiscal 2000, we did not issue any options to purchase shares of our common stock to any of our directors. In July 1999, we granted options to purchase 7,407 shares of our common stock to two of our nonemployee directors. BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The board of directors has standing audit and compensation committees, but does not have a nominating committee. In practice, our entire board performs the function of a nominating committee. The compensation committee is responsible for making recommendations to our board concerning such executive compensation arrangements and plans as it deems appropriate. The compensation committee is composed of Walter W. Cruttenden, III and Christine Diemer Iger. The audit committee is responsible for, among other things, considering and recommending to our board of directors, the appointment of our independent auditors, examining the results of audits and quarterly reviews, reviewing with the auditors, the plan and scope of the audit and audit fees, reviewing internal accounting controls, meeting periodically with our independent auditors and the monitoring of all financial aspects of our operations. In June 1999, our board of directors approved and adopted an audit committee charter. The audit committee is currently composed of George Deukmejian and Christine Diemer Iger, and effective as of June 1, 2001, Walter W. Cruttenden, III has also been appointed to the audit committee. Messrs. Deukmejian and Cruttenden and Ms. Diemer Iger are all independent as defined in the listing standards of the National Association of Securities Dealers. 47 52 EXECUTIVE COMPENSATION The following table sets forth information concerning compensation paid or accrued by us to our chief executive officer and to each of our other three most highly compensated executive officers who earned more than $100,000, in salary and bonus for all services rendered to us in all capacities during the year ended December 31, 2000. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES ---------------------------------- UNDERLYING NAME AND FISCAL ALL OTHER STOCK PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS ------------------ ------ -------- ------ ------------ ------------ Aram H. Keith.......................... 2000 $381,926(1) -- $15,115(2) -- Chief Executive Officer and 1999 $375,423(3) -- $66,573(4) 46,000 Chairman of the Board 1998 $373,419(5) -- $ 6,832(6) -- Eric C. Nielsen(7)..................... 2000 $172,551(8) $6,985(9) $39,553(10) 20,000 President and Chief Operating Officer 1999 $158,290(11) -- $15,561(12) 10,000 Gary C. Campanaro...................... 2000 $164,122(13) $5,000 $17,435(14) -- Chief Financial Officer and 1999 $146,116(15) -- $ 9,186(16) 12,500 Secretary 1998 $115,016(17) -- $ 5,171(18) 31,482 Jerry M. Brickman(19).................. 2000 $155,780(20) -- $11,157(21) -- Chief Operating Officer 1999 $147,309 -- $26,090(22) 8,000 1998 $130,403 -- $ 5,186(23) 9,259
- ------------------------- (1) Consists of $373,523 in salary and $8,403 in matching contributions made by us under our 401(k) plan. (2) Consists of a $4,500 auto allowance, $3,688 in payout of accrued vacation and sick time, $6,787 in membership dues paid by us on behalf of Mr. Keith and $140 in premiums on a life insurance policy of which Mr. Keith is the beneficiary. (3) Consists of $373,923 in salary and $1,500 in matching contributions made by us under our 401(k) plan. (4) Consists of $53,957 in payout of accrued vacation and sick time, $5,443 in reimbursement of various automobile expenses, $6,987 in membership dues paid by us on behalf of Mr. Keith and $186 in premiums on a life insurance policy of which Mr. Keith is the beneficiary. (5) Consists of $371,562 in salary and $1,857 in matching contributions made by us under our 401(k) plan. (6) Consists of a $1,500 auto allowance, $5,146 in membership dues paid by us on behalf of Mr. Keith and $186 in premiums on a life insurance policy of which Mr. Keith is the beneficiary. (7) Effective as of March 13, 2001, Mr. Nielsen was elected to serve as our chief operating officer. (8) Consists of $166,426 in salary and $6,125 in matching contributions made by us under our 401(k) plan. (9) Consists of $5,000 year-end bonus and $1,985 as a 15-year service bonus. (10) Consists of a $12,000 auto allowance, $3,000 in membership dues paid by us on behalf of Mr. Nielsen, $140 in premiums on a life insurance policy of which Mr. Nielsen is the beneficiary, $1,328 for an executive medical examination paid for by us and $23,085 in payout of accrued vacation and sick time. (11) Consists of $156,790 in salary and $1,500 in matching contributions made by us under our 401(k) plan. (12) Consists of a $12,000 auto allowance, $3,375 in membership dues paid by us on behalf of Mr. Nielsen and $186 in premiums on a life insurance policy of which Mr. Nielsen is the beneficiary. (13) Consists of $158,746 in salary and $5,376 in matching contributions made by us under our 401(k) plan. (14) Consists of a $6,000 auto allowance, $3,000 in membership dues paid by us on behalf of Mr. Campanaro, $140 in premiums on a life insurance policy of which Mr. Campanaro is the beneficiary, $1,624 for an executive medical examination paid for by us and $6,671 in payout of accrued vacation and sick time. (15) Consists of $144,616 in salary and $1,500 in matching contributions made by us under our 401(k) plan. (16) Consists of a $6,000 auto allowance, $3,000 in club membership dues paid by us on behalf of Mr. Campanaro and $186 in premiums on a life insurance policy of which Mr. Campanaro is the beneficiary. (17) Consists of $114,423 in salary and $593 in matching contributions made by us under our 401(k) plan. 48 53 (18) Consists of a $5,000 auto allowance and $171 in premiums paid on a life insurance policy of which Mr. Campanaro is the beneficiary. (19) Effective as of January 5, 2001, Mr. Brickman ceased being an employee of our company. (20) Consists of $149,576 in salary and $6,204 in matching contributions made by us under our 401(k) program. (21) Consists of a $6,000 auto allowance, $140 in premiums paid on a life insurance policy of which Mr. Brickman is the beneficiary and $5,017 in payout of accrued vacation and sick time. (22) Consists of a $6,000 auto allowance, $186 in premiums paid on a life insurance policy of which Mr. Brickman is the beneficiary and $19,904 in payout of accrued vacation and sick time. (23) Consists of a $5,000 auto allowance and $186 in premiums paid on a life insurance policy of which Mr. Brickman is the beneficiary. OPTIONS GRANTED IN LAST FISCAL YEAR The following table sets forth certain information concerning stock options granted to the executive officers named in the summary compensation table in this prospectus during the fiscal year ended December 31, 2000. This information includes hypothetical potential gains from stock options granted in fiscal 2000. These hypothetical gains are based entirely on assumed annual growth rates of 5% and 10% in the value of our common stock price over the 10-year life of the stock options granted in 2000. These assumed rates of growth were selected by the Securities and Exchange Commission for illustrative purposes only and are not intended to predict future stock prices, which will depend upon market conditions and our future performance and prospects.
POTENTIAL REALIZABLE % OF TOTAL VALUE AT ASSUMED NUMBER OF OPTIONS ANNUAL RATES OF STOCK SECURITIES GRANTED TO PRICE APPRECIATION UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM(3) OPTIONS IN FISCAL PRICE EXPIRATION ---------------------- NAME GRANTED(1) YEAR(2) ($/SHARE) DATE 5% 10% ---- ---------- ---------- --------- ---------- --------- ---------- Aram H. Keith....................... 0 0% -- -- -- -- Eric C. Nielsen..................... 20,000 11.2% $4.38 2010 $55,100 $139,600 Gary C. Campanaro................... 0 0% -- -- -- -- Jerry M. Brickman(4)................ 0 0% -- -- -- --
- ------------------------- (1) Options vest 20% annually over five years. (2) Based on options to purchase 178,150 shares granted to our employees during the fiscal year ended December 31, 2000. (3) Calculated using the potential realizable value of each grant. (4) On January 5, 2001, Mr. Brickman ceased being an employee of our company. 49 54 AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information regarding stock options exercised by the executive officers named in the summary compensation table in this prospectus during the fiscal year ended December 31, 2000, as well as the number of exercisable and unexercisable in-the-money stock options and their values at fiscal year-end. An option is in-the-money if the fair market value for the underlying securities exceeds the exercise price of the option.
NUMBER OF VALUE OF UNEXERCISED SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS ACQUIRED VALUE AT DECEMBER 31, 2000 AT DECEMBER 31, 2000(1) ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE ----------- -------- ------------------------- ------------------------- Aram H. Keith.................... 0 0 0 $0/$0 Eric C. Nielsen.................. 0 0 32,593/24,444 $172,743/$95,953 Gary C. Campanaro................ 0 0 11,111/16,667 $ 58,888/$88,335 Jerry M. Brickman(2)............. 0 0 19,260/ 2,962 $102,078/$15,699
- ------------------------- (1) Based on the last reported sale price of underlying securities ($8.00) on December 29, 2000 (the last trading day during 2000) as reported by Nasdaq, minus the exercise price of the options. (2) On January 5, 2001, Mr. Brickman ceased being an employee of our company. CHANGE IN CONTROL AGREEMENTS In March 2001, our board of directors approved change in control agreements with Aram H. Keith, our chief executive officer and chairman of the board, Eric C. Nielsen, our president and chief operating officer, and Gary C. Campanaro, our chief financial officer and secretary. These agreements provide for severance payments to these executive officers in certain circumstances following a change in control of our company. Specifically, the change in control agreements provide that if the executive officer's employment with us terminates as a result of an involuntary or constructive termination (as these terms are defined in the agreements) at any time within two years following a change in control, the executive officer will receive a one-time payment, equal to two times the executive officer's highest annual level of total cash compensation (including any and all bonus amounts) paid by us to that executive officer during any one of the three consecutive calendar years (inclusive of the year of termination) immediately prior to termination. The level of annual cash compensation for the year in which a termination occurs will include any bonus amounts which the executive officer is eligible to receive during the year of termination, whether or not such bonus was earned by the executive officer. In addition, any unvested options previously granted to the executive officer will immediately vest and become exercisable as of the date of termination. Under these change in control agreements, for a two-year period following the termination, the executive officer is also entitled to receive continuing health coverage at a level commensurate to the coverage provided by us to the executive officer immediately prior to the change in control; all other benefits under welfare benefit plans, practices, policies and programs provided or offered by us, including, medical, dental, prescription, disability, employee life, group life, accidental death and travel accident insurance plans and programs; fringe benefits; and a reasonable level of outplacement services selected by the executive officer. 50 55 Under the change in control agreements, a "change in control" means the occurrence of any of the following events: (1) other than Aram Keith or his family members and affiliates, a person becomes the beneficial owner of 20% or more of the total voting power of our then outstanding voting securities, (2) a change in the composition of our board of directors occurs within a two-year period as a result of which fewer than a majority of the directors are directors who were serving on our board at the beginning of such two-year period 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 on the board who were directors at the beginning of the period, (3) the consummation of a merger or consolidation of our company in which we do not survive as an independent public company, or (4) our business or businesses for which the executive officer's services are principally performed are disposed of by us under a partial or complete liquidation of our company, a sale of assets (including stock of a subsidiary), or otherwise. Under these change in control agreements, the executive officer is also entitled to receive a payment by us to offset any excise tax under the excess parachute payment provisions of Section 4999 of the Internal Revenue Code of 1986, as amended, or the Code, that has been levied against the executive officer for payments that we have made to, or for the benefit of that executive officer (whether or not such payments are made pursuant to the executive officer's change in control agreement). The payment by us will be "grossed up" so that after the executive officer pays all taxes (including any interest or penalties with respect to such taxes) on the payment, the executive officer will retain an amount of the payment equal to the excise tax imposed. STOCK OPTION PLANS On March 13, 2001, our board of directors adopted, subject to the approval of our shareholders, an Amended and Restated 1994 Stock Incentive Plan. The plan is administered by our compensation committee, which has discretion and authority, consistent with the provisions of the plan, to determine which eligible participants will receive options, the time when options will be granted, the terms of options granted and the number of shares which will be issuable upon exercise of options. Our plan provides for the granting of "incentive stock options" within the meaning of Section 422 of the Code, nonqualified options and rights to purchase shares of common stock. Under the plan, options and purchase rights covering an aggregate of 1,600,000 shares of our common stock may be granted, in each case to officers, directors, key employees and consultants of TKCI and its subsidiaries, except that incentive stock options may not be granted to nonemployee directors or nonemployee consultants. The exercise price of incentive stock options must not be less than the fair market value of a share of common stock on the date the option is granted and must not be less than 110% with respect to optionees who own at least 10% of our outstanding common stock. Our compensation committee has the authority to determine the time or times at which options granted under the plan become exercisable, provided that options expire no later than ten years from the date of grant, or five years with respect to incentive stock options held by optionees who own at least 10% of our outstanding common stock. 51 56 Options are nontransferable, other than by will and the laws of descent and distribution, and generally may be exercised only by an employee while employed by TKCI. The plan terminates in March 2011. As of March 23, 2001, options to purchase 755,083 shares of common stock were outstanding under the plan. In September 2000, we made an offer to our option holders which gave them a one-time election to have us 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 our legal counsel, we concluded that the attempt by us to cancel the options was ineffective and the participants continue to hold their original options. INDEMNIFICATION OF DIRECTORS AND OFFICERS Our amended and restated articles of incorporation provide that the liability of our directors for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of our company for breach of a director's duties to us or to our shareholders except for liability for: - acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; - acts or omissions that a director believes to be contrary to the best interests of our company or our shareholders or that involve the absence of good faith on the part of the director; - any transaction for which a director derived an improper personal benefit; - acts or omission that show a reckless disregard for the director's duty to our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to us or our shareholders; - acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to us or our shareholders; and - engaging in transactions described in the California Corporations Code or California case law which result in liability, or approving the same kinds of transactions. Our amended and restated articles of incorporation also provide that we are authorized to provide indemnification to our officers and directors in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code. Our amended and restated bylaws provide for indemnification of our officers, directors, employees, and other agents to the extent and under the circumstances permitted by California law. We have entered into agreements to indemnify our directors and executive officers in addition to the indemnification provided for in our amended and restated articles of 52 57 incorporation and amended and restated bylaws. Among other things, these agreements provide that we will indemnify, under appropriate circumstances, each of our directors and executive officers for expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by that person in any action or proceeding, including any action by or in the right of our company, on account of services provided as a director or executive officer of us, or as a director or executive officer of any other company or enterprise to which the person provides services at our request. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In August 1998, the holders of all of the outstanding shares of Keith Engineering common stock contributed their shares to TKCI as a contribution to capital. In consideration of this contribution, we issued to the contributing shareholders, one share of TKCI common stock for each share of Keith Engineering stock contributed. Aram H. Keith, through the Aram H. Keith and Margie R. Keith Trust, acquired 738,889 shares of TKCI common stock. Floyd S. Reid, as trustee of the Floyd S. Reid and Ruth L. Reid Family Trust dated March 30, 1990, acquired 351,852 shares of TKCI common stock. Mr. Keith is our chief executive officer and chairman of the board, and Mr. Reid is a former director and executive officer of our company and remains a principal shareholder. 53 58 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information with respect to the beneficial ownership of our common stock as of March 23, 2001 and as adjusted to reflect the sale of common stock offered in this offering, by: - each person known by us to own beneficially more than 5% of the outstanding shares of our common stock; - each of our directors; - each of the executive officers named in the summary compensation table contained in this prospectus; - each selling shareholder; and - all of our directors and executive officers as a group. Percentage of shares owned is based on 5,369,997 shares of common stock outstanding as of March 23, 2001, and 7,138,997 shares outstanding after this offering, assuming that the underwriters' over-allotment option is not exercised. Beneficial ownership is calculated based on requirements of the Securities and Exchange Commission. All shares of our common stock subject to options currently exercisable or exercisable within 60 days after March 23, 2001 are deemed to be outstanding for the purpose of computing the percentage of ownership of the person holding the options, but are not deemed to be outstanding for computing the percentage of ownership of any other person. Unless otherwise indicated below, each shareholder named in the table has sole or shared voting and investment power with respect to all shares beneficially owned, subject to applicable community property laws. The address of each of the following shareholders is c/o The Keith Companies, Inc., 2955 Red Hill Avenue, Costa Mesa, California 92626.
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY OWNED PRIOR TO OFFERING SHARES OWNED AFTER OFFERING ------------------------ BEING -------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT ------------------------ ----------- --------- --------- --------- ------- Aram H. Keith.............................. 1,615,220(1) 30.0% 150,000 1,465,220 20.5% Walter W. Cruttenden, III.................. 408,837 7.6% 60,000 348,837 4.9% Floyd S. Reid.............................. 402,944(2) 7.5% 0 402,944 5.6% E*Capital Corporation and related parties.................................. 297,000(3) 5.5% 0 297,000 4.2% Gary C. Campanaro.......................... 49,167(4) * 20,000 29,167 * Eric C. Nielsen............................ 41,815(5) * 20,000(6) 21,815 * Jerry M. Brickman(7)....................... 30,371 * 0 30,371 * George Deukmejian.......................... 8,907(8) * 0 8,907 * Christine Diemer Iger...................... 7,407(9) * 0 7,407 * All directors and executive officers as a group (6 persons)........................ 2,131,353 39.1% 250,000 1,881,353 26.1%
- ------------------------- * Less than 1% of our outstanding common stock. (1) Includes 1,606,020 shares and 9,200 shares underlying options. 54 59 (2) Amount shown does not include 56,870 shares owned by Mr. Reid's daughter and granddaughter who reside with Mr. Reid. Mr. Reid expressly disclaims beneficial ownership of these shares. (3) E*Capital Corporation is the parent of Wedbush Morgan Securities, Inc. Includes 236,600 shares owned by E*Capital Corporation, 31,600 shares owned Edward W. Wedbush, the chairman of E*Capital Corporation and the president of Wedbush Morgan Securities Inc. and 28,800 shares owned by WMS PS Retirement Plan, the employee retirement plan for the employees of Wedbush Morgan Securities Inc. Mr. Wedbush owns a majority of the outstanding shares of E*Capital Corporation. Accordingly, Mr. Wedbush may be deemed the beneficial owner of our shares that are owned by E*Capital Corporation. However, beneficial ownership of our shares which are owned by E*Capital Corporation is disclaimed by Mr. Wedbush. (4) Includes 28,518 shares and 20,649 shares underlying options. (5) Includes 1,000 shares and 40,815 shares underlying options. (6) Consists of 1,000 shares and 19,000 shares underlying options which Mr. Nielsen intends to exercise prior to the offering. (7) On January 5, 2001, Mr. Brickman ceased being an employee of our company. (8) Includes 1,500 shares held by a defined benefit pension plan of which Mr. Deukmejian is the trustee and sole participant and 7,407 shares underlying options. (9) Consists solely of shares underlying options. DESCRIPTION OF CAPITAL STOCK Our authorized capital stock consists of 100,000,000 shares of common stock, $0.001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. The following description of our capital stock does not purport to be complete and is subject to and qualified in its entirety by our amended and restated articles of incorporation, our amended and restated bylaws and the provisions of applicable California law. COMMON STOCK The holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available therefor at times and in amounts as the board of directors may, from time to time, determine, subordinate to any preferences which may be granted to the holders of preferred stock and to some restrictions on the payment of dividends contained in our credit agreement with our bank. Holders of common stock are entitled to one vote per share on all matters on which the holders of common stock are entitled to vote. The holders of our common stock are entitled to cumulative voting rights with respect to the election of directors so long as at least one shareholder has given notice at the meeting of shareholders prior to the voting of that shareholder's desire to cumulate votes. Under cumulative voting, each shareholder may give any one candidate whose name is placed in nomination prior to the commencement of voting, a number of votes equal to the number of directors to be elected, multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the number of votes among as many candidates, in whatever proportions, as the shareholder sees fit. The effect of cumulative voting is that the holders of a majority of the outstanding shares of our common stock may not be able to elect all of our directors. Our common stock is not entitled to preemptive rights and may not be redeemed or converted, except as may be provided by agreement. Upon the liquidation, dissolution or winding-up of our company, the assets legally available for distribution to shareholders are divided among the holders of the common stock in proportion to the number of shares of common stock held by each of them, after the payment of all of our debts and liabilities and the rights of any outstanding class or series of preferred stock to have 55 60 priority to distributed assets. All outstanding shares of our common stock are, and the shares of common stock to be issued in this offering will be, when issued and delivered, validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subordinate to any series of preferred stock that we may issue in the future. As of March 23, 2001, there were 5,369,997 shares of common stock outstanding held by 56 holders of record and 4,536 beneficial owners. Upon completion of this offering, there will be approximately 7,138,997 shares of our common stock outstanding. There are 1,600,000 shares of common stock currently reserved for issuance under our Amended and Restated 1994 Stock Incentive Plan, which is subject to shareholder approval, of which 755,083 shares are issuable upon exercise of outstanding options. PREFERRED STOCK Preferred stock may be issued from time to time in one or more series, and our board of directors, without action by the holders of our common stock, may fix or alter the voting rights, redemption provisions, dividend rights, dividend rates, claims to our assets superior to those of holders of our common stock, conversion rights and any other rights, preferences, privileges and restrictions of any wholly unissued series of preferred stock. The board of directors, without shareholder approval, can issue shares of preferred stock with rights that could adversely affect the rights of the holders of common stock. No shares of preferred stock are presently outstanding, and we have no plans to issue any preferred shares. The issuance of shares of preferred stock could adversely affect the voting power of the holders of common stock and could have the effect of making it more difficult for a third party to acquire, or could discourage or delay a third party from acquiring, a majority of our outstanding stock. TRANSFER AGENT AND REGISTRAR The stock transfer agent and registrar for our common stock is U.S. Stock Transfer Corporation. SHARES ELIGIBLE FOR FUTURE SALE The sale of a substantial amount of our common stock, including shares issued upon exercise of outstanding options, in the public market after this offering could adversely affect the prevailing market price of our common stock. As of March 23, 2001, we had 5,369,997 shares of common stock outstanding. Upon completion of this offering, we will have 7,138,997 shares of common stock outstanding. All of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, unless held by an affiliate of our company within the meaning of Rule 144 adopted under the Securities Act. Sales by any affiliate would be limited by the resale limitations of Rule 144. In connection with this offering, our executive officers, directors and certain other shareholders, who will hold, in the aggregate, approximately 2,760,000 outstanding shares upon completion of this offering, have agreed not to sell or transfer any common stock for 180 days after the date of this 56 61 prospectus without first obtaining the written consent of Wedbush Morgan Securities Inc. The shares of our outstanding common stock that are not registered in this offering or in our initial public offering will be "restricted securities" within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of a registration under the Securities Act unless an exemption from registration is available, including an exemption contained in Rule 144. In general, under Rule 144 as currently in effect, any person who has beneficially owned restricted securities, as that term is defined in Rule 144, for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the then outstanding shares of our common stock, or the average weekly trading volume in our common stock during the four calendar weeks preceding the sale, provided that public information about us, as required by Rule 144, is then available and the seller complies with the manner of sale and notification requirements of the rule. A person who is not an affiliate and has not been an affiliate within three months prior to the sale and has, together with any previous owners who were not affiliates, beneficially owned restricted securities for at least two years is entitled to sell those shares under Rule 144(k) without regard to any of the volume limitations described above. On July 16, 1999, we filed a registration statement on Form S-8 with the Securities and Exchange Commission to register the issuance of 1,111,111 shares of our common stock issuable upon exercise of options granted under our Amended and Restated 1994 Stock Incentive Plan. Upon issuance, all of these shares will be freely tradable without restriction or further registration under the Securities Act except to the extent purchased by one of our affiliates. On March 13, 2001, our board of directors adopted a new Amended and Restated 1994 Stock Incentive Plan which, among other things, increases the number of shares subject to the plan from 1,111,111 shares of common stock to 1,600,000 shares of common stock. We will seek shareholder approval of this Amended and Restated 1994 Stock Incentive Plan at our annual meeting of shareholders to be held in May 2001. Assuming that we obtain shareholder approval, we intend to register the issuance of the additional 488,889 shares of our common stock issuable upon exercise of options granted under the new Amended and Restated 1994 Stock Incentive Plan on a registration statement on Form S-8. We are obligated to issue in the future, shares of unregistered common stock with an aggregate market value of $1,700,000, subject to adjustment, in connection with our acquisitions of Crosby, Mead, Benton & Associates and Hook & Associates Engineering, Inc. No predictions can be made of the effect, if any, that future sales of shares of our common stock, and grants of options and warrants to acquire shares of our common stock, or the availability of shares for future sale, will have on the market price of our common stock prevailing from time to time. Sales of substantial amounts of common stock in the public market, or the perception that these sales could occur, could adversely affect the prevailing market prices of our common stock. See "Principal and Selling Shareholders," "Description of Capital Stock" and "Underwriting." 57 62 UNDERWRITING Under the terms and subject to the conditions of an underwriting agreement, the underwriters named below, acting through their representatives, Wedbush Morgan Securities Inc. and Janney Montgomery Scott LLC, each severally has agreed to purchase from us and the selling shareholders, the number of shares of common stock shown opposite their names below at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus. Other than the shares covered by the over-allotment option, the underwriters are obligated to purchase and accept delivery of all of the shares of common stock if any are purchased.
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Wedbush Morgan Securities Inc............................... Janney Montgomery Scott LLC................................. E InvestmentBank............................................ ............................................. ............................................. ............................................. ............................................. ............................................. ............................................. ............................................. Total.....................................................
The underwriters propose initially to offer the shares of common stock in part directly to the public at the public offering price shown on the cover page of this prospectus and in part to dealers, including the underwriters, at this price less a discount not in excess of $ per share. The underwriters may allow, and these dealers may re-allow other dealers, a discount not in excess of $ per share. After this offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us and the selling shareholders as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated in this prospectus, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part.
TOTAL ------------------------------- WITHOUT WITH PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT --------- -------------- -------------- Underwriting discounts and commissions payable by us................................................ Underwriting discounts and commissions payable by the selling shareholders..........................
We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $ . A prospectus in electronic format may be made on the Internet sites or through other online services maintained by one or more of the underwriters of this offering, or by their affiliates. In those cases, prospective investors may view offering terms online and, 58 63 depending upon the particular underwriter, prospective investors may be allowed to place orders online. The underwriters may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distribution will be made by the representatives on the same basis as other allocations. A prospectus in electronic format is being made available on an Internet web site maintained by E InvestmentBank, an affiliate of Wedbush Morgan Securities Inc. The underwriters may allocate a number of shares to E InvestmentBank for sale to online brokerage account holders. These online brokerage account holders will have the opportunity to purchase shares using the Internet in accordance with procedures established by E InvestmentBank. OVER-ALLOTMENT We and two selling shareholders, Aram H. Keith and Walter W. Cruttenden, III, have granted the underwriters an option, exercisable within 45 days after the date of this prospectus, to purchase up to an aggregate of 300,000 additional shares of common stock at the public offering price less the underwriting discounts and commissions. We anticipate that one-half of the shares subject to the over-allotment option will be sold by us and the other half will be sold by those two selling shareholders. If the entire over-allotment option is exercised, we anticipate that Mr. Keith will sell 110,000 shares and Mr. Cruttenden will sell 40,000 shares to cover one-half of this option. The underwriters may exercise this option solely to cover over-allotments, if any, made in this offering. If the underwriters exercise this option, each underwriter will purchase shares in approximately the same proportion as indicated in the table above. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered hereby are being sold. We and certain of the selling shareholders will be obligated, pursuant to the over-allotment option, to sell shares to the underwriters to the extent the over-allotment option is exercised. INDEMNITY In the underwriting agreement, we and the selling shareholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches or representations and warranties contained in the underwriting agreement. SALES TO DISCRETIONARY ACCOUNTS The underwriters have informed us that they do not intend to confirm sales to accounts over which they exercise discretionary authority. FUTURE SALES We have agreed, along with our executive officers, directors and certain existing shareholders, not to offer, pledge, sell, hedge or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable 59 64 or exchangeable for common stock for a period of 180 days from the date of this prospectus. Transfers or dispositions can be made sooner, however, with the prior written consent of Wedbush Morgan Securities Inc. Their consent may be given at any time without public notice. In making such a determination, Wedbush Morgan Securities Inc. would consider prevailing market factors and conditions at the time of receipt of a request for release from the 180-day restriction period. Specifically, Wedbush Morgan Securities Inc. would consider in evaluating such a request, factors such as average trading volume, recent price trends and the need for additional public float in the market for our common stock. OFFERS IN OTHER JURISDICTIONS Neither we nor the underwriters have taken any action that would permit a public offering of the shares of common stock offered by this prospectus in any jurisdiction where action for that purpose is required, other than the United States. The shares of common stock offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements related to the offer and sale of these shares of common stock be distributed or published, in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of these jurisdictions. This prospectus is not an offer to sell or a solicitation of an offer to buy any shares of common stock offered hereby in any jurisdiction in which such an offer or solicitation is unlawful. STABILIZATION In connection with this offering, the underwriters purchase and sell shares of common stock in the open market in connection with transactions intended to stabilize the price of the common stock. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales in accordance with Regulation M under the Securities Exchange Act of 1934, as amended. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while the offering is in progress. The representatives may impose a penalty bid on underwriters. This means that to the extent the representatives purchase in the open market shares of our common stock sold in this offering to reduce the underwriters' short position or to stabilize the price of our common stock, they have the option to reduce the aggregate selling concession paid or payable to each syndicate member by the amount of the selling concession attributable to the portion of the repurchased shares sold in the offering by the syndicate member while such short covering or stabilizing activities are ongoing. To reduce the likelihood of the imposition of a penalty bid, underwriters, in determining how to allocate shares in the offering, may take into consideration the history of investors who have quickly sold their shares in prior offerings. The imposition of a penalty bid may discourage the immediate resale of shares sold in this offering. 60 65 These activities may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. The underwriters are not required to engage in these activities and may discontinue any of these activities at any time. SYNDICATE SHORT SALES In connection with the offering, the underwriters may make short sales of the issuer's shares and may purchase the issuer's shares on the open market to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. The lead underwriter may, in its sole discretion, establish a syndicate short position. There is no contractual limit on the size of the syndicate short position. The underwriters will deliver a prospectus in connection with these short sales. Purchasers of shares sold short by the underwriters are entitled to the same remedies under the federal securities laws as any other purchaser of shares covered by the registration statement of which this prospectus forms a part. "Covered" short sales are sales made in an amount not greater than the underwriters' over-allotment option to purchase additional shares in this offering. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are sales in excess of the over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our stock or preventing or retarding a decline in the market price of our stock. As a result, the price of the our stock may be higher than the price that might otherwise exist in the open market. PASSIVE MARKET MAKING In connection with this offering and before the commencement of offers or sales of the common stock, certain underwriters who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in the common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Exchange Act, during the business day prior to the pricing of the offering. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid for such security; if all independent 61 66 bids are lowered below the passive market maker's bid, however, the bid must then be lowered when certain purchase limits are exceeded. LEGAL MATTERS The validity of the shares of common stock offered by us will be passed upon for us by Rutan & Tucker, LLP, Costa Mesa, California which has acted as our counsel in connection with this offering. Certain matters will be passed upon for the underwriters by Akin, Gump, Strauss, Hauer & Feld, LLP, Los Angeles. EXPERTS The consolidated financial statements of The Keith Companies, Inc. and subsidiaries as of December 31, 1999 and 2000, and for each of the years in the three-year period ended December 31, 2000, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C. 20549, a registration statement on Form S-1 under the Securities Act, and the rules and regulations enacted under its authority, with respect to the common stock offered in this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules. Statements contained in this prospectus as to the contents of any contract or other document referred to in this prospectus are not necessarily complete, and in each instance, reference is made to the full text of the contract or other document which is filed as an exhibit to the registration statement. Each statement concerning a contract or document which is filed as an exhibit should be read along with the entire contract or document. For further information regarding us and the common stock offered in this prospectus, reference is made to this registration statement and its exhibits and schedules. The registration statement, including its exhibits and schedules, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of these documents may be obtained from the Commission at its principal office in Washington, D.C. upon the payment of the charges prescribed by the Commission. The Commission maintains a web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The Commission's address on the World Wide Web is http://www.sec.gov. 62 67 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of December 31, 1999 and 2000...................................................... F-3 Consolidated Statements of Income for the years ended December 31, 1998, 1999 and 2000.......................... F-4 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1998, 1999 and 2000...... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000.......................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 68 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 F-2 69 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. F-3 70 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. F-4 71 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. F-5 72 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. F-6 73 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. F-7 74 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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. 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. F-8 75 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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
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 F-9 76 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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. F-10 77 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 F-11 78 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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 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. F-12 79 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 (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 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, F-13 80 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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 =========== ===========
F-14 81 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 F-15 82 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 $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). 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 F-16 83 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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. 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 F-17 84 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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. (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 F-18 85 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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 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
F-19 86 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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. 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 F-20 87 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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 F-21 88 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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. (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 ========== ========== ==========
F-22 89 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 F-23 90 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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. 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 F-24 91 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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). (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 ========== ========= ==========
F-25 92 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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) ========= =========== ===========
(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 F-26 93 THE KEITH COMPANIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 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. F-27 94 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
F-28 95 On Inside Back Cover -- Graphics consisting of photographs of projects on which we have performed services, or representative of those on which we have performed services. 96 KEITH COMPANY LOGO WEDBUSH MORGAN SECURITIES INC. JANNEY MONTGOMERY SCOTT LLC 97 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth an estimate of the costs and expenses, other than the underwriting discounts and commissions, payable by the registrant in connection with the issuance and distribution of the common stock being registered. SEC registration fee........................................ $ 12,737 NASD filing fee............................................. 5,560 Nasdaq listing fee.......................................... 17,500 Legal fees and expenses..................................... 150,000 Accountants' fees and expenses.............................. 150,000 Printing expenses........................................... 200,000 Blue sky fees and expenses.................................. 10,000 Transfer agent and registrar fees and expenses.............. 10,000 Miscellaneous............................................... 4,203 -------- Total............................................. $560,000 ========
All amounts except the SEC registration fee, the Nasdaq listing fee and the NASD filing fee are estimated. All of the expenses set forth above are being paid by us and not the selling shareholders. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The underwriting agreement (Exhibit 1.1 hereto) provides for indemnification by the underwriters of our company and our officers and directors, and by us of the underwriters for certain liabilities arising under the Securities Act or otherwise. Our amended and restated articles of incorporation provide that the liability of our directors for monetary damages shall be eliminated to the fullest extent permissible under California law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of our company for breach of a director's duties to us or our shareholders except for liability: for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; for acts or omissions that a director believes to be contrary to the best interests of our company or our shareholders or that involve the absence of good faith on the part of the director; for any transaction for which a director derived an improper personal benefit; for acts or omission that show a reckless disregard for the director's duty to us or our shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to us or our shareholders; for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to us or our shareholders; with respect to certain transactions, or the approval of transactions in which a director has a material financial interest; and expressly imposed by statute, for approval of certain improper distributions to shareholders or certain loans or guarantees. II-1 98 Our amended and restated articles of incorporation also provide that we are authorized to provide indemnification to our agents (as defined in Section 317 of the California Corporations Code), through our amended and restated bylaws or through agreements with our agents or both, for breach of duty to us and our shareholders, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the California Corporations Code. Our amended and restated bylaws provide for indemnification of our officers, directors, employees and other agents to the extent and under the circumstances permitted by California law. Our amended and restated bylaws further provide that no indemnification shall be made in the case of a derivative suit in respect to any claim as to which such person has been adjudged to be liable to our company, except with court approval, nor shall indemnification be made for amounts paid in settling or otherwise disposing of a threatened or pending action, with or without court approval, or for expenses incurred in defending a threatened or pending action which has been settled or otherwise disposed of without court approval. Indemnification under our amended and restated bylaws is mandatory in the case of an agent of ours (present or past) who is successful on the merits in defense of a suit against him or her in that capacity. In all other cases where indemnification is permitted by our amended and restated bylaws, a determination to indemnify such person must be made by a majority of a quorum of disinterested directors, a majority of disinterested shareholders, or the court in which the suit is pending. We have entered into agreements to indemnify our directors and executive officers in addition to the indemnification provided for in our amended and restated articles of incorporation and amended and restated bylaws. Among other things, these agreements provide that we will indemnify, subject to certain requirements, each of our directors and executive officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in the right of our company, on account of services by such person as a director or officer of our company, or as a director or officer of any other company or enterprise to which the person provides services at our request. The inclusion of the above provisions in our amended and restated articles of incorporation and amended and restated bylaws and the existence of the indemnification agreements may have the effect of reducing the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefited us and our shareholders. At present, there is no litigation or proceeding pending involving a director of ours as to which indemnification is being sought, nor are we aware of any threatened litigation that may result in claims for indemnification by any director. Our amended and restated articles of incorporation provide that we may indemnify our directors and officers to the fullest extent permitted by California law, including circumstances in which indemnification is otherwise discretionary under California law. II-2 99 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In August 1998, the holders of all of the outstanding shares of Keith Engineering contributed their shares to TKCI as a contribution to capital. In consideration of this contribution, we issued to the contributing shareholders, one share of our common stock for each share of Keith Engineering stock contributed. We issued an aggregate 1,222,222 shares of our common stock which was exempt from registration under the exemption provided by Section 4(2) of the Securities Act. This exemption was available because there was no solicitation by us or our directors and officers in connection with the issuance and all shares were issued to our existing shareholders or trusts for their benefit who were provided with full access to the kind of information that would be disclosed if we had registered the securities under the Securities Act. From April 1998 until July 1999, we granted options to purchase an aggregate of 395,080 shares of our common stock pursuant to our Amended and Restated 1994 Stock Incentive Plan, to employees, officers and directors.
EXERCISE OPTIONS GRANT DATE PRICE GRANTED PERIOD OF EXERCISE - --------------------------------------------- -------- ------- ----------------------------------- April 1, 1998 -- August 10, 1998............. $5.40 52,222 April 1, 1999 -- August 10, 2008 November 17, 1998 -- January 11, 1999........ $8.10 40,556 November 17, 1999 -- January 11, 2009 June 4, 1999 -- July 15, 1999................ $9.00 302,302 June 4, 2000 -- July 15, 2009 ------- 395,080 =======
This issuance of these securities was exempt from registration pursuant to Rule 701 of the Securities Act as an offer and sale of securities under a compensatory benefit plan between us and our employees, officers and directors at a time when we were not required to report under the Securities Act. In August and September 1998, in connection with our acquisitions of ESI and JMTA, we issued three warrants to purchase an aggregate of 83,333 shares of common stock. These warrants were exercisable for a period of five years at exercise prices ranging from $4.73 to $6.75 per share. Two of these warrants were issued to former shareholders of JMTA and one warrant was issued to James Gregory who facilitated the acquisitions of ESI and JMTA. Mr. Gregory was a consultant and a shareholder of ours. Each of these warrants has been exercised. In July 1999, in connection with our acquisition of Thompson-Hysell, we issued a warrant to purchase 66,667 shares of our common stock to James Gregory for facilitating that acquisition. The warrant was exercisable for a period of five years at an exercise price of $6.75 per share. This warrant has been exercised. The warrants issued in connection with the acquisitions of ESI, JMTA and Thompson-Hysell and the shares issued upon their exercise were issued in private transactions under Section 4(2) of the Securities Act. There was no general solicitation by us or our officers and directors in connection with the grant of these warrants. Prior to the issuance of these warrants, we provided all of the individuals to whom we issued the warrants, with full access to the kind of information that would be disclosed if we had registered the securities under the Securities Act. II-3 100 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. In connection with our acquisition of Hook Engineering & Associates, Inc. in January 2001, we are obligated to issue to the shareholder of that company, unregistered shares of our common stock having an aggregate value of $1,200,000, which is subject to adjustment. The shares of our common stock are payable by us in two installments, one of shares having an aggregate value of $500,000 and the other, of shares having an aggregate value of $700,000. In February 2001, we issued 34,188 shares of our unregistered common stock, having an aggregate value of $500,000 in payment of the first of these installments. In each of the acquisitions of Crosby, Mead, Benton & Associates and Hook Engineering & Associates, Inc., the issuance of the shares either was or will be exempt from registration under Section 4(2) of the Securities Act. The former shareholders of each of these companies were provided with full access to the kind of information that would be disclosed if we had registered these shares. Additionally, each of the former shareholders represented to us that they were acquiring the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends have been or will be affixed to the certificate representing the shares. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement.* 2.1 Stock Purchase Agreement dated October 13, 2000 by and among the registrant, Crosby, Mead, Benton & Associates and the shareholders named therein (incorporated herein by this reference to Exhibit 2.1 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 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 from 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 (incorporated herein by this reference to Exhibit 2.3 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 3.1 Amended and Restated Articles of Incorporation of the registrant (incorporated herein by this reference to Exhibit 3.1 from the registrant's registration statement on 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 from 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 from the registrant's registration statement on Form S-1, registration number 333-77273). 5.1 Opinion of Rutan & Tucker, LLP.* 10.1 Amended and Restated 1994 Stock Incentive Plan (incorporated herein by this reference to Exhibit 10.1 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000).
II-4 101
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.2 Form of Indemnification Agreement (incorporated by this reference to Exhibit 10.2 from the registrant's registration statement on 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 from 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 from 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 (incorporated herein by this reference to Exhibit 10.5 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 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 (incorporated herein by this reference to Exhibit 10.6 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 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 (incorporated herein by this reference to Exhibit 10.7 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 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 from 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 from 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 from 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 10.40 from 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 from 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. (incorporated herein by this reference to Exhibit 10.13 from the registration's annual report on Form 10-K for the fiscal year ended December 31, 2000). 10.14 Severance Agreement between the registrant and Aram H. Keith (incorporated herein by this reference to Exhibit 10.14 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 10.15 Severance Agreement between the registrant and Eric C. Nielsen (incorporated herein by this reference to Exhibit 10.15 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 10.16 Severance Agreement between the registrant and Gary C. Campanaro (incorporated herein by this reference to Exhibit 10.16 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 21 List of Subsidiaries (incorporated herein by this reference to Exhibit 21 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 23.1 Consent of Independent Auditors.* 23.2 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1 hereto).* 24 Power of Attorney (included on signature page hereof).*
- ------------------------- * Filed herewith. II-5 102 ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes to provide the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 14 hereof, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-6 103 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Costa Mesa, State of California, on April 2, 2001. THE KEITH COMPANIES, INC. By: /s/ ARAM H. KEITH ------------------------------------ Aram H. Keith, Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Aram H. Keith and Gary C. Campanaro, or either of them, his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this registration statement and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission under the Securities Act of 1933, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorney-in-fact and agent may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ ARAM H. KEITH Chief Executive Officer, Chairman of April 2, 2001 - ------------------------------------------------ the Board and Director Aram H. Keith (principal executive officer) /s/ ERIC C. NIELSEN President and Chief Operating Officer April 2, 2001 - ------------------------------------------------ Eric C. Nielsen /s/ GARY C. CAMPANARO Chief Financial Officer, Secretary April 2, 2001 - ------------------------------------------------ and Director (principal financial and Gary C. Campanaro accounting officer) /s/ GEORGE DEUKMEJIAN Director April 2, 2001 - ------------------------------------------------ George Deukmejian /s/ CHRISTINE DIEMER IGER Director April 2, 2001 - ------------------------------------------------ Christine Diemer Iger /s/ WALTER W. CRUTTENDEN, III Director April 2, 2001 - ------------------------------------------------ Walter W. Cruttenden, III
II-7 104 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement.* 2.1 Stock Purchase Agreement dated October 13, 2000 by and among the registrant, Crosby, Mead, Benton & Associates and the shareholders named therein (incorporated herein by this reference to Exhibit 2.1 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 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 from 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 (incorporated herein by this reference to Exhibit 2.3 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 3.1 Amended and Restated Articles of Incorporation of the registrant (incorporated herein by this reference to Exhibit 3.1 from the registrant's registration statement on 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 from 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 from the registrant's registration statement on Form S-1, registration number 333-77273). 5.1 Opinion of Rutan & Tucker, LLP.* 10.1 Amended and Restated 1994 Stock Incentive Plan (incorporated herein by this reference to Exhibit 10.1 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 10.2 Form of Indemnification Agreement (incorporated by this reference to Exhibit 10.2 from the registrant's registration statement on 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 from 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 from 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 (incorporated herein by this reference to Exhibit 10.5 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 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 (incorporated herein by this reference to Exhibit 10.6 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 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 (incorporated herein by this reference to Exhibit 10.7 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 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 from the registrant's quarterly report on Form 10-Q for the period ended September 30, 1999).
105
EXHIBIT NO. DESCRIPTION - ------- ----------- 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 from 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 from 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 10.40 from 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 from 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. (incorporated herein by this reference to Exhibit 10.13 from the registration's annual report on Form 10-K for the fiscal year ended December 31, 2000). 10.14 Severance Agreement between the registrant and Aram H. Keith (incorporated herein by this reference to Exhibit 10.14 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 10.15 Severance Agreement between the registrant and Eric C. Nielsen (incorporated herein by this reference to Exhibit 10.15 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 10.16 Severance Agreement between the registrant and Gary C. Campanaro (incorporated herein by this reference to Exhibit 10.16 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 21 List of Subsidiaries (incorporated herein by this reference to Exhibit 21 from the registrant's annual report on Form 10-K for the fiscal year ended December 31, 2000). 23.1 Consent of Independent Auditors.* 23.2 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1 hereto).* 24 Power of Attorney (included on signature page hereof).*
- ------------------------- * Filed herewith. EX-1.1 2 a70932ex1-1.txt EXHIBIT 1.1 1 EXHIBIT 1.1 WEDBUSH MORGAN SECURITIES, INC. THE KEITH COMPANIES, INC. UNDERWRITING AGREEMENT April __, 2001 WEDBUSH MORGAN SECURITIES, INC. JANNEY MONTGOMERY SCOTT LLC As Representatives of the Several Underwriters c/o Wedbush Morgan Securities, Inc. 1000 Wilshire Blvd Los Angeles, CA 90030-0014 Ladies and Gentlemen: The Keith Companies, Inc., a California corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several Underwriters named in Schedule I hereto (each, an "Underwriter" and collectively, the "Underwriters") an aggregate of 1,750,000 shares (the "Company Firm Shares") of the Company's authorized and previously unissued Common Stock, par value $0.001 (the "Common Stock"). Certain shareholders of the Company listed on Schedule II hereto (the "Selling Shareholders") propose, subject to the terms and conditions stated herein, to sell to the Underwriters an aggregate of 250,000 shares of Common Stock (the "Selling Shareholder Firm Shares" and, together with the Company Firm Shares, the "Firm Shares") The Company also proposes to grant to the Underwriters an option to purchase up to 150,000 additional shares of Common Stock (the "Company Option Shares" and, together with the Company Firm Shares, the "Company Shares") and certain of the Selling Shareholders also propose to grant to the Underwriters an option to purchase up to 150,000 additional shares of Common Stock (the "Selling Shareholder Option Shares" and, together with the Selling Shareholder Firm Shares, the "Selling Shareholder Shares"; the Company Option Shares together with the Selling Shareholder Option Shares may hereinafter be referred to as the "Option Shares"), in each case for the sole purpose of covering over-allotments, if any, in connection with the sale of the Firm Shares. The Firm Shares and any Option Shares purchased pursuant to this Agreement are collectively referred to below as the "Shares." Wedbush Morgan Securities, Inc. ("Wedbush") and Janney Montgomery Scott LLC ("Janney") are acting as Representatives of the several Underwriters and in that capacity is referred to in this Agreement as the "Representatives." The Company hereby confirms its agreement with the several Underwriters as follows: 1 2 1. Representations and Warranties of the Company. The Company hereby represents and warrants to and agrees with each Underwriter as follows: (a) A registration statement (Registration No. 333-_______ on Form S-1 under the Securities Act of 1933, as amended (the "Securities Act"), relating to the Shares, including such amendments to such registration statement as may have been required to the date of this Agreement, has been prepared by the Company under and in conformity with the provisions of the Securities Act and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Securities Act, either (A) if the Company relies on Rule 434 under the Securities Act, a Term Sheet (defined below) relating to the Shares, that identifies the Preliminary Prospectus (defined below) that it supplements and contains such information as is required or permitted by Rules 434, 430A and 424(b) of the Rules and Regulations or (B) if the Company does not rely on Rule 434 under the Securities Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment has been filed, in such registration statement), with such changes or insertions as are required by Rule 430A of the Rules and Regulations or permitted by Rule 424(b) of the Rules and Regulations, and in the case of either (i)(A) or (i)(B) of this sentence, as has been provided to and approved by the Representatives prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Securities Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto, any information omitted therefrom pursuant to Rule 430A of the Rules and Regulations and included in the Prospectus (defined below) and further including all filings or other documents incorporated therein, as well as any additional registration statement filed in connection with the offering of the Shares pursuant to Rule 462(b) under the Securities Act; the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective and further including all filings or documents incorporated therein); and the term "Prospectus" means the following, including any filings or documents incorporated therein: A. if the Company relies on Rule 434 under the Securities Act, the Term Sheet relating to the Securities that is first filed pursuant to Rule 424(b)(7) under the Securities Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; B. if the Company does not rely on Rule 434 under the Securities Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Securities Act; or C. if the Company does not rely on Rule 434 under the Securities Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Securities Act, the 2 3 prospectus included in the Registration Statement; provided that if any revised prospectus that is provided to the Underwriters by the Company for use in connection with the offering of the Shares differs from the prospectus on file with the Commission at the time the Registration Statement became or becomes, as the case may be, effective, whether or not the revised prospectus is required to be filed with the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean such revised prospectus (including all filings and documents incorporated therein) from and after the time it is first provided to the Underwriters for such use. The term "Term Sheet" as used in this Agreement means any term sheet that satisfies the requirements of Rule 434 under the Securities Act. Any reference in this Agreement to the "date" of a Prospectus that includes a Term Sheet means the date of such Term Sheet. (b) No order suspending the effectiveness of the Registration Statement or preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for that purpose are pending or threatened or, to the best knowledge of the Company, contemplated by the Commission; no stop order suspending the sale of the Shares in any jurisdiction has been issued and no proceedings for that purpose are pending or threatened or, to the best knowledge of the Company, contemplated, and any request of the Commission for additional information (to be included in the Registration Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been complied with. (c) As used in this Agreement, the word "subsidiary" means any corporation, partnership, limited liability company or other entity of which the Company directly or indirectly owns 50% or more of the equity or that the Company directly or indirectly controls. The subsidiaries of the Company (the "Subsidiaries") and the jurisdiction of incorporation of each Subsidiary are listed on Exhibit A hereto. The Company has no subsidiaries other than the Subsidiaries listed on Exhibit A hereto; and except as set forth on Exhibit A, the Company owns one hundred percent (100%) of the issued and outstanding stock of each of the Subsidiaries free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest of any type, kind or nature. Exhibit B hereto lists each entity in which the Company or any Subsidiary holds an equity interest, whether as shareholder, partner, member, joint venturer or otherwise. Except as set forth on Exhibit B, neither the Company nor any Subsidiary has any equity interest in any person. The Company and each of its Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as is currently being conducted by it and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its Subsidiaries, taken as a whole (a "Consolidated Material Adverse Effect")). The Company and each of its Subsidiaries is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from federal, state, local and other governmental or regulatory authorities that are necessary to the conduct of its or their business, all of which are valid and in full force and effect, except for authorizations, licenses, certificates, consents, orders and permits which would not have a Consolidated Material Adverse Effect. Each contractual joint venture in which the 3 4 Company or any Subsidiary is involved and, to the Company's best knowledge, each participant therein is operating in compliance with the terms of its joint venture agreement except for any non-compliance that would not have a Consolidated Material Adverse Effect. (d) When any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be contained therein and complied in all respects with the requirements of the Securities Act, the Rules and Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations of the Commission thereunder (the "Exchange Act Rules and Regulations") and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective (the "Effective Date") and at all times subsequent thereto up to and including the Closing Date and any date on which the Option Shares are to be purchased, it (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Closing Date (defined below) and any date on which Option Shares are to be purchased, the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (d) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives specifically and expressly for use therein. (e) Since the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there has not been (i) any material loss or interference with the business of the Company or any of its Subsidiaries (A) from fire, explosion, flood or other calamity, whether or not covered by insurance, or (B) from any court or governmental action, order or decree, or (ii) any material changes in the capital stock or, except in the ordinary course of its business, long-term debt of the Company or any of its Subsidiaries, or (iii) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (iv) any development known to the Company that might cause or result in a Consolidated Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, in each case of (i)-(iv) above other than as may be set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). 4 5 Since such dates, except in the ordinary course of business, neither the Company or any of its Subsidiaries has entered into any material transaction not described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) that might cause or result in a Consolidated Material Adverse Effect. (f) There is no agreement, contract, license, lease or other document required to be described in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or to be filed as an exhibit to the Registration Statement which is not described or filed as required. All contracts described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), if any, are in full force and effect on the date hereof, and neither the Company nor any of its direct or indirect subsidiaries nor, to the best knowledge of the Company, any other party, is in breach of or default under any such contract, which breach or default would have a Consolidated Material Adverse Effect. (g) The authorized, issued and outstanding capital stock of the Company is set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the description of the capital stock therein conforms with and accurately describes the rights set forth in the instruments defining the same. The Shares are duly authorized and will, when issued in accordance with the terms of this Agreement and against payment therefor, be validly issued, fully paid and non-assessable, and the issuance of the Shares is not subject to any preemptive or similar rights. (h) All of the outstanding shares of capital stock of the Company (including the Selling Shareholder Shares to be purchased by the Underwriters from the Selling Shareholders) have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities that were not satisfied or waived. All of the issued shares of capital stock or other equity interests of each Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable, have been issued in compliance with all applicable laws, including securities laws, were not issued in violation of or subject to any preemptive or other rights to subscribe for or purchase such securities that were not satisfied or waived and are directly or indirectly owned by the Company, except as otherwise set forth on Exhibit A hereto. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted or exercised thereunder, set forth in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), accurately and fairly present the information required to be shown with respect to such plans, arrangements, options and rights in all material respects. Other than this Agreement and the options and warrants to purchase Common Stock described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no options, warrants or other rights outstanding to subscribe for or purchase any shares of the Company's capital stock from the Company. There are no preemptive rights applicable to any shares of capital stock of the Company. There are no options, warrants or other rights outstanding to subscribe for or purchase any shares of the capital stock or registered capital of any Subsidiary from such Subsidiary and no Subsidiary is subject to any obligation, commitment, plan, arrangement or court or administrative orders with respect to the same. There are no preemptive rights applicable to any shares of capital stock or registered 5 6 capital of the Subsidiaries. There are no restrictions upon the voting or transfer of any of the Firm Shares or Option Shares pursuant to the Company's articles of incorporation, as amended to date ("Articles of Incorporation"), Bylaws or other governing documents or any agreement to which the Company is a party or by which it may be bound other than as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). Except as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no rights for or relating to the registration of any capital stock of the Company. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived, for or relating to the registration of any securities of the Company. (i) The Company has full corporate power and authority to enter into and perform its obligations under this Agreement and to issue, sell and deliver the Shares. This Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and binding agreement of the Company, and is enforceable against the Company in accordance with its terms except insofar as enforceability may be affected by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and except insofar as the indemnification and contribution provisions of Section 9 of this Agreement may be affected by public policy concerns. (j) Neither the Company nor any of its Subsidiaries is, nor with the giving of notice or lapse of time or both would be, in violation of or in default under, nor will the execution or delivery of this Agreement or the consummation of the transactions contemplated by this Agreement result in a violation of or constitute a breach of or a default (including without limitation with the giving of notice, the passage of time or otherwise) that would result in a Consolidated Material Adverse Effect under the Articles of Incorporation, Bylaws or other charter documents of the Company or any of its Subsidiaries or any obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, deed of trust, loan agreement, lease, license, joint venture or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of its or their properties may be bound or affected. The Company has not incurred any liability, direct or indirect, for any finders' or similar fees payable on behalf of the Company or the Underwriters in connection with the transactions contemplated by this Agreement. The performance by the Company of its obligations under this Agreement will not violate any law, ordinance, Rule or regulation or any order, writ, injunction, judgment or decree of any governmental agency or body or of any court having jurisdiction over the Company or any of its Subsidiaries or any of its or their properties that would result in a Consolidated Material Adverse Effect, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of the Company or any of its Subsidiaries that would result in a Consolidated Material Adverse Effect. Except for permits and similar authorizations required under the Securities Act, the Exchange Act or under state securities or blue sky laws of certain jurisdictions and for such permits and authorizations that have been obtained, no consent, approval, authorization or order of any court, governmental agency or body, financial institution or any other person is required in connection with the consummation of the transactions contemplated by this Agreement (except such additional steps as may be required by the National Association of Securities Dealers, Inc. (the "NASD"). 6 7 (k) Each of the Company and its Subsidiaries has good and marketable title, or has valid rights to use, all items of real and personal property which are material to the business of the Company and its Subsidiaries, taken as a whole, free and clear, except as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), of all liens, encumbrances and claims that when taken as a whole would result in a Consolidated Material Adverse Effect and subject to such exceptions that do not adversely affect the present or prospective business of the Company or its Subsidiaries. (l) Each of the Company and its Subsidiaries holds adequate rights to use all inventions, trade secrets, know-how, trademarks, service marks, tradenames and copyrights described or referred to in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) which are necessary for the conduct of its or their business as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); and the Company has not received any notice of infringement of or conflict with asserted rights of others with respect to any patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, tradenames or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Consolidated Material Adverse Effect. (m) There is no litigation or governmental proceeding to which the Company or any of its Subsidiaries is a party or to which any property of the Company or any of its Subsidiaries is subject which is pending or, to the best knowledge of the Company, is threatened or contemplated against the Company or any of its Subsidiaries that might have a Consolidated Material Adverse Effect, that might prevent consummation of the transactions contemplated by this Agreement or that is required to be disclosed in the Registration Statement or Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (n) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), neither the Company nor any of its Subsidiaries is in violation of any law, order, ordinance, Rule or Regulation of which it is aware, or any order, writ, injunction, judgment or decree of any governmental agency or body or of any court, to which it or its properties (whether owned or leased) may be subject, which violation would have a Consolidated Material Adverse Effect. (o) Neither the Company nor, to the Company's knowledge, any of the Selling Shareholders have taken, directly or indirectly, any action designed to cause or result in, or which has constituted or will cause or result in, under the Exchange Act, the Exchange Act Rules and Regulations or otherwise, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares. No bid or purchase by the Company, or, to the Company's knowledge, by any of the Selling Shareholders, nor any bid or purchase that could be attributed to the Company (as a result of bids or purchases by an "affiliated purchaser" within the meaning of Regulation M under the Exchange Act) for or of the Common Stock, any securities of the same class or series as the Common Stock or any securities convertible into or exchangeable for or that represent any right to acquire the Common Stock is now pending or in progress or will have commenced at any time prior to the completion of the distribution of the Shares. 7 8 (p) KPMG LLP, whose reports appear in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) are, and during the periods covered by their reports in the Registration Statement were, independent accountants as required by the Securities Act and the Rules and Regulations. The historical and pro forma financial statements, together with related notes and schedules, and other financial information included in the Registration Statement, each Preliminary Prospectus and the Prospectus present fairly (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will present fairly) the financial position, results of operations, cash flows and changes in shareholders' equity of the Company and its Subsidiaries, taken as a whole, at the dates and for the periods indicated, and the historical and pro forma financial statements, together with related notes, schedules and other financial information included in the Registration Statement present fairly the information required to be stated therein in all material respects. Such financial statements, notes, schedules and other financial information have been prepared in accordance with U.S. generally accepted accounting principles applied on a consistent basis throughout the periods presented and all adjustments necessary for a fair presentation of results for such periods have been made, except as may be stated therein. The selected and summary financial and statistical data included in the Registration Statement and the Prospectus present fairly (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will present fairly) the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. Except as set forth in such financial statements or as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), the Company has no debts, liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature whatsoever, including, without limitation, any tax liabilities or deferred tax liabilities or any other debts, liabilities or obligations. (q) The books, records and accounts of the Company and its Subsidiaries accurately and fairly reflect, in reasonable detail in all material respects, the transactions in and dispositions of the assets of the Company and its Subsidiaries. The systems of internal accounting controls maintained by the Company and its Subsidiaries are sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary (x) to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles and (y) to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and (v) the Company is able to properly apply and test for proper application of the percentage completion method of accounting with respect to its contracts. (r) The Company has delivered to Wedbush the written agreement of each of its executive officers and directors, and members of the immediate family of each of the foregoing, and of the Selling Shareholders, who own Common Stock (collectively, the "Holders") to the effect that each of the Holders will not, without the prior written consent of Wedbush, for a period of 180 days following the date of this Agreement, directly or indirectly offer, sell, grant any option to purchase, contract to sell, or otherwise dispose of any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible 8 9 into or exchangeable for shares of Common Stock owned by the Holder or with respect to which the Holder has the power of disposition, or announce any offer to do so. (s) No labor disturbance by the employees of the Company or any of its Subsidiaries exists, or, to the knowledge of the Company, is imminent, contemplated or threatened; and the Company is not aware of an existing, imminent or threatened labor disturbance by the employees of any principal suppliers, manufacturers, contractors or others which such disturbance might be expected to result in any Consolidated Material Adverse Effect. No collective bargaining agreement exists with any of the Company's employees or those of its Subsidiaries and, to the best knowledge of the Company, no such agreement is imminent. (t) Each of the Company and its Subsidiaries has filed all federal, state, local and foreign tax returns which are required to be filed or has requested extensions thereof and has paid all taxes, including withholding taxes, penalties and interest, assessments, fees and other charges to the extent that the same have become due and payable. To the best of the Company's knowledge, no tax assessment or deficiency has been made or proposed against the Company or any of its Subsidiaries nor has the Company or any of its Subsidiaries received any notice of any proposed tax assessment or deficiency. (u) Except as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding contracts, loans, advances or guaranties of indebtedness by the Company or any of its Subsidiaries to or for the benefit of any of (i) its "affiliates," as such term is defined in the Rules and Regulations, (ii) except for immaterial advances in the ordinary course of business, any of the officers or directors of any of its Subsidiaries, or (iii) any of the members of the families of any of them, in each case, required to be set forth in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), under the Securities Act or Rules and Regulations. (v) The Company and its Subsidiaries are in compliance with the requirements of Section 13(b)(2) of the Exchange Act and, except as disclosed in the Prospectus, to the best knowledge and belief of the Company, neither the Company nor any of it Subsidiaries, nor any employee or agent of the Company or a Subsidiary, has made any payment of funds of the Company or a Subsidiary or received or retained any funds in violation of any law, rule or regulation. (w) Neither the Company nor any of its Subsidiaries has any liability, absolute or contingent, relating to: (i) public health or safety; (ii) worker health or safety; or (iii) product defect or warranty (all except as would not reasonably be expected to have a Consolidated Material Adverse Effect or as are disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus)). (x) The Company has not distributed and will not distribute prior to the Closing Date or on or prior to any date on which the Option Shares are to be purchased, as the case may be, any prospectus or other offering material in connection with the offering and sale of the Shares other than the Preliminary Prospectus(es), the Prospectus, the Registration Statement and any other material which may be permitted by the Securities Act and the Rules and Regulations. 9 10 (y) Subject to official notice of issuance, the Shares have been approved for inclusion for listing on the Nasdaq National Market. (z) The Company is not now an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"). The Company has been advised concerning the 1940 Act, and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it has not and will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (aa) The Company and each of its Subsidiaries is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) for which the Company or any of its Subsidiaries would have any liability has occurred; neither the Company nor any of its Subsidiaries has incurred or expects to incur liability under (1) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (2) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company or any of its Subsidiaries would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (bb) Except as set forth in the Prospectus (or if the Prospectus is not in existence, the most recent Preliminary Prospectus), there has not been any storage, disposal, generation, manufacture, refinement, transportation, handling, arranging for disposal or treatment of toxic wastes, hazardous wastes, medical wastes, solid wastes or hazardous substances (collectively, "Environmental Activities") by the Company or any of its Subsidiaries (or any of their predecessors in interest) at any location; there have not been any Environmental Activities by any person or entity at, upon or from any of the property now or previously owned or leased by the Company or its Subsidiaries either (i) in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit (collectively, "Environmental Laws") or (ii) which would require remedial action under any Environmental Laws; the Company has, at all relevant times, been in compliance with all Environmental Laws; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind from or onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or any of its Subsidiaries or, to the best knowledge of the Company, due to or caused by any other person or entity; the Company has no knowledge (1) of any of the foregoing matters with respect to any projects with respect to which the Company or any of its Subsidiaries provided any services or (2) that the Company or any of its Subsidiaries is or may be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or any similar state laws; there are no toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances presently located at, on or under any of the property now or previously owned or leased by the Company or its Subsidiaries, except for such substances that are naturally occurring at such locations; and the terms "hazardous wastes," 10 11 "toxic wastes," "medical wastes," "solid wastes" and "hazardous substances" shall have the meanings specified in any Environmental Laws. (cc) The Company and each of its Subsidiaries are insured against such losses and risks and in such amounts as are customary in the businesses in which they are engaged; neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not cause a Consolidated Material Adverse Effect. (dd) Each certificate signed by any officer of the Company, as amended in writing from time to time, and delivered to the Representatives' or Underwriters' counsel pursuant to Section 7 of this Agreement shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. 2. Representations, Warranties and Covenants of the Selling Shareholders. Each Selling Shareholder, severally and not jointly, represents and warrants to and agrees with each Underwriter and the Company that: (a) Such Selling Shareholder now has and on the Closing Date will have good and marketable title to the Shares to be sold by such Selling Shareholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than pursuant to this Agreement; and upon delivery of such Shares hereunder and payment of the purchase price as herein contemplated, each Underwriter who acquires such Shares without knowledge of any adverse claim, will obtain good and marketable title to the Shares purchased by it from such Selling Shareholder, free and clear of any pledge, lien, security interest pertaining to such Selling Shareholder or such Selling Shareholder's property, encumbrance, claim or equitable interest, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Shareholder. (b) Such Selling Shareholder has duly authorized (if applicable), executed and delivered, in the form heretofore furnished to the Representatives, an irrevocable Power of Attorney (the "Power of Attorney") appointing [____________________] as attorneys-in-fact (collectively, the "Attorneys" and individually, an "Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody Agreement") with [_________________________], as custodian (the "Custodian"); each of the Power of Attorney and the Custody Agreement constitutes a valid and binding agreement on the part of such Selling Shareholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and except insofar as the indemnification and contribution provisions of Section 9 of this Agreement may be affected by public policy concerns; and each of such Selling Shareholder's Attorneys, acting alone, is authorized to execute and deliver this Agreement and the certificate referred to in Section 7(f) hereof on behalf of such Selling Shareholder, to determine the purchase price to be paid by the several Underwriters to such Selling Shareholder as provided in Section 3 hereof, to authorize 11 12 the delivery of the Shares to be sold by such Selling Shareholder under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Shares or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Selling Shareholder in connection with this Agreement. (c) All consents, approvals, authorizations and orders required for the execution and delivery by such Selling Shareholder of the Power of Attorney and the Custody Agreement, the execution and delivery by or on behalf of such Selling Shareholder of this Agreement and the sale and delivery of the Shares to be sold by such Selling Shareholder under this Agreement (other than, at the time of the execution hereof (if the Registration Statement has not yet been declared effective by the Commission), the issuance of the order of the Commission declaring the Registration Statement effective and such consents, approvals, authorizations or orders as may be necessary under state or other securities or Blue Sky laws) have been obtained and are in full force and effect; such Selling Shareholder, if other than a natural person, has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization as the type of entity that it purports to be; and such Selling Shareholder has full legal right, power and authority to enter into and perform its obligations under this Agreement and such Power of Attorney and Custody Agreement, and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder under this Agreement. (d) Certificates in negotiable form for all Shares to be sold by such Selling Shareholder under this Agreement, together with a stock power or powers duly endorsed in blank by such Selling Shareholder, have been placed in custody with the Custodian for the purpose of effecting delivery hereunder. (e) This Agreement has been duly authorized by each Selling Shareholder that is not a natural person and has been duly executed and delivered by or on behalf of such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and except insofar as the indemnification and contribution provisions of Section 9 of this Agreement may be affected by public policy concerns; and the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of or constitute a material default under any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which such Selling Shareholder is a party or to the best of such Selling Shareholder's knowledge by which such Selling Shareholder, or any Shares to be sold by such Selling Shareholder hereunder, may be bound or, to the best of such Selling Shareholders' knowledge, result in any violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over such Selling Shareholder or over the properties of such Selling Shareholder, or, if such Selling Shareholder is other than a natural person, result in any violation of any provisions of the charter, bylaws or other organizational documents of such Selling Shareholder. 12 13 (f) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock. (g) Such Selling Shareholder has not distributed to the public and will not distribute to the public any prospectus or other offering material in connection with the offering and sale of the Shares. (h) All information furnished by or on behalf of such Selling Shareholder relating to such Selling Shareholder and the Shares that is contained in the representations and warranties of such Selling Shareholder in such Selling Shareholder's Power of Attorney or set forth in the Registration Statement or the Prospectus is, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date was or will be, true, correct and complete in all material respects, and such information furnished by or on behalf such Selling Shareholder does not, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading. (i) Such Selling Shareholder will review the Prospectus and will comply with all agreements and satisfy all conditions on its part to be complied with or satisfied pursuant to this Agreement on or prior to the Closing Date and will advise its Attorneys and the Representatives prior to the Closing Date if any statement to be made on behalf of such Selling Shareholder in the certificate contemplated by Section 7(f) would be inaccurate if made as of such date. (j) Such Selling Shareholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Shareholders to the Underwriters pursuant to this Agreement; such Selling Shareholder does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Shareholder in the transactions to which this Agreement relates in accordance with the terms of this Agreement; and such Selling Shareholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, rights, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus or those which are not required to be described in the Registration Statement and the Prospectus. (k) Such Selling Shareholder is not aware that any of the representations and warranties of the Company set forth in Section 1 above is untrue or inaccurate. (l) To the best of such Selling Shareholder's knowledge, when any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be contained therein and complied in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in 13 14 order to make the statements therein, in the light of the circumstances under which they were made, not misleading. To the best of such Selling Shareholder's knowledge, on the Effective Date, the Registration Statement (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. To the best of such Selling Shareholder's knowledge, when the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on any date on which Option Shares are to be purchased by the Underwriters pursuant to this Agreement, the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (l) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives specifically and expressly for use therein. (m) At the time of delivery to the Custodian of Shares to be sold by the Selling Shareholders, all stock transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of such Shares to be sold by the Selling Shareholders to the several Underwriters hereunder will have been fully paid or provided for by the Selling Shareholder and all laws imposing such taxes will have been fully complied with. 3. Purchase, Sale and Delivery of the Shares. (a) On the basis of the representations, warranties, covenants and agreements contained in this Agreement and subject to the terms and conditions set forth in this Agreement, each of the Company and each Selling Shareholder, severally and not jointly, agrees to sell to the several Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company and the Selling Shareholders, at a purchase price of $________ per share, the respective number of Firm Shares set forth opposite the name of such Underwriter on Schedule I to this Agreement (subject to adjustment as provided in Section 10 of this Agreement). (b) On the basis of the several (and not joint) covenants and agreements of the Underwriters contained in this Agreement and subject to the terms and conditions set forth in this Agreement, each of the Company and each Selling Shareholder, acting severally and not jointly grants an option to the several Underwriters to purchase from the Company all or any portion of the respective number of Company Option Shares and the number of Selling Shareholder Option Shares set forth opposite the name of each such Selling Shareholder on Schedule II hereto at the 14 15 same price per share as the Underwriters are to pay for the Firm Shares. This option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the 45th day after the date of the Prospectus first filed pursuant to Rule 424(b) under the Securities Act upon written or telecopied notice by the Representatives to the Company setting forth the aggregate number of Option Shares as to which the several Underwriters are exercising the option and the settlement date; notwithstanding the foregoing, if the 45th day after the date of the Prospectus first filed pursuant to Rule 424(b) under the Securities Act is not a business day, then the time period for delivery of the notice of the exercise of the over-allotment option shall automatically be extended until the first business day following the 45th day after the date of the Prospectus. The Option Shares shall be purchased severally, and not jointly, by each Underwriter, if purchased at all, in the same proportion that the number of Firm Shares set forth opposite the name of the Underwriter in Schedule I to this Agreement bears to the total number of Firm Shares to be purchased by the Underwriters under Section 3(a) above, subject to such adjustments as the Representatives in their absolute discretion shall make to eliminate any fractional shares. Delivery of certificates for the Option Shares, and payment therefor, shall be made as provided in Section 3(c) and Section 3(d) below. Nothing contained in this Section 3 shall relieve any defaulting Underwriter of its liability, if any, to the Company or to the remaining Underwriters for damages occasioned by its default hereunder. (c) Delivery of the Firm Shares and payment therefor, shall be made at the office of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 2029 Century Park East, 24th Floor, Los Angeles, California 90067 (or at such other location as is agreed by the parties), at 6:30 a.m., Pacific time, on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern Time) on any given day) business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such third (or fourth) business day, as shall be agreed upon in writing by the Company and the Representatives, or as provided in Section 8 of this Agreement. The date and hour of delivery and payment for the Firm Shares are referred to in this Agreement as the "Closing Date." As used in this Agreement, "business day" means a day on which the Nasdaq National Market is open for trading and on which banks in New York and California are open for business and not permitted by law or executive order to be closed. (d) Delivery of the Option Shares and payment therefor, shall be made at the office of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 2029 Century Park East, 24th Floor, Los Angeles, California 90067 (or at such other location as is agreed by the parties), at 6:30 a.m., Pacific time, on the date specified by the Representatives (which shall be three business days after the exercise of the option, but not in excess of the period of time specified in the Rules and Regulations). (e) Payment of the purchase price for the Firm Shares by the several Underwriters shall be made at the election of the Representatives by (i) certified or official bank check or checks drawn in next-day funds, payable to the order of the Company and to the Custodian on behalf of the Selling Shareholders, or (ii) wire transfer of immediately available funds to such account of the Company and of the Custodian as the Company and the Custodian, respectively, shall advise the Representatives in writing at least three business days prior to the Closing Date. Such payment shall be made upon delivery of certificates for the Firm Shares to the Representatives for the respective accounts of the several Underwriters. Certificates for the Firm Shares to be delivered to the Representatives shall be registered in such name or names and shall 15 16 be in such denominations as the Representatives may request at least two business days before the Closing Date. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 2029 Century Park East, 24th Floor, Los Angeles, California 90067, not less than one full business day prior to the Closing Date. It is understood that the Representatives, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company and the Custodian for Firm Shares to be purchased by any Underwriter whose check shall not have been received by the Representatives on the Closing Date for the account of such Underwriter. Any such payment shall not relieve such Underwriter from any of its obligations hereunder. 12 (f) Payment of the purchase price for the Option Shares by the several Underwriters shall be made at the election of the Representatives by (i) certified or official bank check or checks drawn in next-day funds, payable to the order of the Company and to the Custodian on behalf of the Selling Shareholders, or (ii) wire transfer of immediately available funds to such accounts of the Company and of the Custodian, on behalf of the Selling Shareholders, as the Company and the Custodian, respectively, shall advise the Representatives in writing at least three business days prior to the date on which any such Option Shares are purchased. Such payment shall be made upon delivery of certificates for the Option Shares to the Representatives for the respective accounts of the several Underwriters. Certificates for the Option Shares to be delivered to the Representatives shall be registered in such name or names and shall be in such denominations as the Representatives may request at least two business days before the date on which any Option Shares are purchased by the Underwriters pursuant to this Agreement. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices of Akin, Gump, Strauss, Hauer & Feld, L.L.P., 2029 Century Park East, 24th Floor, Los Angeles, California 90067 , not less than one full business day prior to the Closing Date. It is understood that the Representatives, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for Option Shares to be purchased by any Underwriter whose check shall not have been received by the Representatives on any date on which Option Shares are purchased for the account of such Underwriter. Any such payment shall not relieve such Underwriter from any of its obligations hereunder. (g) It is understood that the several Underwriters propose to offer the Shares for sale to the public as soon as the Representatives deems it advisable to do so. The Firm Shares are to be initially offered to the public at the public offering price set forth (or to be set forth) in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. (h) The information set forth in the legends respecting passive market making and stabilization set forth on the inside cover page and the statements set forth under the caption "Underwriting" in any Preliminary Prospectus, the Registration Statement and the Prospectus filed pursuant to Rule 424(b) constitute the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement. 16 17 4. Further Agreements of the Company. The Company covenants and agrees with the several Underwriters as follows: (a) The Company will use its best efforts to cause the Registration Statement, and any amendment thereof, if not effective at the time of execution of this Agreement, to become effective as promptly as possible. If the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed (and in form and substance reasonably satisfactory to the Underwriters) pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to the Representatives of such timely filing. The Company will not file the Prospectus, any amended Prospectus, any amendment (including post-effective amendments) to the Registration Statement or any supplement to the Prospectus without (i) advising the Representatives of and, a reasonable time prior to the proposed filing of such amendment or supplement, furnishing the Representatives with copies thereof and (ii) obtaining the prior consent of the Representatives to such filing. If, in the judgment of the Company, it becomes necessary to amend or supplement the Prospectus, the Company will prepare and file with the Commission, promptly upon the request of the Representatives, any amendment to the Registration Statement or supplement to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by the Underwriters and use its best efforts to cause the same to become effective as promptly as possible. (b) The Company will promptly advise the Representatives (i) when the Registration Statement becomes effective, (ii) when any post-effective amendment thereof becomes effective, (iii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (v) of the receipt by the Company of any notification with respect to the suspension of the registration, qualification or exemption from registration or qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order or suspension and, if issued, to obtain as soon as possible the withdrawal thereof. (c) The Company will (i) on or before the Closing Date, deliver to the Representatives and to Underwriters' counsel a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless and to the extent previously furnished to the Representatives) and all documents filed by the Company with the Commission under the Exchange Act and deemed to be incorporated by reference into any Preliminary Prospectus or the Prospectus and will also deliver to the Representatives, for distribution to the several Underwriters, a sufficient number of additional conformed copies of each of the foregoing (excluding exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to each of the Representatives and send to the several Underwriters, at such office or offices as the Representatives may designate, as many copies of the Prospectus as the Representatives may reasonably request and (iii) thereafter from time to time during the period in which a prospectus 17 18 is required by law to be delivered by an Underwriter, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended Prospectus, filed by the Company with the Commission, as the Representatives may reasonably request for the purposes contemplated by the Securities Act. (d) If, in the judgment of the Company, at any time during the period in which a prospectus is required by law to be delivered by an Underwriter any event shall occur as a result of which, in the opinion of counsel to the Representatives, it is necessary to supplement or amend the Prospectus in order to make the Prospectus not misleading or so that the Prospectus will not omit to state a material fact necessary to be stated therein, in each case at the time the Prospectus is delivered to a purchaser of the Shares, or if it shall be necessary to amend or to supplement the Prospectus to comply with the Securities Act or the Rules and Regulations, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus so that the 14 Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein not misleading and so that it then will otherwise comply with the Securities Act and the Rules and Regulations. If, after the public offering of the Shares by the Underwriters commences and during such period, the Underwriters propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, the Representatives will advise the Company in writing of the proposed variation and if, in the opinion either of counsel for the Company or counsel for the Underwriters, such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Shares may be sold by the Underwriters to use the Prospectus, as from time to time so amended or supplemented, in connection with the sale of the Shares in accordance with the applicable provisions of the Securities Act and the Rules and Regulations for such period. (e) The Company will cooperate with the Representatives' and Underwriters' counsel in the qualification or registration of the Shares for offer and sale under the securities or blue sky laws of such jurisdictions as the Representatives may designate and, if applicable, in connection with exemptions from such qualification or registration and, during the period in which a Prospectus is required by law to be delivered by an Underwriter or a dealer, in keeping such qualifications, registrations and exemptions in effect; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will, from time to time, prepare and file such statements, reports and other documents as are or may be required to continue such qualifications, registrations and exemptions in effect for so long a period as the Representatives may reasonably request for the distribution of the Shares. (f) During a period of five years commencing with the date of this Agreement, the Company will promptly furnish to the Representatives and to each Underwriter who may so request in writing copies of (i) all periodic and special reports furnished by it to shareholders of the Company, (ii) all information, documents and reports filed by it with the Commission, the Nasdaq National Market, any securities exchange or the NASD, (iii) all material press releases and material news items or articles in respect of the Company, its products or affairs released or 18 19 prepared by the Company (other than promotional and marketing materials disseminated solely to customers and potential customers of the Company in the ordinary course of business) and (iv) any additional information concerning the Company or its business which the Representatives may reasonably request. (g) As soon as practicable, but not later than the 45th day following the end of the fiscal quarter first ending after the first anniversary of the Effective Date, the Company will make generally available to its securities holders and furnish to the Representatives an earnings statement or statements in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (h) The Company agrees that, without Wedbush's prior written consent, the Company will not, and to the extent it has any ability to control the actions of Holders, will not allow the Holders to, in each case directly or indirectly, offer, sell, grant any option to purchase, contract to sell, or otherwise sell or dispose of any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock for a period of 180 days following the date of this Agreement, excluding only (i) the sale of the Shares to be sold to the Underwriters pursuant to this Agreement and (ii) the grant by the Company of options to purchase Common Stock (provided that none of such options are or become exercisable during such 180-day period) or the issuance by the Company of shares of Common Stock upon the exercise in accordance with options previously granted under the Company's presently authorized stock option plans as described in the Prospectus or in documents incorporated therein, or upon the exercise in accordance with their terms of previously granted warrants which are described in the Prospectus or in documents incorporated therein. (i) The Company will establish and maintain all financial control and financial reporting systems customary for well-established public companies, including but not limited to adequate management information and reporting systems, and will employ and maintain, with adequate staffing levels at headquarters and at each significant Subsidiary or significant functional division, and at each level of responsibility, an employee staff of well trained and highly qualified financial professionals. (j) The Company will apply the net proceeds from the offering received by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (k) The Company will, and at all times for a period of at least five years after the date of this Agreement, unless such securities are then listed on a national securities exchange, use its best efforts to cause the Common Stock (including the Shares) to be included for listing on the Nasdaq National Market, and the Company will comply with all registration, filing, reporting and other requirements within its control of the Exchange Act and the Nasdaq National Market which may from time to time be applicable to the Company. (l) The Company will use commercially reasonable efforts to maintain insurance of the types and in the amounts which it deems adequate for its business consistent with insurance coverage maintained by companies of similar size and engaged in similar businesses including, but not limited to, general liability insurance covering all real and personal property owned or 19 20 leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against. (m) The Company will issue no press release prior to the purchase by the Underwriters of all of the Option Shares or within 45 days after the Closing Date, whichever is earlier, without prior consultation with Wedbush with respect to the contents thereof. (n) Within 90 days of the Closing Date, the Company will furnish the Representatives with four bound volumes which shall be standard for an underwriting transaction of the type contemplated by this Agreement. (o) The Company will comply in all material respects with the provisions of the undertakings contained in the Registration Statement. (p) The Company has not and will not, without the prior written consent of the Representatives, seek any exemption from the requirements for inclusion on the Nasdaq National Market. (q) The Company will take all steps necessary to comply with the requirements of the NASD in connection with the issuance and sale of the Shares. 5. Further Agreement of the Selling Shareholders. The Selling Shareholders, severally and not jointly, covenant and agree with the several Underwriters that, without Wedbush's prior written consent, such Selling Shareholder will not, directly or indirectly, offer, sell, grant any option to purchase, contract to sell, or otherwise dispose of any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock for a period of 180 days following the date of this Agreement, excluding only the sale of the Selling Shareholder Shares to be sold to the Underwriters pursuant to this Agreement. 6. Fees and Expenses. (a) The Company and the Selling Shareholders agree with each Underwriter that: (i) The Company will pay and bear all costs and expenses incurred by it in connection with or incident to: the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus, any drafts of each of them and any amendments or supplements to any of them; the duplication or, if applicable, printing (including all drafts thereof) and distribution, by mail, telex or other means of communication of this Agreement, the Agreement Among Underwriters, any Selected Dealer Agreements, the Blue Sky Survey, the Underwriters' Questionnaire and the Power of Attorney and the duplication and printing (including of drafts thereof) of any other underwriting documents and material (including but not limited to marketing memoranda and other marketing material) in connection with the offering, purchase, sale and delivery of the Shares; the issuance, transfer and delivery of the Shares under this Agreement to the several Underwriters, including all expenses, taxes, duties, fees and commissions on the purchase and sale of the Shares and Nasdaq National Market brokerage and transaction levies and fees with respect to the purchase and, if applicable, the sale of the Shares incident to the sale and delivery of the Shares by the Company and the Selling Shareholders to the Underwriters; the cost of 20 21 printing all stock certificates; the Transfer Agent's and Registrar's fees; the Custodian's fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent public accountants and any other experts named in the Prospectus; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus(es) and the Prospectus, the agreements and other documents and instruments referred to above and any amendments or supplements to any of the foregoing; NASD filing fees and reasonable fees and disbursements of Underwriters' counsel incurred in connection with the review by the NASD of the terms of the Offering of the Shares; the cost of qualifying or registering the Shares (or obtaining exemptions from qualification or registration) under the laws of such jurisdictions as the Representatives may designate (including filing fees in connection with such state securities or blue sky qualifications, registrations and exemptions) and preparing the preliminary and any final Blue Sky Memorandum (including reasonable fees and disbursements of Underwriters' counsel in connection therewith); all fees and expenses in connection with qualification of the Shares for inclusion for listing on the Nasdaq National Market; the Company's share of roadshow expenses; and all other expenses incurred by the Company in connection with the performance of its obligations hereunder. The Selling Shareholders will pay and bear all Custodian's fees and costs associated with the Custodian. Except as provided in this Section 6, the Underwriters, including the Representatives, shall bear all of their own expenses (including legal fees and costs/charges of their own counsel, syndication, advertising, stabilization and travel and other out-of-pocket expenses), except for state securities, blue sky fees and expenses and the NASD fees and expenses, which fees and expenses the Company will pay directly or to counsel for the Underwriters, Akin, Gump, Strauss, Hauer & Feld, LLP. The provisions of this Section 6(a)(i) are intended to relieve the Underwriters from the payment of the expenses and costs which the Selling Shareholders and the Company hereby agree to pay, but shall not affect any agreement which the Selling Shareholders and the Company may make, or may have made, for the sharing of any of such expenses and costs. Such agreements shall not impair the obligations of the Company and the Selling Shareholders hereunder to the several Underwriters. (ii) In addition to its obligations under Section 9(a) of this Agreement, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 9(a) of this Agreement, it will reimburse or advance to or for the benefit of the Underwriters, and each of them, on a monthly basis (or more often, if requested) for all legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse or advance for the benefit of the Underwriters for such expenses or the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments or advances are so held to have been improper, the Underwriters receiving the same shall promptly return such amounts to the Company together with interest, compounded daily, at the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America NT&SA, San Francisco, California (the "Prime Rate"), but not in excess of the maximum rate permitted by applicable law. Any such interim reimbursement payments or advances that are not made to or for the Underwriters within 30 days of a request for 21 22 reimbursement or for an advance shall bear interest at the Prime Rate, but not in excess of the maximum rate permitted by applicable law, from the date of such request until the date paid. (b) In addition to their obligations under Section 9(c) of this Agreement, the Underwriters severally and in proportion to their obligation to purchase Firm Shares as set forth on Schedule I hereto, agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 9(c) of this Agreement, they will reimburse or advance to (for the benefit of the Company on a monthly basis (or more often, if requested) for all legal and other expenses incurred by the Company in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety or enforceability of the Underwriters' obligation to reimburse or advance for the benefit of the Company for such expenses and the possibility that such payments or advances might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments or advances are so held to have been improper, the Company shall promptly return such amounts to the Underwriters together with interest, compounded daily, at the Prime Rate, but not in excess of the maximum rate permitted by applicable law. Any such interim reimbursement payments or advances that are not made to the Company within 30 days of a request for reimbursement or for an advance shall bear interest at the Prime Rate, but not in excess of the maximum rate permitted by applicable law, from the date of such request until the date paid. (c) Any controversy arising out of the operation of the interim reimbursement and advance arrangements set forth in Sections 6(a)(ii) and 6(b) above, including the amounts of any requested reimbursement payments or advance, the method of determining such amounts and the basis on which such amounts shall be apportioned among the indemnifying parties, shall be settled by arbitration conducted under the provisions of the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. If the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to the demand or notice is authorized to do so. Any such arbitration will be limited to the interpretation and obligations of the parties under the interim reimbursement and advance provisions contained in Sections 6(a)(ii) and 6(b) above and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for or contribute to expenses that is created by the provisions of Section 9 of this Agreement. (d) If the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 of this Agreement is not satisfied, or because of any termination pursuant to Section 11(b) of this Agreement, or because of any refusal, inability or failure on the part of the Company to perform any material covenant or agreement set forth in this Agreement or to comply with any material provision of this Agreement other than by reason of a default by any of the Underwriters, the Company agrees to reimburse the Representatives upon demand for, or pay directly, all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by the Representatives in connection with investigating, preparing to market or marketing the Shares or otherwise in connection with this Agreement or the offering of the Shares. 22 23 7. Conditions of Underwriters' Obligations. The several obligations of the Underwriters to purchase and pay for the Shares shall be subject, to the reasonable satisfaction of the Representatives, to the accuracy as of the date of execution of this Agreement, the Closing Date and the date on which the Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company and the Selling Shareholders set forth in this Agreement, to the accuracy of the statements of the Company and its officers and the Selling Shareholders made in any certificate delivered pursuant to this Agreement, to the performance by the Company and the Selling Shareholders of all of their obligations to be performed under this Agreement at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, to the satisfaction of all conditions to be satisfied or performed by the Company at or prior to that date and to the following additional conditions: (a) The Registration Statement shall have become effective (or, if a post-effective amendment is required to be filed pursuant to Rule 462(b) under the Act, such post-effective amendment shall become effective and the Company shall have provided evidence satisfactory to the Representatives of such filing and effectiveness) not later than 5:00 p.m., New York time, on the date of this Agreement or at such later date and time as the Representatives may approve in writing and, at the Closing Date or, with respect to the Option Shares, the date on which such Option Shares are to be purchased; no stop order suspending the effectiveness of the Registration Statement or any qualification, registration or exemption from qualification or registration for the sale of the Shares in any jurisdiction shall have been issued and no proceedings for that purpose shall have been instituted or threatened; and any request for additional information on the part of the Commission shall have been complied with to the reasonable satisfaction of the Representatives' and Underwriters' counsel. (b) The Representatives shall have received from Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the Underwriters, an opinion, dated as of the Closing Date or, if applicable, the date on which the Option Shares are to be purchased, and the Company shall have furnished such counsel with all documents which they may reasonably request for the purpose of enabling them to pass upon such matters. (c) The Representatives shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, the opinion of Rutan & Tucker LLP, counsel for the Company, covering the matters set forth on Annex A and on Annex B, addressed to the Underwriters and dated as of the Closing Date or such later date, with reproduced copies or signed counterparts thereof for each of the Underwriters, and in form and substance reasonably satisfactory to the Representatives. (d) The Representatives shall be satisfied that there has not been any material change in the market for securities in general or in political, financial or economic conditions as to render it impracticable in the Representatives' sole judgment to make a public offering of the Shares, or a material adverse change in market levels for securities in general or financial or economic conditions which render it inadvisable to proceed. (e) The Representatives shall have received on or before the Closing Date and on any later date on which Option Shares are purchased a certificate, dated as of the Closing Date or 23 24 such later date, as the case may be, and signed by the Chief Executive Officer and the Chief Financial Officer of the Company, on behalf of the Company, stating that: (i) the representations and warranties of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as if expressly made at and as of the Closing Date or such later date on which the Option Shares are purchased, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or such later date; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or are threatened under the Securities Act; and (iii) (A) the respective signers of the certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus and any supplements or amendments to any of them and, as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct in all material respects and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, (B) since the Effective Date, no event has occurred that should have been set forth in an amendment to the Registration Statement or a supplement or amendment to the Prospectus that has not been set forth in such an amendment or supplement, (C) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any Consolidated Material Adverse Effect or any development involving a prospective Consolidated Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, neither the Company nor any of its Subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (D) there are not any pending or known threatened legal proceedings to which the Company or any of its Subsidiaries is a party or of which property of the Company or any of its Subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (E) there are not any license agreements, contracts, leases or other documents that are required to be filed or incorporated by reference as exhibits to the Registration Statement that have not been filed or incorporated by reference as required[, and (F) the Shares shall have been designated national market system securities, duly authorized for listing on the Nasdaq National Market upon official notice of issuance]. (f) The Representatives shall be satisfied that, and shall have received a certificate, dated the Closing Date from the Attorneys for each Selling Shareholder to the effect that, as of the date on which Option Shares are to be purchased, they have not been informed that: (i) The representations and warranties made by such Selling Shareholder herein are not true or correct in any material respect on the Closing Date; or 24 25 (ii) Such Selling Shareholder has not complied with any obligation or satisfied any condition which is required to be performed or satisfied on the part of such Selling Shareholder at or prior to the Closing Date. (g) The Representatives shall have received from KPMG LLP a letter or letters, addressed to the Underwriters and dated as of the Closing Date and any later date on which Option Shares are purchased, confirming that they are independent accountants with respect to the Company within the meaning of the Securities Act and the applicable Rules and Regulations thereunder and, based upon the procedures described in their letter, referred to below, delivered to the Representatives concurrently with the execution of this Agreement (the "Original Letter"), but carried out to a date not more than five business days prior to the Closing Date or such later date on which Option Shares are purchased, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter that are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. Such letters shall not disclose any change, or any development involving a prospective change, in or affecting the business, properties or condition (financial or otherwise), results of operations or prospects of the Company or any of its Subsidiaries which, in the Representatives' sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Shares or the purchase of the Option Shares as contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). In addition, the Representatives shall have received from KPMG LLP, on or prior to the Closing Date, a letter addressed to the Company and made available to the Representatives for the use of the Underwriters stating that their review of the Company's system of internal controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of December 31, 2000, or in delivering their Original Letter, did not disclose any weaknesses in internal controls that they considered to be a material weaknesses. (h) Prior to the Closing Date, the Shares shall have been designated national market system securities, duly authorized for listing on the Nasdaq National Market upon official notice of issuance. (i) On or prior to the Closing Date, the Representatives shall have received from all Holders executed agreements covering the matters described in Section 1(r) of this Agreement. (j) The Company shall have furnished to the Representatives such further certificates and documents as the Representatives shall reasonably request (including certificates of officers of the Company), as to the accuracy of the representations and warranties of the Company set forth in this Agreement, the performance by the Company of its obligations under this Agreement and the other conditions concurrent and precedent to the obligations of the Underwriters under this Agreement. Counsel to the Representatives shall provide a written memorandum to the Company identifying closing documents which such counsel deems necessary for the Underwriters' review, not less than two business days before the Closing Date. 25 26 All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement will be in compliance with the provisions of this Agreement only if they are reasonably satisfactory to the Representatives. The Company will furnish the Representatives with such number of conformed copies of such opinions, certificates, letters and documents as the Representatives shall reasonably request. If any of the conditions specified in this Section 7 shall not have been fulfilled when and as provided in this Agreement, time being of the essence, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be reasonably satisfactory in form and substance to the Representatives' and Underwriters' counsel, this Agreement and all obligations of the Underwriters hereunder may be canceled by the Representatives at, or at any time prior to, the Closing Date or (with respect to the Option Shares) prior to the date upon which the Option Shares are to be purchased, as the case may be. Notice of such cancellation shall be given to the Company in writing or by telephone or telecopy confirmed in writing. Any such termination shall be without liability of the Company to the Underwriters (except as provided in Section 6 or Section 9 of this Agreement) and without liability of the Underwriters to the Company (except to the extent provided in Section 9 of this Agreement). 8. Conditions of the Obligations of the Company and the Selling Shareholders. The respective obligations of the Company and the Selling Shareholders to sell and deliver the Shares required to be delivered as and when specified in this Agreement shall be subject to the condition that, at the Closing Date or (with respect to the Option Shares) the date upon which the Option Shares are to be purchased by the Underwriters pursuant to this Agreement, no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. 9. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statute, law or regulation, at common law or otherwise, and the Company agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise provided below, settlement expenses and fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon, in whole or in part, (i) any breach of any representation, warranty, covenant or agreement of the Company in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement in the form originally filed or in any amendment thereto (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (iii) any untrue statement or alleged untrue 26 27 statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iv) any untrue statement or alleged untrue statement of a material fact contained in any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify or register the Shares under the securities or Blue Sky laws thereof or to obtain an exemption from such qualification or registration or filed with the Commission or any securities association, the Nasdaq National Market, or any securities exchange, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that (1) the indemnity agreements of the Company contained in this Section 9(a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically and expressly for use in the Registration Statement, any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreement contained in this Section 9(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares that are the subject thereof (or to the benefit of any person controlling such Underwriter) if the Company can demonstrate that at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented), unless the failure is the result of noncompliance by the Company with Section 4 of this Agreement. The indemnity agreements of the Company contained in this Section 9(a) and the representations and warranties of the Company contained in Section 1 of this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. This indemnity agreement shall be in addition to any liabilities which the Company may have pursuant to this Agreement or otherwise. (b) Each Selling Shareholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statute, law or regulation, at common law or otherwise, specifically including but not limited to losses, claims, damages or liabilities (or actions in respect thereof) related to negligence on the part of any Underwriter, and each Selling Shareholder, severally and not jointly, agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise provided below, settlement expenses and fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective 27 28 indemnified parties, in each case insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon, in whole or in part, (i) any breach of any representation, warranty, covenant or agreement of such Selling Shareholder in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement in the form originally filed or in any amendment thereto (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iv) any untrue statement or alleged untrue statement of a material fact contained in any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify or register the Shares under the securities or Blue Sky laws thereof or to obtain an exemption from such qualification or registration or filed with the Commission or any securities association, the Nasdaq National Market, or any securities exchange, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that (1) the indemnity agreements of the Selling Shareholders contained in this Section 9(b) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically and expressly for use in the Registration Statement, any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto, (2) the indemnity agreement contained in this Section 9(b) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares that are the subject thereof (or to the benefit of any person controlling such Underwriter) if the Selling Shareholder can demonstrate that at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented), unless the failure is the result of noncompliance by the Company with Section 4 of this Agreement and (3) the indemnity agreements of the Selling Shareholders contained in this Section 9(b) shall apply in the case of subparagraphs (ii), (iii) and (iv) of this Section 9(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or such Underwriter by such Selling Shareholder, directly or through such Selling Shareholder's representatives, specifically for use in the preparation thereof. The indemnity agreements of the Selling Shareholders contained in this Section 9(b) and the representations and warranties of the Selling Shareholders contained in Section 2 of this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for 28 29 the Shares. This indemnity agreement shall be in addition to any liabilities which the Selling Shareholders may have pursuant to this Agreement or otherwise. Notwithstanding anything to the contrary in this Section 9, no Selling Shareholder shall be required to make any payments in respect of any indemnity obligation arising under this Section 9(b) in excess of the net proceeds from the Firm Shares sold by that Selling Shareholder. (c) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement, each of its directors, each other Underwriter, each Selling Shareholder, and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or other federal or state statute, law or regulation or at common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, settlement expenses and fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any breach of any representation, warranty, covenant or agreement of the indemnifying Underwriter in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case under clauses (ii) and (iii) above, as the case may be, only if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such indemnifying Underwriter through the Representatives specifically and expressly for use in the Registration Statement, in any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto. The Company and the Selling Shareholders acknowledges and agrees that the matters described in Section 2(h) of this Agreement constitute the only information furnished in writing by or on behalf of the several Underwriters for inclusion in the Registration Statement, any Preliminary Prospectus or the Prospectus. The indemnity agreement of each Underwriter contained in this Section 9(c) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. This indemnity agreement shall be in addition to any liabilities which each Underwriter may have pursuant to this Agreement or otherwise. Notwithstanding anything to the contrary in this Section 9, no Underwriter shall be required to make any payments in respect of any claim arising under this Section 9(c) in excess of the underwriting discount applicable to the Shares purchased by that Underwriter. 29 30 (d) Each person or entity indemnified under the provisions of Sections 9(a), 9(b) and 9(c) above agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such Sections, it will, if a claim in respect thereunder is to be made against the indemnifying party or parties under this Section 9, give written notice (the "Notice") of such service or notification to the party or parties from whom indemnification may be sought hereunder within ten (10) calendar days after receipt by them of written notice of the commencement of any actions against them. No indemnification provided for in Sections 9(a) and 9(b) above shall be available to any person who fails to so give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related, but only to the extent such party was materially prejudiced by the failure to receive the Notice, and except as set forth in the preceding clause, the omission to so notify such indemnifying party or parties shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of Sections 9(a), 9(b) and 9(c). Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (the "Notice of Defense") to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses or rights available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then separate counsel for and selected by the indemnified party or parties shall be entitled to conduct, at the expense of the indemnifying parties, the defense of the indemnified parties to the extent determined by such counsel to be necessary to protect the interests of the indemnified party or parties, and (ii) provided, further, that the indemnifying party shall not be liable for the fees and expenses of more than one separate counsel, reasonably approved by the indemnifying party, for all of the indemnified parties, plus, if applicable, one local counsel in each jurisdiction. In addition, in any event, the indemnified party or parties shall be entitled to have counsel selected by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and, unless separate counsel is to be chosen by the indemnified party or parties as provided above, the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under Sections 9(a), 9(b) and 9(c) for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear and pay the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear and pay such other 30 31 expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (e) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 9 but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right to appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 9 provides for indemnification in such case, each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in Section 9(a), 9(b) and 9(c) above (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Shareholders and the Underwriters shall be deemed to be in the same respective proportions as the total proceeds from the offering of the Shares, net of the underwriting discounts, received by the Company and the Selling Shareholders and the total underwriting discount retained by the Underwriters bear to the aggregate public offering price of the Shares. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by a party and the party's relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contribution pursuant to this Section 9(e) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of the first paragraph of this Section 9(e) and to the considerations referred to in the third sentence of the first paragraph of this Section 9(e). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of the first paragraph of this Section 9(e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against any action or claim which is the subject of this Section 9(e). Notwithstanding the provisions of this Section 9(e), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by that Underwriter and no Selling Shareholder shall be required to contribute any amount in excess of the net proceeds from the Selling Shareholder Shares sold by such Selling Shareholder. For purposes of this Section 9(e), each person who controls an Underwriter within the meaning of the Securities Act shall have the same rights to contribution as such Underwriter, and each person who controls the Company within the meaning of the Securities Act, each officer of the Company who signed the Registration Statement and each director of the Company shall have the same rights to 31 32 contribution as the Company, subject in each case to the immediately preceding and immediately following sentences. No person guilty of fraudulent misrepresentation (within the meaning of Section 1l(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute in this Section 9(e) are several, and not joint, in proportion to their respective underwriting obligations and not joint. Each party or other entity entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in Section 9(d) above). This Section 9(e) shall not be operative as to any Underwriter to the extent that the Company is entitled to receive or has received indemnity under this Section 9. (f) The Company shall not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act is a party to such claim, action, suit or proceeding), which consent shall not be unreasonably withheld, unless such settlement, compromise or consent includes an unconditional release of each such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (g) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions of this Agreement, including, without limitation, the provisions of Sections 6(a)(ii), 6(b) and 6(c) and this Section 9 of this Agreement and that they are fully informed regarding all such provisions. They further acknowledge that the provisions of Sections 6(a)(ii), 6(b) and 6(c) and this Section 9 of this Agreement fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement, each Preliminary Prospectus and the Prospectus as required by the Securities Act, the Rules and Regulations, the Exchange Act and the rules and regulations of the Commission under the Exchange Act. The parties are advised that federal or state policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain provisions of Sections 6(a)(ii), 6(b) and 6(c) and this Section 9 of this Agreement and, to the extent permitted by law, the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under Sections 6(a)(ii), 6(b) or 6(c) or this Section 9 of this Agreement and further agree not to attempt to assert any such defense. 10. Substitution of Underwriters. If for any reason one or more of the Underwriters fails or refuses (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 7 or Section 11 of this Agreement) to purchase and pay for the number of Firm Shares agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to the Representatives and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by the Representatives of such notice to purchase, 32 33 or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon among the Representatives and such purchasing Underwriter or Underwriters and upon the terms set forth herein, all or any part of the Firm Shares that such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail to make such arrangements with respect to all such Shares, the number of Firm Shares that each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining Shares that the defaulting Underwriter or Underwriters agreed to purchase, provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the Shares that the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such Shares exceeds 10% of the total number of Firm Shares that all Underwriters agreed to purchase under this Agreement. If the total number of Firm Shares that the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the first 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to the Representatives for purchase of such Shares on the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the Closing Date determined as provided in Section 3(c) of this Agreement for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 3(c) in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company makes arrangements within the time periods provided in the first three sentences of the first paragraph of this Section 10 for the purchase of all the Firm Shares that the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter (except as provided in Section 6 or Section 9 of this Agreement) and without any liability on the part of any non-defaulting Underwriter to the Company (except to the extent provided in Section 9 of this Agreement). Nothing in this Section 10, and no action taken hereunder, shall relieve any defaulting Underwriter from liability, if any, to the Company, any Selling Shareholder or any non-defaulting Underwriter for damages occasioned by its default under this Agreement. The term "Underwriter" in this Agreement shall include any persons substituted for an Underwriter under this Section 10. 11. Effective Date of Agreement and Termination. (a) If the Registration Statement has not been declared effective prior to the date of this Agreement, this Agreement shall become effective at such time, after notification of the effectiveness of the Registration Statement has been released by the Commission, as the Representatives and the Company shall agree upon the public offering price and the purchase price of the Shares. If the public offering price and the purchase price of the Shares shall not have been determined prior to 5:00 p.m., New York time, on the fifth full business day after the Registration Statement has become effective, this Agreement shall thereupon terminate without liability on the part of the Company or the Selling Shareholders to the Underwriters (except as provided in Section 6 or Section 9 of this Agreement) or the Underwriters to the Company or the Selling Shareholders (except as set forth in Section 9 of this Agreement). By giving notice before the time this Agreement becomes effective, the Representatives may prevent this 33 34 Agreement from becoming effective without liability of any party to the other party, except that the Company shall remain obligated to pay costs and expenses to the extent provided in Section 6 and Section 9 of this Agreement. If the Registration Statement has been declared effective prior to the date of this Agreement, this Agreement shall become effective upon execution and delivery by the Representatives, the Company and the Attorneys. (b) This Agreement may be terminated by the Representatives in its absolute discretion by giving written notice to the Company at any time on or prior to the Closing Date or, with respect to the purchase of the Option Shares, on or prior to any later date on which the Option Shares are to be purchased, as the case may be, if prior to such time any of the following has occurred or, in the Representatives' reasonable opinion, is likely to occur: (i) after the respective dates as of which information is given in the Registration Statement and the Prospectus, any Consolidated Material Adverse Effect or development involving a prospective Consolidated Material Adverse Effect in or affecting particularly the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its direct and indirect subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, occurs which would, in the Representatives' reasonable judgment, make the offering or the delivery of the Shares impracticable or inadvisable; or (ii) if there shall have been the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, or any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions, if the effect of such outbreak, calamity, crisis or change in economic or political conditions on the financial markets of the United States would, in the Representatives' reasonable judgment, make the offering or delivery of the Shares impracticable or inadvisable; or (iii) if there shall have been suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market or over-the- counter market has been suspended, or minimum prices for trading have been fixed, or maximum ranges for prices for securities have been required, by either of such exchanges, by the NASD or by the Commission; or (iv) if there shall have been the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Representatives' reasonable judgment has or may have a Consolidated Material Adverse Effect; or (v) if there shall have been the declaration of a banking moratorium by federal, New York or California state authorities; or (vi) if there shall have been the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Representatives' reasonable judgment has a material adverse effect on the securities markets in the United States; or (vii) existing international monetary conditions shall have undergone a material adverse change which, in your reasonable judgment, makes the offering or delivery of the Shares impracticable or inadvisable. If this Agreement shall be terminated pursuant to this Section 11, there shall be no liability of the Company or the Selling Shareholders to the Underwriters (except pursuant to Section 6 and Section 9 of this Agreement) and no liability of the Underwriters to the Company or the Selling Shareholders (except to the extent provided in Section 9 of this Agreement). 12. Notices. Except as otherwise provided herein, all communications hereunder shall be in writing and, if to the Underwriters, shall be mailed, telecopied or delivered to Wedbush Morgan 34 35 Securities, Inc., 1000 Wilshire Blvd., Los Angeles, California 90017 (telecopier: (213) 688-6642), with a copy to Akin, Gump, Strauss, Hauer & Feld, L.L.P., 2029 Century Park East, 24th Floor, Los Angeles, California 90067 (telecopier: (310) 229-1001), Attention: C.N. Franklin Reddick III, Esq.; and if to the Company, shall be mailed, telecopied or delivered to it at 2955 Red Hill Avenue, Costa Mesa, CA 92626 (telecopier: (714) 668-7026) Attention: President, with a copy to Rutan & Tucker LLP, 611 Anton Blvd., Fourteenth Floor, Costa Mesa, California 92626 Attention: Thomas J. Crane, Esq. (telecopier: (714) 546-9035). All notices given by telecopy shall be promptly confirmed by letter. 13. Persons Entitled to the Benefit of this Agreement. This Agreement shall inure to the benefit of the Company, the Selling Shareholders and the several Underwriters and, with respect to the provisions of Section 6 and Section 9 of this Agreement, the several parties (in addition to the Company, the Selling Shareholders and the several Underwriters) indemnified under the provisions of Section 6 and Section 9, and their respective personal Representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision contained herein. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Shares from the several Underwriters. 14. General. Notwithstanding any provision of this Agreement to the contrary, the reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties, covenants and agreements in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its respective directors or officers, and (c) delivery and payment for the Shares under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of Sections 4(f) through 4(q), inclusive, of this Agreement shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument, and may be delivered by facsimile transmission. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE STATE OF CALIFORNIA. 15. Authority of the Representatives. In connection with this Agreement, the Representatives will act for and on behalf of the several Underwriters, and any action taken under this Agreement by the Representatives, as Representatives of the several Underwriters, will be binding on all the Underwriters. 16. Jurisdiction. The parties agree that any litigation arising out of or in any way related to this Agreement will be adjudicated in a state or district court sitting in the City of Los Angeles, California, and the parties hereby consent to the jurisdiction of such court. The parties hereby 35 36 waive any right to object to such jurisdiction, including, without limitation, any objection based on a claim of improper venue or forum non conveniens. If the foregoing correctly sets forth your understanding, please so indicate by signing in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company and the several Underwriters. Very truly yours, THE KEITH COMPANIES, INC. By: ------------------------------------------ Aram H. Keith Chief Executive Officer THE SELLING SHAREHOLDERS. By: ------------------------------------------ Attorney-in-Fact for the Selling Shareholders named in Schedule II hereto The foregoing Agreement is hereby confirmed and accepted as of the date first above written. On their own behalf and on behalf of each of the several Underwriters named in Schedule I hereto. WEDBUSH MORGAN SECURITIES, INC. JANNEY MONTGOMERY SCOTT LLC As Representative of the Several Underwriters By: Wedbush Morgan Securities, Inc. By: ------------------------------------------ Michael G. Gardner Managing Director On its behalf and on behalf of each of the several Underwriters named in Schedule I hereto 36 37 SCHEDULE I UNDERWRITERS
Number of Firm Shares Underwriters to be Purchased - ---------------------------------------------------- ----------------------- Wedbush Morgan Securities, Inc................... ----------------------- Janney Montgomery Scott LLC...................... ----------------------- [E*OFFERING Corp]................................ ----------------------- [__]............................................. ----------------------- [__]............................................. ----------------------- Total -----------------------
38 SCHEDULE I SELLING SHAREHOLDERS
Maximum Number of Selling Number of Firm Shares Shareholder Option Shares Shareholder To be Sold which may be Sold - -------------------------------- --------------------- ------------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- -------------------- Total ---------- ----------
39 ANNEX A MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR THE COMPANY (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of California. (ii) The Company has the corporate power to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except for jurisdictions where the failure so to qualify would not have a Consolidated Material Adverse Effect; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the date stated therein and conforms as of the date stated therein as to legal matters in all material respects to the description thereof set forth in the Prospectus under the caption "Description of Capital Stock"; the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable, and have not been issued in violation of any preemptive right or other rights to subscribe for or purchase securities contained in the Company's charter documents or any Material Agreement; and except as reflected on Exhibit A to the Underwriting Agreement, to the knowledge of such counsel, there are no outstanding options, warrants or other rights to acquire from the Company any equity securities of the Company; (v) The Shares have been duly authorized and, when duly countersigned by the Company's transfer agent and registrar, upon issuance and delivery against payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and nonassessable, and will not have been issued in violation of any preemptive right or other rights to subscribe for or purchase securities contained in the Company's charter documents or any Material Agreement and will have been duly approved for listing on the Nasdaq National Market; (vi) The Company has corporate power to enter into the Underwriting Agreement and to sell, issue and deliver the Shares to the Underwriters. (vii) The Underwriting Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming its due authorization, execution and delivery by the Representatives is the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except insofar as the indemnification and contribution provisions of the Agreement may be limited by public policy concerns and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or by general equitable principles; 40 (viii) The Company's counsel has been informed by the staff of the Securities and Exchange Commission that the Registration Statement has become effective under the Securities Act and no stop order suspending the effectiveness of the Registration Statement has been issued and to the knowledge of such counsel no proceedings for that purpose have been instituted or are pending or overtly threatened under the Securities Act; (ix) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements, related notes and schedules, and financial and statistical data derived therefrom or included therein, as to which such counsel need express no opinion), as of the effective date of the Registration Statement, appeared on their face to be appropriately responsive to the Securities Act and the Rules and Regulations with respect to registration statements on Form S-1; (x) The forms of certificates evidencing the Common Stock incorporated by reference as an exhibit to the Registration Statement are in due and proper form under California law; (xi) The information in the Prospectus under the captions "Description of Capital Stock" and "Shares Eligible for Future Sale," to the extent such information constitutes matters of law or legal conclusions, has been reviewed by such counsel and is correct in all material respects; (xii) The description in the Registration Statement and the Prospectus under the captions "Management," "Certain Transactions," "Description of Capital Stock," "Shares Eligible for Future Sale" and "Risk Factors" and any statements referring to agreements, contracts, licenses, leases or other documents in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, are accurate in all material respects and fairly present in all material respects the information required to be presented by the Securities Act and the Rules and Regulations; (xiii) To the knowledge of such counsel, there are no agreements, contracts, licenses, leases or documents of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed or incorporated by reference as an exhibit to the Registration Statement that are not described or referred to therein or filed or incorporated by reference as required; (xiv) The execution and delivery of the Underwriting Agreement do not, and the Company's performance of the Underwriting Agreement and the consummation of the transactions contemplated thereby will not, conflict with, violate or result in the material breach of or a material default (including without limitation with the giving of notice, the passage of time or otherwise) under any of the terms and provisions of the Company's Articles of Incorporation or Bylaws or any agreement or instrument of the Company or any Subsidiary that is filed as an exhibit to the Registration Statement, or, to the knowledge of such counsel, any law, ordinance, rule or regulation or order, writ, injunction, judgment or decree of any governmental agency or body or of any court or arbitration tribunal having jurisdiction over the Company or any Subsidiary or over any of its or their properties; provided, however, that no opinion need be rendered concerning state securities or blue sky laws and regulations; 41 (xv) No authorization, approval or consent or other order of any governmental authority or agency is necessary in connection with the consummation of the transactions contemplated by the Underwriting Agreement, except such as have been obtained and are in full force and effect under the Securities Act or as may be required under state securities or blue sky laws in connection with the purchase and the distribution of the Shares by the Underwriters and the clearance of such offering with the NASD; (xvi) To the knowledge of such counsel, there are no legal or governmental proceedings pending or overtly threatened against the Company or any Subsidiary of a character which are required to be disclosed in the Registration Statement or the Prospectus by the Securities Act or the applicable Rules and Regulations; and (xvii) To the knowledge of such counsel, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have rights which have not been waived or complied with respect to the registration of any securities of the Company because of the filing of the Registration Statement by the Company or the offering contemplated by the Underwriting Agreement. In addition, such counsel shall state that such counsel has participated in conferences with officers and other Representatives of the Company, the independent public accountants of the Company, the Representatives and counsel to the Underwriters, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although they have not independently verified the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel that caused them to believe that, at the time the Registration Statement became effective, the Registration Statement (except as to financial statements, related notes and schedules, and financial and statistical data derived therefrom or contained therein, as to which such counsel need express no opinion) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the date Opinion is given, the Prospectus (except as to financial statements, related notes and schedules, and financial and statistical data derived therefrom or contained therein, as to which such counsel need express no opinion) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 42 ANNEX B FORM OF OPINION FOR EACH SUBSIDIARY OF THE KEITH COMPANIES, INC. 1. [Subsidiary] is a corporation duly organized, validly existing and in good standing under the laws of the State of _______________. 2. [Subsidiary] has the corporate power to own, lease and operate its properties and to conduct its business as presently conducted or as described in the Prospectus. 3. The issued and outstanding shares of [Subsidiary] have been duly authorized and validly issued, are fully paid and nonassessable and have not been issued in violation of any preemptive right or other rights to subscribe for or purchase securities contained in its charter documents or any Material Agreement. Based solely upon our review of the stock ledger for the subsidiary, The Keith Companies, Inc. is the record holder of all of the issued and outstanding equity securities of Subsidiary. To such counsel's knowledge there are no outstanding options, warrants or other rights to acquire from Subsidiary any equity securities. 43 Exhibit A List of Subsidiaries
Subsidiary Jurisdiction - ---------- ------------ Crosby, Mead, Benton & Associates California Hook & Associates Engineering, Inc. Arizona
44 Exhibit B List of Equity Interests EX-5.1 3 a70932ex5-1.txt EXHIBIT 5.1 1 EXHIBIT 5.1 April 2, 2001 The Keith Companies, Inc. 2955 Red Hill Avenue Costa Mesa, California 92626 Gentlemen: At your request, we have examined the form of Registration Statement on Form S-1 (the "Registration Statement") which has been filed by The Keith Companies, Inc. (the "Company") with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "Act"), for the purpose of registering 2,300,000 shares of Common Stock of the Company (including 250,000 shares registered on behalf of selling shareholders and 300,000 shares which may be sold by the Company and the selling shareholders pursuant to the exercise of the underwriters' over-allotment option). We have examined the Company's charter documents and the proceedings relating to the issuance of your presently outstanding shares of Common Stock and are also familiar with proceedings taken and proposed to be taken in connection with the issuance and sale of securities in the manner set forth in the Registration Statement, as amended. Subject to the completion of the proceedings contemplated in connection with the foregoing matters, we are of the opinion that: (i) all of the issued and outstanding securities of the Company have been duly and validly authorized and issued, and are fully paid and nonassessable; and (ii) all of the securities included in the Registration Statement for sale by the Company have been duly authorized and, when issued and sold in the manner set forth in the Registration Statement will, upon such issuance and sale, be validly and legally issued, fully paid and nonassessable. This opinion letter is rendered as of the date first written above and we disclaim any obligation to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinion expressed herein. Our opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company or the securities included in the registration statement. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and to the use of our name under the caption "Legal Matters" in the Registration Statement. Respectfully submitted, /s/ RUTAN & TUCKER, LLP EX-23.1 4 a70932ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS The Board of Directors The Keith Companies, Inc.: We consent to the use of our report included herein, and to the references to our firm under the headings "Selected Consolidated Financial Data" and "Experts" in the prospectus. /s/ KPMG LLP --------------------- KPMG LLP Orange County, California April 2, 2001 -----END PRIVACY-ENHANCED MESSAGE-----