-----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, JJRPxzq0E5jDPwtxZCur+rBTipxylwhJLN1lqm3DA/dow3NgTy4BZmxDZiiuTrAS hIizmJOge/vKjJLjoE0p3Q== 0001095811-01-504146.txt : 20010815 0001095811-01-504146.hdr.sgml : 20010815 ACCESSION NUMBER: 0001095811-01-504146 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KEITH COMPANIES INC CENTRAL INDEX KEY: 0001080922 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING SERVICES [8711] IRS NUMBER: 330203193 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-26561 FILM NUMBER: 1707963 BUSINESS ADDRESS: STREET 1: 2955 RED HILL AVENUE CITY: COSTA MESA STATE: CA ZIP: 92626 BUSINESS PHONE: 7146687001 MAIL ADDRESS: STREET 1: 2955 RED HILL AVENUE CITY: COSTA MESA STATE: CA ZIP: 92626 10-Q 1 a74782e10-q.txt FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2001 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 Commission File Number 0-26561 THE KEITH COMPANIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 33-0203193 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2955 REDHILL AVENUE, COSTA MESA, CALIFORNIA 92626 - -------------------------------------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (714) 540-0800 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of outstanding shares of the registrant's common stock as of August 1, 2001 was 7,321,847. 2 THE KEITH COMPANIES, INC. AND SUBSIDIARIES INDEX PAGE NO. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets 2 Consolidated Statements of Income 3 Consolidated Statements of Cash Flows 4 Notes to the Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities and Use of Proceeds 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 1 3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements THE KEITH COMPANIES, INC. AND SUBSIDIARIES Consolidated Balance Sheets
June 30, December 31, 2001 2000 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents ..................................... $15,068,000 $ 1,043,000 Securities held-to-maturity ................................... 11,086,000 -- Contracts and trade receivables, net of allowance for doubtful accounts of $1,192,000 and $1,166,000 at June 30, 2001 and December 31, 2000, respectively ........... 14,113,000 12,089,000 Costs and estimated earnings in excess of billings ............ 8,195,000 6,334,000 Prepaid expenses and other current assets ..................... 790,000 766,000 ----------- ----------- Total current assets ..................................... 49,252,000 20,232,000 Equipment and leasehold improvements, net .......................... 5,192,000 4,713,000 Goodwill, net of accumulated amortization of $544,000 and $329,000 at June 30, 2001 and December 31, 2000, respectively .... 10,636,000 8,128,000 Other assets ....................................................... 251,000 239,000 ----------- ----------- Total assets ............................................. $65,331,000 $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 621,000 3,359,000 Trade accounts payable ........................................ 1,568,000 1,689,000 Accrued employee compensation ................................. 2,920,000 2,467,000 Current portion of deferred tax liabilities ................... 1,541,000 1,541,000 Other accrued liabilities ..................................... 2,225,000 807,000 Billings in excess of costs and estimated earnings ............ 1,552,000 1,001,000 ----------- ----------- Total current liabilities ............................... 10,427,000 12,889,000 Long-term debt and capital lease obligations, less current portion . 1,569,000 361,000 Issuable common stock .............................................. 1,700,000 1,000,000 Deferred tax liabilities ........................................... 719,000 719,000 Accrued rent ....................................................... 143,000 104,000 ----------- ----------- Total liabilities ....................................... 14,558,000 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 at June 30, 2001 and December 31, 2000; issued and outstanding 7,318,041 and 5,115,882 shares at June 30, 2001 and December 31, 2000, respectively ......................... 7,000 5,000 Additional paid-in capital .................................... 42,024,000 12,453,000 Retained earnings ............................................. 8,742,000 5,781,000 ----------- ----------- Total shareholders' equity .............................. 50,773,000 18,239,000 ----------- ----------- Total liabilities and shareholders' equity .............. $65,331,000 $33,312,000 =========== ===========
See accompanying notes to the consolidated financial statements. 2 4 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
For the Three Months Ended For the Six Months Ended June 30, June 30, ------------------------------ ------------------------------ 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Gross revenue .................................. $ 19,239,000 $ 13,567,000 $ 37,941,000 $ 26,674,000 Subcontractor costs ............................ 1,522,000 886,000 3,602,000 1,574,000 ------------ ------------ ------------ ------------ Net revenue ............................ 17,717,000 12,681,000 34,339,000 25,100,000 Costs of revenue .............................. 11,356,000 8,307,000 22,253,000 16,689,000 ------------ ------------ ------------ ------------ Gross profit ........................... 6,361,000 4,374,000 12,086,000 8,411,000 Selling, general and administrative expenses ... 3,777,000 2,486,000 7,061,000 5,136,000 ------------ ------------ ------------ ------------ Income from operations ................. 2,584,000 1,888,000 5,025,000 3,275,000 Interest income ................................ (151,000) (6,000) (151,000) (12,000) Interest expense ............................... 68,000 88,000 210,000 195,000 Other expenses, net ............................ 22,000 28,000 31,000 44,000 ------------ ------------ ------------ ------------ Income before provision for income taxes 2,645,000 1,778,000 4,935,000 3,048,000 Provision for income taxes ..................... 1,058,000 711,000 1,974,000 1,219,000 ------------ ------------ ------------ ------------ Net income ............................. 1,587,000 1,067,000 2,961,000 1,829,000 ============ ============ ============ ============ Earnings per share data: Basic .................................. $ 0.24 $ 0.22 $ 0.50 $ 0.37 ============ ============ ============ ============ Diluted ................................ $ 0.23 $ 0.20 $ 0.46 $ 0.35 ============ ============ ============ ============ Weighted average number of shares outstanding: Basic .................................. 6,520,611 4,956,942 5,885,776 4,958,025 ============ ============ ============ ============ Diluted ................................ 7,037,829 5,238,537 6,442,380 5,254,864 ============ ============ ============ ============
See accompanying notes to the consolidated financial statements. 3 5 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
For the Six Months Ended June 30, ----------------------------- 2001 2000 ------------ ----------- Cash flows from operating activities: Net income ................................................ $ 2,961,000 $ 1,829,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ......................... 1,111,000 715,000 Loss on sale of equipment ............................. 17,000 25,000 Tax benefit from exercise of stock options ............ 548,000 -- Changes in operating assets and liabilities, net of effects from acquisition: Contracts and trade receivables, net ................. 123,000 (1,738,000) Costs and estimated earnings in excess of billings ... (1,749,000) (646,000) Prepaid expenses and other assets .................... 132,000 16,000 Trade accounts payable and accrued liabilities ....... 826,000 1,208,000 Billings in excess of costs and estimated earnings ... 354,000 195,000 ------------ ----------- Net cash provided by operating activities .......... 4,323,000 1,604,000 ------------ ----------- Cash flows from investing activities: Net cash expended for acquisition ..................... (1,530,000) -- Additions to equipment and leasehold improvements, net (873,000) (480,000) Purchase of securities held-to-maturity ............... (11,086,000) -- Proceeds from sale of equipment ....................... 19,000 -- ------------ ----------- Net cash used in investing activities .............. (13,470,000) (480,000) ------------ ----------- Cash flows from financing activities: Payments on line of credit, net ........................ (2,294,000) (1,125,000) Principal payments on long-term debt and capital lease obligations, including current portion ......... (3,061,000) (718,000) Repurchase of common stock ............................. -- (136,000) Net proceeds from secondary offering ................... 27,979,000 -- Proceeds from exercise of stock options ................ 548,000 22,000 ------------ ----------- Net cash provided by (used in) financing activities 23,172,000 (1,957,000) ------------ ----------- Net increase (decrease) in cash and cash equivalents 14,025,000 (833,000) Cash and cash equivalents, beginning of period ................ 1,043,000 1,569,000 ------------ ----------- Cash and cash equivalents, end of period ...................... $ 15,068,000 $ 736,000 ============ ===========
See supplemental cash flow information at Note 8. See accompanying notes to the consolidated financial statements. 4 6 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION The accompanying consolidated balance sheet as of June 30, 2001, the consolidated statements of income for the three and six months ended June 30, 2001 and 2000, and the consolidated statements of cash flows for the six months ended June 30, 2001 and 2000, are unaudited and in the opinion of management include all adjustments necessary to present fairly the information set forth therein, which consist solely of normal recurring adjustments. All significant intercompany transactions have been eliminated and certain reclassifications have been made to prior periods' consolidated financial statements to conform to the current period presentation. The results of operations for these interim periods are not necessarily indicative of results for the full year. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K/A of The Keith Companies, Inc. (together with its subsidiaries, the "Company") for the year ended December 31, 2000 as certain disclosures which would substantially duplicate those contained in such audited financial statements have been omitted from this report. 2. PER SHARE DATA Basic earnings per share ("EPS") is computed by dividing net income during the period by the weighted average number of common shares outstanding during each period. Diluted EPS is computed by dividing net income 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:
For the Three Months For the Six Months Ended June 30, Ended June 30, --------------------- --------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Weighted average shares used for the basic EPS computation ..................................... 6,520,611 4,956,942 5,885,776 4,958,025 Incremental shares from the assumed exercise of dilutive stock options and stock warrants, issuable shares and contingently issuable shares 517,218 281,595 556,604 296,839 --------- --------- --------- --------- Weighted average shares used for the diluted EPS computation ..................................... 7,037,829 5,238,537 6,442,380 5,254,864 ========= ========= ========= =========
In conjunction with certain acquisitions, the Company agreed to pay consideration consisting of shares of its common stock. As a result, the Company estimated and included 164,458 and 157,170 weighted average issuable and contingently issuable shares in its weighted average shares used for the diluted EPS computation for the three and six months ended June 30, 2001, respectively, and 148,000 weighted average issuable and contingently issuable shares for the three and six months ended June 30, 2000. Anti-dilutive weighted potential common shares excluded from the above calculations were 10,033 and 5,459 for the three and six months ended June 30, 2001, respectively, and 663,736 and 633,461 for the three and six months ended June 30, 2000, respectively. 3. SECONDARY OFFERING In May 2001, the Company completed a secondary offering of an aggregate of 2.3 million shares of common stock (including an over-allotment of 300,000 shares), of which 1.9 million shares were sold by the Company and 400,000 shares were sold by selling shareholders. The public offering price was $16.00 per share which resulted in proceeds to the Company, net of underwriting fees and offering expenses, of approximately $28 million. 5 7 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The Company used a portion of the net proceeds from the secondary offering to repay its line of credit balance and for general corporate purposes, including working capital, and may also use a portion of the net proceeds to acquire other businesses. The remaining balance of the net proceeds has been invested in highly liquid investment grade short-term securities. 4. SECURITIES HELD-TO-MATURITY The Company accounts for its securities held-to-maturity ("Securities") under the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115"). Under SFAS No. 115, the Company is required to classify its Securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the intent and ability to hold until maturity. All other securities not included in trading or held-to-maturity categories are classified as available-for-sale. The Company has the ability and intent to hold all of its Securities until maturity and therefore, has classified all of its Securities as held-to-maturity. Accordingly, the Securities are stated at amortized cost. 5. ACQUISITIONS On January 31, 2001, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Hook & Associates Engineering, Inc. ("Hook") for an estimated purchase price of $4,430,000. The purchase price consisted of $1,530,000 in cash, $1,200,000 of issuable common stock of the Company, a subordinated promissory note in the original amount of $1,300,000 and an estimated $400,000 to be paid in cash related to an income tax reimbursement to the seller. The common stock of the Company is to be issued in two installments; 34,188 shares were issued in February 2001 with a value of $500,000, with the remaining $700,000 to be issued in 2002. The issuance of the $700,000 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 value 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. This acquisition was accounted for using the purchase method of accounting. Accordingly, the Company recorded goodwill of $2,716,000, which represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed. Such amount is being amortized over a period of 25 years. See "Effect of Recent Accounting Pronouncements" for discussion of goodwill amortization. The following unaudited pro forma data presents information as if the acquisition of Hook had occurred on both January 1, 2000 and January 1, 2001. The pro forma data is provided for information 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 Hook and the Company comprised a single entity during the periods presented, nor is it necessarily indicative of future results of operations of the combined entities.
PRO FORMA PRO FORMA FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------------- ------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Net revenue ............ $17,717,000 $14,266,000 $34,998,000 $28,215,000 Net income ............. $ 1,587,000 $ 1,331,000 $ 2,988,000 $ 2,155,000 Basic earnings per share $ 0.24 $ 0.22 $ 0.51 $ 0.39
6. INDEBTEDNESS In September 1999, the Company entered into a line of credit agreement with a bank, which consists of a working capital component with a maximum outstanding principal balance of $6.0 million, maturing on September 3, 2001. At June 30, 2001, there were no outstanding borrowings under the working capital component of the line of credit. 6 8 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 7. 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, the Company has grouped its operations into two primary reportable segments; Real Estate Development, Public Works/Infrastructure and Communications ("REPWIC") and Industrial/Energy ("IE"). The REPWIC segment includes engineering and consulting services for the development of both private projects, such as 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 communications. The IE segment 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 following tables set forth certain information regarding the Company's operating segments for the three and six months ended June 30, 2001 and 2000:
FOR THE THREE MONTHS ENDED JUNE 30, 2001 -------------------------------------------------------- CORPORATE REPWIC IE COSTS CONSOLIDATED ----------- ---------- ----------- ------------ Net revenue ................. $16,752,000 $ 965,000 $ -- $17,717,000 Income (loss) from operations $ 4,248,000 $ (103,000) $(1,561,000) $ 2,584,000 Identifiable assets ......... $63,335,000 $ 1,996,000 $ -- $65,331,000
FOR THE THREE MONTHS ENDED JUNE 30, 2000 ------------------------------------------------------ CORPORATE REPWIC IE COSTS CONSOLIDATED ----------- ---------- --------- ------------ Net revenue ................. $11,585,000 $1,096,000 $ -- $12,681,000 Income (loss) from operations $ 2,945,000 $ 132,000 $(1,189,000) $ 1,888,000 Identifiable assets ......... $23,714,000 $1,285,000 -- $24,999,000
FOR THE SIX MONTHS ENDED JUNE 30, 2001 ------------------------------------------------------ CORPORATE REPWIC IE COSTS CONSOLIDATED ----------- ---------- ----------- ------------ Net revenue ................. $32,147,000 $2,192,000 $ -- $34,339,000 Income (loss) from operations $ 7,976,000 $ 22,000 $(2,973,000) $ 5,025,000
FOR THE SIX MONTHS ENDED JUNE 30, 2000 ------------------------------------------------------ CORPORATE REPWIC IE COSTS CONSOLIDATED ----------- ---------- ----------- ------------ Net revenue ................. $22,866,000 $2,234,000 $ -- $25,100,000 Income (loss) from operations $ 5,322,000 $ 343,000 $(2,390,000) $ 3,275,000
7 9 THE KEITH COMPANIES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 8. SUPPLEMENTAL CASH FLOW INFORMATION
FOR THE SIX MONTHS ENDED JUNE 30, ------------------- 2001 2000 -------- -------- Supplemental disclosure of cash flow information: Cash paid for interest .......................... $215,000 $234,000 ======== ======== Cash paid for income taxes ...................... $456,000 $455,000 ======== ======== Noncash financing and investing activities: Purchase price adjustment to goodwill and trade accounts payable and accrued liabilities ...... $ 7,000 $ -- ======== ======== Insurance financing ............................. $ -- $ 63,000 ======== ======== Accrued deferred offering costs ................. $285,000 $ -- ======== ======== Transfer of deferred offering costs to additional paid in capital ............................... $285,000 $ -- ======== ======== Issuable common stock issued .................... $500,000 $ -- ======== ======== Transfer of leasehold improvements to prepaid expenses and other assets ..................... $159,000 $ -- ======== ========
The acquisition of Hook on January 31, 2001 resulted in the following increases: Contracts and trade receivables .............................. $(2,147,000) Costs and estimated earnings in excess of billings ........... (112,000) Other current assets ......................................... (12,000) Equipment and leasehold improvements ......................... (696,000) Goodwill ..................................................... (2,716,000) Other assets ................................................. (12,000) Line of credit ............................................... 269,000 Long term debt, including current portion .................... 1,530,000 Accounts payable, accrued expenses and other liabilities ..... 968,000 Billings in excess of costs and estimated earnings ........... 198,000 Issuable common stock ........................................ 1,200,000 ----------- Net cash expended for acquisition ....................... $(1,530,000) =========== 8 10 ITEM 2. 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 the Company and the related notes included elsewhere in this Form 10-Q and the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2000 filed by the Company. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under "Risk Factors" and elsewhere in the Annual Report on Form 10-K/A filed by the Company. In this Management's Discussion and Analysis of Financial Condition and Results of Operations section, references to "TKCI", "we", "our" and "us" mean the Company. 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 material contracts. Most of our time and material contracts have not-to-exceed provisions. Revenue is recognized on the percentage of completion method of accounting based on the proportion of actual direct contract costs incurred to total estimated direct contract costs. We believe that costs incurred are the best available measure of progress towards completion on the contracts. In the course of providing services, we sometimes subcontract for various services. These costs are included in billings to clients and, in accordance with industry practice, are included in our gross revenue. Because subcontractor services can change significantly from project to project, changes in gross revenue may not be indicative of business trends. Accordingly, we also report net revenue, which is gross revenue less subcontractor costs. Our revenue is generated from a large number of relatively small contracts. A substantial portion of our net revenue is derived from services rendered in connection with commercial and residential real estate development projects. The real estate market has historically experienced pronounced business cycles. Our consolidated results of operations can be adversely impacted by downturns in the real estate market. Based upon the number of building permits issued, the last peak of the business cycle in the southern California real estate market was in 1989 and the last trough was in 1996. A majority of our net revenue for the periods presented, was derived from services rendered in southern California. Consequently, adverse economic conditions affecting the southern California economy could also have an adverse effect on our consolidated results of operations. We anticipate that as we consummate acquisitions in the future, the concentration of revenue from both real estate development and in southern California may decline. Costs of revenue include labor, non-reimbursable subcontract costs, materials and various direct and indirect overhead costs including rent, utilities and depreciation. Selling, general, and administrative expenses consist primarily of corporate costs related to finance and accounting, information technology, business development and marketing, contract proposal, executive salaries, amortization of goodwill, provisions for doubtful accounts and other indirect overhead costs. 9 11 RESULTS OF OPERATIONS The following table sets forth unaudited historical consolidated operating results for each of the periods presented as a percentage of net revenue:
FOR THE THREE FOR THE SIX MONTHS ENDED MONTHS ENDED JUNE 30, JUNE 30, ----------------- ----------------- 2001 2000 2001 2000 ----- ----- ----- ----- Gross revenue ................................ 108.6% 107.0% 110.5% 106.3% Subcontractor costs .......................... 8.6% 7.0% 10.5% 6.3% ----- ----- ----- ----- Net revenue ............................. 100.0% 100.0% 100.0% 100.0% Costs of revenue ............................. 64.1% 65.5% 64.8% 66.5% ----- ----- ----- ----- Gross profit ............................ 35.9% 34.5% 35.2% 33.5% Selling, general and administrative expenses . 21.3% 19.6% 20.6% 20.5% ----- ----- ----- ----- Income from operations .................. 14.6% 14.9% 14.6% 13.0% Interest (income) ............................ (0.9%) 0.0% (0.4%) 0.0% Interest expense ............................. 0.4% 0.7% 0.6% 0.8% Other expense, net ........................... 0.2% 0.2% 0.1% 0.1% ----- ----- ----- ----- Income before provision for income taxes 14.9% 14.0% 14.3% 12.1% Provision for income taxes ................... 6.0% 5.6% 5.7% 4.8% ----- ----- ----- ----- Net income ............................. 8.9% 8.4% 8.6% 7.3% ===== ===== ===== =====
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 Net Revenue. Net revenue for the three months ended June 30, 2001 increased $5.0 million, or 40% to $17.7 million compared to $12.7 million for the three months ended June 30, 2000. Net revenue for the six months ended June 30, 2001 increased $9.2 million, or 37% to $34.3 million compared to $25.1 million for the six months ended June 30, 2000. Net revenue increased by $3.6 million and $6.4 million for the three and six months ended June 30, 2001, respectively, as a result of the acquisitions of Crosby Mead Benton & Associates in October 2000 and Hook & Associates Engineering, Inc. ("Hook") in January 2001. Excluding the revenue from these acquisitions, net revenue grew $1.4 million or 11%, and $2.9 million or 11% for the three and six months ended June 30, 2001, respectively, compared to the three and six months ended June 30, 2000. The net revenue growth for both periods is primarily attributable to continued growth in the Company's surveying and civil engineering services resulting largely from the strong demand for real estate in California and Nevada, as well as improved project management. Subcontractor costs, as a percentage of net revenue, increased to 8.6% and 10.5% for the three and six months ended June 30, 2001, respectively, compared to 7.0% and 6.3% for the three and six months ended June 30, 2000. The percentage increase in subcontractor costs for the three and six months ended June 30, 2001, resulted primarily from a significant increase in subcontract services related to a large contract in our industrial/energy segment and an increase in subcontractor services for contracts in our civil engineering services sector. Gross Profit. Gross profit for the three months ended June 30, 2001 increased $2.0 million, or 45% to $6.4 million compared to $4.4 million for the three months ended June 30, 2000. Gross profit for the six months ended June 30, 2001 increased $3.7 million, or 44% to $12.1 million compared to $8.4 million for the six months ended June 30, 2000. As a percentage of net revenue, gross profit increased to 35.9% and 35.2% for the three and six months ended June 30, 2001, respectively, compared to 34.5% and 33.5% for the three and six months ended June 30, 2000, respectively. The gross profit percentage for the three and six months ended June 30, 2001 was positively impacted as a result of improved project management and continued focus on contracts with higher profit margins. Such improvement in gross profit percentage was partially offset by lower margins related to one of the Hook offices, as well as lower revenue in the industrial/energy segment services involving automation and robotics design. The gross profit percentage for the three and six months ended June 30, 2000 was negatively impacted by lower margins on several large projects. Excluding the effect of lower margins resulting from one of the Hook offices and lower margins from several large projects during 2000, gross profit as a percentage of net revenue increased to 37.1% and 36.2% for the quarter and six months ended June 30, 2001 as compared to 35.3% and 35.4% for the corresponding prior year period. Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended June 30, 2001 increased $1.3 million, or 52% to $3.8 million compared to $2.5 million for the three months ended June 30, 2000. Selling, general and administrative expenses for the six months ended June 30, 2001 increased $1.9 million, or 38% to $7.1 10 12 million compared to $5.1 million for the six months ended June 30, 2000. The increases for each period resulted primarily from the acquisitions of Crosby Mead Benton & Associates and Hook & Associates Engineering, Inc., and the related amortization of goodwill. As a percentage of net revenue, selling, general and administrative expenses increased to 21.3% and 20.6% for the three and six months ended June 30, 2001, respectively, from 19.6% and 20.5% for the three and six months ended June 30, 2000, respectively. The percentage increases were due principally to an increase in administrative costs as a result of additional contract proposal time. Interest Income. Interest income for the three and six months ended June 30, 2001 was $151,000 compared to $6,000 and $12,000 for the three and six months ended June 30, 2000, respectively. Such increases are due to interest earned on securities purchased with a portion of the net proceeds generated from our secondary offering which was completed in May 2001. Interest Expense. Interest expense for the three months ended June 30, 2001 decreased $20,000, or 23% to $68,000 compared to $88,000 for the three months ended June 30, 2000. The decrease in interest expense resulted principally from the repayment of our line of credit in May 2001 with a portion of the net proceeds from our secondary offering and the repayment of a $2.4 million acquisition note in April 2001. Interest expense for the six months ended June 30, 2001 increased $15,000, or 8% to $210,000 compared to $195,000 for the six months ended June 30, 2000. The increase in interest expense for the six months ended June 30, 2001 was due to the issuance of a $1.3 million note in connection with the acquisition of Hook & Associates Engineering, Inc., offset by the repayment of our line of credit and a $2.4 million acquisition note. Income Taxes. For the three months ended June 30, 2001, the provision for income taxes was $1.1 million compared to $711,000 for the three months ended June 30, 2000. The provision for income taxes for the six months ended June 30, 2001 was $2.0 million compared to $1.2 million for the six months ended June 30, 2000. The increase in income tax expense was due to higher taxable income for the quarter and six months ended June 30, 2001 as compared to the corresponding prior year period. Our effective income tax rate has remained at approximately 40%, consistent with our effective tax rate during 2000. 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 June 30, 2001, was $15.1 million compared to $1.0 million as of December 31, 2000. Working capital as of June 30, 2001 was $38.8 million compared to $7.3 million as of December 31, 2000, an increase of $31.5 million, resulting primarily from net proceeds of approximately $28 million received in connection with the secondary offering and net income of $3.0 million during the six months ended June 30, 2001. The debt to equity ratio (excluding the effect of issuable common stock) as of June 30, 2001 improved to 0.04 to 1 compared to 0.31 to 1 at December 31, 2000 as a result of the secondary offering and the repayment of our line of credit balance and a $2.4 million acquisition note. Net cash provided by operating activities increased $2.7 million to $4.3 million for the six months ended June 30, 2001 compared to $1.6 million for the corresponding prior year period. The increase in net cash provided by operating activities was a result of higher income before the effects of depreciation and amortization, tax benefit from the exercise of stock options and a decrease in contract and trade receivables, offset by an increase in costs and estimated earnings in excess of billings and a decrease in accounts payable and accrued liabilities. The cash generated from operating activities was used primarily to make principal payments on debt and capital leases, fund capital expenditures, and partially fund our acquisition of Hook & Associates Engineering, Inc. in January 2001. In September 1999, we entered into a line of credit agreement with a bank, which consists of a working capital component with a maximum outstanding principal balance of $6.0 million, maturing on September 3, 2001. At June 30, 2001, there were no outstanding borrowings under the working capital component of the line of credit. Based upon our current cash position and assuming our credit facility is renewed in September 2001, or we are able to arrange for a replacement credit facility with a similar availability, we expect to have sufficient cash resources to fund our anticipated operations, planned capital expenditures and debt reductions for the next 12 months. 11 13 EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Standard (SFAS) No. 141, "Business Combinations" which was effective upon issuance. This statement requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. The adoption of this standard is not expected to have a material effect on the Company's financial condition, results of operations or cash flows. In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" which is effective January 1, 2002. This statement requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment. The Company has not yet completed its analysis of the effect this standard will have on the Company's financial condition, results of operations or cash flows. 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 on to our clients. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to interest rate changes primarily as a result of our securities held-to-maturity, line of credit and long-term debt, which are used to maintain liquidity and to fund capital expenditures and our expansion. The Company intends to hold all of its securities until maturity, and therefore, should not bear any interest rate risk due to early disposition. 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 $465,000 and a note payable of $1,300,000), weighted average interest rates, fair values and other items required by year of expected maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of June 30, 2001.
Fair 2001 2002 2003 2004 Total Value (1) ---------- ---------- ------- ------- ----------- ----------- Securities held-to-maturity (non-trading) ........... $3,457,000 $7,629,000 -- -- $11,086,000 $11,077,000 Weighted average interest rate (2) ................ 3.90% 3.40% -- -- 3.56% 3.56% Fixed rate debt (3) ....... $ 181,000 $ 125,000 $90,000 $29,000 $ 425,000 $ 425,000 Weighted average interest rate .................... 8.40% 7.85% 7.63% 7.74% 8.03% 8.03%
- -------------- (1) The fair value of fixed rate debt was determined based on current rates offered for debt instruments with similar risks and maturities, while the fair value for securities was based on the quoted market price of such securities as of June 30, 2001. (2) Approximately 41% of the Company's securities held-to-maturity are invested in federally tax-exempt bonds. The weighted average interest rate shown above is a combination of a pre-tax interest rate for taxable securities and an after tax interest rate for tax-exempt securities. (3) Fixed rate debt excludes an acquisition note payable with a carrying amount of $1,300,000 due to the nature of the financing. As the table incorporates only those exposures that existed as of June 30, 2001, 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. 12 14 PART II. OTHER INFORMATION ITEM 1. 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 our wholly-owned subsidiary at the time the claim by Clayton was filed and was subsequently merged with and into the Company in December 2000. In January 2001, The Irvine Company filed a claim against JMTA for indemnity. Clayton Engineering has made the allegation that plans prepared by JMTA were inaccurate as to the elevation of the bottom of the Peters Wash. Consequently, The Irvine Company has filed an equitable indemnity cross-complaint against JMTA. The Irvine Company is in the process of settling with Clayton Engineering. The Company believes that the claim made against it is without merit and intends to defend itself vigorously in this action. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 16, 2001, we held our annual meeting of shareholders. At this meeting, our shareholders were asked to vote on four matters: o the election of five directors; o the approval of our Amended and Restated 1994 Stock Incentive Plan; o the approval of an amendment to our Amended and Restated Bylaws increasing the authorized number of directors eligible to sit on our board of directors to a range of five to nine; and o the ratification of the appointment of KPMG LLP as our independent auditors for fiscal 2001. Of the total outstanding shares, 4,319,112 or 80.43%, were voted. The first item presented for a vote before our shareholders was the re-election of our five directors. Set forth below is information with respect to the nominees elected as directors at the annual meeting and the votes cast for, against and/or withheld with respect to each such nominee. Nominees For Against Withheld -------- --------- ------- -------- Aram H. Keith 4,317,862 0 1,250 Gary C. Campanaro 4,317,862 0 1,250 Walter W. Cruttenden, III 4,317,862 0 1,250 George Deukmejian 4,317,862 0 1,250 Christine Diemer Iger 4,317,862 0 1,250 There were no broker non-votes in connection with this proposal. The second item presented for a vote before the shareholders was the approval of our Amended and Restated 1994 Stock Incentive Plan. Of the votes received, 3,083,617 were in favor of the proposal, 267,332 were against and 3,740 were withheld. There were 964,423 broker non-votes in connection with this proposal. The third item presented for a vote before the shareholders was the approval of an amendment to our Amended and Restated Bylaws to increase the number of directors eligible to sit on our board of directors to a range of five to nine. Of the votes received, 3,341,257 were in favor of the proposal, 9,382 were against and 4,050 were withheld. There were 964,423 broker non-votes in connection with this proposal. 13 15 The last item presented for a vote before the shareholders was the ratification of the appointment of KPMG LLP as our independent auditors for fiscal 2001. Of the votes received, 4,316,862 were in favor of the proposal, 600 were against and 1,650 were withheld. There were no broker non-votes in connection with this proposal. There were no other matters submitted for a vote of our shareholders during the period covered by this report. ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibits Number Description -------- ----------- 3.1 Amended and Restated Bylaws.* 4.1 Amended and Restated 1994 Stock Incentive Plan (incorporated herein by this reference to exhibit 4.1 to the registrant's registration statement on Form S-8, registration Number 333-61312). 10.17 Fourth Amendment to Credit Agreement dated January 31, 2001 by and between the Registrant, HEA Acquisition, Inc. and Wells Fargo Bank, National Association.* 10.18 Fifth Amendment to Credit Agreement dated April 27, 2001 by and between the Registrant, HEA Acquisition, Inc. and Wells Fargo Bank, National Association.* - ---------------- * Filed herewith (b) Reports on Form 8-K None 14 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 14, 2001 THE KEITH COMPANIES, INC. By: /s/ Aram H. Keith ----------------------------------------- Aram H. Keith Chairman of the Board of Directors and Chief Executive Officer By: /s/ Gary C. Campanaro ----------------------------------------- Gary C. Campanaro Chief Financial Officer and Secretary 15 17 EXHIBIT INDEX Exhibits Number Description -------- ----------- 3.1 Amended and Restated Bylaws.* 4.1 Amended and Restated 1994 Stock Incentive Plan (incorporated herein by this reference to exhibit 4.1 to the registrant's registration statement on Form S-8, registration Number 333-61312). 10.17 Fourth Amendment to Credit Agreement dated January 31, 2001 by and between the Registrant, HEA Acquisition, Inc. and Wells Fargo Bank, National Association.* 10.18 Fifth Amendment to Credit Agreement dated April 27, 2001 by and between the Registrant, HEA Acquisition, Inc. and Wells Fargo Bank, National Association.* - ---------------- * Filed herewith EX-3.1 3 a74782ex3-1.txt EXHIBIT 3.1 1 EXHIBIT 3.1 AMENDED AND RESTATED BYLAWS OF THE KEITH COMPANIES, INC., A CALIFORNIA CORPORATION 2 TABLE OF CONTENTS Page ---- ARTICLE I OFFICES........................................................... 1 Section 1. Principal Executive Office................................. 1 Section 2. Other Offices.............................................. 1 ARTICLE II SHAREHOLDERS..................................................... 1 Section 1. Place of Meetings.......................................... 1 Section 2. Annual Meetings............................................ 1 Section 3. Special Meetings........................................... 1 Section 4. Notice of Annual or Special Meeting........................ 1 Section 5. Quorum..................................................... 2 Section 6. Adjourned Meeting and Notice Thereof....................... 2 Section 7. Voting..................................................... 2 Section 8. Record Date................................................ 4 Section 9. Consent of Absentees....................................... 5 Section 10. Action Without Meeting..................................... 5 Section 11. Proxies.................................................... 5 Section 12. Inspectors of Election..................................... 5 ARTICLE III DIRECTORS....................................................... 6 Section 1. Powers..................................................... 6 Section 2. Number of Directors........................................ 7 Section 3. Election and Term of Office................................ 7 Section 4. Vacancies.................................................. 7 Section 5. Place of Meeting........................................... 7 Section 6. Regular Meetings........................................... 7 Section 7. Special Meetings........................................... 8 Section 8. Quorum..................................................... 8 Section 9. Participation in Meetings by Conference Telephone.......... 8 Section 10. Waiver of Notice........................................... 8 Section 11. Adjournment................................................ 9 Section 12. Fees and Compensation...................................... 9 Section 13. Action Without Meeting..................................... 9 Section 14. Rights and Inspection...................................... 9 Section 15. Committees................................................. 9 ARTICLE IV OFFICERS......................................................... 10 Section 1. Officers................................................... 10 Section 2. Election................................................... 10 Section 3. Subordinate Officers....................................... 10 Section 4. Removal and Resignation.................................... 10 Section 5. Vacancies.................................................. 10 Section 6. Chairman of the Board...................................... 11 Section 7. President.................................................. 11 Section 8. Vice President............................................. 11 Section 9. Secretary.................................................. 11 Section 10. Chief Financial Officer.................................... 11 ARTICLE V OTHER PROVISIONS.................................................. 12 Section 1. Inspection of Corporate Records............................ 12 Section 2. Inspection of Bylaws....................................... 12 Section 3. Endorsement of Documents; Contracts........................ 13 Section 4. Certificates of Stock...................................... 13 Section 5. Representation of Shares of other Corporations............. 13 Section 6. Stock Purchase Plans....................................... 14 Section 7. Annual Report to Shareholders.............................. 14 Section 8. Construction and Definitions............................... 14 ARTICLE VI INDEMNIFICATION.................................................. 14 Section 1. Definitions................................................ 14 Section 2. Indemnification in Actions by Third Parties................ 14 Section 3. Indemnification in Actions by or in the Right of the Corporation................................................ 15 Section 4. Mandatory Indemnification Against Expenses................. 15 Section 5. Required Determinations.................................... 15 Section 6. Advance of Expenses........................................ 16 Section 7. Other Indemnification...................................... 16 Section 8. Circumstances Where Indemnification Not Permitted.......... 16 Section 9. Insurance.................................................. 16 Section 10. Nonapplicability to Fiduciaries of Employee Benefit Plans.. 16 ARTICLE VII AMENDMENTS...................................................... 16 -i- 3 AMENDED AND RESTATED BYLAWS Bylaws for the regulation, except as otherwise provided by statute or its Articles of Incorporation of THE KEITH COMPANIES, INC., a California corporation ARTICLE I OFFICES Section 1. Principal Executive Office. The principal executive office of the Corporation shall be located at 2955 Red Hill Avenue, Costa Mesa, CA 92626. The Board of Directors (herein called the "Board") is granted full power and authority to change said principal executive office from one location to another. Section 2. Other Offices. Branch or subordinate offices may be established at any time by the Board at any place or places. ARTICLE II SHAREHOLDERS Section 1. Place of Meetings. Meetings of shareholders shall be held either at the principal executive office of the Corporation or at any other place within or without the State of California which may be designated either by the Board or by the written consent of all persons entitled to vote thereat, given either before or after the meeting and filed with the Secretary. Section 2. Annual Meetings. The annual meetings of the shareholders shall be held on such date and at such time as may be fixed by the Board. At such meetings, directors shall be elected and any other proper business may be transacted. Section 3. Special Meetings. Special meetings of the shareholders may be called at any time by the Board, the Chairman of the Board, the President, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at such meeting. Upon request in writing to the Chairman of the Board, the President, any Vice President or the Secretary by any person (other than the Board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five nor more than sixty days after the receipt of the request. If the notice is not given within twenty days after receipt of the request, the persons entitled to call the meeting may give the notice. Section 4. Notice of Annual or Special Meeting. Written notice of each annual or special meeting of shareholders shall be given not less than ten nor more than sixty days before the date of the meeting to each shareholder entitled to vote thereat. Such notice shall state the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of 4 the business to be transacted, and no other business may be transacted, or (ii) in the case of the annual meeting, those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders, but, subject to the provisions of applicable law, any proper matter may be presented at the meeting for such action. The notice of any meeting at which directors are to be elected shall include the names of nominees intended at the time of the notice to be presented by management for election. Notice of a shareholders' meeting shall be given either personally or by mail or by other means of written communication, addressed to the shareholder at the address of such shareholder appearing on the books of the Corporation or given by the shareholder to the Corporation for the purpose of notice; or, if no such address appears or is given, at the place where the principal executive office of the Corporation is located or by publication at least once in a newspaper of general circulation in the county in which the principal executive office is located. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person given the notice by electronic means, to the recipient. Section 5. Quorum. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to have less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 6. Adjourned Meeting and Notice Thereof. Any shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum (except as provided in Section 5 of this Article) no other business may be transacted at such meeting. It shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement at the meeting at which such adjournment is taken; provided, however, when any shareholders' meeting is adjourned for more than 45 days or, if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Section 7. Voting. The shareholders entitled to notice of any meeting or to vote at any such meeting shall be only persons in whose name shares stand on the stock records of the Corporation on the record date determined in accordance with Section 8 of this Article. -2- 5 Voting shall in all cases be subject to the provisions of Chapter 7 of the California General Corporation Law, and to the following provisions: (a) Subject to clause (g), shares held by an administrator, executor, guardian, conservator or custodian may be voted by such holder either in person or by proxy, without a transfer of such shares into the holder's name; and shares standing in the name of a trustee may be voted by the trustee, either in person or by proxy, but no trustee shall be entitled to vote shares held by such trustee without a transfer of such shares into the trustee's name. (b) Shares standing in the name of a receiver may be voted by such receiver; and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into the receiver's name if authority to do so is contained in the order of the court by which such receiver was appointed. (c) Subject to the provisions of Section 705 of the California General Corporation Law and except where otherwise agreed in writing between the parties, a shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. (d) Shares standing in the name of a minor may be voted and the Corporation may treat all rights incident thereto as exercisable by the minor, in person or by proxy, whether or not the Corporation has notice, actual or constructive, of the nonage, unless a guardian of the minor's property has been appointed and written notice of such appointment given to the Corporation. (e) Shares standing in the name of another corporation, domestic or foreign, may be voted by such officer, agent or proxyholder as the bylaws of such other corporation may prescribe or, in the absence of such provision, as the Board of Directors of such other corporation may determine or, in the absence of such determination, by the chairman of the board, president or any vice president of such other corporation. Shares which are purported to be voted or any proxy purported to be executed in the name of a corporation (whether or not any title of the person signing is indicated) shall be presumed to be voted or the proxy executed in accordance with the provisions of this subdivision, unless the contrary is shown. (f) Shares of the Corporation owned by any subsidiary shall not be entitled to vote on any matter. (g) Shares held by the Corporation in a fiduciary capacity, and shares of the issuing corporation held in a fiduciary capacity by any subsidiary, shall not be entitled to vote on any matter, except to the extent that the settlor or beneficial owner possesses and exercises a right to vote or to give the Corporation binding instructions as to how to vote such shares. (h) If shares stand of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, husband and wife as community property, tenants by the entirety, voting trustees, persons entitled to vote under a shareholder voting agreement or otherwise, or if two or more persons (including proxyholders) have the same fiduciary relationship respecting the same shares, unless the secretary of the Corporation is given written notice to the contrary and is furnished with a -3- 6 copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) If only one votes, such act binds all; (ii) If more than one vote, the act of the majority so voting binds all; (iii) If more than one vote, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionately. If the instrument so filed or the registration of the shares shows that any such tenancy is held in unequal interests, a majority or even split for the purpose of this section shall be a majority or even split in interest. Subject to the following sentence and to the provisions of Section 708 of the California General Corporation Law, every shareholder entitled to vote at any election of directors may cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit. No shareholder shall be entitled to cumulate votes for any candidate or candidates pursuant to the preceding sentence unless such candidate or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at a meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. At the time the Corporation becomes a listed corporation within the meaning of Section 301.5 of the California General Corporation Law, the provisions of this paragraph shall be of no further force and effect and no shareholder shall be entitled to cumulate such shareholder's votes at any election of directors. Elections need not be by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at the meeting and before the voting begins. In any election of directors, the candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. Section 8. Record Date. The Board may fix, in advance, a record date for the determination of the shareholders entitled to notice of any meeting to vote or entitled to receive payment of any dividend or other distribution, or any allotment of rights, or to exercise rights in respect of any other lawful action. The record date so fixed shall be not more than 60 days nor less than 10 days prior to the date of the meeting nor more than 60 days prior to any other action. When a record date is so fixed, only shareholders of record on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to the exercise of the rights, as the case may be, notwithstanding any transfer of shares on the books of the Corporation after the record date. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board fixes a new record date for the adjourned meeting. The Board shall fix a new record date if the meeting is adjourned for more than 45 days. -4- 7 If no record date is fixed by the Board, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the next business day next preceding the day on which the meeting is held. The record date for determining shareholders for any purpose other than set forth in this Section 8 or Section 10 of this Article shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth day prior to the date of such other action, whichever is later. Section 9. Consent of Absentees. The transactions of any meeting of shareholders, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Neither the business to be transacted at nor the purpose of any regular or special meeting of shareholders need be specified in any written waiver of notice, except as provided in Section 601(f) of the California General Corporation Law. Section 10. Action Without Meeting. Subject to Section 603 of the California General Corporation Law, any action which, under any provision of the California General Corporation Law, may be taken at any annual or special meeting of shareholders, may be taken without a meeting and without prior notice if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Unless a record date for voting purposes be fixed as provided in Section 8 of this Article, the record date for determining shareholders entitled to give consent shall be the day on which the first written consent is given. Section 11. Proxies. Every person entitled to vote shares has the right to do so either in person or by one or more persons authorized by a written proxy executed by such shareholder and filed with the Secretary. Every proxy duly executed shall continue in full force and effect until revoked by the person executing it prior to the vote pursuant thereto effected by a writing delivered to the Corporation stating that the proxy is revoked or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or by attendance at the meeting and voting in person by the person executing the proxy; provided, however, that no proxy shall be valid after the expiration of eleven months from the date of its execution unless otherwise provided in the proxy. Section 12. Inspectors of Election. In advance of any meeting of shareholders, the Board may appoint any persons, other than nominees for office inspectors of election to act at such meeting and any adjournment thereof. If inspectors of election are not so appointed, or if any persons so appointed fail to appear or refuse to act, the chairman of any such meeting may, and on the request of any shareholder or shareholder's proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares present shall determine whether one or three inspectors are to be appointed. -5- 8 The duties of such inspectors shall be as prescribed by Section 707(b) of the California General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each; the shares represented at the meeting; the existence of a quorum; the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and doing such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. ARTICLE III DIRECTORS Section 1. Powers. Subject to limitations of the Articles of Incorporation, of these Bylaws and of the California General Corporation Law relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board. The Board may delegate the management of the day-to-day operation of the business of the Corporation to a management company or other person provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the following powers in addition to the other powers enumerated in these Bylaws: (a) To select and remove all the other officers, agents and employees of the Corporation, prescribe the powers and duties for them as may not be inconsistent with applicable law, with the Articles of the Corporation or these Bylaws, fix their compensation and require from them security for faithful service. (b) To conduct, manage and control the affairs and business of the Corporation and to make such rules and regulations therefor not inconsistent with applicable law, or with the Articles of the Corporation or these Bylaws, as they may deem best. (c) To adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time as in their judgment they may deem best. (d) To authorize the issuance of shares of stock of the Corporation from time to time, upon such terms and for such consideration as may be lawful. (e) To borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecation or other evidences of debt and securities thereof. -6- 9 Section 2. Number of Directors. The authorized number of directors shall be, until changed by amendment of the Articles or by a Bylaw duly adopted by the shareholders, such number as may from time to time be authorized by resolution of the Board of Directors or the shareholders, provided that such number shall not be less than five (5) nor more than nine (9). Section 3. Election and Term of Office. The directors shall be elected at each annual meeting of the shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director shall hold office until the next annual meeting and until a successor has been elected and qualified. Section 4. Vacancies. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, Secretary or the Board, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Vacancies in the Board, except those existing as a result of a removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until the next annual meeting and until such director's successor has been elected and qualified. A vacancy or vacancies in the Board shall be deemed to exist in the case of the death, resignation or removal of any director, or if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The Board may declare vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal requires the consent of a majority of the outstanding shares entitled to vote. If the Board accepts the resignation of a director tendered to take effect at a future time, the Board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of the director's term of office. Section 5. Place of Meeting. Regular or special meetings of the Board shall be held at any place within or without the State of California which has been designated from time to time by the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the Corporation. Section 6. Regular Meetings. Immediately following each annual meeting of shareholders, the Board shall hold a regular meeting for the purpose of organization, election of officers and the transaction of other business. Call and notice of all such regular meetings of the Board of Directors is hereby dispensed with. Other regular meetings of the Board shall be held without call on such dates and at such times as may be fixed by the Board, and shall be subject to the notice requirements set forth in Section 7 hereof. -7- 10 Section 7. Special Meetings. Special meetings of the Board for any purpose or purposes may be called at any time by the Chairman of the Board, the President or the Secretary or by any two directors. Special meetings of the Board shall be held upon four days' written notice or 48 hours' notice given personally or by telephone, telegraph, telecopier, telex or other similar means of communication. Any such notice shall be addressed or delivered to each director at such director's address as it is shown upon the records of the Corporation or as may have been given to the Corporation by the director for purposes of notice or, if such address is not shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held. Notice by mail shall be deemed to have been given at the time a written notice is deposited in the United States mails, postage prepaid. Any other written notice shall be deemed to have been given at the time it is personally delivered to the recipient or is delivered to a common carrier for transmission, or actually transmitted by the person giving the notice by electronic means, to the recipient. Oral notice shall be deemed to have been given at the time it is communicated in person or by telephone or wireless, to the recipient or to a person at the office or residence of the recipient who the person giving the notice has reason to believe will promptly communicate it to the recipient. Section 8. Quorum. One third of the authorized number of directors or two directors, whichever is larger, constitutes a quorum of the Board for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, unless a greater number be required by law or by the Articles. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 9. Participation in Meetings by Conference Telephone. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Section 10. Waiver of Notice. The transactions of any meeting of the Board, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding such a meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. -8- 11 Section 11. Adjournment. A majority of the directors present, whether or not a quorum is present, may adjourn any directors' meeting to another time and place. Notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. If the meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 12. Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by the Board. Section 13. Action Without Meeting. Any action required or permitted to be taken by the Board may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such consent or consents shall have the same effect as a unanimous vote of the Board and shall be filed with minutes of the proceedings of the Board. Section 14. Rights and Inspection. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts. Section 15. Committees. The Board may appoint one or more committees, each consisting of two or more directors, and delegate to such committees any of the authority of the Board except with respect to: (i) The approval of any action for which the California General Corporation Law also requires shareholders' approval of the outstanding shares. (ii) The filling of vacancies on the Board or in any committee; (iii) The fixing of compensation of the directors for serving on the Board or on any committee; (iv) The amendment or repeal of Bylaws or the adoption of new Bylaws; (v) The amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (vi) A distribution to the shareholders of the Corporation except at a rate or in a periodic amount or within a price range determined by the Board; or (vii) The appointment of other committees of the Board or the members thereof. -9- 12 Any such committee must be appointed by resolution adopted by a majority of the authorized number of directors and may be designated an Executive Committee or by such other name as the Board shall specify. The Board shall have the power to prescribe the manner in which proceedings of any such committee shall be conducted. In the absence of any such prescription, such committee shall have the power to prescribe the manner in which its proceedings shall be conducted. Unless the Board or such committee shall otherwise provide, the regular and special meetings and other actions of any such committee shall be governed by the provisions of this Article applicable to meetings and actions of the Board. Minutes shall be kept of each meeting of each committee. ARTICLE IV OFFICERS Section 1. Officers. The officers of the Corporation shall be a President, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Financial Officers and such other officers as may be elected or appointed in accordance with the provisions of Section 3 of this Article. Section 2. Election. The officers of the Corporation, except such officers as may be elected or appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by, and shall serve at the pleasure of the Board, and shall hold their respective offices until their resignation, removal or other disqualification from service, or until their respective successors shall be elected. Section 3. Subordinate Officers. The Board may elect, and may empower the President to appoint such other officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these Bylaws or as the Board may from time to time determine. Section 4. Removal and Resignation. Any officer may be removed, either with or without cause, by the Board of Directors at any time or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any such removal shall be without prejudice to the rights, if any, of the officer under any contract of employment. Any officer may resign at any time by giving written notice to the Corporation, but without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular election or appointment to such office. -10- 13 Section 6. Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board and exercise and perform such other powers and duties as may be from time to time assigned by the Board. Section 7. President. Subject to such powers, if any, as may be given by the Board to the Chairman of the Board, if there be such an officer, the President is the general manager and chief executive officer of the Corporation and has, subject to the control of the Board, general supervision, direction and control of the business and officers of the Corporation. The President shall preside at all meetings of the shareholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board. The President has the general powers and duties of management usually vested in the office of president and general manager of a corporation and such other powers and duties as may be prescribed by the Board. Section 8. Vice President. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board or, if not ranked, the Vice President designated by the Board, shall perform all the duties of the President and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board. Section 9. Secretary. The Secretary shall keep or cause to be kept, at the principal executive office and such other place as the Board may order, a book of minutes of all meetings of shareholders, the Board and its committees, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Board and committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The Secretary shall keep, or cause to be kept, a copy of the Bylaws of the Corporation at the principal executive offices or business office in accordance with Section 213 of the California General Corporation Law. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent or registrar, if one be appointed, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders of the Board and of any committees thereof required by these Bylaws or by law to be given, shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board. Section 10. Chief Financial Officer. The Chief Financial Officer is the chief financial officer of the Corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, and shall send or cause to be sent to the shareholders of the Corporation such financial statements and reports as are by law or these Bylaws required to be sent to them. The books of account shall at all times be open to inspection by any director. -11- 14 The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board. The Chief Financial Officer shall disburse the funds of the Corporation as may be ordered by the Board, shall render to the President and directors, whenever they request it, an account of all transactions entered into as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board. ARTICLE V OTHER PROVISIONS Section 1. Inspection of Corporate Records. (a) A shareholder or shareholders holding at least five percent (5%) in the aggregate of the outstanding voting shares of the Corporation shall have an absolute right to do either or both of the following: (i) Inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the Corporation; or (ii) Obtain from the transfer agent, if any, for the Corporation, upon five business days' prior written demand and upon the tender of its usual charges for such a list (the amount of which charges shall be stated to the shareholder by the transfer agent upon request), a list of the shareholders' names and addresses who are entitled to vote for the election of directors and their shareholdings as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. (b) The record of shareholders shall also be open to inspection and copying by any shareholder or holder of a voting trust certificate at any time during usual business hours upon written demand on the Corporation, for a purpose reasonably related to such holder's interest as a shareholder or holder of a voting trust certificate. (c) The accounting books and records and minutes of proceedings of the shareholders and the Board and committees of the Board shall be open to inspection upon written demand on the Corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as a holder of such voting trust certificate. (d) Any inspection and copying under this Article may be made in person or by agent or attorney. Section 2. Inspection of Bylaws. The Corporation shall keep in its principal executive office the original or a copy of these Bylaws as amended to date, which shall be open to inspection by shareholders at all reasonable times, during office hours. If the principal executive office of the Corporation is located outside the State of California and the Corporation has no principal business office in such state, it shall upon the written notice of any shareholder furnish to such shareholder a copy of these Bylaws as amended to date. -12- 15 Section 3. Endorsement of Documents; Contracts. Subject to the provisions of applicable law, any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance or other instrument in writing and any assignment or endorsements thereof executed or entered into between the Corporation and any other person, when signed by the Chairman of the Board, the President or any Vice President and the Secretary, any Assistant Secretary, the Chief Financial Officer or any Assistant Financial Officer of the Corporation shall be valid and binding on the Corporation in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same. Any such instruments may be signed by another person or persons and in such manner as from time to time shall be determined by the Board, and, unless so authorized by the Board, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or amount. Section 4. Certificates of Stock. Every holder of shares of the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the Chairman of the Board, the President or a Vice President and by the Chief Financial Officer or an Assistant Financial Officer or the Secretary or an Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. If any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board may provide; provided, however, that on any certificate issued to represent any partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Except as provided in this section, no new certificate for shares shall be issued in lieu of an old one unless the latter is surrendered and cancelled at the same time. The Board may, however, if any certificate for shares is alleged to have been lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, and the Corporation may require that the Corporation be given a bond or other adequate security sufficient to indemnify it against any claim that may be made against it (including expense or liability) on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. Section 5. Representation of Shares of other Corporations. The President or any other officer or officers authorized by the Board or the President are each authorized to vote, represent and exercise on behalf of the Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of the Corporation. The authority herein granted may be exercised either by any such officer in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officer. -13- 16 Section 6. Stock Purchase Plans. The Corporation may adopt and carry out a stock purchase plan or agreement or stock option plan or agreement providing for the issue and sale for such consideration as may be fixed of its unissued shares, or of issued shares acquired or to be acquired, to one or more of the employees or directors of the Corporation or of a subsidiary or to a trustee on their behalf and for the payment for such shares in installments or at one time, and may provide for aiding any such persons in paying for such shares by compensation for services rendered, promissory notes or otherwise. Any such stock purchase plan or agreement or stock option plan or agreement may include, among other features, the fixing of eligibility for participation therein, the class and price of shares to be issued or sold under the plan or agreement, the number of shares which may be subscribed for, the method of payment therefor, the reservation of title until full payment therefor, the effect of the termination of employment and option or obligation on the part of the Corporation to repurchase the shares upon termination of employment, restrictions upon transfer of the shares, the time limits of and termination of the plan, and any other matters, not in violation of applicable law, as may be included in the plan as approved or authorized by the Board or any committee of the Board. Section 7. Annual Report to Shareholders. The annual report to shareholders referred to in Section 1501 of the California General Corporation Law is expressly waived, but nothing herein shall be interpreted as prohibiting the Board from issuing annual or other periodic reports to shareholders. Section 8. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Provisions of the California Corporations Code and in the California General Corporation Law shall govern the construction of these Bylaws. ARTICLE VI INDEMNIFICATION Section 1. Definitions. For the purposes of this Article, "agent" means any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of such predecessor corporation. "Proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative and "expenses" includes without limitation attorneys' fees and any expenses of establishing a right to indemnification under Sections 4 or 5(d). Section 2. Indemnification in Actions by Third Parties. The Corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of the Corporation to procure a judgment in its favor) by reason of the fact that such person is or was an agent of the Corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in -14- 17 connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of the Corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. Section 3. Indemnification in Actions by or in the Right of the Corporation. The Corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was an agent of the Corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action, provided that no such person shall be indemnified for acts, omissions or transactions for which California Corporations Code Section 204(a)(10) disallows eliminating or limiting the personal liability of a director. No indemnification shall be made under this Section 3 for any of the following: (a) In respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation in the performance of such person's duty to the Corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (b) Of amounts paid in settling or otherwise disposing of a pending action without court approval; or (c) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. Section 4. Mandatory Indemnification Against Expenses. To the extent that an agent of the Corporation has been successful on the merits in defense of any proceeding referred to in Sections 2 or 3 or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. Section 5. Required Determinations. Except as provided in Section 4, any indemnification under this Article shall be made by the Corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3, by any of the following: (a) A majority vote of a quorum consisting of directors who are not parties to such proceeding; (b) If a quorum of directors is not obtainable, by independent legal counsel in a written opinion; -15- 18 (c) Approval of the shareholders, with the shares owned by the person to be indemnified not being entitled to vote thereon; or (d) The court in which such proceeding is or was pending upon application made by the Corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by the Corporation. Section 6. Advance of Expenses. Expenses incurred in defending any proceeding may be advanced by the Corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent to repay such amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this Article. Section 7. Other Indemnification. The indemnification provided by this section shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent such additional rights to indemnification are authorized in the Articles of this corporation. The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee, or agent and shall inure to the benefit of the heirs, executors, and administrators of the person. Nothing contained in this Article shall affect any right to indemnification to which persons other than such directors and officers may be entitled by contract or otherwise. Section 8. Circumstances Where Indemnification Not Permitted. No indemnification or advance shall be made under this Article, except as provided in Sections 4 or 5(d), in any circumstance where it appears: (a) That it would be inconsistent with a provision of the Articles, a resolution of the shareholders or an agreement in effect at the time of the occurrence of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. Section 9. Insurance. The Corporation shall have power to purchase and maintain insurance on behalf of any agent of the Corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such whether or not the Corporation would have the power to indemnify the agent against such liability under the provisions of this Article. Section 10. Nonapplicability to Fiduciaries of Employee Benefit Plans. This Article does not apply to a proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an agent as defined in Section 1 of the employer Corporation. The Corporation shall have power to indemnify such a trustee, investment manager or other fiduciary to the extent permitted by subdivision (f) of Section 207 of the California General Corporation Law. ARTICLE VII AMENDMENTS These Bylaws may be amended or repealed either by approval of the outstanding shares or by the approval of the Board; provided, however, that after the issuance of shares, a Bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable Board or vice versa may only be adopted by approval of the outstanding shares. -16- EX-10.17 4 a74782ex10-17.txt EXHIBIT 10.17 1 EXHIBIT 10.17 FOURTH AMENDMENT TO CREDIT AGREEMENT THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of January 31, 2001, by and among THE KEITH COMPANIES, INC., a California corporation, and HEA ACQUISITION, INC., a California corporation (individually and collectively "Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of September 1, 1999, as amended from time to time ("Credit Agreement"). WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: 1. John M. Tettemer & Associates, Ltd., a California corporation ("JMTA") is a party to and named as a Borrower under the Credit Agreement. JMTA is no longer separate legal entity, but rather a division of The Keith Companies, Inc.("Keith"). Accordingly, all references in the Agreement and in the other Loan Documents to JMTA as a Borrower are hereby deleted; and all references in the Credit Agreement and in the other Loan Documents to Keith as a Borrower include, without limitation, JMTA as a division of Keith. 2. HEA Acquisition, Inc., a California corporation ("HEA"), has become a subsidiary of Keith, and is hereby added to the Credit Agreement as a "Borrower" and included in the definition of such term. HEA hereby assumes and agrees to perform all the obligations of Borrower under the Credit Agreement and the other Loan Documents. HEA hereby grants to Bank security interests of first priority in all of HEA's assets comprising collateral as described in all security agreements executed by Keith (alone or with others) with the same effect as if HEA had signed such security agreements, except that the security interest in the equipment described in Schedule I hereto shall be of second priority. Borrower shall execute and deliver to Bank a promissory note substantially in the form of Exhibit A hereto, which note shall constitute the Line of Credit Note and shall amend and replace the Line of Credit Note previously attached to the Credit Agreement as Exhibit A thereto. 3. A new Section 1.5 is hereby added to the Credit Agreement, which Section 1.5 reads as follows: "Section 1.5. SUBORDINATION. All obligations of Borrower to Hook & Associates Engineering, Inc. shall be subordinated to all obligations of Borrower to Bank pursuant to the terms of a Subordination Agreement in form and content acceptable to Bank." -1- 2 4. The third paragraph of Section 2.1 is hereby amended to read as follows: "HEA Acquisition, Inc. is a corporation, duly organized and existing and in good standing under the laws of the state of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower." 5. Section 4.11 is hereby deleted without substitution. 6. Section 5.3 is hereby amended to read as follows: "SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof, (c) leases permitted under Section 5.6 below, and (d) the subordinated indebtedness described in Section 1.5 above." 7. Section 5.4 is hereby amended to read as follows: "SECTION 5.4 MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity, nor acquire all or substantially all of the assets of any other entity; (provided, however that notwithstanding the foregoing, Borrower shall be permitted to merge, so long as a Borrower is the surviving entity, and/or acquire assets of other entities, so long as the total consideration paid by Borrower (whether in cash, notes, stock or otherwise) in each such merger, consolidation or acquisition does not exceed $1,000,000.00); nor make any substantial change in the nature of Borrower's business as conducted as of the date hereof ; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business." 8. Section 5.5 is hereby amended to read as follows: "SECTION 5.5 LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or entity, except (a) any of the foregoing existing as of, and disclosed to Bank prior to, the date hereof, (b) loans and advances to, and/or investments in, any Borrower consistent with Borrowers' prior practices, and (c) investments consisting of the purchase of all or substantially all of the equity interests in other entities engaged in businesses similar to that of Borrower, provided, that (i) the total consideration paid by Borrower (whether in cash, notes, stock or otherwise) in each such purchase does not exceed $1,000,000.00, and (ii) each such entity executes and delivers to Bank security agreements and UCC-1's substantially similar to those executed by Borrower in favor of Bank. No investment otherwise permitted under clause (c) hereunder, or merger or consolidation otherwise permitted under Section 5.4, shall be permitted if following such transaction, a breach of this Agreement would exist." -2- 3 Bank hereby consents to Keith's investment in HEA and to the purchase by HEA of the assets of Hook & Associates Engineering, Inc. 9. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 10. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. THE KEITH COMPANIES, INC. WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ GARY CAMPANARO By: /s/ STEPHANIE JUNEAU -------------------------------- ---------------------------------- Title: CFO Title: Vice President HEA ACQUISITION, INC. By: /s/ GARY CAMPANARO -------------------------------- Title: CFO -3- EX-10.18 5 a74782ex10-18.txt EXHIBIT 10.18 1 EXHIBIT 10.18 FIFTH AMENDMENT TO CREDIT AGREEMENT THIS FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of April 27, 2001, by and between THE KEITH COMPANIES, INC., a California corporation, HEA ACQUISTION, INC., a California corporation, (individually and collectively "Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of September 1, 1999, as amended from time to time ("Credit Agreement"). WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows: 1. Section 6.1.(h) is hereby deleted in its entirety, and the following substituted therefor: "(h) Aram Keith shall not for any reason own less than an aggregate of eighteen percent (18%) of the common stock of Borrower." 2. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this- Amendment. This Amendment and the Credit Agreement shall be read together, as one document. 3. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above. WELLS FARGO BANK, THE KEITH COMPANIES, INC. NATIONAL ASSOCIATION By: /s/ Gary Campanaro By: /s/ Stephanie Juneau -------------------------------- -------------------------- Title: CFO Title: Vice President HEA ACQUISITION, INC. By: /s/ Gary Campanaro ------------------------------- Title: CFO -----END PRIVACY-ENHANCED MESSAGE-----