As Filed with the Securities and Exchange Commission on April 28, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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THE KEITH COMPANIES, INC.
(Exact name of registrant as specified in charter)
California 8711 33-0203193
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
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2955 Red Hill Avenue
Costa Mesa, California 92626
(714) 540-0800
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Aram H. Keith
Chief Executive Officer
The Keith Companies, Inc.
2955 Red Hill Avenue
Costa Mesa, California 92626
(714) 540-0800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
JAMES S. WEISZ, ESQ. JEREMY D. GLASER, ESQ.
NATALIE DUNDAS, ESQ. COOLEY GODWARD LLP
NATASHA LAKAMP, ESQ. 4365 Executive Drive, Suite 1100
RUTAN & TUCKER, LLP San Diego, California 92121
611 Anton Boulevard, 14th Floor (619) 550-6000
Costa Mesa, California 92626
(714) 641-5100
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act of 1933 registration statement number of the
earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum
Title of Each Class of to be Offering Price Aggregate Amount of
Securities to be Registered Registered(1) Per Share(2) Offering Price(1)(2) Registration Fee
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Common Stock, no par
value................. 2,012,500 shares $10.00 $20,125,000 $5,595.00
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(1) Includes 262,500 shares of common stock issuable upon exercise of the
underwriters' over-allotment option.
(2) Estimated using the proposed maximum offering price per share solely for
the purpose of calculating the registration fee under Rule 457.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, April 28, 1999
1,750,000 Shares
[LOGO OF TKCI TO APPEAR HERE]
Common Stock
Of the shares of common stock offered, all 1,750,000 shares are being sold by
The Keith Companies, Inc.
We propose to list the shares on the Nasdaq National Market under the symbol
"TKCI." This is our initial public offering and no public market currently
exists for our shares. We currently estimate that the initial public offering
price of our common stock will be between $8.00 and $10.00 per share. We have
granted the underwriters an option, exercisable for 45 days from the date of
this prospectus, to purchase a maximum of 262,500 additional shares to cover
over-allotments of shares. See "Underwriting" for information related to the
factors to be considered in determining the initial public offering price.
This investment involves risk. See "Risks Factors" beginning on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Underwriting
Price Discounts and Proceeds to
to Public Commissions TKCI
Per Share................................ $ $ $
Total.................................... $ $ $
FIRST SECURITY VAN KASPER E*OFFERING Corp.
, 1999
[COLLAGE OF TYPICAL PROJECTS WITH PHOTOGRAPHS
AND BRIEF DESCRIPTIONS OF EACH PHOTOGRAPH]
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from the
information contained in this prospectus. We are offering to sell, and seeking
offers to buy, shares of common stock only in jurisdictions in which offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of our common stock.
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TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY....................................................... 4
RISK FACTORS............................................................. 8
USE OF PROCEEDS.......................................................... 17
DIVIDEND POLICY.......................................................... 17
PRIOR S CORPORATION STATUS............................................... 18
ACQUISITION.............................................................. 18
CAPITALIZATION........................................................... 19
DILUTION................................................................. 20
SELECTED FINANCIAL DATA.................................................. 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.......................................................... 24
BUSINESS................................................................. 35
MANAGEMENT............................................................... 51
CERTAIN TRANSACTIONS..................................................... 57
PRINCIPAL SHAREHOLDERS................................................... 60
DESCRIPTION OF CAPITAL STOCK............................................. 61
SHARES ELIGIBLE FOR FUTURE SALE.......................................... 62
UNDERWRITING............................................................. 64
LEGAL MATTERS............................................................ 66
EXPERTS.................................................................. 66
WHERE YOU CAN FIND MORE INFORMATION...................................... 67
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................... P-1
INDEX TO FINANCIAL STATEMENTS............................................ F-1
All trademarks or trade names referred to in this prospectus are the property
of their respective owners.
3
PROSPECTUS SUMMARY
The following is a summary of the more detailed information and financial
statements appearing elsewhere in this prospectus. This summary is not complete
and may not contain all of the information that is important to you. To
understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and financial statements.
We are one of the leading engineering, consulting and technical services firms
in the western United States. We specialize in:
. planning, engineering, designing, permitting and other services for a
wide range of residential, commercial and recreational real estate
development and public works projects and for wireless
telecommunications networks
. mechanical, electrical, chemical and other industrial engineering
services to design and improve the efficiency and reliability of
automated and manufacturing processes, production lines and fire
protection systems
We believe that our success is due to a number of factors, including:
. our well-established reputation for providing timely and high quality
services to our clients
. our experienced professional staff
. our ability to provide our clients with a full range of services, which
many of our competitors are unable to provide, resulting in both cost
and time savings to our clients as they no longer need to manage
multiple providers
. our ability to provide the increased scope of services that may arise
beyond the original contract, often resulting in the fees paid to us
significantly exceeding the original contract
The geographic regions we serve in the western United States are undergoing
economic expansion. Historical and projected growth in population, personal
income and employment are all combining to provide a robust economic
environment in which our services are necessary. As an example, we believe that
southern California residential real estate development is in the beginning of
the third year of what we believe has historically been a seven to ten year
upturn for new home building.
Our business strategy includes the following:
. Maintain the high quality of our services
. Continue to recruit and retain highly qualified personnel
. Expand the geographic scope of our operations in the western United
States
. Expand our service offerings and the industries we serve
. Continue to acquire and effectively integrate new business operations
4
We have provided engineering, consulting and technical services for over 16
years. Since late 1997, we have made three acquisitions that enabled us to
expand our service offerings to include process engineering design, mechanical,
chemical and electrical engineering, environmental waste processing systems
design, petrochemical design, services relating to flood control and expanded
water resources engineering, environmental permitting, and biological surveys
and studies. In addition, we have expanded geographically into central and
northern California and Utah, and we intend to continue to expand throughout
the western United States to better service our clients.
We employ 461 professionals in our eight offices located in three states. Our
clients include major national and regional real estate development firms such
as The Irvine Company, Kaufman & Broad Home Corporation and Pulte Home
Corporation. We also serve architects, water districts, federal, state and
local governments, including Orange County Transportation Authority,
Metropolitan Water District of Southern California and Central Utah Water
Conservation District. In addition, we serve cellular telephone service
providers, universities and manufacturers of a wide variety of products,
including Dow Chemical Company, Toyota Motor Company and Enron Energy Services.
Our principal executive offices are located at 2955 Red Hill Avenue, Costa
Mesa, California 92626, and our telephone number is (714) 540-0800. Our
Internet address is http://www.keithco.com. Information contained on our web
site should not be considered to be part of this prospectus.
5
The Offering
Common stock offered ....... 1,750,000 shares
Common stock to be
outstanding after the
offering(/1/)............... 5,309,708 shares
Use of proceeds............. We intend to use the estimated net cash proceeds
of $14.2 million that we will receive from this
offering to partially finance the acquisition of
substantially all of the assets and certain of
the liabilities of Thompson-Hysell, to repay
existing indebtedness and for general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market symbol............... TKCI
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(1) Excludes outstanding options, warrants and other rights to acquire TKCI
common stock. See "Capitalization."
Simultaneously with the consummation of this offering, TKCI will acquire
substantially all of the assets and assume certain liabilities of Thompson-
Hysell Inc. As used in this prospectus, except where the context clearly
requires otherwise, references made to "TKCI," "we," "our," or "us" mean The
Keith Companies, Inc. and its subsidiaries (including substantially all of the
assets and certain liabilities of Thompson-Hysell). Unless otherwise indicated,
the information in this prospectus, including share and per share data:
. assumes no exercise of the underwriters' over-allotment option
. assumes no exercise of any other outstanding options, warrants or other
rights to acquire shares of TKCI common stock
. gives effect to the acquisition of substantially all of the assets and
the assumption of certain of the liabilities of Thompson-Hysell
. reflects a 2.70-for-1 reverse split of our common stock to be effected
prior to the consummation of this offering
6
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Summary Financial Information
Three Months
Year Ended December 31, Ended March 31,
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1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(in thousands, except share and per share data)
Historical Statements of
Operations Data(/2/):
Net revenue................ $ 12,966 $ 18,592 $ 29,182 $ 5,962 $ 8,969
Gross profit............... 3,737 6,721 9,895 1,882 3,055
Income (loss) from
operations................ (1,223) 2,236 4,037 412 1,159
Interest expense........... 720 852 967 221 260
Income (loss) before
provision (benefit) for
income taxes and
extraordinary gain........ (1,948) 1,301 3,004 184 918
Extraordinary gain on
forgiveness of
liability(/1/)............ 2,686 -- -- -- --
Net income................. $ 735 $ 2,698 $ 1,654 $ 68 $ 529
--------- --------- --------- --------- ---------
Pro Forma Supplemental
Data(/3/):
Net income................. $ 428 $ 755 $ 1,742 $ 107 $ 532
--------- --------- --------- --------- ---------
Net income per
share--diluted............ $ 0.14 $ 0.24 $ 0.47 $ 0.03 $ 0.14
========= ========= ========= ========= =========
Weighted average shares
outstanding--diluted...... 2,962,963 3,104,994 3,728,729 3,559,708 3,866,479
========= ========= ========= ========= =========
Pro Forma Statements of
Income Data(/3/)(/4/):
Net revenue................ $ 37,971 $ 11,271
Gross profit............... 14,077 4,163
Income from operations..... 5,729 1,718
Interest expense........... 421 120
Income before provision for
income taxes.............. 5,243 1,623
Provision for income
taxes..................... 2,202 682
Net income................. $ 3,041 $ 941
========= =========
Net income per share--
diluted................... $ 0.55 $ 0.17
========= =========
Weighted average shares
outstanding--diluted...... 5,568,957 5,611,360
========= =========
As of March 31, 1999
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Actual As Adjusted(/5/)
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(in thousands)
Balance Sheet Data:
Working capital.................. $ 567 $ 9,199
Total assets..................... 15,689 23,969
Total debt....................... 9,674 3,835
Total stockholders' equity....... 658 14,641
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(1) In 1996, amounts owed through December 31, 1995, relating to excessive
lease space in one of our facilities, were forgiven, resulting in an
extraordinary gain on the forgiveness of the liability and accrued but
unpaid rent of $2.7 million. See note 17 to the TKCI consolidated financial
statements.
(2) Prior to August 1, 1998, Keith Engineering, Inc., which is included in
TKCI's consolidated financial statements, elected to be taxed as an
S corporation. See "Prior S Corporation Status."
(3) Amounts reflect pro forma adjustments for provision for federal and state
income taxes at an assumed effective income tax rate of 42%. Net income per
share--diluted reflects a 2.70-for-1 reverse split of TKCI's common stock
to be effected prior to the consummation of this offering.
(4) Amounts reflect pro forma adjustments for our initial public offering of
1,750,000 shares of common stock at an assumed initial public offering
price of $9.00 per share, the acquisition and the application of the
estimated net proceeds from this offering as if the transactions had
occurred on January 1, 1998. See "Pro Forma Condensed Consolidated
Financial Statements."
(5) Amounts reflect pro forma adjustments for our initial public offering of
1,750,000 shares of common stock at an assumed initial public offering
price of $9.00 per share, the acquisition and the application of the
estimated net proceeds from this offering as if the transactions had
occurred on March 31, 1999. See "Pro Forma Condensed Consolidated Financial
Statements."
7
RISK FACTORS
You should consider carefully the following risks before you decide to buy our
common stock. The risks and uncertainties described below are not the only ones
facing our company. Additional risks and uncertainties may also adversely
impact our business operations. If any of the following risks actually occur,
our business, financial condition or results of operations would likely suffer.
In such case, the trading price of our common stock could decline, and you may
lose all or part of the money you paid to buy our common stock.
A substantial portion of our business is dependent on the real estate market
We estimate that during 1998 at least 85% of our services were rendered in
connection with commercial and residential real estate development projects.
Real estate activity is highly cyclical in nature and is highly sensitive to
the rate of growth in employment within a geographic area, and as a result, our
revenue base can be adversely affected during periods of negative job growth.
From 1991 to 1996, our operations and financial condition were materially
adversely impacted during the real estate market downturn in southern
California, and we experienced cash flow difficulties and substantial operating
losses.
Our business, financial condition and results of operations may also be
adversely affected by conditions that impact the real estate market in general,
including, among other things:
. changes in national economic conditions, changes in local market
conditions due to changes in general or local economic conditions and
neighborhood characteristics
. changes in interest rates and in the availability, cost and terms of
financing
. the impact of present or future environmental legislation and
compliance with environmental laws and other regulatory requirements
. changes in real estate tax rates and assessments and other operating
expenses
. adverse changes in governmental rules and fiscal policies
. adverse changes in zoning and other land use laws
. earthquakes and other natural disasters (which may result in uninsured
losses) and other factors which are beyond our control
A substantial portion of our business is conducted in southern California
We estimate that during 1998 at least 50% of our revenues were derived from
services rendered in connection with commercial and residential real estate
developments in southern California. Consequently, we are disproportionately
exposed to adverse economic and other conditions affecting the southern
California real estate market or local economy, any of which could have a
material adverse effect on our business, financial condition and results of
operations. From 1991 to 1996, concurrent with the economic recession in
southern California, we experienced cash flow difficulties and substantial
operating losses.
8
Our ability to attract and retain employees is critical to our business
We derive our revenues almost exclusively from services performed by our
professionals. Our future performance will continue to depend in large part
upon our ability to attract and retain highly skilled professionals. Qualified
professionals are in great demand and are likely to remain a limited resource
for the foreseeable future. There is significant competition for employees with
the requisite skills from major and boutique consulting, engineering, research
and other professional service firms. We may not be able to attract and retain
a substantial majority of our existing or future professionals for the long
term. The loss of the services of, or the failure to recruit, a significant
number of professionals could adversely affect our ability to secure and
complete engagements and could have an adverse effect on our business,
financial condition and results of operations. In addition, former employees
might compete with us with respect to ongoing or potential future projects.
We may face challenges managing our growth
We have grown rapidly and intend to pursue further growth as part of our
business strategy. Our rapid growth has presented and will continue to present
numerous operational challenges, such as the management of an expanding array
of engineering, consulting and technical services, the assimilation of
financial reporting systems, increased pressure on our senior management and
increased demand on our systems and internal controls. We may not be able to
maintain or accelerate our current growth, effectively manage our expanding
operations or achieve planned growth on a timely or profitable basis. Our
inability to manage growth effectively and efficiently could materially and
adversely affect our business, financial condition and results of operations.
We may fail to successfully integrate our acquisitions
A significant part of our growth strategy is to acquire other companies that
complement or expand the scope of our services and/or broaden our geographic
presence. Acquisitions involve certain risks that could cause our actual growth
or operating results to differ from our expectations or the expectations of
security analysts. For example:
. We may not be able to identify suitable acquisition candidates or to
acquire additional companies on favorable terms.
. We compete with others to acquire companies. We believe that this
competition will increase and may result in decreased availability or
increased prices for suitable acquisition candidates.
. We may not be able to obtain the necessary financing, on favorable
terms or at all, to finance any of our potential acquisitions.
. We may ultimately fail to consummate an acquisition even if we
announce that we plan to acquire a company.
. We may fail to integrate successfully or manage any acquired company
due to differences in business backgrounds or corporate cultures.
9
. An acquired company may not perform as we expect.
. We may choose to acquire a company that is less profitable than us or
has lower profit margins than ours.
. We may find it difficult to provide a consistent quality of service
across our geographically diverse operations.
. If we fail to integrate successfully any acquired company, our
reputation could be damaged, potentially making it more difficult to
market our services or to acquire additional companies in the future.
. Our acquisition strategy may divert management's attention away from
our primary service offerings, result in the loss of key clients
and/or personnel and expose us to unanticipated liabilities.
Since December 1997, we have acquired three companies in two separate
transactions. At the present time, however, with the exception of our
acquisition of substantially all of the assets and certain of the liabilities
of Thompson-Hysell concurrent with this offering, we have no understandings or
agreements relating to any additional acquisitions. We expect to continue to
acquire companies as an element of our growth strategy in the future.
We may need to sell additional shares of common stock and/or incur additional
debt to finance future acquisitions
Our business strategy is to expand into new markets and enhance our position in
existing markets through the acquisition of complementary businesses. In order
to successfully complete targeted acquisitions, it may be necessary for us to
issue additional equity securities that could dilute your stock ownership. We
may also incur additional debt and amortize expenses related to goodwill and
other tangible assets if we acquire another company, and this could negatively
impact our business, financial condition and results of operations.
We rely on a relatively limited number of clients
We derive a significant portion of our revenues and profits from a relatively
limited number of clients. For example, net revenue from our five most
significant clients accounted for approximately 21% of our total net revenues
for the year ended December 31, 1998. There can be no assurance that any of our
most significant clients will continue to engage us for additional projects or
will do so at the same revenue levels. If we lose any significant client, our
business, financial condition and results of operations could be materially
adversely affected. In addition, the level of our services required by a
significant client may diminish over the life of its relationship with us, and
we may not be successful in establishing relationships with new clients as this
occurs.
We compete with other consulting firms
The market for services in the engineering, consulting and technical services
industries is highly competitive and is based primarily on quality of service,
relative experience, staffing
10
capabilities, reputation, geographic presence, stability and price. Such
competition is likely to increase in the future. Many of our competitors have
more personnel and greater financial, technical and marketing resources than
us. Such competitors include many larger consulting firms such as TetraTech
Inc. and URS Corporation. We can offer no assurance that we will be able to
compete successfully in the future with these or other competitors.
We depend on key personnel
Our success is highly dependent upon the efforts, abilities, business
generation capabilities and project execution of our officers, especially those
of Aram H. Keith, our President and Chief Executive Officer. We do not have an
employment agreement with, or maintain key man life insurance on, Mr. Keith. If
we lose his services or the services of other officers for any reason, our
business, operating results and financial condition, including our ability to
secure and complete engagements and retain some of our employees, could be
materially adversely affected.
There are risks associated with our contracts
Our services are provided primarily through three types of contracts: fixed-
price, time-and-materials and time-and-materials with "not to exceed"
provisions. Under fixed price contracts, we perform services under a contract
at a stipulated price. Under time-and-materials contracts, we are reimbursed
for the number of labor hours expended at an established hourly rate negotiated
in the contract, plus the cost of materials incurred. Under time-and-materials
with "not to exceed" provisions contracts, we are reimbursed similar to time-
and-materials contracts; however, there is a stated maximum dollar amount for
the services to be provided under the contract.
Fixed-price contracts and time-and-materials contracts with "not to exceed"
provisions protect clients but expose us to a greater number of risks than time
and materials contracts. These risks include:
. underestimation of costs
. problems with new technologies
. unforeseen costs or difficulties
. delays beyond our control
. economic and other changes that may occur during the contract period
If any of these events occur, a loss on the contract could be incurred and
could result in a material adverse effect on our business, financial condition
and results of operations.
In fiscal 1998, approximately 54%, 17% and 29% of our net revenue was derived
from fixed-price, time-and-materials and time-and-materials with "not to
exceed" provisions contracts, respectively.
11
Our services may expose us to liability
Our services involve significant risks of professional and other liabilities
which may substantially exceed the fees we derive from our services. Our
business activities could expose us to potential liability under various
environmental laws, such as the Comprehensive Environmental Response,
Compensation and Liability Act of 1980. In addition, from time to time, we
contractually assume liability under indemnification agreements. We cannot
predict the magnitude of such potential liabilities.
We currently maintain comprehensive general liability, umbrella and
professional liability insurance policies. These policies are "claims made"
policies. Thus, only claims made during the term of the policy are covered. If
we terminate our policies and do not obtain retroactive coverage, we would be
uninsured for claims made after termination even if these claims are based on
events or acts that occurred during the term of the policy. Our insurance may
not protect us against liability because our policies typically have various
exclusions and retentions. In addition, if we expand into new markets, we may
not be able to obtain insurance coverage for such activities or, if insurance
is obtained, the dollar amount of any liabilities incurred could exceed our
insurance coverage. A partially or completely uninsured claim, if successful
and of significant magnitude, could have a material adverse effect on our
business, financial condition and results of operations.
We rely on subcontractors
Under some of our contracts, we rely on the efforts and skills of
subcontractors for the performance of certain tasks. In 1998, subcontractor
costs comprised approximately 14% of our gross revenue. The absence of
qualified subcontractors with whom we have a satisfactory relationship could
adversely affect the quality of our service and our ability to perform under
some of our contracts.
Our quarterly results may fluctuate
Variations in our revenues and operating results can occur from quarter to
quarter as a result of a number of factors, including:
. client engagements commenced and completed during a quarter
. seasonality
. the number of business days in a quarter
. the number of work days lost as a result of adverse weather conditions
or delays caused by third parties
. employee hiring, billing and utilization rates
. the consummation of acquisitions
. the length of the sales cycle on new business
. the ability of clients to terminate engagements without penalty
12
. our ability to efficiently shift our employees from project to project
. the size and scope of assignments
. general economic conditions
Our business is subject to seasonal and quarterly variations due primarily to
climactic conditions. Due primarily to this variable, typically, the first and
fourth quarters of our fiscal year have lower revenues and operating results
than the second and third quarters.
In addition, because a portion of our expenses are relatively fixed,
significant variations in revenues or the number of days in a quarter can cause
fluctuations in operating results from quarter to quarter and could result in
losses.
Our existing shareholders will retain significant control over TKCI following
this offering
Upon completion of this offering, our directors and executive officers and
their respective affiliates will beneficially own 2,959,629 shares of common
stock, or approximately 55.39% of our outstanding common stock. Of these
shares, 1,533,704 shares, or approximately 28.7% of our outstanding common
stock, will be owned by Aram H. Keith, and as a result, he will have the
ability to control the election of directors and the results of other matters
submitted to a vote of shareholders. In addition, Floyd S. Reid, who co-founded
TKCI with Mr. Keith, will own 509,444 shares or approximately 9.53% of our
outstanding common stock; and Walter W. Cruttenden, III, one of our directors,
will own 418,137 shares or approximately 7.83% of our outstanding common stock.
Such concentration of ownership may have the effect of delaying or preventing a
change in control of us and may adversely affect the voting or other rights of
other holders of our common stock.
The book value of your common stock will be substantially diluted in this
offering and may be diluted in the future
The offering price for the shares of common stock in this offering is
substantially higher than the book value per share of our common stock.
Consequently, if you purchase shares of our common stock in this offering you
will incur immediate and substantial dilution. In addition, we may sell shares
in the future which may cause further dilution.
If we issue shares of preferred stock, the rights of holders of common stock
will be subject to the rights of holders of preferred stock
Our board of directors has the authority to issue up to 5,000,000 shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any vote or
action by the shareholders. The rights of the holders of our common stock will
be subject to, and may be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future. The issuance of the
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of our outstanding voting stock.
13
There has been no prior public market for our common stock and our stock price
will likely be subject to significant volatility
Prior to this offering, there has been no public market for our common stock,
and there can be no assurance that an active public market for our common stock
will develop or be sustained after the offering. The initial public offering
price will be determined by negotiations between us and the representatives of
the underwriters and may bear no relationship to our book value, earnings
history or other established criteria of value or to the price at which the
common stock will trade after the offering.
In addition, in recent years the stock market has experienced extreme price and
volume fluctuations that have affected the market price of many service-based
companies and which have, at times, been unrelated to the operating performance
of the specific companies whose stocks were affected. Such fluctuations could
adversely affect the market price of our common stock. We believe that in
addition to the other factors discussed in this "Risk Factors" section, the
following factors could also cause the market price of our common stock to
fluctuate, perhaps substantially:
. quarterly fluctuations in our operating results
. loss of key personnel
. general conditions in the financial markets, the real estate market,
the engineering, consulting and technical services market and the
worldwide economy
. fluctuations in interest rates
. announcement and market acceptance of acquisitions
. our failure to meet securities analysts' expectations
. changes in accounting principles
. sales of common stock by existing shareholders or holders of options
or warrants
. adverse circumstances affecting the introduction or market acceptance
of new services offered by us
. announcements of key developments by competitors
The large number of shares available for future sale could adversely affect the
price of our publicly traded stock
After this offering, the possibility that substantial amounts of our common
stock may be sold in the public market will likely have a material adverse
effect on prevailing market prices of our common stock and could impair our
ability to raise capital through the sale of equity securities. Upon completion
of this offering, 5,309,708 shares of our common stock will be outstanding. As
of March 31, 1999, we have also granted options to employees to acquire an
aggregate of 485,074 shares of common stock subject to certain vesting
requirements pursuant to our Amended and Restated 1994 Stock Incentive Plan.
Prior to the
14
consummation of the offering, we will also grant options to purchase an
aggregate of 14,815 shares to outside directors under this plan. We intend to
register on a registration statement on Form S-8, shortly after the closing of
this offering, all 499,889 shares of common stock underlying the options then
outstanding or issuable under such plan. We may also issue 148,148 shares of
common stock in 2000 (which may be adjusted upward or downward depending on
certain conditions), will reserve 37,037 shares of our common stock under our
Amended and Restated 1994 Stock Incentive Plan and will issue a warrant to
acquire 66,667 shares of TKCI common stock in relation to the acquisition of
substantially all of the assets and the assumption of certain of the
liabilities of Thompson-Hysell. We have also issued warrants to acquire 83,333
shares of TKCI common stock in connection with earlier acquisitions. The
1,750,000 shares sold in this offering (other than shares that may be purchased
by our affiliates) will be freely tradeable. All of the remaining 5,309,708
shares held by existing shareholders will be "restricted securities" as defined
in Rule 144 of the Securities Act of 1933, of which 492,037 shares will be
eligible for sale in the public market on the date of this prospectus in
reliance on Rule 144(k). The remainder of the restricted shares will be
eligible for sale from time to time thereafter upon expiration of one-year
holding periods and subject to the requirements of Rule 144. In addition, the
shares held by all of our shareholders and persons with rights to acquire our
shares, except certain non-management employees, are subject to agreements
restricting the sale of their shares in favor of the representatives of the
underwriters. The shares of common stock that may be issued in connection with
our acquisition of Thompson-Hysell will be restricted securities but will
include the right to have such shares registered for resale under the
Securities Act of 1933.
Year 2000 issues could affect our business
Many existing computer programs use only two digits to identify the year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the century. As a result, any computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failure or
miscalculations, causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We are heavily dependent upon the proper functioning of our own computer and
data-dependent systems. This includes, but is not limited to, our
support/administrative and operational/production systems. Any failure or
malfunctioning on the part of these or other systems could harm our business in
ways that we currently do not know and cannot discern, quantify or otherwise
anticipate. In addition, if our key vendors experience Year 2000 compliance
issues, then our business could be harmed.
We may be unable to implement the upgrades necessary to resolve any significant
problems we discover in our testing efforts. Even if we do make these upgrades,
they may not be effective in addressing the problems identified. If required
upgrades are not completed in a timely manner or are not successful, our
business could be harmed.
15
There are risks associated with forward-looking statements made by us and
actual results may differ
This prospectus contains certain forward-looking statements, including, among
others:
. the anticipated growth in the engineering, consulting and technical
services industries
. anticipated trends in our financial condition and results of
operations
. our ability to finance our working capital requirements
. our business strategy for expanding our presence in the engineering,
consulting and technical services industry
. our ability to distinguish ourselves from our current and future
competitors
When used in this prospectus, the words "anticipate," "believe," "estimate,"
"expect," "intend," "plan" and similar expressions as they relate to us are
intended to identify such forward-looking statements. These forward-looking
statements are based on our current expectations and are subject to a number of
risks and uncertainties. In addition to the risks described elsewhere in this
"Risk Factors" discussion, important factors to consider in evaluating such
forward-looking statements include:
. the shortage of reliable market data regarding the engineering,
consulting and technical services industry
. changes in external competitive market factors or in our internal
budgeting process that might impact trends in our results of
operations
. unanticipated working capital or other cash requirements
. changes in our business strategy or an inability to execute our
strategy due to unanticipated changes in the engineering, consulting
and technical services industry
. various other factors that may prevent us from competing successfully
in the marketplace
In light of these risks and uncertainties, many of which are described in
greater detail elsewhere in this "Risk Factors" discussion, our actual results
may differ materially from any forward-looking statements contained in this
prospectus.
16
USE OF PROCEEDS
We estimate that we will receive net cash proceeds of $14,179,000 from the sale
of 1,750,000 shares of common stock offered hereby, assuming an initial public
offering price of $9.00 per share and after deducting estimated underwriting
discounts and unpaid offering expenses. We currently intend to use the net
proceeds of this offering to acquire substantially all of the assets and
certain of the liabilities of Thompson-Hysell, to repay, in whole or in part,
debt, capital lease obligations and notes payable to related parties, including
accrued interest thereon, and for general corporate purposes.
As of March 31, 1999, the debt, capital lease obligations and notes payable to
related parties, including accrued interest thereon, expected to be repaid is
as follows:
Type Amount Interest Rate Maturity
- ---- ------ ------------- --------
(in thousands)
Bank line of credit........... $4,180 10.50% March 2000
Bank line of credit........... 95 9.25% May 2000
Notes payable*................ 460 8.00% to 13.22% Offering date
to December 2003
Capital lease obligations*.... 740 4.80% to 17.18% February 2000
to November 2002
Notes payable to related
parties (including accrued
interest)................... 2,602 10.00% July to
October 2000
- ------------------
*Used for capital expenditures.
We intend to acquire substantially all of the assets of Thompson-Hysell for
cash of $3,333,333, a note payable of $1,333,333 and may issue 148,148 shares
of TKCI common stock in 2000 if certain conditions are met (assuming an initial
public offering price of $9.00 per share). We may also be required to pay an
additional $500,000 if specified financial targets are met and approximately
$400,000 for certain income tax effects. If the underwriters exercise all or a
portion of their overallotment option, we will use the net proceeds for general
corporate purposes.
We intend to invest the remainder of the net proceeds in short-term, investment
grade, interest-bearing cash equivalents until they are used.
DIVIDEND POLICY
TKCI has not declared or paid any cash dividends on TKCI's capital stock in
either of the past two fiscal years and does not anticipate paying cash
dividends on its common stock in the foreseeable future. The payment of any
future dividends will be at the discretion of TKCI's board of directors and
will depend upon, among other things, future earnings, capital requirements and
the general financial condition of its business.
TKCI's credit agreement with Imperial Bank restricts the payment of dividends
without the bank's consent. We intend to repay most of our bank debt with the
proceeds of the offering and then to attempt to negotiate a new credit
agreement, although we anticipate that any new credit agreement will similarly
restrict our ability to pay dividends.
17
PRIOR S CORPORATION STATUS
From 1983 until 1998, Keith Engineering (a corporation originally affiliated
with TKCI which then became a wholly-owned subsidiary and was merged into TKCI)
was treated as an S corporation for purposes of federal and state income taxes.
Accordingly, Keith Engineering had not been subject to regular federal income
tax and was subject to California income tax at a rate of 1.5% of its taxable
income. Each of the shareholders of Keith Engineering was required to include
his portion of the Keith Engineering taxable income or loss in his individual
income for state and federal income tax purposes. Effective August 1, 1998,
Keith Engineering became a wholly-owned subsidiary, and its S corporation
status terminated. As a result, it began being taxed as a C corporation and
became subject to regular federal and state income taxes. Keith Engineering was
merged into TKCI on November 30, 1998.
ACQUISITION
On April 9, 1999, TKCI entered into an Asset Purchase Agreement with Thompson-
Hysell and its shareholders. Thompson-Hysell provides real estate services
similar to TKCI in central and northern California and Utah. The founding
shareholders of Thompson-Hysell, who will be employed by us after the
acquisition, have been providing engineering, consulting and technical services
for 17 years.
Under the Asset Purchase Agreement, TKCI will acquire substantially all of the
assets of Thompson-Hysell, including the right to use its name, and assume
certain of its liabilities. TKCI will pay a purchase price of: (a) cash in the
amount of $3,333,333; (b) a promissory note in the amount of $1,333,333 payable
in 2001; and (c) shares of common stock with a value equal to $1,333,334 which
may be issuable in 2000 if certain conditions are met. The purchase price is
subject to adjustment upward or downward depending upon (a) certain financial
targets being met related to the assets acquired and liabilities assumed; (b)
earnings for the years ended December 31, 1999 and 2000; and (c) an adjustment
for income tax effects. For purposes of this prospectus, including the pro
forma information, we have assumed that an additional $500,000 will be payable
pursuant to financial targets being met (which is the maximum additional amount
payable for that purpose) and $400,000 will be payable for certain income tax
effects. We have excluded the effect of the 1999 earnings target on our
contingent obligation to issue shares of our common stock. We expect to close
this acquisition concurrently with this offering. TKCI has also agreed to
reserve 37,037 shares of its common stock for issuance under stock options to
be granted to those employees of Thompson-Hysell who become employees of TKCI
upon the consummation of this offering. All of the shareholders of Thompson-
Hysell will enter into five year non-competition agreements with TKCI.
18
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 and as
adjusted to reflect our sale of 1,750,000 shares of common stock (assuming an
initial public offering price of $9.00 per share) and application of the
estimated net proceeds.
March 31, 1999
-------------------
Actual As Adjusted
------ -----------
(in thousands,
except share data)
Short term debt:
Short term borrowings, including current portion of
long term debt and capital lease obligations......... $6,325 $ 1,635
====== =======
Long term debt:
Long term debt and capital lease obligations, less
current portion...................................... $ 948 $ 2,200
Notes payable to related parties....................... 2,401 --
Stockholders' equity:
Preferred Stock, no par value, 20,000,000 shares
authorized; no shares issued and outstanding actual;
and no shares issued and outstanding, as adjusted.... -- --
Common stock, no par value, 100,000,000 shares
authorized; 3,559,708 shares issued and outstanding
actual; and 5,309,708 shares issued and outstanding,
as adjusted.......................................... 1,085 15,068
Accumulated deficit.................................... (427) (427)
------ -------
Total stockholders' equity............................. 658 14,641
------ -------
Total capitalization.................................... $4,007 $16,841
====== =======
- ------------------
The shares listed above exclude:
(1) 1,111,111 shares of common stock reserved for issuance under our Amended
and Restated 1994 Stock Incentive Plan, of which 499,889 shares are
issuable pursuant to outstanding options or will be issuable pursuant to
options to be granted prior to or upon the consummation of this offering.
(2) 83,333 shares of common stock issuable upon the exercise of warrants
granted in connection with the acquisitions of ESI, Engineering Services
Incorporated and John M. Tettemer & Associates, Ltd.
(3) up to 37,037 shares of common stock issuable if certain earnings, targets
and other conditions are met by ESI.
(4) that number of shares of common stock with a value of $1,333,334 (subject
to adjustment upward or downward) which we may be required to issue to the
shareholders of Thompson-Hysell in 2000 if certain conditions are met.
(5) a warrant to purchase 66,667 shares of common stock which will be granted
in connection with the acquisition of substantially all of the assets and
the assumption of certain of the liabilities of Thompson-Hysell.
19
DILUTION
At March 31, 1999, TKCI had a net tangible book value of $(2,000) or $0.00 per
share of common stock. Net tangible book value per share represents tangible
book value (total tangible assets less our total liabilities) divided by the
total number of shares of common stock outstanding. Without taking into account
any changes in net tangible book value after March 31, 1999 other than to give
effect to our sale of 1,750,000 shares of common stock (at an assumed initial
public offering price of $9.00 per share), our net tangible book value at March
31, 1999 would have been $13,831,000 or $2.60 per share. This represents an
immediate decrease in the net tangible book value of $6.40 per share to new
investors. The following table illustrates this per share dilution:
Assumed initial public offering price per share................... $9.00
Net tangible book value per share before the offering........... $0.00
Increase in net tangible book value per share attributable to
new investors................................................. $2.60
-----
Net tangible book value per share after the offering.............. $2.60
-----
Dilution per share to new investors............................... $6.40
=====
The following table sets forth on a pro forma basis, as of March 31, 1999, the
total number of shares of common stock purchased from us, after giving effect
to our sale of 1,750,000 shares at an assumed initial public offering price of
$9.00 per share, that total consideration paid and the average price per share
paid by the existing shareholders and by new investors:
Shares Purchased Total Consideration
----------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
--------- ------- ------------- -------- -------------
Existing shareholders.. 3,559,708 67% 658,000 4% $0.18
New investors.......... 1,750,000 33% 15,750,000 96% $9.00
--------- --- ------------- ------
Total................ 5,309,708 100% 16,408,000 100%
========= === ============= ======
- ------------------
The above information assumes no exercise of the over-allotment option or any
other outstanding options, warrants or other rights to acquire shares. If all
of such options and warrants are exercised in full, there would be further
dilution to new investors. See "Management--Stock Options," "Description of
Capital Stock" and "Certain Transactions."
20
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The selected financial data includes consolidated financial statement data for
certain periods presented and combined financial statement data for certain
periods presented. All financial statement data is referred to as consolidated.
See Note 1 to the Consolidated Financial Statements of TKCI included elsewhere
in this prospectus for a description of which periods reflect consolidated or
combined financial statements.
The Historical Statements of Operations Data for the years ended December 31,
1996, 1997 and 1998, and the Historical Balance Sheet Data as of December 31,
1997 and 1998, have been derived from the historical consolidated financial
statements of TKCI audited by KPMG LLP, independent auditors, which
consolidated financial statements and independent auditors' report are included
elsewhere in this prospectus. The Historical Statements of Operations Data for
the three months ended March 31, 1998 and 1999 and the Historical Balance Sheet
Data as of March 31, 1999 have been derived from the unaudited consolidated
financial statements of TKCI included elsewhere in this prospectus. The
Historical Statements of Operations Data for the year ended December 31, 1995,
and the Historical Balance Sheet Data as of December 31, 1996, have been
derived from the audited historical consolidated financial statements of TKCI
which are not included herein. The Historical Statements of Operations Data for
the year ended December 31, 1994 and the Historical Balance Sheet Data as of
December 31, 1994 and 1995, have been derived from the unaudited consolidated
financial statements of TKCI which are not included herein and which, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations and financial position as of the dates and for the period presented.
The Pro Forma Statements of Income Data for the year ended December 31, 1998
and the three months ended March 31, 1999, is unaudited and assumes an
effective income tax rate of 42% and that the initial public offering of
1,750,000 shares of common stock at an assumed initial public offering price of
$9.00 per share, the acquisition of substantially all of the assets and the
assumption of certain of the liabilities of Thompson-Hysell, and the repayment
of debt, capital lease obligations and notes payable to related parties with
the net proceeds of this offering had all occurred on January 1, 1998.
The Pro Forma Balance Sheet Data as of March 31, 1999 is unaudited and assumes
that the initial public offering of 1,750,000 shares of common stock at an
assumed initial public offering price of $9.00 per share, the acquisition of
substantially all of the assets and the assumption of certain of the
liabilities of Thompson-Hysell, and the repayment of short-term obligations,
long-term debt, capital lease obligations and notes payable to related parties
with the net proceeds of this offering had all occurred on March 31, 1999.
21
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The following information should be read in conjunction with the consolidated
financial statements of TKCI and the notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included
elsewhere in this prospectus.
Three Months
Year Ended December 31, Ended March 31,
------------------------------------------------- ----------------
1994 (/1/) 1995 1996 (/1/) 1997 1998 1998 1999
---------- ------- ---------- ------- --------- ------ ---------
(in thousands, except share and per share data)
Historical Statements of
Operations Data(/2/):
Gross revenue.......... $22,071 $15,152 $14,344 $22,585 $ 34,021 $7,121 $ 9,999
------- ------- ------- ------- --------- ------ ---------
Net revenue............ 19,979 14,039 12,966 18,592 29,182 5,962 8,969
Costs of revenue....... 14,837 10,212 9,229 11,871 19,287 4,080 5,914
------- ------- ------- ------- --------- ------ ---------
Gross profit........... 5,142 3,827 3,737 6,721 9,895 1,882 3,055
Selling, general and
administrative
expenses.............. 7,850 4,808 4,960 4,485 5,858 1,470 1,896
------- ------- ------- ------- --------- ------ ---------
Income (loss) from
operations............ (2,708) (981) (1,223) 2,236 4,037 412 1,159
Interest expense....... 583 568 720 852 967 221 260
Other expenses
(income), net......... 3 68 5 83 66 7 (19)
------- ------- ------- ------- --------- ------ ---------
Income (loss) before
provision (benefit)
for income taxes and
extraordinary gain.... (3,294) (1,617) (1,948) 1,301 3,004 184 918
Provision (benefit) for
income taxes(/2/)..... (16) 18 3 (1,397) 1,350 116 389
------- ------- ------- ------- --------- ------ ---------
Income (loss) before
extraordinary gain.... (3,278) (1,635) (1,951) 2,698 1,654 68 529
Extraordinary gain on
forgiveness of
liability(/1/)........ -- -- 2,686 -- -- -- --
------- ------- ------- ------- --------- ------ ---------
Net income (loss)...... $(3,278) $(1,635) $ 735 $ 2,698 $ 1,654 $ 68 $ 529
======= ======= ======= ======= ========= ====== =========
Pro Forma Statements of
Income Data(/3/)(/4/):
Gross revenue.......... $ 43,133 $ 12,377
--------- ---------
Net revenue............ 37,971 11,271
Costs of revenue....... 23,894 7,108
--------- ---------
Gross profit........... 14,077 4,163
Selling, general and
administrative
expenses.............. 8,348 2,445
--------- ---------
Income from
operations............ 5,729 1,718
Interest expense....... 421 120
Other expenses
(income), net......... 65 (25)
--------- ---------
Income before income
taxes................. 5,243 1,623
Provision for income
taxes................. 2,202 682
--------- ---------
Net income............. $ 3,041 $ 941
========= =========
Net income per share--
diluted............... $ 0.55 $ 0.17
========= =========
Weighted average shares
outstanding--diluted.. 5,568,957 5,611,360
========= =========
22
As of December 31, As of March 31, 1999
------------------------------------------- ----------------------
As
1994 1995 1996 1997 1998 Actual Adjusted (/5/)
------- ------- ------- ------- ------- ------- --------------
(in thousands)
Balance Sheet Data:
Working capital
(deficit)............. $(3,671) $(4,395) $(3,548) $ 2,016 $ 5,180 $ 567 $ 9,199
Total assets........... 7,931 5,384 4,677 11,733 14,530 15,689 23,969
Total debt............. 5,069 5,302 6,597 8,087 9,667 9,674 3,835
Total stockholders'
equity (deficit)...... (4,328) (5,962) (5,227) (1,525) 129 658 14,641
- ------------------
(1) In 1994, we accrued $2.0 million relating to excessive lease space in one
of our facilities. In 1996, amounts owed under the lease through December
31, 1995 were forgiven, resulting in an extraordinary gain on the
forgiveness of the liability and accrued but unpaid rent of $2.7 million.
See Note 17 to the TKCI consolidated financial statements.
(2) Prior to August 1, 1998, Keith Engineering, which is included in TKCI's
consolidated financial statements, elected to be taxed as an S corporation.
See "Prior S Corporation Status."
(3) Amounts reflect pro forma adjustments for provision for federal and state
income taxes at an assumed effective income tax rate of 42%. Net income per
share--dilutive reflects a 2.70-for-1 reverse split of TKCI's common stock
to be effected prior to the consummation of this offering.
(4) Amounts reflect pro forma adjustments for our initial public offering of
1,750,000 shares of common stock at an assumed initial offering price of
$9.00 per share, the acquisition and the application of the estimated net
proceeds from this offering as if the transactions had occurred on January
1, 1998. See "Pro Forma Condensed Consolidated Financial Statements."
(5) Amounts reflect pro forma adjustments for our initial public offering of
1,750,000 shares of common stock at an assumed initial offering price of
$9.00 per share, the acquisition and the application of the estimated net
proceeds from this offering as if the transactions had occurred on March
31, 1999. See "Pro Forma Condensed Consolidated Financial Statements."
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of TKCI and its subsidiaries and the related notes and the
other financial information included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of any number of
factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus.
Overview
The following discussion should be read in conjunction with "Selected Financial
Data" and our consolidated financial statements and the related notes, included
elsewhere in this prospectus, and includes the operations of TKCI and our
wholly-owned subsidiaries, including Keith Engineering. TKCI and Keith
Engineering have been under common management and ownership since the inception
of TKCI in 1986. On August 1, 1998, TKCI was reorganized, such that Keith
Engineering became a wholly-owned subsidiary of TKCI. This reorganization was
accounted for as a combination of affiliated entities under common control in a
manner similar to a pooling-of-interests. Under this method, the assets,
liabilities and equity were carried over at their historical book values and
the operations of TKCI and Keith Engineering have been recorded on a combined
historical basis. The combination did not require any material adjustments to
conform the accounting policies of the separate entities. On November 30, 1998
Keith Engineering was merged with and into TKCI. In this Management's
Discussion and Analysis of Financial Condition and Results of Operations,
references to "TKCI," "we," "our" and "us" mean TKCI and its subsidiaries
without giving effect to the acquisition of Thompson-Hysell.
In December 1997, TKCI purchased ESI and its wholly-owned subsidiary ESII,
Engineered Systems Integration, Inc., which was subsequently merged into ESI.
ESI provides consulting services related to process engineering design,
chemical engineering, electrical engineering, environmental waste processing
system design and petrochemical systems design. In August 1998, TKCI purchased
John M. Tettemer and Associates, which provides services relating to flood
control and drainage engineering, environmental permitting, and biological
surveys and studies. In April 1999, TKCI entered into an asset purchase
agreement with Thompson-Hysell, under which TKCI would acquire substantially
all of the assets and assume certain liabilities of Thompson-Hysell. With the
exception of the services provided by ESI, Thompson-Hysell provides services
similar to ours in central and northern California and Utah. This acquisition
will close concurrently with this offering and is expected to increase our
revenue, and, based upon Thompson-Hysell's historical results, we anticipate
that our gross margins after the acquisition will be positively impacted.
We derive most of our revenue from professional service activities. The
majority of these activities are billed under various types of contracts with
our clients, including fixed fee and time and material contracts. Most of our
time and material contracts have not-to-exceed provisions. Revenue is
recognized on the percentage of completion method of accounting
24
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 revenues are
generated from a large number of relatively small contracts.
In 1998, at least 85% of our revenues were 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. At least 50% of our
revenues are 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 southern
California will decline.
Costs of revenue include labor, non-reimbursable subcontract costs, materials
and certain direct and indirect overhead costs such as rent, utilities and
depreciation. Direct labor employees work predominantly at our offices, or in
some cases at the clients job site. The number of direct labor employees
assigned to a contract will vary according to the size, complexity, duration
and demands of the project. Contract terminations, completions and scheduling
delays may result in periods when direct labor employees are not fully
utilized. As we continue to grow, we anticipate that we will continue to add
professional and administrative staff to support our growth. Such professionals
are in great demand and are likely to remain a limited resource for the
foreseeable future. The significant competition for employees with the required
skills creates wage pressures on professional compensation. We attempt to
increase our billing rates to customers to compensate for wage increases,
however, there can be a lag before wage increases can be incorporated into our
existing contracts. Certain expenses, primarily long term leases, are fixed and
cannot be adjusted in reaction to an economic downturn.
Selling, general, and administrative expenses consist primarily of corporate
costs related to finance and accounting, information technology, contract
proposal, executive salaries, provisions for doubtful accounts and other
indirect overhead costs.
25
Results of Operations
The following table sets forth historical and unaudited pro forma supplemental
consolidated operating results for each of the periods presented as a
percentage of net revenue. Pro forma amounts for these periods reflect
adjustments for provisions for federal and state income taxes as if we had been
taxed as a C corporation, at an assumed effective income tax rate of
approximately 42%. On August 1, 1998, in connection with our reorganization,
Keith Engineering converted from an S corporation to a C corporation.
Year Ended Three Months
December 31, Ended March 31,
----------------- ---------------
1996 1997 1998 1998 1999
---- ---- ---- ------ ------
Gross revenue.............................. 111% 121% 117% 119% 111%
Subcontractor costs........................ 11% 21% 17% 19% 11%
--- --- --- ----- -----
Net revenue.............................. 100% 100% 100% 100% 100%
Costs of revenue........................... 71% 64% 66% 68% 66%
--- --- --- ----- -----
Gross profit............................. 29% 36% 34% 32% 34%
Selling, general and administrative
expenses................................. 38% 24% 20% 25% 21%
--- --- --- ----- -----
Income (loss) from operations............ (9%) 12% 14% 7% 13%
Interest expense........................... 6% 5% 3% 4% 3%
--- --- --- ----- -----
Income (loss) before pro forma provision
(benefit) for income taxes and
extraordinary gain..................... (15%) 7% 11% 3% 10%
Pro forma provision (benefit) for income
taxes.................................... (6%) 3% 5% 1% 4%
--- --- --- ----- -----
Pro forma income (loss) before
extraordinary gain..................... (9%) 4% 6% 2% 6%
Extraordinary gain on forgiveness of
liability, net of pro forma income
taxes.................................... 12% -- -- -- --
--- --- --- ----- -----
Pro forma net income..................... 3% 4% 6% 2% 6%
=== === === ===== =====
Three Months Ended March 31, 1999 and March 31, 1998
Revenue. Net revenue for the three months ended March 31, 1999 was $9.0 million
compared to $6.0 million for the three months ended March 31, 1998, an increase
of $3 million, or 50%. Net revenue growth resulted primarily from the continued
strengthening of the California and Nevada housing markets; growth in our
employee base and base of projects, which resulted in additional services and
follow-up contracts being awarded in the first three months of 1999 relating to
projects undertaken prior to 1999; improved weather conditions for field survey
crews for the first three months of 1999; and additional revenue as a result of
the acquisition of John M. Tettemer & Associates in August 1998. Excluding the
revenue from the acquisition of John M. Tettemer & Associates, our net revenue
for the three months ended 1999 grew $2.5 million, or 42%, compared to the
three months ended March 31, 1998. Subcontractor costs, as a percentage of net
revenue declined to 11% for the three months ended March 31, 1999 as compared
to 19% for the three months ended March 31, 1998, resulting primarily from a
decrease in services for our primary wireless telecommunications contract,
which was substantially completed by the end of 1998.
Gross Profit. Gross profit for the three months ended March 31, 1999 was $3.1
million compared to $1.9 million for the three months ended March 31, 1998, an
increase of
26
$1.2 million, or 62%. Gross profit growth is attributable to both our internal
revenue increases as well as the acquisition of John M. Tettemer & Associates.
As a percentage of net revenue, gross profit increased slightly to 34% for the
three months ended March 31, 1999 compared to 32% for the three months ended
March 31, 1998, resulting primarily from increased utilization of employees and
a reduction in facility costs as a percentage of net revenue. Costs of revenue
for the three months ended March 31, 1999 were $5.9 million compared to $4.1
million for the three months ended March 31, 1998, an increase of $1.8 million,
or 45%. Costs of revenue increases resulted primarily from growth in our
employee base from 271 as of March 31, 1998 to 372 as of March 31, 1999, an
increase of 101, or 37%. Excluding the acquisition of John M. Tettemer &
Associates in 1998, the number of employees increased by 83, or 31%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 1999 were $1.9
million as compared to $1.5 million for the three months ended March 31, 1998,
an increase of $426,000, or 29%. As a percentage of net revenue, selling,
general and administrative expenses decreased to 21% for the three months ended
March 31, 1999 from 25% for the three months ended March 31, 1998. The
percentage decrease resulted primarily from holding the growth in our corporate
labor costs and legal and accounting costs below our internal revenue
increases.
Years Ended December 31, 1998 and December 31, 1997
Revenue. Net revenue for 1998 was $29.2 million compared to $18.6 million for
1997, an increase of $10.6 million, or 57%. Net revenue growth resulted
primarily from the continued strengthening of the California and Nevada housing
markets, partially offset by a decline in our wireless telecommunications
business; growth in our employee base and base of projects, which resulted in
additional services and follow-up contracts being awarded in 1998 relating to
projects undertaken prior to 1998; and additional revenue as a result of the
acquisition of ESI in December 1997 and John M. Tettemer & Associates in August
1998. Excluding the revenue from the acquisitions of ESI and John M. Tettemer &
Associates, our 1998 net revenue grew $6.0 million, or 32%, compared to 1997.
Subcontractor costs, as a percentage of net revenue, declined to 17% for 1998
compared to 21% for 1997, resulting largely from our primary wireless
telecommunication contract coming to substantial completion in 1998.
Gross Profit. Gross profit for 1998 was $9.9 million compared to $6.7 million
for 1997, an increase of $3.2 million, or 47%. Gross profit growth is
attributable to both our internal revenue increases as well as the acquisitions
of ESI and John M. Tettemer & Associates. As a percentage of net revenue, gross
profit decreased slightly to 34% for 1998 compared to 36% for 1997. Costs of
revenue for 1998 was $19.3 million compared to $11.9 million in 1997, an
increase of $7.4 million, or 63%. Costs of revenue increases resulted primarily
from growth in our employee base from 260 in 1997 to 356 in 1998, an increase
of 96, or 37%, and wage pressures on professional compensation, which
represents the largest component of cost of revenue. Excluding the John M.
Tettemer & Associates acquisition in 1998, the number of employees increased by
78, or 30%.
27
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for 1998 were $5.9 million compared to $4.5 million for
1997, an increase of $1.4 million, or 31%. As a percentage of net revenue,
selling, general and administrative expenses decreased to 20% for 1998 from 24%
for 1997. The percentage decrease resulted primarily from the collection of
approximately $390,000 of accounts receivable written off in prior years and
holding the growth in our corporate labor costs below our internal revenue
increases.
Interest Expense. Interest expense for 1998 was $967,000 compared to $852,000
for 1997, an increase of $115,000, or 14%. As a percentage of net revenue,
interest expense was 3% for 1998 compared to 5% for 1997. The percentage
decrease resulted primarily from our increased revenue base and the refinancing
of our line of credit at a lower interest rate in February 1998.
Years Ended December 31, 1997 and December 31, 1996
Revenue. Net revenue for 1997 was $18.6 million compared to $13.0 million for
1996, an increase of $5.6 million, or 43%. Net revenue growth was driven
primarily by improvement in the California and Nevada housing market; growth in
our employee base and base of projects, which resulted in additional services
and follow-up contracts being awarded in 1997 relating to projects undertaken
prior to 1997; and our award of a significant contract with a wireless
telecommunications client at the end of 1996. Subcontractor costs, as a
percentage of net revenue, grew to 21% for 1997 compared to 11% for 1996,
resulting primarily from the significant wireless telecommunications contract
awarded at the end of 1996.
Gross Profit. Gross profit for 1997 was $6.7 million compared to $3.7 million
for 1996, an increase of $3.0 million, or 80%. As a percentage of net revenue,
gross profit increased to 36% in 1997 compared to 29% in 1996 reflecting our
ability to expand our revenue through increased utilization of employees and a
reduction in facility and professional insurance costs as a percentage of net
revenue. In addition, the gross profit percentage increased due to improvements
in the overall economy in 1997 resulting in favorable pricing adjustments.
Costs of revenue was $11.9 million for 1997 compared to $9.2 million for 1996,
an increase of $2.7 million, or 29%. Costs of revenue increases resulted
primarily from growth in our employee base from 181 in 1996 to 260 in 1997, an
increase of 79, or 44%. Excluding the acquisition of ESI in 1997, the number of
employees increased by 45, or 25%.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $4.5 million for 1997 compared to $5.0 million for
1996, a decrease of $475,000, or 10%. Selling, general and administrative
expenses as a percentage of net revenue decreased to 24% for 1997 from 38% for
1996. The percentage decrease was primarily related to an approximate $822,000
reduction in the provision for doubtful accounts in 1997 compared to 1996.
Concurrently with the prolonged southern California economic recession, in
1996, we reached the conclusion that a significant receivable was uncollectible
and increased our provision for doubtful accounts by $710,000. The increase in
selling, general and administrative expenses, as a percentage of revenue was
impacted by holding the growth in our corporate labor and legal and accounting
costs below our internal revenue increases.
28
Extraordinary Gain. Our 1996 results of operations were impacted by a one time
gain on the forgiveness of a lease liability of $2.7 million. In August 1996,
we entered into an agreement, whereby all amounts owed and accrued under a
lease through December 31, 1995 were forgiven.
Quarterly Results
The following table sets forth unaudited historical and supplemental pro forma
selected quarterly consolidated financial information. Pro forma amounts
reflect adjustments for provisions for federal and state income taxes as if we
had been taxed as a C corporation, at an assumed effective income tax rate of
approximately 42%. On August 1, 1998, Keith Engineering was converted from an S
corporation to a C corporation. This information has been derived from
unaudited consolidated financial statements which, in the opinion of
management, include all adjustments (consisting of normal recurring entries)
necessary for a fair presentation of such information. Consolidated results of
operations for any one or more quarters are not necessarily indicative of
results for an entire year or the results to be expected for any future period.
Quarterly Results
----------------------------------------------------------------------------------
Three Months Ended
----------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
(in thousands)
Consolidated Statement
of Income Data:
Gross revenue........... $4,423 $5,401 $6,060 $6,701 $7,121 $8,399 $9,192 $9,309 $9,999
------ ------ ------ ------ ------ ------ ------ ------ ------
Net revenue............. 3,978 4,486 5,116 5,012 5,962 7,051 7,900 8,269 8,969
Costs of revenue........ 2,574 2,804 3,235 3,258 4,080 4,613 5,077 5,517 5,914
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit........... 1,404 1,682 1,881 1,754 1,882 2,438 2,823 2,752 3,055
Selling, general and
administrative
expense................ 968 1,210 1,085 1,222 1,470 1,131 1,626 1,631 1,896
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
operations............ 436 472 796 532 412 1,307 1,197 1,121 1,159
Interest expense........ 167 212 229 244 221 244 249 253 260
Other expenses (income),
net.................... 42 9 6 26 7 (18) 18 59 (19)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before pro forma
provision for income
taxes................. 227 251 561 262 184 1,081 930 809 918
Pro forma provision for
income taxes........... 95 105 236 110 77 454 391 340 386
------ ------ ------ ------ ------ ------ ------ ------ ------
Pro forma net income... $ 132 $ 146 $ 325 $ 152 $ 107 $ 627 $ 539 $ 469 $ 532
====== ====== ====== ====== ====== ====== ====== ====== ======
As a Percentage of Net Revenue
----------------------------------------------------------------------------------
Three Months Ended
----------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1997 1997 1997 1997 1998 1998 1998 1998 1999
-------- -------- --------- -------- -------- -------- --------- -------- --------
Consolidated Statement
of Income Data:
Gross revenue........... 111% 120% 118% 134% 119% 119% 116% 113% 111%
------ ------ ------ ------ ------ ------ ------ ------ ------
Net revenue............. 100% 100% 100% 100% 100% 100% 100% 100% 100%
Costs of revenue........ 65% 63% 63% 65% 68% 65% 64% 67% 66%
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit........... 35% 37% 37% 35% 32% 35% 36% 33% 34%
Selling, general and
administrative
expense................ 24% 27% 21% 24% 25% 16% 21% 19% 21%
------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
operations............ 11% 10% 16% 11% 7% 19% 15% 14% 13%
Interest expense........ 4% 5% 5% 5% 4% 3% 3% 3% 3%
Other expenses (income),
net.................... 1% -- -- 1% -- -- -- 1% --
------ ------ ------ ------ ------ ------ ------ ------ ------
Income before pro forma
provision for income
taxes................. 6% 5% 11% 5% 3% 16% 12% 10% 10%
Pro forma provision for
income taxes........... 2% 2% 5% 2% 1% 7% 5% 4% 4%
------ ------ ------ ------ ------ ------ ------ ------ ------
Pro forma net income... 4% 3% 6% 3% 2% 9% 7% 6% 6%
====== ====== ====== ====== ====== ====== ====== ====== ======
29
Our quarterly revenue and operating results fluctuate primarily as a result of:
. client engagements commenced and completed during a quarter
. seasonality
. the number of business days in a quarter
. the number of work days lost as a result of adverse weather conditions
or delays caused by third parties
. employee hiring, billing and utilization rates
. the consummation of acquisitions
. the length of the sales cycle on new business
. the ability of clients to terminate engagements without penalty
. our ability to efficiently shift our employees from project to project
. the size and scope of assignments
. general economic conditions
The treatment of $172,000 as compensation expense, resulting from an option
granted in April 1997, and the collection of an account receivable in the
amount of $390,000, previously written off affected selling, general and
administrative expense in the quarters ended June 30, 1997 and 1998,
respectively.
Liquidity and Capital Resources
We have financed our working capital needs and capital expenditure requirements
through a combination of internally generated funds, bank and related party
borrowings, leases and the sale of our common stock.
Working capital for 1998 was $5.2 million compared to $2.0 million in 1997, an
increase of $3.2 million, or 157%, resulting primarily from growth in accounts
receivable and costs and estimated earnings in excess of billings, due to
higher revenue levels. Cash generated from operating activities increased
$310,000, or 82%, to $686,000 in 1998 compared to $376,000 in 1997, reflecting
our increase in income from operations. The growth in cash generated from
operating activities was used primarily to fund capital expenditures of
$835,000 in 1998 compared to $276,000 in 1997 and to partially finance the
acquisition of John M. Tettemer & Associates. Capital expenditures consisted
primarily of computer equipment, upgrades to our information systems, and
equipment and vehicles used in our survey services.
We maintain a line of credit agreement with a bank, which as of March 31, 1999,
allowed us to borrow up to $5.5 million, not to exceed 80% of our eligible
accounts receivable, as defined in the agreement. On March 5, 1999, the bank
amended the agreement to, among other things, amend certain financial related
covenants effective December 31, 1998, adjust the interest rate to the bank's
prime rate plus a variable margin tied to certain financial
30
covenants (10.5% at March 31, 1999) and extend the maturity on the line to
March 1, 2000. Cash of $1.8 million drawn on our line of credit was used
primarily for working capital purposes, to repay debt assumed in acquisitions
and to repay existing debt. At December 31, 1998, we owed $4.5 million on this
line of credit. We expect to repay approximately $4.2 million of the line of
credit with a portion of the net proceeds from this offering. We must meet or
exceed certain financial covenants to the bank under the line of credit. If we
have not received the net proceeds from the offering by June 30, 1999, we may
need additional equity or subordinated debt to satisfy these covenants. We
expect certain of our shareholders to be able to provide additional equity or
subordinated debt to us if necessary.
Net cash received from related party borrowings decreased to $156,000 in 1998
from $919,000 in 1997. In addition, in 1997, we received $598,000 from a
related party in exchange for shares of TKCI common stock. The reduction in
cash received from related parties resulted primarily from our increase in cash
generated from operating activities and availability under our line of credit.
On April 9, 1999, TKCI entered into an Asset Purchase Agreement with Thompson-
Hysell and its shareholders. Thompson-Hysell provides real estate services
similar to TKCI in central and northern California and Utah. Under the Asset
Purchase Agreement, TKCI will acquire substantially all of the assets of
Thompson-Hysell, including the right to use its name, and assume certain of its
liabilities. TKCI will pay a purchase price of: (a) cash in the amount of
$3,333,333; (b) a promissory note in the amount of $1,333,333 payable in 2001;
and (c) shares of common stock with a value equal to $1,333,334 which may be
issuable in 2000 if certain conditions are met. The purchase price is subject
to adjustment upward or downward depending upon (a) certain financial targets
being met related to the assets acquired and liabilities assumed; (b) earnings
for the years ended December 31, 1999 and 2000; and (c) an adjustment for
income tax effects. We expect to close this acquisition concurrently with this
offering. We expect the operations acquired to increase our revenues, and if
the Thompson-Hysell operations perform as they have historically, to increase
our gross margins.
We believe existing cash balances, internally generated funds, and availability
under credit facilities together with the proceeds of this offering will be
sufficient to fund our anticipated internal operating needs for the next twelve
months.
Inflation
Although our operations can be influenced by general economic trends, we do not
believe that inflation had a significant impact on our results of operations
for the periods presented.
31
Due to the short-term nature of most of our contracts, if costs of revenue
increase, we attempt to pass these increases to our clients.
Year 2000
We are currently in the final phase of identifying and evaluating the potential
impacts of the Year 2000 on information systems and embedded systems. A Year
2000 Mitigation Committee comprised of senior management and functional
managers is evaluating the following issues:
. State of readiness
. Costs to address Year 2000 issues
. Risk assessment
. Contingency plan
The following is a description of the process we have established and which we
intend to follow to minimize our Year 2000 risk exposure:
State of readiness. Our information technology and non-information technology
systems can be divided into support/administrative and operational/production
systems. We have surveyed all significant systems used to perform our
support/administrative functions and received written assurance from our system
suppliers either that these systems are currently Year 2000 compliant or that a
Year 2000 compliance update will be available by the end of the third quarter
of 1999. We intend to perform internal tests on all mission critical systems to
validate the supplier statements by the end of the third quarter of 1999. We
use several major software programs to perform our daily operations and we are
in the final stage of assessing these systems. We have received letters
assuring us of Year 2000 compliance on almost all of these systems and have
requested similar assurances relating to the remaining systems. We intend to
perform in-house testing to validate the Year 2000 compliance of our
operational production systems and expect to have such testing completed by the
end of the third quarter of 1999. In May 1999, we intend to ask the vendors of
embedded systems to provide us with written assurance of Year 2000 compliance.
Cost to address Year 2000 issues. We have determined that the primary computer
systems which we use are Year 2000 compliant and therefore we do not anticipate
that costs related to the Year 2000 date change will be material to our
business, financial condition or results of operations.
Risk assessment. Based on the findings of our Mitigation Committee, we believe
that the impact of Year 2000 issues on our internal operations will be minimal.
In order to minimize any adverse effect caused by the Year 2000 date change,
our operational personnel transfer their work to back-up tapes on a daily basis
and store such tapes in an offsite facility.
We have had difficulty estimating the impact of Year 2000 non-compliance by
outside parties with whom we transact business. While we have received
assurances from many of these third parties as to their Year 2000 compliance,
we have not yet completed our survey. As a result, we are not in a position at
this time to accurately ascertain the degree of
32
compliance by vendors and subconsultants with whom we conduct business.
Although not all of the vendors and subconsultants from whom we have received
responses are Year 2000 compliant at this time, we have received some
assurances that these third parties will be prepared for the Year 2000 date
change by the end of 1999. During May 1999, we intend to survey our vendors and
subconsultants to ascertain their Year 2000 readiness.
We are currently having discussions with other significant third parties such
as our bank and payroll service and expect to receive assurances regarding Year
2000 compliance from such service providers by the end of the second quarter of
1999. Although our client base is diverse and no one client accounts for more
than 10% of our gross revenue, we have had discussions with our major clients
regarding their readiness for the Year 2000 date change and those who have not
given us written assurance, we expect to receive it by the end of third quarter
of 1999.
Contingency plan. Because we have not completed our testing and assessment
procedures, we have not developed any plans for likely scenarios involving Year
2000 failures. If, when testing and assessment is complete, it appears
reasonably likely that such a failure may occur, management intends to develop
appropriate plans to deal with such contingencies. If we are unsuccessful in
developing or implementing a plan to correct possible Year 2000 failures, or if
we fail properly to anticipate a Year 2000 failure either in our information
technology (software) or non-information technology (microcontrollers in
equipment), we may experience disruptions in operations. Our projection of the
most serious disruptions which could occur include:
. the loss of approximately two months' revenues if our accounting
systems fail and we are unable to utilize backup information. We
would, however, expect eventually to be able to recover a significant
portion of this revenue by recreating time and cost entries from hard
copies of such data.
. the loss of engineering and project data if we are unable to utilize
backup information, resulting in the need to re-input printed data.
This effort could increase operating costs and reduce margins in the
first two quarters of 2000 and might cause the loss of some projects
if we are unable to fulfill our time commitments.
. the loss of the services of subcontractors who are experiencing
disruptions due to Year 2000 risks, resulting in the loss of contracts
because of failure to meet deadlines
. the loss of revenues if any of the accounting systems of our clients
experience a Year 2000 failure
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate changes primarily as a result of our line of
credit, long-term debt, capital leases and notes payable to related parties,
which are used to maintain liquidity and to fund capital expenditures and our
expansion. Our interest rate risk management
33
objectives are to limit the impact of interest rate changes on earnings and
cash flows and to lower our overall borrowing costs. To achieve our objectives,
we have borrowed at fixed rates and may enter into derivative financial
instruments to mitigate our interest rate risk on variable rate debt. We do not
enter into derivative or interest rate transactions for speculative purposes.
The table below presents the principal amounts, 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
(dollars in thousands).
Fair
1999 2000 2001 2002 2003 Total Value(/1/)
----- ------ ----- ----- ----- ------ ----------
Fixed rate debt(/2/)........... $ 519 $2,458 $ 61 $ 66 $ 47 $3,151 $3,151
Average interest rate.......... 8.00% 10.00% 8.00% 8.00% 8.00% 9.57% 9.57%
Variable rate debt............. -- $4,527 -- -- -- $4,527 $4,527
Average interest rate.......... -- 9.25% -- -- -- 9.25% 9.25%
- ------------------
(1) The fair value of fixed rate debt and variable rate debt was determined
based on current rates offered for debt instruments with similar risks and
maturities.
(2) Fixed rate debt excludes notes payable with an aggregate principal amount
of $576,000 as there is no established market for these notes.
As the table incorporates only those exposures that existed as of December 31,
1998, 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 therein has limited predictive value. As a
result, our ultimate realized gain or loss with respect to interest rate
fluctuations will depend on the exposure that arises during the period and
interest rates.
34
BUSINESS
General
We began operating in 1983 as Keith Engineering, which was incorporated on
March 1, 1983. We formed TKCI in November 1986, under the name The Keith
Companies-Inland Empire, Inc., and merged the two companies in November 1998
with TKCI as the survivor. We provide engineering, consulting and technical
services to clients operating in a variety of environments.
Industries Served
The industries we serve are real estate development, public works and wireless
telecommunications and industrial engineering.
Real Estate Development, Public Works and Wireless Telecommunications
Real Estate Development
Residential, commercial and golf and other recreational developers use
technical consultants to provide planning and environmental services to create
land use plans, write the supporting planning and environmental documents and
process entitlements and permits through governmental authorities. Technical
consultants also assist clients in gaining approvals and permits from federal,
state and local agencies. After projects are approved by governmental agencies,
developers need surveying, mapping and civil engineering services to survey
development sites, create accurate boundary/base maps and provide engineering
designs for mass grading, streets, sewer pipelines and facilities, water
pipelines and facilities, utilities and drainage facilities. Upon completion of
the design phase, survey crews provide construction staking services to
identify the precise locations of streets, utilities, pipelines and other
facilities. In culturally sensitive projects or areas, developers may also
require environmental and archaeological services for the planning and
environmental approvals and construction and post-construction phase monitoring
services.
The U.S. real estate industry is commonly segmented into four geographic
regions: northeast, south, mid-west and west. We operate in the west region,
primarily in California and in Nevada and Utah. During the last economic upturn
in the real estate industry in southern California, which we believe lasted
eight years from 1983-1990, our gross revenue and number of employees grew.
During the following downturn in southern California, through 1996, we
experienced a reduction in revenue and employees. We believe that the southern
California real estate market is in the third year of an economic upturn. In
1998, at least 80% of our revenue from residential real estate related
development was in California.
Residential. The residential development industry consists of large scale
communities, seniors/retirement communities, single family homes and multi-
family homes such as condominiums and apartments. The issuance of building
permits is an important economic indicator in forecasting housing starts. The
following table from Regional Financial
35
Associates, Inc., shows the actual building permits issued for 1996-1997 and
the building permits expected to be issued for 1998-2000 in California, Nevada,
Utah and nationally.
Residential Building Permits (Issued Annually)
1996 1997 1998 1999 2000
------ ------- ------- ------- -------
California 92,060 109,589 131,673 170,321 182,474
Nevada 37,242 34,811 36,092 28,000 25,973
Utah 23,481 19,263 20,005 18,885 18,267
National (million) 1.48 1.62 1.52 1.34 1.37
According to a report released by the U.S. Bureau of the Census in 1997,
California, Nevada and Utah are projected to be among the top seven fastest
growing states in population growth during the thirty year period from 1995 to
2025. In March 1999, the U.S. Bureau of the Census also reported that of the
nation's 3,142 counties, four southern California counties (Los Angeles,
Orange, San Diego and Riverside) and one Nevada county (Clark) were among the
top seven in population gains between 1997 and 1998. In December 1998, a report
prepared by Regional Financial Associates, Inc. showed that since 1991, the
west region has outpaced the nation in population growth. Regional Financial
Associates, Inc. forecasted that the region's population would continue to
outpace the nation at least through the year 2002.
The following three tables from Regional Financial Associates, Inc., show
historical demographic data for 1996-1997 and projected demographic data for
1998-2000 for population, employment and personal income.
Population
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
California (000's) 31,858 32,268 32,756 33,271 33,740
Nevada (000's) 1,601 1,677 1,733 1,787 1,835
Utah (000's) 2,018 2,059 2,097 2,130 2,164
National (million) 267.7 270.3 272.6 274.9 277.2
Employment
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
California (000's) 12,743 13,169 13,577 13,827 14,104
Nevada (000's) 843 890 929 961 995
Utah (000's) 954 995 1,024 1,043 1,076
National (million) 122.7 125.8 127.8 129.0 131.1
Personal Income Growth (% Change)
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
California 5.8 6.0 6.5 5.7 6.1
Nevada 10.4 7.5 6.7 6.9 7.5
Utah 8.2 7.4 5.8 6.2 6.6
National 5.6 5.0 4.6 4.9 5.6
36
Commercial. The commercial development industry includes the construction of
retail, office and industrial facilities. Important economic indicators in
forecasting commercial development include, among others, growth in employment
and personal income. According to research conducted in 1998 by Regional
Financial Associates, Inc., employment and income in the west region are
projected to grow by an annual average of 2.0% and 6.1%, respectively, from
1999 to 2000. Colliers International reported in a 1999 market study that
retail development in Las Vegas continues to grow, with approximately 4 million
square feet of new retail in the planning phase and 1.4 million square feet
under construction. This constitutes a 26% increase over the existing 21
million square feet. Colliers also forecasts that with residential growth
continuing to fuel retail growth in the Nevada marketplace, the construction of
neighborhood and community centers lead commercial development growth with a
25% planned growth rate.
During 1997, the United States' economy generated 730,000 new office jobs,
according to the U.S. Bureau of Labor Statistics. In the same year, national
office vacancy rates dropped below what is considered the market's equilibrium,
lease rates continued to remain steady and construction for 1998 jumped from 49
million square feet at year end 1997 to 90 million square feet at year end 1998
according to 1998 and 1999 Grubb and Ellis commercial industry reports. The
U.S. Commerce Department stated that through November 1998, office building
construction was running at an annual rate of $41.5 billion, a 21% increase
over 1997. The F.W. Dodge division of the McGraw-Hill Companies forecasts
office building construction to increase by 9% in 1999.
Golf and Other Recreational Facilities. Recreational projects include golf
courses, hotels and resorts. The most significant proportion of our revenue
from golf and other recreational projects is derived from golf related
projects. According to the 1998 edition of Golf Participation in the United
States and Trends in the Golf Industry, the United States currently has 26.5
million golfers over age 12, a 33% increase from 1986. Likewise, the National
Golf Foundation published a report in March 1999 stating that the number of new
courses in 1998 was 448 as compared with 10 years ago when the industry was
averaging less than 175 courses per year. In addition, the National Golf
Foundation states that the number of courses in planning and construction
increased from 1,652 on January 1, 1998 to 1,777 on January 1, 1999, a 7.6%
increase. Lastly, as of December 31, 1998, according to the National Golf
Foundation, California is ranked among the top three states for total number of
existing courses, new course openings, courses under construction and courses
related to real estate development.
Public Works
Transportation, water resources, and other public works projects may provide
ongoing, reliable sources of revenue for engineering firms and consultants when
private development activities decline during unfavorable economic periods.
These public projects are often long-term and ongoing, and have historically
provided more determinable and consistent revenue streams.
37
Transportation. Highway and interchange projects require engineering designs
for roadways, interchanges, the placement or relocation of sewer lines, water
pipelines and utility lines and rainfall run-off management. In a recent
publication, The American Society of Civil Engineers reported that as much as
$1.3 trillion of capital investment is currently necessary to repair and renew
our infrastructure to meet our growing needs. In 1998, the U.S. Congress
authorized funding of $175 billion under the Transportation Equity Act for
highway projects over the next six years, a 44% increase over the previous
funding program according to the F.W. Dodge division of the McGraw Hill
Companies. According to Dodge, western states will be the earliest recipient of
funds from the program with non-building construction expected to increase 14%
in 1999 over 1998.
According to the California Department of Transportation, Governor Gray Davis
has proposed more than $7.9 billion to fund Caltrans during the 1999-2000
fiscal year, which is $1.6 billion more than the 1998-1999 fiscal year. The
largest portion of this budget is $3.9 billion for capital outlay projects
(ongoing and new highway construction projects), according to the California
Department of Transportation.
Water Resources. Public water resource projects include the installation,
rehabilitation or replacement of facilities or infrastructure for:
. protection of water sources
. storage (i.e., dams or reservoirs)
. water treatment
. water pipelines
. collection of wastewater
. sewer lines
. treatment of wastewater
In 1998, the American Society of Civil Engineers published the 1998 Report Card
for America's Infrastructure. This report states that the total infrastructure
needs for drinking water remain large, $138.4 billion, more than $76.8 billion
of that is needed right now to protect public health. This organization also
stated that America needs to invest roughly $140 billion over the next 20 years
in its wastewater treatment systems and that an additional 2,000 plants may be
necessary by the year 2016 to meet expanded treatment goals.
Wireless Telecommunications
With the emergence and growth of personal communication services and the
conversion from analog to digital technology, the demand for the development
and construction of new wireless transmission base stations, switching centers
and microwave link networks has increased. For the development of most wireless
telecommunications networks, wireless service providers hire outside experts in
site acquisition/lease arrangement, land planning, permitting, civil
engineering, equipment procurement and/or construction management. The
development costs for a typical base station in southern California are
approximately $350,000 to $700,000, of which engineering, consulting and
technical services may account for approximately $50,000.
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Wireless subscriber growth is the main driver in demand for new tower sites,
according to a 1998 business model by Morgan Stanley Dean Witter Equity
Research. In 1998, the Cellular Telecommunications Industry Association
predicted that the number of United States wireless customers would grow from
an estimated 124 million in 1998 to an estimated 209 million in 2003 and
expected the compounded average growth rate from 1998 to 2003 to be 11%. The
Personal Communications Industry Association estimated that 12,000 to 20,000
new towers are needed by 2003 to accommodate the growth of wireless services.
In 1998, the Cellular Telecommunications Industry Association stated that the
total number of communication sites would grow from 38,650 at the end of 1997
to approximately 100,000 by the year 2000.
Industrial Engineering
Modern machines, assembly lines, factories and refineries require industrial
engineering services to enable utilization of new processes and to improve
efficiency and reliability. Comprehensive industrial engineering services
include the design or redesign of electrical systems and HVAC systems,
mechanical equipment design and procurement, instrumentation and control
systems integration, chemical process engineering, energy usage consulting,
fire protection engineering, material handling and process flow planning,
automation and robotics design, construction management and installation
supervision, project management and computer programming.
Industrial engineering projects which utilize engineering, consulting and
technical services include:
. High Tech Facilities: biotechnology, pharmaceutical, and laboratory
facilities, computer centers, control rooms, research and development
facilities
. Consumer Product Facilities: automotive assembly, household products
and packaging facilities
. Food and Beverage Facilities: bottling/packaging facilities, material
handling facilities, process controls, robotics, food and beverage
manufacturing facilities
. Educational Facilities: schools and universities
. Public Facilities/Utilities/Energy/Power: power plants, natural gas,
electric
There is a continued trend in the manufacturing and assembly industry toward
automation and increased efficiency. As these industries grow, so does their
need for design and engineering services to automate and increase efficiency of
new and existing facilities. According to a 1998 Standard & Poors survey of the
manufacturing and assembly industries in the United States, the biotechnology
industry is expected to grow annually in the 20-25% range in 1999 and 2000, the
packaged food and beverage industry is expected to grow by 10% in 1999, and the
non-alcoholic beverage sector is expected to grow by 12% in 1999. We expect
these industries to increase their use of automation to make their facilities
more efficient.
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The TKCI Advantage
The engineering, consulting and technical services industries are highly
fragmented, ranging from a large number of relatively small local firms to
large, multi-national firms. We estimate that there are over 500 firms
providing the engineering, consulting and technical services to the industries
we serve in our principal operating areas. We believe that we have successfully
penetrated the regional residential real estate industry to capture a
significant share of the market and establish ourselves as a leader in the
market. In California, Nevada and Utah, residential building permits projected
for issuance in 1999 through 2002 represented 908,172 residential units. In
these locations, we are serving projects with over 100,000 estimated
residential units. These projects range in duration from less than one year to
more than five years. We believe that we can further enhance our leading
position in the western United States in the industries we serve for the
following reasons:
Reputation
Our reputation for providing high quality services has been a source of
numerous project assignments. We believe our reputation is strengthened due to
the personal relationships developed between our staff and representatives of
clients and agencies. We have been awarded many projects either due to our
expertise in working with an agency or project type or because a particular
client desires to work with, and can count on, specific project managers. In
addition, we have received numerous awards for technical excellence including
the Project of the Year Award of Excellence in the award category of
Engineering Land Development for the "Dana Point Townhomes" from the California
Council of Civil Engineers and Land Surveyors; a Certificate of Recognition for
the design of the "Grand Avenue-Chino Hills Parkway" from the County of San
Bernardino, California Board of Supervisors; and a Letter of Appreciation from
the State of California for streamlining the "Telecommunications Leasing
Program" and for our assistance in formulating telecommunications real estate
objectives and strategies.
Industry and Professional Experience
We recognize that our employees are our most valuable resource for providing
ongoing quality service and for obtaining new work. Of our staff of over 450,
we have over 100 individuals with professional registrations. During employee
selection and as part of our acquisition criteria we require that the people
added to our team have significant experience in the industries they serve. We
supplement this industry experience by providing in-house continuing education
seminars, design forums and training programs.
Full Service Approach
We provide civil engineering, surveying and mapping, planning, environmental,
archaeological, construction management, site acquisition, water resource
engineering, instrumentation and control systems engineering, fire protection
engineering, electrical engineering, mechanical engineering and chemical
process engineering services. Since most engineering, consulting and technical
services firms specialize in only one or a few services,
40
a project owner may often be required to engage several engineering and/or
consulting firms during the various phases of a project (i.e., from identifying
and evaluating whether to acquire a parcel of land to designing, engineering
and managing the construction of the finished project). We believe that clients
realize significant cost and time savings and maintain consistent quality by
utilizing a single firm for all services.
Cross-Marketing
Due to our reputation and industry and technical expertise, we have frequently
increased the number and scope of services provided to a client from an initial
engagement, such as land planning, to include other services, such as mapping
and surveying. When we expand into new geographic regions, we have successfully
cross-sold and intend to continue to cross-sell services offered by one office
to clients in another office.
Because our professionals provide many of the preliminary services on projects
such as planning, civil engineering and surveying and mapping, we are
frequently asked to bid on additional services on a project as it progresses.
In performing the preliminary services in the initial phases of a project, we
obtain background information and data relating to the project that may be
inefficient and costly for another firm to compile. Consequently, we are often
more knowledgeable about a project, and, as a result, we are often engaged to
perform the additional engineering and consulting services that the client
requires as the project progresses.
Effective Organizational Structure
We believe that our organizational structure allows us to compete effectively
with small and mid-size local firms and with large regional and national firms.
Our organizational structure combines the efficiencies associated with
centralization and the flexibility of decentralization. Our administrative
functions are centralized in our corporate headquarters in Costa Mesa,
California allowing us to eliminate duplicative functions and personnel at our
divisional offices. We believe this centralization allows the management at our
divisional offices the freedom to focus on identifying new business
opportunities and overseeing the technical services provided in that office,
and allows the flexibility for those managers to maintain focus on being
responsive to client needs. The centralization of administrative functions also
allows us to effectively and efficiently integrate acquired companies.
Business Strategy
Our objective is to strengthen our position as a leading provider of
engineering, consulting and technical services while growing our geographic
presence and expanding the services we offer. To achieve this objective, we
have developed a strategy with the following key elements:
. Maintain High Quality of Service. To maintain high quality service,
we focus on being responsive to customers and working diligently and
responsibly to maintain schedules and budgets. As a result of our
focus on quality and timeliness of service, we believe that we have
established an excellent reputation
41
in the markets we serve. We intend to continue providing high quality
service as we expand our geographic presence and service offerings.
. Continue to Recruit and Retain Highly Qualified Personnel. We believe
that recruiting and retaining skilled professionals is crucial to our
success and our growth. As a result, we intend to continue to recruit
experienced and talented individuals who can provide quality services
and innovative solutions for our clients' projects. We believe that
our employee benefits package provides incentives that enable us to
continue to attract the most qualified candidates.
. Expand Geographically. To diminish the impact of regional economic
cycles, we intend to continue to expand our geographic presence by
making acquisitions, opening additional divisional offices and
marketing our services to clients with national and international
needs. Our geographic growth will provide us with broader access to
employee pools, work sharing between regions and new business
opportunities. We believe the acquisition of Thompson-Hysell will
enable us to more effectively sell additional services in both
central and northern California and Utah. We intend to continue to
increase our service offerings outside of California, Nevada and
Utah.
. Expand Scope of Services. We intend to build upon our reputation as a
quality provider of real estate related engineering, consulting and
technical services as we diversify our services to meet new demands
of clients and the demands of new markets. As part of our effort to
continue diversifying our scope of services, we intend to pursue
strategic partnering relationships and acquisitions.
. Continue to Effectively Integrate Acquired Operations. We intend to
continue to pursue acquisitions that expand our range of services
and/or our geographic presence and that result in an increase in our
operating efficiencies. We believe that strategic acquisitions will
enable us to more efficiently and quickly serve the diverse technical
and geographic needs of, and secure additional business from, our
national and international clients.
We have implemented our strategy, by (a) providing services to the wireless
telecommunications industry; (b) obtaining a subcontract to assist Marconi
Integrated Systems, Inc. in a global mapping project for the National Imagery
and Mapping Agency; and (c) acquiring ESI, John M. Tettemer & Associates and
Thompson-Hysell. This diversification of our services has broadened our
geographic presence, expanded the number of industries we serve and added our
capability to provide water resources, environmental, mechanical, electrical,
chemical process, and fire protection and other industrial engineering
services.
Services Provided
We provide a broad range of services, including civil engineering, surveying
and mapping, planning, environmental, archaeological, construction management,
site acquisition, water resources engineering and other industrial engineering
services (instrumentation and control
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systems engineering, fire protection engineering, electrical engineering,
mechanical engineering and chemical process engineering).
Civil Engineering Services
General civil engineering is often referred to as "design from the ground down"
because it is part of all construction design work on the ground and below.
Civil engineering services include:
. project feasibility and due diligence analysis
. development cost projections
. access and circulation analysis
. infrastructure design and analysis
. pro forma cost studies
. project management
. construction documents
. tentative mapping
. flood plain studies
. sewer, water and drainage design
. street and highway design
. site/subdivision design
. grading design
As an example of how our civil engineering services are utilized, our engineers
were the master engineers for the Newport Coast development in southern
California. This development consists of over 9,600 acres that has been planned
for more than 2,400 residential units, three destination resorts, two
championship golf courses (both part of the Pelican Hill Golf Club) and over
7,300 acres of dedicated open space. We were responsible for the preparation of
a majority of the preliminary and final civil engineering designs, and provided
the project with land surveying, mapping, water resources and archaeological
services. In addition, as the infrastructure engineer for this project, we
completed the master drainage plan, designed the master water and sewer
facilities and designed many of the primary roadways.
Surveying and Mapping Services
From establishing boundaries for preliminary engineering through construction
layout and as-built surveys, it is common for our surveying and mapping teams
to be "the first in and the last out" on a construction project. We provide
surveying and mapping services through our teams of skilled professionals that
utilize the latest technology, including global positioning systems, geographic
information systems, and field-to-office digital and electronic data capture,
to produce information that will serve as the foundation for a variety of
planning and engineering design and analysis endeavors. Our surveying and
mapping services also include the identification of topography and boundary
features that directly affect a project's design. We were among the first
engineering and surveying consultants to support geographic information systems
technology and to utilize global positioning systems to conduct precise and
more efficient surveys and to establish accurate ground surveys.
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We utilized our expertise in the use of ground and global positioning systems
surveys to plot the aftermath of the Mt. Pinatubo eruption in the Philippines
for a long-term lava flow management project. For Cox Communications (formerly
Sprint), we provided site topographic and boundary surveys for approximately
500 proposed cellular telecommunication sites. Using these surveys, we designed
and generated construction documents and developed legal descriptions that were
used in lease contract documents. Government agencies and landowners have also
utilized our surveying and mapping services to develop the basic elements
(control, parcel, topographic and planimetric) of successful geographic
information systems databases.
Planning Services
Planning services include both physical planning and policy planning. Physical
planning is graphical and includes conception and layout of communities, land
uses and residential and commercial neighborhoods. The resulting plan often
becomes the basis for the preparation of engineering plans. To complement a
physical plan, policy planning entails the preparation of supporting text and
documents that establish procedures, requirements, aesthetic guidelines and
legal mitigation requirements under which the physical plan may be implemented.
Our planning services are designed to assist clients in maximizing the
potential uses of real estate and other limited resources. We provide plans
that take into account government regulations, effective and creative use of
land assets, and the expectations and needs of the community.
An example of our planning services was our involvement in the design of a
major flood control dam on a 10,000 acre project in Los Angeles County that
controlled yearly flooding of Palmdale, California, a downstream municipality,
saving millions of dollars in flood control facilities. Our solution allowed
plans for concrete channelization of the waterway to be abandoned, thus
resolving the concerns of the local water agencies (concerned with groundwater
recharge and replenishment) and local environmentalists. It also provided the
inducement for the city to annex and entitle that project. Other projects for
which we have provided planning services include Hanalei Garden Farm Estates in
Hawaii, Jian Zhuan Lake Resort in China, a Jack Nicklaus Golf Course at Lake
Las Vegas and Hurricane Iniki Emergency Permitting in Hawaii.
Environmental Services
Our environmental services include biology, permit processing, document
preparation and mitigation monitoring. We assist clients with the complex
federal, state and local permitting process enabling them to successfully
implement private and public projects.
As an example of our environmental services, we prepared design plans and
analyses for the creation of a constructed wetlands project in southern
California. This facility uses natural processes for extensive nitrate removal
from water that flows from upstream dairy farms. The water is stored for
groundwater recharging and used to supplement the drinking water supply.
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Archaeological Services
Many environmental impact analyses require protection of significant
archaeological resources which may exist on a property, such as native peoples'
community settings, artifacts and burial sites. We perform studies which range
from site review and records analysis to a discussion of measures to protect
sensitive or valuable archaeological resources. Further, we conduct field
sampling and testing to establish or verify site review and records information
and determine both the quantity and quality of archaeological materials on a
given site.
An example of the use of our archaeological services is when, after performing
civil engineering services on a project for a client, the client asked us to
provide archeological services on a different project in southern California.
For this project, our archaeological staff mobilized, organized and supervised
a team of 25 people in the excavation of one of the largest fossil whale beds
in the continental United States. In the course of this excavation, we found
rare samples of Baleen whales, which were subsequently donated for further
academic study.
Construction Management Services
Construction management services are an efficient "bundling" of some of the
other services which we provide. We direct development and construction tasks,
including the preparation of cost projections, entitlement and feasibility
analysis, professional consultant selection and supervision, contractor
bidding, and construction supervision. We provide these services in discrete
components or as a comprehensive package for private development, public works
and wireless telecommunications clients.
An example of our construction management services is a master planned
community in Chino Hills, California, where a developer retained us to manage,
plan, design, permit, stake and subcontract a 620 acre community, consisting of
1,410 residential units and associated park and community facilities.
Site Acquisition Services
We provide site acquisition services to assist our clients in obtaining the
most appropriate real estate for their particular needs. For example, a
property intended for the development of multi-family housing will have
characteristics which vary greatly from that of a property intended for the
siting of a heavy industrial use. We provided site acquisition services for
over 700 wireless communications sites in Riverside, San Bernardino, Ventura,
Los Angeles and San Diego counties for Cox Communications (formerly Sprint), a
national wireless services provider.
Water Resources Engineering Services
Our water resources engineers frequently assist clients in financial planning,
feasibility studies, demand forecasting, and hydraulic analysis to develop
system master plans in addition to designing conventional systems of pipes and
other conveyance systems.
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Examples of the water resources engineering services that we have provided
include the performance of a hydrological study of a 23 square-mile watershed
in Riverside County, California and the development of a concept report and
preliminary design for a 2,000 acre-feet (652 million gallon) water quality
detention basin, including the relocation of 6,200 feet of roadway incidental
to the construction of the basin and related structures.
Industrial Engineering Services
In addition to the engineering, consulting and technical services described
above, we also provide the following industrial engineering services:
Instrumentation & Control Systems Integration Engineering Services. Our
professionals integrate equipment selection, maintenance requirements and spare
parts inventory by designing, selecting and reviewing mechanical, piping and
electrical layouts, and operating maintenance, training, start-up and emergency
procedures during the design of contemporary processes or the automation of
outdated manufacturing processes. These services are essential to creating an
efficient and safe operating facility.
Fire Protection Engineering Services. We provide fire protection engineering
services in connection with both new construction and the
renovation/modification of existing facilities to assist our clients in
defining and providing an acceptable level of fire safety in a cost-effective
manner.
Electrical Engineering Services. These services include design of electrical
power systems for buildings, manufacturing plants, and miscellaneous
facilities, design of lighting systems, and selection of other equipment which
delivers or uses electrical power.
Mechanical Engineering Services. These services are required to design energy
systems, HVAC systems, plumbing systems, water distribution systems and fire
protection systems for facilities and buildings.
Chemical Process Engineering Services. Our chemical and process engineers
design systems for chemical reactions, distillations, polymerizations,
filtration and centrifugation, thermal processes, blending and mixing, material
handling, ultra filtration and reverse osmosis, and absorption and stripping.
These services are necessary for the design of chemical processing operations
in industries such as food and beverage, pharmaceutical, chemical and
petroleum.
Sales and Marketing
Our Client Services Department is dedicated to business development and
marketing activities. We employ a variety of strategic business development and
marketing techniques to obtain contracts with new clients and repeat business
with existing clients and to maintain our positive reputation. With our
expansion of services in the past several years, cross-selling our services has
become a large component of our active promotional efforts. Our marketing
advantage in selling additional services is enhanced when we have already
provided initial services on the project. For example, when we have provided
planning and
46
civil engineering on a project, we have an advantage over our competitors in
successfully cross-selling our other services, such as mechanical and
electrical engineering. Our Client Services Department identifies and pursues
these opportunities. A large portion of revenue is generated from ongoing work
opportunities on long-term, large scale projects.
In addition, our Client Services Department assists our in-house management and
clients to assure quality performance and client satisfaction. To accomplish
this effort, we provide clients with referrals to project partners and
financing sources, assistance in legislative matters, monitoring of in-house
performance and many other nontechnical support functions.
Our Client Services Department also identifies projects and clients in each of
the markets in which we are active. This is achieved through the use of many
resources such as: geographic information systems maps and aerial maps,
project/contact databases, the Internet, and leads publications, which track
most public works and public agency projects. Our Client Services Department
pursues those companies, agencies, projects and markets that have financial
strength, long term growth potential and reputation.
One of our most effective methods of winning new contracts has been the
Executive Land Search program. We have developed map rooms containing a variety
of maps such as computerized geographic information systems maps, aerial maps,
and city and county maps. These cover most of the geographic regions in which
we are active and identify a number of available properties which are of
interest to our clients. We meet with existing and prospective clients and
refer available projects to them in the hope of being selected to provide
services to such clients if they successfully acquire the project. For example,
upon referring a large undeveloped parcel of land in southern California to a
land development company that was not an existing client, we were awarded
multiple contracts to provide planning, civil engineering, mapping and
surveying services which, by December 31, 1998, had resulted in over $700,000
in contract value.
Clients
We serve clients in the real estate development, public works and wireless
telecommunications and industrial engineering industries. Our primary private
clients consist of real estate developers, builders, wireless
telecommunications providers, and major manufacturers. Our public clients
include water and school districts, cities, and other local, state and federal
government agencies.
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The following are some of the clients to whom we have provided services:
Real Estate Public Works
Del Webb California Corporation City of Newport Beach
The Irvine Company Clark County, Nevada
Kaufman & Broad Home Corporation Metropolitan Water District of
Lake Las Vegas Resorts Southern California
Security Capital Industrial Trust Central Utah Water Conservation
Pulte Home Corporation District
Shea Homes Federal Emergency Management Agency
Starwood Development Orange County Transportation
Thomas & Mack Co. Authority
Toll Brothers, Inc. Moulton Niguel Water District
Industrial Engineering Wireless Telecommunications
ARCO Products Company Bechtel Corporation
California Energy Commission L.A. Cellular
Dow Chemical Company Pacific Bell Mobile Services
Enron Energy Services Sprint PCS/Cox Communications
Ernest & Julio Gallo Winery
Kellogg U.S.A. Inc.
Toyota Motor Company
In 1997, The Irvine Company accounted for 11% of our net revenue. No individual
client accounted for more than 10% of our net revenue in 1998.
Backlog
Our backlog represents (a) an estimate of the remaining future gross revenues
from existing signed contracts and (b) contracts which have been awarded, with
a defined scope of work and contract value and on which we have begun work with
verbal client approval. The backlog estimates do not include projected revenues
from those projects for which we have provided services and anticipate
additional services to be requested.
Because our professionals provide much of the preliminary services on projects
such as planning, civil engineering and surveying and mapping, we are
frequently called upon to expand the scope of our work on a project as it
progresses. In performing the preliminary services in the initial phases of a
project, we obtain background information and data relating to the project that
may be inefficient and costly for another firm to compile. As a result of this
knowledge about the project, we are often chosen to perform the additional
engineering and consulting services that such clients require as the project
progresses.
At March 31, 1999, our backlog was approximately $22 million, of which
approximately $20 million is expected to be completed in 1999. Our engagements
are terminable at will, and no assurance can be given that we will receive any
of the revenues associated with the backlog described above.
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Competition
We believe that our principal competitors of our size or larger are: Robert
Bein William Frost & Associates, Hunsaker & Associates, Inc., Psomas and Nolte
& Associates, in the real estate development market; Tetra Tech, URS
Corporation, and Black & Veatch Corporation, in the public works market; The
Planning Center, in the wireless telecommunications market; and The Bentley
Companies, Eichleay Engineers and Jacobs Engineering Group, in the industrial
engineering market. In any market there are also several smaller firms with
which we compete.
We believe that the principal factors in the engineering, consulting and
technical services selection criteria include, in order of importance:
. quality of service
. relative experience
. staffing capabilities
. reputation
. geographic presence
. stability
. price
Employees
We have 461 employees, of which over 400 are technicians and technical
professionals. Believing that our success depends significantly upon attracting
and retaining talented, innovative and experienced professionals, we are
comprised of highly skilled personnel with significant industry experience and
strong client relationships. We employ licensed civil engineers, mechanical
engineers, electrical engineers, land surveyors, landscape architects,
certified planners, information technology specialists, biologists, doctoral
archaeologists and geodesists.
Our field survey employees in our southern California offices are covered by a
Master Labor Agreement between the International Union of Operating Engineers
and the Southern California Association of Civil Engineers and Land Surveyors.
The agreement applies to civil engineering and land surveying work, including
global positioning system surveys, and covers our employees in Imperial, Inyo,
Kern, Los Angeles, Mono, Orange, Riverside, San Bernardino, San Diego, San Luis
Obispo, Santa Barbara and Ventura counties. Our field survey employees in our
Northern California offices are covered by a Master Agreement between the Bay
Counties Civil and Land Surveyors Association and Operating Engineers Local
Union No. 3. Our other employees are not represented by any labor union and we
have never experienced a work stoppage from union actions. We believe that our
relationship with our employees is good.
Facilities
We occupy offices and facilities in various locations in California, Nevada
and, with the acquisition of Thompson-Hysell in Utah. Our corporate
headquarters are located in Costa
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Mesa, California and consist of approximately 49,000 square feet of space. Our
monthly rent for this space consists of a base rent, including common area
maintenance of approximately $71,200, with periodic adjustments. Our lease
extends until August 1, 1999. We also maintain offices at another location in
Costa Mesa and have additional offices in the California cities of Walnut
Creek, Moreno Valley, Modesto, Palm Desert, and Salinas (projected opening
1999); one office in Las Vegas, Nevada; and one office in Taylorsville, Utah.
Legal Proceedings
From time to time, we have been involved in routine litigation incidental to
the conduct of our business. There are currently no material pending litigation
proceedings to which we are a party.
50
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of TKCI and their ages and positions as of
April 28, 1999 are as follows:
Name Age Position with the Company
- ---- --- -------------------------
Aram H. Keith........... 54 President, Chief Executive Officer and Director
Jerry M. Brickman....... 52 Chief Operating Officer
Gary C. Campanaro....... 38 Chief Financial Officer, Secretary and Director
Eric C. Nielsen......... 39 President, Costa Mesa division(/1/)
Walter W. Cruttenden,
III................... 48 Director(/2/)(/3/)
George Deukmejian....... 70 Director(/4/)
Christine M. Diemer..... 46 Director(/2/)(/3/)(/4/)
- ------------------
(1) Upon the consummation of this offering, Mr. Nielsen will become the
President (and an executive officer) of TKCI.
(2) Appointed as a member of the audit committee effective immediately prior to
the consummation of this offering.
(3) Appointed as a member of the compensation committee effective immediately
prior to the consummation of this offering.
(4) has been elected to our board of directors effective immediately prior to
the consummation of this offering.
All directors hold office until the next annual meeting of shareholders or the
election and qualification of their successors. Officers are elected annually
by the board of directors and serve at its discretion.
Aram H. Keith co-founded TKCI in March 1983 and has served as our President,
Chief Executive Officer and Chairman of the Board since that time. In addition,
Mr. Keith is the President, Chief Executive Officer and Chairman of the Board
of Directors of John M. Tettemer & Associates and the President and a director
of ESI, each a wholly-owned subsidiary of TKCI. Mr. Keith has been a California
licensed civil engineer since 1972. He also holds civil engineering licenses in
the states of Arizona, Colorado, Nevada and Texas. Mr. Keith received a B.S. in
Civil Engineering from California State University at Fresno.
Jerry M. Brickman joined TKCI in March, 1988 and has served as our Chief
Operating Officer since October 1993. Prior to his appointment to such office,
Mr. Brickman held the positions of Senior Vice President and Contracts
Administrator with TKCI. Additionally, Mr. Brickman is a director of ESI.
Before joining TKCI, Mr. Brickman served 22 years in the United States Air
Force, retiring at the rank of Major in February 1988. He received a B.S. in
Business Administration from the University of Arizona and an M.S. in Logistics
Management from the Air Force Institute of Technology.
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Gary C. Campanaro has served as our Chief Financial Officer since January 1998
and as a director since July 1998. In addition, Mr. Campanaro is the Chief
Financial Officer, Secretary, Treasurer and a director of ESI and the Chief
Financial Officer of John M. Tettemer & Associates. Mr. Campanaro joined CB
Commercial Real Estate Group, Inc. (now CB Richard Ellis), a commercial real
estate brokerage firm, in November 1992 as a Vice President of the Financial
Consulting Group and became Senior Vice President, Managing Officer of the
Financial Consulting Group in February 1995 and also began serving on CB
Commercial Real Estate Group Inc.'s operation management board. Mr. Campanaro
served in those positions until he joined TKCI. From July 1988 to November
1992, he held various accounting, finance and real estate positions with CKE
Restaurants, Inc., an owner and operator of a restaurant chain. Mr. Campanaro
began his professional career with KPMG LLP and is licensed by the State of
California as a Certified Public Accountant, and as a Real Estate Broker. He is
a member of the American Institute of Certified Public Accountants. Mr.
Campanaro received a B.S. in Accounting from the University of Utah.
Eric C. Nielsen became the President of our Costa Mesa division in November
1994. Mr. Nielsen joined TKCI in November 1985 as Senior Designer and became a
Vice President, Engineering and Mapping in July 1990. Upon the consummation of
this offering, Mr. Nielsen will replace Mr. Keith as the President of TKCI. Mr.
Nielsen received a B.S. in Civil Engineering from California Polytechnic State
University and is a registered engineer in the states of California, Colorado
and Hawaii.
Walter W. Cruttenden, III was elected to our board of directors in July 1997.
Mr. Cruttenden serves as Chairman of the Board of Directors and Chief Executive
Officer of E*OFFERING Corp., the co-underwriter in this offering. In 1986, he
founded Cruttenden Roth Incorporated and served as the Chairman of the Board of
Directors and Chief Executive Officer until 1998. E*OFFERING Corp. and
Cruttenden Roth Incorporated are both investment banking institutions.
George Deukmejian has been elected to our board of directors to become
effective immediately prior to the consummation of the offering. Mr. Deukmejian
is the former Governor of the State of California, serving in such office from
January 1983 until January 1991. Following his departure from the Governor's
office, he joined the law firm of Sidley & Austin in its Los Angeles office
where he currently practices as a partner. Prior to his election as Governor,
Mr. Deukmejian served from 1979 to 1982 as the Attorney General of the State of
California and from 1963 to 1978, served in the California State Legislature.
Mr. Deukmejian currently serves on the boards of directors of Burlington
Northern Santa Fe Corp., Foundation Health Systems, Inc. and the Whittaker
Corporation. He also serves as a Deputy Trustee of the Golden Eagle Insurance
Trust in Liquidation and on the Senior Advisory Council of the Industrial Bank
of Japan's Los Angeles office. Mr. Deukmejian received a B.A. in Sociology from
Siena College and a J.D. from St. Johns University Law School.
52
Christine M. Diemer has been elected to our board of directors to become
effective immediately prior to the consummation of the offering. Ms. Diemer is
the current Chief Executive Officer of the Building Industry Association of
Southern California, Orange County chapter which she joined in July 1981. Prior
to joining that organization, she was an appellate lawyer for the Attorney
General of the State of California from 1981 to 1983, and served as the
Director of the California Department of Housing and Community Development from
1983 to 1989. Ms. Diemer is a former board member of the Federal National
Mortgage Association (Fannie Mae) and the California Housing Finance Agency
(CHFA). Ms. Diemer received a B.A. in English from California State University
at San Diego and a J.D. from Western State School of Law.
Director Compensation
Our non-employee directors will receive $1,500 for each board or committee
meeting which they attend and are reimbursed for out-of-pocket expenses
incurred in connection with attendance at board and committee meetings.
Board Committees; Compensation Committee Interlocks and Insider Participation
The board of directors has established an audit committee and a compensation
committee.
The audit committee, which will consist of Mr. Cruttenden and Ms. Diemer, will
review the adequacy of TKCI's internal controls and the results and scope of
the audit and other services provided by our independent auditors. The audit
committee will meet periodically with management and our independent auditors.
The compensation committee, which will consist of Mr. Cruttenden and Ms. Diemer
will establish salaries and other forms of compensation for officers and other
employees of TKCI and will administer our option plans.
No executive officer of TKCI has served as a director or member of the
compensation committee of any other entity whose executive officers served as a
director or member of the compensation committee. Mr. Cruttenden owns
approximately 11.64% of TKCI's common stock. In addition, in April 1997, Mr.
Cruttenden loaned the company $700,000. Mr. Cruttenden was also a party in
interest to a right of first refusal to have Cruttenden Roth serve as the
managing underwriter in the offering, which he subsequently waived pursuant to
a written waiver dated July 1998.
53
Executive Compensation
The following table sets forth certain summary information concerning
compensation paid or accrued for services rendered to TKCI in all capacities
during the year ended December 31, 1998 to our Chief Executive Officer and to
each of our other three most highly compensated executive officers whose total
compensation in 1998 exceeded $100,000.
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
-------------------------- -------------
Securities
Name and Fiscal All Other Underlying
Principal Position Year Salary Bonus Compensation Stock Options
- ------------------------- ------ -------- ----- ------------ -------------
Aram H. Keith............ 1998 $373,419(/1/) -- $6,832(/4/) --
President and Chief
Executive Officer
Jerry M. Brickman........ 1998 $130,403 -- $5,186(/5/) 9,259
Chief Operating Officer
Gary C. Campanaro........ 1998 $115,016(/2/) -- $5,171(/6/) 31,481
Chief Financial Officer
Floyd S. Reid(/7/)....... 1998 $111,369(/3/) -- $4,119(/8/) --
- ------------------
(1) Consists of $371,562 in salary and $1,857 in matching contributions made by
TKCI pursuant to our 401(k) plan.
(2) Consists of $114,423 in salary and $593 in matching contributions made by
TKCI pursuant to our 401(k) plan.
(3) Consists of $110,816 in salary and $553 in matching contributions made by
TKCI pursuant to our 401(k) plan.
(4) Consists of a $1,500 auto allowance, $5,146 in membership dues paid on
behalf of Mr. Keith by TKCI and $186 in premiums on a life insurance policy
of which Mr. Keith is the beneficiary.
(5) Consists of a $5,000 auto allowance and $186 in premiums paid on a life
insurance policy of which Mr. Brickman is the beneficiary.
(6) Consists of a $5,000 auto allowance and $171 in premiums paid on a life
insurance policy of which Mr. Campanaro is the beneficiary.
(7) Mr. Reid resigned as the Treasurer and Secretary of TKCI on April 12, 1999
and is no longer an executive officer.
(8) Consists of a $500 auto allowance, $3,433 in membership dues paid on behalf
of Mr. Reid by TKCI and $186 in premiums on a life insurance policy of
which Mr. Reid is the beneficiary.
54
Option Grants in the Last Fiscal Year
The following table sets forth certain information regarding options granted to
the executive officers named in the Summary Compensation Table above during the
fiscal year ended December 31, 1998.
Potential
Realizable
Value
at Assumed
Annual Rates
% of Total of Stock Price
Number of Options Appreciation
Securities Granted to for Option
Underlying Employees in Exercise Term(/3/)
Options Fiscal Price Expiration ----------------
Name Granted(/1/) Year(/2/) ($/Share) Date 5% 10%
- ---- ------------ ------------ --------- ---------- ------- --------
Aram H. Keith........... -- -- -- -- $ -- $ --
Jerry M. Brickman....... 9,259 6.8% $8.10 2008 $47,200 $119,500
Gary C. Campanaro....... 27,778 20.0% $2.70 2008 $47,200 $119,500
3,704 2.7% $8.10 2008 $18,900 $ 47,800
Floyd S. Reid........... -- -- -- -- $ -- $ --
Option Grants During Year Ended December 31, 1998
- ------------------
(/1/)Options vest 20% annually over five years.
(/2/Based)on options to purchase 369,700 shares granted to employees during the
fiscal year ended December 31, 1998, including Named Executive Officers.
(/3/)Calculated using the potential realizable value of each grant.
Stock Option Plans
We have adopted an Amended and Restated 1994 Stock Incentive Plan effective as
of March 31, 1999. The plan is administered by the Compensation Committee of
the board of directors, which has discretion and authority, consistent with the
provisions of the plan, to determine which eligible participants will receive
options, the time when options will be granted, the terms of options granted
and the number of shares which will be subject to options.
Our plan provides for the granting of "incentive stock options" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended,
nonqualified options and rights to purchase shares of common stock. Under the
plan, options and purchase rights covering an aggregate of 1,111,111 shares of
TKCI's common stock may be granted, in each case to officers, directors, key
employees and consultants of TKCI and its subsidiaries, except that incentive
stock options may not be granted to nonemployee directors or nonemployee
consultants. The exercise price of incentive stock options must not be less
than the fair market value of a share of common stock on the date the option is
granted (110% with respect to optionees who own at least 10% of the outstanding
common stock). Our Compensation Committee has the authority to determine the
time or times at which options granted under the plan become exercisable,
provided that options expire no later than ten years from the date of grant
(five years with respect to incentive stock options held by
55
optionees who own at least 10% of the outstanding common stock). Options are
nontransferable, other than by will and the laws of descent and distribution,
and generally may be exercised only by an employee while employed by TKCI. The
plan terminates in July 2004. As of March 31, 1999, options to purchase 485,074
shares of common stock were outstanding under the plan.
Indemnification of Directors and Officers
The articles of incorporation of TKCI as amended, provide that the liability of
our directors for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by or in the
right of TKCI for breach of a director's duties to TKCI or our shareholders
except for liability: (a) for acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law; (b) for acts or
omissions that a director believes to be contrary to the best interests of TKCI
or our shareholders or that involve the absence of good faith on the part of
the director; (c) for any transaction for which a director derived an improper
personal benefit; (d) for acts or omission that show a reckless disregard for
the director's duty to our shareholders in circumstances in which the director
was aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to TKCI or our shareholders; (e)
for acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to TKCI or our shareholders;
(f) with respect to certain transactions, or the approval of transactions in
which a director has a material financial interest; and (g) expressly imposed
by statute, for approval of certain improper distributions to shareholders or
certain loans or guarantees.
Our articles of incorporation also provide that we are authorized to provide
indemnification to our officers and directors in excess of the indemnification
otherwise permitted by Section 317 of the California Corporations Code. Our
bylaws provide for indemnification of our officers, directors, employees, and
other agents to the extent and under the circumstances permitted by California
law.
We have entered into agreements to indemnify our directors and executive
officers in addition to the indemnification provided for in our articles of
incorporation and bylaws. Among other things, these agreements provide that we
will indemnify, subject to certain requirements, each of our directors and
executive officers for certain expenses (including attorneys' fees), judgments,
fines and settlement amounts incurred by such person in any action or
proceeding, including any action by or in the right of TKCI, on account of
services by such person as a director or executive officer of us, or as a
director or executive officer of any other company or enterprise to which the
person provides services at our request.
56
CERTAIN TRANSACTIONS
In November 1998, we entered into Indemnification Agreements with all of our
directors and executive officers providing for indemnification rights in
certain circumstances. See "Management--Indemnification of Directors and
Officers."
In August 1998, the holders of all of the outstanding shares of Keith
Engineering common stock contributed their shares to TKCI as a contribution to
capital. In consideration of this contribution, we issued to the contributing
shareholders one share of TKCI common stock for each share of Keith Engineering
stock contributed. Pursuant to this transaction, Aram H. Keith, through the
Aram H. Keith and Margie R. Keith Trust, acquired 738,889 shares of TKCI common
stock. Floyd S. Reid, as trustee of the Floyd S. Reid and Ruth L. Reid Family
Trust dated March 30, 1990, acquired 351,852 shares of TKCI common stock. Mr.
Keith is our President, Chief Executive Officer and the Chairman of our board
of our directors, and Mr. Reid is a former director and executive officer of
our company and remains a principal shareholder.
On December 31, 1997, we borrowed $910,177 and $127,815 from Aram H. Keith and
Floyd S. Reid, respectively, under promissory notes. On June 3, 1998, we
borrowed an additional $300,000 from Mr. Keith. We have borrowed funds from Mr.
Keith from time to time as cash flow was needed. In February 1998, as a
condition to our credit agreement with Imperial Bank, subordination agreements
were executed by Messrs. Keith and Reid subordinating our payment obligations
to them under the notes to our obligations to Imperial Bank under our credit
agreement. The notes to Messrs. Keith and Reid were subsequently amended and
restated to include language which referenced these agreements and the two
separate notes to Mr. Keith were consolidated into a single note in the
principal amount of $1,210,177. Each of these notes provides for an interest
rate of 10% per annum and is due and payable in full on July 1, 2000. As of
March 31, 1999, we were indebted to Messrs. Keith and Reid under such notes in
the respective amounts of $1,371,697 and $161,048.
In October 1997, we borrowed an aggregate of $213,782 from the Erica Keith
Educational Trust and the Susan E. Reid Housing Trust under two separate
promissory notes in the amounts of $129,205 and $84,577, respectively. The
obligees on these notes are trusts established for the benefit of the children
of Messrs. Reid and Keith. In February 1998, as a condition to our credit
agreement with Imperial Bank, subordination agreements were executed on behalf
of these trusts subordinating our payment obligations to the trusts under the
notes to our obligations to Imperial Bank under our credit agreement. Amended
and restated notes were executed in February 1999 to include accrued and unpaid
interest in the principal amounts, to extend the maturation dates and to
include language on the face of the notes to reference the subordination to our
obligations to Imperial Bank. The amended and restated notes to the Erica Keith
Educational Trust and the Susan E. Reid Housing Trust were in the amounts of
$132,000 and $86,000, respectively. These notes replaced the October 1997
notes. Each of these notes provides for an interest rate of 10% per annum and
is due and payable in full on October 30, 2000. As of March 31, 1999, we were
indebted to the obligees of these notes in the amounts of $134,134 and $87,390.
57
In April 1997, we entered into an Agreement for Advisory Services with Walter
W. Cruttenden, III, which provided that Mr. Cruttenden would provide us with
advice regarding strategic acquisitions and that Mr. Cruttenden, or a designee,
would serve on our board of directors. Mr. Cruttenden currently serves as a
director on our board of directors. In exchange for these services, we agreed
to pay Mr. Cruttenden $2,500 per quarter. In addition, for $10,000, we granted
Mr. Cruttenden options to purchase 10% of our outstanding common stock upon the
payment of additional consideration of $88,000. In July 1997, upon his exercise
of this option, we issued 325,926 shares of our common stock to Mr. Cruttenden.
The agreement also provides for indemnification by us and Mr. Keith in certain
circumstances. Further, the agreement provides Mr. Cruttenden with a right of
first refusal to have Cruttenden Roth serve as the managing underwriter in our
initial public offering, which he waived pursuant to a written waiver in July
1998. The agreement terminated on April 10, 1999.
In December 1997, Mr. Cruttenden and members of his family purchased 196,745
shares of TKCI common stock for an aggregate purchase price of $500,000.
In April 1997, we borrowed $700,000 from Mr. Cruttenden under a Secured
Promissory Note Line of Credit. This note provides for an interest rate of 10%
per annum and becomes fully due and payable on July 1, 2000. As of March 31,
1999, our obligations under the note were $700,000. In conjunction with the
note, we entered into a Security Agreement with Mr. Cruttenden, Keith
Engineering and Mr. Keith, granting to Mr. Cruttenden a security interest in
all of our assets to secure the repayment of the amounts due under the note.
Mr. Keith personally guaranteed our obligations under the note. The note also
provides that our indebtedness to Mr. Keith and Mr. Reid under their December
31, 1997 notes (discussed above) are subordinate to our obligations under the
note. In February 1999, the note to Mr. Cruttenden was amended and restated to
provide for its subordination to our obligations to Imperial Bank.
In February 1997, Keith International borrowed $100,000 from Douglas Travato
under a promissory note. In February 1998 pursuant to a written agreement, Mr.
Keith assumed the Travato note and fully paid all amounts due under the note by
transferring 55,556 shares of Mr. Keith's TKCI common stock to the Travato
Family Trust. We entered into a promissory note dated February 10, 1998 in
favor of Mr. Keith in the principal amount of $150,000, of which $100,000
reflected our obligation to Mr. Keith in connection with his assumption of the
Travato note. In October 1998, we made a $150,000 cash payment to Mr. Keith in
full satisfaction of our obligations under our note to him. Keith International
was a corporation owned by Messrs. Keith and Reid that was dissolved in
November 1998.
On February 26, 1996, Keith Engineering borrowed $50,000 from the Wyckoff
Company Money Purchase Pension Plan. In February 1997, the parties reduced this
loan to writing under a promissory note. The original maturity date of the loan
was August 26, 1996, which was successively extended to become fully due and
payable on February 26, 1998. In February 1998, Mr. Keith assumed the Wyckoff
note and fully paid all amounts due under the note by transferring to the
Wyckoff Company Profit Sharing Plan 18,519 shares of
58
Mr. Keith's TKCI common stock. In connection with this transaction, we entered
into a promissory note in favor of Mr. Keith in the principal amount of
$150,000 (discussed above), of which $50,000 reflected our obligation to Mr.
Keith pursuant to his assumption of the Wyckoff note. In October 1998, we made
a $150,000 cash payment to Mr. Keith in full satisfaction under our note to
him.
In February 1998, Mr. Keith personally guaranteed the repayment of our
obligations under our credit agreement with Imperial Bank.
59
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 31, 1999 and as adjusted
to reflect the sale of common stock offered hereby, by (a) each person known by
us to beneficially own more than 5% of the outstanding shares of common stock,
(b) each of our directors, (c) each of the executive officers listed in the
Summary Compensation Table, and (d) all of our directors and executive officers
as a group. Except as otherwise indicated, we believe that the beneficial
owners of the common stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
Shares Beneficially Shares Beneficially
Owned Prior to Owned After
Offering Offering
Name of Beneficial Owner --------------------------------------------
or Identity of Group(/1/)(/2/) Number Percent Number Percent
------------------------------ ----------- --------------------- ----------
Aram H. Keith...................... 1,533,704 42.68% 1,533,704 28.70%
Floyd S. Reid(/3/)................. 509,444 14.18% 509,444 9.53%
Gary C. Campanaro(/4/)............. 5,556 * 5,556 *
Jerry M. Brickman(/4/)............. 13,333 * 13,333 *
Walter W. Cruttenden, III.......... 418,137 11.64% 418,137 7.83%
George Deukmejian(/5/)............. 7,407 * 7,407 *
Christine M. Diemer(/5/)........... 7,407 * 7,407 *
All directors and executive
officers as a group (6 persons)..
- ------------------
* Less than 1%
(1) The address of each person listed is c/o The Keith Companies, Inc., 2955
Red Hill Avenue, Costa Mesa, California 92626.
(2) Mr. Keith is the President, Chief Executive Officer and Chairman of the
Board of TKCI; Mr. Campanaro is Secretary and Chief Financial Officer of
TKCI; and Mr. Brickman is Chief Operating Officer of TKCI.
(3) Mr. Reid resigned as the Treasurer and Secretary of TKCI on April 12, 1999
and is no longer an executive officer.
(4) Consists solely of shares issuable under options presently exercisable or
which will become exercisable within 60 days.
(5) Consists solely of shares issuable under options which will be granted
immediately prior to the offering and which will be immediately exercisable
upon grant.
60
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common stock, no
par value, and 5,000,000 shares of preferred stock, no par value. The following
description of our capital stock is qualified in all respects by reference to
our amended and restated articles of incorporation, which has been filed as an
exhibit to the registration statement incorporating this prospectus. As of
March 31, 1999, there were 41 holders of TKCI's common stock.
Common Stock
The holders of outstanding shares of our common stock are entitled to receive
dividends out of assets legally available therefor at such times and in such
amounts as the board of directors may, from time to time, determine, subject to
any preferences which may be granted to the holders of preferred stock and to
certain restrictions on the payment of dividends contained in our credit
agreement with Imperial Bank. Holders of common stock are entitled to one vote
per share on all matters on which the holders of common stock are entitled to
vote. The common stock is not entitled to preemptive rights and is not subject
to redemption or conversion. Upon liquidation, dissolution or winding-up of
TKCI, the assets (if any) legally available for distribution to shareholders
are distributable ratably among the holders of the common stock after payment
of all of our debts and liabilities and the liquidation preference of any
outstanding class or series of preferred stock. All outstanding shares of
common stock are, and the shares of common stock to be issued pursuant to this
offering will be, when issued and delivered, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of common
stock are subject to any series of preferred stock that we may issue in the
future.
Preferred Stock
Preferred stock may be issued from time to time in one or more series, and our
board of directors, without action by the holders of common stock, may fix or
alter the voting rights, redemption provisions (including sinking fund
provisions), dividend rights, dividend rates, liquidation preferences,
conversion rights and any other rights, preferences, privileges and
restrictions of any wholly unissued series of preferred stock. The board of
directors, without shareholder approval, can issue shares of preferred stock
with rights that could adversely affect the rights of the holders of common
stock. No shares of preferred stock presently are outstanding, and we have no
present plans to issue any such shares. The issuance of shares of preferred
stock could adversely affect the voting power of the holders of common stock
and could have the effect of making it more difficult for a third party to
acquire, or could discourage or delay a third party from acquiring, a majority
of our outstanding stock.
Registration Rights
Following this offering, the shareholders of Thompson-Hysell will be entitled
to certain registration rights with respect to the shares they may receive in
2000. No other persons have registration rights.
61
Transfer Agent and Registrar
The stock transfer agent and registrar for TKCI common stock is U.S. Stock
Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
As of March 31, 1999, TKCI had outstanding 3,559,708 shares of common stock.
The 1,750,000 shares sold pursuant to this offering (assuming the overallotment
option is not exercised) will be freely tradeable without restriction or
further registration under the Securities Act of 1933, unless held by an
"affiliate" of TKCI within the meaning of Rule 144 adopted under the Securities
Act of 1933. Any such affiliate would be subject to the resale limitations of
Rule 144.
The remaining shares of outstanding common stock are "restricted securities"
within the meaning of Rule 144 under the Securities Act of 1933 and may not be
sold in the absence of a registration under the Securities Act of 1933 unless
an exemption from registration is available, including an exemption contained
in Rule 144. In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated for purposes of Rule 144) who has
beneficially owned restricted securities, as that term is defined in Rule 144,
for at least one year (including, in the case of a nonaffiliate holder, any
period of ownership of preceding nonaffiliate holders) is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (a) 1% of the then outstanding shares of our common stock, or (b)
the average weekly trading volume in our common stock during the four calendar
weeks preceding such sale, provided that certain public information about us,
as required by Rule 144, is then available and the seller complies with the
manner of sale and notification requirements of the rule. A person who is not
an affiliate and has not been an affiliate within three months prior to the
sale and has, together with any previous owners who were not affiliates,
beneficially owned restricted securities for at least two years is entitled to
sell such shares under Rule 144(k) without regard to any of the volume
limitations described above. As of March 31, 1999, 492,037 restricted shares
were eligible for sale under Rule 144(k). The remainder of the restricted
shares will be eligible for sale from time to time thereafter upon expiration
of one-year holding periods and subject to the requirements of Rule 144. In
addition, the shares held by all of our shareholders and persons with rights to
acquire our shares, except certain non-management employees, are subject to
agreements restricting the sale of their shares in favor of the representatives
of the underwriters.
Upon the consummation of this offering, we will have outstanding options to
purchase 499,889 shares of our common stock held by certain employees and
directors pursuant to our Amended and Restated 1994 Stock Incentive Plan. We
intend to register on a registration statement on Form S-8, on or shortly after
the date of this prospectus, all 499,889 shares of common stock underlying the
options that are then outstanding or issuable pursuant to the Amended and
Restated 1994 Stock Incentive Plan.
TKCI also has outstanding four warrants to purchase an aggregate of 83,333
shares of common stock granted in connection with the acquisitions of ESI and
John M. Tettemer &
62
Associates. The shares issued upon exercise of such warrants will be restricted
securities. In connection with the acquisition of ESI, if certain earnings
targets and other conditions are met, TKCI has also agreed to issue (a) up to
37,037 shares of TKCI common stock and (b) options to purchase an additional
37,037 shares of common stock to employees of ESI. In connection with the
acquisition of Thompson-Hysell, TKCI will grant a warrant to purchase 66,667
shares of common stock to a finder and has agreed to (a) issue that number of
shares with a value of $1,333,334 (subject to adjustment upward or downward) to
the shareholders of Thompson-Hysell if certain conditions are met; and (b)
reserve options to purchase 37,037 shares of common stock for granting to those
employees of Thompson-Hysell who become employees of TKCI following this
offering. Such shares, if issued, will be restricted securities but will
include the right to have the shares registered for resale under the Securities
Act of 1933.
No predictions can be made of the effect, if any, that future sales of shares
of our common stock, and grants of options and warrants to acquire shares of
our common stock, or the availability of shares for future sale, will have on
the market price of the common stock prevailing from time to time. Sales of
substantial amounts of common stock in the public market, or the perception
that such sales could occur, could adversely affect the prevailing market
prices of the common stock. See "Principal Shareholders," "Description of
Capital Stock" and "Underwriting.
63
UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below for whom First Security Van Kasper and E*OFFERING Corp. are serving as
representatives, have severally agreed to purchase from us and we have agreed
to sell to each of the underwriters, an aggregate of 1,750,000 shares of common
stock. The number of shares of common stock that each underwriter has agreed to
purchase is set forth opposite its name below:
Underwriters Number of Shares
- ------------ ----------------
First Security Van Kasper......................................
E*OFFERING Corp................................................
---
Total........................................................
===
The underwriting agreement provides that the obligations of the several
underwriters to purchase shares of common stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of common stock are purchased by the underwriters pursuant to the
underwriting agreement, all of the shares of common stock (other than the
shares of common stock covered by the underwriters' over-allotment option
described below) must be so purchased.
Prior to this offering, there has been no established trading market for our
common stock. The initial price to the public for our common stock offered
hereby will be determined by negotiation between the representatives and us.
The factors to be considered in determining the initial price to the public
include the history of and the prospects for the industry in which we compete,
the performance and ability of our management, our past and present operations,
our historical results of operations, our prospects for future earnings, the
general condition of the securities markets at the time of this offering and
the recent market prices of securities of generally comparable companies. The
estimated initial public offering price range set forth on the cover page of
this prospectus is subject to change as a result of market conditions and other
factors.
The underwriters propose to offer the shares of common stock in part directly
to the public at the offering price set forth on the cover page of this
prospectus, and to certain dealers (including the underwriters) at such price
less a concession not in excess of $ per share. Any dealers or agents that
participate in the distribution of the common stock may be deemed to be
underwriters within the meaning of the Securities Act of 1933, and any
discounts, commission or concessions received by them and any provided pursuant
to the sale of the shares by them might be deemed to be underwriting discounts
and commissions
64
under the Securities Act of 1933. TKCI has agreed to pay the representatives a
non-accountable expense allowance of 1% of the proceeds of this offering. After
the public offering of the shares, the offering price and other selling terms
may be changed by the underwriters.
A prospectus in electronic format is being made available on an Internet
website maintained by E*OFFERING Corp. at http://www@eoffering.com. Except for
this prospectus, nothing on E*OFFERING Corp.'s web site shall be deemed to be a
part of this prospectus.
We have agreed to indemnify the underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments that the underwriters may be required to make in respect thereof.
TKCI, and each of its directors, executive officers, shareholders and certain
of its option,warrant and rights holders have agreed not to offer, sell
contract to sell or otherwise dispose of any shares of common stock or any
securities convertible into or exercisable or exchangeable for common stock, or
in any manner transfer all or a portion of the economic consequences associated
with the ownership of such common stock, or to cause a registration statement
covering any shares of common stock to be filed, for 180 days after the date of
the underwriting agreement without the prior written consent of the
representatives, subject to certain limited exceptions, and provided that we
may grant options pursuant to, and issue shares of common stock upon the
exercise of options under our Amended and Restated 1994 Stock Incentive Plan.
See "Shares Eligible for Future Sale."
TKCI has granted to the underwriters an option to purchase up to an aggregate
of additional shares of our common stock, at the initial public offering
price less underwriting discounts and commissions, solely to cover over-
allotments. Such option may be exercised in whole or in part from time to time
during the 45-day period after the date of this prospectus. To the extent that
the underwriters exercise such option, each of the underwriters will be
committed, subject to certain conditions, to purchase from us a number of
option shares proportionate to such underwriters' initial commitment as
indicated in the preceding table.
The following table shows the underwriting fees to be paid to the underwriters
by us in connection with this offering. These amounts are shown assuming both
no exercise and full exercise of the underwriters' option to purchase
additional shares of common stock.
No Exercise Full Exercise
----------- -------------
Per share............................................. $ $
---- ----
Total............................................... $ $
==== ====
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
In the event our common stock does not constitute an excepted security under
the provisions of Regulation M promulgated by the Securities and Exchange
Commission, the underwriters and dealers may engage in passive market making
transactions in accordance with Rule 103. In general, a passive market maker
may not bid for or purchase shares of common stock at a
65
price that exceeds the highest independent bid. In addition, the net daily
purchase made by any passive market maker generally may not exceed 30% of its
average daily trading volume in the common stock during a specified two-month
prior period, or 2000 shares, whichever is greater. A passive market maker must
identify passive market making bids as such on the Nasdaq electronic later-
dealer reporting system. Passive market making may stabilize or maintain the
market price of the common stock above independent market levels. Underwriters
and dealers are not required to engage in passive market making and may end
passive market making activities at any time.
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of our common stock in the open market to cover syndicate
short positions or to stabilize the price of our common stock. These activities
may stabilize or maintain the market price of our common stock above
independent market levels. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
We have applied for the listing of our common stock on the Nasdaq National
Market under the symbol "TKCI."
The representatives have informed us that the underwriters do not intend to
confirm sales to accounts over which they exercise discretionary authority.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for us by Rutan & Tucker, LLP, Costa Mesa, California. Certain legal matters in
connection with the offering will be passed upon for the underwriters by Cooley
Godward LLP, San Diego, California.
EXPERTS
The consolidated financial statements of The Keith Companies, Inc. and
subsidiaries as of December 31, 1997 and 1998, and for each of the years in the
three-year period ended December 31, 1998, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Thompson-Hysell, Inc. as of December 31, 1997 and
1998, and for the years then ended, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
66
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act of 1933,
and the rules and regulations promulgated thereunder, with respect to the
common stock offered hereby. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in
the registration statement and the exhibits and schedules thereto. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the full text of such contract or other document which is
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference. For further information regarding
us and the common stock offered hereby, reference is made to such registration
statement and the exhibits and schedules thereto. The registration statement,
including the exhibits and schedules thereto, may be inspected without charge
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at
Citicorp Center, 50 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such documents may be obtained from the Commission at its principal
office in Washington, D.C. upon the payment of the charges prescribed by the
Commission.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The Commission's address on the World Wide
Web is http://www.sec.gov.
All trademarks or trade names referred to in this prospectus are the property
of their respective owners.
67
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The TKCI unaudited pro forma condensed consolidated balance sheet as of March
31, 1999 is presented as if the initial public offering of 1,750,000 shares of
common stock, at an assumed initial public offering price of $9.00 per share;
the acquisition of substantially all of the assets and the assumption of
certain of the liabilities of Thompson-Hysell; and the repayment of debt,
capital lease obligations and notes payable to related parties with the net
proceeds of the offering had all occurred on March 31, 1999. The TKCI unaudited
pro forma condensed consolidated statements of income for the year ended
December 31, 1998 and the three months ended March 31, 1999 are presented as if
the initial public offering of 1,750,000 shares of common stock, at an assumed
initial public offering price of $9.00 per share; the acquisition of
substantially all of the assets and the assumption of certain of the
liabilities of Thompson-Hysell; and the repayment of debt, capital lease
obligations and notes payable to related parties with the net proceeds of the
offering had all occurred on January 1, 1998.
The pro forma adjustments are based upon currently available information and
upon certain assumptions that we believe are reasonable. There can be no
assurances that the actual effect will not differ significantly from the pro
forma adjustments reflected in the pro forma condensed consolidated financial
statements.
The pro forma condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of TKCI and its
subsidiaries, and the notes thereto, and the financial statements of Thompson-
Hysell, and the notes thereto, included elsewhere in this prospectus. The pro
forma condensed consolidated financial statements do not purport to represent
our financial position as of March 31, 1999 or the results of operations for
the year ended December 31, 1998 or the three months ended March 31, 1999 that
would actually have occurred had the initial public offering of 1,750,000
shares of common stock, at an assumed initial public offering price of $9.00
per share; the acquisition of substantially all of the assets and the
assumption of certain of the liabilities of Thompson-Hysell; and the repayment
of debt, capital lease obligations and notes payable to related parties with
the net proceeds of the offering had all occurred on March 31, 1999 or on
January 1, 1998, or to project our financial position or results of operations
as of any future date or for any future period.
P-1
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Balance Sheet
As of March 31, 1999
(Unaudited)
Historical Pro Forma Adjustments
------------------ ------------------------------
Thompson- Acquisition of Initial Public
TKCI Hysell Thompson-Hysell Offering Pro Forma
------- --------- --------------- -------------- ---------
(in thousands)
Assets
Current assets:
Cash and cash
equivalents.......... $ 144 $ 264 $(4,728)(a) $14,179 (b) $ 1,782
(8,077)(c)
Contracts and trade
receivables, net..... 6,124 2,456 -- -- 8,580
Costs and estimated
earnings in excess of
billings............. 4,748 265 -- -- 5,013
Deferred offering
costs................ 346 -- -- (346)(b) --
Other current assets.. 525 65 -- -- 590
------- ------ ------- ------- -------
Total current
assets............. 11,887 3,050 (4,728) 5,756 15,965
Equipment and
improvements, net.... 2,974 1,097 -- -- 4,071
Goodwill, net......... 556 -- 3,205 (a) -- 3,761
Other assets.......... 272 247 (347)(a) -- 172
------- ------ ------- ------- -------
Total assets........ $15,689 $4,394 $(1,870) $ 5,756 $23,969
======= ====== ======= ======= =======
Liabilities and
Stockholders' Equity
Current liabilities:
Short-term
borrowings........... $ 4,881 $ -- $ 95 (a) $(4,275)(c) $ 701
Current portion of
long-term debt and
capital lease
obligations.......... 1,444 231 -- (741)(c) 934
Trade accounts
payable.............. 1,280 103 -- -- 1,383
Accrued liabilities... 2,955 234 -- -- 3,189
Accrued liabilities to
related parties...... 201 23 (23)(a) (201)(c) --
Billings in excess of
costs and estimated
earnings............. 559 -- -- -- 559
------- ------ ------- ------- -------
Total current
liabilities........ 11,320 591 72 (5,217) 6,766
Long-term debt and
capital lease
obligations, less
current portion....... 948 378 1,333 (a) (459)(c) 2,200
Notes payable to
related parties, less
current portion....... 2,401 579 (579)(a) (2,401)(c) --
Other liabilities...... 362 -- -- -- 362
------- ------ ------- ------- -------
Total liabilities... 15,031 1,548 826 (8,077) 9,328
------- ------ ------- ------- -------
Stockholders' equity:
Common stock.......... 1,085 1 149 (a) 13,833 (b) 15,068
Retained earnings
(accumulated
deficit)............. (427) 2,822 (2,822)(a) -- (427)
Accumulated other
comprehensive
income............... -- 23 (23)(a) -- --
------- ------ ------- ------- -------
Total stockholders'
equity............. 658 2,846 (2,696) 13,833 14,641
------- ------ ------- ------- -------
Total liabilities
and stockholders'
equity............. $15,689 $4,394 $(1,870) $ 5,756 $23,969
======= ====== ======= ======= =======
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements
P-2
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement of Income
Year Ended December 31, 1998
(Unaudited)
Historical Pro Forma Adjustments
----------------- ------------------------------
Thompson- Acquisition of Initial Public
TKCI Hysell Thompson-Hysell Offering Pro Forma
------- --------- --------------- -------------- ---------
(in thousands, except share and per share data)
Gross revenue........... $34,021 $9,112 $ -- $ -- $ 43,133
Subcontractor costs..... 4,839 323 -- -- 5,162
------- ------ ------ ------ ---------
Net revenue......... 29,182 8,789 -- -- 37,971
Costs of revenue........ 19,287 4,607 -- -- 23,894
------- ------ ------ ------ ---------
Gross profit........ 9,895 4,182 -- -- 14,077
Selling, general and
administrative
expenses............... 5,858 2,187 128 (d) 175 (e) 8,348
------- ------ ------ ------ ---------
Income from
operations......... 4,037 1,995 (128) (175) 5,729
Interest expense........ 967 80 133 (d) (759)(f) 421
Other expenses (income),
net.................... 66 (32) 31 (d) -- 65
------- ------ ------ ------ ---------
Income before
provision for
income taxes....... 3,004 1,947 (292) 584 5,243
Provision for income
taxes.................. 1,350 6 -- 846 (g) 2,202
------- ------ ------ ------ ---------
Net income.......... $ 1,654 $1,941 $ (292) $ (262) $ 3,041
======= ====== ====== ====== =========
Net income per share:
Basic................. $ 0.57
=========
Diluted............... $ 0.55
=========
Weighted average shares
used in computing net
income per share
amounts:
Basic................. 5,309,708
=========
Diluted............... 5,568,957 (h)
=========
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements
P-3
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Pro Forma Condensed Consolidated Statement Of Income
Three Months Ended March 31, 1999
(Unaudited)
Historical Pro Forma Adjustments
----------------- ------------------------------
Thompson- Acquisition of Initial Public
TKCI Hysell Thompson-Hysell Offering Pro Forma
------ --------- --------------- -------------- ---------
(in thousands, except share and per share data)
Gross revenue........... $9,999 $2,378 $-- $ -- $ 12,377
Subcontractor costs..... 1,030 76 -- -- 1,106
------ ------ ---- ----- ---------
Net revenue......... 8,969 2,302 -- -- 11,271
Costs of revenue........ 5,914 1,194 -- -- 7,108
------ ------ ---- ----- ---------
Gross profit........ 3,055 1,108 -- -- 4,163
Selling, general and
administrative
expenses............... 1,896 473 32 (d) 44 (e) 2,445
------ ------ ---- ----- ---------
Income from operations.. 1,159 635 (32) (44) 1,718
Interest expense........ 260 32 33 (d) (190)(f) 120
(15)(d)
Other expenses (income),
net.................... (19) (18) 12 (d) -- (25)
------ ------ ---- ----- ---------
Income before
provision for
income taxes....... 918 621 (62) 146 1,623
Provision for income
taxes.................. 389 -- -- 293 (g) 682
------ ------ ---- ----- ---------
Net income............ $ 529 $ 621 $(62) $(147) $ 941
====== ====== ==== ===== =========
Net income per share:
Basic................. $ 0.18
=========
Diluted............... $ 0.17
=========
Weighted average shares
used in computing net
income per share
amounts:
Basic................. 5,309,708
=========
Diluted............... 5,611,360 (h)
=========
See accompanying Notes to Pro Forma Condensed Consolidated Financial Statements
P-4
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Pro forma Condensed Consolidated Financial Statements (continued)
(Unaudited)
Adjustments to the Pro Forma Condensed Consolidated Balance Sheet
The pro forma adjustments to the Pro Forma Condensed Consolidated Balance Sheet
as of March 31, 1999 are as follows:
(a) Acquisition of substantially all of the assets and certain of the
liabilities of Thompson-Hysell (accounted for using purchase accounting;
the purchase price is allocated based upon estimated fair value of assets
and liabilities acquired, which approximates book value):
(in thousands)
Cash............................................................. $(4,233)
Goodwill......................................................... 2,720
Issuance of note payable (interest at 10%)....................... 1,333
Common stock..................................................... (1)
Retained earnings................................................ (2,822)
Accumulated other comprehensive income........................... (23)
Costs associated with the acquisition:
Cash............................................................. $ (231)
Goodwill......................................................... 485
Other assets..................................................... (104)
Common stock (issuance of warrants as finders fee)............... 150
Assets and liabilities which will not be acquired or assumed, and a line
of credit balance to be drawn on by Thompson-Hysell to repay certain
liabilities not assumed by TKCI (in thousands):
Cash............................................................. $ (264)
Other assets..................................................... (243)
Line of credit to be assumed..................................... 95
Accrued liabilities to related parties........................... (23)
Notes payable to related parties................................. (579)
The acquisition of substantially all of the assets and certain of the
liabilities of Thompson-Hysell results in a purchase price of $3,333,333
in cash, $1,333,333 in a note payable and $1,333,334 in common stock. In
addition, TKCI is obligated to pay cash of $500,000 and $400,000 related
to financial targets and certain income tax effects to the sellers,
respectively. The note payable will be issued at closing, but is subject
to adjustment based on an earnings target in 2000. The common stock may or
may not be issued subject to an earnings target in 1999. Due to the
financial targets assumed to be met and assumed income tax effects to the
sellers, TKCI made a pro forma adjustment for the payment of cash of
$500,000 and $400,000, respectively. Due to the assumed issuance of the
note payable, TKCI made a pro forma adjustment for the debt issued. Due to
the uncertainty surrounding the 1999 earnings target, TKCI excluded the
contingent issuance of common stock.
P-5
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Pro forma Condensed Consolidated Financial Statements (continued)
(Unaudited)
(in thousands, except share and per share data)
(b) Sale of 1,750,000 shares of common stock at an assumed initial public
offering price of $9.00 per share pursuant the offering:
Proceeds from the offering, net of underwriting discount........ $14,648
Cash paid relating to offering costs............................ (469)
-------
Net cash proceeds from offering................................. 14,179
Deferred offering costs......................................... (346)
-------
Common stock.................................................... $13,833
=======
(c) Repayment of short-term borrowings, long-term debt, capital lease
obligations and notes payable to related parties (including accrued
interest) with the net proceeds from the offering:
Short-term borrowings:
Line of credit (interest at 10.5%)............................ $ 4,180
Line of credit (interest at 9.25%)............................ 95
-------
$ 4,275
=======
Long-term debt and capital lease obligations:
Note payable (interest at 11.5%).............................. $ 82
Notes payable (interest at 8%)................................ 250
Notes payable (interest ranging from 8.65% to 13.22%)......... 128
Capital lease obligations (interest ranging from 4.80% to
17.18%)...................................................... 740
-------
1,200
Less current portion.......................................... (741)
-------
$ 459
=======
Notes payable to related parties (interest at 10%).............. $ 2,401
=======
Accrued interest to related parties............................. $ 201
=======
Cash expended................................................... $ 8,077
=======
P-6
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Pro forma Condensed Consolidated Financial Statements (continued)
(Unaudited)
(in thousands, except share and per share data)
Adjustments to the Pro Forma Condensed Consolidated Statements of Income
The pro forma adjustments to the Pro Forma Condensed Consolidated Statements of
Income for the year ended December 31, 1998 and the three months ended March
31, 1999 are as follows:
Three months
Year ended ended
December 31, 1998 March 31, 1999
----------------- --------------
(d) Acquisition of substantially all of the
assets and the assumption of certain of
the liabilities of Thompson-Hysell
(accounted for using purchase accounting):
Amortization of goodwill...................... $ 128 $ 32
Interest expense related to long-term
debt (interest rate of 10%).................. $ 133 $ 33
Decrease in interest expense related to
excluded notes payable to related
parties...................................... $ -- $ (15)
Decrease in other income related to
excluded interest and investment
income....................................... $ 31 $ 12
(e) Increase in selling, general and
administrative expenses for the
incremental costs of operating as a
public company (accounting, legal,
printing, reporting and directors and
officers' insurance).............................. $ 175 $ 44
(f) Decrease in interest expense resulting
from the repayment of short-term
borrowings, long-term debt, capital lease
obligations and notes payable to related
parties with the net proceeds from the
offering (see note c):
Short-term borrowings (interest at
10.5%)....................................... $(387) $ (97)
Long-term debt and capital lease
obligations (interest ranging from 4.80%
to 17.18%)................................... (132) (33)
Notes payable to related parties
(interest at 10%)............................ (240) (60)
----- -----
$(759) $(190)
===== =====
(g) Income tax effect assuming a 42% effective
income tax rate................................... $ 846 $ 293
===== =====
(h) Weighted average shares--diluted used in
computing net income per share amounts
assumes a fair value of $9.00 per share
for the periods presented.
P-7
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements of The Keith Companies, Inc. and
subsidiaries
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31,
1999 (unaudited)........................................................ F-3
Consolidated Statements of Income for the years ended December 31, 1996,
1997 and 1998 and the three months ended March 31, 1998 and 1999
(unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1996, 1997 and 1998 and the three months ended March
31, 1999 (unaudited).................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999
(unaudited)............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
Financial Statements of Thompson-Hysell, Inc.
Independent Auditors' Report.............................................. F-30
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999
(unaudited)............................................................. F-31
Statements of Income for the years ended December 31, 1997 and 1998 and
the three months ended March 31, 1998 and 1999 (unaudited).............. F-32
Statements of Stockholders' Equity for the years ended December 31, 1997
and 1998 and the three months ended March 31, 1999 (unaudited).......... F-33
Statements of Cash Flows for the years ended December 31, 1997 and 1998
and the three months ended March 31, 1998 and 1999 (unaudited).......... F-34
Notes to Financial Statements............................................. F-35
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
The Keith Companies, Inc.:
We have audited the accompanying consolidated balance sheets of The Keith
Companies, Inc. and subsidiaries (note 1) as of December 31, 1997 and 1998, and
the related consolidated statements of income, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December
31, 1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Keith
Companies, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Orange County, California
February 12, 1999, except as to the fifth paragraph
of Note 5, which is as of March 5, 1999,
and to Note 18, which is as of April 9, 1999
F-2
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Note 1)
December 31,
------------------------ March 31,
1997 1998 1999
----------- ----------- -----------
(unaudited)
Assets (Note 5)
Current assets:
Cash................................... $ 587,000 $ 457,000 $ 144,000
Contracts and trade receivables (net of
allowance for doubtful accounts of
$348,000, $364,000 and $376,000 at
December 31, 1997, 1998 and March 31,
1999, respectively)................... 3,701,000 5,582,000 6,124,000
Other receivables...................... 148,000 282,000 238,000
Costs and estimated earnings in excess
of billings........................... 3,161,000 3,783,000 4,748,000
Prepaid expenses....................... 502,000 252,000 287,000
Deferred offering costs................ 169,000 291,000 346,000
Deferred tax assets.................... -- 270,000 --
----------- ----------- -----------
Total current assets................ 8,268,000 10,917,000 11,887,000
Equipment and improvements, net......... 1,839,000 2,862,000 2,974,000
Deferred tax assets..................... 1,494,000 -- --
Goodwill, net of accumulated
amortization of $10,000 and $15,000 at
December 31, 1998 and March 31, 1999,
respectively........................... -- 621,000 556,000
Other assets............................ 132,000 130,000 272,000
----------- ----------- -----------
Total assets........................ $11,733,000 $14,530,000 $15,689,000
=========== =========== ===========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Short-term borrowings.................. $ 310,000 $ -- $ 4,881,000
Current portion of long-term debt and
capital lease obligations............. 900,000 1,488,000 1,444,000
Trade accounts payable................. 2,871,000 1,221,000 1,280,000
Accrued employee compensation.......... 1,055,000 1,720,000 2,342,000
Accrued liabilities to related
parties............................... 116,000 185,000 201,000
Other accrued liabilities.............. 378,000 688,000 613,000
Billings in excess of costs and
estimated earnings.................... 622,000 435,000 559,000
----------- ----------- -----------
Total current liabilities........... 6,252,000 5,737,000 11,320,000
Long-term debt and capital lease
obligations, less current portion...... 4,632,000 5,778,000 948,000
Notes payable to related parties........ 2,245,000 2,401,000 2,401,000
Deferred tax liabilities................ -- 348,000 225,000
Accrued rent............................ 129,000 137,000 137,000
----------- ----------- -----------
Total liabilities................... 13,258,000 14,401,000 15,031,000
----------- ----------- -----------
Stockholders' equity (deficit):
Preferred stock, no par value.
Authorized 20,000,000 shares; no
shares issued or outstanding.......... -- -- --
Common stock, no par value. Authorized
105,000,000 shares in 1997 and
100,000,000 shares in 1998 and 1999;
issued and outstanding 9,611,211
shares in 1997, 1998 and 1999......... 1,085,000 1,085,000 1,085,000
Accumulated deficit.................... (2,610,000) (956,000) (427,000)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (1,525,000) 129,000 658,000
----------- ----------- -----------
Commitments and contingencies (Notes 3,
5, 7, 9, 10 and 12)....................
Total liabilities and stockholders'
equity (deficit)................... $11,733,000 $14,530,000 $15,689,000
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Note 1)
Three months
Years ended December 31, ended March 31,
-------------------------------------- ---------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ---------- ----------
(unaudited)
Gross revenue........... $ 14,344,000 $22,585,000 $34,021,000 $7,121,000 $9,999,000
Subcontractor costs..... 1,378,000 3,993,000 4,839,000 1,159,000 1,030,000
------------ ----------- ----------- ---------- ----------
Net revenue........... 12,966,000 18,592,000 29,182,000 5,962,000 8,969,000
Costs of revenue........ 9,229,000 11,871,000 19,287,000 4,080,000 5,914,000
------------ ----------- ----------- ---------- ----------
Gross profit.......... 3,737,000 6,721,000 9,895,000 1,882,000 3,055,000
Selling, general and
administrative
expenses............... 4,960,000 4,485,000 5,858,000 1,470,000 1,896,000
------------ ----------- ----------- ---------- ----------
Income (loss) from
operations........... (1,223,000) 2,236,000 4,037,000 412,000 1,159,000
Interest expense........ 720,000 852,000 967,000 221,000 260,000
Other expenses (income),
net.................... 5,000 83,000 66,000 7,000 (19,000)
------------ ----------- ----------- ---------- ----------
Income (loss) before
provision (benefit)
for income taxes and
extraordinary gain... (1,948,000) 1,301,000 3,004,000 184,000 918,000
Provision (benefit) for
income taxes........... 3,000 (1,397,000) 1,350,000 116,000 389,000
------------ ----------- ----------- ---------- ----------
Income (loss) before
extraordinary gain... (1,951,000) 2,698,000 1,654,000 68,000 529,000
Extraordinary gain on
forgiveness of
liability, net of
income taxes........... 2,686,000 -- -- -- --
------------ ----------- ----------- ---------- ----------
Net income.......... $ 735,000 $ 2,698,000 $ 1,654,000 $ 68,000 $ 529,000
============ =========== =========== ========== ==========
Per share data:
Basic................. $ 0.06
==========
Diluted............... $ 0.05
==========
Weighted average number
of shares outstanding:
Basic................. 9,611,211
==========
Diluted............... 10,439,493
==========
Pro Forma Supplemental
Data (unaudited):
Historical income (loss)
before provision
(benefit) for income
taxes and extraordinary
gain................... $ (1,948,000) $ 1,301,000 $ 3,004,000 $ 184,000 $ 918,000
Pro forma provision
(benefit) for income
taxes.................. (818,000) 546,000 1,262,000 77,000 386,000
------------ ----------- ----------- ---------- ----------
Pro forma income
(loss) before
extraordinary gain... (1,130,000) 755,000 1,742,000 107,000 532,000
Extraordinary gain on
forgiveness of
liability, net of
income taxes........... 1,558,000 -- -- -- --
------------ ----------- ----------- ---------- ----------
Pro forma net income.. $ 428,000 $ 755,000 $ 1,742,000 $ 107,000 $ 532,000
============ =========== =========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit) (Note 1)
Shares Common Accumulated
Outstanding Stock Deficit Total
----------- ---------- ----------- -----------
Balance at December 31,
1995........................ 8,000,000 $ 80,000 $(6,043,000) $(5,963,000)
Net income................... -- -- 735,000 735,000
--------- ---------- ----------- -----------
Balance at December 31,
1996........................ 8,000,000 80,000 (5,308,000) (5,228,000)
Issuance of common stock..... 1,611,211 1,005,000 -- 1,005,000
Net income................... -- -- 2,698,000 2,698,000
--------- ---------- ----------- -----------
Balance at December 31,
1997........................ 9,611,211 1,085,000 (2,610,000) (1,525,000)
Net income................... -- -- 1,654,000 1,654,000
--------- ---------- ----------- -----------
Balance at December 31,
1998........................ 9,611,211 1,085,000 (956,000) 129,000
Net income (unaudited)....... -- -- 529,000 529,000
--------- ---------- ----------- -----------
Balance at March 31, 1999
(unaudited)................. 9,611,211 $1,085,000 $ (427,000) $ 658,000
========= ========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Note 1)
Three months ended
Years ended December 31, March 31,
------------------------------------- ----------------------
1996 1997 1998 1998 1999
----------- ----------- ----------- ----------- ---------
(unaudited)
Cash flows from
operating activities:
Net income.............. $ 735,000 $ 2,698,000 $ 1,654,000 $ 68,000 $ 529,000
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 294,000 371,000 595,000 112,000 191,000
Gain on sale of
equipment............ (11,000) -- (29,000) -- --
Stock compensation
expense.............. -- 206,000 -- -- --
Extraordinary gain on
forgiveness of
liability, net of
income taxes......... (2,686,000) -- -- -- --
Changes in operating
assets and
liabilities, net of
effects from
acquisitions:
Contracts and trade
receivables......... 633,000 516,000 (1,597,000) (1,814,000) (542,000)
Other receivables.... 12,000 53,000 (134,000) (35,000) 44,000
Costs and estimated
earnings in excess
of billings......... 18,000 (3,158,000) (423,000) 2,538,000 (965,000)
Billings in excess of
costs and estimated
earnings............ 15,000 (323,000) (187,000) (418,000) 124,000
Prepaid expenses..... 6,000 (41,000) 250,000 104,000 (35,000)
Deferred tax assets.. -- (1,494,000) 1,224,000 79,000 270,000
Other long-term
assets.............. (1,000) 5,000 32,000 1,000 (142,000)
Trade accounts
payable and accrued
liabilities......... 438,000 1,590,000 (1,116,000) (1,064,000) 607,000
Accrued liabilities
to related parties.. 71,000 (47,000) 69,000 (79,000) 15,000
Deferred tax
liabilities......... -- -- 348,000 97,000 (123,000)
----------- ----------- ----------- ----------- ---------
Net cash provided by
(used in) operating
activities......... (476,000) 376,000 686,000 (411,000) (27,000)
----------- ----------- ----------- ----------- ---------
Cash flows from
investing activities:
Net cash (expended
for) acquired in
connection with
acquisitions......... -- 12,000 (77,000) -- --
Additions to equipment
and improvements..... (214,000) (276,000) (835,000) (90,000) (298,000)
Proceeds from sales of
equipment............ 33,000 -- 126,000 -- --
----------- ----------- ----------- ----------- ---------
Net cash used in
investing
activities......... (181,000) (264,000) (786,000) (90,000) (298,000)
----------- ----------- ----------- ----------- ---------
Cash flows from
financing activities:
Net payments under
short-term
borrowings........... -- -- (310,000) (310,000) --
Proceeds (payments)
from line of credit,
net.................. (202,000) (393,000) 1,844,000 624,000 354,000
Principal payments on
long-term debt and
capital lease
obligations,
including current
portion.............. (271,000) (598,000) (1,598,000) (261,000) (287,000)
Proceeds from issuance
of debt.............. 557,000 100,000 -- -- --
Borrowings on notes
payable to related
parties.............. 588,000 919,000 300,000 -- --
Payments on notes
payable to related
parties.............. -- -- (144,000) -- --
Payment of deferred
offering costs....... -- (169,000) (122,000) -- (55,000)
Proceeds from issuance
of common stock...... -- 598,000 -- -- --
----------- ----------- ----------- ----------- ---------
Net cash provided by
(used in) financing
activities........... 672,000 457,000 (30,000) 53,000 12,000
----------- ----------- ----------- ----------- ---------
Net increase
(decrease) in cash... 15,000 569,000 (130,000) (448,000) (313,000)
Cash, beginning of
period............... 3,000 18,000 587,000 587,000 457,000
----------- ----------- ----------- ----------- ---------
Cash, end of period... $ 18,000 $ 587,000 $ 457,000 $ 139,000 $ 144,000
=========== =========== =========== =========== =========
See supplemental cash flow information at Note 15.
See accompanying notes to consolidated financial statements.
F-6
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1997 and 1998
and Three Months Ended March 31, 1998 and 1999 (Unaudited)
(1) Organization and Basis of Presentation
The Keith Companies, Inc. (formerly The Keith Companies--Inland Empire, Inc.)
("TKCI") was incorporated in the State of California in November 1986. Keith
Engineering, Inc. ("KEI") was incorporated in the State of California in March
1983. The Keith Companies--Hawaii, Inc. ("TKCH"), a wholly-owned subsidiary of
TKCI, was incorporated in the state of Hawaii on January 4, 1989. TKCH no
longer maintains an office in Hawaii and had minimal operations in 1996, 1997,
1998 and 1999. In December 1997, TKCI acquired Engineering Services
Incorporated, and its wholly-owned subsidiary Engineered Systems Integrated,
Inc. (which was merged with Engineering Services Incorporated on August 1,
1998) (collectively, "ESI"). In addition, in August 1998, TKCI acquired John M.
Tettemer and Associates, Inc. ("JMTA").
TKCI and KEI have been under common management and ownership since inception.
On August 1, 1998, TKCI acquired all of the outstanding common stock of KEI
(the "Reorganization"), and on November 30, 1998, KEI was merged with and into
TKCI. The Reorganization was accounted for as a combination of affiliated
entities under common control in a manner similar to a pooling-of-interests.
Under this method, the assets, liabilities and equity were carried over at
their historical book values and their operations have been recorded on a
combined historical basis. The combination did not require any material
adjustments to conform the accounting policies of the separate entities.
TKCI and its wholly-owned subsidiaries (the "Company") is a leading provider of
engineering, consulting and technical services. The Company primarily serves
clients in the real estate development, public works and wireless
telecommunications and industrial engineering industries, pursuant to short and
long-term construction type contracts principally in California and Nevada. The
Company specializes in the planning, engineering, permitting and other services
essential to create and build infrastructure for a wide range of real estate
development and public works projects and provides site acquisition and
construction management services for the wireless telecommunications industry.
In addition, the Company provides a complete array of industrial engineering
services required to design and test automated processes, manufacturing
production lines and fire protection systems.
Services offered by the Company include civil engineering, surveying and
mapping, planning, environmental, archaeological, construction management, site
acquisition, water resource engineering, instrumentation and control systems
engineering, fire protection engineering, electrical engineering, mechanical
engineering and chemical process engineering. The Company's clients include
real estate developers, residential and commercial builders, architects,
cities, counties, water districts, local and federal agencies, universities,
retailers, cellular phone service providers and manufacturers of a variety of
products.
F-7
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TKCI, KEI, ESI, JMTA and TKCH (see Note 1). All material intercompany
transactions and balances have been eliminated in consolidation.
Revenue and Cost Recognition on Engineering Contracts
The Company enters into fixed fee contracts and contracts that provide for fees
on a time and materials basis, most of which have not to exceed provisions.
Contracts typically vary in length between six months and three years. However,
certain contracts are for small increments of work, which can be completed in
less than six months. Revenue is recognized on the percentage of completion
method of accounting based on the proportion of actual contract costs incurred
to total estimated contract costs. Management considers costs incurred to be
the best available measure of progress on the contracts.
In the course of providing its services, the Company sometimes subcontracts for
various services such as landscape architecture, architecture, geotechnical
engineering, structural engineering, traffic engineering, and aerial
photography. These costs are included in the billings to the clients and, in
accordance with industry practice, are included in the Company's gross revenue.
Because subcontractor services can change significantly from project to
project, changes in gross revenue may not be indicative of business trends.
Accordingly, the Company also reports net revenue, which is gross revenue less
subcontractor costs.
Costs of revenue include labor, nonreimbursable subcontract costs, materials
and certain direct and indirect overhead costs such as rent, utilities and
depreciation. General and administrative costs are charged to expense as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions and estimated profitability, including final contract settlements,
may result in revisions to costs and income and are recognized in the period in
which the revisions are determined. Additional revenue resulting from requests
for additional work due to changes in the scope of engineering services to be
rendered, are included in revenues when realization is probable and can be
estimated with reasonable certainty.
Costs and estimated earnings in excess of billings represents revenue
recognized in excess of amounts billed on the respective uncompleted
engineering contracts. Billings in excess of costs and estimated earnings
represents amounts billed in excess of revenue recognized on the respective
uncompleted contracts.
F-8
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(2) Summary of Significant Accounting Policies (continued)
At December 31, 1997, 1998 and March 31, 1999 (unaudited), the Company had no
significant amounts included in contracts and trade receivables or trade
accounts payable representing amounts retained pending contract or subcontract
completion.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost or, in the case of
leased assets, the lesser of the present value of future minimum lease payments
or fair value. Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets, or, in the case of capital leased assets,
over the lease term if shorter, as follows:
Equipment................................................. 5 to 10 years
Leasehold Improvements.................................... 1 to 10 years
When assets are sold or otherwise retired, the related cost and accumulated
depreciation are removed from the accounts and the resulting gain or loss is
included in other expenses (income), net in the accompanying consolidated
statements of income.
Income Taxes and Pro Forma Supplemental Data
Prior to August 1, 1998, KEI, with the consent of its stockholders, elected to
be taxed as an S corporation under certain sections of the Internal Revenue
Code of 1986, as amended. As an S corporation, corporate income or loss flows
through to the stockholders who are responsible for including the income,
deductions, losses and credits in their individual income tax returns.
Accordingly, prior to August 1, 1998, no provision for federal or state income
taxes for KEI is included in the accompanying consolidated financial
statements, except for California income taxes at the greater of $800 or the S
corporation rate of 1.5% of taxable income. As a result of the Reorganization,
KEI no longer qualified to be taxed as an S corporation and effective August 1,
1998, its operations were included in the consolidated C corporation tax return
of the Company.
TKCI, ESI, JMTA and TKCH are C corporations and account for income taxes, under
the asset and liability method, in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-9
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(2) Summary of Significant Accounting Policies (continued)
Historical pro forma supplemental data are unaudited and are presented as if
the Company had been taxed as a C corporation for the periods presented. The
pro forma tax provision has been calculated assuming a 42% combined effective
tax rate.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 25 years. The Company assesses the
recoverability of goodwill by determining whether the amortization of the
goodwill balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of
funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. Amortization expense
related to goodwill totaled $10,000 and $5,000 (unaudited) for the year ended
December 31, 1998 and the three months ended March 31, 1999, respectively.
Stock Options
The Company accounts for its stock options in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of
the underlying stock exceeds the exercise price. SFAS No. 123, "Accounting for
Stock Based Compensation," permits entities to recognize the fair value of all
stock-based awards on the date of grant as expense over the vesting period.
Alternatively, SFAS No. 123 allows entities to continue to apply the provisions
of APB Opinion No. 25 and provide pro forma net income disclosures for employee
stock option grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosure provisions of SFAS No. 123.
Deferred Offering Costs
The Company expects to complete an initial public offering during 1999. Certain
related costs incurred have been deferred and included in the accompanying
1997, 1998 and 1999 consolidated balance sheets as deferred offering costs.
Should the Company decide not to consummate the offering, these costs would
then be expensed.
F-10
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(2) Summary of Significant Accounting Policies (continued)
Per Share Data
Disclosure of per share data for the years ended December 31, 1996, 1997 and
1998 has been omitted, as a result of KEI's S corporation status prior to the
Reorganization.
Basic EPS is computed by dividing earnings available to common stockholders
during the period by the weighted average number of common shares outstanding
during each period. Diluted EPS is computed by dividing earnings available to
common stockholders 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 (all net income
is available to common stockholders for the period presented):
Three months ended
March 31, 1999
(unaudited)
------------------
Weighted average shares used for the basic EPS computation
(deemed outstanding the entire period) 9,611,211
Incremental shares from the assumed exercise of dilutive
stock options and stock warrants 828,282
----------
Weighted average shares used for the diluted EPS
computation 10,439,493
==========
There were no anti-dilutive shares excluded from the above calculation.
Interim Financial Statements
The accompanying consolidated balance sheet as of March 31, 1999 and the
statements of income and cash flows for the three months ended March 31, 1998
and 1999, and the statement of stockholders' equity for the three months ended
March 31, 1999 are unaudited and have been prepared on the same basis as the
audited consolidated financial statements included herein. In the opinion of
management, such unaudited consolidated financial statements include all
adjustments necessary to present fairly the information set forth therein,
which consist solely of normal recurring adjustments. The results of operations
for such interim periods are not necessarily indicative of results for the full
year.
F-11
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(2) Summary of Significant Accounting Policies (continued)
Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of these consolidated financial statements, in conformity with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the amounts of revenue and expenses reported during
the periods. Actual results may differ from the estimates and assumptions used
in preparing these consolidated financial statements.
Reclassifications
Certain 1996 and 1997 balances have been reclassified to conform to the
presentation used in 1998.
(3) Acquisitions
John M. Tettemer & Associates, Inc.
On August 1, 1998, TKCI acquired all of the outstanding common stock of JMTA,
in exchange for cash of $150,000; $300,000 in amortizing notes bearing interest
at 8% payable in 60 monthly payments; $250,000 in interest only notes bearing
interest at 8% payable quarterly; due the sooner of the first anniversary date
of the purchase agreement or the date the Company closes its anticipated
initial public offering and warrants to purchase 150,000 shares of TKCI common
stock, exercisable immediately at a purchase price of $1.75 per share, expiring
July 31, 2003. The amortizing and interest only notes include the principal
stockholder of TKCI as co-maker. The amortizing notes are subject to an
adjustment based on a calculation tied to the JMTA book value at August 1,
1998. The acquisition was accounted for using the purchase method of accounting
and, accordingly, the consolidated financial statements include the assets and
liabilities and results of operations of JMTA as of and subsequent to August 1,
1998. The excess purchase price over the fair value of the net identified
assets acquired of $631,000, has been recorded as goodwill in the accompanying
December 31, 1998 consolidated balance sheet.
During 1999, the purchase price allocation was revised to reflect an adjustment
to the JMTA book value at August 1, 1998. The purchase price allocation
revision resulted in a $60,000 (unaudited) adjustment to decrease goodwill and
long-term debt in the accompanying March 31, 1999 consolidated balance sheet.
F-12
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(3) Acquisitions (continued)
ESI, Engineering Services Incorporated
On December 30, 1997, TKCI acquired all of the outstanding common stock of ESI,
Engineering Services Incorporated, and its wholly-owned subsidiary Engineered
Systems Integrated, Inc., in exchange for 200,000 shares of TKCI common stock
valued at $1.00 per share. The acquisition was accounted for using the purchase
method of accounting and accordingly, the consolidated financial statements
include the assets and liabilities and results of operations of ESI as of and
subsequent to December 30, 1997.
The purchase agreement contains a provision whereby TKCI, under certain
conditions, must, at the sole discretion of the seller, repurchase any or all
of the seller's portion of the 200,000 shares issued for a price of $2.50 per
share, if the Company does not complete an initial public offering by October
31, 1999. This right of the seller expires November 15, 1999. Both dates are
automatically extended under certain conditions. The Company must also
repurchase stock options granted under certain conditions (see note 9). TKCI's
officers and/or shareholders have agreed, with ESI's former shareholders, to
subordinate repayment of debt owed to them up to such amount as, when netted
with the book value of TKCI's equity, equals $750,000. Further, an additional
100,000 shares of TKCI common stock may be issued to the prior ESI owners
subject to attainment of certain performance criteria related to the fiscal
years ended 1998, 1999 and 2000. As of March 31, 1999, none of the 100,000
shares have been issued.
In addition, the ESI purchase agreement provides for an anti-dilution provision
whereby TKCI may not issue additional shares of stock without the sellers'
consent; except as may be required to comply with the terms of the ESI
agreement, to issue shares in connection with future acquisitions, to provide
additional shares for Incentive Stock Option Plans, or for the contemplated
initial public offering by TKCI.
The following unaudited pro forma data presents information as if the
acquisition of ESI had occurred at the beginning of the period presented. The
pro forma information is provided for information purposes only. It is based on
historical information and does not necessarily reflect the actual results of
operations that would have occurred had ESI and the Company comprised a single
entity during such period, nor is it necessarily indicative of future results
of operations of the Company.
Pro forma for the year ended
December 31, 1997
(unaudited)
----------------------------
Net revenue................................. $22,983,000
Net income.................................. $ 2,782,000
F-13
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(4) Equipment and Improvements
Equipment and leasehold improvements at December 31, 1997 and 1998 consist of
the following:
1997 1998
----------- -----------
Equipment $ 4,465,000 $ 5,949,000
Leasehold improvements 78,000 91,000
Accumulated depreciation and amortization (2,704,000) (3,178,000)
----------- -----------
Net equipment and improvements $ 1,839,000 $ 2,862,000
=========== ===========
At December 31, 1997 and 1998, the cost of computer equipment, vehicles and
office furniture and fixtures recorded under capital leases, net of the related
accumulated amortization, were $1,181,000 and $1,634,000, respectively.
(5) Indebtedness
The Company's short-term borrowings and long-term debt, some of which prohibit
payment of dividends, are substantially all guaranteed by the principal
stockholder of TKCI.
Short-Term Borrowings
The Company had a consolidated and restated credit agreement, as amended in
December 1996 and September 1997, which allowed the Company to borrow up to
$10,500,000 at the bank's prime rate plus 3.25%, with all unpaid principal and
interest due on March 1, 1998. The bank's prime rate at December 31, 1997 was
8.5%. The credit agreement was collateralized by accounts receivable and UCC-1
filing on tangible assets and was guaranteed by TKCI's principal stockholder.
As of December 31, 1997, the Company owed $2,683,000 and $27,000 in principal
and accrued interest, respectively, under this line of credit.
On February 9, 1998, the Company obtained a new line of credit from a bank and
used the proceeds to repay all amounts due under its previous consolidated and
restated credit agreement. This new line of credit agreement, which was to
expire on April 30, 1999, contained positive and negative covenants of both a
financial and nonfinancial nature, as amended. As a result of the Company's
demonstrated ability and intent to refinance the short-term obligation on a
long-term basis, borrowings under the previous line of credit at December 31,
1997 were classified as long-term in the accompanying consolidated balance
sheet.
F-14
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(5) Indebtedness (continued)
The new line of credit permitted the Company to borrow up to $5,000,000, but
not in excess of 75% of eligible accounts receivable as defined in the
agreement. The interest rate is at the bank's prime rate plus 1.5% (9.25% at
December 31, 1998), payable monthly, with the principal maturing one year from
the date of the agreement. The line of credit is collateralized by a first-
priority perfected security interest in all assets of the Company and is
guaranteed by TKCI's principal stockholder.
The new line of credit agreement was amended in March 1998, June 1998 and
October 1998 to, among other things, add ESI and JMTA as co-borrowers on the
agreement, increase the percentage of eligible receivables to 80%, increase the
amount available to borrow to $5,500,000, extend the maturity on the line to
April 30, 1999 and amend certain financial related covenants. As of September
30, 1998, the Company was in default of certain financial related covenants. On
March 5, 1999, the bank waived compliance related to these covenants as of
September 30, 1998. In addition, the bank further amended the agreement to,
among other things, amend certain financial related covenants as of December
31, 1998, adjust the interest rate to the bank's prime rate plus a variable
margin tied to certain financial covenants (10.5% at March 5, 1999) and extend
the maturity on the line to March 1, 2000. As a result of the Company's
demonstrated ability and intent to refinance the short-term obligation on a
long-term basis, the outstanding borrowings under the line of credit of
$4,527,000 as of December 31, 1998 are classified as long-term in the
accompanying consolidated balance sheet. The outstanding borrowings under the
line of credit of $4,881,000 (unaudited) as of March 31, 1999 are classified as
short-term borrowings in the accompanying consolidated balance sheet.
On December 30, 1997, the Company acquired ESI, which had a line of credit with
a commercial bank in the amount of $1,250,000, bearing interest at the bank's
reference rate plus 1.25% (9.75% at December 31, 1997), subject to periodic
adjustment. As of December 31, 1997, the Company had an outstanding balance of
$310,000 on this line of credit. On January 6, 1998, the outstanding balance
was paid off and the line of credit was terminated.
F-15
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(5) Indebtedness (continued)
Long-Term Debt and Capital Lease Obligations
December 31,
-----------------------
1997 1998
---------- -----------
Short-term borrowings refinanced as long-term debt $2,683,000 $ 4,527,000
Note payable; no stated interest rate; interest im-
puted at an annual rate of 10.75%; payable in
monthly installments of $12,000 including interest;
final payment due November 2002 (see (a)) 564,000 460,000
Unsecured note payable to landlord; interest at
11.5%; payable in monthly installments of $10,000
including interest; all unpaid principal and inter-
est was due May 1998. On February 4, 1998, this note
was amended to provide for its repayment in 24
monthly installments of principal and interest in
the initial amount of $9,000 209,000 116,000
Note payable; interest at the lender's prime rate
plus 1.5% (10% at December 31, 1997). In June 1998,
the loan was paid off and the agreement was termi-
nated 600,000 --
Notes payable; interest at 7.75%; payable in monthly
installments of $23,000, including interest, through
August 1999 351,000 216,000
Notes payable; bearing interest at 8%; interest only
payable quarterly; principal and unpaid interest are
due the sooner of August 3, 1999 or the date TKCI
closes an initial public offering -- 250,000
Notes payable; bearing interest at 8%; payable in
monthly installments of $6,000 including interest;
final payment due August 2003 -- 284,000
Capital lease obligations; interest ranging from 4.8%
to 17.18%; monthly principal and interest payments
ranging from $1,000 to $5,000 through 2002 1,125,000 1,413,000
---------- -----------
5,532,000 7,266,000
Less current portion (900,000) (1,488,000)
---------- -----------
$4,632,000 $ 5,778,000
========== ===========
F-16
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(5) Indebtedness (continued)
(a) TKCI and certain of its affiliates, as specified in the agreement, and
KEI's majority stockholder entered into a settlement agreement and mutual
release on November 14, 1995 related to the default by KEI on payment of rent
and other amounts due under a lease. The Company agreed to pay the sum of
$1,490,000, of which $140,000 was paid upon execution of the agreement and
$1,350,000 was payable under the terms of a promissory note. The obligations
under the promissory note are collateralized by a judgment of $1,800,000, less
any amounts previously paid under the agreement, not to be executed unless and
until an event of default has occurred, as defined. The promissory note, as
amended, required a $300,000 payment in November 1996 and monthly payments of
$12,000, until paid in full. The $300,000 payment due in November 1996 was
renegotiated and paid in three $100,000 payments in November 1996, March 1997
and June 1997. The monthly payments for a particular calendar quarter are to be
increased, in the event that consolidated sales of TKCI and certain of its
affiliates, as specified in the agreement, exceed $5,000,000 in the previous
calendar quarter. Such increase is proportional to the percentage by which
quarterly sales exceed $5,000,000. In 1998, the Company made additional
principal payments of $47,000 related to this provision.
Future annual principal maturities of long-term debt (including short-term
borrowings refinanced as long-term-debt) as of December 31, 1998 are as
follows:
Years ending December 31,
1999....................................................... $1,488,000
2000....................................................... 5,364,000
2001....................................................... 299,000
2002....................................................... 68,000
2003....................................................... 47,000
----------
$7,266,000
==========
(6) Notes Payable to Related Parties
Notes payable to related parties consist of unsecured borrowings for operating
purposes from the principal stockholders and parties related to the Company's
stockholders. Interest only payments at 10% per annum are due quarterly on each
January 1, April 1, July 1, and October 1, commencing on April 1, 1998. Accrued
interest at December 31, 1997 and 1998 related to these notes was $116,000 and
$185,000, respectively. These notes mature on July 1, 2000, with all the
outstanding principal and unpaid interest then due, and are subordinate to the
line of credit obtained from the Company's primary bank in February 1998 (see
note 5).
F-17
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(6) Notes Payable to Related Parties (continued)
In February 1996 and 1997, $50,000 and $100,000, respectively, were loaned to
the Company by two related parties in exchange for promissory notes bearing
interest at 10%. These notes were subsequently amended to extend the due dates
to February 1998. In February 1998, agreements were entered into whereby the
notes were assigned to the principal stockholder of TKCI in exchange for shares
of TKCI common stock, which the principal stockholder owns personally. The old
notes were subsequently cancelled and a new note was created for $150,000, with
a maturity date of January 15, 2000 and bearing interest at 10% payable
quarterly. As a result of the Company's demonstrated ability and intent to
refinance the short-term obligations on a long-term basis, the Company has
recorded the above loans in the amounts of $50,000 and $100,000, respectively,
as long-term notes payable to related parties in the December 31, 1997
consolidated balance sheet. This note was paid in full along with all accrued
interest in October 1998.
In April 1997, the Company entered into a collateralized promissory note
agreement, which was amended in December 1997, for working capital purposes
with a related party in the principal amount of $700,000. Interest on the note
accrues at a rate of 10% per annum and is payable on each of January 1, April
1, July 1 and October 1, commencing April 1, 1998. The note matures on July 1,
2000 with all the outstanding principal and unpaid interest then due. The note
is collateralized by all property of the Company, as defined in the agreement,
and is subordinate to the line of credit obtained from the Company's primary
bank in February 1998. This related party also received an option to purchase
common stock in the Company (see note 8).
Principal payments due to related parties of $2,401,000 are due in 2000.
(7) Leases
The Company leases equipment and vehicles under capital lease agreements that
expire at various dates through 2002.
The Company also has several noncancelable operating leases, primarily for
office facilities, that expire through 2004. These leases generally contain
renewal options for periods ranging from one to five years and require the
Company to pay costs such as common area maintenance and insurance charges.
Rental expense for operating leases during 1996, 1997 and 1998 totaled
$1,190,000, $1,183,000 and $1,671,000, respectively.
F-18
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(7) Leases (continued)
Certain facilities have been sublet under month-to-month subleases that provide
for reimbursement of various common area maintenance charges. Rental expense
has been reduced for sublease income of $92,000, $81,000 and $64,000 for the
years ended December 31, 1996, 1997 and 1998, respectively. Future minimum
lease payments as of December 31, 1998 are as follows:
Operating Capital
leases leases
---------- ----------
Years ending December 31:
1999................................................ $2,009,000 $ 789,000
2000................................................ 1,391,000 570,000
2001................................................ 738,000 199,000
2002................................................ 259,000 2,000
2003................................................ 221,000 --
Thereafter.......................................... 37,000 --
---------- ----------
Total future minimum lease payments................... $4,655,000 $1,560,000
==========
Less amounts representing interest.................... (147,000)
----------
Total obligations under capital leases................ 1,413,000
Less current portion.................................. (662,000)
----------
Long-term capital lease obligations................... $ 751,000
==========
(8) Common Stock
All issued and outstanding shares of KEI prior to the Reorganization were
exchanged into an equivalent number of shares of TKCI and all of the shares of
KEI were subsequently cancelled. The outstanding shares of TKCI prior to the
Reorganization remained outstanding and were not affected by the
Reorganization.
In April 1997, an option to purchase 10% of the Company's outstanding common
stock (calculated after the option purchase) was granted to a related party for
$10,000. The option was exercised in July 1997, for $88,000, resulting in the
issuance of 880,000 shares. On December 31, 1997, an additional 531,211 shares
of the Company's stock were purchased by this related party for $500,000. In
connection with the grant of options and sale of stock to this related party, a
total of $206,000 was recorded as common stock and stock compensation expense,
representing the difference between the exercise price at which the options
were granted and the price at which the stock was sold, and the estimated fair
value of the Company's stock at the date of grant and sale, respectively. The
related party was also granted a position on the Company's board of directors.
In April 1997, the Company also entered into a collateralized promissory note
agreement with this related party for $700,000 (see note 6).
F-19
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(9) Stock Plans
The following options and warrants are authorized for issuance at December 31,
1998:
Stock options.................................................. 1,500,000
Stock warrants related to acquisitions......................... 225,000
---------
1,725,000
=========
Stock Option Plans
In 1994, KEI and TKCI each adopted stock option plans (the "Plans"). Under the
terms of the Plans, the Boards of Directors of KEI and TKCI were able to grant
stock options to officers and key employees. The Plans, as amended in 1997,
authorize grants of options to purchase a total 1,500,000 shares of authorized
but unissued common stock in TKCI and KEI. Stock options are granted with an
exercise price equal to or greater than the stock's estimated fair market value
at the date of grant. All stock options issued in connection with the Plans
have ten-year terms and vest and become exercisable ratably each year for the
first five years from the grant date.
In connection with the Reorganization, the KEI plan was terminated and options
to purchase shares of common stock of KEI outstanding at August 1, 1998 were
automatically converted into options to purchase a like number of shares of
TKCI common stock, with the same exercise price, expiration date and other
terms as prior to the Reorganization (the "Plan").
At December 31, 1998, there were options to acquire 189,000 shares available
for grant under the Plan. The following represents the estimated fair value of
options granted, as determined using the Black-Scholes option pricing model and
the assumptions used for calculation:
Years ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
Weighted average estimated fair value per
option at grant date....................... $ 1.00 $ 1.00 $ 1.26
Average exercise price per option granted... $ 1.00 $ 1.00 $ 1.26
Risk-free interest rate..................... 6.0% 6.0% 5.0%
Option term (years)......................... 10 10 10
Stock dividend yield........................ 0.0% 0.0% 0.0%
F-20
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(9) Stock Plans (continued)
In accounting for its Plans, the Company elected the pro forma disclosure
option under SFAS No. 123. Accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial statements. Had
the Company determined compensation cost based on the fair value at the grant
date for its stock options under SFAS No. 123, the Company's net income would
have been adjusted to the pro forma amount indicated below:
Years ended December 31,
------------------------------
1996 1997 1998
-------- ---------- ----------
Net income:
As reported................................. $735,000 $2,698,000 $1,654,000
Pro forma................................... $735,000 $2,675,000 $1,601,000
Pro forma net income reflects only options granted after January 1, 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period of five years and compensation cost for options granted prior to
January 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
Number of shares Weighted-average
underlying options exercise price
------------------ ----------------
Balance at December 31, 1995............. 502,000
Granted................................ 75,000 $1.00
Forfeited.............................. (100,000) $1.00
---------
Balance at December 31, 1996............. 477,000
Granted................................ 487,000 $1.00
Forfeited.............................. (35,000) $1.00
---------
Balance at December 31, 1997............. 929,000 $1.00
Granted................................ 385,000 $1.90
Forfeited.............................. (3,000) $1.00
---------
Balance at December 31, 1998............. 1,311,000 $1.26
=========
At December 31, 1998, options outstanding had an exercise price ranging from
$1.00 to $3.00 and a weighted average remaining contractual life of 7.92 years.
At December 31, 1996, 1997 and 1998, the number of shares of common stock
subject to exercisable options were 161,000, 235,000 and 429,000, respectively,
and the weighted-average exercise price of those options was $1 for each year.
F-21
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(9) Stock Plans (continued)
In 1997 and 1998, in connection with acquisitions, TKCI reserved for grant
options to purchase 350,000 shares of its common stock to employees of the
acquired companies under the Plan. Of the shares reserved for grant, 120,000
have provisions such that in the event that the underlying shares do not have a
fair market value of at least $3.00 per share at some time during the period
between October 1, 1999 and October 1, 2002, the holders are entitled to
receive $2.00 in cash for each share of common stock subject to the exercise of
any tendered unexercised vested stock options. In addition, under the same
provisions, the holders of the options to acquire 120,000 shares of common
stock have the right, to be exercised only during October 2002, to sell any
shares acquired by exercise of options to the Company for $3.00 per share.
Further, included in the options reserved for grant, TKCI is required to
provide options for no less than 100,000 shares of common stock as of January
1, 2000, subject to certain earnings goals being obtained by the acquired
company (see note 3). As of December 31, 1998, the options to purchase 213,000
shares of common stock reserved for grant have been granted subject to the
Plan.
Stock Warrants
The Company has issued stock warrants to purchase common stock in connection
with the acquisitions of ESI and JMTA. The terms of stock warrants to acquire
shares of common stock are as follows at December 31, 1998:
Exercise
Warrants Grant Date Price Expiration Date
-------- ------------------ -------- ------------------
150,000 August 3, 1998 $1.75 July 31, 2003
75,000 September 15, 1998 $2.50 September 18, 2001
--------
225,000
========
Warrants are granted with an exercise price equal to or greater than the
stock's estimated fair market value at the date of grant, vest immediately and
may be exercised at any time until the expiration date.
(10) Employee Benefit Plans
The Company has two defined contribution 401(k) plans, which commenced in 1980
and 1988, covering a majority of its employees. These plans are designed to be
tax deferred in accordance with the provisions of Section 401(k) of the
Internal Revenue Code. Employees may contribute from 1% to 20% of compensation
(subject to certain limitations) on a tax-deferred basis through a "salary
reduction" arrangement. In 1998, the Company implemented an employer matching
contribution program, with a five year vesting schedule,
F-22
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(10) Employee Benefit Plans (continued)
whereby the Company matches 50% of the first 1% of employee contributions for
the year. No employer contributions were made during 1996 and 1997. During
1998, the Company contributed $55,000 to its 401(k) plans. Effective January 1,
1999, the Company increased the employer contribution percentage to 50% of the
first 6% of employee contributions, not to exceed $1,500 per employee per year.
(11) Income Taxes
Income tax expense (benefit) consists of the following:
Years ended December 31,
------------------------------
1996 1997 1998
------ ----------- ----------
Current:
Federal.................................... $ -- $ -- $ (29,000)
State...................................... 3,000 3,000 (99,000)
------ ----------- ----------
Subtotal................................. 3,000 3,000 (128,000)
------ ----------- ----------
Deferred:
Federal.................................... -- (1,299,000) 1,262,000
State...................................... -- (101,000) 216,000
------ ----------- ----------
Subtotal................................. -- (1,400,000) 1,478,000
------ ----------- ----------
Total.................................... $3,000 $(1,397,000) $1,350,000
====== =========== ==========
A reconciliation of income tax expense (benefit) at the federal statutory rate
of 34% to the Company's provision (benefit) for income taxes is as follows:
Years ended December 31,
-----------------------------------
1996 1997 1998
---------- ----------- ----------
Computed "expected" federal income tax
expense (benefit)..................... $ (662,000) $ 443,000 $1,021,000
State income tax expense (benefit), net
of federal income tax benefit......... 2,000 (64,000) 77,000
Tax effect of (earnings) losses not
subject to federal income tax due to S
corporation election.................. 1,023,000 (223,000) (513,000)
Tax effect of S to C corporation
conversion............................ -- -- 595,000
Change in federal deferred tax
valuation allowance................... (565,000) (1,585,000) 35,000
Other.................................. 205,000 32,000 135,000
---------- ----------- ----------
$ 3,000 $(1,397,000) $1,350,000
========== =========== ==========
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities are as follows:
F-23
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(11) Income Taxes (continued)
December 31,
----------------------
1997 1998
---------- ----------
Deferred tax assets:
Trade accounts payable............................ $ 823,000 $ --
Intercompany/related party payables............... 259,000 76,000
Accrued liabilities and employee compensation..... 159,000 383,000
Billings in excess of costs and earnings.......... 39,000 180,000
Allowance for doubtful accounts................... -- 117,000
Settlement obligations............................ -- 188,000
Other............................................. 36,000 174,000
Net operating loss carryforwards.................. 1,233,000 1,304,000
Less valuation allowance.......................... (31,000) (62,000)
---------- ----------
Total deferred tax assets....................... 2,518,000 2,360,000
---------- ----------
Deferred tax liabilities:
Trade receivable, net............................. 885,000 --
Section 481, change from cash to accrual.......... -- 818,000
Costs and earnings in excess of billings.......... 168,000 1,541,000
Other............................................. 12,000 79,000
---------- ----------
Total deferred tax liabilities.................. 1,065,000 2,438,000
---------- ----------
Net deferred tax assets (liabilities)........... $1,453,000 $ (78,000)
========== ==========
The net change in the valuation allowance for the years ended December 31,
1996, 1997 and 1998 was a decrease of $663,000 and $1,761,000, and an increase
of $31,000, respectively. The Company considers recording a valuation allowance
in accordance with the provisions of SFAS No. 109 to reflect the estimated
amount of deferred tax assets, which may not be realized. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not, that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment, and believes it is more likely
than not the Company will realize the benefits of its deferred tax assets, net
of the existing valuation allowance at December 31, 1998. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
As of December 31, 1998, the Company had approximately $3,500,000 and
$1,400,000 in federal and state net operating loss carryforwards, respectively,
available to offset future taxable income, if any. The federal carryforwards
expire from the years 2007 to 2018. The state carryforwards expire from the
years 1999 to 2003.
F-24
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(12) Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management and the Company's
legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial statements
taken as a whole.
(13) Segment and Related Information
The Company evaluates performance and makes resource allocation decisions based
on the overall type of services provided to customers. For financial reporting
purposes, we have grouped our operations into two primary reportable segments.
The Real Estate Development, Public Works and Wireless Telecommunications
("REPWWT") segment includes engineering, consulting and technical services for
the development of both private projects, such as residential communities,
commercial and industrial properties and recreational projects; public works
projects, such as transportation and water/sewage facilities; and site
acquisition and construction management services for wireless
telecommunications. The Industrial Engineering ("IE") segment, which consists
of ESI, provides the technical expertise and management required to design and
test manufacturing facilities and processes. The accounting policies of the
segments are the same as those described in note 2.
The following tables set forth certain information regarding the Company's
operating segments as of and for the years ended December 31, 1996, 1997, 1998
and the three months ended March 31, 1998 and 1999 (unaudited):
Year ended December 31, 1996
-----------------------------------------------
Corporate
REPWWT IE Costs Consolidated
----------- --------- ----------- ------------
Net revenue............... $12,966,000 $ -- $ -- $ 12,966,000
Income (loss) from opera-
tions.................... $ 216,000 $ -- $(1,439,000) $ (1,223,000)
Identifiable assets....... $ 4,677,000 $ -- $ -- $ 4,677,000
Year ended December 31, 1997
------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
----------- ---------- ----------- ------------
Net revenue............... $18,592,000 $ -- $ -- $18,592,000
Income (loss) from opera-
tions.................... $ 4,180,000 $ -- $(1,944,000) $ 2,236,000
Identifiable assets....... $10,485,000 $1,248,000 $ -- $11,733,000
Year ended December 31, 1998
------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
----------- ---------- ----------- ------------
Net revenue............... $25,330,000 $3,852,000 $ -- $29,182,000
Income (loss) from opera-
tions.................... $ 5,761,000 $ 244,000 $(1,968,000) $ 4,037,000
Identifiable assets....... $13,068,000 $1,462,000 $ -- $14,530,000
F-25
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(13) Segment and Related Information (continued)
Three months ended March 31, 1998
(unaudited)
---------------------------------------------
Corporate
REPWWT IE Costs Consolidated
---------- ---------- --------- ------------
Net revenue.................. $5,074,000 $ 888,000 $ -- $ 5,962,000
Income (loss) from
operations.................. $ 886,000 $ 20,000 $(494,000) $ 412,000
Identifiable assets.......... $9,386,000 $1,570,000 $ -- $10,956,000
Three months ended March 31, 1999
(unaudited)
----------------------------------------------
Corporate
REPWWT IE Costs Consolidated
----------- ---------- --------- ------------
Net revenue................. $ 7,993,000 $ 976,000 $ -- $ 8,969,000
Income (loss) from opera-
tions...................... $ 1,764,000 $ 32,000 $(637,000) $ 1,159,000
Identifiable assets......... $14,167,000 $1,522,000 $ -- $15,689,000
Business Concentrations
In 1996 and 1998, the Company had no customers which represented greater than
10% of consolidated net revenue. In 1997, the Company had one customer which
represented 11% of net revenue. In addition, in 1997 the Company had one
customer representing greater than 10% of net contract and trade receivables.
Receivables from this customer totaled $1,283,000 at December 31, 1997. No
customers represented greater than 10% of net contract and trade receivables at
December 31, 1998.
(14) Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments reported in the
accompanying consolidated balance sheets for cash, contracts and trade
receivables, other receivables, short-term borrowings, trade accounts payable,
accrued employee compensation, accrued liabilities to related parties, and
other accrued liabilities approximate fair values due to the short maturity of
these instruments.
At December 31, 1998, long-term debt, excluding capital lease obligations,
consisted of the Company's line of credit payable, notes payable and notes
payable to related parties. The carrying value of the Company's line of credit
payable approximates its fair value, based upon the borrowing rate currently
available to the Company for loans with similar terms. It was not practicable
to estimate the fair value of two notes payable with a combined carrying value
of $576,000, as there is no established market for these notes. The carrying
value of the remaining long-term debt and notes payable to related parties was
$3,151,000, which approximates fair value, determined using estimates for
similar debt instruments (see notes 5 and 6).
F-26
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(15) Supplemental Cash Flow Information
Three months ended
Years ended December 31, March 31,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- ---------- ---------- --------- ---------
(unaudited)
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for interest..... $587,000 $ 725,000 $1,024,000 $ 439,000 $ 240,000
======== ========== ========== ========= =========
Cash paid during the
period for income
taxes................... $ 3,000 $ 28,000 $ 144,000 $ 2,000 $ 2,000
======== ========== ========== ========= =========
Noncash financing and
investing activities:
Capital lease obligations
recorded in connection
with equipment
acquisitions............ $ 50,000 $1,120,000 $ 788,000 $ 105,000 $ --
======== ========== ========== ========= =========
Purchase price
adjustment.............. $ -- $ -- $ 26,000 $ -- $ 60,000
======== ========== ========== ========= =========
Issuance of common
stock................... $ -- $ 206,000 $ -- $ -- $ --
======== ========== ========== ========= =========
Insurance financing...... $ -- $ 311,000 $ 202,000 $ -- $ --
======== ========== ========== ========= =========
The acquisition of ESI and JMTA on December 30, 1997 and August 1, 1998,
respectively, resulted in the following:
Increases in:
ESI JMTA
December 30, 1997 August 1, 1998
----------------- --------------
Contracts and trade receivables........... $(541,000) $(309,000)
Costs and estimated earnings in excess of
billings................................. (131,000) (201,000)
Other receivables......................... (63,000) --
Goodwill.................................. -- (631,000)
Equipment and improvements................ -- (56,000)
Other assets.............................. (127,000) (29,000)
Short-term borrowings..................... 310,000 --
Long-term debt, including current por-
tion..................................... -- 700,000
Accounts payable, accrued expenses and
other liabilities........................ 364,000 449,000
Common stock.............................. 200,000 --
--------- ---------
Cash acquired in (expended for) acquisi-
tions.................................... $ 12,000 $ (77,000)
========= =========
F-27
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(16) Valuation and Qualifying Accounts
For the years ending in December 1996, 1997 and 1998, certain supplementary
information regarding valuation and qualifying accounts follows:
Provisions
Balance at for
beginning of doubtful Balance at end
period accounts Deductions of period
------------ ---------- ---------- --------------
Allowance for doubtful ac-
counts:
1996...................... $918,000 $1,146,000 $1,477,000 $587,000
1997...................... $587,000 $ 324,000 $ 563,000 $348,000
1998...................... $348,000 $ 300,000 $ 284,000 $364,000
(17) Extraordinary Gain
In 1990, the Company entered into a facility lease in Moreno Valley, California
anticipating growth in operations. By December 31, 1994, concurrent with the
recession in the southern California real estate industry, the Company's
operations from this location had diminished significantly resulting in
excessive lease space. Accordingly, the Company accrued a loss of $2,028,000,
based on its obligation for the excess space through the lease expiration date,
as the excess space had no substantive future use or benefit to the Company. In
addition, the Company was in default under the lease and had accrued unpaid
rent totaling $658,000 through December 31, 1995. During 1995, the landlord
issued a deed-in-lieu of foreclosure to the mortgage holder who subsequently
sold the building. The Company entered into an agreement with the new landlord
in August 1996, whereby all amounts owing under the previous lease through
December 31, 1995 were forgiven and a new lease was negotiated effective
January 1, 1996. Therefore, the Company recorded an extraordinary gain on the
forgiveness of $2,686,000 in 1996.
In connection with the original lease, a partnership owned by the two major
stockholders of TKCI, held a 25% ownership interest in the building and a small
interest in the overall project. As a result of the Company's default on the
lease, the partnership's ownership interest in the project was forfeited.
F-28
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements--(Continued)
Years Ended December 31, 1996, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(18) Subsequent Event
Thompson-Hysell, Inc.
On April 9, 1999, TKCI entered into an Asset Purchase Agreement with Thompson-
Hysell, Inc. ("Thompson-Hysell") and its shareholders (the "Acquisition
Agreement"). Under the terms of the Acquisition Agreement, TKCI is to acquire
substantially all of the assets of and assume certain of the liabilities of
Thompson-Hysell. Based on the terms of the Acquisition Agreement, TKCI is
obligated to pay cash in the amount of $3,333,333 and execute a promissory note
in the original principal amount of $1,333,333. TKCI may also be obligated to
issue shares of common stock with a value equal to $1,333,334. The purchase
price is subject to adjustment upward or downward depending upon certain
financial targets related to the assets acquired and liabilities assumed,
earnings for the years ended December 31, 1999 and 2000 and the effect on the
net proceeds to Thompson-Hysell and its shareholders of certain income tax
attributed to the assets acquired and liabilities assumed. It is anticipated
this transaction is to close concurrent with the Company's planned initial
public offering. As of March 31, 1999, the Company has incurred approximately
$104,000 (unaudited), consisting primarily of legal and accounting costs,
related to the acquisition of Thompson-Hysell. These acquisition costs have
been deferred and included in the March 31, 1999 accompanying consolidated
balance sheet in other assets. Should the Company decide not to consummate the
Thompson-Hysell acquisition, these costs would then be expensed.
F-29
Independent Auditors' Report
The Stockholders
Thompson-Hysell, Inc.:
We have audited the accompanying balance sheets of Thompson-Hysell, Inc. as of
December 31, 1997 and 1998, and the related statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Thompson-Hysell, Inc. as of
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Sacramento, California
February 26, 1999, except as to
Note 13, which is
as of April 9, 1999
F-30
THOMPSON-HYSELL, INC.
Balance Sheets
December 31,
----------------------
1997 1998 March 31, 1999
---------- ---------- --------------
(unaudited)
Assets
Current assets:
Cash and cash equivalents............. $ 118,000 $ 366,000 $ 264,000
Accounts receivable (net of allowance
for doubtful accounts of $68,000,
$102,000 and $113,000 at December 31,
1997, 1998 and March 31, 1999,
respectively)........................ 1,408,000 2,118,000 2,456,000
Costs and estimated earnings in excess
of billings.......................... 64,000 271,000 265,000
Prepaid expenses...................... -- 15,000 65,000
---------- ---------- ----------
Total current assets................ 1,590,000 2,770,000 3,050,000
Equipment and improvements, net......... 380,000 987,000 1,097,000
Marketable investment securities........ 215,000 232,000 243,000
Deposits................................ 4,000 4,000 4,000
---------- ---------- ----------
Total assets........................ $2,189,000 $3,993,000 $4,394,000
========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable...................... $ 154,000 $ 57,000 $ 103,000
Accrued liabilities................... 173,000 278,000 234,000
Dividends payable..................... -- 100,000 --
Related party payables................ 669,000 200,000 23,000
Line of credit payable................ 427,000 -- --
Current portion of notes payable and
capital lease obligations............ 124,000 209,000 231,000
Billings in excess of costs and
estimated earnings................... -- 3,000 --
---------- ---------- ----------
Total current liabilities........... 1,547,000 847,000 591,000
Notes payable and capital lease
obligations, net of current portion.... 254,000 344,000 378,000
Related party payables, net of current
portion................................ -- 587,000 579,000
---------- ---------- ----------
Total liabilities................... 1,801,000 1,778,000 1,548,000
---------- ---------- ----------
Stockholders' equity:
Common stock, $1 par value, 10,000
shares authorized, 1,000 shares
issued and outstanding............... 1,000 1,000 1,000
Notes receivable--stockholders........ (1,000) (1,000) --
Retained earnings..................... 360,000 2,201,000 2,822,000
Accumulated other comprehensive
income............................... 28,000 14,000 23,000
---------- ---------- ----------
Total stockholders' equity.......... 388,000 2,215,000 2,846,000
---------- ---------- ----------
Commitments and contingencies (notes
7, 11, 12, and 13)...................
Total liabilities and stockholders'
equity............................. $2,189,000 $3,993,000 $4,394,000
========== ========== ==========
See accompanying notes to financial statements.
F-31
THOMPSON-HYSELL, INC.
Statements of Income
Years ended December 31, Three months ended March 31,
-------------------------- ------------------------------
1997 1998 1998 1999
------------ ------------ -------------- --------------
(unaudited)
Gross revenue........... $ 4,567,000 $ 9,112,000 $ 1,660,000 $ 2,378,000
Subcontractor costs..... 238,000 323,000 88,000 76,000
------------ ----------- -------------- --------------
Net revenue........... 4,329,000 8,789,000 1,572,000 2,302,000
Costs of revenue........ 2,695,000 4,607,000 799,000 1,194,000
------------ ----------- -------------- --------------
Gross profit.......... 1,634,000 4,182,000 773,000 1,108,000
Selling, general and
administrative
expenses............... 1,264,000 2,187,000 321,000 473,000
------------ ----------- -------------- --------------
Income from
operations........... 370,000 1,995,000 452,000 635,000
Interest expense........ 52,000 80,000 20,000 32,000
Other income, net....... (43,000) (32,000) (28,000) (18,000)
------------ ----------- -------------- --------------
Income before
provision for income
taxes................ 361,000 1,947,000 460,000 621,000
Provision for income
taxes.................. 1,000 6,000 1,000 --
------------ ----------- -------------- --------------
Net income............ $ 360,000 $ 1,941,000 $ 459,000 $ 621,000
============ =========== ============== ==============
See accompanying notes to financial statements.
F-32
THOMPSON-HYSELL, INC.
Statements of Stockholders' Equity
Accumulated
Notes Other
Shares Common Receivable-- Retained Comprehensive
Outstanding Stock Stockholders Earnings Income Total
----------- ------ ------------ ---------- ------------- ----------
December 31, 1996....... 1,000 $1,000 $(1,000) $ -- $ -- $ --
Comprehensive income:
Net income............ -- -- -- 360,000 -- 360,000
Other comprehensive
income--unrealized
holding gains arising
during the period.... -- -- -- -- 28,000 28,000
----- ------ ------- ---------- ------- ----------
Balance at December 31,
1997................... 1,000 1,000 (1,000) 360,000 28,000 388,000
----- ------ ------- ---------- ------- ----------
Comprehensive income
(loss):
Net income............ -- -- -- 1,941,000 -- 1,941,000
Other comprehensive
income--unrealized
holding losses
arising during the
period............... -- -- -- -- (12,000) (12,000)
Less reclassification
adjustment for gain
included in net
income............... -- -- -- -- (2,000) (2,000)
----- ------ ------- ---------- ------- ----------
Total comprehensive
income (loss)......... -- -- -- 1,941,000 (14,000) 1,927,000
Dividends declared .... -- -- -- (100,000) -- (100,000)
----- ------ ------- ---------- ------- ----------
Balance at December 31,
1998................... 1,000 1,000 (1,000) 2,201,000 14,000 2,215,000
----- ------ ------- ---------- ------- ----------
Comprehensive income:
Net income............ -- -- -- 621,000 -- 621,000
Other comprehensive
income--unrealized
holding gains arising
during the period.... -- -- -- -- 9,000 9,000
----- ------ ------- ---------- ------- ----------
Total comprehensive
income................ -- -- -- 621,000 9,000 630,000
Collection of notes
receivable--
stockholders. -- -- 1,000 -- -- 1,000
----- ------ ------- ---------- ------- ----------
Balance at March 31,
1999 (unaudited)...... 1,000 $1,000 $ -- $2,822,000 $23,000 $2,846,000
===== ====== ======= ========== ======= ==========
See accompanying notes to financial statements.
F-33
THOMPSON-HYSELL, INC.
Statements of Cash Flows
Years ended Three Months ended
December 31, March 31,
----------------------- --------------------
1997 1998 1998 1999
----------- ---------- --------- ---------
(unaudited)
Cash flows from operating activities:
Net income.................................. $ 360,000 $1,941,000 $ 459,000 $ 621,000
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Depreciation and amortization............ 47,000 138,000 20,000 20,000
Bad debt expense (recoveries)............ 68,000 34,000 3,000 (16,000)
Gain on sale of marketable investment
securities.............................. (23,000) (6,000) -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... (1,476,000) (744,000) (107,000) (322,000)
Costs and estimated earnings in excess of
billings................................ (64,000) (207,000) (1,000) 6,000
Prepaid expenses......................... -- (15,000) (61,000) (50,000)
Deposits................................. (4,000) -- -- --
Accounts payable......................... 28,000 (97,000) 98,000 46,000
Accrued liabilities...................... 139,000 105,000 (28,000) (44,000)
Billings in excess of costs and estimated
earnings................................ -- 3,000 -- (3,000)
----------- ---------- --------- ---------
Net cash (used in) provided by operating
activities.............................. $ (925,000) $1,152,000 $ 383,000 $ 258,000
----------- ---------- --------- ---------
Cash flows from investing activities:
Acquisition of equipment and improvements.. (80,000) (346,000) (54,000) (33,000)
Purchase of marketable investment
securities................................ (5,000) (99,000) (8,000) (2,000)
Proceeds from sale of marketable investment
securities................................ 80,000 74,000 -- --
----------- ---------- --------- ---------
Net cash used in investing activities.... $ (5,000) $ (371,000) $ (62,000) $ (35,000)
----------- ---------- --------- ---------
Cash flows from financing activities:
Net change in related party payables....... 869,000 (207,000) (123,000) (184,000)
Net change in line of credit payable....... 172,000 (427,000) (172,000) --
Payments on notes payable and capital lease
obligations............................... (64,000) (164,000) (24,000) (63,000)
Proceeds from notes payable................ 71,000 265,000 42,000 22,000
Distributions to stockholders.............. -- -- -- (100,000)
----------- ---------- --------- ---------
Net cash provided by (used in) financing
activities.............................. $ 1,048,000 $ (533,000) $(277,000) $(325,000)
----------- ---------- --------- ---------
Cash and cash equivalents.................... 118,000 248,000 44,000 (102,000)
Cash and cash equivalents, beginning of
period...................................... -- 118,000 118,000 366,000
----------- ---------- --------- ---------
Cash and cash equivalents, end of period..... $ 118,000 $ 366,000 $ 162,000 $ 264,000
=========== ========== ========= =========
See supplemental cash flow information at Note 9
See accompanying notes to financial statements.
F-34
THOMPSON-HYSELL, INC.
Notes to Financial Statements
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(1) Organization and Summary of Significant Accounting Policies
Company's Activities and Operating Cycle
Thompson-Hysell, Inc. (the "Company") was incorporated as an S Corporation on
December 20, 1996 in California, with significant operations commencing on May
1, 1997. The Company provides civil engineering for private land development
and large development projects, and provides project planning and heavy
construction surveying/staking along with construction management, primarily in
central California and Utah. The work is performed under fixed price and time
and material contracts, some of which have not to exceed provisions. The length
of the Company's contracts varies but are typically from one to three years. In
accordance with normal practice in the civil engineering industry, the Company
includes asset and liability accounts relating to engineering contracts in
current assets and liabilities even when such amounts are realizable or payable
over a period in excess of one year.
Interim Financial Statements
The accompanying balance sheet as of March 31, 1999 and the statements of
income and cash flows for the three months ended March 31, 1998 and 1999, and
the statement of stockholders' equity for the three months ended March 31, 1999
are unaudited and have been prepared on the same basis as the audited financial
statements included herein. In the opinion of management, such unaudited
financial statements include all adjustments necessary to present fairly the
information set forth therein, which consist solely of normal recurring
adjustments. The results of operations for such interim periods are not
necessarily indicative of results for the full year.
Engineering Contract Income Recognition
For financial reporting purposes, profits on engineering contracts are recorded
using the percentage-of-completion method of accounting, determined by the
ratio of costs incurred to date to management's estimates of total anticipated
costs. Such amounts necessarily are based on estimates, and the uncertainty
inherent in the estimates initially is reduced progressively as work on the
contract nears completion.
Costs of revenue include all direct material, labor, subcontractor costs and
those indirect costs related to contract performance, such as indirect labor,
supplies, tools, equipment costs, and depreciation and amortization applicable
to autos and trucks under capital leases. Selling, general and administrative
costs are expensed as incurred. If estimated total costs for a
F-35
THOMPSON-HYSELL, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
contract indicate a loss, the Company provides currently for the total
anticipated loss on the contract. Changes in job performance, job conditions,
and estimated profitability may result in revisions to revenue and costs, which
are recognized in the period in which the revisions are determined.
Costs and estimated earnings in excess of billings represents revenue
recognized in excess of amounts billed. Billings in excess of costs and
estimated earnings represents billings in excess of revenue recognized.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all cash accounts
that are not subject to withdrawal restrictions or penalties with maturities at
date of purchase of three months or less, to be cash or cash equivalents.
Equipment and Improvements
Equipment and improvements are recorded at cost. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets. Autos
and trucks held under capital leases (stated at the present value of the future
minimum lease payments) and leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or the estimated useful
life of the asset. Expenditures for maintenance and repairs are charged against
income in the year in which they are incurred and betterments are capitalized.
When depreciable assets are sold or disposed of, the cost and accumulated
depreciation accounts are reduced by the applicable amounts, and any profit or
loss is credited or charged to income.
F-36
THOMPSON-HYSELL, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
Equipment and improvements consist of the following:
December 31,
---------------------------------
March 31,
1997 1998 1999
-------- ---------- -----------
(unaudited)
Equipment................................ $ 99,000 $ 627,000 $ 627,000
Leasehold improvements................... -- 313,000 316,000
Office furniture and fixtures............ 1,000 226,000 234,000
Autos and trucks......................... 13,000 195,000 217,000
Autos and trucks under capital leases.... 339,000 413,000 510,000
-------- ---------- ----------
452,000 1,774,000 1,904,000
Accumulated depreciation and amortiza-
tion.................................... (72,000) (787,000) (807,000)
-------- ---------- ----------
$380,000 $ 987,000 $1,097,000
======== ========== ==========
Depreciation and amortization are based on the following estimated useful
lives:
Years
-----
Leasehold improvements................................ 15
Equipment, autos and trucks........................... 5
Office furniture and fixtures......................... 3--7
Depreciation expense for the years ended December 31, 1997 and 1998, totaled
$11,000 and $65,000, respectively. Amortization expense for autos and trucks
under capital leases for the years ended December 31, 1997 and 1998, totaled
$36,000 and $73,000, respectively.
Marketable Investment Securities
Marketable investment securities at December 31, 1997 and 1998 and March 31,
1999, consist of equity securities and mutual funds. The Company has classified
its investments as available-for-sale, and has recorded them at fair market
value with any unrealized gains or losses reflected as a component of
stockholders' equity.
Income Taxes
The Company, with the consent of its stockholders, elected, under the Internal
Revenue Code, to be an S Corporation effective December 20, 1996. Under the S
election, the Company's income or loss is passed on to the individual
stockholders for federal and state income tax purposes. Therefore, there is no
federal tax liability at the corporate level and thus, no provision for federal
income taxes has been included in these financial statements. However, a tax is
assessed on income apportioned to California equal to the greater of $800 or
1.5% of income apportioned to California for franchise tax purposes.
F-37
THOMPSON-HYSELL, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
Fair Value of Financial Instruments
The carrying amount reported in the balance sheet of the assets and liabilities
that are considered to be financial instruments (such as cash and cash
equivalents, accounts receivable, deposits, accounts payable, accrued
liabilities, dividends payable, related party payables and line of credit
payable) approximate their fair value based upon their short-term nature. The
carrying amount of notes payable approximates fair value since their terms and
conditions are similar to those currently available to the Company.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period.
Accordingly, actual results could differ from those estimates.
(2) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable is composed of amounts due from clients, which vary from
private individuals to large construction companies. Consequently, the
Company's ability to collect the amounts due is affected by fluctuations in the
economy of the local community. The Company provides an allowance for
uncollectible accounts based upon prior experience and management's assessment
of the collectibility of existing specific accounts.
F-38
THOMPSON-HYSELL, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(3) Marketable Investment Securities
The Company has invested in stocks and mutual funds through AG Edwards & Sons,
Inc. Securities classified as available-for-sale as of December 31, 1997,
consisted of the following:
Gross Gross Current
Cost Unrealized Unrealized Market
Shares Basis Gains Losses Value
------ -------- ---------- ---------- --------
Putnam--CA Tax Exempt......... 600 $ 5,000 $ -- $ -- $ 5,000
Putnam--Hi Yield.............. 3,700 47,000 2,000 -- 49,000
Putnam--Growth Fund........... 3,000 37,000 21,000 -- 58,000
Alliance Growth Fund.......... 400 10,000 6,000 -- 16,000
Silicon....................... 400 5,000 -- 3,000 2,000
AT&T.......................... 300 15,000 6,000 -- 21,000
E. I. Dupont De Nemours....... 300 16,000 -- 1,000 15,000
Eastman Kodak................. 200 15,000 -- -- 15,000
Philip Morris................. 400 15,000 1,000 -- 16,000
Somatogen, Inc................ 1,000 7,000 -- 2,000 5,000
Union Carbide Corp............ 300 15,000 -- 2,000 13,000
-------- ------- ------ --------
Totals...................... $187,000 $36,000 $8,000 $215,000
======== ======= ====== ========
During 1997, the Company sold securities classified as available-for-sale for
total proceeds of approximately $80,000 resulting in gross realized gains of
$23,000.
Securities classified as available-for-sale as of December 31, 1998, consisted
of the following:
Gross Gross Current
Cost Unrealized Unrealized Market
Shares Basis Gains Losses Value
------ -------- ---------- ---------- --------
Putnam--CA Tax Exempt........ 600 $ 5,000 $ -- $ -- $ 5,000
Putnam--Hi Yield............. 4,000 53,000 14,000 -- 67,000
Putnam--Growth Fund.......... 3,000 50,000 -- 5,000 45,000
Alliance Growth Fund......... 400 11,000 9,000 -- 20,000
Silicon...................... 400 5,000 -- 4,000 1,000
E. I. Dupont De Nemours...... 300 16,000 -- 2,000 14,000
International Paper Co....... 300 17,000 -- 2,000 15,000
BankAmerica Corporation...... 200 13,000 -- 1,000 12,000
Preferred Network Inc........ 2,600 5,000 -- 4,000 1,000
Caterpillar Inc.............. 300 15,000 1,000 -- 16,000
General Motors............... 300 14,000 7,000 -- 21,000
Good Year Tire and Rubber.... 300 14,000 1,000 -- 15,000
-------- ------- ------- --------
Totals..................... $218,000 $32,000 $18,000 $232,000
======== ======= ======= ========
F-39
THOMPSON-HYSELL, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
During 1998, the Company sold securities classified as available-for-sale for
total proceeds of approximately $74,000 resulting in gross realized gains of
$6,000.
(4) Line of Credit Payable
The Company has a line of credit which allows the Company, at its discretion,
to borrow up to $500,000 at prime plus 1.5%, with all unpaid principal and
interest due on May 10, 2000. As of December 31, 1997, the effective interest
rate was 9.75% and the outstanding balance was $427,000. There was no
outstanding balance at December 31, 1998 and March 31, 1999 (unaudited).
(5) Notes Payable
Notes payable is comprised of the following:
December 31,
------------------
1997 1998
-------- --------
Notes payable to various third parties secured by
equipment, payable in monthly installments ranging from
$70 to $700, including principal and interest at rates
ranging from 8.65% to 13.22%, maturing between 2000 and
2003................................................... $ 95,000 $285,000
Less current portion.................................... (26,000) (93,000)
-------- --------
$ 69,000 $192,000
======== ========
Maturities of notes payable as of December 31, 1998 are:
Years Ending
December 31:
------------
1999.......................................................... $ 93,000
2000.......................................................... 97,000
2001.......................................................... 59,000
2002.......................................................... 23,000
2003.......................................................... 13,000
--------
$285,000
========
F-40
THOMPSON-HYSELL, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(6) Autos and Trucks Under Capital Leases
The Company leases various vehicles under capital lease agreements that expire
at various dates over the next four years.
Future minimum payments on capitalized leases as of December 31, 1998 are:
Years ending
December 31:
------------
1999...................................................... $ 146,000
2000...................................................... 125,000
2001...................................................... 20,000
2002...................................................... 26,000
---------
317,000
Amount representing interest (at rates ranging from approxi-
mately 5% to 16%).......................................... (48,000)
---------
Present value of future minimum capital lease payments...... 269,000
Less current portion........................................ (116,000)
---------
Long-term capital lease portion............................. $ 153,000
=========
(7) Operating Leases
The Company has several noncancelable operating leases, primarily for office
facilities and equipment used in its operations, that expire over the next 15
years. The facility leases require the Company to pay such costs as common area
maintenance and insurance.
During the years ended December 31, 1997 and 1998, rentals under long-term
lease obligations were $156,000 and $268,000, respectively. Future minimum
lease payments on these leases at December 31, 1998 are:
Years ending Third Related
December 31: Parties Parties
------------ -------- ----------
1999............................................... $116,000 $ 144,000
2000............................................... 113,000 144,000
2001............................................... 74,000 144,000
2002............................................... 10,000 144,000
2003............................................... -- 144,000
Thereafter......................................... -- 684,000
-------- ----------
$313,000 $1,404,000
======== ==========
F-41
THOMPSON-HYSELL, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
The Company leases a building from shareholders of the Company. The lease is
for an initial fifteen year term expiring in 2008 and has been classified as an
operating lease. Total rent expense associated with this lease for the years
ended December 31, 1997 and 1998, was $96,000 and $158,000, respectively, and
$36,000 for each of the three months ended March 31, 1998 and 1999.
(8) Transactions with Related Parties
In addition to related party leasing transactions as noted in footnote 7,
amounts due from (to) related parties are as follows:
December 31,
--------------------
1997 1998
--------- ---------
Notes receivable--stockholders..................... $ 1,000 $ 1,000
========= =========
Related party payables:
Notes payable.................................... -- 608,000
Other............................................ $ 669,000 $ 179,000
--------- ---------
669,000 787,000
Less current portion of related party payables..... (669,000) (200,000)
--------- ---------
Related party payables, net of current portion.... $ -- $ 587,000
========= =========
Notes receivable--stockholders--The stockholders were issued 1,000 shares of
Company stock ($1 par value) in exchange for $1,000 in notes receivable. The
notes are secured by the underlying shares of Company stock.
Notes payable--related party--Balance represents the amounts due to a former
stockholder of a related party for buyout of his stock in the related party,
severance package upon termination of his employment/ownership with the related
party, and amounts owed to a former stockholder of the related party in return
for a covenant not to compete with related party and/or the Company. The notes
have a remaining life of 14 years, have been discounted at 9%. The current
portion of the notes payable-related party, was $0 and $200,000, as of December
31, 1997 and 1998, respectively.
Other related party payables--Balance represents the net position of payments
for expenses made by a related party on behalf of the Company and collections
of receivables made by the Company on behalf of a related party. The balance
due to the related party was paid in full as of March 31, 1999 (unaudited).
F-42
THOMPSON-HYSELL, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(9) Supplemental Cash Flow Information
Year ended Three months
December 31, ended
----------------- March 31,
1997 1998 1999
-------- -------- ------------
(unaudited)
Cash paid for:
Interest................................... $ 47,000 $ 82,000 $32,000
Taxes...................................... $ -- $ 2,000 $ --
Noncash transactions:
Equipment acquired through
financing/leasing......................... $339,000 $ 73,000 $97,000
Dividends declared, but unpaid as of Decem-
ber 31, 1998.............................. $ -- $100,000 $ --
On May 1, 1997 and December 31, 1998, certain assets and liabilities were
transferred from Thompson-Hysell Engineers, Inc. (a related party) of the
Company. The assets and liabilities were transferred at book value as follows:
1997 1998
--------- ---------
Cash................................................. $ 2,000 $ --
Prepaid expenses..................................... 62,000 --
Leasehold improvements............................... -- 313,000
Equipment............................................ 20,000 301,000
Office furniture and fixtures........................ -- 216,000
Autos and trucks..................................... 13,000 72,000
Accumulated depreciation and amortization............ (25,000) (576,000)
Marketable investment securities..................... 182,000 --
Security deposits.................................... 2,000 --
Accounts payable..................................... (126,000) --
Accrued liabilities.................................. (34,000) (26,000)
Related party receivable (recorded as a reduction in
related party payable).............................. 192,000 308,000
Line of credit payable............................... (255,000) --
Notes payable........................................ (33,000) --
Notes payable, former stockholder of a related par-
ty.................................................. -- (608,000)
F-43
THOMPSON-HYSELL, INC.
Notes to Financial Statements--(Continued)
Years Ended December 31, 1997 and 1998 and
Three Months Ended March 31, 1998 and 1999 (Unaudited)
(10) 401(k) Profit Sharing Plan
The Company provides a 401(k) Profit Sharing Plan to their employees. Employees
are eligible to participate immediately; however, the Company does not match
until after one full year of service. After one year, the Company matches 50%
of what each employee puts into the plan, up to 5% of their gross annual salary
subject to limitations imposed by the Internal Revenue Code. Matching
contributions to the plan for the years ended December 31, 1997 and 1998, were
$27,000 and $54,000, respectively.
(11) Business and Credit Concentrations
The Company's primary operations are located in central California, and the
Salt Lake City, Utah areas. Thus, the Company is susceptible to economic
conditions in those geographical areas.
The Company maintains its cash balances at Wells Fargo Bank. Combined accounts
at the institution are insured by the Federal Deposit Insurance Corporation up
to $100,000. At December 31, 1998 and March 31, 1999, the Company's uninsured
cash balances totaled $266,000 and $164,000, respectively.
(12) Purchase of Stock
The Company has a shareholder agreement for the purchase of a retiring
shareholder's stock in the Company. Included in the agreement is term life
insurance on some of the shareholders. By board action, it is understood that
when a shareholder's stock is purchased, the term life insurance will be
transferred to the shareholder.
(13) Subsequent Event
On April 9, 1999, the Company entered into an Asset Purchase Agreement with an
unrelated third party to sell substantially all of the assets and certain of
the liabilities of the Company for cash, a promissory note and common stock of
the Company with an aggregate value of $6,000,000. The purchase price is
subject to change based on certain financial targets. The transaction is
anticipated to be consummated concurrent with the unrelated third party's
initial public offering.
F-44
[TKCI GRAPHICS]
Until , 1999 (25 days after the date of this Prospectus) all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table itemizes the estimated expenses incurred in connection with
the offering described in this Registration Statement.
Registration fee.......................................................... $
NASD filing fee........................................................... $
Printing and engraving expenses........................................... *
Nasdaq application fee.................................................... *
Blue sky qualification fees and expenses.................................. *
Legal fees and expenses................................................... *
Accountants' fees and expenses............................................ *
Transfer agent and registrar fees......................................... *
Miscellaneous............................................................. *
----
Total................................................................ $ *
====
- ------------------
* To be supplied by amendment
Item 14. Indemnification of Directors and Officers
The underwriting agreement (Exhibit 1.1 hereto) provides for indemnification by
the underwriters of the Registrant and its officers and directors, and by the
Registrant of the underwriters for certain liabilities arising under the
Securities Act of 1933 or otherwise.
Our articles of incorporation provide that the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible under
California law. This is intended to eliminate the personal liability of a
director for monetary damages in an action brought by or in the right of TKCI
for breach of a director's duties to TKCI or our shareholders except for
liability: (a) for acts or omissions that involve intentional misconduct or a
knowing and culpable violation of law; (b) for acts or omissions that a
director believes to be contrary to the best interests of TKCI or our
shareholders or that involve the absence of good faith on the part of the
director; (c) for any transaction for which a director derived an improper
personal benefit; (d) for acts or omission that show a reckless disregard for
the director's duty to TKCI or our shareholders in circumstances in which the
director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to TKCI or our
shareholders; (e) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to TKCI or our
shareholders; (f) with respect to certain transactions, or the approval of
transactions in which a director has a material financial interest; and (g)
expressly imposed by statute, for approval of certain improper distributions to
shareholders or certain loans or guarantees.
II-1
Our articles also provide that we are authorized to provide indemnification to
our officers and directors in excess of the indemnification otherwise permitted
by Section 317 of the California Corporations Code. Our bylaws provide for
indemnification of our officers, directors, employees, and other agents to the
extent and under the circumstances permitted by California law.
We have entered into agreements to indemnify our directors and executive
officers in addition to the indemnification provided for in the articles of
incorporation and bylaws. Among other things, these agreements provide that we
will indemnify, subject to certain requirements, each of our directors for
certain expenses (including attorneys' fees), judgments, fines and settlement
amounts incurred by such person in any action or proceeding, including any
action by or in the right of TKCI, on account of services by such person as a
director or officer of TKCI, or as a director or officer of any other company
or enterprise to which the person provides services at our request. We have
also purchased directors and officers liability insurance, which provides
coverage against certain liabilities including liabilities under the Securities
Act.
The inclusion of the above provisions in our articles of incorporation and
bylaws, the existence of the indemnification agreements and directors and
officers insurance may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter shareholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted the Registrant and its shareholders. At present, there is no
litigation or proceeding pending involving a director of the Registrant as to
which indemnification is being sought, nor is the Registrant aware of any
threatened litigation that may result in claims for indemnification by any
director.
Item 15. Recent Sales of Unregistered Securities.
In April 1997, we entered into an agreement for advisory services with Walter
W. Cruttenden, III, pursuant to which, among other things, for $10,000 we
provided Mr. Cruttenden with an option to purchase 10% of our outstanding
common stock upon the payment of additional consideration of $88,000. In July
1997, upon his exercise of this option, we issued 325,926 shares of our common
stock to Mr. Cruttenden.
In December 1997, Mr. Cruttenden and members of his family purchased an
additional 196,745 shares of common stock for an aggregate purchase price of
$500,000. The securities issued to Mr. Cruttenden and his family members were
issued in private transactions pursuant to Section 4(2) of the Securities Act
of 1933.
In December 1997, in connection with our acquisition of all of the outstanding
common stock of ESI, we issued an aggregate of 74,074 shares of our common
stock to the three selling shareholders in partial consideration of the ESI
common stock. These securities were issued in a private transaction pursuant to
Section 4(2) of the Securities Act of 1933.
II-2
In August 1998, the holders of all of the outstanding shares of Keith
Engineering contributed their shares to TKCI as a contribution to capital. In
consideration of this contribution, we issued to the contributing shareholders
one share of TKCI common stock for each share of Keith Engineering stock
contributed. We issued an aggregate of 1,222,222 shares of our common stock
pursuant to Section 4(2) of the Securities Act of 1933.
We have granted options to purchase an aggregate of 485,074 shares of our
common stock pursuant to our Amended and Restated 1994 Stock Incentive Plan to
certain employees, officers and directors. The issuance of these securities was
exempt from registration pursuant to Rule 701 of the Securities Act of 1933.
In connection with our acquisitions of ESI and John M. Tettemer & Associates in
December, 1997, we issued four warrants to purchase an aggregate of 83,333
shares of common stock. These warrants were exercisable for a period of five
years at exercise prices ranging from $1.75 to $2.50 per share. These
securities were issued in private transactions under Section 4(2) of the
Securities Act of 1933.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement.*
2.1 Asset Purchase Agreement dated April 9, 1999 between the Registrant
and Thompson-Hysell, Inc.
2.2 Agreement for the Acquisition of All Outstanding Stock of ESI,
Engineering Services Incorporated by the Registrant dated September
22, 1997.
2.3 Stock Purchase Agreement dated July 10, 1998 by and among the
Registrant; John M. Tettemer & Associates, Inc.; Murdoch V. and Nadine
R. Heideman, trustees of the Murdoch V. Heideman and Nadine R.
Heideman Living Trust U/D/T dated October 16, 1992; and Jimmie E. and
Jolene M. Dysert, trustees of the Jimmie E. Dysert and Jolene M.
Dysert Living Trust U/D/T dated February 20, 1993.
3.1 Amended and Restated Articles of Incorporation filed on August 19,
1994 and Certificate of Amendment of Articles of Incorporation filed
on April 26, 1999.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Specimen Stock Certificate.*
5.1 Opinion of Rutan & Tucker, LLP.*
10.1 Amended and Restated 1994 Stock Incentive Plan, together with form of
Nonqualified Stock Option Agreement and form of Incentive Stock Option
Agreement.*
II-3
Exhibit
Number Description
------- -----------
10.2 Form of Indemnification Agreement.
10.3 Security and Loan Agreement dated February 9, 1998 between the
Registrant, Keith Engineering, Inc. and Imperial Bank and Addendum to
Security and Loan Agreement dated February 9, 1998.
10.4 First Amendment to Security and Loan Agreement dated March 23, 1998
between the Registrant, Keith Engineering, Inc. and Imperial Bank.
10.5 Second Amendment to Security and Loan Agreement dated June 22, 1998
between the Registrant; Keith Engineering, Inc.; ESI, Engineering
Services Incorporated and Imperial Bank.
10.6 Third Amendment to Security and Loan Agreement dated October 7, 1998
between the Registrant; Keith Engineering, Inc.; ESI, Engineering
Services Incorporated and Imperial Bank.
10.7 Fourth Amendment to Security and Loan Agreement dated March 5, 1999
between the Registrant; Keith Engineering, Inc.; ESI, Engineering
Services Incorporated; John M. Tettemer & Associates, LTD and Imperial
Bank.
10.8 General Security Agreement dated February 9, 1998 between ESI,
Engineering Services Incorporated and Imperial Bank and General
Security Agreement dated February 9, 1998 between the Registrant,
Keith Engineering, Inc. and Imperial Bank.
10.9 Commercial Security Agreement dated October 7, 1998 between the
Registrant; Keith Engineering, Inc.; ESI, Engineering Services
Incorporated; John M. Tettemer & Associates, LTD and Imperial Bank.
10.10 Waiver dated July 1998 executed by Walter W. Cruttenden, III.
10.11 Lease dated August 16, 1989 between Keith Engineering, Inc. and
Scripps Center Associates, Work Letter Agreement dated August 16,
1989, Tenant Estoppel Certificate dated August 16, 1989 and Addendum
to Lease, as amended by Lease Amendment No. 1 dated November 30, 1989,
as amended by Lease Amendment No. 2 dated August 31, 1990, as amended
by Lease Amendment No. 3 dated October 24, 1991, as amended by Lease
Amendment No. 3 (sic) dated April 15 1993, as amended by Lease
Amendment No. 4 dated October 1, 1993, as amended by Fifth Amendment
to Lease dated May 1998.
10.12 Lease dated January 1, 1996 between Moreno Corporate Center, L.L.C.
and the Registrant, as amended by First Amendment to Lease dated
December 1, 1997.
10.13 Agreement Regarding Lease and Assignment of Leases and Release dated
January 1, 1996 between Moreno Corporate Center, L.L.C. and the
Registrant.
10.14 Agreement for Advisory Services dated April 10, 1997 between the
Registrant; Keith Engineering, Inc.; Keith International, Inc.; Aram
Keith and Walter W. Cruttenden, III.
II-4
Exhibit
Number Description
------- -----------
10.15 Security Agreement dated April 10, 1997 between the Registrant; Keith
International, Inc.; Keith Engineering, Inc. and Walter W. Cruttenden,
III.
10.16 Promissory Note dated August 1, 1996 between the Registrant; Keith
International, Inc.; The Keith Companies--North Counties, Inc.; Keith
Engineering, Inc.; The Keith Companies--Hawaii, Inc.; Aram H. Keith
and Moreno Corporate Center, L.L.C. in the principal amount of
$273,893.
10.17 Amendment to Promissory Note dated April 29, 1997 between the
Registrant; Keith International, Inc.; The Keith Companies--North
Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii,
Inc.; Aram H. Keith and Moreno Corporate Center, L.L.C.
10.18 Second Amendment to Promissory Note dated February 4, 1998 between the
Registrant; Keith International, Inc.; The Keith Companies--North
Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii,
Inc.; Aram H. Keith, and Moreno Corporate Center, L.L.C.
10.19 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Ruth Ann Fallon as trustee for the Erica Keith Educational
Trust in the principal amount of $132,000, and Imperial Bank--
Subordination Agreement dated February 9, 1998.
10.20 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Ruth Ann Fallon as trustee for the Kimberly Keith Educational
Trust in the principal amount of $33,000, and Imperial Bank--
Subordination Agreement dated February 9, 1998.
10.21 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Ruth Ann Fallon as trustee for the Ryan Keith Educational
Trust in the principal amount of $11,000, and Imperial Bank--
Subordination Agreement dated February 9, 1998.
10.22 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Aram H. Keith as trustee for the Susan Reid Housing Trust in
the principal amount of $86,000, and Imperial Bank--Subordination
Agreement dated February 9, 1998.
10.23 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Aram H. Keith as trustee for the Ruth Reid Housing Trust in
the principal amount of $53,000, and Imperial Bank--Subordination
Agreement dated February 9, 1998.
10.24 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Aram H. Keith as trustee for the William Scott Reid Housing
Trust in the principal amount of $48,000, and Imperial Bank--
Subordination Agreement dated February 9, 1998.
II-5
Exhibit
Number Description
------- -----------
10.25 Amended and Restated Promissory Note dated February 25, 1999 by the
Registrant in favor of Walter W. Cruttenden, III in the principal
amount of $700,000 and Imperial Bank--Subordination Agreement dated
February 9, 1998.
10.26 Amended and Restated Promissory Note dated February 25, 1999 by the
Registrant in favor of Aram H. Keith in the principal amount of
$1,210,177 and Imperial Bank--Subordination Agreement dated February
9, 1998.
10.27 Restated and Amended Promissory Note dated February 25, 1999 by the
Registrant in favor of Floyd S. Reid in the principal amount of
$127,815 and Imperial Bank--Subordination Agreement dated February 9,
1998.
10.28 Employment Agreement dated October 1, 1997 between ESI, Engineering
Services Incorporated and Lynn C. Cannady.
10.29 Employment Agreement dated October 1, 1997 between ESI, Engineering
Services Incorporated and Glenn I. Chase.
10.30 Employment Agreement dated October 1, 1997 between ESI, Engineering
Services Incorporated and Stephen J. Lane.
10.31 Promissory Note dated February 21, 1997 by Keith International, Inc.
in favor of Doug Travato in the principle amount of $100,000.
10.32 Promissory Note dated February 26, 1997 by Keith Engineering, Inc. in
favor of the Wyckoff Company Money Purchase Pension Plan in the
principle amount of $50,000.
10.33 Promissory Note dated February 10, 1998 by Keith Engineering, Inc. in
favor of Aram H. Keith in the principle amount of $150,000.
23.1 Consent of Independent Auditors.
23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed herewith
as Exhibit 5.1).*
24 Power of Attorney (included on signature page hereof).
27 Financial Data Schedule.
- ------------------
* To be filed by amendment.
II-6
(b) Financial Statement Schedules.
None.
Item 17. Undertakings
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14 hereof, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newport Beach, State of
California, on April 28, 1999.
The Keith Companies, Inc.
/s/ Aram H. Keith
By:_________________________________
Aram H. Keith
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Messrs. Aram
H. Keith and Gary C. Campanaro his or her true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, at any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, or any Registration Statement for
the same offering that is to be effective upon filing pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and to file the same, with all
exhibits thereto, and other documents in connection therewith or in connection
with the registration of the Common Stock under the Securities Exchange Act of
1934, as amended, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary in connection with such
matters and hereby ratifying and confirming that each of said attorneys-in-fact
and agents, acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Aram H. Keith Chief Executive Officer, April 28, 1999
______________________________________ President and Director
Aram H. Keith (Principal Executive
Officer)
/s/ Gary C. Campanaro Chief Financial Officer April 28, 1999
______________________________________ and Director (Principal
Gary C. Campanaro Financial and Accounting
Officer)
/s/ Walter W. Cruttenden, III Director April 28, 1999
______________________________________
Walter W. Cruttenden, III
II-8
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement.*
2.1 Asset Purchase Agreement dated April 9, 1999 between the Registrant
and Thompson-Hysell, Inc.
2.2 Agreement for the Acquisition of All Outstanding Stock of ESI,
Engineering Services Incorporated by the Registrant dated September
22, 1997.
2.3 Stock Purchase Agreement dated July 10, 1998 by and among the
Registrant; John M. Tettemer & Associates, Inc.; Murdoch V. and Nadine
R. Heideman, trustees of the Murdoch V. Heideman and Nadine R.
Heideman Living Trust U/D/T dated October 16, 1992; and Jimmie E. and
Jolene M. Dysert, trustees of the Jimmie E. Dysert and Jolene M.
Dysert Living Trust U/D/T dated February 20, 1993.
3.1 Amended and Restated Articles of Incorporation filed on August 19,
1994 and Certificate of Amendment of Articles of Incorporation filed
on April 26, 1999.
3.2 Amended and Restated Bylaws of the Registrant.
4.1 Specimen Stock Certificate.*
5.1 Opinion of Rutan & Tucker, LLP.*
10.1 Amended and Restated 1994 Stock Incentive Plan, together with form of
Nonqualified Stock Option Agreement and form of Incentive Stock Option
Agreement.*
10.2 Form of Indemnification Agreement.
10.3 Security and Loan Agreement dated February 9, 1998 between the
Registrant, Keith Engineering, Inc. and Imperial Bank and Addendum to
Security and Loan Agreement dated February 9, 1998.
10.4 First Amendment to Security and Loan Agreement dated March 23, 1998
between the Registrant, Keith Engineering, Inc. and Imperial Bank.
10.5 Second Amendment to Security and Loan Agreement dated June 22, 1998
between the Registrant; Keith Engineering, Inc.; ESI, Engineering
Services Incorporated and Imperial Bank.
10.6 Third Amendment to Security and Loan Agreement dated October 7, 1998
between the Registrant; Keith Engineering, Inc.; ESI, Engineering
Services Incorporated and Imperial Bank.
10.7 Fourth Amendment to Security and Loan Agreement dated March 5, 1999
between the Registrant; Keith Engineering, Inc.; ESI, Engineering
Services Incorporated; John M. Tettemer & Associates, LTD and Imperial
Bank.
1
Exhibit
Number Description
------- -----------
10.8 General Security Agreement dated February 9, 1998 between ESI,
Engineering Services Incorporated and Imperial Bank and General
Security Agreement dated February 9, 1998 between the Registrant,
Keith Engineering, Inc. and Imperial Bank.
10.9 Commercial Security Agreement dated October 7, 1998 between the
Registrant; Keith Engineering, Inc.; ESI, Engineering Services
Incorporated; John M. Tettemer & Associates, LTD and Imperial Bank.
10.10 Waiver dated July 1998 executed by Walter W. Cruttenden, III.
10.11 Lease dated August 16, 1989 between Keith Engineering, Inc. and
Scripps Center Associates. Work Letter Agreement dated August 16,
1989, Tenant Estoppel Certificate dated August 16, 1989 and Addendum
to Lease, as amended by Lease Amendment No. 1 dated November 30, 1989,
as amended by Lease Amendment No. 2 dated August 31, 1990, as amended
by Lease Amendment No. 3 dated October 24, 1991, as amended by Lease
Amendment No. 3 (sic) dated April 15 1993, as amended by Lease
Amendment No. 4 dated October 1, 1993, as amended by Fifth Amendment
to Lease dated May 1998.
10.12 Lease dated January 1, 1996 between Moreno Corporate Center, L.L.C.
and the Registrant, as amended by First Amendment to Lease dated
December 1, 1997.
10.13 Agreement Regarding Lease and Assignment of Leases and Release dated
January 1, 1996 between Moreno Corporate Center, L.L.C. and the
Registrant.
10.14 Agreement for Advisory Services dated April 10, 1997 between the
Registrant; Keith Engineering, Inc.; Keith International, Inc.; Aram
Keith and Walter W. Cruttenden, III.
10.15 Security Agreement dated April 10, 1997 between the Registrant; Keith
International, Inc.; Keith Engineering, Inc. and Walter W. Cruttenden,
III.
10.16 Promissory Note dated August 1, 1996 between the Registrant; Keith
International, Inc.; The Keith Companies--North Counties, Inc.; Keith
Engineering, Inc.; The Keith Companies--Hawaii, Inc.; Aram H. Keith
and Moreno Corporate Center, L.L.C. in the principal amount of
$273,893.
10.17 Amendment to Promissory Note dated April 29, 1997 between the
Registrant; Keith International, Inc.; The Keith Companies--North
Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii,
Inc.; Aram H. Keith and Moreno Corporate Center, L.L.C.
10.18 Second Amendment to Promissory Note dated February 4, 1998 between the
Registrant; Keith International, Inc.; The Keith Companies--North
Counties, Inc.; Keith Engineering, Inc.; The Keith Companies--Hawaii,
Inc.; Aram H. Keith and Moreno Corporate Center, L.L.C.
2
Exhibit
Number Description
------- -----------
10.19 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Ruth Ann Fallon as trustee for the Erica Keith Educational
Trust in the principal amount of $132,000, and Imperial Bank--
Subordination Agreement dated February 9, 1998.
10.20 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Ruth Ann Fallon as trustee for the Kimberly Keith Educational
Trust in the principal amount of $33,000, and Imperial Bank--
Subordination Agreement dated February 9, 1998.
10.21 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Ruth Ann Fallon as trustee for the Ryan Keith Educational
Trust in the principal amount of $11,000, and Imperial Bank--
Subordination Agreement dated February 9, 1998.
10.22 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Aram H. Keith as trustee for the Susan Reid Housing Trust in
the principal amount of $86,000, and Imperial Bank--Subordination
Agreement dated February 9, 1998.
10.23 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Aram H. Keith as trustee for the Ruth Reid Housing Trust in
the principal amount of $53,000, and Imperial Bank--Subordination
Agreement dated February 9, 1998.
10.24 Unsecured Promissory Note dated October 31, 1998 by the Registrant in
favor of Aram H. Keith as trustee for the William Scott Reid Housing
Trust in the principal amount of $48,000, and Imperial Bank--
Subordination Agreement dated February 9, 1998.
10.25 Amended and Restated Promissory Note dated February 25, 1999 by the
Registrant in favor of Walter W. Cruttenden, III in the principal
amount of $700,000 and Imperial Bank--Subordination Agreement dated
February 9, 1998.
10.26 Amended and Restated Promissory Note dated February 25, 1999 by the
Registrant in favor of Aram H. Keith in the principal amount of
$1,210,177 and Imperial Bank--Subordination Agreement dated February
9, 1998.
10.27 Restated and Amended Promissory Note dated February 25, 1999 by the
Registrant in favor of Floyd S. Reid in the principal amount of
$127,815 and Imperial Bank--Subordination Agreement dated February 9,
1998.
10.28 Employment Agreement dated October 1, 1997 between ESI, Engineering
Services Incorporated and Lynn C. Cannady.
3
Exhibit
Number Description
------- -----------
10.29 Employment Agreement dated October 1, 1997 between ESI, Engineering
Services Incorporated and Glenn I. Chase.
10.30 Employment Agreement dated October 1, 1997 between ESI, Engineering
Services Incorporated and Stephen J. Lane.
10.31 Promissory Note dated February 21, 1997 by Keith International, Inc.
in favor of Doug Travato in the principle amount of $100,000.
10.32 Promissory Note dated February 26, 1997 by Keith Engineering, Inc. in
favor of the Wyckoff Company Money Purchase Pension Plan in the
principle amount of $50,000.
10.33 Promissory Note dated February 10, 1998 by Keith Engineering, Inc. in
favor of Aram H. Keith in the principle amount of $150,000.
23.1 Consent of Independent Auditors.
23.2 Consent of Rutan & Tucker, LLP (included in the opinion filed herewith
as Exhibit 5.1).*
24 Power of Attorney (included on signature page hereof).
27 Financial Data Schedule.
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* To be filed by amendment.
4