SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File Number 0-19655
THE KEITH COMPANIES, INC.
--------------
(Exact name of registrant as specified in its charter)
California 33-0203193
--------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2955 REDHILL AVENUE, COSTA MESA, CALIFORNIA 92626
---------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (714) 540-0800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares outstanding of the registrant's common stock on
November 9, 1999 was 5,069,489
THE KEITH COMPANIES,INC. AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Condensed Consolidated Statements of Cash Flows 4
Notes to the Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3. Qualitative and Quantitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Note 1)
(Unaudited)
September 30, December 31,
1999 1998
---------------- ----------------
Assets
Current assets:
Cash and Cash equivalents $ 1,346,000 $ 457,000
Contracts and trade receivables, net of allowance for doubtful accounts of
$829,000 and $364,000 at September 30, 1999 and December 31, 1998,
respectively 7,271,000 5,582,000
Costs and estimated earnings in excess of billings 5,728,000 3,783,000
Prepaid expenses and other current assets 440,000 534,000
Deferred offering costs - 291,000
Deferred tax assets - 270,000
---------------- ----------------
Total current assets 14,785,000 10,917,000
Equipment and improvements, net 4,508,000 2,862,000
Goodwill, net of accumulated amortization of $62,000 and $10,000 at September
30, 1999 and December 31, 1998, respectively 4,709,000 621,000
Other assets 165,000 130,000
---------------- ----------------
Total assets $24,167,000 $14,530,000
================ ================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Short-term borrowings $ 438,000 $ -
Current portion of long-term debt and capital lease obligations 1,391,000 1,488,000
Trade accounts payable 881,000 1,221,000
Accrued employee compensation 2,858,000 1,720,000
Accrued liabilities to related parties - 185,000
Other accrued liabilities 2,105,000 688,000
Deferred tax liabilities 313,000 -
Billings in excess of costs and estimated earnings 566,000 435,000
---------------- ----------------
Total current liabilities 8,552,000 5,737,000
Long-term debt and capital lease obligations, less current portion 2,499,000 5,778,000
Notes payable to related parties - 2,401,000
Other liabilities 280,000 485,000
Redeemable securities - 430,000
---------------- ----------------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value. Authorized 5,000,000 shares; no shares - -
issued or outstanding
Common stock, $0.001 par value. Authorized 100,000,000 shares at September
30, 1999 and December 31, 1998; issued and outstanding 5,069,119 shares at
September 30, 1999 and 3,485,634 shares at December 31, 1998 5,000 3,000
Additional paid-in capital 12,327,000 652,000
Retained earnings (accumulated deficit) 504,000 (956,000)
---------------- ----------------
Total stockholders' equity (deficit) 12,836,000 (301,000)
---------------- ----------------
Commitments and contingencies (Notes 1, 3 and 5)
Total liabilities and stockholders' equity (deficit) $24,167,000 $14,530,000
================ ================
See accompanying notes to the condensed consolidated financial statements.
2
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Note 1)
(Unaudited)
Three Months Ended Nine Months Ended
----------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- --------------- ------------
Gross revenue $11,397,000 $9,192,000 $30,867,000 $24,712,000
Subcontractor costs 739,000 1,292,000 2,596,000 3,799,000
------------- ------------- --------------- ------------
Net revenue 10,658,000 7,900,000 28,271,000 20,913,000
Costs of revenue 7,350,000 5,077,000 19,051,000 13,770,000
------------- ------------- --------------- ------------
Gross profit 3,308,000 2,823,000 9,220,000 7,143,000
Selling, general and administrative expenses 2,211,000 1,626,000 5,904,000 4,227,000
------------- ------------- --------------- ------------
Income from operations 1,097,000 1,197,000 3,316,000 2,916,000
Interest expense 149,000 249,000 678,000 714,000
Other expense, net 132,000 18,000 102,000 7,000
------------- ------------- --------------- ------------
Income before provision for income taxes 816,000 930,000 2,536,000 2,195,000
Provision for income taxes 347,000 418,000 1,076,000 986,000
------------- ------------- --------------- ------------
Net income 469,000 512,000 1,460,000 1,209,000
Reversal (accretion) of redeemable securities
to redemption value, net 344,000 (57,000) 230,000 (171,000)
------------- ------------- --------------- ------------
Net income available to common stockholders $ 813,000 $ 455,000 $ 1,690,000 $ 1,038,000
============= ============= =============== ============
Earnings per share:
Basic $ 0.17 $ 0.13 $ 0.43 $ 0.30
============= ============= =============== ============
Diluted $ 0.16 $ 0.12 $ 0.40 $ 0.29
============= ============= =============== ============
Weighted average number of shares outstanding:
Basic 4,807,300 3,485,634 3,931,030 3,485,634
============= ============= =============== ============
Diluted 5,063,349 3,660,639 4,213,751 3,624,724
============= ============= =============== ============
See accompanying notes to the condensed consolidated financial statements.
3
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Note 1)
(Unaudited)
Nine Months Ended
------------------------------
September 30, September 30,
1999 1998
------------- -------------
Cash flows from operating activities:
Net income $ 1,460,000 $ 1,209,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 652,000 410,000
Changes in operating assets and liabilities, net of effects from
acquisitions:
Contracts and trade receivables 564,000 (917,000)
Other receivables 182,000 (23,000)
Costs and estimated earnings in excess of billings and billings in
excess of costs and estimated earnings, net (1,964,000) (1,008,000)
Prepaid expenses (87,000) 348,000
Deferred tax assets and liabilities, net 375,000 1,209,000
Other long-term assets (30,000) (166,000)
Trade accounts payable and accrued liabilities 992,000 (1,060,000)
Accrued liabilities to related parties (185,000) 55,000
----------- -----------
Net cash provided by operating activities 1,959,000 57,000
----------- -----------
Cash flows from investing activities:
Net cash expended in connection with acquisitions (3,659,000) (77,000)
Additions to equipment and improvements, net (840,000) (404,000)
----------- -----------
Net cash used in investing activities (4,499,000) (481,000)
----------- -----------
Cash flows from financing activities:
(Payments on) proceeds from line of credit, net (4,527,000) 1,464,000
Principal payments on long-term and short-term debt and capital leases (989,000) (1,429,000)
Borrowings on notes payable to related parties - 300,000
Payments on notes payable to related parties (2,401,000) (150,000)
Proceeds from issuance of common stock, net 12,447,000 -
Payment of deferred offering costs (1,101,000) (91,000)
----------- -----------
Net cash provided by financing activities 3,429,000 94,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 889,000 (330,000)
Cash and cash equivalents, beginning of period 457,000 587,000
----------- -----------
Cash and cash equivalents, end of period $ 1,346,000 $ 257,000
=========== ===========
See supplemental cash flow information at Note 9
See accompanying notes to the condensed consolidated financial statements.
4
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of The Keith Companies, Inc., and its wholly owned subsidiaries
("TKCI" or the "Company"). On August 1, 1998, TKCI acquired all of the
outstanding common stock of Keith Engineering, Inc. ("KEI") (the
"Reorganization") by a contribution to capital of TKCI by KEI's
shareholders of all of the outstanding stock of KEI in exchange for the
issuance by TKCI of an equal number of shares of its stock. On November
30, 1998, KEI, a wholly owned subsidiary of TKCI, was merged with and into
TKCI, and its outstanding shares, all of which were then owned by TKCI,
were cancelled as a result of the merger. Prior to the Reorganization,
TKCI and KEI were under common management and common control as a result of
a contemporaneous written agreement dated July 1992 between their majority
shareholders. This agreement provided for the shareholders to vote in
concert and thus the majority shareholders became a common control group.
The Reorganization was accounted for as a combination of affiliated
entities under common control in a manner similar to a pooling-of-
interests. Under this method, the assets, liabilities and equity of TKCI
and KEI were carried over at their historical book values and their
operations prior to the Reorganization have been recorded on a combined
historical basis. The combination did not require any material adjustments
to conform the accounting policies of the separate entities. As a result
of the Reorganization, the accompanying condensed consolidated financial
statements include the consolidated assets, liabilities, equity and results
of operations of TKCI, and its wholly owned subsidiaries, and KEI effective
August 1, 1998.
On July 15, 1999, TKCI completed an initial public offering of 1,500,000
shares of its common stock. The offering price was $9.00 per share
resulting in proceeds of approximately $11,673,000 to the Company, net of
underwriters' discount and offering costs. The net proceeds were used
primarily to repay related party notes payable and accrued interest of
$2,647,000, to repay notes payable and accrued interest of $251,000, to
repay the bank line of credit of $4,731,000 and to acquire substantially
all of the assets of and assume substantially all of the liabilities of
Thompson-Hysell, Inc. ("Thompson-Hysell") (see Note 3).
The accompanying condensed consolidated balance sheet as of September 30,
1999, the consolidated statements of income for the three and nine months
ended September 30, 1999 and 1998, and the consolidated statements of cash
flows for the nine months ended September 30, 1999 and 1998, are unaudited
and in the opinion of management include all adjustments necessary to
present fairly the information set forth therein, which consist solely of
normal recurring adjustments. The results of operations for these interim
periods are not necessarily indicative of results for the full year. The
condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in
the Company's Registration Statement on Form S-1 filed with the Securities
and Exchange Commission and declared effective on July 12, 1999.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company. All material intercompany transactions and
balances have been eliminated in consolidation.
Cash and Cash Equivalents
Cash equivalents are comprised of highly liquid instruments with maturities
three months or less when purchased.
Income Taxes
Prior to August 1, 1998, KEI, with the consent of its stockholders, elected
to be taxed as an S corporation under the Internal Revenue Code of 1986, as
amended. As an S corporation, corporate income or loss flows through to
the stockholders who are responsible for including the income, deductions,
losses and credits in their individual income tax returns. The Company's
effective tax rate of approximately 45% for the period ended September 30,
1998 reflects the anticipated conversion of KEI from an S corporation to a
C corporation in August 1998.
5
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
2. Summary of Significant Accounting Policies (continued)
Deferred Offering Costs
In anticipation of its initial public offering, the Company deferred the
related costs incurred and included them in the accompanying condensed
consolidated balance sheet as of December 31, 1998 as deferred offering
costs. The Company completed its initial public offering on July 15, 1999,
at which time these costs were netted against the offering proceeds.
Stock Split
On April 23, 1999, the board of directors authorized a 2.70-for-1 reverse
split of TKCI's common stock, effective April 26, 1999. All share amounts
in the accompanying condensed consolidated financial statements (except for
shares of authorized common stock) have been restated to give effect to the
stock split.
Par Value
On June 22, 1999, TKCI established a par value for its common and preferred
stock of $0.001 per share. Prior to this date, the Company's common and
preferred stock had no par value. All amounts in the accompanying
condensed consolidated financial statements have been restated to give
effect to the $0.001 per share par value.
Use of Estimates
The preparation of these condensed 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 and the amounts of revenue and expenses reported during the
periods. Actual results may differ from the estimates and assumptions used
in preparing these condensed consolidated financial statements.
3. Acquisitions
In conjunction with its initial public offering, on July 15, 1999, the
Company acquired substantially all of the assets and assumed substantially
all of the liabilities of Thompson-Hysell. The Company paid cash at
closing in the amount of $3,333,000. In addition, contingent consideration
consists of (i) cash in the amount of $500,000 related to the net book
value of assets acquired and liabilities assumed, (ii) a promissory note in
the original principal amount of $1,333,000 payable in 2001, and (iii)
shares of common stock with a value equal to $1,333,000, which may be
issuable in 2000 if various conditions are met. TKCI is also obligated to
pay cash related to the income tax effects to the sellers of Thompson-
Hysell, which is estimated to be $525,000. The issuance of common stock and
the principal balance of the promissory note are contingent upon earnings
for the years ended December 31, 1999 and 2000, respectively. The
acquisition was accounted for using the purchase method of accounting.
Goodwill, which represents the excess of the purchase price over the fair
value of the net tangible and identifiable intangible assets acquired and
liabilities assumed, in the amount of $4,200,000 is being amortized over a
period of twenty-five years.
6
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
4. Acquisitions (continued)
The following unaudited pro forma data presents information as if the
acquisition of Thompson-Hysell had occurred at the beginning of the periods
presented. The pro forma data is based on historical information and does
not necessarily reflect the actual results of operations that would have
occurred had Thompson-Hysell and TKCI comprised a single entity during the
periods, nor is it necessarily indicative of future results of operations
of the combined entities.
Pro forma for the periods ended
September 30, 1999
--------------------------------
Three Months Nine Months
Ended Ended
-------------- --------------
Net revenue $11,150,000 $33,655,000
Net income $ 518,000 $ 2,058,000
On August 1, 1998, TKCI acquired all of the outstanding common stock of
John M. Tettemer & Associates, Inc. ("JMTA"). The purchase price was
$700,000, consisting of cash, amortizing and interest only notes payable
and warrants to purchase 55,556 shares of TKCI common stock, exercisable
immediately at a purchase price of $4.73 per share. The acquisition was
accounted for using the purchase method of accounting.
On December 30, 1997, TKCI acquired all of the outstanding common stock of
ESI, Engineering Services, Inc., and its wholly-owned subsidiary Engineered
Systems Integrated, Inc. ("ESI"). The purchase price was $200,000,
consisting of 74,074 shares of TKCI common stock, which are subject to
certain repurchase provisions and stock indemnification rights (see Note
5). The acquisition was accounted for using the purchase method of
accounting.
5. Redeemable Securities and Stock Indemnification Rights
In connection with the acquisition of ESI, TKCI issued to the sellers
74,074 shares of common stock which contained redemption provisions. These
redemption provisions allowed any of the sellers, at their discretion, to
redeem the common shares, for a stated price per share, if the Company did
not complete an initial public offering prior to October 31, 1999. In
connection with the acquisition of ESI, the Company also issued to the
sellers options to purchase 44,444 shares of common stock containing
redemption provisions which provided that in the event that the underlying
shares did not have a fair market value of at least $8.10 per share at some
time during the period between the date of the Company's initial public
offering and October 1, 2002, the holders were entitled to receive, at
their discretion, a stated amount for all unexercised vested options. The
difference between the redemption values and the initial values of the
common stock and options to purchase common stock was accreted over the
respective period through charges to redeemable securities and common
stock. As a result of the Company's completion of its initial public
offering at $9.00 per share on July 15, 1999, the securities are no longer
redeemable and, accordingly, $353,000 of accumulated accretion on
redeemable securities was reclassified to common stock and additional paid-
in capital.
Subsequent to the acquisition of ESI, TKCI agreed to indemnify certain
holders of 40,000 shares of common stock issued in connection with the
acquisition of ESI against a market decline in TKCI's common stock after
the initial public offering of TKCI's common stock. The excess of the
guarantee price over the market value of the 40,000 shares of common stock
was $130,000 on September 30, 1999 and is recorded as other expense and
accrued expenses in the accompanying condensed consolidated financial
statements as of and for the periods ended September 30, 1999.
7
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
6. Per Share Data
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. Net income
available to common stockholders is used in the basic and diluted EPS
calculations as the assumed impact of the redeemable securities would be
anti-dilutive.
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
Weighted average shares used for the basic
EPS computation (deemed outstanding the
entire period) 4,807,300 3,485,634 3,931,030 3,485,634
Incremental shares from the assumed exercise
of dilutive stock options and stock warrants 256,049 175,005 282,721 139,090
---------- ----------- ---------- -----------
Weighted average shares used for the
diluted EPS computation 5,063,349 3,660,639 4,213,751 3,624,724
========== =========== ========== ===========
Anti-dilutive shares excluded from the above calculations were 336,902 and
147,115 for the three and nine months ended September 30, 1999,
respectively and 13,285 and 40,997 for the three and nine months ended
September 30, 1998, respectively.
7. Indebtedness
On September 1, 1999, the Company entered into a new line of credit
agreement with a bank to fund working capital needs and the acquisition of
equipment. The line of credit has a working capital component with a
maximum outstanding principal balance of $6,000,000 which matures on
September 3, 2001 and an equipment component with a maximum outstanding
principal balance of $3,500,000, which matures on September 3, 2000. The
line of credit bears interest at either the prime rate or, at one and
three-quarters percent above LIBOR. The aggregate outstanding principal
balance of working capital advances and equipment advances can not exceed
$8,500,000. The line of credit is subject to various restrictions and
contains certain financial and nonfinancial related covenants. As of
September 30, 1999, there was no outstanding borrowing on the line of
credit. The Company anticipates borrowing on its line of credit as
appropriate in the future.
In conjunction with the acquisition of substantially all of the assets and
assumption of substantially all of the liabilities of Thompson-Hysell, TKCI
assumed $438,000 related to a portion of the Thompson-Hysell existing bank
debt. TKCI's intent is to pay-off this liability in the fourth quarter of
1999.
Prior to September 1, 1999, the Company maintained a line of credit
agreement with a bank, which allowed us to borrow up to $5,500,000, 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 some of the financial related covenants effective
December 31, 1998, adjust the interest rate to the bank's prime rate plus a
variable margin tied to financial covenants and extend the maturity on the
line to March 1, 2000. A portion of the proceeds from the Company's initial
public offering on July 15, 1999 were used to repay the outstanding
principal balance of $4,731,000.
8
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
8. 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, like residential communities, commercial and industrial
properties and recreational projects; public works projects, like
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 following tables set forth certain information regarding the Company's
operating segments for the three and nine months ended September 30, 1999
and 1998:
Three Months Ended September 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
-------------- ---------- ----------------- ----------------
Net revenue $ 9,715,000 $ 943,000 $ - $10,658,000
Income (loss) from operations $ 1,549,000 $ 135,000 $ (587,000) $ 1,097,000
Identifiable assets $22,827,000 $1,340,000 $ - $24,167,000
Three Months Ended September 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
-------------- ---------- ----------------- ----------------
Net revenue $ 6,927,000 $ 973,000 $ - $ 7,900,000
Income (loss) from operations $ 1,564,000 $ 125,000 $ (492,000) $ 1,197,000
Identifiable assets $12,260,000 $1,652,000 $ - $13,912,000
Nine Months Ended September 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
-------------- ---------- ----------------- ----------------
Net revenue $25,485,000 $2,786,000 $ - $28,271,000
Income (loss) from operations $ 5,012,000 $ 175,000 $(1,871,000) $ 3,316,000
Nine Months Ended September 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
Corporate
REPWWT IE Costs Consolidated
-------------- ---------- ----------------- ----------------
Net revenue $18,108,000 $2,805,000 $ - $20,913,000
Income (loss) from operations $ 4,129,000 $ 263,000 $(1,476,000) $ 2,916,000
9
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
9. Supplemental Cash Flow Information
Nine Months Ended September 30,
-------------------------------
1999 1998
----------- ----------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 856,000 $874,000
=========== ========
Cash paid for income taxes $ 124,000 $ 2,000
=========== ========
Noncash financing and investing activities:
Capital lease obligations recorded in connection with equipment
acquisitions $ 258,000 $608,000
=========== ========
Purchase price adjustment $ 60,000 $ -
=========== ========
Accretion of redeemable securities $(230,000) $114,000
=========== ========
Accrued deferred offering costs $(291,000) $ -
=========== ========
The acquisition of Thompson-Hysell on July 15, 1999 resulted in the
following:
July 15, 1999
----------------
Contracts and trade receivables $(2,253,000)
Goodwill (4,200,000)
Equipment and improvements (1,105,000)
Other assets (6,000)
Short-term borrowings 438,000
Long-term debt, including current portion 1,943,000
Billings in excess of cost and estimated earnings 150,000
Other liabilities 1,224,000
Common stock 150,000
----------------
Cash expended for the acquisition $ 3,659,000
================
10. Subsequent Event
On October 13, 1999, the board of directors of TKCI approved the repurchase
of up to 100,000 shares of the Company's common stock. Through October 31,
1999, the Company acquired 13,700 shares of its common stock at prices
ranging from $5.50 to $6.25 per share. These shares are being held in
treasury by the Company.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated
financial statements of TKCI and its subsidiaries and the related notes included
elsewhere in Part I- Item I of this Form 10-Q and in the Form S-1 filed by the
Company. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of any number of
factors, including those set forth under "Risk Factors" included in Form S-1
filed by the Company. In this Management's Discussion and Analysis of Financial
Condition and Results of Operations section, references to "TKCI", "we", "our"
and "us" mean TKCI and its subsidiaries and references to KEI means Keith
Engineering.
Overview
The following discussion includes the operations of TKCI and our wholly-owned
subsidiaries, including KEI. TKCI and KEI have been under common management and
ownership since the inception of TKCI in 1986. TKCI and KEI were under common
control as a result of a contemporaneous written agreement dated July 1992
between their majority shareholders. This agreement provided for the
shareholders to vote in concert and thus the majority shareholders became a
common control group. On August 1, 1998, TKCI was reorganized, so that KEI
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 KEI 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, KEI was merged with and into TKCI.
In December 1997, TKCI purchased ESI and its wholly-owned subsidiary ESII,
Engineered Systems Integration, Inc., which was subsequently merged into ESI.
In August 1998, TKCI purchased John M. Tettemer and Associates.
On July 15, 1999, TKCI completed an initial public offering of 1.5 million
shares of its common stock. The offering price was $9.00 per share resulting in
proceeds of approximately $11.8 million to the Company, net of underwriters'
discount and unpaid offering costs.
In conjunction with its initial public offering, on July 15, 1999, the Company
acquired substantially all of the assets and assumed substantially all of the
liabilities of Thompson-Hysell, Inc. ("Thompson-Hysell"). The Company paid cash
in the amount of $3.3 million. In addition, contingent consideration consisted
of a promissory note in the original principal amount of $1.3 million payable in
2001 and shares of common stock with a value equal to $1.3 million which may be
issuable in 2000 if various conditions are met. TKCI may also be obligated or
entitled to pay or receive cash related to financial targets being met, related
to the assets acquired and liabilities assumed, and pay cash related to the
income tax effects to the sellers of Thompson-Hysell.
We derive most of our revenue from professional service activities. The
majority of these activities are billed under various types of contracts with
our clients, including fixed fee and time and material contracts. Most of our
time and material contracts have not-to-exceed provisions. Revenue is
recognized on the percentage of completion method of accounting based on the
proportion of actual direct contract costs incurred to total estimated direct
contract costs. We believe that costs incurred are the best available measure
of progress towards completion on the contracts. In the course of providing
services, we sometimes subcontract for various services. These costs are
included in billings to clients and, in accordance with industry practice, are
included in our gross revenue. Because subcontractor services can change
significantly from project to project, changes in gross revenue may not be
indicative of business trends. Accordingly, we also report net revenue, which
is gross revenue less subcontractor costs. Our revenue is generated from a
large number of relatively small contracts.
For the periods presented, a substantial portion of our net revenue was derived
from services rendered in connection with commercial and residential real estate
development projects. The real estate market has historically experienced
pronounced business cycles. Our consolidated results of operations can be
adversely impacted by downturns in the real estate market. Based upon the
number of building permits issued, the last peak of the business cycle in the
southern California real estate market was in 1989 and the last trough was in
1996. A majority of our net revenue for the periods presented, was derived from
services rendered in southern California. Consequently, adverse economic
conditions affecting the southern California economy could also have an adverse
effect on our consolidated results of operations. We anticipate that as we
consummate acquisitions in the future, the concentration of revenue from both
real estate development and southern California will decline.
11
Costs of revenue include labor, non-reimbursable subcontract costs, materials
and various direct and indirect overhead costs including rent, utilities and
depreciation. Selling, general, and administrative expenses consist primarily
of corporate costs related to finance and accounting, information technology,
contract proposal, executive salaries, provisions for doubtful accounts and
other indirect overhead costs.
Results of Operations
The following table sets forth unaudited historical consolidated operating
results for each of the periods presented as a percentage of net revenue.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1999 1998 1999 1998
-------- ------- -------- -------
Gross revenue 107% 116% 109% 118%
Subcontractor costs 7% 16% 9% 18%
-------- ------- -------- -------
Net revenue 100% 100% 100% 100%
Costs of revenue 69% 64% 67% 66%
-------- ------- -------- -------
Gross profit 31% 36% 33% 34%
Selling, general and administrative expenses 21% 21% 21% 20%
-------- ------- -------- -------
Income from operations 10% 15% 12% 14%
Interest expense 1% 3% 2% 3%
Other expense, net 1% -% -% -%
-------- ------- -------- -------
Income before provision for income taxes 8% 12% 9% 10%
Provision for income taxes 3% 5% 4% 5%
-------- ------- -------- -------
Net income 4% 6% 5% 6%
======== ======= ======== =======
Three and Nine Months Ended September 30, 1999 and September 30, 1998
Revenue. Net revenue for the nine months ended September 30, 1999 was $28.3
million compared to $20.9 million for the nine months ended September 30, 1998,
an increase of $7.4 million, or 35%. Net revenue for the three months ended
September 30, 1999 was $10.7 million compared to $7.9 million for the three
months ended September 30, 1998, an increase of $2.8 million, or 35%. Net
revenue increased by $3.6 million and $2.5 million for the nine and three months
ended September 30, 1999, respectively, as a result of the acquisitions of John
M. Tettemer & Associates in August 1998 and Thompson-Hysell in July 1999.
Excluding the revenue from the acquisitions, our net revenue grew $3.8 million,
or 18%, and $275,000, or 4% for the nine and three months ended September 30,
1999, respectively, compared to the nine and three months ended September 30,
1998. The net revenue growth resulted primarily from the overall continued
strengthening of the California and Nevada economies. However, net revenue for
the nine and three months ended September 1999, was negatively impacted by an
increase to the estimated direct contract costs expected to be incurred on
several large projects resulting in a reduction to the estimated percentage of
completion on these contracts and consequently a $600,000 reduction in net
revenue. Subcontractor costs, as a percentage of net revenue, declined to 9% and
7% for the nine and three months ended September 30, 1999, respectively, as
compared to 18% and 16% for the nine and three months ended September 30, 1998,
respectively. The percentage decline in subcontractor costs resulted 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 nine months ended September 30, 1999 was
$9.2 million compared to $7.1 million for the nine months ended September 30,
1998, an increase of $2.1 million, or 29%. Gross profit for the three months
ended September 30, 1999 was $3.3 million compared to $2.8 million for the three
months ended September 30, 1998, an increase of $485,000, or 17%. The gross
profit growth is attributable to both our internal revenue increases as well as
the acquisition of John M. Tettemer & Associates and Thompson-Hysell. As a
percentage of net revenue, gross profit decreased slightly to 33% for the nine
months ended September 30, 1999 compared to 34% for the nine months ended
September 30, 1998. As a percentage of net revenue, gross profit decreased to
31% for the three months ended September 30, 1999 compared to 36% for the three
months ended September 30, 1998. The decrease in gross profit as a percentage of
net revenue for the nine and three months ended September 30, 1999 resulted
primarily from the negative impact to revenue relating to the increase to the
estimated direct contract costs on several large projects previously discussed.
Excluding this revenue impact of $600,000, gross profit as a percentage of net
revenue remained flat at 34% for the nine months ended September 30, 1999
compared to the prior year period and decreased to 35% for the three months
ended September 30, 1999 compared to 36% for the three
12
months ended September 30, 1998. The gross profit percentage was further reduced
by a decline in the industrial engineering operations of ESI, as a percentage of
net revenue for the nine months ended September 30, 1999.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the nine months ended September 30, 1999 were $5.9
million as compared to $4.2 million for the nine months ended September 30,
1998, an increase of $1.7 million, or 40%. Selling, general and administrative
expenses for the three months ended September 30, 1999 were $2.2 million as
compared to $1.6 million for the three months ended September 30, 1998, an
increase of $585,000, or 36%. As a percentage of net revenue, selling, general
and administrative expenses increased to 21% for the nine months ended September
30, 1999 from 20% for the nine months ended September 30, 1998, while for the
three month period ended September 30, 1999, selling, general and administrative
expenses remained flat at 21% compared to the previous year period. Included in
the nine months ended September 30, 1998 period is a credit to bad debt expense
included in selling, general and administrative expense resulting from the cash
collection of $390,000 related to a receivable written-off in a prior period.
Excluding the $390,000 collection in 1998, selling, general and administrative
expenses, as a percentage of net revenue, declined 1% for the nine months ended
September 30, 1999 compared to the previous year period. The selling, general
and administrative expense percentage of net revenue for the nine and three
months ended September 30, 1999 were also negatively impacted by the decrease to
revenue relating to the increase to the estimated direct contract costs
previously discussed.
Interest expense and other expense, net. Interest expense for the nine months
ended September 30, 1999 was $678,000 as compared to $714,000 for the nine
months ended September 30, 1998, a decrease of $36,000, or 5%. Interest expense
for the three months ended September 30, 1999 was $149,000 as compared to
$249,000 for the three months ended September 30, 1998, a decrease of $100,000,
or 40%. The lower interest expense resulted from the repayment of our line of
credit and various related party notes payable with a portion of the net
proceeds from the initial public offering on July 15, 1999. Other expense, net
for the nine months ended September 30, 1999 was $102,000 as compared to $7,000
for the nine months ended September 30, 1998, an increase of $95,000. Other
expense, net for the three months ended September 30, 1999 was $132,000 as
compared to $18,000 for the three months ended September 30, 1998, an increase
of $114,000. Subsequent to the acquisition of ESI, TKCI agreed to indemnify
certain holders of 40,000 shares of common stock issued in connection with the
acquisition of ESI against a market decline in TKCI's common stock after the
initial public offering of TKCI's common stock. The excess of the guarantee
price over the market value of the 40,000 shares of common stock was $130,000 on
September 30, 1999.
Income Taxes. The provision for income taxes for the nine months ended
September 30, 1999 was $1.1 million compared to $1.0 million for the nine months
ended September 30, 1998. The provision for income taxes for the three months
ended September 30, 1999 was $347,000 compared to $418,000 for the three months
ended September 30, 1998. Our effective income tax rate was approximately 42%
for the nine and three months ended September 30, 1999 compared to an effective
tax rate of 45% for the nine and three months ended September 30, 1998. Our
effective income tax rate of 45% for the periods ended September 30, 1998 was
primarily due to the anticipated conversion of KEI from an S corporation to a C
corporation in August 1998.
Liquidity and Capital Resources
We have financed our working capital needs and capital expenditure requirements
through a combination of internally generated funds, bank borrowings, leases and
the initial public offering of our common stock.
Working capital as of September 30, 1999 was $6.2 million compared to $5.2
million as of December 31, 1998, an increase of $1.1 million, or 20%. The
increase in working capital resulted primarily from higher cash balances
resulting from the initial public offering, the acquisition of substantially all
of the assets and assumption of substantially all of the liabilities of
Thompson-Hysell and growth in contracts and trade receivables and cost and
estimated earnings in excess of billings due to higher revenue volume. Cash
generated from operating activities increased $1.9 million to $2.0 million for
the nine months ended September 30, 1999, compared to $57,000 for the nine
months ended September 30, 1998. The significant growth in operating cash flow
resulted primarily from higher income from operations and the timing of payments
related to prepaid expenses, trade accounts payable and accrued liabilities.
The growth in cash generated from operating activities was used primarily to
fund capital expenditures of $840,000 for the nine months ended September 30,
1999 compared to $404,000 for the nine months ended September 30, 1998 and to
make principal payments on long-term and short-term debt and capital leases.
Capital expenditures consisted primarily of computer equipment and upgrades to
our information systems.
On July 15, 1999, TKCI completed an initial public offering of 1.5 million
shares of its common stock resulting in proceeds net of underwriters' discount
of approximately $12.4 million to the Company. TKCI's cash from operations in
addition to the proceeds from the offering were used to pay approximately $1.1
million in offering costs for the nine months ended September 30, 1999. The
remaining net proceeds were used to fund the $3.7 million cash expended for the
acquisition of
13
substantially all of the assets and the assumption of substantially all of the
liabilities of Thompson-Hysell, the repayment of the line of credit balance of
$4.5 million, the repayment of related party notes payable of $2.4 million and
notes payable of $250,000.
On September 1, 1999, the Company entered into a new line of credit agreement
with a bank to fund working capital needs and the acquisition of equipment. The
line of credit has a working capital component with a maximum outstanding
principal balance of $6,000,000 which matures on September 3, 2001 and an
equipment component with a maximum outstanding principal balance of $3,500,000,
which matures on September 3, 2000. The aggregate outstanding principal balance
of working capital advances and equipment advances can not exceed $8,500,000.
The line of credit is subject to various restrictions and contains certain
financial and nonfinancial related covenants. As of September 30, 1999, there
was no outstanding borrowing on the line of credit. The Company anticipates
borrowing on its line of credit as appropriate in the future.
In conjunction with the acquisition of substantially all of the assets and
assumption of substantially all of the liabilities of Thompson-Hysell, TKCI
assumed $438,000 related to a portion of the Thompson-Hysell existing bank debt.
TKCI's intent is to pay-off this liability in the fourth quarter of 1999.
Prior to September 30, 1999, TKCI maintained a line of credit agreement with a
bank, which allowed us to borrow up to $5.5 million, not to exceed 80% of our
eligible accounts receivable, as defined in the agreement. On July 15, 1999, a
portion of the net proceeds from the Company's initial public offering was used
to pay off the $4.5 million outstanding line of credit balance. On September 30,
1999 this line of credit agreement was terminated.
We believe existing cash balances, internally generated funds, and availability
under credit facilities will be sufficient to fund our anticipated internal
operating needs for the next twelve months.
Inflation
Although our operations can be influenced by general economic trends, we do not
believe that inflation had a significant impact on our results of operations for
the periods presented. Due to the short-term nature of most of our contracts,
if costs of revenue increase, we attempt to pass these increases 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. The significant systems used to perform our support and administrative
functions as well as our engineering work and the operating systems upon which
these systems function are detailed in the table below. We have surveyed the
system suppliers and have received from each supplier either written assurance
or vendor documentation in the form of information published on a website
stating that these systems are Year 2000 compliant or Year 2000 compliant with
minor issues as indicated below.
Operating System
System Name Description (if applicable) Year 2000 Status
----------- ----------- ---------------- ----------------
Harper & Shuman CFMS/RD Compliant
V5.0 (Server) Accounting and Project Cost software Open VMS V7.1-1H1 Assurance received
Windows 95,
Windows 98,
Harper & Shuman CFMS/RD Client component that allows access to Windows NT 4.0 Compliant
V5.0 (Client) server data Workstation SP4 Assurance received
Compaq-DEC Open VMS Alpha operating system that supports Compliant
V7.1-1H1 CFMS/RD software N/A Assurance received
Autodesk AutoCAD R14 Engineering CAD design software Windows 95, Compliant
14
Operating System
System Name Description (if applicable) Year 2000 Status
----------- ----------- ---------------- ----------------
being run on Windows operating system Windows 98, Assurance received
Windows NT 4.0
Workstation SP4
Windows 95,
Office suite includes word processing, Windows 98,
Microsoft Office 97 SR-2 spreadsheet, database, presentation Windows NT 4.0 Compliant
components Workstation SP4 Assurance received
ProBusiness Payroll PowerPay Compliant
v.5.03 Payroll software Windows 95 Assurance received
ProBusiness HRMS Compliant
Powersource II V1.0 Human Resources software Windows 95 Assurance received
Windows 95,
Windows 98,
MicroStation 95 V5.05.01.65 Engineering CAD design software being Windows NT 4.0 Compliant
run on Windows operating system Workstation SP4 Assurance received
Microsoft Windows NT Server 4.0 Server operating system for storing
SP4 engineering drawings and administrative Compliant
documents N/A Assurance received
Microsoft Windows NT Operating system running on workstations Compliant
Workstation 4.0 SP4 and laptops N/A Assurance received
Microsoft Windows 95 Operating system running on workstations Compliant
and laptops N/A Assurance received
Microsoft Windows 98 Operating system running on workstations Compliant
and laptops N/A Assurance received
Microsoft Exchange Server 5.5 E-mail server application running on Compliant
SP2 Windows operating system Windows NT 4.0 SP4 Assurance received
Compliant
Nortel Meridian SL1 (Corporate) Telephone switch N/A Assurance received
Compliant
Nortel Meridian Mail R5.0 Voicemail messaging system N/A Assurance received
(Corporate) Compliant
Toshiba Perception II (Moreno Telephone system N/A Assurance received
Valley Location) Not Compliant
AVT PhoneXpress (Moreno Valley
Location) Voice mail system N/A (see below)
Toshiba Strata DK-424 (Las Compliant
Vegas Location) Telephone system N/A Assurance received
AVT CallXpress3 (Las Vegas Compliant
Location) Voicemail messaging system N/A Assurance received
N/A no feature within
this product is
pertinent to Y2K per
telephone vendor,
Trillium Panther 2064
(Thompson-Hysell) Telephone system N/A O'Leary Telephone &
Data Compliant
Pacific Bell Voice Mail Assurance received
(Thompson-Hysell) Voice message boxes N/A Compliant
Nortel Norstar Plus Model II Integrated telephone and voice mail N/A Assurance received
DR5.1 (John M. Tettemer) system Compliant
Toshiba Strata DK424 (ESI) Telephone system N/A Assurance received
Compliant
AVT PhoneXpress (ESI) Voice message system N/A Assurance received
Toshiba Strata DK96 (Palm Compliant
Desert Location) Voice message system N/A Assurance received
We are currently in the process of asking the vendors of embedded systems to
provide us with written assurance of Year 2000 compliance. In addition, where
cost effective and appropriate, have performed internal tests on mission
critical and operational production systems and all either passed the Year 2000
testing or require minor manual remediation following the January 1, 2000 date.
Cost to address Year 2000 issues. The only costs we have incurred in connection
with addressing the Year 2000 issues are administrative expenses resulting from
the efforts of our Mitigation Committee and time spent in attempting to identify
and resolve Year 2000 issues in contacting our vendors and subconsultants to
ensure compliance. These costs are included in selling, general and
administrative expense in the consolidated statements of income. All costs
related to Year 2000 issues are paid from cash flows from operations.
15
We anticipate a cost of $25,000 to $50,000 to upgrade our telephone voice
message system near the end of the fourth quarter 1999 to ensure Year 2000
compliance. This expenditure will be recorded as selling, general and
administrative expense as incurred. Our Mitigation Committee has determined
that the primary computer systems that we use are Year 2000 compliant and
therefore we do not anticipate any additional costs related to the Year 2000
date change that 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 these tapes in an offsite facility. We have not deferred any information
technology projects due to Year 2000 issues.
We have had difficulty estimating the impact of Year 2000 non-compliance by
outside parties with whom we transact business. We have received Year 2000
compliance letters from most of our critical vendors and subcontractors. Based
on theses responses we are not aware of any significant issues relating to third
parties compliance with the Year 2000 date change.
We have also engaged in discussions with other significant third parties, such
as our bank and payroll service, and have received written assurances regarding
Year 2000 compliance from such service providers. Although our client base is
diverse, with no one client making up 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 are not aware of any significant issues.
Contingency plan. We have completed our testing and assessment procedures.
Plans for likely scenarios involving Year 2000 failures currently cover only
manual remediation of workstation and/or server computers. Where cost effective
and appropriate, we have performed internal tests on mission critical and
operational production systems to validate Year 2000 compliance, and all either
passed Year 2000 testing or require minor manual intervention on or after the
January 1, 2000 date. Appropriate plans to deal with identified failures are
being developed. If we are unsuccessful in developing or implementing a plan to
correct possible 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 most serious disruptions
which could occur include:
. the loss of approximately two months' net revenues, an amount of
approximately $7,500,000, 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 net revenues if any of the accounting systems of our clients
experience a Year 2000 failure.
16
Item 3: Quantitative and Qualitative Disclosures About Market Risk
We are exposed to interest rate changes primarily as a result of our line of
credit, long-term debt and capital leases which are used to maintain liquidity
and to fund capital expenditures and our expansion. Our interest rate risk
management 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 are
expressed in thousands.
1999 2000 2001 2002 2003 Total Fair Value/(1)/
Fixed rate debt /(2)/ $ 33 $ 164 $1,501 $ 136 $ 37 $1,871 $1,871
Average interest rate 8.50% 8.40% 9.80% 8.30% 8.00% 9.50% 9.50%
Variable rate debt -- $ 438 -- -- -- $ 438 $ 438
Average interest rate -- 8.25% -- -- -- 8.25% 8.25%
- ----------------------------
/(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 $350,000 as there is no established market for these notes.
As the table incorporates only those exposures that existed as of September 30,
1999, it does not consider those exposures or positions which could arise after
that date. Moreover, because firm commitments are not presented in the table
above, the information presented in the table has limited predictive value. As a
result, our ultimate realized gain or loss with respect to interest rate
fluctuations will depend on those exposures or positions that arise during the
period and interest rates.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 13, 1999, a complaint was filed in the Stanislaus County, California
Superior Court against Thompson-Hysell, Inc. ("Thompson-Hysell"), four
shareholders of Thompson-Hysell (the "Defendant Shareholders"), Thompson-Hysell
Liquidation Corporation, Thompson-Hysell Engineers, Inc. and us. This complaint
was filed by Phillip Kirk Delamare and his wife Catherine A. Delamare who are
shareholders of a corporation named Thompson-Hysell Engineers, Inc. ("T-H
Engineers"), in which the Defendant Shareholders were majority shareholders and
directors. The complaint alleges, among other things, that Thompson-Hysell was
an alter ego of T-H Engineers and as such, when we acquired substantially all of
the assets and assumed substantially all of the liabilities of Thompson-Hysell
(the "Acquisition"), the plaintiffs were fraudulently deprived of any benefit
derived from their ownership interest in the shares of T-H Engineers. The
complaint further alleges that the Defendant Shareholders breached their
fiduciary duties as directors and majority shareholders of T-H Engineers and
that they conspired with Thompson-Hysell and us to defraud T-H Engineers of its
assets and to exclude plaintiffs from any benefit derived from the Acquisition.
The plaintiffs in this action are seeking injunctive relief and general monetary
damages in an unspecified amount, special damages in the amount of $600,000,
interest, costs and punitive and exemplary damages. We believe that the claim
made against us is completely without merit and intend to vigorously defend
ourselves in this action.
Item 2. Changes In Securities and Use of Proceeds
On July 12, 1999, our Registration Statement on Form S-1 (333-77273) pertaining
to our initial public offering of 1,500,000 shares of our common stock, par
value $0.001 per share, was declared effective by the Securities and Exchange
Commission. The managing underwriters in the offering were Wedbush Morgan
Securities.
The offering commenced on July 12, 1999 and closed on July 15, 1999. The
initial public offering price was $9 per share for an aggregate initial public
offering price of $13,500,000.
Of the $13,500,000 in gross proceeds raised in connection with the offering, (i)
$1,080,000 was paid to the managing underwriter in connection with underwriting
discounts and expenses and (ii) approximately $747,000 was paid by us in
connection with expenses, including legal, accounting, printing, filing and
other fees, in connection with the offering. Of the remaining net proceeds, we
have paid cash of $3,333,000 in connection with the acquisition of substantially
all of the assets and assumption of substantially all of the liabilities of
Thompson-Hysell; paid off the outstanding line of credit balance of $4,731,000;
and repaid debts to related parties of $1,407,000 to Aram Keith, our Chief
Executive Officer and Chairman of the Board, $703,000 to Walter Cruttenden III,
one of our directors, $165,000 to Floyd Reid, a former director and executive
officer, and an aggregate of $372,000 to various other related parties. There
were no other direct or indirect payments to any of our officers or directors,
their associates, ten- percent shareholders or any other affiliate of ours. We
are currently investing the remaining net proceeds from the offering for future
use as additional working capital and/or to repay other debt. Our investments
are currently in a government cash fund which invests substantially all of its
assets in high-quality obligations of the U.S. Government, its agencies and
instrumentalities and in repurchase agreements, backed by these obligations.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to A Vote of Security Holders
None
Item 5. Other Information
None
18
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits
Number Description
------ -----------
10.35 Wells Fargo Bank Line of Credit Note dated September 1, 1999
between The Keith Companies, Inc., John M. Tettemer and
Associated, LTD., and ESI, Engineering Services, Inc. and
Wells Fargo Bank, National Association.
10.36 Wells Fargo Bank Credit Agreement dated September 1, 1999
between The Keith Companies, Inc., John M. Tettemer and
Associated, LTD., and ESI, Engineering Services, Inc. and
Wells Fargo Bank, National Association.
10.37 Facility Lease dated July 29, 1999 between ASP Scripps,
L.L.C. and the Keith Companies, Inc.
10.38 Addendum to Facility Lease dated July 29, 1999 between ASP
Scripps, L.L.C. and the Keith Companies, Inc.
10.39 Sublease Agreement dated July 29, 1999 between Cannon
Computer Systems, Inc. and The Keith Companies, Inc.
10.40 Agreement of non-disturbance and attornment dated July 28,
1999 between ASP Scripps, L.L.C. and The Keith Companies,
Inc.
10.41 Consent to Sublease Agreement dated July 28, 1999 between ASP
Scripps, L.L.C., Canon Computer Systems, Inc. and The Keith
Companies, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 12, 1999 THE KEITH COMPANIES, INC. AND SUBSIDIARIES
By: /s/ ARAM H. KEITH
-----------------------------------
Aram H. Keith
Chairman of the Board of Directors
and Chief Executive Officer
By: /s/ GARY C. CAMPANARO
-----------------------------------
Gary C. Campanaro
Chief Financial Officer and Secretary
20