1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission File Number 0-26561
THE KEITH COMPANIES, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 33-0203193
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2955 REDHILL AVENUE, COSTA MESA, CALIFORNIA 92626
--------------------------------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (714) 540-0800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of outstanding shares of the registrant's common stock as of August
1, 2001 was 7,321,847.
2
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Cash Flows 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2001 2000
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ..................................... $15,068,000 $ 1,043,000
Securities held-to-maturity ................................... 11,086,000 --
Contracts and trade receivables, net of allowance for
doubtful accounts of $1,192,000 and $1,166,000 at
June 30, 2001 and December 31, 2000, respectively ........... 14,113,000 12,089,000
Costs and estimated earnings in excess of billings ............ 8,195,000 6,334,000
Prepaid expenses and other current assets ..................... 790,000 766,000
----------- -----------
Total current assets ..................................... 49,252,000 20,232,000
Equipment and leasehold improvements, net .......................... 5,192,000 4,713,000
Goodwill, net of accumulated amortization of $544,000 and
$329,000 at June 30, 2001 and December 31, 2000, respectively .... 10,636,000 8,128,000
Other assets ....................................................... 251,000 239,000
----------- -----------
Total assets ............................................. $65,331,000 $33,312,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit ................................................ $ -- $ 2,025,000
Current portion of long-term debt and capital lease obligations 621,000 3,359,000
Trade accounts payable ........................................ 1,568,000 1,689,000
Accrued employee compensation ................................. 2,920,000 2,467,000
Current portion of deferred tax liabilities ................... 1,541,000 1,541,000
Other accrued liabilities ..................................... 2,225,000 807,000
Billings in excess of costs and estimated earnings ............ 1,552,000 1,001,000
----------- -----------
Total current liabilities ............................... 10,427,000 12,889,000
Long-term debt and capital lease obligations, less current portion . 1,569,000 361,000
Issuable common stock .............................................. 1,700,000 1,000,000
Deferred tax liabilities ........................................... 719,000 719,000
Accrued rent ....................................................... 143,000 104,000
----------- -----------
Total liabilities ....................................... 14,558,000 15,073,000
----------- -----------
Shareholders' equity:
Preferred stock, $0.001 par value. Authorized 5,000,000 shares;
no shares issued or outstanding ............................. -- --
Common stock, $0.001 par value. Authorized 100,000,000 shares
at June 30, 2001 and December 31, 2000; issued and
outstanding 7,318,041 and 5,115,882 shares at June 30, 2001
and December 31, 2000, respectively ......................... 7,000 5,000
Additional paid-in capital .................................... 42,024,000 12,453,000
Retained earnings ............................................. 8,742,000 5,781,000
----------- -----------
Total shareholders' equity .............................. 50,773,000 18,239,000
----------- -----------
Total liabilities and shareholders' equity .............. $65,331,000 $33,312,000
=========== ===========
See accompanying notes to the consolidated financial statements.
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THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Gross revenue .................................. $ 19,239,000 $ 13,567,000 $ 37,941,000 $ 26,674,000
Subcontractor costs ............................ 1,522,000 886,000 3,602,000 1,574,000
------------ ------------ ------------ ------------
Net revenue ............................ 17,717,000 12,681,000 34,339,000 25,100,000
Costs of revenue .............................. 11,356,000 8,307,000 22,253,000 16,689,000
------------ ------------ ------------ ------------
Gross profit ........................... 6,361,000 4,374,000 12,086,000 8,411,000
Selling, general and administrative expenses ... 3,777,000 2,486,000 7,061,000 5,136,000
------------ ------------ ------------ ------------
Income from operations ................. 2,584,000 1,888,000 5,025,000 3,275,000
Interest income ................................ (151,000) (6,000) (151,000) (12,000)
Interest expense ............................... 68,000 88,000 210,000 195,000
Other expenses, net ............................ 22,000 28,000 31,000 44,000
------------ ------------ ------------ ------------
Income before provision for income taxes 2,645,000 1,778,000 4,935,000 3,048,000
Provision for income taxes ..................... 1,058,000 711,000 1,974,000 1,219,000
------------ ------------ ------------ ------------
Net income ............................. 1,587,000 1,067,000 2,961,000 1,829,000
============ ============ ============ ============
Earnings per share data:
Basic .................................. $ 0.24 $ 0.22 $ 0.50 $ 0.37
============ ============ ============ ============
Diluted ................................ $ 0.23 $ 0.20 $ 0.46 $ 0.35
============ ============ ============ ============
Weighted average number of shares outstanding:
Basic .................................. 6,520,611 4,956,942 5,885,776 4,958,025
============ ============ ============ ============
Diluted ................................ 7,037,829 5,238,537 6,442,380 5,254,864
============ ============ ============ ============
See accompanying notes to the consolidated financial statements.
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THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
June 30,
-----------------------------
2001 2000
------------ -----------
Cash flows from operating activities:
Net income ................................................ $ 2,961,000 $ 1,829,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ......................... 1,111,000 715,000
Loss on sale of equipment ............................. 17,000 25,000
Tax benefit from exercise of stock options ............ 548,000 --
Changes in operating assets and liabilities, net of
effects from acquisition:
Contracts and trade receivables, net ................. 123,000 (1,738,000)
Costs and estimated earnings in excess of billings ... (1,749,000) (646,000)
Prepaid expenses and other assets .................... 132,000 16,000
Trade accounts payable and accrued liabilities ....... 826,000 1,208,000
Billings in excess of costs and estimated earnings ... 354,000 195,000
------------ -----------
Net cash provided by operating activities .......... 4,323,000 1,604,000
------------ -----------
Cash flows from investing activities:
Net cash expended for acquisition ..................... (1,530,000) --
Additions to equipment and leasehold improvements, net (873,000) (480,000)
Purchase of securities held-to-maturity ............... (11,086,000) --
Proceeds from sale of equipment ....................... 19,000 --
------------ -----------
Net cash used in investing activities .............. (13,470,000) (480,000)
------------ -----------
Cash flows from financing activities:
Payments on line of credit, net ........................ (2,294,000) (1,125,000)
Principal payments on long-term debt and capital
lease obligations, including current portion ......... (3,061,000) (718,000)
Repurchase of common stock ............................. -- (136,000)
Net proceeds from secondary offering ................... 27,979,000 --
Proceeds from exercise of stock options ................ 548,000 22,000
------------ -----------
Net cash provided by (used in) financing activities 23,172,000 (1,957,000)
------------ -----------
Net increase (decrease) in cash and cash equivalents 14,025,000 (833,000)
Cash and cash equivalents, beginning of period ................ 1,043,000 1,569,000
------------ -----------
Cash and cash equivalents, end of period ...................... $ 15,068,000 $ 736,000
============ ===========
See supplemental cash flow information at Note 8.
See accompanying notes to the consolidated financial statements.
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THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 2001, the
consolidated statements of income for the three and six months ended June
30, 2001 and 2000, and the consolidated statements of cash flows for the six
months ended June 30, 2001 and 2000, are unaudited and in the opinion of
management include all adjustments necessary to present fairly the
information set forth therein, which consist solely of normal recurring
adjustments. All significant intercompany transactions have been eliminated
and certain reclassifications have been made to prior periods' consolidated
financial statements to conform to the current period presentation. The
results of operations for these interim periods are not necessarily
indicative of results for the full year. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Annual Report on Form 10-K/A of
The Keith Companies, Inc. (together with its subsidiaries, the "Company")
for the year ended December 31, 2000 as certain disclosures which would
substantially duplicate those contained in such audited financial statements
have been omitted from this report.
2. PER SHARE DATA
Basic earnings per share ("EPS") is computed by dividing net income during
the period by the weighted average number of common shares outstanding
during each period. Diluted EPS is computed by dividing net income during
the period by the weighted average number of shares that would have been
outstanding assuming the issuance of common shares for all dilutive
potential common shares outstanding during the reporting period, net of
shares assumed to be repurchased using the treasury stock method.
The following is a reconciliation of the denominator for the basic EPS
computation to the denominator of the diluted EPS computation:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Weighted average shares used for the basic EPS
computation ..................................... 6,520,611 4,956,942 5,885,776 4,958,025
Incremental shares from the assumed exercise of
dilutive stock options and stock warrants,
issuable shares and contingently issuable shares 517,218 281,595 556,604 296,839
--------- --------- --------- ---------
Weighted average shares used for the diluted EPS
computation ..................................... 7,037,829 5,238,537 6,442,380 5,254,864
========= ========= ========= =========
In conjunction with certain acquisitions, the Company agreed to pay
consideration consisting of shares of its common stock. As a result, the
Company estimated and included 164,458 and 157,170 weighted average issuable
and contingently issuable shares in its weighted average shares used for the
diluted EPS computation for the three and six months ended June 30, 2001,
respectively, and 148,000 weighted average issuable and contingently
issuable shares for the three and six months ended June 30, 2000.
Anti-dilutive weighted potential common shares excluded from the above
calculations were 10,033 and 5,459 for the three and six months ended June
30, 2001, respectively, and 663,736 and 633,461 for the three and six months
ended June 30, 2000, respectively.
3. SECONDARY OFFERING
In May 2001, the Company completed a secondary offering of an aggregate of
2.3 million shares of common stock (including an over-allotment of 300,000
shares), of which 1.9 million shares were sold by the Company and 400,000
shares were sold by selling shareholders. The public offering price was
$16.00 per share which resulted in proceeds to the Company, net of
underwriting fees and offering expenses, of approximately $28 million.
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THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
The Company used a portion of the net proceeds from the secondary offering
to repay its line of credit balance and for general corporate purposes,
including working capital, and may also use a portion of the net proceeds to
acquire other businesses. The remaining balance of the net proceeds has been
invested in highly liquid investment grade short-term securities.
4. SECURITIES HELD-TO-MATURITY
The Company accounts for its securities held-to-maturity ("Securities")
under the provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS No.
115"). Under SFAS No. 115, the Company is required to classify its
Securities in one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally for the
purpose of selling them in the near term. Held-to-maturity securities are
those securities in which the Company has the intent and ability to hold
until maturity. All other securities not included in trading or
held-to-maturity categories are classified as available-for-sale. The
Company has the ability and intent to hold all of its Securities until
maturity and therefore, has classified all of its Securities as
held-to-maturity. Accordingly, the Securities are stated at amortized cost.
5. ACQUISITIONS
On January 31, 2001, the Company acquired substantially all of the assets
and assumed substantially all of the liabilities of Hook & Associates
Engineering, Inc. ("Hook") for an estimated purchase price of $4,430,000.
The purchase price consisted of $1,530,000 in cash, $1,200,000 of issuable
common stock of the Company, a subordinated promissory note in the original
amount of $1,300,000 and an estimated $400,000 to be paid in cash related to
an income tax reimbursement to the seller. The common stock of the Company
is to be issued in two installments; 34,188 shares were issued in February
2001 with a value of $500,000, with the remaining $700,000 to be issued in
2002. The issuance of the $700,000 of common stock and the amount of the
subordinated promissory note are subject to certain adjustments extending up
to one year from the date of acquisition related to the book value of net
assets acquired, cash, accounts receivable, costs and estimated earnings in
excess of billings and billings in excess of costs and estimated earnings as
of December 31, 2000.
This acquisition was accounted for using the purchase method of accounting.
Accordingly, the Company recorded goodwill of $2,716,000, which represents
the excess of the purchase price over the fair value of the net tangible and
identifiable intangible assets acquired and liabilities assumed. Such amount
is being amortized over a period of 25 years. See "Effect of Recent
Accounting Pronouncements" for discussion of goodwill amortization.
The following unaudited pro forma data presents information as if the
acquisition of Hook had occurred on both January 1, 2000 and January 1,
2001. The pro forma data is provided for information purposes only and is
based on historical information. The pro forma data does not necessarily
reflect the actual results of operations that would have occurred had Hook
and the Company comprised a single entity during the periods presented, nor
is it necessarily indicative of future results of operations of the combined
entities.
PRO FORMA PRO FORMA
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net revenue ............ $17,717,000 $14,266,000 $34,998,000 $28,215,000
Net income ............. $ 1,587,000 $ 1,331,000 $ 2,988,000 $ 2,155,000
Basic earnings per share $ 0.24 $ 0.22 $ 0.51 $ 0.39
6. INDEBTEDNESS
In September 1999, the Company entered into a line of credit agreement with
a bank, which consists of a working capital component with a maximum
outstanding principal balance of $6.0 million, maturing on September 3,
2001. At June 30, 2001, there were no outstanding borrowings under the
working capital component of the line of credit.
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THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
7. SEGMENT AND RELATED INFORMATION
The Company evaluates performance and makes resource allocation decisions
based on the overall type of services provided to customers. For financial
reporting purposes, the Company has grouped its operations into two primary
reportable segments; Real Estate Development, Public Works/Infrastructure
and Communications ("REPWIC") and Industrial/Energy ("IE"). The REPWIC
segment includes engineering and consulting services for the development of
both private projects, such as residential communities, commercial and
industrial properties and recreational projects; public works/infrastructure
projects, such as transportation and water/sewage facilities; and site
acquisition and construction management services for wireless
communications. The IE segment provides the technical expertise and
management required to design and test manufacturing facilities and
processes and to facilitate the construction of alternate electrical power
systems that supplement public power supply and large scale power consumers.
The following tables set forth certain information regarding the Company's
operating segments for the three and six months ended June 30, 2001 and
2000:
FOR THE THREE MONTHS ENDED JUNE 30, 2001
--------------------------------------------------------
CORPORATE
REPWIC IE COSTS CONSOLIDATED
----------- ---------- ----------- ------------
Net revenue ................. $16,752,000 $ 965,000 $ -- $17,717,000
Income (loss) from operations $ 4,248,000 $ (103,000) $(1,561,000) $ 2,584,000
Identifiable assets ......... $63,335,000 $ 1,996,000 $ -- $65,331,000
FOR THE THREE MONTHS ENDED JUNE 30, 2000
------------------------------------------------------
CORPORATE
REPWIC IE COSTS CONSOLIDATED
----------- ---------- --------- ------------
Net revenue ................. $11,585,000 $1,096,000 $ -- $12,681,000
Income (loss) from operations $ 2,945,000 $ 132,000 $(1,189,000) $ 1,888,000
Identifiable assets ......... $23,714,000 $1,285,000 -- $24,999,000
FOR THE SIX MONTHS ENDED JUNE 30, 2001
------------------------------------------------------
CORPORATE
REPWIC IE COSTS CONSOLIDATED
----------- ---------- ----------- ------------
Net revenue ................. $32,147,000 $2,192,000 $ -- $34,339,000
Income (loss) from operations $ 7,976,000 $ 22,000 $(2,973,000) $ 5,025,000
FOR THE SIX MONTHS ENDED JUNE 30, 2000
------------------------------------------------------
CORPORATE
REPWIC IE COSTS CONSOLIDATED
----------- ---------- ----------- ------------
Net revenue ................. $22,866,000 $2,234,000 $ -- $25,100,000
Income (loss) from operations $ 5,322,000 $ 343,000 $(2,390,000) $ 3,275,000
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9
THE KEITH COMPANIES, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
8. SUPPLEMENTAL CASH FLOW INFORMATION
FOR THE SIX MONTHS
ENDED JUNE 30,
-------------------
2001 2000
-------- --------
Supplemental disclosure of cash flow information:
Cash paid for interest .......................... $215,000 $234,000
======== ========
Cash paid for income taxes ...................... $456,000 $455,000
======== ========
Noncash financing and investing activities:
Purchase price adjustment to goodwill and trade
accounts payable and accrued liabilities ...... $ 7,000 $ --
======== ========
Insurance financing ............................. $ -- $ 63,000
======== ========
Accrued deferred offering costs ................. $285,000 $ --
======== ========
Transfer of deferred offering costs to additional
paid in capital ............................... $285,000 $ --
======== ========
Issuable common stock issued .................... $500,000 $ --
======== ========
Transfer of leasehold improvements to prepaid
expenses and other assets ..................... $159,000 $ --
======== ========
The acquisition of Hook on January 31, 2001 resulted in the following
increases:
Contracts and trade receivables .............................. $(2,147,000)
Costs and estimated earnings in excess of billings ........... (112,000)
Other current assets ......................................... (12,000)
Equipment and leasehold improvements ......................... (696,000)
Goodwill ..................................................... (2,716,000)
Other assets ................................................. (12,000)
Line of credit ............................................... 269,000
Long term debt, including current portion .................... 1,530,000
Accounts payable, accrued expenses and other liabilities ..... 968,000
Billings in excess of costs and estimated earnings ........... 198,000
Issuable common stock ........................................ 1,200,000
-----------
Net cash expended for acquisition ....................... $(1,530,000)
===========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements of the Company and the related notes included elsewhere in
this Form 10-Q and the Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2000 filed by the Company. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of any number of factors, including those set forth under "Risk Factors"
and elsewhere in the Annual Report on Form 10-K/A filed by the Company. In this
Management's Discussion and Analysis of Financial Condition and Results of
Operations section, references to "TKCI", "we", "our" and "us" mean the Company.
OVERVIEW
We derive most of our revenue from professional service activities. The majority
of these activities are billed under various types of contracts with our
clients, including fixed price and time and material contracts. Most of our time
and material contracts have not-to-exceed provisions. Revenue is recognized on
the percentage of completion method of accounting based on the proportion of
actual direct contract costs incurred to total estimated direct contract costs.
We believe that costs incurred are the best available measure of progress
towards completion on the contracts. In the course of providing services, we
sometimes subcontract for various services. These costs are included in billings
to clients and, in accordance with industry practice, are included in our gross
revenue. Because subcontractor services can change significantly from project to
project, changes in gross revenue may not be indicative of business trends.
Accordingly, we also report net revenue, which is gross revenue less
subcontractor costs. Our revenue is generated from a large number of relatively
small contracts.
A substantial portion of our net revenue is derived from services rendered in
connection with commercial and residential real estate development projects. The
real estate market has historically experienced pronounced business cycles. Our
consolidated results of operations can be adversely impacted by downturns in the
real estate market. Based upon the number of building permits issued, the last
peak of the business cycle in the southern California real estate market was in
1989 and the last trough was in 1996. A majority of our net revenue for the
periods presented, was derived from services rendered in southern California.
Consequently, adverse economic conditions affecting the southern California
economy could also have an adverse effect on our consolidated results of
operations. We anticipate that as we consummate acquisitions in the future, the
concentration of revenue from both real estate development and in southern
California may decline.
Costs of revenue include labor, non-reimbursable subcontract costs, materials
and various direct and indirect overhead costs including rent, utilities and
depreciation. Selling, general, and administrative expenses consist primarily of
corporate costs related to finance and accounting, information technology,
business development and marketing, contract proposal, executive salaries,
amortization of goodwill, provisions for doubtful accounts and other indirect
overhead costs.
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RESULTS OF OPERATIONS
The following table sets forth unaudited historical consolidated operating
results for each of the periods presented as a percentage of net revenue:
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
2001 2000 2001 2000
----- ----- ----- -----
Gross revenue ................................ 108.6% 107.0% 110.5% 106.3%
Subcontractor costs .......................... 8.6% 7.0% 10.5% 6.3%
----- ----- ----- -----
Net revenue ............................. 100.0% 100.0% 100.0% 100.0%
Costs of revenue ............................. 64.1% 65.5% 64.8% 66.5%
----- ----- ----- -----
Gross profit ............................ 35.9% 34.5% 35.2% 33.5%
Selling, general and administrative expenses . 21.3% 19.6% 20.6% 20.5%
----- ----- ----- -----
Income from operations .................. 14.6% 14.9% 14.6% 13.0%
Interest (income) ............................ (0.9%) 0.0% (0.4%) 0.0%
Interest expense ............................. 0.4% 0.7% 0.6% 0.8%
Other expense, net ........................... 0.2% 0.2% 0.1% 0.1%
----- ----- ----- -----
Income before provision for income taxes 14.9% 14.0% 14.3% 12.1%
Provision for income taxes ................... 6.0% 5.6% 5.7% 4.8%
----- ----- ----- -----
Net income ............................. 8.9% 8.4% 8.6% 7.3%
===== ===== ===== =====
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
Net Revenue. Net revenue for the three months ended June 30, 2001 increased $5.0
million, or 40% to $17.7 million compared to $12.7 million for the three months
ended June 30, 2000. Net revenue for the six months ended June 30, 2001
increased $9.2 million, or 37% to $34.3 million compared to $25.1 million for
the six months ended June 30, 2000. Net revenue increased by $3.6 million and
$6.4 million for the three and six months ended June 30, 2001, respectively, as
a result of the acquisitions of Crosby Mead Benton & Associates in October 2000
and Hook & Associates Engineering, Inc. ("Hook") in January 2001. Excluding the
revenue from these acquisitions, net revenue grew $1.4 million or 11%, and $2.9
million or 11% for the three and six months ended June 30, 2001, respectively,
compared to the three and six months ended June 30, 2000. The net revenue growth
for both periods is primarily attributable to continued growth in the Company's
surveying and civil engineering services resulting largely from the strong
demand for real estate in California and Nevada, as well as improved project
management. Subcontractor costs, as a percentage of net revenue, increased to
8.6% and 10.5% for the three and six months ended June 30, 2001, respectively,
compared to 7.0% and 6.3% for the three and six months ended June 30, 2000. The
percentage increase in subcontractor costs for the three and six months ended
June 30, 2001, resulted primarily from a significant increase in subcontract
services related to a large contract in our industrial/energy segment and an
increase in subcontractor services for contracts in our civil engineering
services sector.
Gross Profit. Gross profit for the three months ended June 30, 2001 increased
$2.0 million, or 45% to $6.4 million compared to $4.4 million for the three
months ended June 30, 2000. Gross profit for the six months ended June 30, 2001
increased $3.7 million, or 44% to $12.1 million compared to $8.4 million for the
six months ended June 30, 2000. As a percentage of net revenue, gross profit
increased to 35.9% and 35.2% for the three and six months ended June 30, 2001,
respectively, compared to 34.5% and 33.5% for the three and six months ended
June 30, 2000, respectively. The gross profit percentage for the three and six
months ended June 30, 2001 was positively impacted as a result of improved
project management and continued focus on contracts with higher profit margins.
Such improvement in gross profit percentage was partially offset by lower
margins related to one of the Hook offices, as well as lower revenue in the
industrial/energy segment services involving automation and robotics design. The
gross profit percentage for the three and six months ended June 30, 2000 was
negatively impacted by lower margins on several large projects. Excluding the
effect of lower margins resulting from one of the Hook offices and lower margins
from several large projects during 2000, gross profit as a percentage of net
revenue increased to 37.1% and 36.2% for the quarter and six months ended June
30, 2001 as compared to 35.3% and 35.4% for the corresponding prior year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2001 increased $1.3
million, or 52% to $3.8 million compared to $2.5 million for the three months
ended June 30, 2000. Selling, general and administrative expenses for the six
months ended June 30, 2001 increased $1.9 million, or 38% to $7.1
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million compared to $5.1 million for the six months ended June 30, 2000. The
increases for each period resulted primarily from the acquisitions of Crosby
Mead Benton & Associates and Hook & Associates Engineering, Inc., and the
related amortization of goodwill. As a percentage of net revenue, selling,
general and administrative expenses increased to 21.3% and 20.6% for the three
and six months ended June 30, 2001, respectively, from 19.6% and 20.5% for the
three and six months ended June 30, 2000, respectively. The percentage increases
were due principally to an increase in administrative costs as a result of
additional contract proposal time.
Interest Income. Interest income for the three and six months ended June 30,
2001 was $151,000 compared to $6,000 and $12,000 for the three and six months
ended June 30, 2000, respectively. Such increases are due to interest earned on
securities purchased with a portion of the net proceeds generated from our
secondary offering which was completed in May 2001.
Interest Expense. Interest expense for the three months ended June 30, 2001
decreased $20,000, or 23% to $68,000 compared to $88,000 for the three months
ended June 30, 2000. The decrease in interest expense resulted principally from
the repayment of our line of credit in May 2001 with a portion of the net
proceeds from our secondary offering and the repayment of a $2.4 million
acquisition note in April 2001. Interest expense for the six months ended June
30, 2001 increased $15,000, or 8% to $210,000 compared to $195,000 for the six
months ended June 30, 2000. The increase in interest expense for the six months
ended June 30, 2001 was due to the issuance of a $1.3 million note in connection
with the acquisition of Hook & Associates Engineering, Inc., offset by the
repayment of our line of credit and a $2.4 million acquisition note.
Income Taxes. For the three months ended June 30, 2001, the provision for income
taxes was $1.1 million compared to $711,000 for the three months ended June 30,
2000. The provision for income taxes for the six months ended June 30, 2001 was
$2.0 million compared to $1.2 million for the six months ended June 30, 2000.
The increase in income tax expense was due to higher taxable income for the
quarter and six months ended June 30, 2001 as compared to the corresponding
prior year period. Our effective income tax rate has remained at approximately
40%, consistent with our effective tax rate during 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our working capital needs and capital expenditure requirements
through a combination of internally generated funds, bank borrowings, leases and
the sale of our common stock.
Cash and cash equivalents as of June 30, 2001, was $15.1 million compared to
$1.0 million as of December 31, 2000. Working capital as of June 30, 2001 was
$38.8 million compared to $7.3 million as of December 31, 2000, an increase of
$31.5 million, resulting primarily from net proceeds of approximately $28
million received in connection with the secondary offering and net income of
$3.0 million during the six months ended June 30, 2001. The debt to equity ratio
(excluding the effect of issuable common stock) as of June 30, 2001 improved to
0.04 to 1 compared to 0.31 to 1 at December 31, 2000 as a result of the
secondary offering and the repayment of our line of credit balance and a $2.4
million acquisition note. Net cash provided by operating activities increased
$2.7 million to $4.3 million for the six months ended June 30, 2001 compared to
$1.6 million for the corresponding prior year period. The increase in net cash
provided by operating activities was a result of higher income before the
effects of depreciation and amortization, tax benefit from the exercise of stock
options and a decrease in contract and trade receivables, offset by an increase
in costs and estimated earnings in excess of billings and a decrease in accounts
payable and accrued liabilities. The cash generated from operating activities
was used primarily to make principal payments on debt and capital leases, fund
capital expenditures, and partially fund our acquisition of Hook & Associates
Engineering, Inc. in January 2001.
In September 1999, we entered into a line of credit agreement with a bank, which
consists of a working capital component with a maximum outstanding principal
balance of $6.0 million, maturing on September 3, 2001. At June 30, 2001, there
were no outstanding borrowings under the working capital component of the line
of credit.
Based upon our current cash position and assuming our credit facility is renewed
in September 2001, or we are able to arrange for a replacement credit facility
with a similar availability, we expect to have sufficient cash resources to fund
our anticipated operations, planned capital expenditures and debt reductions for
the next 12 months.
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EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Standard (SFAS) No. 141, "Business Combinations" which was
effective upon issuance. This statement requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001.
The adoption of this standard is not expected to have a material effect on the
Company's financial condition, results of operations or cash flows.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets" which is effective January 1, 2002. This statement requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment. The Company has not yet
completed its analysis of the effect this standard will have on the Company's
financial condition, results of operations or cash flows.
INFLATION
Although our operations can be influenced by general economic trends, we do not
believe that inflation had a significant impact on our results of operations for
the periods presented. Due to the short-term nature of most of our contracts, if
costs of revenue increase, we attempt to pass these increases on to our clients.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate changes primarily as a result of our securities
held-to-maturity, line of credit and long-term debt, which are used to maintain
liquidity and to fund capital expenditures and our expansion. The Company
intends to hold all of its securities until maturity, and therefore, should not
bear any interest rate risk due to early disposition. Due to the relatively
immaterial levels of our current borrowings, our earnings and cash flows are not
materially impacted by changes in interest rates. Promissory notes delivered in
connection with our acquisitions have generally been at fixed rates. Our bank
line of credit is based on variable interest rates and is therefore affected by
changes in market rates. We do not enter into derivative or interest rate
transactions for speculative purposes.
The table below presents the principal amounts of debt (excluding capital lease
obligations of $465,000 and a note payable of $1,300,000), weighted average
interest rates, fair values and other items required by year of expected
maturity to evaluate the expected cash flows and sensitivity to interest rate
changes as of June 30, 2001.
Fair
2001 2002 2003 2004 Total Value (1)
---------- ---------- ------- ------- ----------- -----------
Securities held-to-maturity
(non-trading) ........... $3,457,000 $7,629,000 -- -- $11,086,000 $11,077,000
Weighted average interest
rate (2) ................ 3.90% 3.40% -- -- 3.56% 3.56%
Fixed rate debt (3) ....... $ 181,000 $ 125,000 $90,000 $29,000 $ 425,000 $ 425,000
Weighted average interest
rate .................... 8.40% 7.85% 7.63% 7.74% 8.03% 8.03%
--------------
(1) The fair value of fixed rate debt was determined based on current rates
offered for debt instruments with similar risks and maturities, while the
fair value for securities was based on the quoted market price of such
securities as of June 30, 2001.
(2) Approximately 41% of the Company's securities held-to-maturity are invested
in federally tax-exempt bonds. The weighted average interest rate shown
above is a combination of a pre-tax interest rate for taxable securities and
an after tax interest rate for tax-exempt securities.
(3) Fixed rate debt excludes an acquisition note payable with a carrying amount
of $1,300,000 due to the nature of the financing.
As the table incorporates only those exposures that existed as of June 30, 2001,
it does not consider those exposures or positions which could arise after that
date. Moreover, because firm commitments are not presented in the table above,
the information presented in the table has limited predictive value. As a
result, our ultimate realized gain or loss with respect to interest rate
fluctuations will depend on those exposures or positions that arise during the
period and interest rates.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2000, Clayton Engineering filed a claim against The Irvine Company
alleging that The Irvine Company failed to pay Clayton Engineering for the
removal of 30,000 cubic yards of dirt in the Peters Wash located in Irvine,
California. JMTA had provided engineering design services for The Irvine Company
in connection with this project. JMTA was our wholly-owned subsidiary at the
time the claim by Clayton was filed and was subsequently merged with and into
the Company in December 2000. In January 2001, The Irvine Company filed a claim
against JMTA for indemnity. Clayton Engineering has made the allegation that
plans prepared by JMTA were inaccurate as to the elevation of the bottom of the
Peters Wash. Consequently, The Irvine Company has filed an equitable indemnity
cross-complaint against JMTA. The Irvine Company is in the process of settling
with Clayton Engineering. The Company believes that the claim made against it
is without merit and intends to defend itself vigorously in this action.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 2001, we held our annual meeting of shareholders. At this
meeting, our shareholders were asked to vote on four matters:
o the election of five directors;
o the approval of our Amended and Restated 1994 Stock Incentive Plan;
o the approval of an amendment to our Amended and Restated Bylaws
increasing the authorized number of directors eligible to sit on our
board of directors to a range of five to nine; and
o the ratification of the appointment of KPMG LLP as our independent
auditors for fiscal 2001.
Of the total outstanding shares, 4,319,112 or 80.43%, were voted.
The first item presented for a vote before our shareholders was the
re-election of our five directors. Set forth below is information with
respect to the nominees elected as directors at the annual meeting and
the votes cast for, against and/or withheld with respect to each such
nominee.
Nominees For Against Withheld
-------- --------- ------- --------
Aram H. Keith 4,317,862 0 1,250
Gary C. Campanaro 4,317,862 0 1,250
Walter W. Cruttenden, III 4,317,862 0 1,250
George Deukmejian 4,317,862 0 1,250
Christine Diemer Iger 4,317,862 0 1,250
There were no broker non-votes in connection with this proposal.
The second item presented for a vote before the shareholders was the
approval of our Amended and Restated 1994 Stock Incentive Plan. Of the
votes received, 3,083,617 were in favor of the proposal, 267,332 were
against and 3,740 were withheld. There were 964,423 broker non-votes in
connection with this proposal.
The third item presented for a vote before the shareholders was the
approval of an amendment to our Amended and Restated Bylaws to increase
the number of directors eligible to sit on our board of directors to a
range of five to nine. Of the votes received, 3,341,257 were in favor of
the proposal, 9,382 were against and 4,050 were withheld. There were
964,423 broker non-votes in connection with this proposal.
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The last item presented for a vote before the shareholders was the
ratification of the appointment of KPMG LLP as our independent auditors
for fiscal 2001. Of the votes received, 4,316,862 were in favor of the
proposal, 600 were against and 1,650 were withheld. There were no broker
non-votes in connection with this proposal.
There were no other matters submitted for a vote of our shareholders
during the period covered by this report.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits
Number Description
-------- -----------
3.1 Amended and Restated Bylaws.*
4.1 Amended and Restated 1994 Stock Incentive Plan (incorporated
herein by this reference to exhibit 4.1 to the registrant's
registration statement on Form S-8, registration Number
333-61312).
10.17 Fourth Amendment to Credit Agreement dated January 31, 2001 by
and between the Registrant, HEA Acquisition, Inc. and Wells
Fargo Bank, National Association.*
10.18 Fifth Amendment to Credit Agreement dated April 27, 2001 by
and between the Registrant, HEA Acquisition, Inc. and Wells
Fargo Bank, National Association.*
----------------
* Filed herewith
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 14, 2001 THE KEITH COMPANIES, INC.
By: /s/ Aram H. Keith
-----------------------------------------
Aram H. Keith
Chairman of the Board of Directors
and Chief Executive Officer
By: /s/ Gary C. Campanaro
-----------------------------------------
Gary C. Campanaro
Chief Financial Officer and Secretary
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EXHIBIT INDEX
Exhibits
Number Description
-------- -----------
3.1 Amended and Restated Bylaws.*
4.1 Amended and Restated 1994 Stock Incentive Plan (incorporated herein
by this reference to exhibit 4.1 to the registrant's registration
statement on Form S-8, registration Number 333-61312).
10.17 Fourth Amendment to Credit Agreement dated January 31, 2001 by and
between the Registrant, HEA Acquisition, Inc. and Wells Fargo Bank,
National Association.*
10.18 Fifth Amendment to Credit Agreement dated April 27, 2001 by and
between the Registrant, HEA Acquisition, Inc. and Wells Fargo Bank,
National Association.*
----------------
* Filed herewith