UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Period Ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission File No. 0-18984
REYNOLDS, SMITH AND HILLS, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2986466
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4651 Salisbury Road, Suite 400 32256
Jacksonville, Florida (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (904) 296-2000
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, par
value $.01 per share, at September 30, 2001 was 458,580 shares.
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
REYNOLDS, SMITH AND HILLS, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Six Months Ended Three Months Ended
September 30 September 30
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
GROSS REVENUE $ 33,546,000 $ 28,449,000 $ 17,105,000 $ 14,570,000
SUBCONTRACT AND OTHER
DIRECT COSTS 9,100,000 6,995,000 4,691,000 3,474,000
------------ ------------ ------------ ------------
Net service revenue 24,446,000 21,454,000 12,414,000 11,096,000
COST OF SERVICES 9,368,000 8,145,000 4,657,000 4,215,000
------------ ------------ ------------ ------------
Gross profit 15,078,000 13,309,000 7,757,000 6,881,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 14,266,000 12,608,000 7,379,000 6,456,000
------------ ------------ ------------ ------------
Operating income 812,000 701,000 378,000 425,000
OTHER INCOME (EXPENSE)
Interest and other income 26,000 26,000 11,000 23,000
Interest expense (10,000) (7,000) (6,000) (3,000)
------------ ------------ ------------ ------------
Income before income taxes 828,000 720,000 383,000 445,000
INCOME TAX EXPENSE 391,000 303,000 185,000 183,000
------------ ------------ ------------ ------------
NET INCOME $ 437,000 $ 417,000 $ 198,000 $ 262,000
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ .95 $ .92 .43 .58
------------ ----------- ---- ----
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING 458,000 453,000 458,000 453,000
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
REYNOLDS, SMITH AND HILLS, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
SEPT 30, MARCH 31,
ASSETS 2001 2001
- ------ --------------- ---------------
CURRENT ASSETS:
Cash $ 558,000 $ 420,000
Accounts receivable, net of allowance for doubtful accounts of
$160,000 and $115,000 9,169,000 7,396,000
Unbilled service revenue 5,988,000 6,440,000
Prepaid expenses and other current assets 100,000 95,000
Deferred income taxes 718,000 718,000
----------- -----------
Total current assets 16,533,000 15,069,000
PROPERTY AND EQUIPMENT, net 2,172,000 2,297,000
OTHER ASSETS 168,000 169,000
COST IN EXCESS OF NET ASSETS OF ACQUIRED
BUSINESSES, net of accumulated amortization of $475,000
and $417,000 1,145,000 1,203,000
----------- -----------
$20,018,000 $18,738,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 651,000 $ 100,000
Accounts payable 3,235,000 3,238,000
Accrued payroll 596,000 554,000
Accrued incentive compensation 834,000 1,325,000
Accrued expenses 1,133,000 1,288,000
Unearned service revenue 4,507,000 3,599,000
----------- -----------
Total current liabilities 10,956,000 10,104,000
DEFERRED INCOME TAXES 204,000 204,000
OTHER LIABILITIES 254,000 334,000
----------- -----------
Total liabilities 11,414,000 10,642,000
----------- -----------
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 4,000,000 shares authorized,
459,000 and 453,000 issued and outstanding 5,000 5,000
Paid-in capital 3,698,000 3,627,000
Retained earnings 4,901,000 4,464,000
----------- -----------
Total shareholders' equity 8,604,000 8,096,000
----------- -----------
$20,018,000 $18,738,000
=========== ===========
See accompanying notes to consolidated financial statements.
3
REYNOLDS, SMITH AND HILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED SEPTEMBER 30
- --------------------------------------------------------------------------------
2001 2000
----------- -----------
OPERATING ACTIVITIES:
Net income $ 437,000 $ 417,000
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 470,000 475,000
Stock issued as compensation 71,000 57,000
Deferred rent charges and other (32,000) (19,000)
Change in operating assets and liabilities:
Accounts receivable and unbilled service revenue (1,321,000) (1,567,000)
Other assets and prepaid expenses (4,000) 75,000
Accounts payable and accrued expenses (652,000) (596,000)
Unearned service revenue 908,000 830,000
----------- -----------
Net cash used by operating activities (123,000) (328,000)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (290,000) (267,000)
----------- -----------
Net cash used by investing activities (290,000) (267,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments of long-term debt (100,000) (100,000)
Net increase in credit line payable to bank 651,000 242,000
----------- -----------
Net cash provided by financing activities 551,000 142,000
----------- -----------
NET INCREASE (DECREASE) IN CASH 138,000 (453,000)
CASH AT BEGINNING OF PERIOD 420,000 457,000
----------- -----------
CASH AT END OF PERIOD $ 558,000 $ 4,000
=========== ===========
See accompanying notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1) ACCOUNTING POLICIES
The accompanying unaudited financial statements, in the opinion of
management, include all adjustments (consisting of normal recurring
accruals) necessary to present fairly the results of operations and
financial position of the Company for the periods indicated. However,
certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted. It is suggested
that these financial statements be read in conjunction with the financial
statements, schedules, and notes thereto included in the Company's annual
report on Form 10-K for the fiscal year ended March 31, 2001.
2) PER SHARE DATA
Earnings per share of common stock are based on weighted average number of
shares outstanding during each period.
3) RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the FASB issued SFAS No. 141, "Business Combinations",
and SFAS No. 142, "Goodwill and Other Intangible Assets." These Statements
make significant changes to the accounting for business combinations,
goodwill, and intangible assets. Effective for business combinations
completed after June 30, 2001, SFAS No. 141 eliminates the
pooling-of-interests method of accounting and further clarifies the
criteria for recognition of intangible assets separately from goodwill.
SFAS No. 142 discontinues the practice of amortizing goodwill and
indefinite lived intangible assets and initiates an annual review for
impairment. Impairment would be examined more frequently if certain
indicators are encountered. Intangible assets with a determinable useful
life will continue to be amortized over that period. The amortization
provisions apply to goodwill and intangible assets acquired after June 30,
2001. SFAS No. 142 will be effective for fiscal years beginning after
December 15, 2001. Goodwill and intangible assets on the books at June 30,
2001 will be affected when the Corporation adopts the Statement on April 1,
2002.
Management is currently assessing the impact FAS No. 141 and FAS No. 142
will have on the Company's financial statements.
5
4) CONTINGENCIES
The Company is subject to lawsuits that arise in the normal course of
business involving claims typical of those filed against the engineering
and architectural professions. These suits primarily allege professional
errors and/or omissions. The Company maintains professional liability
insurance which insures against risk within the policy limits. There can be
no assurances that the policy limits are sufficient to cover all claims.
Other than as described below, there are no legal proceedings pending or,
to the knowledge of the Company, threatened against the Company which are
not covered by insurance and which would have a material adverse effect on
the Company's financial position, results of operations, or cash flows.
Effective November 2, 2001, the insurance policy of the Company issued by
its professional liability insurance carrier, Reliance Insurance Co.
("Reliance"), for claims made from June, 1998 through June, 2000, has been
cancelled as a result of the Order of Liquidation (the "Order") approved on
October 3, 2001 by the Insurance Commissioner of the Commonwealth of
Pennsylvania. While the claims period under the insurance policy issued by
Reliance to the Company ended in June, 2000, there are several lawsuits
pending as to which Reliance is the Company's insurance carrier. As a
result of the Order, Reliance will no longer pay any adverse judgment
against the Company up to the policy limit of $5.0 million and will no
longer pay the Company's defense costs with respect to the pending
lawsuits. The Florida Insurance Guaranty Association ("FIGA"), however,
will be handling the pending lawsuits for the Company and will provide
defense costs and substitute coverage of up to $300,000 per claim. Should
the Company incur any litigation-related costs not covered by FIGA but
within Reliance policy limits, then the Company can file a claim in the
Reliance liquidation proceedings and attempt to recover such incurred
costs. It is not possible to predict the outcome of litigation against the
Company nor the costs which may be recoverable in the Reliance liquidation
proceeding, if any. As such, management is unable to estimate the amount or
range of loss that could arise from this situation.
5) SUBSEQUENT EVENTS
On November 12, 2001, pursuant to the terms of a Stock Purchase Agreement,
Reynolds, Smith and Hills, Inc. (the "Company") acquired all of the issued
and outstanding capital stock of Sylva Engineering Corporation ("Sylva"), a
Texas corporation, in exchange for a $700,000 cash payment at the closing
of the transaction, $200,000 withheld by the Company to serve as security
for the obligations of the shareholders of Sylva under the Stock Purchase
Agreement, a $745,000 four year subordinated promissory note payable in
monthly installments, and 15,000 shares of the Company's common stock. The
Stock Purchase Agreement also provides for an additional contingent
purchase price of up to $700,000 based upon the financial performance of
the existing offices of Sylva, the Houston office of the Company and any
new offices of the Company which commence operations in the state of Texas
after the closing of the transaction, over the first four successive twelve
month periods following the closing of the transaction. If earned, the
6
contingent purchase price is payable in cash within sixty days of the end
of each applicable twelve month period. The cash component of the
transaction was financed through a term loan facility obtained from First
Union National Bank.
6) SEGMENT INFORMATION
The Company has identified six reportable segments, each of which is
managed separately. Operating results for the Company's segments are as
follows (in thousands):
Revenue
Six Months Ended Three Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Transportation $ 14,078 $ 10,745 $ 7,463 $ 5,638
Aviation 6,866 4,595 3,491 2,614
Aerospace/Defense 2,716 3,313 1,325 1,442
Public Infrastructure 1,966 1,910 911 912
Commercial 2,869 3,227 1,434 1,663
Institutional 5,051 4,659 2,481 2,301
----- ----- ----- -----
Consolidated $ 33,546 $ 28,449 $ 17,105 $ 14,570
======== ======== ======== ========
Income before income taxes
Six Months Ended Three Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
---- ---- ---- ----
Transportation $ 364 $ 219 $ 319 $ 168
Aviation 647 592 273 531
Aerospace/Defense 236 198 57 21
Public Infrastructure (127) (21) (64) (51)
Commercial 294 466 138 244
Institutional (137) (307) (188) (189)
Corporate overhead (449) (427) (152) (279)
---- ---- ---- ----
Consolidated $ 828 $ 720 $ 383 $ 445
======== ======== ======== ========
Assets of the segment groups are not relevant for management of the business nor
for disclosure.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Gross revenue for the first six months of fiscal 2002 was $33.5 million as
compared to $28.4 million for the first six months of fiscal 2001. This $5.1
million increase (18%) was due primarily to increased revenues in the
transportation and aviation programs as a result of current and prior year
marketing efforts.
Gross revenue for the second quarter of fiscal 2002 was $17.1 million as
compared to $14.6 million for the second quarter of fiscal 2001. This $2.5
million increase (17%) is a reflection of increased revenues in the
transportation and aviation programs.
Subcontract and other direct costs were $9.1 million and $7.0 million for
the first six months of fiscal 2002 and 2001, respectively. This represents a
30% increase which is due primarily to the increase in gross revenue. As a
percent of net service revenue, subcontract and other direct costs were 37% and
33%, respectively, for the two periods. This reflects an increase in the use of
subconsultants in the transportation and aviation programs. Subcontract and
other direct costs were $4.7 million and $3.5 million for the second quarter of
fiscal 2002 and 2001. As a percent of net service revenue, subcontract and other
direct costs were 38% and 31%, respectively, for the two periods. This increase
for the second quarter also corresponds to the increase in gross revenues and
the increase in subconsultants as noted above for the six month period.
Net service revenue more accurately reflects revenue for services performed
by the Company. Net service revenue was $24.4 million for the first six months
of fiscal 2002 compared to $21.5 million for the first six months of fiscal
2001. This 14% increase corresponds primarily to the increase in gross revenues
offset partially by the increase in direct costs. Net service revenue was $12.4
million for the second quarter of fiscal 2002 as compared to $11.1 million for
the prior years quarter. This 12% increase also corresponds to the increase in
gross revenues offset by the increase in direct costs.
Cost of services represents direct labor costs associated with the
generation of net service revenues. Cost of services, as a percentage of net
service revenue, remained consistent at 38% for the first six months of fiscal
2002 and 2001, as well as the second quarter of fiscal 2002 and 2001. Gross
profit, as a result, also remained consistent at 62% for the same periods of
fiscal 2002 and 2001.
8
Selling, general and administrative (SG&A) expenses consist of labor costs
of production personnel not utilized on projects (i.e. indirect labor), labor
costs of administrative and support personnel, office rent, depreciation,
insurance, and other operating expenses. SG&A expenses increased to $14.3
million in the first six months of fiscal 2002 from $12.6 million in the first
six months of fiscal 2001. This 13% increase was due primarily to increases in
personnel and associated costs. The number of employees increased to 540 at
September 30, 2001 from 510 at September 30, 2000 as a result of the increased
workload. Other increases in SG&A expenses were experienced in office rent and
equipment expense.
SG&A expenses increased to $7.4 million for the second quarter of fiscal
2002 from $6.5 million for the second quarter of fiscal 2001. This 14% increase
relates to increases in personnel and associated costs, office rent, and
warranty expense.
Net income was $437,000 for the first six months of fiscal 2002 as compared
to $417,000 for the first six months of fiscal 2001. Net income was $198,000 for
the second quarter of fiscal 2002 as compared to $262,000 for the same period of
fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
As of September 30, 2001 the Company had cash of $558,000 with $2.3 million
of borrowings available under its revolving line of credit.
Operations for the first six months of fiscal year 2002 generated a need
for cash as a result of funding an increase in accounts receivable and unbilled
service revenue. This increase was due to the growth of revenue and an increase
in the combined days outstanding to 90 days from 86 days as of September 30,
2001 and 2000, respectively. Unearned service revenue increased to partially
offset the increase of accounts receivable. The net use of cash was funded by
drawing on the line of credit.
On November 12, 2001 pursuant to the terms of a Stock Purchase Agreement,
Reynolds, Smith and Hills, Inc. (the "Company") acquired all of the issued and
outstanding capital stock of Sylva Engineering Corporation ("Sylva"), a Texas
Corporation, in exchange for a $700,000 cash payment at the closing of the
transaction, $200,000 withheld by the Company to serve as security for the
obligations of the shareholders of Sylva under the Stock Purchase Agreement, a
$745,000 four year subordinated promissory note payable in monthly installments,
and 15,000 shares of the Company's common stock. The cash component of the
transaction was financed througha term loan facility obtained from First Union
National Bank.
The Company believes that its existing financial resources, together with
its cash flow from operations and its unused bank line of credit, will provide
sufficient capital to fund its operations for fiscal 2002.
9
Cautionary Notice Regarding Forward-Looking Statements
Certain information contained in this report consists of forward-looking
statements based on current expectations and plans that involve risks and
uncertainties. Forward-looking statements frequently are identified by the use
of terms such as "expect", "believe", "estimate", "may", "should", "will" or
similar expressions. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experiences to differ materially from the
anticipated results or other expectations expressed in the forward-looking
statements. All forward-looking statements in this report are based on
information that currently is available.
The risks and uncertainties that may affect the operations, development and
results of the Company's business, in addition to those discussed elsewhere in
this report, include the following, among other factors: (a) the ability to
attract and retain qualified professional personnel; (b) periodic fluctuations
in general business conditions and in demand for the types of services provided
by the Company; (c) the timing of new awards and of funding for such awards; (d)
the ability of the Company to meet performance or schedule guarantees; cost
overruns on fixed or maximum priced contracts; and (e) the ability to recover
defense costs and substitute insurance coverage as a result of the Order of
Liquidation instituted for Reliance Insurance Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market risk exposures to the Company are not material.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Effective November 2, 2001, the insurance policy of the Company issued by
its professional liability insurance carrier, Reliance Insurance Co.
("Reliance", for claims made from June, 1998 through June, 2000, has been
cancelled as a result of the Order of Liquidation (the "Order") approved on
October 3, 2001 by the Insurance Commissioner of the Commonwealth of
Pennsylvania. While the claims period under the insurance policy issued by
Reliance to the Company ended June, 2000, there are several lawsuits pending as
to which Reliance is the Company's insurance carrier. These lawsuits are
described pursuant to Item 3 of the Company's Annual Report on Form 10-K for the
year ended March 31, 2001. As a result of the Order, Reliance will no longer pay
any adverse judgment against the Company up to the policy limit of $5.0 million
and will no longer pay the Company's defense costs with respect to the pending
lawsuits. The Florida Insurance Guaranty Association ("FIGA"), however, will be
handling the pending lawsuits for the Company and will provide defense costs and
10
substitute coverage of up to $300,000 per claim. Should the Company incur any
litigation-related costs not covered by FIGA but within Reliance policy limits,
then the Company can file a claim in the Reliance liquidation proceeding and
attempt to recover such incurred costs.
On June 15, 2001, the Company sent a letter to its shareholders and to
participants of the Company's Employees 401(k) Profit Sharing Plan informing
them that a Pennsylvania court had appointed the Pennsylvania Insurance
Commissioner as rehabilitator of Reliance and had imposed a 60-day stay on all
actions pending against Reliance or any of its insureds. Additionally, the
letter stated that on June 12, 2001, the parent company of Reliance, Reliance
Group Holdings, Inc., had filed for bankruptcy protection in New York. On June
18, 2001, the Company filed a copy of this letter as Exhibit 99.1 to its Current
Report on Form 8-K.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company was held on July 24, 2001, in
Jacksonville, Florida, at which the following matters were submitted to a vote
of the shareholders.
(1) Votes regarding the election of seven directors to hold office for a
term of one year and until their respective successors are elected and
qualified were as follows:
Votes Votes Votes
Nominees For Against Withheld
-------- --- ------- --------
Leerie T. Jenkins 386,104 0 0
David K. Robertson 386,104 0 0
Darold F. Cole 386,104 0 0
J. Ronald Ratliff 386,104 0 0
David E. Thomas 386,104 0 0
R. Ray Goode 386,104 0 0
James W. Apthorp 386,104 0 0
(2) Votes regarding the ratification of the appointment of Deloitte &
Touche LLP as independent auditors for fiscal year 2002 were as
follows:
385,844 Votes For -0- Votes Against 260 Abstain
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) There were no Form 8-K reports filed during the quarter for which this
report is filed.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following on behalf of the Registrant in the
capacities indicated.
Reynolds, Smith and Hills, Inc.
Dated: November 14, 2001
/s/ Leerie T. Jenkins, Jr. Chairman of the Board
- ------------------------------ and Chief Executive Officer
Leerie T. Jenkins, Jr. (Principal Executive Officer)
/s/ Kenneth R. Jacobson Chief Financial Officer, Executive
- ------------------------------ Vice President, and General Counsel
Kenneth R. Jacobson (Principal Financial and
Accounting Officer)
12