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 December 31, 2002
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.)
10748 Deerwood Park Blvd. South 32256
Jacksonville, Florida (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (904) 256-2500
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The number of shares outstanding of the registrant's Common Stock, par
value $.01 per share, at December 31, 2002 was 489,838 shares.
PART I: FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
REYNOLDS, SMITH AND HILLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
December 31 December 31
2002 2001 2002 2001
------------ ------------ ------------ ------------
GROSS REVENUE $ 58,991,000 $ 49,524,000 $ 20,005,000 $ 15,978,000
SUBCONTRACT AND OTHER
DIRECT COSTS 15,787,000 13,089,000 5,448,000 3,989,000
------------ ------------ ------------ ------------
Net service revenue 43,204,000 36,435,000 14,557,000 11,989,000
COST OF SERVICES 16,159,000 14,062,000 5,360,000 4,694,000
------------ ------------ ------------ ------------
Gross profit 27,045,000 22,373,000 9,197,000 7,295,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 24,916,000 21,403,000 8,275,000 7,137,000
------------ ------------ ------------ ------------
Operating income 2,129,000 970,000 922,000 158,000
OTHER INCOME (EXPENSE):
Interest and other income 144,000 45,000 36,000 19,000
Interest expense (73,000) (19,000) (24,000) (9,000)
------------ ------------ ------------ ------------
Income before income taxes and
cumulative effect of accounting
change 2,200,000 996,000 934,000 168,000
INCOME TAX EXPENSE 899,000 489,000 367,000 98,000
------------ ------------ ------------ ------------
Income before cumulative effect of
accounting change 1,301,000 507,000 567,000 70,000
CUMULATIVE EFFECT OF ACCOUNTING CHANGE,
net of income taxes of $110,000 (Note 3) (257,000) - - -
------------ ------------ ------------ ------------
NET INCOME $ 1,044,000 $ 507,000 $ 567,000 $ 70,000
============ ============ ============ ============
BASIC AND DILUTED EARNINGS
PER SHARE:
Income before cumulative effect of
accounting change $ 2.69 $ 1.10 $ 1.17 $ .15
Cumulative effect of accounting change $ (.53) - - -
Net income $ 2.16 $ 1.10 $ 1.17 $ .15
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 483,000 461,000 485,000 469,000
See accompanying notes to consolidated financial statements.
- 2 -
REYNOLDS, SMITH AND HILLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
- --------------------------------------------------------------------------------
ASSETS DEC 31, MARCH 31,
- ------ 2002 2002
----------- -----------
CURRENT ASSETS:
Cash $ 5,156,000 $ 440,000
Accounts receivable, net of allowance for doubtful accounts of
$163,000 and $135,000 9,424,000 9,120,000
Unbilled service revenue 7,437,000 7,204,000
Prepaid expenses and other current assets 180,000 273,000
Deferred income taxes 767,000 767,000
----------- -----------
Total current assets 22,964,000 17,804,000
PROPERTY AND EQUIPMENT, net 2,171,000 2,195,000
OTHER ASSETS 125,000 165,000
GOODWILL 1,660,000 1,981,000
----------- -----------
$26,920,000 $22,145,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 329,000 $ 1,266,000
Accounts payable 4,134,000 2,991,000
Accrued payroll 1,336,000 648,000
Accrued incentive compensation 1,862,000 1,233,000
Accrued expenses 1,849,000 1,642,000
Unearned service revenue 5,618,000 3,512,000
----------- -----------
Total current liabilities 15,128,000 11,292,000
LONG-TERM DEBT 826,000 1,074,000
DEFERRED INCOME TAXES 373,000 373,000
OTHER LIABILITIES 97,000 153,000
----------- -----------
Total liabilities 16,424,000 12,892,000
----------- -----------
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 4,000,000 shares authorized,
490,000 and 478,000 issued and outstanding 5,000 5,000
Paid-in capital 4,216,000 4,017,000
Retained earnings 6,275,000 5,231,000
----------- -----------
Total shareholders' equity 10,496,000 9,253,000
----------- -----------
$26,920,000 $22,145,000
=========== ===========
See accompanying notes to consolidated financial statements.
- 3 -
REYNOLDS, SMITH AND HILLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
2002 2001
----------- ------------
OPERATING ACTIVITIES:
Net income $ 1,044,000 $ 507,000
Adjustments to reconcile net income to net cash
provided(used) by operating activities:
Depreciation and amortization 753,000 709,000
Goodwill impairment 367,000 0
Stock issued as compensation 94,000 71,000
Deferred rent charges and other (48,000) (47,000)
Change in operating assets and liabilities, net of
business acquisition:
Accounts receivable and unbilled service revenue (537,000) (1,874,000)
Prepaid expenses and other assets 133,000 18,000
Accounts payable and accrued expenses 2,667,000 (312,000)
Unearned service revenue 2,106,000 547,000
----------- -----------
Net cash provided(used) by operating activities 6,579,000 (381,000)
----------- -----------
INVESTING ACTIVITIES:
Capital expenditures (737,000) (446,000)
Business acquisition, net of cash acquired (46,000) 94,000
----------- -----------
Net cash used in investing activities (783,000) (352,000)
----------- -----------
FINANCING ACTIVITIES:
Repayments of long-term debt (237,000) (126,000)
Proceeds from issuance of long-term debt 0 750,000
Proceeds from issuance of common stock 105,000 64,000
Net repayments under credit line payable to bank (948,000) 0
----------- -----------
Net cash (used) provided by financing activities (1,080,000) 688,000
----------- -----------
NET INCREASE (DECREASE) IN CASH 4,716,000 (45,000)
CASH AT BEGINNING OF PERIOD 440,000 420,000
----------- -----------
CASH AT END OF PERIOD $ 5,156,000 $ 375,000
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
CASH PAID:
Interest $ 73,000 $ 19,000
Income taxes 865,000 762,000
See accompanying notes to consolidated financial statements.
- 4 -
NOTES TO CONDENSED 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 Reynolds, Smith and Hills, Inc. (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, 2002.
2) PER SHARE DATA
Earnings per share of common stock are based on weighted average number
of shares outstanding during each period.
3) NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill
and Other Intangible Assets," changes the accounting for goodwill and
indefinite lived intangible assets from an amortization method to an
impairment-only approach. Goodwill, including goodwill recorded in past
business combinations, is no longer amortized, but is tested for
impairment at least annually at the reporting unit level. The Company
implemented SFAS No. 142 on April 1, 2002. The Company completed step
one of the transitional impairment test in the second quarter of fiscal
year 2003, as required. In step one of the two-part transitional
impairment test, the Company compared the fair value of each reporting
unit with its respective carrying amount, including goodwill as of
April 1, 2002. In the third quarter of fiscal year 2003, the Company
completed step two of goodwill impairment test and as a result,
goodwill assigned to the institutional reporting unit ($367,000) was
determined to be impaired and was written off. The transitional
impairment adjustment has been presented as a change in accounting
principle in accordance with SFAS No. 3, "Reporting Accounting Changes
in Interim Financial Statements", and has been included as of the
beginning of the year (see Note 7).
- 5 -
The changes in the carrying amount of goodwill for the nine months
ended December 31, 2002, are as follows (in thousands):
March 31, 2002 Sylva December 31, 2002
Balance Impairment Acquisition Balance
------- ---------- ----------- -------
Transportation $1,318 $ - $ 42 $1,360
Aviation 150 - 2 152
Aerospace/Defense 90 - 2 92
Commercial 56 - - 56
Institutional 367 (367) - -
------ ------ ------ ------
Total $1,981 ($ 367) $ 46 $1,660
====== ====== ====== ======
Had the Company been accounting for goodwill under SFAS No. 142 for all
periods presented, the Company's net income and earnings per share
would have been as follows (in thousands except per share amounts):
Nine Months Ended Three Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Income before cumulative effect of
accounting change, as reported $ 1,301 $ 507 $ 567 $ 70
Goodwill amortization, net of tax - 73 - 24
------- ------- -------- -------
Income before cumulative effect of
accounting change, as adjusted $ 1,301 $ 580 $ 567 $ 94
Cumulative effect of accounting
change, net of tax (257) - - -
------- ------- -------- -------
Net income, as adjusted $ 1,044 $ 580 $ 567 $ 94
======= ======= ======== =======
Basic and diluted earnings per share:
Income before cumulative effect of
accounting change, as reported $ 2.69 $ 1.10 $ 1.17 $ .15
Goodwill amortization, net of tax - .16 - .05
------- ------- -------- -------
Income before cumulative effect of
accounting change, as adjusted 2.69 1.26 1.17 .20
Cumulative effect of accounting
change, net of tax (.53) - - -
------- ------- -------- -------
Net income, as adjusted $ 2.16 $ 1.26 $ 1.17 $ .20
======= ======= ======== =======
In April 2002, the Financial Accounting Standards Board issued SFAS No.
145 "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This statement eliminates
the required classification of gain or loss on extinguishment of debt
as an extraordinary item of income and states that such gain or loss be
evaluated for extraordinary classification under the criteria of
Accounting Principles Board No. 30 "Reporting Results of Operations."
- 6 -
This statement also requires sale-leaseback accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions, and makes various other technical
corrections to existing pronouncements. The Company adopted SFAS No.
145 for transactions occurring after May 15, 2002. The Statement did
not have a material impact on the Company's consolidated financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred rather than the date of an entity's commitment to
an exit plan. The Company is required to implement SFAS No. 146
effective January 1, 2003. The Company believes that this statement
will not have a material impact on the Company's consolidated financial
position or results of operations.
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 could 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 former professional liability insurance carrier, Reliance
Insurance Co. ("Reliance"), providing up to $5 million of coverage per
claim for claims made from June 1998 through June 2000 was 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 is one lawsuit
pending as to which Reliance was the Company's insurance carrier. As a
result of the Order, Reliance will no longer pay any adverse judgment
against the Company and will no longer pay the Company's defense costs
with respect to the pending lawsuit. The Florida Insurance Guaranty
Association ("FIGA"), however, has approved the Company's legal counsel
to continue the defense of the pending lawsuit for the Company and will
provide defense costs and substitute coverage 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
- 7 -
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.
See "Item 1. Legal Proceedings" of Part II of this Report for further
explanation.
5) ACQUISITION
In November 2001, pursuant to the terms of a Stock Purchase Agreement,
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 former 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 valued at $255,000 resulting in goodwill of approximately
$892,000. 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 contingent purchase price is payable in
cash within sixty days of the end of each applicable twelve month
period. The additional contingent purchase price based on the first
twelve month period was $47,000. The cash component of the transaction
was financed through a term loan facility obtained from Wachovia Bank.
The acquisition was accounted for as a purchase and has been included
in the Company's consolidated results of operations since the date of
acquisition. The purchase price has been allocated to the assets
acquired based on estimated fair values. The excess of the purchase
price over the fair market value of the tangible net assets acquired
was allocated to goodwill.
The following summary presents the Company's unaudited pro forma
consolidated results of operations for the nine months ended December
31, 2001, as if the acquisition had been completed at the beginning of
the period.
The pro forma information is presented for comparative purposes only
and does not purport to be indicative of what would have occurred had
the acquisition actually been made at such date, nor is it necessarily
indicative of future operating results.
- 8-
Nine Months Ended
December 31, 2001
-----------------
Gross Revenue $ 52,707,000
Subcontract and other direct costs 13,655,000
-------------
Net service revenue 39,052,000
Cost of Services 15,940,000
-------------
Gross profit 23,112,000
Selling, General and
Administrative Expenses 21,750,000
-------------
Operating income 1,362,000
Other Income (Expense):
Interest and other income 45,000
Interest expense (94,000)
-------------
Income before income taxes 1,313,000
Income Tax Expense 603,000
-------------
Net Income $ 710,000
=============
Basic Earnings Per Share $ 1.49
=============
Weighted Average Common
Shares Outstanding 476,000
=============
6) SEGMENT INFORMATION
The Company has identified five reportable segments, each of which is
managed separately. Operating results for the Company's segments are as
follows (in thousands):
Gross revenue
Nine Months Ended Three Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
Transportation $ 35,051 $ 24,315 $ 11,375 $ 8,271
Aviation 9,144 9,490 3,272 2,624
Aerospace/Defense 3,863 4,030 1,455 1,314
Commercial 3,759 4,275 924 1,406
Institutional 7,174 7,414 2,979 2,363
---------- ---------- --------- ----------
Consolidated $ 58,991 $ 49,524 $ 20,005 $ 15,978
========== ========== ========= ==========
9
Income before income taxes and cumulative effect of accounting change:
Nine Months Ended Three Months Ended
December 31 December 31
----------- -----------
2002 2001 2002 2001
----- ---- ---- ----
Transportation $ 3,298 $ 215 $ 1,152 $ (51)
Aviation 819 749 222 92
Aerospace/Defense 355 423 177 183
Commercial 88 426 37 126
Institutional (828) (169) (169) (40)
Goodwill amortization - (87) - (29)
Reconciling amounts (1,532) (561) (485) (113)
----------- ----------- ----------- -------
Consolidated $ 2,200 $ 996 $ 934 $ 168
=========== =========== =========== =======
Assets of the segment groups are not relevant for management of the
business nor for disclosure.
7) QUARTERLY INFORMATION (restated)
In accordance with SFAS No. 3, the results for the three months ended
June 30, 2002 and six months ended September 30, 2002 have been
restated to reflect the cumulative effect of the transitional
impairment adjustment resulting from the adoption of SFAS No. 142 (in
thousands except per share amounts):
Three Months Ended Six Months Ended
June 30 September 30
2002 2002
---- ----
Income before cumulative effect of
accounting change, as reported $ 370 $ 734
Cumulative effect of accounting
change, net of tax (257) (257)
----------------------- -----------------------
Net income, as restated $ 113 $ 477
======================= =======================
Basic and diluted earnings per share:
Income before cumulative effect of
accounting change, as reported $ .77 $ 1.52
Cumulative effect of accounting
change (.53) (.53)
----------------------- -----------------------
Net income, as restated $ .24 $ .99
======================= =======================
- 10 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Gross revenue for the first nine months of fiscal year 2003 was $59.0 million as
compared to $49.5 million for the first nine months of fiscal 2002. This $9.5
million increase (19%) was due to increased revenues in the transportation
program, offset by smaller decreases in the Company's other programs. Revenues
in the transportation program increased $10.7 million as a result of strong
sales and beginning major new projects with state, county and municipal clients.
All geographic and technical areas contributed to this growth. The acquisition
of Sylva Engineering Corporation in November 2001 accounted for $1.5 million of
this increase. Gross revenues in the commercial and aviation programs declined
$0.5 million and $0.3 million, respectively, for the first nine months of fiscal
2003 as compared to the same period in fiscal 2002. Commercial revenues declined
primarily as a result of the weakened economy. Gross revenues for the aviation
program declined as a result of the industry wide work slow down after the
terrorist events of September 11 and the cut backs by airlines and airports.
Gross revenue for the third quarter of fiscal 2003 was $20.0 million as compared
to $16.0 million for the third quarter of fiscal 2002. This $4.0 million
increase (25%) is a reflection of increased revenues in the transportation
program, along with smaller increases in the aviation and institutional
programs. Revenues in the transportation program increased $3.1 million for the
same reasons as mentioned above. Gross revenues in the aviation program
increased in comparison to the third quarter of fiscal 2002, which was the
quarter immediately following the September 11 terrorist events. Airlines and
airports were quick to reduce spending immediately after the attacks, but have
gradually increased spending since then. Institutional revenues have increased
slightly due primarily to increased sales.
Gross revenues in the commercial program declined $0.5 million in the third
quarter of fiscal 2003 as compared to the same period in the prior year. This
decline is due primarily to the down turn in the economy.
Subcontract and other direct costs were $15.8 million and $13.1 million for the
first nine months of fiscal 2003 and 2002, respectively. This represents a 21%
increase which is in relationship to the increase in gross revenue. As a percent
of net service revenue, subcontract and other direct costs remained fairly
consistent at 37% and 36%, respectively, for the two periods. Subcontract and
other direct costs were $5.4 million and $4.0 million for the third quarter of
fiscal 2003 and 2002, respectively. As a percent of net service revenue,
subcontract and other direct costs were 37% and 33%, respectively, for the two
periods. This increase is primarily attributable to increased usage of
sub-consultants in the institutional program.
Net service revenue more accurately reflects revenue for services performed by
the Company. Net service revenue was $43.2 million for the first nine months of
fiscal 2003 as compared to $36.4 million for the first nine months of fiscal
- 11 -
2002. This 19% increase corresponds to the increase in gross revenues. Net
service revenue was $14.6 million for the third quarter of fiscal 2003 as
compared to $12.0 million for the same period in fiscal 2002. This increase also
corresponds to the increase in gross revenues.
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,
decreased to 37% from 39% for the first nine months of fiscal 2003 and 2002,
respectively. Gross profit, as a result, increased to 63% from 61% for the same
periods of fiscal 2003 and 2002. Cost of services, as a percentage of net
service revenue, was 37% and 39% for the third quarter of fiscal 2003 and 2002,
respectively. This improvement is primarily a result of improved production
efficiencies.
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 $24.9 million in the
first nine months of fiscal 2003 from $21.4 million in the first nine months of
fiscal 2002. This 16% increase was due primarily to increases in personnel and
associated costs. The average number of employees company wide increased to 590
for the first nine months of fiscal 2003 from 550 for the first nine months of
fiscal 2002 as a result of the Sylva acquisition and the hiring of new personnel
to meet the increased workload. Also, as a result of the Company's increased
earnings for the first nine months of fiscal 2003, incentive compensation
increased significantly from the first nine months of fiscal 2002. Forty percent
of pretax profit is allocated to fund the Company's annual incentive plan. Other
increases in SG&A expenses were experienced in office rent, equipment expense,
and insurance costs.
SG&A expenses increased to $8.3 million for the third quarter of fiscal 2003
from $7.1 million for the third quarter of fiscal 2002. This 16% increase
relates to increases in personnel and associated costs, incentive compensation
expense, office rent, and insurance costs.
Income before income taxes and cumulative effect of accounting change (EBIT) was
$2.2 million and $1.0 million for the nine months ended December 31, 2002 and
2001, respectively. The Company's transportation program accounted for the
highest percentage of the Company's EBIT, $3.3 million, up from $0.2 million for
the same period in 2001. Strong sales, revenues from major new projects and
increased utilization contributed to this increase. The Company believes the
outlook for the balance of the current fiscal year is strong based on sales and
current backlog. The aviation program, in response to the decline in revenues,
has reduced expenses to remain relatively flat at $0.8 million and $0.7 million
for both periods, respectively. The Company anticipates the aviation industry
will continue a slow recovery, but will be depressed slightly due to airline and
airport cost cutting. The aerospace and defense program offset the decline in
gross revenue by a reduction in other direct costs to maintain flat net service
revenues and EBIT. EBIT was $0.4 million for both periods. Successful sales
efforts in the current year has increased the backlog which the Company believes
should maintain the current position. EBIT declined in the commercial program to
$0.1 million in the current year from $0.4 million for the same period of 2001
as market conditions declined. The Company believes corporate and investment
clients deferred spending for design while waiting for the market to stabilize.
- 12 -
Investment clients experienced an increase of surplus space in existing
facilities as tenants downsized or exited the market. Gross revenues in the
institutional program declined, which coupled with inefficient production
resulted in a loss of $0.8 million compared with a $0.2 million loss from last
year. The Company believes demand for institutional design services are strong
and look favorable throughout the year. Steps have been put in place to
strengthen this program by adding staff capability and streamlining management
procedures.
The cumulative effect of accounting change in the nine months of fiscal 2003 was
a $0.4 million write-off of goodwill, net of the income tax effect of $.01
million. The Company completed its transitional impairment testing of goodwill
during the three months ended December 31, 2002. Goodwill allocated to the
institutional program was deemed fully impaired and was written-off. As required
by accounting principles generally accepted in the United States of America, the
transitional impairment has been recorded as of the beginning of the year.
Previously recorded interim financial results for fiscal year 2003 have been
restated. See Note 7 to the Consolidated Financial Statements in Part 1 of this
Form 10-Q.
Net income was $1.0 million for the nine months of fiscal 2003 as compared to
$0.5 million for the first nine months of fiscal 2002. Net income was $0.6
million for the third quarter of fiscal 2003 as compared to $0.1 million for the
same period of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flow generated from operations provided a significant source of liquidity.
For the first nine months of fiscal 2003, cash provided by operations increased
to $6.6 million from requiring $0.4 million for the same period in fiscal 2002.
Cash was provided by operating income before depreciation and amortization.
Growth in the outstanding balances of accounts receivable and unbilled service
revenue required less use of cash in the nine months of fiscal 2003 as compared
to the same period of fiscal 2002. Accounts receivable and unbilled service
revenue balances increased as a result of increased revenue, but the increase
was mitigated by a reduction in the days outstanding to 78 from 89 as of
December 31, 2002 and 2001, respectively. Accounts payable, accrued expenses and
unearned service revenue generated the largest source of cash as a result of
significant increases in the outstanding balances. The balances increased in
relationship to increased revenue, and the days outstanding increased to 68 from
62 days, as of December 31, 2002 and 2001. The Company believes that the
significant increase in cash provided from operations is temporary and will
return to historical levels in the next quarter.
Cash used in investing activities, comprised of capital expenditures, was $0.8
million and $0.4 million for the nine month periods ending December 31, 2002 and
2001, respectively. Expenditures during each of these periods were primarily for
the purchase of computer hardware and software.
- 13 -
Cash used in financing activities in the first nine months of fiscal 2003 was
$1.1 million as compared with cash provided by financing activities of $0.7
million for the first nine months of fiscal 2002. The increase in cash used was
primarily due to repaying the credit line and the monthly amortization of
long-term debt.
As of December 31, 2002 the Company had $5.2 million in cash. We believe that
our current cash position, internally generated funds, and funds available from
the $3 million line of credit with Wachovia Bank should be sufficient to enable
the Company to fund its operations and continue funding capital expenditures.
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; such statements include, among other items, (i) the adequacy of
the Company's sources of cash to finance its current and future operations, (ii)
the outlook and demand for services for the various departments of the Company,
and (iii) the defenses available to the Company in connection with the lawsuit
described in Part II of this report. 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 and the Company disclaims
any obligation to update or review any forward-looking statements.
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; (e) cost
overruns on fixed or maximum priced contracts; and (f) 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. There have been no
changes to our market risks as disclosed in our Annual Report on Form 10-K for
the year ended March 31, 2002.
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Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within 90 days prior to the filing date of this report, and with the
participation of management, the Company's Chief Executive Officer and Chief
Financial Officer carried out an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures (as defined in
Securities Exchange Act Rule 15d-14). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures are effective in providing them with timely
material information that is required to be disclosed in reports the Company
files under Section 15(d) of the Securities Exchange Act.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation.
PART II: OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As described in Note 4 to Consolidated Financial Statements, there is one
lawsuit pending which Reliance was the Company's insurance carrier, which is
described below.
Hewett-Kier Construction, Inc. v. The School District of Palm Beach County,
Florida; Lemuel Ramos and Associates, Inc.; Burton Braswell Middlebrooks
Associates, Inc.; and Tilden Lobnitz Cooper, Inc., Case No. CL 99-10259 AN,
Circuit Court for Palm Beach County, Florida.
The Company's wholly-owned subsidiary, Lemuel Ramos and Associates, Inc.
("LRA"), entered into a contract with the School Board of Palm Beach County to
design and perform contract administration for a new school facility, Lincoln
Elementary School. The Plaintiff was the general contractor for the project,
Burton Braswell Middlebrooks, Inc. was the structural engineer and Tilden
Lobnitz Cooper, Inc. was the mechanical/electrical/plumbing engineer. The
Plaintiff alleges that LRA failed to provide drawings and specifications free
from defects and deficiencies and failed to provide adequate construction
administration. Plaintiff seeks the recovery of costs to correct work, costs to
perform allegedly additional work and delay damages. LRA has filed a
counterclaim against the Plaintiff seeking recovery of re-inspection costs and
extended time on the project due to Plaintiff's failure to timely complete the
work. The Company believes it has meritorious defenses to all claims against it
and the Company intends to defend the case vigorously. The case is in mediation
and no trial date has been set.
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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.
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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: February 14, 2003
/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)
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Certification
I, Leerie T. Jenkins, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reynolds, Smith
and Hills, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Leerie T. Jenkins, Jr.
- --------------------------
Leerie T. Jenkins, Jr.
Chief Executive Officer
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Certification
I, Kenneth R. Jacobson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Reynolds, Smith
and Hills, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: February 14, 2003
/s/ Kenneth R. Jacobson
- ------------------------
Kenneth R. Jacobson
Chief Financial Officer
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