UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended March 31, 1998
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
Jacksonville, Florida 32256
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (904) 296-2000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Common Stock, $.01 par value None
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 estimated aggregate market value of Common Stock held by non-affiliates
as of June 20, 1998 computed with reference to the last sales price, was
$4,331,000.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The number of shares of Common Stock outstanding as of June 20, 1998 was
459,998 shares.
Documents incorporated by reference:
DOCUMENT WHERE INCORPORATED
-------- ------------------
Proxy Statement Dated June 20, 1998 Part III
TABLE OF CONTENTS
FORM 10-K
Item
Number CAPTION PAGE
------ ------- ----
PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 5
Item 3. LEGAL PROCEEDINGS 5
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 5
EXECUTIVE OFFICERS OF THE REGISTRANT 5
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 6
Item 6. SELECTED FINANCIAL DATA 6
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 11
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 11
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 12
Item 11. EXECUTIVE COMPENSATION 12
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 12
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 12
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 12
2
PART I
Item 1. BUSINESS
Reynolds, Smith and Hills, Inc. (the Company) is a professional service
firm operating in the engineering, architectural design and environmental
services industry. The Company is incorporated in the state of Florida. As used
herein, the Company refers to Reynolds, Smith and Hills, Inc. and its
subsidiaries.
The Company provides a full range of architectural, engineering, planning
and environmental services to public and private sector clients primarily in the
Southeastern United States. Specific industry markets are also served nationally
and internationally. These services are provided through the following
market-focused programs of the Company:
* Transportation - Services are provided to governmental
agencies and private entities and include planning, design,
environmental, and construction engineering and inspection
services for various modes of transportation (including
highways and bridges, mass transit, rail and port).
* Aviation - Services are provided to governmental agencies and
private entities (including air carriers and manufacturers)
and include planning, design, and environmental services for
airfields, terminals, and support buildings.
* Aerospace and Defense - Services are provided to NASA,
Department of Defense, Spaceport Florida Authority and major
aerospace contractors. The Company develops launch and
processing facilities for the Shuttle and expendable vehicles
including the latest multi-use launch pads.
* Public Infrastructure - Services are provided to local
government and quasi-governmental agencies. Services include
planning, evaluation, architectural and engineering design,
permitting, and construction administration for road, water,
wastewater, storm water and solid waste systems. These
services are also included for public facilities such as parks
and public buildings.
* Commercial - Services are provided to commercial and
industrial entities engaged in planning, designing and
construction of a wide variety of structures and land
development (including office buildings and office parks,
warehouses, hotels and resorts, research/development and
manufacturing facilities, sports and recreational facilities,
and computer centers).
* Institutional - Services are provided to public agencies
engaged in governmental, educational, recreational, medical
and scientific facilities, and land development. Services
include planning and designing of a wide variety of structures
(including
3
schools and campus master planning, courthouses and other
governmental buildings, research and technical facilities,
community parks and recreational facilities, and media
centers).
Competition. The engineering and architectural services industry is highly
competitive. The Company's competitors include large national firms as well as
many small local firms. The Company competes with these firms on the basis of
technical capabilities, qualifications of personnel, reputation, quality and
price. Additionally, a local presence is important in certain areas. No one firm
currently dominates a significant portion of the industry.
Major Customers. For the years ended March 31, 1998, 1997 and 1996,
approximately 80%, 80% and 75%, respectively, of the Company's business was with
departments or agencies of federal, state and local governments. Contracts with
the Florida Department of Transportation provided 35%, 35% and 40% of total
revenues for fiscal years 1998, 1997 and 1996, respectively. The loss of a
significant client such as Florida Department of Transportation would have a
material adverse effect on the Company. No other customer accounted for 10% or
more of total revenues.
Backlog. Gross revenue backlog is the estimated revenue from contracts
entered into with clients, less that portion which has been recognized as
revenue. Backlog is subject to revision due to cancellations, modifications or
changes in the scope of projects. There can be no assurance that signed
contracts will ultimately be authorized or will not be cancelled by clients in
accordance with their terms. Net revenue backlog is estimated revenue excluding
subconsultant and other direct costs and more accurately reflects the amounts to
be earned for activities performed by the Company.
The Company's gross backlog at March 31, 1998 was $29.5 million compared to
$32.6 million at March 31, 1997. Net backlog was $21.8 million at March 31, 1998
as compared to $23.1 million at March 31, 1997. Approximately $22 million of
services included in the Company's gross backlog as of March 31, 1998 will be
performed in fiscal year 1999. The Company expects additional revenue in 1999
from sales generated in 1999 which are not included in the March 31, 1998
backlog.
Governmental Contracts. Some service contracts with departments or agencies
of federal, state, and local governments are subject to renegotiation of profits
or termination at the election of the government. The Company is not aware of
any adjustments which would have a material impact on the Company.
Compliance with Environmental Laws. Compliance with federal, state and
local regulations which have been enacted or adopted relating to the protection
of the environment is not expected to have any material effect upon the capital
expenditures, earnings and competitive position of the Company. However, such
compliance by the Company's clients may require the need for the
environmental-related services which the Company provides.
Employees. At March 31, 1998 the Company employed approximately 349
persons.
4
Item 2. PROPERTIES
The Company's leases its principal office space in Jacksonville, Florida
and seven branches occupy leased office space in the following Florida
locations: Fort Myers, Merritt Island, Miami, Orlando, Plantation, Tallahassee,
and Tampa. The Company also maintains a leased office in Flint, Michigan. In
addition, the Company leases space for construction sites at approximately seven
locations in Florida. These leases expire at various dates through 2004. The
current facilities are sufficient for the operation of the business.
Item 3. LEGAL PROCEEDINGS
The Company is subject to lawsuits that arise in the normal course of
business involving claims typical of those filed against engineering and
architectural professions, alleging primarily 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. There are no legal proceedings
pending or, to the knowledge of the Company, threatened against the Company
which in management's opinion would have a material adverse effect on the
Company's financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended March 31, 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons serve as the executive officers of the Company:
Name Age Position Held
---- --- -------------
Leerie T. Jenkins, Jr. 49 Chairman of the Board
and Chief Executive Officer
David K. Robertson 46 Executive Vice President, Secretary,
Treasurer, Chief Financial Officer,
and Director
Charles W. Gregg 48 Executive Vice President, Chief
Operating Officer, and Director
Darold F. Cole 56 Senior Vice President and Director
J. Ronald Ratliff 49 Senior Vice President and Director
5
Mr. Jenkins' principal positions are Chairman of the Board and Chief
Executive Officer of the Company, which he has held since June 1990. Mr. Jenkins
has been employed with the Company and predecessor companies for over 26 years.
He holds a Masters and Bachelors degree in landscape architecture from the
University of Michigan and University of Georgia, respectively.
Mr. Robertson's principal positions are Executive Vice President, which he
has held since January 1995, Secretary, Treasurer, Chief Financial Officer and
Director of the Company, which he has held since June 1990. Prior to January
1995 Mr. Robertson was Senior Vice President of the Company. Mr. Robertson has
been employed with the Company and predecessor companies for over 16 years. He
graduated from Florida State University with a degree in Business.
Mr. Gregg's principal positions are Executive Vice President and Chief
Operating Officer of the Company, which he has held since September 1995. He was
appointed Director of the Company in February 1998. Prior to September 1995 and
since 1992 Mr. Gregg was Senior Vice President of the Company. He graduated from
the University of Florida with a degree in civil engineering and holds a Masters
degree from Rollins College, Crummer School of Business.
Mr. Cole's principal positions are Senior Vice President and Director of
the Company, which he has held since June 1990. Mr. Cole has been employed with
the Company and predecessor companies for over 29 years. He holds a degree in
electrical engineering from Kansas State University.
Mr. Ratliff's principal positions are Senior Vice President and Director of
the Company, which he has held since June 1990. Mr. Ratliff has been employed
with the Company and predecessor companies for over 20 years. He holds a Masters
and Bachelors degree from the University of South Florida.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's securities are not presently traded on any public stock
exchange or other public market. The Company had approximately 199 shareholders
of record at March 31, 1998, including persons owning stock through the
Company's 401(k) plan. The Company pays no dividends on its common stock.
Item 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the financial statements of the Company, including the notes thereto.
6
SELECTED FINANCIAL DATA
(in thousands, except per share data)
----------------------------------------------------
YEAR ENDED MARCH 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Gross Revenue $ 37,122 $ 39,065 $ 34,070 $ 30,524 $ 27,974
Net service revenue 26,734 27,397 25,595 23,620 22,005
Net income 567 593 92 350 271
Common stock per share data:
Basic earnings per share 1.25 1.30 .20 .78 .61
Weighted average shares of
common stock outstanding 455,000 455,000 451,000 446,000 442,000
BALANCE SHEET DATA:
Working capital 3,926 2,781 1,935 2,314 2,536
Total assets 13,310 12,680 12,521 11,858 11,203
Long-term debt (less current portion) 0 7 76 524 1,035
Common stockholders' equity 5,908 5,337 4,741 4,576 4,193
7
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the percentage of net service revenue
represented by the items in the Company's consolidated statements of income:
Year Ended March 31,
--------------------
1998 1997 1996
------ ------ ------
Gross revenue 138.9% 142.6% 133.1%
Subcontract and other
direct costs 38.9 42.6 33.1
------ ------ ------
Net service revenue 100.0 100.0 100.0
Cost of services 39.2 39.5 40.4
------ ------ ------
Gross profit 60.8 60.5 59.6
Selling, general, and
administrative expenses 57.4 56.9 58.0
------ ------ ------
Operating income 3.4 3.6 1.6
Other income (expense) .4 .2 (.6)
------ ------ ------
Income before income taxes 3.8 3.8 1.0
Income tax expense 1.7 1.6 .6
------ ------ ------
Net income 2.1% 2.2% .4%
====== ====== ======
Gross Revenue:
Revenue for fiscal 1998 was $37.1 million as compared to $39.1 million for
fiscal 1997. This 5% decrease was due primarily to decreased sales in the
institutional and aviation programs. In addition, the design phases for a few
large projects in the institutional and aviation programs were
8
completed and have entered the construction administration phase. This phase is
less labor intensive resulting in comparatively lower revenues. Gross backlog
decreased 10% in fiscal 1998 from fiscal 1997 and net backlog decreased 6% in
fiscal 1998 from fiscal 1997.
Revenues for fiscal 1997 increased 15% from $34.1 million in fiscal 1996.
This increase was due to transportation, aviation, aerospace and defense,
commercial and institutional projects. Revenues in these program areas increased
as a result of sales efforts throughout the current and prior years.
For the fiscal years ended March 31, 1998, 1997 and 1996 approximately 80%,
80% and 75%, respectively, of the Company's revenues were generated from public
sector clients. For the same periods 35%, 35% and 40% of the Company's revenues
resulted from services provided to the Florida Department of Transportation.
Subcontract and Other Direct Costs:
Subcontract and other direct costs for fiscal 1998 decreased 11% from
fiscal 1997. This decrease occurred primarily in the institutional and aviation
programs as a result of the change in projects from design to construction
administration stage as discussed above. In fiscal 1997 there was a 38% increase
from fiscal 1996 in the use of subconsultants; primarily in the transportation,
aviation, commercial and institutional programs.
Net Service Revenue:
Net service revenue was $26.7 million for fiscal 1998 as compared to $27.4
million for fiscal 1997. This 2% decrease was a result of decreases in gross
revenues as discussed above. Net service revenue for fiscal 1997 increased 7%
from $25.6 million in fiscal 1996. This increase was due to the increases in
gross revenues as discussed above.
Cost of Services:
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, has experienced slight improvement at 39.2%, 39.5% and 40.4%,
respectively for fiscal years ended March 31, 1998, 1997 and 1996. This
percentage reflects improving project efficiency. Gross profit, as a result, has
also improved at 60.8%, 60.5% and 59.6% for fiscal years 1998, 1997 and 1996,
respectively.
Selling, General and Administrative Expenses:
Selling, general and administrative (SG&A) expenses consist of labor costs
of operational personnel not utilized on projects (i.e. indirect labor), labor
costs of administrative and support personnel, office rent, depreciation,
insurance, and other operating expenses.
9
SG&A expenses decreased to $15.3 million in fiscal 1998 from $15.6 million
in fiscal 1997. This 2% decrease was due primarily to a decrease in indirect
labor (labor not charged to projects) and related benefits, and a decrease in
temporary staffing. Selling, general and administrative expenses increased 5% in
fiscal 1997 from $14.8 million in 1996. This increase was due primarily to
increased incentive compensation and the acquisition of computer and
communications technology.
Other Income (Expense):
Interest expense was $4,000, $31,000 and $155,000 for fiscal 1998, 1997 and
1996, respectively. These decreases were a result of lower outstanding balances
on the Company's credit line and capital leases and the pay-off of the term loan
on April 1, 1997.
Net Income:
Net income was $567,000 in 1998, $593,000 in 1997 and $92,000 in 1996. The
decrease in 1998 from 1997 was due primarily to the decrease in net service
revenue (gross revenue less subcontract costs) as discussed above. The increase
in 1997 over 1996 was due primarily to increased net service revenue and the
downsizing in fiscal 1996 of the Greensboro, North Carolina office as described
below.
In fiscal 1996 the Greensboro, North Carolina office was significantly
downsized as a result of continuing net losses. That office's restructure was
completed in 1997. As a result of the Greensboro office restructure, the Company
made a provision of $286,000 in fiscal 1996 to cover related costs. The
Greensboro, NC office's net losses from operations was $812,000 for the fiscal
year ended March 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital measurements are set forth below:
March 31
---------------
1998 1997 1996
------ ------ ------
Working capital (in thousands) $3,926 $2,781 $1,935
Current ratio 1.59:1 1.42:1 1.28:1
Ratio of liabilities to equity 1.25:1 1.38:1 1.64:1
Cash flows from operations were positive for each of the fiscal years ended
March 31, 1998, 1997 and 1996. The Company has made a significant investment of
working capital in information
10
technology over the last three years. Payments on notes payable and long-term
debt totalled $69,000 in fiscal 1998.
The Company has in place a line of credit with a bank which provides for
additional borrowing up to $2,000,000 at March 31, 1998, with interest at the
lower of the bank's prime rate plus .1% or LIBOR plus 2.8%. There were no
borrowings outstanding under the line of credit at March 31, 1998. In addition,
the Company has also secured a committed credit facility of $2,000,000 which may
be used for the acquisition or merger of other architectural/engineering
companies. The interest rate on this facility is LIBOR plus 2.55%. These
borrowing agreements contain covenants related to working capital and debt to
net worth. The Company is in compliance with all provisions of these lines of
credit.
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 1999.
YEAR 2000
The Company is in process of preparing its computer systems and
applications for the Year 2000. This process involves communicating with
external service providers to ensure that they are taking the appropriate action
to remedy their Year 2000 issues, as well as modifying or replacing certain
hardware and software maintained by the Company. Most of the Company's systems
were purchased from vendors who have represented that these systems are already
Year 2000 compliant. Management expects to have substantially all of the system
and application changes completed in early 1999.
The Company expects that the principal costs will be those associated with
testing of its computer applications. The total cost to the Company of these
Year 2000 activities has not been and is not anticipated to be material to its
financial position or results of operations in any given year. These costs and
completion dates are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including third party
modification plans. There can be no assurances that these estimates will be
achieved.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated Financial Statements of the registrant are set forth
beginning on page 15 of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
11
PART III
Item 10 through 13.
The information required by Items 10 through 13 is included in the
Company's definitive proxy statement dated June 20, 1998 and is incorporated
herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
PAGE
----
(a)(1) Financial Statements
Independent Auditors' Report 15
Consolidated Statements of Income, years ended
March 31, 1998, 1997 and 1996 16
Consolidated Balance Sheets as of March 31,
1998 and 1997 17
Consolidated Statements of Common Shareholders'
Equity, years ended March 31, 1998, 1997
and 1996 18
Consolidated Statements of Cash Flows, years
ended March 31, 1998, 1997 and 1996 19
Notes to Consolidated Financial Statements 20
(a)(2) Financial Statement Schedule
Independent Auditors' Report 28
Schedule II - Valuation and Qualifying Accounts 29
12
(a)(3) Exhibits
3.1* Articles of Incorporation of the Company, as amended
3.2* By-Laws of the Company
10.1** Reynolds, Smith and Hills, Inc. Amended and Restated 1991 Employee
Stock Bonus Plan 10.2** Reynolds, Smith and Hills, Inc. Amended and
Restated 1991 Nonqualified Stock Option Plan 10.3** Reynolds, Smith
and Hills, Inc. Amended and Restated 1991 Incentive Stock Option Plan
21 List of Subsidiaries 30
23 Consent of Deloitte & Touche LLP 31
27 Financial Data Schedule - This schedule reports certain financial data
in electronic format for Electronic Data Gathering and Retrieval
(EDGAR) purposes only. This exhibit is not included in this conforming
paper filing.
* Filed in connection with and incorporated by reference to Registration
Statement on Form 10 (filed January 15, 1991).
** Filed in connection with and incorporated by reference to the
Company's September 30, 1997 Quarterly Report on Form 10-Q (filed
November 12, 1997).
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended March 31, 1998.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Reynolds, Smith and Hills, Inc.
Dated: June 20, 1998 By /s/David K. Robertson
------------- ---------------------
David K. Robertson
Executive Vice President,
Secretary, Treasurer, Chief
Financial Officer and Director
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 and in the
capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Leerie T. Jenkins, Jr. Chairman of the Board June 20, 1998
- -----------------------------
Leerie T. Jenkins, Jr. and Chief Executive Officer
(Principal Executive Officer)
/s/ David K. Robertson Executive Vice President, June 20, 1998
- ---------------------------
David K. Robertson Treasurer, Chief Financial
Officer, Secretary, and
Director (Principal Financial
and Accounting Officer)
/s/ Charles W. Gregg Executive Vice President June 20, 1998
- ----------------------------
Charles W. Gregg Chief Operating Officer, and
Director
/s/ Darold F. Cole Director June 20, 1998
- -------------------------------
Darold F. Cole
/s/ J. Ronald Ratliff
Director June 20, 1998
- -------------------------------
J. Ronald Ratliff
Director
- -------------------------------
David E. Thomas, Jr.
Director
- -------------------------------
Alexander P. Zechella
14
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Reynolds, Smith and Hills, Inc.
Jacksonville, Florida
We have audited the accompanying consolidated balance sheets of Reynolds, Smith
and Hills, Inc. and its subsidiaries as of March 31, 1998 and 1997 and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended March 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in compliance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principals used and significant
estimates made by management, as well as evaluating the overall financial
statement position. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Reynolds, Smith and Hills, Inc. and
its subsidiaries as of March 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principals.
/s/ Deloitte and Touche LLP
Jacksonville, Florida
June 5, 1998
REYNOLDS, SMITH AND HILLS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31
- --------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
GROSS REVENUE $37,122,000 $39,065,000 $34,070,000
SUBCONTRACT AND OTHER DIRECT COSTS 10,388,000 11,668,000 8,475,000
---------- ---------- ---------
Net service revenue 26,734,000 27,397,000 25,595,000
COST OF SERVICES 10,482,000 10,817,000 10,357,000
---------- ---------- ----------
Gross profit 16,252,000 16,580,000 15,238,000
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 15,337,000 15,581,000 14,839,000
---------- ---------- ----------
Operating income 915,000 999,000 399,000
OTHER INCOME (EXPENSE):
Interest and other income (expense) 109,000 90,000 (4,000)
Interest expense (4,000) (31,000) (155,000)
---------- ---------- ----------
Income before income taxes 1,020,000 1,058,000 240,000
INCOME TAX EXPENSE 453,000 465,000 148,000
---------- ---------- ----------
NET INCOME $ 567,000 $ 593,000 $ 92,000
========== ========== ==========
BASIC EARNINGS PER SHARE $ 1.25 $ 1.30 $ 0.20
========== ========== ==========
AVERAGE COMMON SHARES OUTSTANDING 455,000 455,000 451,000
========== ========== ==========
See accompanying notes to consolidated financial statements.
16
REYNOLDS, SMITH AND HILLS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31
- --------------------------------------------------------------------------------
ASSTS 1998 1997
- ----- ---- ----
CURRENT ASSETS:
Cash $2,364,000 $ 1,459,000
Accounts receivable, net of allowance for
doubtful accounts of $162,000 and $127,000 4,113,000 3,682,000
Unbilled service revenue 3,680,000 3,955,000
Prepaid expenses and other current assets 225,000 210,000
Deferred income taxes 219,000 166,000
---------- -----------
Total current assets 10,601,000 9,472,000
PROPERTY AND EQUIPMENT, net 1,798,000 2,202,000
OTHER ASSETS 47,000 62,000
IDENTIFIABLE INTANGIBLE ASSETS, net of accumulated
amortization of $909,000 and $852,000 128,000 186,000
COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESS,
net of accumulated amortization of $177,000 and $154,000 736,000 758,000
---------- -----------
$13,310,000 $12,680,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
DURRENT LIABILITIES:
Notes payable and current portion of
long-term debt $ 7,000 $ 69,000
Accounts payable 1,933,000 2,080,000
Accrued expenses 2,681,000 2,604,000
Unearned service revenue 2,054,000 1,938,000
---------- -----------
Total current liabilities 6,675,000 6,691,000
LONG-TERM DEBT 0 7,000
DEFERRED INCOME TAXES 206,000 281,000
OTHER LIABILITIES 521,000 364,000
---------- -----------
Total liabilities 7,402,000 7,343,000
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 7)
SHAREHOLDERS' EQUITY:
Common Stock, $.01 par value, 4,000,000 shares
authorized, 455,000 issued and outstanding 5,000 5,000
Paid-in capital 3,541,000 3,537,000
Retained earnings 2,362,000 1,795,000
---------- -----------
Total shareholders' equity 5,908,000 5,337,000
---------- -----------
$13,310,000 $12,680,000
=========== ===========
See accompanying notes to consolidated financial statements.
17
REYNOLDS, SMITH AND HILLS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Common Stock
------------
paid-in Retained
Shares Amount Capital Earnings Total
- ------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1995 448,000 $ 5,000 $3,461,000 $1,110,000 $4,576,000
Issuance of common stock,
net of issuance costs 7,000 -- 73,000 -- 73,000
Net income 92,000 92,000
-----------------------------------------------------------
BALANCE, MARCH 31, 1996 455,000 5,000 3,534,000 1,202,000 4,741,000
Issuance of common stock,
net of issuance costs -- -- 3,000 -- 3,000
Net income 593,000 593,000
-----------------------------------------------------------
BALANCE, MARCH 31, 1997 455,000 5,000 3,537,000 1,795,000 5,337,000
Issuance of common stock,
net of issuance costs -- -- 4,000 -- 4,000
Net income 567,000 567,000
-----------------------------------------------------------
BALANCE, MARCH 31, 1998 455,000 $ 5,000 $3,541,000 $2,362,000 $5,908,000
===========================================================
See accompanying notes to consolidated financial statements.
18
REYNOLDS, SMITH AND HILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED MARCH 31
- --------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 567,000 $ 593,000 $ 92,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 760,000 747,000 714,000
Deferred income taxes (128,000) (131,000) 101,000
(Gain) loss on disposal of fixed assets (2,000) 11,000 28,000
Deferred rent charges 155,000 (97,000) (82,000)
Change in operating assets and liabilities:
Accounts receivable and unbilled service revenue (156,000) 853,000 (801,000)
Other assets and prepaid expenses (9,000) 6,000 (30,000)
Accounts payable and accrued expenses (67,000) 605,000 869,000
Unearned service revenue 116,000 (115,000) 9,000
----------- ----------- -----------
Net cash provided by operating activities 1,236,000 2,472,000 900,000
----------- ----------- -----------
INVESTING ACTIVITES:
Capital expenditures (269,000) (422,000) (905,000)
Proceeds from sale of fixed assets 4,000 8,000 16,000
----------- ----------- -----------
Net cash used by investing activities (265,000) (414,000) (889,000)
----------- ----------- -----------
FINANCING ACTIVITIES:
Repayments of long-term debt (69,000) (448,000) (510,000)
Net increase (decrease) in credit line payable to bank 0 (415,000) 136,000
Net proceeds from issuance of common stock 3,000 1,000 49,000
----------- ----------- -----------
Net cash used by financing activities (66,000) (862,000) (325,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 905,000 1,196,000 (314,000)
CASH AT BEGINNING OF PERIOD 1,459,000 263,000 577,000
----------- ----------- -----------
CASH AT END OF PERIOD $ 2,364,000 $ 1,459,000 $ 263,000
=========== =========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 4,000 $ 36,000 $ 155,000
Income taxes paid $ 471,000 $ 444,000 $ 360,000
See accompanying notes to consolidated financial statements.
19
REYNOLDS, SMITH AND HILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - Reynolds, Smith and Hills, Inc. (the Company)
is a professional service firm operating in the engineering and
architectural design services industry. The Company provides a full
range of architectural, engineering, planning and environmental
services.
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Income Recognition - Revenue from contract services is recognized on
the percentage-of- completion method. Revenue is recorded as costs are
incurred, and profit is recognized on each contract based on the
percentage that incurred costs bear to estimated total costs. In the
event of an anticipated loss, the entire amount of the loss is charged
to current operations.
The Company incurs subcontract and other direct costs (out-of-pocket
expenses) some of which are passed through directly to its clients. The
Company believes that revenue excluding subcontract and other direct
costs, more accurately reflects the amounts earned for activities
performed by the Company. Accordingly, the Company reports such costs
as a reduction of gross revenue to arrive at net service revenue.
Unbilled service revenue represents revenues recognized in excess of
amounts billed. Unearned service revenue represents billings in excess
of revenues recognized. Unbilled service revenues which will not be
collected during the next year are not significant.
Property and Equipment - Property and equipment is stated at cost.
Depreciation is computed principally on the straight-line method over
the estimated useful lives of the assets. Depreciation of assets
recorded under capitalized leases is computed on the straight-line
method over the lesser of the estimated useful life of the asset or
the term of the lease. Property and equipment is periodically reviewed
by management for impairment whenever changes in circumstances
indicate that the carrying value may not be recoverable.
20
REYNOLDS, SMITH AND HILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Identifiable Intangible Assets - Identifiable intangible assets consist
of values allocated to key employees, contract backlog, proposals, and
a covenant not to compete and are being amortized on a straight-line
basis over periods of 2 to 10 years.
Cost in Excess of Net Assets of Acquired Business - Cost in excess of
net assets of acquired businesses is being amortized on the
straight-line method over forty years. The carrying value of cost in
excess of net assets of acquired business is periodically reviewed by
management and impairment, if any, is recognized when the projected
undiscounted cash flows are less than the carrying value.
Income Taxes - The Company and its subsidiaries file consolidated
Federal income tax returns. Deferred taxes primarily result from
accelerated depreciation methods used for tax purposes and deferred
rent charges.
New Accounting Standards - For the fiscal year ended March 31, 1998 the
Company adopted SFAS No. 128 "Earnings Per Share". The impact on the
financial statements is not material.
Basic Earnings Per Share - Basic earnings per share is computed by
dividing net income by the weighted average number of common shares
outstanding. Options outstanding to purchase common stock had no
significant dilutive effect.
Cash Equivalents - The Company considers cash on hand and cash held in
banks subject to immediate withdrawal to represent cash.
Reclassifications - Certain reclassifications have been made in the
1996 financial statements to conform to classifications used in the
1998 financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31:
1998 1997
---- ----
Leasehold improvements $ 168,000 $ 165,000
Equipment 5,519,000 5,321,000
----------- -----------
5,687,000 5,486,000
Accumulated depreciation (3,889,000) (3,284,000)
----------- -----------
$ 1,798,000 $ 2,202,000
=========== ===========
21
REYNOLDS, SMITH AND HILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. ACCRUED EXPENSES
Accrued expenses consist of the following at March 31:
1998 1997
---- ----
Accrued payroll $ 646,000 $ 633,000
Accrued incentive compensation 548,000 570,000
Other 1,487,000 1,401,000
---------- ----------
$2,681,000 $2,604,000
========== ==========
4. DEBT
Long-term debt consists of the following at March 31:
1998 1997
---- ----
Installment note; interest at
9.25%, matured April 1, 1997 $ -- $31,000
Capital lease obligations 7,000 45,000
------- -------
7,000 76,000
Less current portion (7,000) (69,000)
------- -------
Total long-term debt $ -- $ 7,000
======= =======
At March 31, 1998, the Company had $2,000,000 of additional borrowing
available under a credit line, with interest at the lower of the bank's
prime rate plus .1% or LIBOR plus 2.8%. In addition, the Company has
secured a committed credit facility of $2,000,000 which is reserved for
the potential acquisition or merger of other architectural/engineering
firms. The interest rate on this facility is LIBOR plus 2.55%. These
borrowing agreements, which expire July 31, 1998, require the Company
to be in compliance with financial covenants relating to working
capital and debt to net worth. Substantially all of the Company's
tangible assets are pledged as security.
22
REYNOLDS, SMITH AND HILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. INCOME TAXES
The provision for income taxes for the years ended March 31 consist of
the following:
1998 1997 1996
---- ---- ----
Current:
Federal $ 454,000 $ 495,000 $ 37,000
State 93,000 101,000 10,000
Deferred:
Federal (78,000) (109,000) 84,000
State (16,000) (22,000) 17,000
--------- --------- ---------
$ 453,000 $ 465,000 $ 148,000
========= ========= =========
The differences between the provision for income taxes and income taxes
computed using the U.S. Federal statutory rate are as follows:
1998 1997 1996
---- ---- ----
Amount computed using
the statutory rate $347,000 $360,000 $ 82,000
Increase in
taxes resulting from:
State income taxes 44,000 51,000 15,000
Goodwill amortization 9,000 9,000 9,000
Meals and entertainment 40,000 37,000 34,000
Other 13,000 8,000 8,000
-------- -------- --------
$453,000 $465,000 $148,000
======== ======== ========
The following table identifies net deferred taxes recognized in the
Company's balance sheet at March 31:
1998 1997
---- ----
Deferred tax asset $ 633,000 $ 505,000
Deferred tax liability (620,000) (620,000)
--------- ---------
Total deferred taxes $ 13,000 $(115,000)
========= ---------
23
REYNOLDS, SMITH AND HILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The types of temporary differences and their related tax effects which
create deferred taxes at March 31 are summarized as follows:
1998 1997
---- ----
Assets:
Allowance for doubtful accounts $ 62,000 $ 49,000
Allowance for warranty claims 131,000 111,000
Excess rental expense over payments 119,000 59,000
Accruals not currently deductible 321,000 286,000
--------- ---------
$ 633,000 $ 505,000
========= =========
Liability:
Excess of tax over book depreciation $(324,000) $(309,000)
Accrued Liabilities ( 85,000) (108,000)
Capitalized expenses (211,000) (203,000)
--------- ---------
$(620,000) $(620,000)
========= =========
6. LEASES
The Company leases certain facilities and equipment under
noncancellable leases expiring in various years through 2004. Some of
the operating leases provide that the Company pay taxes, maintenance,
insurance and other occupancy costs applicable to these premises. Rent
expense for the years ended March 31, 1998, 1997 and 1996 amounted to
$2,157,000, $2,109,000 and $1,808,000, respectively.
Future minimum payments under capital leases and noncancellable
operating leases are as follows:
Capital Operating
Leases Leases
------ ------
1999 $ 7,000 $2,014,000
2000 -- 1,897,000
2001 -- 1,685,000
2002 -- 1,345,000
2003 -- 1,064,000
Future years -- 35,000
---------- ----------
Total minimum payments 7,000 $8,040,000
==========
Amount representing
interest --
-----------
Present value of net
minimum lease payments $ 7,000
========
24
REYNOLDS, SMITH AND HILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to lawsuits involving claims typical of those
filed against engineering and architectural professions. In
management's opinion the potential losses not covered by insurance
would not be material to the Company's financial position.
For each of the years ended March 31, 1998, 1997 and 1996 approximately
80%, 80% and 75% of the Company's business is with departments or
agencies of Federal, state and local governments. For the same periods
35%, 35% and 40% of the Company's gross revenues resulted from services
provided to the Florida Department of Transportation. These contracts
may be subject to renegotiation or termination at the election of the
government. The Company is subject to examinations by representatives
of certain governmental agencies for which it provides services. In
management's opinion the results of any examination would not have a
significant effect on the Company's financial position.
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a Profit Sharing Plan which qualifies under
Section 401(k) of the Internal Revenue Code. The Plan allows
participating employees to contribute from 2% to 15% of their earned
compensation to the plan. The Company contributes to the plan 25% of
each participant's contribution, up to the 6% level of the
participant's contribution. For the years ended March 31, 1998, 1997
and 1996 the Company contributed $163,000, $167,000 and $158,000,
respectively. Participants in the plan have the option to purchase
shares of the Company's common stock. At March 31, 1998, 96,000 shares
of Company stock have been issued and 294,000 shares are reserved for
future issuance under the plan.
9. STOCK BONUS AND OPTION PLAN
The Company has a stock bonus plan that provides for the awarding of
the Company's common stock to selected employees. At March 31, 1998,
39,000 shares are reserved for future issuance under the plan.
25
REYNOLDS, SMITH AND HILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has stock option plans that provide to selected employees
the granting of incentive and non-qualified options to purchase the
Company's common stock. A summary of option transactions is shown
below.
1998 1997
-------------------- ---------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
------- ----- ------- -----
Outstanding at
beginning of year 28,300 $ 11 31,400 $ 11
Options granted 22,400 13 500 12
Options exercised 200 11 100 10
Options forfeited 14,100 12 3,500 11
------- -------
Outstanding at
end of year 36,400 $ 12 28,300 $ 11
======= =======
Options exercisable at
year end 11,600 21,300
The following table summarizes information about stock options outstanding at
March 31, 1998:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 3/31/98 Life (years) Price at 3/31/98 Price
------ ---------- ------------ ----- ---------- -----
$10.25-$10.99 7,000 1.1 $ 10.44 7,000 $ 10.44
$11.00-$11.99 17,200 6.5 11.34 4,300 11.08
$12.00-$12.99 5,100 8.3 12.59 300 12.10
$13.00-$13.99 -- -- -- -- --
$14.00-$14.99 7,100 4.5 14.00 -- --
------ ------
36,400 5.3 11.86 11,600 10.73
====== ======
26
REYNOLDS, SMITH AND HILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Remaining non-exercisable stock options as of March 31, 1998 become
available as follows:
1999 7,700
2000 5,600
2001 5,500
2002 3,000
2003 3,000
-------
24,800
=======
At March 31, 1998, 113,600 stock options are reserved for future issuance
under the plans.
10. FINANCIAL INSTRUMENTS
The Company used the following methods and assumptions to estimate the
fair value of the following financial instrument:
Debt. Interest rates that are currently available to the
Company for issuance of debt with similar terms and remaining
maturities are used to estimate fair value for debt instruments. The
Company believes the carrying amount is a reasonable estimate of such
fair value.
*****************************
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Reynolds, Smith and Hills, Inc.
Jacksonville, FL
We have audited the accompanying consolidated financial statements of Reynolds,
Smith and Hills, Inc. and its subsidiaries as of March 31, 1998 and 1997 and for
each of the three years in the period ended March 31, 1998, and have issued our
report thereon dated June 5, 1998; such report is included elsewhere in this
Form 10-K. Our audits also included the consolidated financial statement of
Reynolds, Smith and Hills, Inc., listed in Item 14. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte and Touche LLP
Jacksonville, FL
June 5, 1998
28
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
REYNOLDS, SMITH AND HILLS, INC.
ADDITIONS: DEDUCTIONS:
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
- ----------- --------- -------- --------------------
Year ended March 31, 1998:
Allowance for
doubtful accounts $127,000 $ 70,000 ($35,000) $162,000
Year ended March 31, 1997:
Allowance for
doubtful accounts $148,000 $ 68,000 ($89,000) $127,000
Year ended March 31, 1996:
Allowance for
doubtful accounts $151,000 $ 56,000 ($59,000) $148,000
29