10-Q 1 rsh10q.txt INITIAL FILING 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, 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 December 31, 2001 was 477,592 shares. PART I: FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS REYNOLDS, SMITH AND HILLS, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) -------------------------------------------------------------------------------- Nine Months Ended Three Months Ended December 31 December 31 2001 2000 2001 2000 GROSS REVENUE $ 49,524,000 $ 42,406,000 $ 15,978,000 $ 13,957,000 SUBCONTRACT AND OTHER DIRECT COSTS 13,089,000 10,229,000 3,989,000 3,234,000 --------------- --------------- --------------- --------------- Net service revenue 36,435,000 32,177,000 11,989,000 10,723,000 COST OF SERVICES 14,062,000 12,166,000 4,694,000 4,021,000 --------------- --------------- --------------- --------------- Gross profit 22,373,000 20,011,000 7,295,000 6,702,000 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 21,403,000 19,110,000 7,137,000 6,502,000 --------------- --------------- --------------- --------------- Operating income 970,000 901,000 158,000 200,000 OTHER INCOME (EXPENSE) Interest and other income 45,000 49,000 19,000 23,000 Interest expense (19,000) (9,000) (9,000) (2,000) --------------- --------------- --------------- --------------- Income before income taxes 996,000 941,000 168,000 221,000 INCOME TAX EXPENSE 489,000 403,000 98,000 100,000 --------------- --------------- --------------- --------------- NET INCOME $ 507,000 $ 538,000 $ 70,000 $ 121,000 =============== =============== =============== =============== BASIC EARNING PER SHARE $ 1.10 $ 1.19 $ 0.15 $ 0.27 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 461,000 453,000 469,000 453,000

See accompanying notes to consolidated financial statements. 2 REYNOLDS, SMITH AND HILLS, INC. CONSOLIDATED BALANCE SHEETS (Unaudited) -------------------------------------------------------------------------------- DEC 31, MARCH 31, 2001 2001 ASSETS ------ --------------- --------------- CURRENT ASSETS: Cash $ 375,000 $ 420,000 Accounts receivable, net of allowance for doubtful accounts of $160,000 and $115,000 9,324,000 7,396,000 Unbilled service revenue 7,255,000 6,440,000 Prepaid expenses and other current assets 277,000 95,000 Deferred income taxes 718,000 718,000 --------------- --------------- Total current assets 17,949,000 15,069,000 PROPERTY AND EQUIPMENT, net 2,362,000 2,297,000 OTHER ASSETS 190,000 169,000 COST IN EXCESS OF NET ASSETS OF ACQUIRED BUSINESSES, net of accumulated amortization of $504,000 and $417,000 1,815,000 1,203,000 --------------- --------------- $ 22,316,000 $ 18,738,000 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 314,000 $ 100,000 Accounts payable 3,273,000 3,238,000 Accrued payroll 1,321,000 554,000 Accrued incentive compensation 954,000 1,325,000 Accrued expenses 1,652,000 1,288,000 Unearned service revenue 4,180,000 3,599,000 --------------- --------------- Total current liabilities 11,694,000 10,104,000 LONG-TERM DEBT 1,155,000 0 DEFERRED INCOME TAXES 237,000 204,000 OTHER LIABILITIES 237,000 334,000 --------------- --------------- Total liabilities 13,323,000 10,642,000 --------------- --------------- SHAREHOLDERS' EQUITY: Common Stock, $.01 par value, 4,000,000 shares authorized, 478,000 and 453,000 issued and outstanding 5,000 5,000 Paid-in capital 4,017,000 3,627,000 Retained earnings 4,971,000 4,464,000 --------------- --------------- Total shareholders' equity 8,993,000 8,096,000 --------------- --------------- $ 22,316,000 $ 18,738,000 =============== =============== See accompanying notes to consolidated financial statements.

3 REYNOLDS, SMITH AND HILLS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) NINE MONTHS ENDED DECEMBER 31 -------------------------------------------------------------------------------- 2001 2000 --------------- --------------- OPERATING ACTIVITIES: Net income $ 507,000 $ 538,000 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 709,000 700,000 Stock issued as compensation 71,000 57,000 Deferred rent charges and other (47,000) (36,000) Change in operating assets and liabilities, net of business acquisition: Accounts receivable and unbilled service revenue (1,874,000) (737,000) Prepaid expenses and other assets 18,000 28,000 Accounts payable and accrued expenses (312,000) (1,071,000) Unearned service revenue 547,000 888,000 --------------- --------------- Net cash (used in) provided by operating activities (381,000) 367,000 --------------- --------------- INVESTING ACTIVITIES: Capital expenditures (446,000) (498,000) Business acquisition, net of cash acquired 94,000 0 --------------- --------------- Net cash used in investing activities (352,000) (498,000) --------------- --------------- FINANCING ACTIVITIES: Repayments of long-term debt (126,000) (100,000) Proceeds from issuance of long-term debt 750,000 0 Proceeds from issuance of common stock 64,000 0 --------------- --------------- Net cash provided by (used in) financing activities 688,000 (100,000) --------------- --------------- NET DECREASE IN CASH (45,000) (231,000) CASH AT BEGINNING OF PERIOD 420,000 457,000 --------------- --------------- CASH AT END OF PERIOD $ 375,000 $ 226,000 =============== =============== 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 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, 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 will be examined more frequently if certain indicators are encountered. Intangible assets with a determinable useful life will continue to be amortized over that period. SFAS No. 142 will be effective for the fiscal year beginning April 1, 2002. However, the amortization provisions apply immediately to goodwill and intangible assets acquired after June 30, 2001. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived asset. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid, 5 and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002, with earlier application encouraged. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The acquisition described in Note 5 has been accounted for under the requirements of SFAS No. 141 and SFAS No. 142. Management is currently assessing the impact that SFAS No. 142, SFAS No. 143, and SFAS No. 144 will have on the Company's financial position and 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 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 former professional liability insurance carrier, Reliance Insurance Co. ("Reliance"), 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 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, has approved the Company's legal counsel to continue the defense of the pending lawsuits for the Company and will provide defense costs and substitute coverage of up to 6 $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) ACQUISITION On November 12, 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 $699,000. 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 commencing in December, 2001. If earned, the 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. The acquisition was accounted for as a purchase under SFAS No. 141 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. Such estimated values are preliminary and may change, as more facts become known. The excess of the purchase price over the fair market value of the tangible net assets acquired was allocated to excess cost over net assets acquired. The following summary presents the Company's unaudited pro forma consolidated results of operations for the nine months ended December 31, 2001, and December 31, 2000, as if the acquisition had been completed at the beginning of each 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: 7 Certain pro forma adjustments are based on preliminary estimates. Final allocations will be made on the basis of further evaluations and, therefore, such allocations may differ from those reflected in the pro forma statement of operations. The pro forma statement of operations is not necessarily indicative of the results of operations of the Company had the Sylva acquisition occurred at the beginning of the periods presented, nor is it necessarily indicative of the results of future operations. These statements should be read in conjunction with the separate historical financial statements and notes thereto of the Company (incorporated by referenced in the Company's Annual Report on Form 10-K for the year ended March 31, 2001). Nine Months Ended December 31 2001 2000 ---- ---- Gross Revenue $ 52,707,000 $ 45,905,000 Subcontract and other direct costs 13,655,000 11,146,000 ------------- -------------- Net service revenue 39,052,000 34,759,000 Cost of Services 15,940,000 13,825,000 ------------- -------------- Gross profit 23,112,000 20,934,000 Selling, General and Administrative Expenses 21,785,000 19,680,000 ------------- -------------- Operating income 1,327,000 1,254,000 Other Income (Expense): Interest and other income 45,000 49,000 Interest expense (94,000) (84,000) ------------- -------------- Income before income taxes 1,278,000 1,219,000 Income Tax Expense 592,000 503,000 ------------- -------------- Net Income $ 686,000 $ 716,000 ============= ============== Basic Earnings Per Share $ 1.44 $ 1.53 ============= ============== Weighted Average Common Shares Outstanding 476,000 468,000 ============= ==============

8 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 Nine Months Ended Three Months Ended December 31 December 31 ----------- ----------- 2001 2000 2001 2000 ---- ---- ---- ---- Transportation $ 21,582 $ 15,966 $ 7,504 $ 5,221 Aviation 9,490 7,111 2,624 2,516 Aerospace/Defense 4,030 4,396 1,314 1,083 Public Infrastructure 2,733 2,957 767 1,047 Commercial 4,275 4,833 1,406 1,606 Institutional 7,414 7,143 2,363 2,484 ---------- ---------- ---------- --------- Consolidated $ 49,524 $ 42,406 $ 15,978 $ 13,957 ========== ========== ========== ========= Income before income taxes Nine Months Ended Three Months Ended December 31 December 31 ----------- ----------- 2001 2000 2001 2000 ----- ---- ---- ---- Transportation $ 372 $ 189 $ 9 $ (30) Aviation 734 735 87 143 Aerospace/Defense 415 198 180 0 Public Infrastructure (200) (2) (74) 20 Commercial 417 703 123 237 Institutional (181) (310) (44) (2) Corporate overhead (561) (572) (113) (147) ---------- ---------- ------------ --------- Consolidated $ 996 $ 941 $ 168 $ 221 ========== =========== ============ =========

Assets of the segment groups are not relevant for management of the business nor for disclosure. 9 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 2002 was $49.5 million as compared to $42.4 million for the first nine months of fiscal 2001. This $7.1 million increase (17%) was due primarily to increased revenues in the transportation and aviation programs as a result of current and prior year marketing efforts, offset by declines in other programs. The Transportation program has seen a $5.6 million increase, including a $0.5 million increase as a result of the acquisition of Sylva in November, 2001. The Aviation program increased revenues in Florida and the midwest, adding $2.4 million in revenues. Gross revenue for the third quarter of fiscal 2002 was $16.0 million as compared to $14.0 million for the third quarter of fiscal 2001. This $2.0 million increase (14%) is a reflection of increased revenues in the transportation program, as previously discussed. Subcontract and other direct costs were $13.1 million and $10.2 million for the first nine months of fiscal 2002 and 2001, respectively. As a percent of gross service revenue, subcontract and other direct costs were 26% and 24%, 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 $4.0 million and $3.2 million for the third quarter of fiscal 2002 and 2001. As a percent of gross service revenue, subcontract and other direct costs were 25% and 23%, respectively, for the two periods. This increase for the third quarter also corresponds to the increase in subconsultants as noted above for the nine month period. Net service revenue more accurately reflects revenue for services performed by the Company. Net service revenue was $36.4 million for the first nine months of fiscal 2002 compared to $32.2 million for the first nine months of fiscal 2001. Net service revenue was $12.0 million for the third quarter of fiscal 2002 as compared to $10.7 million for the same quarter of the prior year. The increase for both periods 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, were 39% and 38%, respectively, for the first nine months of fiscal 2002 and 2001, as well as the third quarter of fiscal 2002 and 2001. Gross profit, as a result, was 61% and 62%, respectively, for the same periods of fiscal 2002 and 2001. 10 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 $21.4 million in the first nine months of fiscal 2002 from $19.1 million in the first nine months of fiscal 2001. This 12% increase was due primarily to increases in personnel and associated costs. The number of employees increased to 590 at December 31, 2001 from 520 at December 31, 2000 corresponding to the increased workload, as well as the addition of 35 employees due to the acquisition of Sylva in November, 2001. Other increases in SG&A expenses were experienced in office rent, warranty, and equipment expense. SG&A expenses increased to $7.1 million for the third quarter of fiscal 2002 from $6.5 million for the third quarter of fiscal 2001. This 10% increase relates to increases in personnel and associated costs, office rent, and warranty expense. Net income was $507,000 for the first nine months of fiscal 2002 as compared to $538,000 for the first nine months of fiscal 2001. Net income was $70,000 for the third quarter of fiscal 2002 as compared to $121,000 for the same period of fiscal 2001. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- As of December 31, 2001 the Company had cash of $375,000 with $3.0 million of borrowings available under its revolving line of credit. Operations for the first nine 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 89 days from 81 days as of December 31, 2001 and 2000, respectively. 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 and commitments for fiscal 2002. 11 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, any claims, 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, is 12 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 proceeding and attempt to recover such incurred costs. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) In November, 2001 the Company issued a total of 15,000 shares of common stock to the former shareholders of Sylva, pursuant to the acquisition of all of the outstanding capital stock of Sylva. The Company's shares were last valued at $17.00 per share for purposes of setting the price at which registered shares of the Company are sold to and traded within the Company's Employees 401(k) Profit Sharing Plan, representing an aggregate valuation of $255,000 for the 15,000 shares of common stock. The shares of common stock were exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as they were issued pursuant to a transaction not involving any public offering. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Form 8-K, filed November 13, 2001, providing information regarding the purchase of Sylva Engineering Corporation and including Financial Statements of the Acquired Business and Pro Forma Financial Information giving effect to the acquisition. Form 8-K/A, filed November 20, 2001, amending Form 8-K dated November 13, 2001 and providing restated Pro Forma Financial Information. 13 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 13, 2002 /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) 14

REYNOLDS SMITH & HILLS INC 10-Q