U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1998
( )TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file Number 001-14137
---------
HLM Design, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 56-2018819
(State or Other Jurisdiction (I.R.S Employer Identification No.)
of Incorporation or Organization)
121 West Trade Street, Suite 2950
Charlotte, North Carolina 28202
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (704) 358-0779
Indicate by check 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Each Class Outstanding at September 8, 1998
- ------------------- --------------------------------
Common stock, par value $.001 per share 2,075,087 shares
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
INDEX TO FORM 10-Q
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PAGE
NO.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - May 1, 1998 and July 31, 1998 3
Consolidated Statements of Operation - One month period ended May
30, 1997 (Predecessor), Three month period ended August 1,
1997 and July 31, 1998 5
Consolidated Statement of Stockholders' Equity - Three month
Period ended July 31,1998 6
Consolidated Statements of Cash Flows - One month period ended May
30, 1997 (Predecessor), Three month period ended August
1, 1997 and July 31,1998 7
Notes to Unaudited Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Operations
And Results of Operations 11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
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May 1, July 31,
1998 1998
---- ----
(Unaudited)
ASSETS:
Current Assets:
Cash $ 17,369 $ 1,920,361
Accounts Receivable:
Trade and other receivables, less allowance for
doubtful accounts at May 1 and July 31 $150,000 6,089,929 6,452,638
Costs and estimated earnings in excess of billings on
uncompleted projects, net 5,513,854 5,998,496
Prepaid expenses 724,010 160,770
------------------------------------
Total Current Assets 12,345,162 14,532,265
------------------------------------
Other Assets:
Deferred income taxes 465,601 560,421
Other 825,018 468,345
Goodwill, net 2,426,598 2,383,574
------------------------------------
Total Other Assets 3,717,217 3,412,340
------------------------------------
Property and Equipment:
Leasehold improvements 782,609 782,609
Furniture and fixtures 1,786,250 1,965,012
------------------------------------
Property and Equipment, at cost 2,568,859 2,747,621
Less Accumulated depreciation 768,904 1,001,170
------------------------------------
Property and equipment, net 1,799,955 1,746,451
------------------------------------
TOTAL ASSETS $ 17,862,334 19,691,056
====================================
</TABLE>
See notes to unaudited consolidated financial statements.
3
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HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
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May 1, July 31,
1998 1998
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 656,576 $ 579,112
Notes payable 2,250,000 1,500,000
Accounts payable 3,041,859 2,055,843
Accrued expenses 1,913,505 1,459,368
Income tax payable 215,950 95,862
Billings in excess of costs and estimated earnings
on uncompleted projects 3,008,023 3,608,296
Deferred income taxes 1,517,146 1,569,320
------------------------------------
Total Current Liabilities 12,603,059 10,867,801
------------------------------------
LONG-TERM DEBT 4,164,401 1,893,464
------------------------------------
TOTAL LIABILITIES 16,767,460 12,761,265
------------------------------------
MINORITY INTEREST 15,187 15,422
------------------------------------
COMMITMENT AND CONTINGENCIES
WARRANTS OUTSTANDING 114,932 1,200
------------------------------------
STOCKHOLDERS' EQUITY:
Capital Stock:
Common, $.001 par value, voting, authorized 9,000,000
shares: issued 776,134 and 2,075,087, respectively 776 2,075
Preferred, $.10 par value, voting, authorized 1,000,000
shares, no shares outstanding
Additional paid in capital 185,623 6,221,965
Retained earnings 778,356 689,129
------------------------------------
TOTAL STOCKHOLDERS' EQUITY 964,755 6,913,169
------------------------------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 17,862,334 $ 19,691,056
====================================
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited) (Predecessor
Company)
One Three Three
Month Months Months
Ended Ended Ended
May 30, August 1, July 31,
1997 1997 1998
---- ---- ----
REVENUES:
Fee Income $ 1,998,611$ 4,843,288 $ 7,655,816
Reimbursable Income 234,425 467,753 478,306
-----------------------------------
Total Revenues 2,233,036 5,311,041 8,134,122
-----------------------------------
CONSULTANT EXPENSE 192,862 848,588 1,256,955
-----------------------------------
PROJECT EXPENSES:
Direct Expenses 35,404 217,308 194,089
Reimbursable expenses 68,617 141,592 338,087
-----------------------------------
Total project expenses 104,021 358,900 532,176
-----------------------------------
NET PRODUCTION INCOME 1,936,153 4,103,553 6,344,991
DIRECT LABOR 602,096 1,145,045 1,752,119
INDIRECT EXPENSES 1,172,712 2,610,124 4,035,743
-----------------------------------
OPERATING INCOME 161,345 348,384 557,129
-----------------------------------
OTHER EXPENSE:
Interest Expense, net 36,951 150,580 203,990
Other 603 835
-----------------------------------
Total Other Expense 36,951 151,183 204,825
-----------------------------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 124,394 197,201 352,304
INCOME TAX 43,000 150,000 160,682
-----------------------------------
NET INCOME BEFORE EXTRAORDINARY ITEM 81,394 47,201 191,622
EXTRAORDINARY ITEM FOR EARLY
EXTINGUISHMENT OF DEBT, NET OF TAX OF $171,842 280,849
===================================
NET INCOME (LOSS) $ 81,394 $ 47,201 $ (89,227)
===================================
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic $ 0.13
============
Diluted $ 0.13
============
NET INCOME (LOSS) PER SHARE
Basic $ (0.06)
============
Diluted $ (0.06)
============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic 1,489,844
============
Diluted 1,489,844
============
SUPPLEMENTAL PROFORMA NET INCOME (LOSS) PER SHARE:
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM
Basic $ 0.11
============
Diluted $ 0.11
============
NET INCOME (LOSS) PER SHARE
Basic $ (0.05)
============
Diluted $ (0.05)
============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic 1,764,012
============
Diluted 1,764,012
============
See notes to unaudited financial statements.
5
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
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Additional Total
Common Stock Paid-In Retained Stockholders'
------------
Shares Amount Capital Earnings Equity
------ ------ ------- -------- -------
Balance, May 1, 1998 776,134 $ 776 $ 185,623 $ 778,356 $ 964,755
Issuance of Common Stock 1,298,953 1,299 6,036,342 6,037,641
(Note 4)
Net Loss (89,227) (89,227)
============================================================================================
Balance, July 31, 1998 2,075,087 $ 2,075 $ 6,221,965 $ 689,129 $ 6,913,169
============================================================================================
</TABLE>
See notes to unaudited financial statements.
6
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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(Predecessor
Company)
One Three Three
Month Months Months
Ended Ended Ended
May 30, August 1, July 31,
1997 1997 1998
------ ------ -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 81,394 $ 47,201 $ (89,227)
Adjustments to reconcile net income (loss) to net used in operating activities:
Extraordinary item for early extinguishment of debt 280,849
Depreciation 55,544 90,673 232,266
Amortization of goodwill 9,571 158,140 43,024
Amortization of deferred loan fees 9,300 31,056
Deferred income taxes 54,907 (314,000) 129,196
Other
Minority interest 603 235
Changes in certain working capital items:
Increase in trade and other accounts receivable (1,500,472) (1,069,271) (362,709)
Deecrease in costs and estimated earnings compared to billings
on uncompleted contracts, net 1,199,028 786,526 115,631
(Increase) decrease in refundable income taxes (11,157) 440,181
Increase (decrease) in prepaid expenses and other assets (11,579) (175,893) 436,166
Increase (decrease) in accounts payable 233,659 (977,850) (986,016)
Increase (decrease) in accrued expenses (278,500) 266,095 (454,137)
Decrease in income tax payable (120,088)
Increase in other non-current liabilities 15,000
------------------------------------------------
Net cash (used in) provided by
operating activities (152,605) (738,295) (743,754)
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,023) (147,745) (178,762)
------------------------------------------------
Net cash used in investing activities (2,023) (147,745) (178,762)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on line of credit (2,360,000)
Net proceeds from issuance of common stock 28,784 5,922,709
Proceeds from long-term borrowings 2,800,000 3,000,000
Payment on short term borrowings (750,000)
Payment on long-term borrowings (285,372) (122,568) (2,348,401)
Payment of ESOP buyback (3,221,824)
Proceeds from issuance of notes payable to shareholders 182,308
Proceeds from issuance of warrants 20,001 1,200
------------------------------------------------
Net cash provided by financing activities 154,628 (113,299) 2,825,508
------------------------------------------------
INCREASE (DECREASE) IN CASH - (999,339) 1,902,992
CASH BALANCE:
Beginning of period 2,321 2,321 17,369
================================================
End of period $ 2,321 $ (997,018) $ 1,920,361
================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the year for:
Interest $ 6,827 $ 162,415 $ 263,509
Income tax payments (refunds) $ (750) $ (12,300) $ 139,170
Noncash investing and financing transactions:
Issuance of warrants to certain debt holders $ 238,752 $ 192,832 $ 1,200
See notes to unaudited financial statements.
</TABLE>
7
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business-HLM Design, Inc. ("HLM Design") is a management
services company incorporated March 6, 1997 for the purpose of providing
management and services to architectural, engineering and planning design
entities under long term management and services agreements ("MSAs"). HLM
Design, Inc entered into an MSA with HLM Design of North America, Inc.
("HLMI"), HLM Design of the Southeast, P.C.("HLMNC"), and HLM Design of
the Northwest, Architecture, Engineering and Planning, P.C. ("HLMO") in
May 1997. In July 1998, HLM Design, Inc. entered into an MSA with HLM
Design of the Midwest, Inc. ("HLMMW"), HLM Design of the Midatlantic, P.C.
("HLMMA"), and HLM Design of the Northeast, Architecture, Engineering and
Planning, P.C. ("HLMNE"). HLMI, HLMNC, HLMO, HLMMW, HLMMA and HLMNE are
collectively referred to as "Managed Firms". At the same time, the Managed
Firms and its stockholders entered into a stockholders agreement (which
positions the stockholders of Managed Firms as nominee stockholders);
therefore, as of May 31, 1997 and thereafter, HLM Design, Inc. and Managed
Firms financial statements are presented on a consolidated basis. HLMI has
been in operation for over thirty years, while the other Managed Firms
have had no operations as of July 31, 1998. HLM Design and the Managed
Firms are referred to herein collectively as the "Company".
Financial Statement Presentation - The accompanying unaudited financial
information for the one month period ended May 30, 1997(Predecessor), and
three month period ended August 1, 1997 and July 31, 1998 have been
prepared in accordance with generally accepted accounting principles
pursuant to the rules and regulations of the Securities and Exchange
Commission. All significant intercompany accounts and transactions have
been eliminated. These unaudited consolidated financial statements
reflect, in the opinion of management, all material adjustments (which
include only normal recurring adjustments) necessary to fairly state the
financial position and the results of operations for the periods
presented. The results for interim periods are not necessarily indicative
of the results to be expected for the entire fiscal year. These interim
financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended May 1, 1998.
In June 1997, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 131 "Disclosure about Segments of an
Enterprise and Related Information." This statement redefines how
operating segments are determined and requires disclosure of certain
financial and descriptive information about the Company's fiscal year
ending April 30, 1999, but will need not be applied to interim financial
statements in the initial year of its application. The Company has not yet
completed its' analysis of which operating segments it will disclose, if
any.
8
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HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. CONTRACTS IN PROGRESS
Information relative to contracts in progress is as follows:
May 1, July 31,
1998 1998
------ --------
Costs incurred on uncompleted
projects
(excluding overhead) $45,830,792 $45,353,322
Estimated earnings thereon 45,615,282 45,976,974
----------- -----------
Total 91,446,074 91,330,296
Less billings to date 88,940,243 88,940,096
----------- ----------
Net underbillings $ 2,505,831 $ 2,390,200
=========== ===========
Net underbillings are included in the accompanying balance sheets as
follows:
May 1, July 31,
1998 1998
------- --------
Costs and estimated earnings in excess
of billings
On uncompleted projects $5,513,854 $5,998,496
Billings in excess of costs and
estimated earnings
On uncompleted projects (3,008,023) (3,608,296)
------------ -----------
Net underbillings $2,505,831 $2,390,200
========== ==========
3. FINANCING ARRANGEMENTS
A summary of changes in financing arrangements are as follows: Notes
Payable: The Company repaid its indebtedness to Berthel Fisher & Company
Financial Services, Inc. ($.75 million) from the net proceeds of its
initial public offering (the "Offering") in June 1998. Long-Term Debt: The
Company repaid its obligation to Pacific Capital, L.P. and Equitas, L.P.
($2.0 million) and to employee stockholders ($.2 million) from the net
proceeds of the Offering in June 1998.
On August 31, 1998, the Company increased its revolving line of credit
with First Charter National Bank from $1.5 million to $3.0 million. At
July 31, 1998, the Company had borrowings outstanding of $1.5 million. The
revolving line of credit is secured by, among other things, a security
interest in all accounts receivable. Any outstanding balance under this
loan bears interest at prime plus 1%. This loan matures on June 30, 1999.
The related loan agreement includes various provisions, which among other
things, require maintenance of a minimum net worth of $6.0 million, a
minimum current ratio of 1.25 to 1.0, and a maximum debt to equity ratio
of 1.5 to 1.0.
9
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. INITIAL PUBLIC OFFERING
In June 1998 pursuant to a Registration Statement on Form S-1 filed with
the Securities and Exchange Commission, HLM Design consummated the
Offering. Through the Offering, HLM Design offered and sold 1,200,000
shares of Common Stock at a price to the public of $6.00 per share.
The net proceeds of the Offering totaling $5.92 million (after
underwriting discount and other offering expenses) were used to repay
certain indebtedness consisting of: (a)$2.0 million loan from Pacific
Capital L.P. and Equitas L.P. and (b)$.75 million term loan from Berthel
Fisher & Company Financial Services, Inc. and (c)$.2 million of
indebtedness to employee stockholders. Remaining net proceeds will be used
for development of new business and other general corporate purposes.
The early extinguishment of the Pacific Capital, L.P., Equitas, L.P. and
Berthel Fisher & Company Financial Services, Inc. debt resulted in an
extraordinary charge of $280,849, net of income taxes of $171,842, that
consisted of write-off of related unamortized financing costs.
5. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED)
HLM Design, Inc.'s unconsolidated balance sheet for the three month period
ended July 31, 1998 is as follows:
Balance Sheet
Current assets $ 3,480,905
-----------
Non-current assets 5,666,106
-----------
Total assets $ 9,147,011
=========
Current liabilities 2,244,420
-----------
Non-current liabilities 0
----------
Total liabilities 2,244,320
----------
Total stockholders' equity 6,902,691
----------
Total liabilities and stockholders' equity $9,147,011
==========
Income Statement
Equity in earnings of Affiliate $ 108,945
Net interest, extraordinary item, tax and
other expense 198,172
-------
Net loss $ (89,227)
===========
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
Pro Forma Results of Operations (excluding the effect of the Offering)
As a result of the acquisition of HLMI through the merger of BBH Corp. (an
affiliate of HLM Design) into HLMI, the consummation of the MSA between HLM
Design and the Managed Firms and stockholders' agreements among the Managed
Firms and its stockholders, the discussion and analysis of operating results for
the three month period ended August 1, 1997 is presented on a pro forma basis
that reflects such acquisition, MSA and stockholders' agreements as through they
occurred at the beginning of the period.
First Quarter 1998 Compared with First Quarter 1997-Pro forma
This pro forma financial information does not give effect to the
Offering.
Pro Forma
for
Consolidated Consolidated
Three Months Three Months
Ended Ended
August 1, July 31,
1997 1998
---- ----
Revenues $7,544,087 $8,134,122
Costs and expenses
Direct cost of revenue 3,251,512 3,541,250
Operating expenses 3,755,836 4,055,743
----------- -----------
Total costs and expenses 7,007,348 7,576,993
----------- -----------
Income from operations 536,739 557,129
Other income (expense)
Interest expense (244,531) (203,990)
Other expense (603) (835)
----------- -----------
Total other expense (245,134) (204,825)
----------- ------------
Income before income taxes and extraordinary
item 291,605 352,304
Income tax expense 183,350 160,682
------- -------
Net income before extraordinary item 108,255 191,622
Extraordinary item for early extinguishment of
debt, net
Of tax of $171,842 0 280,849
---------- ------------
Net income (loss) $ 108,255 $ (89,227)
=========== ============
11
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
Revenues were $8.1 million for the three month period ended July 31, 1998
as compared to $7.5 million for the three month period ended August 1, 1997.
This increase of 7.8% is principally due to management's continued focus on
marketing efforts which have continued from the previous year. This increase is
partially offset by the Company's change in its fiscal year end date from the
last Friday in April to the Friday nearest the end of April. This change
resulted in an additional week of revenues in the three month period ended
August 1, 1997 as compared to the three month period ended July 31, 1998.
Direct costs primarily include, direct labor, subconsultant costs and
reimbursable expenses. Direct costs were $3.5 million, or 43.5% of revenues, for
the three month period ended July 31, 1998 as compared to $3.3 million, or 43.1%
of revenues, for the three month period ended August 1, 1997. This increase as a
percent of revenues is due to an increased use of subconsultants to meet project
requirements (14.9%and 11.3% of revenue for the three month period ended July
31, 1998 and August 1, 1997, respectively). This increase is partially offset by
a decrease in direct labor costs incurred due to improved productivity as a
result of Company's increased focus on cost containment for each project (21.5%
and 23.2% of revenue for the three month period ended July 31, 1998 and August
1, 1997, respectively).
Operating costs were $4.0 million, or 49.9% of revenues, for the three
month period ended July 31, 1998 as compared to $3.8 million, or 49.8% of
revenues, for the three month period ended August 1, 1997. This increase as a
percent of revenues is principally due to an increase in marketing expenses
which is partially offset by a decrease in rent and occupancy costs in certain
office locations as well as a decrease in travel expenses.
Interest expense was $0.2 million for the three month period ended July
31, 1998 as compared to $0.2 million for the three month period ended August 1,
1997. In June 1998, the Company repaid approximately $3.0 million in debt from
the proceeds of its Offering.
See Note 4 to Notes to Consolidated Financial Statements.
Income tax expense related to income before tax and extraordinary item was
$0.2 million for the three month period ended July 31, 1998 as compared to $0.2
million for the three month period ended August 1, 1997. The effective income
tax rate was 45.5% and 62.5% for the three month period ended July 31, 1998 and
August 1, 1997, respectively. This rate decrease is principally due to
nondeductible items in 1997 not repeating in 1998.
12
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
The Company reported an extraordinary item for early extinguishment of
debt of $0.3 million, net of tax of $0.2 million for the three month period
ended July 31, 1998. In June 1998, the Company used the net proceeds from the
Offering to repay certain indebtedness which resulted in recognition of write
off of related unamortized financing costs.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1998, the Company's current assets of $14.5 million exceeded
current liabilities of $10.9 million resulting in working capital of $3.6
million. During the three month period ended July 31, 1998, the Company used
$0.8 million in operating activities primarily due to the decrease in accounts
payable and accrued expenses and an increase in accounts receivable which was
partially offset by the reduction in deferred debt discount caused by the
extraordinary item for early extinguishment of debt. The Company used $0.2
million for investing activities, primarily the purchase of equipment. In
addition, the Company generated $2.8 million in financing activities primarily
from the net proceeds of $5.9 million from the sale of 1,200,000 shares of
Common Stock sold at an aggregate price of $6.00 per share. Net proceeds of the
Offering were used to repay certain indebtedness as follows: (a)a $2.0 million
loan from Pacific Capital, L.P. and Equitas, L.P., (b)a $0.75 million loan from
Berthel Fisher &Company Financial Services, Inc. and (c)$0.2 million of
indebtedness due to employee stockholders. The remaining net proceeds of the
Offering of $2.97 million will be used for new business development as well as
working capital and general corporate purposes.
The Company's growth and operating strategy will require substantial
capital and may result in the Company incurring additional debt, issuing equity
securities or obtaining additional bank financing. As a management company, HLM
Design will be responsible for the financing of working capital growth, capital
growth and other cash needs of its managed firms. As of September 1, 1998, the
Company increased its revolving line of credit with First Charter National Bank
from $1.5 million to $3.0 million. At July 31, 1998, the Company had borrowings
outstanding of $1.5 million. The revolving line of credit is secured by, among
other things, a security interest in all accounts receivable. Any outstanding
balance under this loan bears interest at prime plus 1%. This loan matures on
June 30, 1999. The related loan agreement includes various provisions, which
among other things, require maintenance of minimum net worth of $6.0 million,
minimum current ratio of 1.25 to 1.0, and maximum debt to equity of 1.5 to 1.0.
The Company believes that the net proceeds from the Offering, its new
revolving line of credit and anticipated funds from future operations will be
sufficient to meet its operating cash needs for at least the next twelve months.
13
<PAGE>
PART II-OTHER INFORMATION
Item 5. Other Information
As of September 1, 1998, in accordance with HLM Design's bylaws, the Board
of Directors appointed Mr. Fred Pounds as a new director of HLM Design, filing
the vacancy created as a result of a resignation from the Board earlier in the
year. L. Fred Pounds has served as Chief Financial Officer of American Oncology
Resources since its inception in January 1993. From June 1990 until joining the
Company, Mr. Pounds was principal of Pounds & Associates, a health care
consulting company. From January 1997 to May 1990, Mr. Pounds was President and
Chief Operating Officer of Avanti Health Systems, Inc., a managed care and
physician practice company. From September 1969 to January 1987, Mr. Pounds was
employed by Price Waterhouse, in various positions, including partner in charge
of the Southwest Area Health Care Group.
As of September 10, 1998, the Board of Directors established an Audit
Committee consisting of Clay R. Caroland III and D. Shannon LeRoy. The Audit
Committee will recommend the selection of the auditors for the Company and will
review the results of the audit and other reports and services provided by the
Company's independent auditors.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this Form 10-Q are:
Exhibit No. Description
10.1 Promissory Note made by HLM Design, Inc. in favor of
First Charter National Bank dated as of September 1, 1998
27 Financial Data Schedule
(b)HLM Design has not filed any reports on Form 8-K during the period covered
by this report.
14
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HLM DESIGN, INC.
(Registrant)
Date: September 14, 1998 By: /s/ Joseph M. Harris
----------------- ---------------------
Joseph M. Harris
President, Chairman and Director
Date: September 14, 1998 By: /s/ Vernon B. Brannon
------------------ ---------------------
Vernon B. Brannon
Senior Vice President, Chief Financial
Officer, Treasurer, Assistant Secretary
And Director
15
EXHIBIT 10.1
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<CAPTION>
<S> <C>
PROMISSORY NOTE
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Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$3,000,000.00 09-01-1998 06-30-1999 2069136 004A 905 GRS
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References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
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Borrower: HLM DESIGN, INC. (TIN: 56-2018819) Lender: First Charter National Bank
121 West Trade Street, Suite 2950 P. O. Box 228
Charlotte, NC 28202 Concord, NC 28026-0228
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Principal Amount: $3,000,000.00 Initial Rate: 9.500% Date of Note: September 1, 1998
</TABLE>
PROMISE TO PAY. HLM DESIGN, INC. ("BORROWER") PROMISES TO PAY TO FIRST CHARTER
NATIONAL BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF
AMERICA, THE PRINCIPAL AMOUNT OF THREE MILLION & 00/100 DOLLARS ($3,000,000.00)
OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID
OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM
THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL
PLUS ALL ACCRUED UNPAID INTEREST ON JUNE 30, 1999. IN ADDITION, BORROWER WILL
PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING OCTOBER 1,
1998, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH
AFTER THAT. The annual interest rate for this Note is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year
of 360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the Prime Rate as
published in the Wall Street Journal. When a range of rates has been published,
the higher of the rates will be used (the "Index"). The Index is not necessarily
the lowest rate charged by Lender on its loans. If the index becomes unavailable
during the term of this loan, Lender may designate a substitute Index after
notice to Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each day. THE INDEX CURRENTLY IS 8.500% PER ANNUM. THE INTEREST RATE TO BE
APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 1.000
PERCENTAGE POINT OVER THE INDEX, RESULTING TO THE INITIAL RATE OF 9.500% PER
ANNUM. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 15 DAYS OR MORE LATE, Borrower will be charged
4.00% OF THE REGULARLY SCHEDULED PAYMENT.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(e) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (f) Any guarantor dies or any of the other
events described in this default section occurs with respect to any guarantor
of this Note. (g) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired. (h) Lender in good faith deems itself insecure.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Lender may hire or pay someone
else to help collect this Note if Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to any limits under applicable law,
Lender's reasonable attorneys' fees and Lender's legal expenses whether or not
there is a lawsuit, including reasonable attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
If not prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF NORTH CAROLINA. IF THERE IS A
LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF
THE COURTS OF CABARRUS COUNTY, THE STATE OF NORTH CAROLINA. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH
CAROLINA.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts Borrower may open in the future, excluding however all IRA and
Keogh accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts, and, at Lender's option, to administratively
freeze all such accounts to allow Lender to protect Lender's charge and setoff
rights provided on this paragraph.
COLLATERAL. This Note is secured by THIS FINANCING STATEMENT COVERS THE
FOLLOWING TYPES (OR ITEMS) OF PROPERTY: ALL PRESENTLY EXISTING AND FUTURE
ACCOUNTS, ACCOUNTS RECEIVABLE, RECEIVABLES, CONTRACTS, CONTRACT RIGHTS, BOOK
DEBTS, GENERAL INTANGIBLES, CHECKS, NOTES, DRAFTS, INSTRUMENTS, CHATTEL PAPER,
DOCUMENTS, ACCEPTANCES, CHOSES IN ACTION AND ALL OTHER OBLIGATIONS FOR THE
PAYMENT OF MONEY CREATED BY THE DEBTOR FROM THE SALE OF INVENTORY AND FURTHER
PROCEEDS THEREOF, ALSO SECURED BY UNCONDITIONAL GUARANTY FROM HLM OF
NORTHAMERICA, INC., HLM DESIGN OF THE SOUTHEAST, P.C. AND HLM DESIGN OF THE
NORTHWEST, ARCHITECTURE, ENGINEERING AND PLANNING, P.C.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized person. All
oral requests shall be confirmed in writing on the day of the request. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lender's office shown above. The following party or
parties are authorized to request advances under the line of credit until Lender
receives from the Borrower at Lender's address shown above written notice of
revocation of their authority: JOSEPH HARRIS, PRESIDENT; VERNON SHANNON, SENIOR
VICE-PRESIDENT; and KAREN KAPLAN, SECRETARY. Borrower agrees to be liable for
all sums either: (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender. The
unpaid principal balances owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note or any agreement that Borrower or any guarantor has with Lender, including
any agreement made in connection with the signing of this Note; (b) Borrower or
any guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized by
Lender; or (e) Lender in good faith deems itself insecure under this Note or any
other agreement between Lender and Borrower.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
<PAGE>
09-01-1998 PROMISSORY NOTE Page 2
Loan No 2069136 (Continued)
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PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
HLM DESIGN, INC.
By: /s/ Vernon Brannon (SEAL)
-------------------------------------
VERNON BRANNON, SENIOR VICE-PRESIDENT
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001049129
<NAME> HLM DESIGN, INC
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-01-1998
<PERIOD-START> MAY-02-1998
<PERIOD-END> JUL-31-1998
<CASH> 1,920,361
<SECURITIES> 0
<RECEIVABLES> 6,602,638
<ALLOWANCES> 150,000
<INVENTORY> 0
<CURRENT-ASSETS> 14,532,265
<PP&E> 2,747,621
<DEPRECIATION> 1,001,170
<TOTAL-ASSETS> 19,691,056
<CURRENT-LIABILITIES> 10,867,801
<BONDS> 0
0
0
<COMMON> 2,075
<OTHER-SE> 6,911,094
<TOTAL-LIABILITY-AND-EQUITY> 19,691,056
<SALES> 8,134,122
<TOTAL-REVENUES> 8,134,122
<CGS> 0
<TOTAL-COSTS> 7,576,993
<OTHER-EXPENSES> 835
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 203,990
<INCOME-PRETAX> 352,304
<INCOME-TAX> 160,682
<INCOME-CONTINUING> 191,622
<DISCONTINUED> 0
<EXTRAORDINARY> 280,849
<CHANGES> 0
<NET-INCOME> (89,227)
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
