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 October 30, 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 November 30, 1998
Common stock, par value $.001 per share 2,315,087 shares
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
<S> <C>
PAGE
NO.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - May 1, 1998 and October 30, 1998 3
Consolidated Statements of Operation - One month period ended May
30, 1997 (Predecessor), Six month periods ended
October 31, 1997 and October 30, 1998 and Three month periods
ended October 30, 1997 and October 30, 1998 5
Consolidated Statement of Stockholders' Equity - May 1, 1998
And October 30, 1998 6
Consolidated Statements of Cash Flows - One month period ended May
30, 1997 (Predecessor), and Six month periods
ended October 31, 1997 and October 30, 1998 7
Notes to Unaudited Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Operations
And Results of Operations 13
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 1, October 30,
1998 1998
----- ------
(Unaudited)
<S> <C> <C>
ASSETS:
Current Assets:
Cash $ 17,369 $ 721,122
Accounts Receivable:
Trade and other receivables, less allowance for
doubtful accounts at May 1 and October 30 $150,000 6,089,929 7,654,532
Costs and estimated earnings in excess of billings on
uncompleted projects, net 5,513,854 6,381,747
Prepaid expenses 724,010 703,680
-----------------------------------
Total Current Assets 12,345,162 15,461,081
-----------------------------------
Other Assets:
Deferred income taxes 465,601 509,776
Other 825,018 568,776
Goodwill, net 2,426,598 5,937,950
-----------------------------------
Total Other Assets 3,717,217 7,016,502
-----------------------------------
Property and Equipment:
Leasehold improvements 782,609 1,064,528
Furniture and fixtures 1,786,250 2,301,346
-----------------------------------
Property and Equipment, at cost 2,568,859 3,365,874
Less Accumulated depreciation 768,904 1,233,436
-----------------------------------
Property and equipment, net 1,799,955 2,132,438
-----------------------------------
TOTAL ASSETS $ 17,862,334 24,610,021
===================================
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 1, October 30,
1998 1998
----- ------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 656,576 $ 548,604
Notes payable 2,250,000 2,451,335
Accounts payable 3,041,859 3,581,777
Accrued expenses 1,913,505 1,791,989
Income tax payable 215,950 633,486
Billings in excess of costs and estimated earnings
on uncompleted projects 3,008,023 3,215,557
Deferred income taxes 1,517,146 1,501,055
-----------------------------------
Total Current Liabilities 12,603,059 13,723,803
-----------------------------------
LONG-TERM DEBT 4,164,401 2,635,642
-----------------------------------
TOTAL LIABILITIES 16,767,460 16,359,445
-----------------------------------
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 2,315,087, respectively 776 2,315
Preferred, $.10 par value, voting, authorized 1,000,000
shares, no shares outstanding
Additional paid in capital 185,623 7,292,725
Retained earnings 778,356 938,914
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY 964,755 8,233,954
-----------------------------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 17,862,334 $ 24,610,021
===================================
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATION
(UNAUDITED)
<TABLE>
<CAPTION>
(Predecessor
Company)
One Six Six Three Three
Month Months Months Months Months
Ended Ended Ended Ended Ended
May 30, October 31, October 30, October 31, October 30,
1997 1997 1998 1997 1998
----- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C>
REVENUES:
Fee Income $1,998,611 $10,294,060 $12,815,480 $5,450,772 $5,159,664
Reimbursable Income 234,425 2,892,743 2,829,066 2,424,990 2,350,760
----------- ----------- ----------- ----------- -----------
Total Revenues 2,233,036 13,186,803 15,644,546 7,875,762 7,510,424
----------- ----------- ----------- ----------- -----------
CONSULTANT EXPENSE 192,862 1,976,901 2,142,048 1,128,313 885,093
----------- ----------- ----------- ----------- -----------
PROJECT EXPENSES:
Direct Expenses 35,404 535,341 345,968 318,033 151,879
Reimbursable expenses 68,617 369,677 568,437 228,085 230,350
----------- ----------- ----------- ----------- -----------
Total project expenses 104,021 905,018 914,405 546,118 382,229
----------- ----------- ----------- ----------- -----------
NET PRODUCTION INCOME 1,936,153 10,304,884 12,588,093 6,201,331 6,243,102
DIRECT LABOR 602,096 3,062,843 3,601,546 1,917,798 1,849,427
INDIRECT EXPENSES 1,172,712 5,991,828 7,852,607 3,381,704 3,816,864
----------- ----------- ----------- ----------- -----------
OPERATING INCOME 161,345 1,250,213 1,133,940 901,829 576,811
----------- ----------- ----------- ----------- -----------
OTHER EXPENSE:
Interest Expense, net 36,951 496,370 327,547 345,187 123,557
Other 603 835 603 -
----------- ----------- ----------- ----------- -----------
Total Other Expense 36,951 496,973 328,382 345,790 123,557
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 124,394 753,240 805,558 556,039 453,254
INCOME TAX 43,000 374,125 364,151 224,125 203,469
----------- ----------- ----------- ----------- -----------
NET INCOME BEFORE EXTRAORDINARY ITEM 81,394 379,115 441,407 331,914 249,785
EXTRAORDINARY ITEM FOR EARLY
EXTINGUISHMENT OF DEBT, NET OF TAX
OF $171,842 280,849
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 81,394 $ 379,115 $ 160,558 $ 331,914 $ 249,785
=========== =========== =========== =========== ===========
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic and diluted $ 0.24 $ 0.12
=========== ===========
NET INCOME (LOSS) PER SHARE
Basic and diluted $ 0.09 $ 0.12
=========== ===========
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic and diluted 1,812,339 2,075,087
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Common Stock Additional Total
------------ 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 Income 160,558 160,558
Issuance of Common Stock
for purchase of JPJ Architects,
Inc. (Note 5) 240,000 240 1,070,760 1,071,000
-------------------------------------------------------------------------
Balance, October 30, 1998 2,315,087 $ 2,315 $7,292,725 $ 938,914 $8,233,954
========================================================================
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Predecessor
Company)
One Six Six
Month Months Months
Ended Ended Ended
May 30, October 31, October 30,
1997 1997 1998
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 81,394 $ 379,115 $ 160,558
Adjustments to reconcile net income to net used in operating activities:
Extraordinary item for early extinguishment of debt 280,849
Depreciation 55,544 118,176 464,532
Amortization of goodwill 9,571 71,496 86,097
Amortization of deferred loan fees 26,922 42,703
Deferred income taxes 54,907 308,413 117,450
Changes in assets and liabilities net of effects from purchase of of JPJ
Architects, Inc.:
(Increase) decrease in trade and other accounts receivable (1,500,472) (1,481,816) 863,724
(Increase) decrease in costs and estimated earnings compared to billings
on uncompleted contracts, net 1,199,028 1,506,233 (1,065,871)
(Increase) decrease in refundable income taxes (11,157) 41,835
Increase (decrease) in prepaid expenses and other assets (11,579) (101,899) 46,969
Increase (decrease) in accounts payable 233,659 (1,005,222) (866,191)
Increase (decrease) in accrued expenses and other liabilities (263,500) 88,146 (620,254)
Increase in income tax payable 50,022
-------------------------------------------
Net cash used in operating activities (152,605) (48,601) (439,412)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,023) (391,974) (638,749)
Note receivable from officer (20,000)
Payment for purchase of JPJ Architects, Inc., net of cash acquired (1,834,279)
-------------------------------------------
Net cash used in investing activities (2,023) (411,974) (2,473,028)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing on line of credit (2,360,000) 951,335
Net proceeds from issuance of common stock 11,693 5,922,709
Proceeds from long-term borrowings 2,800,000 3,750,000
Payment on short term borrowings (750,000)
Payment on long-term borrowings (285,372) (240,916) (2,509,051)
Payment of deferred loan fees (40,000)
Payment of ESOP buyback (3,221,824)
Proceeds from issuance of notes payable to shareholders 182,308
Proceeds from issuance of warrants 23,501 1,200
-------------------------------------------
Net cash provided by financing activities 154,628 464,762 3,616,193
-------------------------------------------
INCREASE IN CASH - 4,187 703,753
CASH BALANCE:
Beginning of period 2,321 2,321 17,369
-------------------------------------------
End of period $ 2,321 $ 6,508 $ 721,122
===========================================
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the year for:
Interest $ 6,827 $ 332,414 $ 460,175
Income tax payments (refunds) $ (750) $ (24,750) $ 184,526
Noncash investing and financing transactions:
Issuance of warrants to certain debt holders $ 238,752 $ 226,577 $ 1,200
Acquisition of JPJ Architects, Inc.:
Notes payable issued to JPJ Architects, Inc. shareholders $ 872,320
Fair value of assets acquired and liabilities assumed, net $ 180,150
Common stock to be issued on delayed delivery schedule $ 1,071,000
</TABLE>
See notes to unaudited consolidated financial statements.
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 each of HLM Design of North America,
Inc. ("HLMNA"), HLM Design of the Southeast, P.C.("HLMSE"), and HLM Design
of the Northwest, Architecture, Engineering and Planning, P.C. ("HLMNW")
in May 1997. In July 1998, HLM Design, Inc. entered into an MSA with each
of 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"). HLMNA, HLMSE,
HLMNW, 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 provides the stockholders of Managed
Firms with nominee stockholder status); therefore, as of May 31, 1998 and
thereafter, HLM Design, Inc. and Managed Firms financial statements are
presented on a consolidated basis. 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
six month periods ended October 31, 1997 and October 30, 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
consolidated 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
<PAGE>
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, October 30,
1998 1998
---- ----
Costs incurred on uncompleted
projects (excluding overhead) $45,830,792 $44,988,932
Estimated earnings thereon 45,615,282 48,551,771
----------- -------------
Total 91,446,074 93,540,703
Less billings to date 88,940,243 90,374,513
----------- -------------
Net underbillings $ 2,505,831 $ 3,166,190
=========== =============
Net underbillings are included in the accompanying balance sheets as
follows:
May 1, October 30,
1998 1998
---- ----
Costs and estimated earnings in excess of
billings
On uncompleted projects $5,513,854 $6,381,747
Billings in excess of costs and estimated
earnings
On uncompleted projects (3,008,023) (3,215,557)
------------ -----------
Net underbillings $2,505,831 $3,166,190
========== ==========
3. FINANCING ARRANGEMENTS
A summary of changes in financing arrangements are as follows:
Notes Payable: The Company repaid its indebtedness to Berthel Fisher &
Company Financial Services, Inc. ($.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
October 30, 1998, the Company had borrowings outstanding of $1.9 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 percent. This loan matures on June 30,
1999.
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. ACQUISITION OF JPJ ARCHITECTS, INC.
On October 30, 1998, HLM Design purchased all the issued and outstanding
common stock of JPJ Architects, Inc. ("JPJ") for $2.4 million in cash, an
aggregate of 240,000 shares of HLM Design's common stock, and subordinated
promissory notes bearing interest at 7 percent in the aggregate principal
amount of $1,160,000. Such purchase price may be adjusted downward if
certain earnings and stockholders' equity levels are not achieved by JPJ
for the year ended April 30, 1999. The purchase price agreement specifies
delivery of 30 percent of the aggregate shares of the stock and the
principal amount of the promissory notes on each of October 30, 2000 and
October 30, 2001 and delivery of the remaining 40 percent of the
aggregated shares of stock and the principal amount of the promisssory
notes on October 30, 2002. Following the purchase, HLM Design and JPJ
entered into Management Services Agreement whereby the Company will manage
all aspects of JPJ other than the provisions of professional architectural
services.
10
<PAGE>
HLM DESIGN INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. ACQUISITION OF JPJ ARCHITECTS, INC. (CONTINUED)
The acquisition has been accounted for using the purchase method of
accounting. The purchase price has been allocated on a preliminary basis
as shown below to the assets and liabilities acquired based on their
estimated fair value at the acquisition date. Such allocations may
ultimately be different than amounts reflected depending on final
valuations.
Working capital $ 444,585
Property and equipment 158,266
Other assets 143,020
Goodwill 3,597,449
---------
$ 4,343,320
The following unaudited pro forma information presents a summary of
consolidated results of operations as if the JPJ acquisition has occurred
at the beginning of the period in which the acquisition was completed
after giving effect to certain adjustments, including amortization of
goodwill, interest expense on acquisition debt and related income tax
effects. The pro forma results have been prepared for comparative purposes
only and are not necessarily indicative of the results of operations that
would have occurred had the acquisitions been completed at the beginning
of the period presented. These results are not necessarily indicative of
the results of future operations. It is not practicable to prepare
comparative pro forma results of operations for the six months period
ended October 31, 1997 due to the short time frame between consummation of
the acquisitionn and required filing deadlines for the report of Form
10-Q.
For the Six Months
Ended 10/30/98
-----------------
Total revenues $23,152,439
Net income before extraordinary item 606,842
Net income before extraordinary item
Per share (basic and fully diluted) $ 0.30
Net income 325,992
Net income per share (basic and fully
Diluted) $ 0.16
11
<PAGE>
HLM DESIGN INC. AND AFFILIATES
NOTES TO UNAUDITED FINANCIAL STATEMENTS
6. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED)
HLM Design, Inc.'s unconsolidated balance sheet as of October 30, 1998 and
income statement for the six month period ended October 30, 1998 is as
follows:
Balance Sheet:
Current assets $ 4,516,854
------------
Non-current assets 10,616,386
------------
Total assets $ 15,133,240
============
Current liabilities 6,025,766
------------
Non-current liabilities 873,520
------------
Total liabilities 6,899,286
------------
Total stockholders' equity 8,233,954
------------
Total liabilities and stockholders' equity $ 15,133,240
============
Income Statement:
Equity in earnings of Affiliate $ 375,750
Net interest, extraordinary item, tax and
other expense 215,192
------------
Net income $ 160,558
============
12
<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.
As a result of the acquisition of HLMNA through the merger of BBH Corp. (an
affiliate of HLM Design) into HLMNA, 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 six month period ended October 31, 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.
This pro forma financial information does not give effect to the
Offering.
<TABLE>
<CAPTION>
Pro Forma for
Consolidated Consolidated Consolidated Consolidated
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
October 31, October 30, October 31, October 30,
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $7,875,762 $ 7,510,424 $15,419,839 $15,644,546
Costs and expenses:
Direct cost of revenue 3,592,229 3,116,749 6,843,741 6,657,999
Operating expenses 3,381,704 3,816,864 7,137,540 7,852,607
----------- ------------ ------------ -------------
Total costs and expenses 6,973,933 6,933,613 13,981,281 14,510,606
----------- ------------ ------------ ------------
Income from operations 901,829 576,811 1,438,558 1,133,940
Other income (expense):
Interest expense (345,790) (123,557) (590,321) (327,547)
Other expense 0 (0) (603) (835)
------------ ------------ -------------- -------------
Total other expense (345,790) (123,557) (590,924) (328,382)
------------ ------------ -------------- -------------
Income before income taxes
and
Extraordinary item 556,039 453,254 847,634 805,558
Income tax expense 224,125 203,470 407,486 364,151
------------ ------------- ------------ -------------
Net income before
extraordinary item 331,914 249,785 440,148 441,407
Extraordinary item for
early extinguishment of debt,
Net of tax of $171,842 0 0 0 280,849
----------- ------------ ------------ ------------
Net income $ 331,914 $ 249,785 $ 440,148 $ 160,558
=========== ============ ============ ============
</TABLE>
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
Revenues were $7.5 million and $7.9 million for the three month period ended
October 30, 1998 and October 31, 1997, respectively. This decrease of 4.6% is
principally due to a reduction in the use of subconsultants and related expenses
to meet project requirements which is partially offset by management's continued
focus on marketing efforts which have continued from the previous year.
Direct costs primarily include, direct labor, subconsultant costs and
reimbursable expenses. Direct costs were $3.1 million, or 41.5% of revenues, for
the three month period ended October 30, 1998, as compared to $3.6 million, or
45.6% of revenues, for the three month period ended October 31, 1997. This
decrease as a percent of revenues is due to a decreased use of subconsultants to
meet project requirements as well as 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.
Operating costs were $3.8 million, or 50.8% of revenues, for the three month
period ended October 30, 1998, as compared to $3.4 million, or 42.9% of
revenues, for the three month period ended October 31, 1997. This increase as a
percent of revenues is principally due to an increase in expenses associated
with being a public company and marketing expenses which is partially offset by
a decrease in rent and occupancy costs in certain office locations as well as a
decrease in legal expenses.
Interest expense was $0.1 million and $0.3 million for the three month period
ended October 30, 1998, and October 31, 1997, respectively. 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 was $0.2 million and $0.2 million for the three month period
ended October 30, 1998, and October 31, 1997, respectively. The effective income
tax rate was 44.8% and 40.3% for the three month period ended October 30, 1998
and October 31, 1997, respectively.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-CONTINUED
FOR THE SIX MONTHS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997
Revenues were $15.6 million and $15.4 million for the six month period ended
October 30, 1998, and October 31, 1997, respectively. This increase of 1.5% is
principally due to management's continued focus on marketing efforts which have
continued from the previous year. This increase is partially offset by a
reduction in the use of subconsultants and related expenses to meet project
requirements as well as 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 a one week less revenues in the six months ended October 30, 1998
as compared to the six month period ended October 31, 1997.
Direct costs primarily include, direct labor, subconsultant costs and
reimbursable expenses. Direct costs were $6.7 million, or 42.6% of revenues, for
the six month period ended October 30, 1998, as compared to $6.8 million, or
44.4% of revenues, for the six month period ended October 31, 1997. This
decrease as a percent of revenues is due to a decreased use of subconsultants to
meet project requirements as well as 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.
Operating costs were $7.9 million, or 50.2% of revenues, for the six month
period ended October 30, 1998, as compared to $7.1 million, or 46.3% of
revenues, for the six month period ended October 31, 1997. This increase as a
percent of revenues is principally due to an increase in expenses associated
with being a public company and marketing expenses which is partially offset by
a decrease in rent and occupancy costs in certain office locations as well as a
decrease in legal expenses and travel expenses.
Interest expense was $0.3 million and $0.6 million for the six month period
ended October 30, 1998, and October 31, 1997, respectively. 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 was $0.4 million and $0.4 million for the six month period
ended October 30, 1998, and October 31, 1997, respectively. The effective income
tax rate was 45.2% and 48.1% for the six month period ended October 30, 1998 and
October 31, 1997, respectively. This rate decrease is principally due to
nondeductible items in 1997.
15
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERTIONS-CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
At October 30, 1998, the Company's current assets of $15.5 million exceeded
current liabilities of $13.7 million resulting in working capital of $1.7
million. During the six month period ended October 30, 1998, the Company used
$0.4 million in operating activities primarily due to the decrease in accounts
payable and accrued expenses and an increase in costs and estimated earnings
compared to billings on uncompleted contracts which was partially offset by a
decrease in accounts receivable, the reduction in deferred debt discount caused
by the extraordinary item for early extinguishment of debt and depreciation. The
Company used $2.5 million for investing activities primarily from the cash
payment for the purchase of JPJ Architects, Inc., net of cash acquired, and to a
lesser extent, the purchase of equipment. On October 30, 1998, the Company
purchased all the issued and outstanding stock of JPJ Architects, Inc. for $2.4
million in cash, promissory notes bearing interest at 7 percent in the aggregate
principal amount of $1.1 million and an aggregate of 240,000 shares of HLM
Design common stock. See Note 5 in the unaudited consolidated financial
statements.
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. 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 October 30, 1998, the Company had borrowings outstanding of
$1.9 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 percent. This loan matures on June 30, 1999.
The Company believes that the net proceeds from the Offering, the First Charter
National Bank 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.
AUTOMATED SYSTEMS AND YEAR 2000
The ability of automated systems to recognize the date change from December 31,
1999 to January 1, 2000 is commonly referred to as the Year 2000 matter. Similar
to most other organizations, the Company has assessed the potential impact of
the Year 2000 matter on its operations based on current and forseeable computer
and other automated system applications. The Company believes any future costs
associated with modifying its computer software and other automated systems for
the Year 2000 matters will not be significant.
16
<PAGE>
PART II-OTHER INFORMATION
Item 5. Other Information
As of October 27, 1998, the Board of Directors established a Compensation
Committee consisting of Clay Caroland III and L. Fred Pounds. The Compensation
Committee will address matters relating to executive officer compensation and
will administer the Company's Employee Stock Purchase Plan and Stock Option
Plan.
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this Form 10-Q are:
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
(b) On November 16, 1998 the Company filed a Current Report on Form 8-K, dated
November 16, 1998, pursuant to Item 2 of such form, reporting the JPJ
Architects, Inc. acquisition.
17
<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)
<TABLE>
<CAPTION>
<S> <C>
Date: December 14, 1998 By: /s/ Joseph M. Harris
----------------- ---------------------
Joseph M. Harris
President, Chairman and
Director
Date: December 14 , 1998 By: /s/ Vernon B. Brannon
------------------- ----------------------
Vernon B. Brannon
Senior Vice President, Chief Financial
Officer, Treasurer, Assistant Secretary
And Director
</TABLE>
18
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-02-1998
<PERIOD-END> APR-30-1999
<CASH> 721,122
<SECURITIES> 0
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<ALLOWANCES> 150,000
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<PP&E> 3,365,874
<DEPRECIATION> 1,233,436
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<COMMON> 2,315
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<TOTAL-LIABILITY-AND-EQUITY> 24,610,021
<SALES> 15,644,546
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<EXTRAORDINARY> 280,849
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