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 29, 1999
( ) 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:
<TABLE>
<CAPTION>
<S> <C>
Title of Each Class Outstanding at December 2, 1999
- - - - - - - - - - - - - - - - - ------------------- -------------------------------
Common stock, par value $.001 per share 2,086,942 shares
</TABLE>
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
NO.
PART I - FINANCIAL INFORMATION
<S> <C> <C> <C>
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - April 30, 1999 and
October 29, 1999 3
Condensed Consolidated Statements of Income - Six Month Periods
Ended October 30, 1998 and October 29, 1999 and Three Month
Periods Ended October 30, 1998 and October 29, 1999 5
Condensed Consolidated Statement of Stockholders' Equity - Six
Month Period Ended October 29, 1999 6
Condensed Consolidated Statements of Cash Flows - Six Month
Periods Ended October 30, 1998 and October 29, 1999 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 17
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
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, October 29,
1999 1999
---- ----
(Unaudited)
<S> <C> <C>
ASSETS:
Current Assets:
Cash $ 250,575 $ 118,620
Trade and other receivables, less allowance for
doubtful accounts at April 30, 1999 and October 29, 1999
of $341,692 and $401,641, respectively 8,311,068 9,061,692
Costs and estimated earnings in excess of billings on
uncompleted projects, net 7,550,247 8,023,902
Prepaid expenses and other 482,740 488,208
--------------------------------------------
Total Current Assets 16,594,630 17,692,422
--------------------------------------------
Other Assets:
Goodwill, net 7,442,301 7,879,814
Other 1,225,909 1,364,629
--------------------------------------------
Total Other Assets 8,668,210 9,244,443
--------------------------------------------
Property and Equipment:
Leasehold improvements 1,114,337 1,442,808
Furniture and fixtures 1,291,633 1,606,778
Assets under capital leases 1,638,043 1,853,857
--------------------------------------------
Property and Equipment, at cost 4,044,013 4,903,443
Less Accumulated depreciation and amortization 1,832,611 2,433,992
--------------------------------------------
Property and equipment, net 2,211,402 2,469,451
--------------------------------------------
TOTAL ASSETS $ 27,474,242 $ 29,406,316
============================================
See notes to unaudited condensed consolidated financial statements.
3
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, October 29,
1999 1999
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,054,369 $ 6,241,251
Accounts payable 4,853,283 6,988,783
Billings in excess of costs and estimated earnings
on uncompleted projects 3,179,882 1,445,741
Accrued expenses and other 2,385,121 1,760,897
---------------------------------------
Total Current Liabilities 11,472,655 16,436,672
---------------------------------------
LONG-TERM DEBT AND OTHER 6,997,517 3,459,189
---------------------------------------
TOTAL LIABILITIES 18,470,172 19,895,861
---------------------------------------
MINORITY INTEREST 21,930 600
---------------------------------------
WARRANTS OUTSTANDING 1,200 1,200
---------------------------------------
STOCKHOLDERS' EQUITY:
Capital Stock:
Common, $.001 par value, voting, authorized 9,000,000
shares: issued 2,345,077 and 2,354,609, respectively 2,345 2,355
(April 30, 1999 and October 29, 1999) (includes 267,667 shares
to be issued on a delayed delivery schedule)
Preferred, $.10 par value, voting, authorized 1,000,000
shares, no shares outstanding
Additional paid in capital 7,408,864 7,431,962
Retained earnings 1,570,393 2,067,272
Accumulated other comprehensive (loss) income (662) 7,066
---------------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,980,940 9,508,655
---------------------------------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 27,474,242 $ 29,406,316
=======================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
HLM DESIGN, INC. AND AFFILIATES
CONDENDSED CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited)
Six Six Three Three
Months Months Months Months
Ended Ended Ended Ended
October 30, October 29, October 30, October 29,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Fee Income $ 14,845,136 $ 22,137,677 $ 7,189,320 $ 11,473,611
Reimbursable Income 799,410 1,640,759 321,104 851,630
-------------------------------- -------------------------------
Total Revenues 15,644,546 23,778,436 7,510,424 12,325,241
-------------------------------- -------------------------------
CONSULTANT EXPENSE 2,142,048 6,004,259 885,093 3,230,710
-------------------------------- -------------------------------
PROJECT EXPENSES:
Direct Expenses 345,968 354,828 151,879 140,828
Reimbursable expenses 568,437 901,023 230,350 516,663
-------------------------------- -------------------------------
Total project expenses 914,405 1,255,851 382,229 657,491
-------------------------------- -------------------------------
NET PRODUCTION INCOME 12,588,093 16,518,326 6,243,102 8,437,040
DIRECT LABOR 3,601,546 4,853,626 1,849,427 2,547,202
INDIRECT EXPENSES 7,852,607 10,227,418 3,816,864 5,111,915
-------------------------------- -------------------------------
OPERATING INCOME 1,133,940 1,437,282 576,811 777,923
-------------------------------- -------------------------------
OTHER EXPENSE:
Interest Expense, net 328,382 472,162 123,557 254,797
-------------------------------- -------------------------------
Total Other Expense 328,382 472,162 123,557 254,797
-------------------------------- -------------------------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 805,558 965,120 453,254 523,126
INCOME TAX 364,151 468,241 203,469 253,217
-------------------------------- -------------------------------
NET INCOME BEFORE EXTRAORDINARY ITEM 441,407 496,879 249,785 269,909
EXTRAORDINARY ITEM FOR EARLY
EXTINGUISHMENT OF DEBT, NET OF TAX OF $171,842 280,849
================================ ===============================
NET INCOME $ 160,558 $ 496,879 $ 249,785 $ 269,909
================================ ===============================
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic and Diluted $ 0.24 $ 0.21 $ 0.12 $ 0.11
================================ ===============================
NET INCOME PER SHARE
Basic and Diluted $ 0.09 $ 0.21 $ 0.12 $ 0.11
================================ ===============================
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic and Diluted 1,812,339 2,350,248 2,075,087 2,352,993
================================ ===============================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Stock Paid-In Retained Comprehensive Stockholders'
Shares Amount Capital Earnings (Loss) Income Equity
------ ------ ------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 30, 1999 2,345,077 $ 2,345 $ 7,408,864 $ 1,570,393 $ (662) $ 8,980,940
Issuance of Common Stock 9,532 10 23,098 23,108
(Note 5)
Comprehensive Income-
Foreign Currency Translation Adjustment 7,728 7,728
Net Income 496,879 496,879
----------------------------------------------------------------------------------------
Balance, October 29, 1999 2,354,609 $ 2,355 $ 7,431,962 $ 2,067,272 $ 7,066 $ 9,508,655
========================================================================================
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Six
Months Months
Ended Ended
October 30, October 29,
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 160,558 $ 496,879
Adjustments to reconcile net income to net cash used in operating activities:
Extraordinary item for early extinguishment of debt 280,849 -
Depreciation 464,532 419,949
Amortization of goodwill 86,097 201,439
Amortization of deferred loan fees 42,703 39,275
Other 117,450 -
Changes in assets and liabilities, net of effects from purchase of
acquired companies:
Decrease (increase) in trade and other accounts receivable 863,724 (733,024)
Increase in costs and estimated earnings compared to billings
on uncompleted contracts, net (1,065,871) (1,892,640)
Decrease (increase) in prepaid expenses and other assets 46,969 (76,514)
Increase (decrease) in accounts payable (866,191) 1,870,176
Decrease in accrued expenses and other (570,232) (1,082,178)
------------------------------------------
Net cash used in operating activities (439,412) (756,638)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (638,749) (569,075)
Payment for purchase of minority interest in GAIH - (21,330)
Payment for purchase of acquired companies, net of cash acquired (1,834,279) (153,993)
------------------------------------------
Net cash used in investing activities (2,473,028) (744,398)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing on line of credit 951,335 1,800,000
Net proceeds from issuance of common stock 5,922,709 -
Net decrease on short term borrowings (750,000) -
Payment on long-term borrowings (2,509,051) (454,027)
Proceeds from issuance of warrants 1,200 -
Proceeds from issuance of common stock under the Employee Stock Purchase Plan - 23,108
------------------------------------------
Net cash provided by financing activities 3,616,193 1,369,081
------------------------------------------
INCREASE (DECREASE) IN CASH 703,753 (131,955)
CASH BALANCE:
Beginning of period 17,369 250,575
------------------------------------------
End of period $ 721,122 $ 118,620
==========================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 460,175 $ 382,272
Income tax payments $ 184,526 $ 703,943
Noncash investing and financing transactions:
Issuance of warrants to certain debt holders $ 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
See notes to unaudited condensed consolidated 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. (the "Company" or "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"). In May 1997, HLM Design executed long
term MSAs with HLM Design of North America, Inc. ("HLMNA"), HLM of the
Southeast. P.C. ("HLMSE") and HLM of the Northwest, Architecture,
Engineering and Planning, P.C. ("HLMNW"). HLMSE and HLMNW were
organized in 1996 and had no operations through May 1, 1998. In July
1998, HLM Design 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"). In October 1998, HLM Design entered into an
MSA with JPJ Architects, Inc. ("JPJ"). In January 1999, HLM Design
entered into an MSA with G.A. Design International Holdings, Ltd.
("GAIH"). JPJ and GAIH are subsidiaries of the Company that were
acquired on October 30, 1998 and January 30, 1999 respectively. In
September 1999, the Company acquired ESS Architects, Inc. ("ESS").
HLMNA, HLMSE, HLMNW, HLMMW, HLMMA, HLMNE, JPJ, GAIH and ESS are
referred to herein collectively as "Managed Firms". In order to
simplify the MSAs, in November 1999, HLMMA, HLMNW and HLMSE merged into
HLMNE. HLMNE's name was changed to HLM Design Architecture, Engineering
and Planning, P.C. In addition, HLMMW's name was changed to HLM Design
USA, Inc.
Financial Statement Presentation - The accompanying unaudited financial
information for the three and six month periods ended October 30, 1998
and October 29, 1999 has 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 interim 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 April 30,
1999.
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:
<TABLE>
<CAPTION>
April 30, October 29,
1999 1999
---- ----
<S> <C> <C>
Costs incurred on uncompleted projects
(excluding overhead) $52,092,171 $54,501,739
Estimated earnings thereon 49,678,268 50,963,826
------------ -------------
Total 101,770,439 105,465,565
Less billings to date 97,400,074 98,887,404
------------ -------------
Net underbillings $ 4,370,365 $ 6,578,161
============ =============
</TABLE>
Net underbillings are included in the accompanying balance sheets as
follows:
<TABLE>
<CAPTION>
April 30, October 29,
1999 1999
---- ----
<S> <C> <C>
Costs and estimated earnings in excess of billings
On uncompleted projects $7,550,247 $8,023,902
Billings in excess of costs and estimated earnings
On uncompleted projects (3,179,882) (1,445,741)
---------- ----------
Net underbillings $4,370,365 $6,578,161
========== ==========
</TABLE>
3. ACQUISITIONS
ESS ARCHITECTS, INC.
On September 16, 1999, HLM Design purchased all the issued and
outstanding common stock of ESS for a combination of cash and
promissory notes for a total of $425,000. The purchase price has been
allocated on a preliminary basis to the assets and liabilities acquired
based on their estimated fair value at the acquisition date resulting
in an allocation of goodwill of approximately $515,450. Such
allocations may ultimately be different than amounts referenced herein
depending on final valuations.
4. FINANCING ARRANGEMENTS
A summary of changes in financing arrangements are as follows:
$5,000,000 Revolving Line of Credit: As of October 29, 1999, the
Company has borrowings outstanding of $4,918,335. This loan matures on
August 31, 2000.
Notes Payable: In November 1999, the Company entered into a secured
$250,000 debt agreement with the Lender. This note bears interest at
prime plus 1 percent and matures on February 8, 2000.
9
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. STOCKHOLDERS' EQUITY
In September 1999, 2,411 shares of stock were issued under the HLM
Design, Inc. Employee Stock Purchase Plan.
In September 1999, the Company purchased the remaining 5 percent of the
issued and outstanding common stock of GAIH for $25,960.
On July 21, 1999, 28,400 stock options were issued to certain Company
employees at a grant price of $3.61.
6. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED)
HLM Design's unconsolidated balance sheet as of and for the six month
period ended October 29, 1999 is as follows:
Balance Sheet
Current assets $15,072,626
-----------
Non-current assets 9,029,340
-----------
Total assets $24,101,966
===========
Current liabilities 13,357,497
-----------
Non-current liabilities 1,235,814
-----------
Total liabilities 14,593,311
-----------
Total stockholders' equity 9,508,655
-----------
Total liabilities and stockholders' equity $24,101,966
===========
Statement of Income
Equity in earnings of affiliate $ 552,923
Net interest, income tax and other expense 56,044
-----------
Net income $ 496,879
===========
7. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENT AND HEDGING ACTIVITIES. This Standard establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging
activities. Management originally intended to adopt this provision
effective January 30, 1999. However, based on further review of the
pronouncement and the potential impact on the Company which can not be
currently determined, management has deferred adoption of the
pronouncement. The Statement will become effective for the Company's
second quarter of fiscal 2001.
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
<TABLE>
<CAPTION>
Consolidated Consolidated Consolidated Consolidated
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
October 30, October 29, October 30, October 29,
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 7,510,424 $12,325,241 $15,644,546 $23,778,436
Consultant and project expenses 1,267,322 3,888,201 3,056,453 7,260,110
----------- ----------- ----------- -----------
Net production income 6,243,102 8,437,040 12,588,093 16,518,326
----------- ----------- ----------- -----------
Direct labor 1,849,427 2,547,202 3,601,546 4,853,626
Operating costs 3,773,791 5,010,455 7,766,510 10,025,979
Amortization of intangible assets 43,073 101,460 86,097 201,439
----------- ----------- ----------- -----------
Total costs and expenses 5,666,291 7,659,117 11,454,153 15,081,044
----------- ----------- ----------- -----------
Income from operations 576,811 777,923 1,133,940 1,437,282
Interest expense, net 123,557 254,797 328,382 472,162
----------- ----------- ----------- -----------
Total other expense 123,557 254,797 328,382 472,162
----------- ----------- ----------- -----------
Income before income taxes and
Extraordinary item 453,254 523,126 805,558 965,120
Income tax expense 203,469 253,217 364,151 468,241
----------- ----------- ----------- -----------
Net income before extraordinary
item 249,785 269,909 441,407 496,879
Extraordinary item for early
extinguishment
of debt, net of tax of $171,842 280,849
----------- ----------- ----------- -----------
Net income $ 249,785 $ 269,909 $ 160,558 $ 496,879
=========== =========== =========== ===========
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 29, 1999 AND OCTOBER 30, 1998
Revenues were $12.3 million for the three month period ended October
29, 1999 as compared to $7.5 million for the three month period ended October
30, 1998. This increase of 64% is attributable to the acquisition of JPJ in
October 1998 and to internal growth.
Direct costs which primarily include consultant costs and
reimbursable project expenses totaling $3.9 million, or 32% of revenues, for the
three month period ended October 29, 1999 as compared to $1.3 million, or 17% of
revenues, for the three month period ended October 30, 1998. This increase as a
percent of revenue is due to an increased use of consultants to meet project
requirements (26% and 12% of revenue for the three month periods ended October
29, 1999 and October 30, 1998, respectively), primarily due to JPJ's use of
consultants since November 1998. Management believes that JPJ will continue to
use consultants which will cause direct costs as a percent of revenues to
increase in future periods as JPJ consultant expenses are reflected for a twelve
month period.
Direct labor cost was $2.5 million, or 30% of net production income,
for the three month period ended October 29, 1999 as compared to $1.8 million,
or 30% of net production income, for the three month period ended October 30,
1998. Management believes that although the volume of architecture, planning and
engineering services has increased, it is offset by (a) an increase in salary
and salary related costs which has not been passed through to the Company's
clients in all cases; and (b) a reduction in certain higher margin projects.
Operating costs were $5.0 million, or 59% of net production income, for
the three month period ended October 29, 1999 as compared to $3.8 million, or
60% of net production income, for the three month period ended October 30, 1998.
This decrease as a percent of net production income is principally due to a
decrease in certain recurring expenses relating to the Company's obligations as
a public company as well as the Company's internally performing several
functions that has previously been outsourced. This decrease is partially offset
by (a) an increase in education and seminars due to the Company's increased
focus on training and education of its employees; (b) an increase in
depreciation expense due to the Company's increased focus on improvement of
certain computer and related equipment; and (c) an increase in certain salary
and related costs as a result of market competition for certain professionals.
Amortization of intangible assets was $101,460 for the three months
ended October 29, 1999 as compared to $43,073 for the three months ended October
30, 1998. This increase is attributable to amortization expense arising from the
acquisition of JPJ and GAIH in October 1998 and January 1999, respectively.
12
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
Interest expense was $0.3 million for the three month period ended
October 29, 1999 as compared to $0.1 million for the three month period ended
October 30, 1998. This increase is principally due to the Company's increase in
borrowings on its line of credit as well as debt resulting from the acquisitions
of JPJ and GAIH which is partially offset by the repayment of approximately $3.0
million in debt from the proceeds of its initial public offering in June of 1998
(the "Offering").
Income tax expense was $0.3 million for the three month period ended
October 29, 1999 as compared to $0.2 million for the three month period ended
October 30, 1998. The effective income tax rate was 48% and 45% for the three
month periods ended October 29, 1999 and October 30, 1998, respectively. This
effective tax rate is higher principally due to increased goodwill amortization.
FOR THE SIX MONTHS ENDED OCTOBER 29, 1999 AND OCTOBER 30, 1998
Revenues were $23.8 million for the six month period ended October 29,
1999 as compared to $15.6 million for the six month period ended October 30,
1998. This increase of 52% is attributable to the acquisition of JPJ in October
1998 and to internal growth.
Direct costs (primarily including consultant costs and reimbursable
project expenses) totaling $7.3 million, or 31% of revenues, for the six month
period ended October 29, 1999 as compared to $3.1 million, or 20% of revenues,
for the six month period ended October 30, 1998. This increase as a percent of
revenue is due to an increased use of consultants to meet project requirements
(25% and 14% of revenue for the six month periods ended October 29, 1999 and
October 30, 1998, respectively), primarily due to JPJ's use of consultants since
November 1998. Management believes that JPJ will continue to use consultants
which will cause direct costs as a percent of revenues to increase in future
periods as JPJ consultant expenses are reflected for a twelve month period.
Direct labor cost was $4.9 million, or 30% of net production income,
for the six month period ended October 29, 1999 as compared to $3.6 million, or
29% of net production income, for the six month period ended October 30, 1998.
Management believes that although volume of architecture, planning and
engineering services has increased, it is offset by (a) an increase in salary
and salary related costs which has not been passed through to the Company's
clients in all cases and (b) a reduction in certain higher margin projects.
13
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
Operating costs were $10.0 million, or 61% of net production income,
for the six month period ended October 29, 1999 as compared to $7.8 million, or
62% of net production income, for the six month period ended October 30, 1998.
This decrease as a percent of net production income is principally due to (a) a
decrease in certain recurring expenses relating to the Compny's obligation as a
public company as well as the Company's internally performing several functions
that had previously been outsourced; and (b) a decrease in office supplies due
to additional costs related to implementation of an updated corporate identity
in the prior year. This decrease is partially offset by (a) an increase in
education and seminars due to the Company's increased focus on training and
education of its employees and (b) an increase in depreciation expense due to
the Company's increased focus on improvement of certain computer and related
equipment.
Amortization of intangible assets was $201,439 for the six months ended
October 29, 1999 as compared to $86,097 for the six months ended October 30,
1998. This increase is attributable to amortization expense arising from the
acquisitions of JPJ and GAIH in October 1998 and January 1999, respectively.
Interest expense was $0.5 million for the six month period ended
October 29, 1999 as compared to $0.3 million for the six month period ended
October 30, 1998. This increase is principally due to the Company's increase in
borrowings on its line of credit as well as debt resulting from the acquisition
of JPJ and GAIH which is partially offset by the repayment of approximately $3.0
million in debt from the proceeds of its Offering.
Income tax expense was $0.5 million for the six month period ended
October 29, 1999 as compared to $0.4 million for the six month period ended
October 30, 1998. The effective income tax rate was 49% and 45% for the six
month periods ended October 29, 1999 and October 30, 1998, respectively. This
effective rate is higher principally due to increased goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
At October 29, 1999, the Company's current assets of $17.7 million
exceeded current liabilities of $16.4 million resulting in net working capital
of $1.3 million. Working capital has declined since April 30, 1999 as a result
of the classification of certain debt as current. During the six month period
ended October 29, 1999, the Company used $0.8 million in operating activities
primarily due to the increase in costs and estimated earnings compared to
billings on uncompleted projects and accounts receivable as well as a decrease
in accrued expenses and other. This use of cash provided by operating activities
is partially offset by an increase in accounts payable. The Company used $0.7
million for investing activities, primarily the purchase of equipment as well as
payment for purchase of ESS in September 1999. In addition, the Company
generated $1.8 million in financing activities primarily from borrowings under
the Company's revolving line of credit.
14
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
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. In August 1999, the Company's
$5.0 million revolving line of credit maturity date was extended from June 30,
2000 to August 31, 2000. As of October 29, 1999, the Company has borrowings
outstanding under this line of credit of $4.9 million. In November 1999, the
Company entered into a $250,000 debt agreement with a maturity date of February
8, 2000.
The Company is working with several lenders to obtain additional
capital in order to finance any future acquisitions. The Company expects to
receive several proposals during late December 1999 in order to determine the
ultimate financing arrangements. In order to continue its expansion program
through acquisitions, the Company will require additional capital. If the
Company is unable to obtain additional capital, its ability to implement its
growth strategy will be adversely affected. The Company believes that its
revolving line of credit and anticipated funds from future operations will be
sufficient to meet the Company's operating needs for at least the next twelve
months.
YEAR 2000 COMPLIANCE
Some computer systems will not be able to process dates beyond 1999
and will need to be modified or replaced prior to the year 2000. Many of the
Company's information technology purchases were made after January 1997, and
management believes the Company's internal software and hardware systems will
function properly with respect to dates in the year 2000 and thereafter. Year
2000 issues are also addressed as the Company's network and internal systems are
upgraded in the normal course of business. As of October 29, 1999, the Company's
expenditures toward year 2000 compliance has been minimal and management does
not expect its additional expenditures directly related to year 2000 compliance
to exceed $40,000. Management continually reassesses the estimated costs and
status of the Company's year 2000 compliance effort.
The Company began conducting verification testing of all its internal
information technology and information systems in 1998. The testing is a
multi-phased process which includes, but is not limited to, simulating several
key dates and times in the year 2000 and performing normal daily activities. The
infrastructure, servers and workstations, as well as primary software systems,
have been tested and validated using this process.
15
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
While management believes that its hardware and software applications
are year 2000 compliant, there can be no assurance until the year 2000 occurs
that all systems will then function adequately. The Company is monitoring all
key vendors and suppliers for year 2000 compliance by various methods including,
but not limited to, gathering information from detailed surveys sent by the
Company to each key vendor. Most of the Company's significant suppliers and
vendors have advised the Company that they are, or anticipate being, year 2000
compliant. If, however, other software applications of other suppliers or of
local exchange carriers, long distance carriers, service providers, competitive
access providers, or others on whose services the Company depends are not year
2000 compliant, a material adverse effect on the Company's financial condition
and results of operations could result. The Company is not aware of any
significant vendor who may be unable to provide service to the Company as a
result of year 2000 non-compliance. The Company currently has a disaster
recovery plan in place which will serve as a foundation for its contingency plan
in the event some suppliers and vendors are not year 2000 compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the opinion of management, there has been no material change in
market risk since April 30, 1999.
16
<PAGE>
PART II-OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on September 22, 1999
for the purpose of electing five directors and ratifying the appointment of
independent accountants. Proxies were solicited pursuant to Regulation 14A of
the Securities Exchange Act of 1934 and there was no solicitation in opposition
to management's solicitations.
Proposal 1:
Election of directors for terms indicated:
<TABLE>
<CAPTION>
Years of Annual Meeting of
Stockholders that
Term Expires Shares Voted Shares
Name "For" "Withheld"
---- ----- ----------
<S> <C> <C> <C>
D. Shannon LeRoy 2000 1,928,307 8,100
James E. Finley 2001 1,928,307 8,100
L. Fred Pounds 2001 1,928,807 7,600
Joseph M. Harris 2002 1,928,807 7,600
Vernon B. Brannon 2002 1,928,807 7,600
</TABLE>
Proposal 2:
Ratification of appointment of Deloitte & Touche LLP as the Company's
independent accountants was approved with the following vote:
Shares Voted Shares Voted Shares
"For" "Against" "Abstaining"
----- --------- ------------
1,929,191 1,800 5,416
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of this Form 10-Q are:
Exhibit No. Description
- - - - - - - - - - - - - - - - - ----------- -----------
10.62 Promissory Note made by the Company in favor of First Charter
National Bank dated as of November 10, 1999.
27 Financial Data Schedule
(b) HLM Design has not filed any reports on Form 8-K during the period covered
by this report.
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)
Date: December 13, 1999 By: /s/ Joseph M. Harris
------------------ ---------------------
Joseph M. Harris
President, Chairman and Director
Date: December 13, 1999 By: /s/ Vernon B. Brannon
------------------ ---------------------
Vernon B. Brannon
Senior Vice President, Chief Financial
Officer, Treasurer, Assistant Secretary
And Director
18
Exhibit 10.62
PROMISSORY NOTE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$250,000.00 11-10-1999 02-08-2000 585059 004A 905 GRS
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------------------------
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.
- - - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------------------------------
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
==============================================================================================================
PRINCIPAL AMOUNT: $250,000.00 INITIAL RATE: 9.250% DATE OF NOTE: NOVEMBER 10, 1999
</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 TWO HUNDRED FIFTY THOUSAND & 00/100 DOLLARS
($250,000.00), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE FROM
NOVEMBER 10, 1999, UNTIL PAID IN FULL.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PRINCIPAL PAYMENT OF $250,000.00
PLUS INTEREST ON FEBRUARY 8, 2000. THIS PAYMENT DUE FEBRUARY 8, 2000, WILL BE
FOR ALL PRINCIPAL AND ACCRUED INTEREST NOT YET PAID. 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 8.250% 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 IN AN INITIAL RATE OF 9.250% 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
under the payment schedule. Rather, they will reduce the principal balance due.
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, convenant, 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 SEE ATTACHED UCC-5 FILED 9-21-98 (NC
SECRETARY OF STATE-19980067927); ATTACHED UCC-5 FILED 9-21-98 (MECKLENBURG
COUNTY-13223) AND THE CORPORATE GUARANTORS OF HLM DESIGN OF THE NORTHAMERICA,
INC. (42-1414522), HLM DESIGN OF THE SOUTHEAST, P.C. (56-1981021), HLM DESIGN OF
THE NORTHWEST, ARCHITECTURE, ENGINEERING AND PLANNING, P.C. (56-2041359), JPJ
ARCHITECTS, INC. ().
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.
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 B. Brannon (SEAL)
----------------------------
VERNON B. BRANNON, CFO
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-28-2000
<PERIOD-END> OCT-29-1999
<CASH> 118,620
<SECURITIES> 0
<RECEIVABLES> 9,463,333
<ALLOWANCES> 401,641
<INVENTORY> 0
<CURRENT-ASSETS> 17,692,422
<PP&E> 4,903,443
<DEPRECIATION> 2,433,992
<TOTAL-ASSETS> 29,406,316
<CURRENT-LIABILITIES> 16,436,672
<BONDS> 0
0
0
<COMMON> 2,355
<OTHER-SE> 9,506,300
<TOTAL-LIABILITY-AND-EQUITY> 29,406,316
<SALES> 0
<TOTAL-REVENUES> 23,778,436
<CGS> 0
<TOTAL-COSTS> 12,113,736
<OTHER-EXPENSES> 10,227,418
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 472,162
<INCOME-PRETAX> 965,120
<INCOME-TAX> 468,241
<INCOME-CONTINUING> 496,879
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 496,879
<EPS-BASIC> 0.21
<EPS-DILUTED> 0.21
</TABLE>
