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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 28, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to --------------- to ---------------
Commission file number 001-14137
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HLM Design, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 56-2018819
(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.)
121 West Trade Street
Suite 2950
Charlotte, North Carolina 28202
(Address of Principal Executive Offices) (Zip Code)
(704) 358-0779
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class on Which Registered
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$.001 Par Value Common Stock American Stock Exchange
</TABLE>
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At July 11, 2000, the aggregate market value of the voting stock held by
non-affiliates was $5,871,692, based on the closing sales price of the
registrant's Common Stock on that date, of $4.00 per share. As of July 11,
2000, the registrant had a total of 2,105,438 shares of Common Stock
outstanding.
Documents incorporated by reference. Portions of the registrant's proxy
statement for the annual meeting of stockholders to be held September 14, 2000
have been incorporated by reference in Part III of this Form 10-K.
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FORM 10-K TABLE OF CONTENTS
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Page
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Part I
Item 1. Business ................................................................................. 3
Item 2. Properties ............................................................................... 7
Item 3. Legal Proceedings ........................................................................ 7
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 7
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................ 8
Item 6. Selected Financial Data .................................................................. 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ............................... 14
Item 8. Financial Statements and Supplementary Data .............................................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 14
Part III
Item 10. Directors and Executive Officers of the Registrant ....................................... 15
Item 11. Executive Compensation ................................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management ........................... 15
Item 13. Certain Relationships and Related Transactions ........................................... 15
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ......................... 16
Index to Financial Statements .................................................................... F-1
Signatures ....................................................................................... F-19
</TABLE>
Forward-Looking Statements
The forward-looking statements included in the "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections, which reflect management's best judgment based on factors
currently known, involve risks and uncertainties. Words such as "expects,"
"anticipates," "believes," "intends," and "hopes," variations of such words and
similar expressions are intended to identify such forward-looking statements.
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including but
not limited to, the factors discussed in such sections and those set forth in
the cautionary statements contained in Exhibit 99.1 to this Form 10-K. (See
Exhibit 99.1 -- Safe Harbor Under the Private Securities Litigation Reform Act
of 1995.) Forward-looking information provided by the Registrant in such
sections pursuant to the safe harbor established under the Private Securities
Litigation Reform Act of 1995 should be evaluated in the context of these
factors.
Explanatory Note
Unless otherwise indicated, all information in this report gives effect to
(a) an effective 12.75-to-1 stock split (effected in a series of transactions)
(the "Stock Split") of the Registrant's common stock, par value $.001 per share
(the "Common Stock") completed, and (b) the exercise of certain warrants (as
defined herein) exercised, prior to the consummation of the Registrant's
initial public offering as described herein (the "IPO" or "Offering") in June
1998. Unless the context otherwise requires, references herein to the "Company"
mean HLM Design, Inc.; references to a "Management and Services Agreement" mean
a long-term agreement between the Company and an architectural, engineering and
planning firm (an "AEP Firm") as described herein; and references to the
"Managed Firms" mean HLMNA, HLMUSA, HLMAEP, JPJ, GAIH and BL&P (each as defined
below) and such other AEP Firms with which the Company shall, from time to
time, enter into Management and Services Agreements. "HLM" is a registered
trademark of the Company.
2
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PART I
Item 1. Business
Overview
HLM Design, Inc., headquartered in Charlotte, North Carolina, is a
management company that enters into management and services relationships with
full service architecture, engineering and planning firms. It was formed in
March 1997 to pursue a strategy of consolidating non-professional operations
and providing management expertise to individual AEP Firms. The Company has
chosen to focus on full service AEP Firms because it believes these firms offer
a competitive advantage -- the ability to provide a full line of high-quality,
cost-effective services. HLM Design believes it is the first company to pursue
such a consolidation strategy in order to take advantage of operating
efficiencies and provide geographic and service diversification for clients. By
establishing management and services relationships, HLM Design is adopting a
successful strategy used to consolidate other professional service industries.
The Managed Firms provide a broad spectrum of design services to public
and private clients in the United States and internationally. At April 28,
2000, the Managed Firms were as follows:
o HLM Design of North America, Inc. ("HLMNA");
o HLM Design USA, Inc. ("HLMUSA") -- In May 1999, HLM Holdings, Inc.'s name
was changed to HLM Design USA, Inc. In November 1999, HLM Design of the
Midwest, Inc. was merged into HLMUSA. In December 1999, ESS Architects,
Inc. ("ESS") was merged into HLMUSA;
o HLM Design Architecture, Engineering and Planning, P.C. ("HLMAEP") -- HLM
Design of the Northeast, Architecture, Engineering and Planning, P.C.'s
("HLMNE") name was changed to HLM Design Architecture, Engineering and
Planning, P.C.. In November 1999, HLM Design of the Midatlantic, P.C., HLM
Design of the Northwest, Architecture, Engineering and Planning, P.C.
("HLMNW") and HLM of the Southeast, P.C. ("HLMSE") merged into HLMNE;
o JPJ Architects, Inc. ("JPJ"); and
o G.A. Design International Holdings, Ltd. ("GAIH").
In addition, as of April 29, 2000, the Company acquired and established a
management and services agreement with BL&P Engineers, Inc. ("BL& P"). JPJ,
GAIH and BL&P are subsidiaries of the Company.
These firms operate in 11 offices located in Atlanta, Georgia; Iowa City,
Iowa; Chicago, Illinois; Orlando, Florida; Bethesda, Maryland; Denver,
Colorado; San Francisco, California; Dallas, Texas; Philadelphia, Pennsylvania;
Charlotte, North Carolina; and London, UK. The Company is headquartered in
Charlotte, North Carolina. The Company is not itself engaged in the practice of
architecture, engineering, and planning.
The Managed Firms
The Managed Firms provide a broad spectrum of design services to public
and private clients in the United States and internationally through a wide
range of professionals, including architects, mechanical, electrical,
structural and civil engineers, landscape architects, interior designers, and
construction administration personnel. The Company believes that its management
strategy will assist in attracting new AEP Firms as a result of two major
trends: (1) the increasing complexity, cost and competitiveness of the design
practice conducted by AEP Firms requiring operating and cost efficiencies and
(2) AEP Firms' need for access to a wider pool of geographically dispersed
professionals in order to provide solutions for the evolving needs of their
clients.
Markets
The professionals at the Managed Firms specialize in the design of large
complex projects in the healthcare, justice (courts and correctional
facilities), research, corporate/commercial, education, and hospitality
markets. Design experience of professionals employed by the Managed Firms
includes corporate headquarters, hospitals, physician office buildings,
investment office buildings, multi-use office complexes, laboratories,
courthouses, schools, and related facilities. The Managed Firms' professionals
maintain full control over their architectural and engineering practices,
determine which projects to pursue, and set their own standards of practice in
order to promote high-quality provision of services and retain ownership of all
contracts with clients.
3
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The following more fully describes the markets and depth of experience of
the Managed Firms.
Healthcare:
o 405 healthcare clients
o 205 health facility master plans
o 120 ambulatory care centers
o 80 ambulatory surgery centers
o 120 academic medical centers and teaching hospitals
o 67 cancer centers
o 69 women's facilities
o 15 replacement hospitals
o 50 medical office buildings
Justice:
o Nearly 8.5 million square feet of courts and associated agency space
o Almost 300 courtrooms: appeals, district, magistrate, and bankruptcy
o Over 15 juried awards for Excellence in Justice Architecture
o 10 million square feet of prisons and jails
o More than $700 million in construction of prisons and jails
Research/high technology:
o Over 50 major facilities
o Over 6,000,000 square feet
o Totaling over $850,000,000 in construction
Corporate/commercial:
o Over 100 corporate office buildings
o 136 facilities for financial institutions totaling over 30,500,000 square
feet
o Over 400 interior design and renovation projects
o 26 data centers totaling 3,330,000 square feet
o 20 industrial facilities
Education:
o Over 88 projects for 50 colleges, community colleges, and universities
o Over 250 primary and secondary school projects
Hospitality:
o 160 hospitality projects
o 79 international projects
o 119 hotels
o 54 restaurants and clubs
Operating Strategy
As a management company, the Company's relationship with the Managed Firms
is contractual. It has no ownership interest in the Managed Firms except for
JPJ, GAIH and BL&P. As a result, stockholders in the Company will have no
direct or indirect ownership interest in the Managed Firms except for JPJ, GAIH
and BL&P.
The Company's strategy is to expand revenues through (1) the development
of new long-term Management and Services Agreements with full-service AEP firms
throughout the United States and internationally and (2) the expansion of
services by Managed Firms to existing clients.
The creation of a management relationship between the Company and a
Managed Firm involves, among other things, the signing of a Management and
Services Agreement between the Company and the Managed Firm. Under the terms of
the Management and Services Agreement, the Company is the sole and exclusive
manager and administrator of all of the Managed Firm's day-to-day business
functions. These functions include: financial planning, facilities, equipment
and supplies, managed and administrative services (including bookkeeping and
accounts), general administrative services, contract negotiation and
administration for all non-architectural and non-engineering aspects of all
agreements pertaining to the provision
4
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of architectural and engineering services by Managed Firms to third parties,
personnel, maintenance, architectural and engineering recruiting and training,
insurance, billing, and marketing support. In connection with these services,
the Company receives all but 1% of the firm's positive cash flow (as determined
in accordance with accounting principles generally accepted in the United
States of America applied on a consistent basis). See " -- HLM Design
Operations -- Management and Services Agreements."
In addition to the Management and Services Agreements, the Company
requires individual stockholders of Managed Firms to enter into Stockholders'
Agreements, which provide the stockholders of those entities with nominee
stockholder status. Generally, the Stockholders' Agreements provide for the
following: (i) the repurchase by the Managed Firm of the stockholder's stock
upon such stockholder's death, (ii) restrictions on transferability of the
stock, (iii) a "call-right" on the stock by the Managed Firm and (iv) a voting
agreement among the stockholders and the Managed Firm. See " -- HLM Design
Operations -- Stockholders' Agreements."
Joseph M. Harris and Vernon B. Brannon, executive officers and
stockholders of the Company, are also the principal stockholders of the
non-subsidiary Managed Firms and are the principal officers of all the Managed
Firms. As officers, they caused the Managed Firms to enter into Management and
Services Agreements with the Company, and as stockholders of certain of the
Managed Firms they entered into Stockholders' Agreements (as described below).
Growth Strategy
During the current fiscal year the Company continued its aggressive, yet
disciplined, expansion program by pursuing Management and Services Agreements
with (i) large "regional" AEP Firms with established operating histories
located in large metropolitan and high-growth suburban geographic markets that
the Company does not currently serve and (ii) small firms that provide
operational diversity in geographic areas that will complement the services
that are either currently provided by the Company in such geographic areas or
that are intended to be provided in the future. The Company believes its
approach is attractive to these large and small AEP Firms because it provides
these firms with economies of scale and the synergies that result from
increased purchasing power, a greater breadth of services, an increased pool of
professionals and geographical diversity. Furthermore, this strategy will give
these regional and local AEP Firms, as a part of the Company's organization,
the ability to provide services to existing and future clients with national
operations that might otherwise have turned to "non-local" firms to service
their needs. The goal is for the Company to be the single source provider for
large national clients with geographically diverse operations.
Since May 1, 1999, the Company has completed two acquisitions:
o On September 16, 1999, the acquisition of ESS was completed. ESS' focus
in the healthcare market adds an existing client base and an operating
base in San Francisco from which to service existing and potential new HLM
Design clients. The Company purchased all the issued and outstanding
common stock of ESS for a combination of cash and promissory notes for a
total of $425,000.
o On April 29, 2000, the acquisition of BL&P was completed. BL&P adds
engineering disciplines to the existing Dallas office and leadership for
the Managed Firms' national engineering effort. The Company purchased all
the issued and outstanding stock of BL&P and related goodwill for $1.46
million in cash, subordinated promissory notes bearing interest at 7
percent per annum in the aggregate amount of $2.0 million and aggregate of
50,000 shares of the Company's common stock.
The Company generally expects that AEP Firms that sign Management and
Services Agreements will retain existing high-quality professional staff and
continue to operate in an effective and efficient manner with personnel who
understand the local market. Additionally, management believes it is positioned
to pursue larger, well-established AEP Firms as a result of the depth of the
Company's management team, its capital structure and the reputation of the
management team in the design industry. Management also believes these goals
can be achieved at less cost than that which would be incurred by AEP Firms
operating on a stand-alone basis.
HLM Design Operations
Pursuant to its Management and Services Agreements, the Company manages
all aspects of the Managed Firm but does not provide professional
architectural, engineering and planning services. The provision of these
services is controlled by the Managed Firms themselves. The Company enhances
growth of the Managed Firms by assisting in the recruitment of new
professionals and by expanding and adding ancillary services.
5
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One of the Company's goals is to negotiate national arrangements and
provide cost savings to Managed Firms through economies of scale in areas such
as professional liability insurance, supplies, equipment and business
functions.
Management and Services Agreements
The Management and Services Agreements with the Managed Firms are for a
period of 40 years. Although these agreements are terminable by the Company,
with or without cause, upon 60 days' notice to the Managed Firms (with the
approval of a majority of the Board of Directors and a majority of its
independent directors), they cannot be terminated by the Managed Firms without
a material default or bankruptcy by the Company. Under these agreements, the
Company is appointed as the sole and exclusive manager and administrator of all
of the Managed Firms' day-to-day business functions. The Company has no
authority, directly or indirectly, to perform any of the Managed Firms'
operations that are required by law to be performed by duly licensed architects
and engineers. The Managed Firms retain ownership of all contracts with
clients. Additionally, the Company has the authority to approve or deny, on
behalf of the Managed Firm, any and all proposals by stockholders of such firm
to encumber, sell, pledge, give or otherwise transfer the capital stock of the
Managed Firm, as well as the authority to approve issuances of common stock or
incurrence of indebtedness.
Stockholders' Agreements
Individual stockholders of Managed Firms (not including JPJ, GAIH and
BL&P, which are subsidiaries of the Company) have entered into Stockholders'
Agreements, which generally restrict the ability of these stockholders to
exercise certain rights commonly associated with ownership of common stock and
effectively provide stockholders of such entities with nominee stockholder
status. Generally, such Stockholders' Agreements provide that:
(i) upon the death of a stockholder, the Managed Firm will purchase, and
the personal representative of such stockholder's estate will sell to the
Managed Firm, all the stock owned by such deceased stockholder; provided,
however, in certain circumstances the sale of such stockholder's stock may
be made to one or more third parties, subject to the approval of the
Managed Firm;
(ii) stockholders may not sell, pledge, give or otherwise transfer any or
all of their stock to any third party, either voluntarily or involuntarily,
without first obtaining the Managed Firm's written approval of such
transfer, provided, that if the Managed Firm denies such approval, it shall
purchase such stock;
(iii) the Managed Firm has the right at any time to purchase all, but not
less than all, of the stock then owned by any or all of the stockholders;
and
(iv) the stockholders agree that with respect to all matters submitted to
stockholder vote (and, to the extent that all or any of the stockholders
serve as a director of the Managed Firm, then also with respect to all
matters submitted to a vote of the board of directors), the stockholders
will, if not in unanimous agreement, follow specified procedures to achieve
unity in voting among all stockholders.
In addition, the Stockholders' Agreements contain an acknowledgment on the
part of each stockholder that it is in the parties' best interest that certain
of the Managed Firm's administrative and managerial functions be performed
pursuant to a Management and Services Agreement with the Company and that in
order to ensure consistency and continuity in the management of the firm's
business and affairs, with respect to all matters pertaining to the initiation
of stock "calls" and the approval or denial of proposed stock transfers, the
Managed Firm will in all cases act in accordance with the written
recommendation of the Company. The Stockholders' Agreements provide that they
may be terminated upon the occurrence of any of the following events:
(i) cessation of the Managed Firm's business;
(ii) bankruptcy, receivership or dissolution of the Managed Firm; or
(iii) the voluntary agreement of all parties bound by the terms of such
Stockholders' Agreement.
It is anticipated that Stockholders' Agreements among individual
stockholders of the AEP Firms with whom the Company enters into Management and
Services Agreements in the future will have similar terms.
Competition
The architectural and engineering services industry is highly fragmented
and very competitive. As a result, in each specific market area the Company
competes with many architectural and engineering consulting firms, several of
which are substantially larger than the Company and possess greater financial
resources. No firm currently dominates any significant portion of the Company's
market areas. Competition is based on quality of service, expertise, price,
reputation and local
6
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presence. The Company believes that the Managed Firms compete favorably with
respect to each of these factors in the market areas it serves. The Company is
not aware of any other company actively pursuing a strategy of contracting for
firms' administrative and management functions, but believes that additional
companies with similar objectives could be organized in the future.
Governmental Regulations and Environmental Matters
Each state has enacted legislation governing the registration of
architects and engineers, and, in some cases, landscape architects, fire
protection engineers and interior designers. These state laws and regulations
impose licensing requirements and standards upon individual design
professionals and architectural-engineering firms that are overseen by a
registration board. In general, the state laws and regulations define the
practice of architecture and engineering, restrict the use of the titles
architect and engineer to licensed individuals, establish rules for entry into
the profession, explain how professionals licensed in other states may become
reciprocally registered to practice in the jurisdiction and define and enforce
standards of professional conduct and misconduct.
The state laws, or the regulations established by a registration board,
may also establish requirements for the practice of architecture or engineering
by a corporation or partnership. A few states do not permit the practice of
architecture or engineering in a corporate form. Some states require design
professionals who want to incorporate to do so as a professional corporation
authorized and certified by the secretary of state. Most states permit practice
through either a professional corporation or a general business corporation.
Even if a state permits practice in a corporate form, the state may require
that a certain number of principals in the corporation must be registered
architects or engineers. Some states specify that a certain percentage of the
principals, directors or stockholders of a corporate entity must be registered
architects or engineers in order to practice in the state. A corporation
seeking to practice in a state other than that in which it is incorporated must
register as a foreign corporation in the other state and satisfy all of the
registration requirements.
There can be no assurance that the regulatory environment in which the
Company operates will not change significantly in the future.
Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.
Employees
As of April 28, 2000, the Company and the Managed Firms together employed
approximately 310 persons of which approximately 120 were registered
professionals (engineers, architects and others). None of the Company's
employees or the Managed Firm's employees is represented by a labor union. The
Company considers its relations with its employees and the employees of the
Managed Firms to be satisfactory.
The registered professional architects and engineers generally have
degrees from accredited architecture or engineering schools, several years of
work experience and have passed licensing examinations. Both registered and
degreed architects have either a five year architectural degree or a four year
degree and a two year advanced architectural degree. The Company's degreed
professionals who are not registered have not yet passed the required licensing
examinations.
Item 2. Properties
The Company's principal executive offices are located at 121 West Trade
Street, Suite 2950, Charlotte, North Carolina, where the Company leases 12,292
square feet. Its telephone number is (704) 358-0779. Its lease of such offices
expires in 2005. In addition to the Company's principal executive offices, the
Company or the Managed Firms lease office space in San Francisco, California;
Denver, Colorado; Orlando, Florida; Atlanta, Georgia; Iowa City, Iowa; Chicago,
Illinois; Bethesda, Maryland; Philadelphia, Pennsylvania; Dallas, Texas and
London, UK.
Item 3. Legal Proceedings
From time to time the Company or one or more of the Managed Firms are
named in legal proceedings involving contractual disputes or other matters
arising in the ordinary course of business. Currently, no legal proceedings are
pending against or involve the Company or any of the Managed Firms that, in the
opinion of management, when considering insurance coverage, could reasonably be
expected to have a material adverse effect on the business, financial condition
or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fiscal
quarter ended April 28, 2000.
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PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Prior to June 12, 1998, the Company was privately held and there was no
market for the Common Stock. Effective June 12, 1998, the Common Stock began
trading on the NASDAQ Small Cap Market under the symbol "HLMD". Effective
January 14, 2000, the Common Stock began trading on the American Stock Exchange
("AMEX") under the symbol "HMD." As of July 11, 2000, 2,105,438 shares of
Common Stock were outstanding and issued to a total of approximately 760 record
and beneficial holders.
The Company has never declared or paid a dividend on its Common Stock. The
Company intends to retain all of its earnings to finance the growth and
development of its business, including through the execution of new Management
and Services Agreements, and does not anticipate paying any cash dividends on
its Common Stock for the foreseeable future. Any future change in the Company's
dividend policy will be made at the discretion of the Board of Directors of the
Company and will depend upon the Company's operating results, financial
condition, capital requirements, general business conditions and such other
factors as the Board of Directors deems relevant.
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High Low
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April 30, 1999
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First Quarter (Since June 12, 1998) $ 6.25 $ 5.00
Second Quarter ..................... $ 6.25 $ 3.88
Third Quarter ...................... $ 5.63 $ 4.25
Fourth Quarter ..................... $ 5.13 $ 3.38
April 28, 2000
---------------------------------------------
First Quarter ...................... $ 4.38 $ 2.81
Second Quarter ..................... $ 4.00 $ 2.75
Third Quarter ...................... $ 4.00 $ 2.50
Fourth Quarter ..................... $ 5.19 $ 3.25
</TABLE>
Recent Sales of Unregistered Securities; Use of Proceeds
As of October 30, 1998 in connection with the acquisition of JPJ, as of
January 29, 1999 in connection with the acquisition of GAIH, and as of April
29, 2000 in connection with the acquisition of BL&P, the Company agreed to
issue to the respective sellers 240,000 shares, 27,667 shares and 50,000 shares
of Common Stock, respectively, on a delayed delivery basis (9,223 of such
shares relating to the GAIH acquisition having been issued as of January 29,
2000). In each case, such shares will be issued in reliance upon the private
placement exemption from the registration requirements of the Securities Act of
1933, as amended, provided in Section 4(2) thereof.
For additional information concerning such transactions and for
information concerning the use of proceeds of the Company's initial public
offering (the "Offering") (Registration Statement No. 333-40617, effective June
12, 1998), see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 to the Financial Statements included
elsewhere herein.
Item 6. Selected Financial Data
The following selected financial data for the Predecessor Company (as
defined below) for each of the two fiscal years ended April 25, 1997 are
derived from audited financial statements. The selected financial data
(Predecessor Company) for the one month ended May 30, 1997 are derived from the
unaudited financial statements of HLMNA. The selected financial data for the
year ended May 1, 1998 are derived from the audited consolidated financial
statements of the Company, which reflect the results of operations of the
Company for twelve months and the results of operations of HLMNA, HLMSE and
HLMNW for the eleven month period from May 31, 1997 to May 1, 1998. The
selected financial data for the years ended April 30, 1999 and April 28, 2000
are derived from audited consolidated financial statements of the Company and
the Managed Firms. All of the data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and related notes
included elsewhere herein.
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<TABLE>
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(Predecessor Company) (1)
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For the Years Ended
--------------------------------- One Month
Ended
April 26, April 25, May 30,
1996 1997 1997
---------------- ---------------- ----------------
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Revenue ........................................ $ 28,554,424 $ 26,754,710 $ 2,233,036
Costs and expenses:
Direct cost of revenue ........................ 14,261,952 13,376,251 898,979
Operating costs ............................... 13,104,278 12,414,739 1,163,141
ESOP expenses ................................. 584,202 408,765 --
Amortization of intangible assets ............. 99,145 107,670 9,571
------------ ------------ ------------
Total costs and expenses ..................... 28,049,577 26,307,425 2,071,691
------------ ------------ ------------
Income from operations ......................... 504,847 447,285 161,345
------------ ------------ ------------
Other income (expense):
Net interest .................................. (383,552) (396,007) (36,951)
Non-operating income (expense) ................ 850,273 285,635 --
------------ ------------ ------------
Total other income (expense) ................. 466,721 (110,372) (36,951)
------------ ------------ ------------
Income before income taxes and extraordinary
item .......................................... 971,568 336,913 124,394
Income tax expense ............................. 435,459 219,799 43,000
------------ ------------ ------------
Income before extraordinary item ............... 536,109 117,114 81,394
Extraordinary item for early extinguishment of
debt, net of tax of $171,842 and $128,004 in
1999 and 2000, respectively ................... -- -- --
------------ ------------ ------------
Net income ..................................... $ 536,109 $ 117,114 $ 81,394
============ ============ ============
NET INCOME PER SHARE (NOTE 1) -- BASIC:
Income before extraordinary item ..............
Extraordinary loss from early extinguishment of
debt .........................................
Net income ...................................
NUMBER OF SHARES USED TO COMPUTE PER SHARE
DATA (NOTE 1) .................................
NET INCOME PER SHARE (NOTE 1) -- DILUTED:
Income before extraordinary item ..............
Extraordinary loss from early extinguishment of
debt .........................................
Net income ...................................
NUMBER OF SHARES USED TO COMPUTE PER SHARE
DATA (NOTE 1) .................................
SUPPLEMENTAL NET INCOME PER SHARE (6):
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic .........................................
Diluted .......................................
NET INCOME PER SHARE:
Basic .........................................
Diluted .......................................
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA:
Basic .........................................
Diluted .......................................
BALANCE SHEET DATA:
Working capital (deficiency) .................. $ (1,620,488) $ (1,902,363) $ (2,238,531)
Total assets .................................. 12,577,992 12,874,503 17,639,673
Long-term debt ................................ 564,577 103,792 2,476,008
Stockholders' equity (5) ...................... 758,196 1,203,541 1,284,935
<CAPTION>
HLM Design
Consolidated
For the Years Ended
--------------------------------------------
May 1, April 30, April 28,
1998 (2) 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue ........................................ $ 29,296,690 $37,757,653 $ 53,101,661
Costs and expenses:
Direct cost of revenue ........................ 13,124,743 17,911,395 28,799,298
Operating costs ............................... 13,465,102 16,848,779 20,915,714
ESOP expenses .................................
Amortization of intangible assets ............. 147,269 262,275 429,569
------------ ----------- ------------
Total costs and expenses ..................... 26,737,114 35,022,449 50,144,581
------------ ----------- ------------
Income from operations ......................... 2,559,576 2,735,204 2,957,080
------------ ----------- ------------
Other income (expense):
Net interest .................................. (1,027,368) (719,611) (1,120,407)
Non-operating income (expense) ................ (69,955) -- --
------------ ----------- ------------
Total other income (expense) ................. 1,097,323 (719,611) (1,120,407)
------------ ----------- ------------
Income before income taxes and extraordinary
item .......................................... 1,462,253 2,015,593 1,836,673
Income tax expense ............................. 683,897 942,707 853,894
------------ ----------- ------------
Income before extraordinary item ............... 778,356 1,072,886 982,779
Extraordinary item for early extinguishment of
debt, net of tax of $171,842 and $128,004 in
1999 and 2000, respectively ................... -- (280,849) (228,355)
------------ ----------- ------------
Net income ..................................... $ 778,356 $ 792,037 $ 754,424
============ =========== ============
NET INCOME PER SHARE (NOTE 1) -- BASIC:
Income before extraordinary item .............. $ 1.12 $ 0.52 $ 0.42
Extraordinary loss from early extinguishment of
debt ......................................... -- (0.13) (0.10)
------------ ----------- ------------
Net income ................................... $ 1.12 $ 0.39 $ 0.32
============ =========== ============
NUMBER OF SHARES USED TO COMPUTE PER SHARE
DATA (NOTE 1) ................................. 697,255 2,048,974 2,352,856
============ =========== ============
NET INCOME PER SHARE (NOTE 1) -- DILUTED:
Income before extraordinary item .............. $ 0.91 $ 0.52 $ 0.42
Extraordinary loss from early extinguishment of
debt ......................................... -- (0.13) (0.10)
------------ ----------- ------------
Net income ................................... $ 0.91 $ 0.39 $ 0.32
============ =========== ============
NUMBER OF SHARES USED TO COMPUTE PER SHARE
DATA (NOTE 1) ................................. 854,453 2,048,974 2,362,471
============ =========== ============
SUPPLEMENTAL NET INCOME PER SHARE (6):
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic ......................................... $ 0.78
============
Diluted ....................................... $ 0.70
============
NET INCOME PER SHARE:
Basic ......................................... $ 0.57
============
Diluted ....................................... $ 0.51
============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA:
Basic ......................................... 1,305,774
============
Diluted ....................................... 1,462,976
============
BALANCE SHEET DATA:
Working capital (deficiency) .................. $ (273,084) $ 5,121,975 $ 8,112,877
Total assets .................................. 17,582,948 27,474,242 32,460,412
Long-term debt ................................ 4,164,401 5,672,379 9,503,285
Stockholders' equity (5) ...................... 964,755 8,980,940 9,766,793
</TABLE>
---------
(1) The "Predecessor Company" is HLMNA.
9
<PAGE>
(2) Includes information for HLMNA, HLMSE and HLMNW for the eleven months from
May 31, 1997 to May 1, 1998 on a consolidated basis. The Company's
operations for the month ended May 30, 1997 reflected herein include no
revenues or expenses.
(3) Historical net income per share of the Predecessor Company is not
presented, as the historical capital structure of the Company prior to the
Offering is not comparable with the capital structure of the Company after
the Offering.
(4) Reflects in part Warrants held by Pacific Capital, L.P. ("Pacific") as of
May 1, 1998. Pacific exercised its Warrants in June 1998 immediately prior
to the effective date of the Registration Statement with respect to the
Offering.
(5) Neither the Company nor the Predecessor Company has paid cash dividends
from May 1, 1992 to April 28, 2000.
(6) Supplemental net income per share has been prepared based upon the shares
outstanding giving effect to the issuance of common stock related to the
Offering pro rata for Common Stock used to pay certain indebtedness. In
addition, net income has been adjusted to give effect to the Offering and
the May 1997 merger transaction between HLMNA and BBH Corp. as if the
transactions had occurred at the beginning of fiscal 1998.
Item 7. 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 Company's
financial statements and the Predecessor Company's financial statements and the
related notes thereto included elsewhere herein.
Overview
The Company is a management company which enters into management and
services relationships with full-service architectural, engineering and
planning firms. Currently, the Company has entered into Management and Services
Agreements with six Managed Firms. These Managed Firms operate in eleven
offices: Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando,
Florida, Bethesda, Maryland, Denver, Colorado, San Francisco, California,
Dallas, Texas, Philadelphia, Pennsylvania, Charlotte, North Carolina and
London, UK. The Company is headquartered in Charlotte, North Carolina. A full
service AEP Firm provides a spectrum of services in various specialties to
clients through a broad range of professionals, including architectural,
mechanical, electrical, structural and civil engineers, landscape architects,
interior designers and construction administration personnel.
10
<PAGE>
Results of Operations
As a result of the acquisition of HLMNA and the consummation of the
Company's Management and Services Agreements and Stockholders' Agreements, the
discussion and analysis of results of operations for the year ended May 1, 1998
is presented on a pro forma basis that reflects the acquisition of the assets
of HLMNA and the consummation of the Management and Services Agreements and
Stockholders' Agreements as though they occurred at the beginning of that
period.
<TABLE>
<CAPTION>
Pro Forma
May 1, April 30, April 28,
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Revenue ............................................ $ 31,529,726 $37,757,653 $ 53,101,661
Consultant and project expenses .................... 6,689,555 9,771,935 18,221,216
------------ ----------- ------------
Net production income .............................. 24,840,171 27,985,718 34,880,445
------------ ----------- ------------
Direct labor ....................................... 7,334,167 8,139,460 10,578,082
Operating costs .................................... 14,638,291 16,848,779 20,915,714
Amortization of intangible assets .................. 172,124 262,275 429,569
------------ ----------- ------------
Total costs and expenses ........................... 22,144,582 25,250,514 31,923,365
------------ ----------- ------------
Income from operations ............................. 2,695,589 2,735,204 2,957,080
Interest expense ................................... (1,124,357) (719,611) (1,120,407)
------------ ----------- ------------
Income before income taxes and extraordinary item .. 1,571,232 2,015,593 1,836,673
Income tax expense ................................. 714,897 942,707 853,894
------------ ----------- ------------
Income before extraordinary item ................... 856,335 1,072,886 982,779
Extraordinary item for early extinguishment of debt -- (280,849) (228,355)
------------ ----------- ------------
Net income ......................................... $ 856,335 $ 792,037 $ 754,424
============ =========== ============
</TABLE>
Fiscal 2000 Compared to Fiscal 1999
Revenues were $53.1 million in fiscal 2000 as compared to $37.8 million in
fiscal 1999, which is a 40.6% increase. This increase is attributable primarily
to internal growth in existing operations and prior year acquisitions.
Direct costs primarily include consultant costs and reimbursable project
expenses. Direct costs were $18.2 million, or 34.3% of revenues, in fiscal 2000
as compared to $9.8 million, or 25.9% of revenues, in fiscal 1999. This
increase as a percent of revenues is due to the Company's increased use of
consultants to meet project requirements partially due to the extensive use of
consultants by certain companies acquired since November 1998, resulting in
only a partial year of such expenses reflected in the April 30, 1999 financial
statements, as well as the tight labor market. Management believes that this
trend may continue which will cause direct costs as a percentage of revenues to
increase in future periods.
Direct labor cost was $10.6 million, or 30.3% of net production income, in
fiscal 2000 as compared to $8.1 million, or 29.1% of net production income, in
fiscal 1999. 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 $20.9 million, or 60.0% of net production income, in
fiscal 2000 as compared to $16.8 million, or 60.2% of net production income, in
fiscal 1999. Operating costs as a percentage of net production income has been
negatively impacted in the current period by (a) an increase in indirect labor
as a result of a slowdown in work in November and December imposed by several
commercial clients while they concentrated on Y2K issues and winter storms
across the country that closed several offices; (b) an increase in education
and seminars due to the Company's increased focus on training and education of
its employees; and (c) an increase in depreciation expense due to the Company's
increased focus on improvement of certain computer and related equipment.
Conversely, operating costs as a percentage of net production income was
positively impacted in fiscal 2000 by 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 have previously been
outsourced.
Amortization of intangible assets was $0.4 million in fiscal 2000 as
compared to $0.3 million in fiscal 1999. This increase is attributable to
goodwill amortization expense arising from the acquisition of JPJ and GAIH in
October 1998 and January 1999, respectively. See Note 2 to the Consolidated
Financial Statements included elsewhere herein.
11
<PAGE>
Interest expense was $1.1 million in fiscal 2000 and $0.7 million in
fiscal 1999. 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, GAIH and ESS.
Income tax expense was $0.9 million for both fiscal 2000 and fiscal 1999.
The effective income tax rate was 47% for both fiscal 2000 and fiscal 1999.
This effective tax rate has been impacted by reduction in the effect of state
income taxes, which is offset by an increase in the effective tax rate due to
increased goodwill amortization.
Extraordinary item for early extinguishment of debt was $0.2 million in
fiscal 2000. In February 2000, the early extinguishment of indebtedness to
First Charter National Bank ("First Charter") and Berthel Fisher & Company
Financial Services, Inc. ("Berthel Fisher") resulted in an extraordinary charge
of $228,355, net of income taxes of $128,004, that consisted of write-off of
related unamortized financing costs and other related costs.
Fiscal 1999 Compared to Fiscal 1998
Revenues were $37.8 million in fiscal 1999 as compared to $31.5 million in
fiscal 1998, which is a 19.8% increase. This increase is attributable primarily
to the acquisition of JPJ in October 1998. 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 one week less
revenues for the fiscal year 1999 as compared to the fiscal year 1998.
Direct costs primarily include consultant costs and reimbursable project
expenses. Direct costs were $9.8 million, or 25.9% of revenues, in fiscal 1999
as compared to $6.7 million, or 21.2% of revenues, in fiscal 1998. This
increase as a percent of revenues is due to the Company's increased use of
consultant expenses to meet project requirements. The increase is primarily due
to JPJ's use of consultants in the period from November 1998 to April 1999.
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 $8.1 million, or 29.1% of net production income, in
fiscal 1999 as compared to $7.3 million, or 29.5% of net production income, in
fiscal 1998. This decrease as a percent of net production income is principally
due to continued improvement in productivity as a result of the Company's
increased focus on cost containment for each project.
Operating costs were $16.8 million, or 60.2% of net production income, in
fiscal 1999 as compared to $14.6 million, or 58.9% of net production income, in
fiscal 1998. This increase as a percent of net production income is principally
due to expenses associated with being a public company and depreciation and
amortization expenses associated with property and equipment, partially offset
by a decrease in legal expenses.
Amortization of intangible assets was $0.3 million in fiscal 1999 as
compared to $0.2 million in fiscal 1998. This increase is attributable to
amortization expense arising from the acquisition of JPJ and GAIH in October
1998 and January 1999, respectively. See Note 2 to the Consolidated Financial
Statements included elsewhere herein.
Interest expense was $0.7 million in fiscal 1999 and $1.1 million in
fiscal 1998. This decrease is principally due to the Company's Offering in June
1998 whereby the Company repaid approximately $3.0 million in debt from the
proceeds of the Offering. This decrease is partially offset by increased
borrowings in the last six months of fiscal 1999 as a result of the Company's
acquisition of JPJ and GAIH in October 1998 and January 1999, respectively.
Income tax expense was $0.9 million and $0.7 million for fiscal 1999 and
fiscal 1998, respectively. The effective income tax rate was 47% and 46% for
fiscal 1999 and fiscal 1998, respectively. The effective rate is higher
primarily due to increased goodwill amortization.
Extraordinary item for early extinguishment of debt was $0.3 million in
fiscal 1999. In June 1998, the early extinguishment of indebtedness to Pacific,
Equitas, L.P. and Berthel Fisher 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.
Liquidity and Capital Resources
At April 28, 2000, the Company's current assets of $20.8 million exceeded
current liabilities of $12.7 million resulting in working capital of $8.1
million. During the year ended April 28, 2000, the Company used $2.6 million in
cash from operating activities, primarily related to the increase in trade and
other receivables, costs and estimated earnings in excess of billings on
uncompleted contracts, prepaid expenses and other assets, and decreases in
accrued expenses that were partially offset by increases in accounts payable.
The Company used $1.1 million for investing activities, the purchase of
equipment and the acquisition of ESS, net of cash acquired. On September 16,
1999, the Company purchased all the issued and
12
<PAGE>
outstanding stock of ESS for a combination of cash and promissory notes for a
total of $425,000. The Company generated $3.7 million from financing
activities, primarily from borrowings under the revolving credit facility and
term notes payable completed in February 2000 with IBJ Whitehall Business
Credit Corporation ("IBJ"). A portion of these borrowings were used to repay
the Company's existing line of credit with First Charter which matured on June
30, 2000 as well as the equipment lease with Berthel Fisher.
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 the management company,
the Company will be responsible for the financing of working capital growth,
capital growth and other cash needs of the Managed Firms. See "Business -- HLM
Design Operations -- Management and Services Agreements." On February 7, 2000,
the Company entered into a revolving credit, term loan and capital expenditure
loan for a total of $20,000,000 with IBJ. The three financing arrangements are
discussed below:
a. Revolving Credit -- The maximum revolving advance amount is
$17,000,000. The amount available to borrow is calculated based on the aging of
certain assets. This loan matures in February 2003. This revolving credit
facility bears interest at the sum of the Eurodollar rate plus 2.75%. A portion
of the revolver was used to repay the First Charter revolver of $4,918,335 and
note payable of $250,000. At April 28, 2000, the Company had $7,257,470
outstanding bearing interest at 9.5%.
b. Term Loan -- The amount of the loan is $2,000,000. This loan matures in
February 2003 and bears interest at a maximum of prime plus 2%. A portion of
the proceeds from this term loan was used to repay $1,820,514 in indebtedness
to Berthel Fisher. At April 28, 2000, the interest rate was 11%.
c. Capital Expenditure Loan -- The maximum capital expenditure amount is
$1,000,000. The amount is available for the financing of equipment used in the
Company's business. This loan matures in February 2005 and bears interest at a
maximum of prime plus 1%. At April 28, 2000, there were no borrowings under
this loan.
Substantially all assets are pledged under this financing arrangement.
This financing arrangement requires certain financial requirements be
maintained such as minimum net worth, maximum leverage and senior leverage
ratios, maximum fixed charge coverage and senior fixed charge coverage ratios
and maximum capital expenditure commitments. At April 28, 2000, the Company was
in compliance with these financial requirements.
In the fourth quarter, the early extinguishment of the Berthel Fisher and
the First Charter debt noted above resulted in an extraordinary charge of
$228,355, net of income taxes of $128,004, that consisted of write-off of
related unamortized financing costs.
The Company believes that for present operations, the existing 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. However, 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's operations are professional services and as such are not
capital intensive. However, in order to enhance productivity, the Company has
increased its purchase of computer hardware and software. The Company currently
has no material commitments for purchases of additional equipment. Capital
expenditures during fiscal 2000 were $0.9 million.
Seasonality
The Company's operations are not seasonal in nature.
Effects of Inflation
Due to the relatively low levels of inflation in fiscal years 1998, 1999
and 2000, inflation did not have a significant effect on the Company's results
of operations for those periods.
Year 2000 Compliance
Prior to December 31, 1999, the Company had instituted a comprehensive
Year 2000 review for compliance both internal and with all key vendors and
suppliers. The transition to Year 2000 resulted in no significant disruptions
to the Company's operations. Since many of the Company's information technology
purchases were made after January 1997, the Company's computer systems were
Year 2000 compliant. No significant expenditures were incurred as a result of
Year 2000 issues.
13
<PAGE>
Significant Materiality of Goodwill
Goodwill represents the excess purchase price over the estimated fair
value of tangible and separately measurable intangible net assets acquired. The
cumulative amount of goodwill at April 30, 1999 was $7.4 million and at April
28, 2000 was $8.1 million. As a percentage of total assets and stockholders'
equity, goodwill, net of accumulated amortization, represented 27.1% and 82.9%,
respectively, at April 30, 1999, and 25.1% and 83.3%, respectively, at April
28, 2000. Accounting principles generally accepted in the United States of
America require that goodwill and all other intangible assets be amortized over
the period benefited. We have determined that the period benefited by the
goodwill will be no less than 15 years. Accordingly, we are amortizing goodwill
over a 15 year period for HLMNA and a 25 year period for both JPJ and GAIH.
Earnings reported in periods immediately following an acquisition would be
overstated if the Company attributed a 15 or 25 year benefit to an intangible
asset that should have had a shorter benefit period. In later years, the
Company would be burdened by a continuing charge against earnings without the
associated benefit to income valued by management in arriving at the price paid
for the businesses acquired. Earnings in later years also could be
significantly affected if management then determined that the remaining balance
of goodwill was impaired. We periodically compare the carrying value of
goodwill with the anticipated undiscounted future cash flows from operations of
the businesses we have acquired in order to evaluate the recoverability of
goodwill. We have concluded that the anticipated future cash flows associated
with intangible assets recognized in our acquisitions will continue
indefinitely and there is no persuasive evidence that any material portion will
dissipate over a period shorter than 15 and 25 years, respectively. We expect
to incur additional goodwill in future acquisitions.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS 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. The Statement will become effective for the Company
beginning April 2002. The Company is currently calculating the effects of SFAS
No. 133 on the Company's financial statements and current disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has limited exposure to interest rate risk related to certain
instruments entered into for other than trading purposes. Specifically, the
Company has in place a $17,000,000 revolving credit facility, which bears
interest at the Eurodollar rate plus 2.75%. At April 28, 2000, the Company had
borrowings under this revolving credit facility of $7,257,470 and the effective
interest rate at that date was 9.5%. In addition, the Company has a $2,000,000
note payable due in monthly installments of $55,556 plus interest at a maximum
of prime plus 2% (11% at April 28, 2000) as well as a $1,000,000 capital
expenditure loan bearing interest at prime plus 1% which had no borrowings
outstanding at April 28, 2000. While changes in the prime rate could affect the
cost of funds borrowed in the future, the Company believes the effect, if any,
of reasonably foreseeable near-term changes in interest rates on the Company's
financial conditions, results of operations and cash flows would not be
material.
The Company has no other material exposure to market risk sensitive
instruments.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Information which appears on F-1 herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
14
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item with respect to the Company's directors
and executive officers and compliance by the Company's directors, executive
officers and certain beneficial owners of the Company's Common Stock with
Section 16(a) of the Securities Exchange Act of 1934 is furnished by
incorporation by reference of all information under the captions entitled
"Election of Directors", "Executive Officers" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement (to be
filed hereafter) for the Company's Annual Meeting of the Stockholders to be
held on September 14, 2000 (the "Proxy Statement").
Item 11. Executive Compensation
The information required by this item is furnished by incorporation by
reference of all information under the caption entitled "Executive
Compensation" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is furnished by incorporation by
reference of all information under the caption "General -- Equity Security
Ownership" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is furnished by incorporation by
reference of all information under the caption "Certain Transactions" in the
Proxy Statement.
15
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The exhibits and other documents filed as part of this Annual Report on
Form 10-K, including those exhibits which are incorporated by reference herein
to documents previously filed as exhibits to other filings with the Commission,
are:
(a) (1) Financial Statements
See the Index to Financial Information which appears on page F-1
herein.
(2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts.
(3) Exhibits:
Exhibits required in connection with this Annual Report on Form 10-K
are listed below. Certain of such exhibits, indicated by an asterisk
(*), are incorporated by reference to documents previously filed as
exhibits to other filings with the Commission.
(b) The Company has not filed any reports on Form 8-K during the last
quarter of the period covered by this report.
16
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
---------- ----------------------------------------------------------------------------------------------------------
<S> <C>
3.1* Certificate of Incorporation of the Company, as amended to date (incorporated by reference to Exhibit 3.1
to the Registration Statement on Form S-1 (SEC File No. 333-40617) (the "Form S-1")).
3.2* Bylaws of the Registrant, as amended to date (incorporated by reference to Exhibit 3.2 to the Form S-1).
4.1* Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Form S-1).
4.2* Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Form S-1).
4.3* Registration Rights Agreement dated as of May 30, 1997 by and among the Company, Pacific Capital,
L. Equitas, L.P. (incorporated by reference to Exhibit 4.3 to the Form S-1).
4.4* Registration Rights Agreement dated as of September 10, 1997 by and among the Company and Berthel
Fisher Company Leasing, Inc. (incorporated by reference to Exhibit 4.4 to the Form S-1).
10.1*1 Management and Services Agreement dated as of May 29, 1997 by and between Hansen Lind Meyer Inc.
(now HLMNA) and the Company (incorporated by reference to Exhibit 10.1 to the Form S-1).
10.2*2 Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon
and Hansen Lind Meyer Inc. (now HLMNA) (incorporated by reference to Exhibit 10.4 to the Form S-1).
10.3* Security Escrow Agreement among the Company, certain security holders and First Union National Bank,
as escrow agent (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on
Form 10-K for the fiscal year ended May 1, 1998 (the "1998 Form 10- K")).
10.4* Noncompetition Agreement dated as of May 30, 1997 by and between the Company, Hansen Lind Meyer
Inc. and Joseph M. Harris (incorporated by reference to Exhibit 10.18 to the Form S-1).
10.5* Noncompetition Agreement dated as of May 30, 1997 by and between the Company, Hansen Lind Meyer
Inc. and Vernon B. Brannon (incorporated by reference to Exhibit 10.19 to the Form S-1).
10.6* Guaranty (Limited in Amount) dated as of May 30, 1997 by and among Vernon B. Brannon, Joseph M.
Harris, and a former director (incorporated by reference to Exhibit 10.20 to the Form S-1).
10.7* Addendum B to Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company
Leasing, Inc. and Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.20.1 to the
Form S-1).
10.8* Letter Agreement dated as of January 9, 1998 amending the Berthel Lease (incorporated by reference to
Exhibit 10.20.2 to the Form S-1).
10.9* Security Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc.
and Hansen Lind Meyer Inc. (incorporated by reference to Exhibit 10.21 to the Form S-1).
10.10* Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and
Hansen Lind Meyer Inc. (the "Berthel Lease") (incorporated by reference to Exhibit 10.22 to the
Form S-1).
10.11* HLM Design, Inc. Stock Option Plan (incorporated by reference to Exhibit 10.23 to the 1998
Form 10-K).
10.12* HLM Design, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.24 to the 1998
Form 10-K).
10.13* Employment Agreement between the Company and Joseph M. Harris, as amended to date (incorporated
by reference to Exhibit 10.25 to the Form S-1).
10.14* Employment Agreement between the Company and Vernon B. Brannon, as amended to date (incorporated
by reference to Exhibit 10.26 to the Form S-1).
10.15* Promissory Note dated as of May 30, 1997 issued by the Company in favor of First Charter National
Bank(incorporated by reference to Exhibit 10.27 to the Form S-1).
10.16* First Amendment to Management and Services Agreement dated as of May 29, 1997 by and between
HLM Design of Northamerica, Inc. (formerly Hansen Lind Meyer Inc.) and the Company (incorporated
by reference to Exhibit 10.28 to the Form S-1).
10.17* Statutory Incentive Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option
Plan between the Company and Joseph M. Harris (incorporated by reference to Exhibit 10.31 to the 1998
Form 10-K).
10.18* Statutory Incentive Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option
Plan between the Company and Vernon B. Brannon (incorporated by reference to Exhibit 10.32 to the
1998 Form 10-K).
10.19* Nonstatutory Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Plan between
the Company and Joseph M. Harris (incorporated by reference to Exhibit 10.33 to the 1998 Form 10-K).
10.20* Nonstatutory Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan
between the Company and Vernon B. Brannon (incorporated by reference to Exhibit 10.34 to the 1998
Form 10-K).
10.21* Promissory Note dated as of December 10, 1996 issued by Hansen Lind Meyer, Inc. in favor of First
Charter National Bank (incorporated by reference to Exhibit 10.36 to the Form S-1).
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
----------- -------------------------------------------------------------------------------------------------------
<S> <C>
10.22* Modification and Extension Agreement dated as of June 2, 1997 between First Charter National Bank and
Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.37 to the Form S-1).
10.23* Commercial Guaranty dated as of May 30, 1997 by Hansen Lind Meyer, Inc. in favor of First Charter
National Bank (incorporated by reference to Exhibit 10.38 to the Form S-1).
10.24* Security Agreement dated as of June 2, 1997 between Hansen Lind Meyer, Inc. and First Charter National
Bank (incorporated by reference to Exhibit 10.39 to the Form S-1).
10.25* Commercial Security Agreement dated as of May 30, 1997 between Hansen Lind Meyer, Inc. and First
Charter National Bank (incorporated by reference to Exhibit 10.40 to the Form S-1).
10.26* Subordination Agreement dated as of May 30, 1997 among Berthel Fisher & Company Leasing, Inc.,
First Charter National Bank, the Company and Hansen Lind Meyer, Inc. (incorporated by reference to
Exhibit 10.41 to the Form S-1).
10.27* Note and Security Agreement dated as of September 10, 1997 by and among the Company, Hansen Lind
Meyer, Inc., certain individual guarantors and Berthel Fisher & Company Leasing, Inc., as amended to
date (incorporated by reference to Exhibit 10.42 to the Form S-1).
10.28* Note and Security Agreement dated as of September 16, 1997 by and among the Company, Hansen Lind
Meyer, Inc., certain individual guarantors and Berthel Fisher & Company Leasing, Inc., as amended to
date (incorporated by reference to Exhibit 10.43 to the Form S-1).
10.29* Commercial Guaranty dated as of May 30, 1997 by Joseph M. Harris in favor of First Charter National
Bank (relating to Promissory Note of the Company of even date therewith) (incorporated by reference to
Exhibit 10.45 to the Form S-1).
10.30* Commercial Guaranty dated as of May 30, 1997 by Vernon B. Brannon in favor of First Charter National
Bank (relating to Promissory Note of the Company of even date therewith) (incorporated by reference to
Exhibit 10.46 to the Form S-1).
10.31* Modification and Extension Agreement dated as of May 30, 1998 between First Charter National Bank
and the Company (incorporated by reference to Exhibit 10.47 to the Form S-1).
10.32* Modification and Extension Agreement dated as of May 30, 1998 between First Charter National Bank
and Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.48 to the Form S-1).
10.33* Lease Agreement dated as of December 18, 1995 between CTHL Properties and Hanson Lind Meyer, Inc.
(incorporated by reference to Exhibit 10.49 to the Form S-1).
10.34* Promissory Note dated as of March 20, 1997 issued by Hansen Lind Meyer, Inc. in favor of Joseph M.
Harris, as extended to date (incorporated by reference to Exhibit 10.50 to the Form S-1).
10.35* Promissory Note dated as of March 20, 1997 issued by Hansen Lind Meyer, Inc. in favor of Vernon B.
Brannon, as extended to date (incorporated by reference to Exhibit 10.51 to the Form S-1).
10.36* Guaranty dated as of December 10, 1996 by Joseph M. Harris in favor of First Charter National Bank
(relating to Promissory Note of Hansen Lind Meyer, Inc. of even date therewith) (incorporated by
reference to Exhibit 10.52 to the Form S-1).
10.37* Guaranty dated as of December 10, 1996 by Vernon B. Brannon in favor of First Charter National Bank
(relating to Promissory Note of Hansen Lind Meyer, Inc. of even date therewith) (incorporated by
reference to Exhibit 10.53 to the Form S-1).
10.38* Second Amendment to Management and Services Agreement dated as of June 5, 1998 by and between
HLM Design of Northamerica, Inc. and the Company (incorporated by reference to Exhibit 10.55 to the
Form S-1).
10.39* Letter Agreement among Messrs. Harris and Brannon, Berthel Leasing and the Company (incorporated by
reference to Exhibit 10.58 to the 1998 Form 10-K).
10.40* Nonstatutory Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan
between the Company and Fred Pounds (incorporated by reference to Exhibit 10.59 to the 1999 Form
10-K).
10.41* Promissory Note made by the Company in favor of First Charter National Bank dated as of March 26,
1999 (incorporated by reference to Exhibit 10.60 to the 1999 Form 10-K).
10.42+ Revolving Credit, Term Loan, Capital Expenditure Loan, Guaranty, and Security Agreement dated as of
February 7, 2000 between HLM Design, Inc. and IBJ Whitehall Business Credit Corporation (confidential
portions omitted).
10.43* Stock Purchase Agreement dated as of October 30, 1998 among the Company, Bill D. Smith, FAIA,
Walter J. Viney, AIA, Richard E. Morgan, AIA, Weldon W. Nash, Jr., FCSI, Ken G. Rowley, AIA,
Douglas R. Bissell, AIA, Paul H. Woodard, AIA, Jan G. Blackmon, FAIA, and JPJ Architect, Inc.
(incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed on November 16, 1998).
10.44* Stock Purchase Agreement dated as of April 28, 2000 among HLM Design, Inc., BL&P Engineers, Inc.
and Scott Brady, PE (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed on
May 15, 2000).
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
---------- -----------------------------------------------------------------------------------------------
<S> <C>
10.45 The Goodwill Purchase Agreement dated as of April 28, 2000 by and between HLM Design, Inc. and
Scott L. Brady.
21.1 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
</TABLE>
---------
* Incorporated by reference to documents previously filed as exhibits to other
filings with the Commission.
+ Confidential treatment requested.
1 The Company has entered into substantially identical Management and Services
Agreements with each of its other Managed Firms -- HLMUSA, HLMAEP, JPJ, GAIH
and BL&P (in addition to those filed as Exhibit 10.1, as amended (see
Exhibits 10.16 and 10.39)).
2 The other Managed Firms -- HLMUSA and HLMAEP (but not including JPJ, GAIH and
BL&P, which are subsidiaries of the Company) have entered into substantially
identical Stockholders' Agreements with their respective individual
stockholders (in addition to those filed as Exhibits 10.2).
19
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
-----
<S> <C>
HLM DESIGN, INC. AND AFFILIATES:
INDEPENDENT AUDITORS' REPORT ........................................................... F-2
FINANCIAL STATEMENTS:
Consolidated Balance Sheets at April 30, 1999 and April 28, 2000 ...................... F-3
Consolidated Statements of Income for the Years Ended May 1, 1998, April 30, 1999 and F-4
April 28, 2000
Consolidated Statements of Stockholders' Equity for the Years Ended May 1, 1998, April
30, 1999 and
April 28, 2000 ....................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended May 1, 1998, April 30, 1999
and
April 28, 2000 ....................................................................... F-6
Notes to Consolidated Financial Statements ............................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
HLM DESIGN, INC.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of HLM
Design, Inc. (the "Company") and Affiliates as of April 30, 1999 and April 28,
2000, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended April 28, 2000.
Our audits also included the financial statement schedule listed in the Index
at Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of April 30, 1999 and April 28, 2000, and the results of its operations and
its cash flows for each of the three years in the period ended April 28, 2000
in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
DELOITTE & TOUCHE LLP
July 12, 2000
Charlotte, North Carolina
F-2
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
April 30, 1999 and April 28, 2000
<TABLE>
<CAPTION>
April 30, 1999 April 28, 2000
(Note 1) (Note 1)
---------------- ---------------
<S> <C> <C>
ASSETS (Note 4)
CURRENT ASSETS:
Cash .................................................................................... $ 250,575 $ 285,616
Trade and other receivables, less allowance for doubtful accounts at April 30, 1999 and
April 28, 2000 of $341,692 and $346,060, respectively ................................. 8,311,068 11,286,334
Costs and estimated earnings in excess of billings on uncompleted projects (Note 3) ..... 7,550,247 8,412,159
Refundable income taxes ................................................................. 85,495 --
Prepaid expenses and other .............................................................. 397,245 788,015
------------ ------------
Total current assets ................................................................. 16,594,630 20,772,124
OTHER ASSETS:
Goodwill, less amortization at April 30, 1999 and April 28, 2000 of $409,544 and
$839,113, respectively (Note 2) ....................................................... 7,442,301 8,136,010
Other noncurrent assets ................................................................. 668,064 887,137
------------ ------------
Total other assets ................................................................... 8,110,365 9,023,147
PROPERTY AND EQUIPMENT:
Leasehold improvements .................................................................. 1,114,337 1,508,208
Furniture and fixtures .................................................................. 2,929,676 3,898,288
------------ ------------
Total property and equipment ......................................................... 4,044,013 5,406,496
Less accumulated depreciation and amortization .......................................... (1,832,611) (3,101,004)
------------ ------------
Property and equipment, net .......................................................... 2,211,402 2,305,492
------------ ------------
TOTAL ASSETS ............................................................................. $ 26,916,397 $ 32,100,763
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 4) ........................................... $ 1,054,369 $ 1,216,468
Accounts payable ........................................................................ 4,853,283 7,425,799
Accrued expenses and other .............................................................. 1,241,621 961,487
Accrued payroll ......................................................................... 613,743 714,045
Income taxes payable .................................................................... -- 434,020
Billings in excess of costs and estimated earnings on uncompleted projects (Note 3) ..... 3,179,882 1,752,736
Deferred income taxes (Note 8) .......................................................... 529,757 154,692
------------ ------------
Total current liabilities ............................................................ 11,472,655 12,659,247
LONG-TERM DEBT (Note 4) .................................................................. 5,672,379 9,503,285
DEFERRED INCOME TAXES (Note 8) ........................................................... 767,293 32,188
OTHER .................................................................................... 21,930 138,050
------------ ------------
TOTAL LIABILITIES ........................................................................ 17,934,257 22,332,770
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 5 and 6) ............................................
STOCKHOLDERS' EQUITY (Note 9):
Preferred stock, $.10 par value, voting, authorized 1,000,000 shares, no shares
outstanding ........................................................................... -- --
Common stock, $ .001 par value, voting, authorized 9,000,000 shares; issued 2,345,077
and 2,359,975 at April 30, 1999 and April 28, 2000, respectively (includes 267,667
and 258,444 shares to be issued on a delayed delivery schedule at April 30, 1999 and
April 28, 2000, respectively) ......................................................... 2,345 2,360
Additional paid in capital .............................................................. 7,410,064 7,450,261
Retained earnings ....................................................................... 1,570,393 2,324,817
Accumulated other comprehensive loss .................................................... (662) (9,445)
------------ ------------
Total stockholders' equity ........................................................... 8,982,140 9,767,993
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................... $ 26,916,397 $ 32,100,763
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended May 1, 1998, April 30, 1999 and April 28, 2000
<TABLE>
<CAPTION>
Years Ended
--------------------------------------------
May 1, April 30, April 28,
1998 1999 2000
-------------- -------------- --------------
(Note 1) (Note 1) (Note 1)
<S> <C> <C> <C>
REVENUES (Note 1):
Fee income ....................................................................... $ 27,401,122 $35,090,595 $ 49,138,344
Reimbursable income .............................................................. 1,895,568 2,667,058 3,963,317
------------ ----------- ------------
Total revenues ................................................................ 29,296,690 37,757,653 53,101,661
------------ ----------- ------------
CONSULTANT EXPENSES ............................................................... 4,664,605 7,525,208 15,024,032
------------ ----------- ------------
PROJECT EXPENSES:
Direct expenses .................................................................. 890,873 742,633 1,050,512
Reimbursable expenses ............................................................ 837,194 1,504,094 2,146,672
------------ ----------- ------------
Total project expenses ........................................................ 1,728,067 2,246,727 3,197,184
------------ ----------- ------------
NET PRODUCTION INCOME ............................................................. 22,904,018 27,985,718 34,880,445
DIRECT LABOR ...................................................................... 6,732,071 8,139,460 10,578,082
INDIRECT EXPENSES ................................................................. 13,682,326 17,111,054 21,345,283
------------ ----------- ------------
OPERATING INCOME .................................................................. 2,489,621 2,735,204 2,957,080
------------ ----------- ------------
OTHER INCOME (EXPENSE): ...........................................................
Interest income .................................................................. 2,983 39,486 4,350
Interest expense ................................................................. (1,030,351) (759,097) (1,124,757)
------------ ----------- ------------
Total other expense, net ...................................................... (1,027,368) (719,611) (1,120,407)
------------ ----------- ------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ................................. 1,462,253 2,015,593 1,836,673
INCOME TAXES (Note 8):
Current tax expense .............................................................. 323,035 697,201 1,964,064
Deferred tax expense (benefit) ................................................... 360,862 245,506 (1,110,170)
------------ ----------- ------------
Total income tax expense ...................................................... 683,897 942,707 853,894
------------ ----------- ------------
INCOME BEFORE EXTRAORDINARY ITEM .................................................. 778,356 1,072,886 982,779
EXTRAORDINARY ITEM FOR EARLY EXTINGUISHMENT OF DEBT, NET OF TAX BENEFIT OF $171,842
AND $128,004 IN 1999 AND 2000, RESPECTIVELY (NOTES 4 and 9) ...................... -- (280,849) (228,355)
------------ ----------- ------------
NET INCOME ........................................................................ $ 778,356 $ 792,037 $ 754,424
============ =========== ============
NET INCOME PER SHARE (NOTE 1) -- BASIC:
Income before extraordinary item ................................................. $ 1.12 $ 0.52 $ 0.42
Extraordinary loss from early extinguishment of debt ............................. -- ( 0.13) ( 0.10)
------------ ----------- ------------
Net income ....................................................................... $ 1.12 $ 0.39 $ 0.32
============ =========== ============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (NOTE 1) .......................... 697,255 2,048,974 2,352,856
============ =========== ============
NET INCOME PER SHARE (NOTE 1) -- DILUTED:
Income before extraordinary item ................................................. $ 0.91 $ 0.52 $ 0.42
Extraordinary loss from early extinguishment of debt ............................. -- ( 0.13) ( 0.10)
------------ ----------- ------------
Net income ....................................................................... $ 0.91 $ 0.39 $ 0.32
============ =========== ============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (Note 1) .......................... 854,453 2,048,974 2,362,471
============ =========== ============
SUPPLEMENTAL NET INCOME PER SHARE (NOTE 1):
INCOME PER SHARE BEFORE EXTRAORDINARY ITEM
Basic ............................................................................ $ 0.78
============
Diluted .......................................................................... $ 0.70
============
NET INCOME PER SHARE
Basic ............................................................................ $ 0.57
============
Diluted .......................................................................... $ 0.51
============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic ............................................................................ 1,305,774
============
Diluted .......................................................................... 1,462,976
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended May 1, 1998, April 30, 1999 and April 28, 2000
<TABLE>
<CAPTION>
Common Stock
---------------------
Additional
Paid-In
Shares Amount Capital
------------ -------- --------------
<S> <C> <C> <C>
BALANCE APRIL 25, 1997 ................ 618,375 $ 618 $ 2,382
Payment for common stock
(subscription receivable)
HLM Design ......................... 157,759 158 183,241
Issuance of warrants (Note 9) ........ -- -- 114,932
Net income ........................... -- -- --
------- ------ ----------
BALANCE, MAY 1, 1998 .................. 776,134 776 300,555
Issuance of common stock (Note 9) .... 1,298,953 1,299 6,036,342
Issuance of common stock for
purchase of JPJ Architects, Inc.
(Note 2) ........................... 240,000 240 1,070,760
Issuance of common stock, for
purchase of GA Design
International Limited (Note 2) ..... 27,667 28 108,737
Issuance of common stock under the
employee stock purchase plan ....... 2,323 2 7,402
Exercise of warrants ................. -- -- (113,732)
Comprehensive income:
Net income ......................... -- -- --
Foreign currency translation
adjustment ........................ -- -- --
Total comprehensive income ........... -- -- --
--------- ------ ----------
BALANCE, APRIL 30, 1999 ............... 2,345,077 2,345 7,410,064
Issuance of common stock under the
employee stock purchase plan ....... 14,898 15 40,197
Comprehensive income:
Net income ......................... -- -- --
Foreign currency translation
adjustment ........................ -- -- --
Total comprehensive income ........... -- -- --
--------- ------ ----------
BALANCE, APRIL 28, 2000 ............... 2,359,975 $2,360 $7,450,261
========= ====== ==========
<CAPTION>
Accumulated
Stock Other Total
Retained Subscription Comprehensive Stockholders'
Earnings Receivable Loss Equity
------------ -------------- --------------- --------------
<S> <C> <C> <C> <C>
BALANCE APRIL 25, 1997 ................ $ -- $ (3,000) $ -- $ --
Payment for common stock
(subscription receivable)
HLM Design ......................... -- 3,000 -- 186,399
Issuance of warrants (Note 9) ........ -- -- -- 114,932
Net income ........................... 778,356 -- -- 778,356
---------- -------- -------- ----------
BALANCE, MAY 1, 1998 .................. 778,356 -- -- 1,079,687
Issuance of common stock (Note 9) .... -- -- -- 6,037,641
Issuance of common stock for
purchase of JPJ Architects, Inc.
(Note 2) ........................... -- -- -- 1,071,000
Issuance of common stock, for
purchase of GA Design
International Limited (Note 2) ..... -- -- -- 108,765
Issuance of common stock under the
employee stock purchase plan ....... -- -- -- 7,404
Exercise of warrants ................. -- -- -- (113,732)
Comprehensive income:
Net income ......................... 792,037 -- -- --
Foreign currency translation
adjustment ........................ -- -- (662) --
Total comprehensive income ........... -- -- -- 791,375
---------- -------- -------- ----------
BALANCE, APRIL 30, 1999 ............... 1,570,393 -- (662) 8,982,140
Issuance of common stock under the
employee stock purchase plan ....... -- -- -- 40,212
Comprehensive income:
Net income ......................... 754,424 -- -- --
Foreign currency translation
adjustment ........................ -- -- (8,783) --
Total comprehensive income ........... -- -- -- 745,641
---------- -------- -------- ----------
BALANCE, APRIL 28, 2000 ............... $2,324,817 $ -- $ (9,445) $9,767,993
========== ======== ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 1, 1998, April 30, 1999 and April 28, 2000
<TABLE>
<CAPTION>
Years Ended
---------------
May 1,
1998
(Note 1)
---------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 778,356
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Extraordinary item for early extinguishment of debt-net of tax benefit ............... --
Depreciation ......................................................................... 468,556
Amortization of intangible assets .................................................... 147,269
Amortization of deferred loan fees ................................................... 172,905
Deferred income taxes ................................................................ (48,432)
Other ................................................................................ 14,585
Changes in certain working capital items:
(Increase) decrease in trade and other receivables .................................. (373,675)
Net increase in costs and estimated earnings in excess of billings on uncompleted (184,513)
projects
(Increase) decrease in refundable income taxes ...................................... 485,047
(Increase) decrease in prepaid expenses and other assets ............................ (742,948)
Increase (decrease) in accounts payable ............................................. (1,418,834)
Increase (decrease) in accrued expenses ............................................. 1,112,959
Increase (decrease) in income taxes payable ......................................... 215,950
-------------
Net cash provided by (used in) operating activities ................................ 627,225
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................................... (737,356)
Repayment of note receivable from officer ............................................. 30,000
Payment for purchase of G.A. Design International Holdings, Ltd. ("GAIH") ............. --
Payment for purchase of JPJ Architects, Inc., net of cash acquired .................... --
Payment for purchase of ESS Architects, Inc., net of cash acquired .................... --
-------------
Net cash used in investing activities .............................................. (707,356)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit ...................................................... --
Net borrowings on revolving credit facility ........................................... --
Net proceeds from issuance of common stock ............................................ --
Proceeds from issuance of common stock under the employee stock purchase plan ......... --
Proceeds from long-term borrowings .................................................... 6,712,307
Net decrease in short-term borrowings ................................................. --
Payments on long-term borrowings ...................................................... (3,584,491)
Payment of deferred loan fees ......................................................... (56,300)
Payment on ESOP buyback ............................................................... (3,221,824)
Proceeds from issuance of notes payable to shareholders ............................... 182,308
Proceeds from the issuance of warrants ................................................ 24,680
Proceeds from the issuance of common stock ............................................ 34,899
Proceeds from payment of stock subscription receivable ................................ 3,600
-------------
Net cash provided by financing activities .......................................... 95,179
-------------
INCREASE IN CASH ....................................................................... 15,048
CASH BALANCE:
Beginning of year ..................................................................... 2,321
-------------
End of year ........................................................................... $ 17,369
=============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest ............................................................................. $ 833,674
Income taxes ......................................................................... $ 47,194
NONCASH INVESTING AND FINANCING TRANSACTIONS:
Issuance of warrants to certain debt holders .......................................... $ 238,752
Acquisition of JPJ Architects, Inc. (net of imputed interest):
Notes payable issued to JPJ Architects, Inc. shareholders ............................ $ --
Fair value of assets acquired and liabilities assumed, net ........................... $ --
Common stock to be issued on delayed delivery schedule ............................... $ --
Acquisition of GAIH (net of imputed interest):
Notes payable issued to GAIH shareholders ............................................ $ --
Fair value of assets acquired and liabilities assumed, net ........................... $ --
Common stock to be issued on delayed delivery schedule ............................... $ --
Acqusition of ESS (net of imputed interest):
Notes payable issued to ESS shareholders ............................................. $ --
Fair value of assets acquired and liabilities assumed, net ........................... $ --
<CAPTION>
Years Ended
-------------------------------
April 30, April 28,
1999 2000
(Note 1) (Note 1)
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 792,037 $ 754,424
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Extraordinary item for early extinguishment of debt-net of tax benefit ............... 280,849 228,355
Depreciation ......................................................................... 675,924 895,778
Amortization of intangible assets .................................................... 262,275 429,569
Amortization of deferred loan fees ................................................... 86,628 104,372
Deferred income taxes ................................................................ 251,379 (1,110,170)
Other ................................................................................ (336) (21,330)
Changes in certain working capital items:
(Increase) decrease in trade and other receivables .................................. 609,861 (2,957,666)
Net increase in costs and estimated earnings in excess of billings on uncompleted (2,549,431) (2,289,058)
projects
(Increase) decrease in refundable income taxes ...................................... (85,495) --
(Increase) decrease in prepaid expenses and other assets ............................ 222,069 (978,208)
Increase (decrease) in accounts payable ............................................. (539,268) 2,324,979
Increase (decrease) in accrued expenses ............................................. (475,238) (689,221)
Increase (decrease) in income taxes payable ......................................... (411,622) 647,519
------------ ------------
Net cash provided by (used in) operating activities ................................ (880,368) (2,639,327)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................................... (815,668) (880,945)
Repayment of note receivable from officer ............................................. -- --
Payment for purchase of G.A. Design International Holdings, Ltd. ("GAIH") ............. (357,830) --
Payment for purchase of JPJ Architects, Inc., net of cash acquired .................... (1,332,030) --
Payment for purchase of ESS Architects, Inc., net of cash acquired .................... -- (153,993)
------------ ------------
Net cash used in investing activities .............................................. (2,505,528) (1,056,268)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit ...................................................... 1,618,336 (3,118,336)
Net borrowings on revolving credit facility ........................................... -- 7,257,470
Net proceeds from issuance of common stock ............................................ 5,922,712 --
Proceeds from issuance of common stock under the employee stock purchase plan ......... 7,404 40,212
Proceeds from long-term borrowings .................................................... -- 2,000,000
Net decrease in short-term borrowings ................................................. (688,630) --
Payments on long-term borrowings ...................................................... (3,241,920) (2,448,710)
Payment of deferred loan fees ......................................................... -- --
Payment on ESOP buyback ............................................................... -- --
Proceeds from issuance of notes payable to shareholders ............................... -- --
Proceeds from the issuance of warrants ................................................ 1,200 --
Proceeds from the issuance of common stock ............................................ -- --
Proceeds from payment of stock subscription receivable ................................ -- --
------------ ------------
Net cash provided by financing activities .......................................... 3,619,102 3,730,636
------------ ------------
INCREASE IN CASH ....................................................................... 233,206 35,041
CASH BALANCE:
Beginning of year ..................................................................... 17,369 250,575
------------ ------------
End of year ........................................................................... $ 250,575 $ 285,616
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest ............................................................................. $ 1,130,214 $ 1,273,453
Income taxes ......................................................................... $ 992,916 $ 1,255,009
NONCASH INVESTING AND FINANCING TRANSACTIONS:
Issuance of warrants to certain debt holders .......................................... $ -- $ --
Acquisition of JPJ Architects, Inc. (net of imputed interest):
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 $ --
Acquisition of GAIH (net of imputed interest):
Notes payable issued to GAIH shareholders ............................................ $ 605,920 $ --
Fair value of assets acquired and liabilities assumed, net ........................... $ 21,004 $ --
Common stock to be issued on delayed delivery schedule ............................... $ 108,765 $ --
Acqusition of ESS (net of imputed interest):
Notes payable issued to ESS shareholders ............................................. $ 219,167 $ --
Fair value of assets acquired and liabilities assumed, net ........................... $ (48,513) $ --
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended May 1, 1998, April 30, 1999 and April 28, 2000
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business -- HLM Design, Inc. (the "Company" or "HLM
Design") is a management services company that provides management and services
to architectural, engineering and planning design entities ("Managed Firms")
under long-term management services agreements ("MSAs"). As of April 28, 2000,
the Company had wholly owned subsidiaries and affiliates as follows:
o HLM Design of North America, Inc. ("HLMNA");
o HLM Design USA, Inc. ("HLMUSA") -- In May 1999, HLM Holdings, Inc.'s name
was changed to HLM Design USA, Inc. In November 1999, HLM Design of the
Midwest, Inc. was merged into HLMUSA. In December 1999, ESS Architects,
Inc. ("ESS") was merged into HLMUSA;
o HLM Design Architecture, Engineering and Planning, P.C. ("HLMAEP") -- HLM
Design of the Northeast, Architecture, Engineering and Planning, P.C.'s
("HLMNE") name was changed to HLM Design Architecture, Engineering and
Planning, P.C. In November 1999, HLM Design of the Midatlantic, P.C., HLM
Design of the Northwest, Architecture, Engineering and Planning, P.C.
("HLMNW") and HLM of the Southeast, P.C. ("HLMSE") merged into HLMNE;
o JPJ Architects, Inc. ("JPJ");
o G.A. Design International Holdings, Ltd. ("GAIH").
In addition, as of April 29, 2000, the Company acquired and established a
management and services agreement with BL&P Engineers, Inc. ("BL&P").
The MSAs are for a term of 40 years. HLM Design is the sole and exclusive
manager and administrator of all of the Managed Firms' day-to-day business
functions including financial planning, facilities, equipment and supplies and
management and administrative services (bookkeeping and accounts, general
administration services, contract negotiation and administration for all
non-architectural and non-engineering aspects of all agreements, personnel,
security and maintenance, architectural and engineering recruiting and
training, insurance, financing and billing and collections). For these
services, HLM Design receives all but 1% of the Managed Firm's net income and
positive cash flow (as determined in accordance with accounting principles
generally accepted in the United States of America applied on a consistent
basis).
Financial Statement Presentation
The financial statements include the accounts of the Company consolidated
with the accounts of the Managed Firms, including JPJ, GAIH and ESS from their
respective dates of acquisition. All significant balances and transactions
between the Company and the Managed Firms have been eliminated in the
consolidated financial statements.
The Company provides architectural and engineering consulting and design
services from offices in Iowa City, Iowa, Chicago, Illinois, Denver, Colorado,
Orlando, Florida, Dallas, Texas, Atlanta, Georgia, Bethesda, Maryland,
Philadelphia, Pennsylvania, San Francisco, California, Charlotte, North
Carolina and London, U.K.
The Company operates in one segment, which provides architectural,
engineering and planning services.
Fiscal Year-End Policy -- The Company uses a 52-53 week fiscal year for
accounting purposes which defines the fiscal year-end date as the Friday
nearest the end of April. For fiscal years 1999 and 2000, the year-ends were
April 30 and April 28, respectively, each containing 52 weeks. For fiscal year
1998, the year-end was May 1 and contained 53 weeks.
Operating Cycle -- Assets and liabilities related to long-term contracts
are included in current assets and current liabilities in the accompanying
balance sheets, as they will be liquidated in the normal course of contract
completion, although this may require more than one year.
Stockholder Redemption Rights -- Pursuant to the right of certain
affiliate shareholders, under nominee shareholder agreements, to redeem their
interests, the Company has recognized a liability (and goodwill) in the amount
of approximately $347,000. Because certain of these rights may be exercised
prior to April 27, 2001, approximately $210,000 of this liability is included
within current liabilities in the accompanying balance sheet.
F-7
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
In the initial consolidation of the Company and HLMNA, the Company
eliminated the common stock and additional paid-in capital of HLMNA against
goodwill. Upon further evaluation, the Company reclassified in consolidation
the common stock and additional paid-in capital of HLMNA as a liability and an
increase in goodwill of approximately $470,000 at April 28, 2000. The effect on
prior year's financial position and results of operations is not material. The
effect on future periods will be to increase goodwill amortization by $30,000
on an annual basis.
Revenue Recognition -- Revenue is recognized, at estimated collectible
amounts, in the period the services are performed. More specifically, the
Company recognizes revenues either on the percentage-of-completion method
whereby the extent of the contract performance is measured by the percentage of
cost incurred to date to estimated total cost for each contract, or based upon
actual hours spent on the project times the agreed upon hourly rate. Consultant
expenses, project expenses, direct labor and indirect expenses are charged to
expense as incurred. Provisions for estimated losses on uncompleted projects
are made in the period in which such losses are first subject to reasonable
estimation. Unanticipated changes in project performance, project conditions
and estimated profitability may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
The asset "costs and estimated earnings in excess of billings on
uncompleted projects" represents revenues recognized in excess of amounts
billed. The liability "billings in excess of costs and estimated earnings on
uncompleted projects" represents billings in excess of revenues recognized.
Use of Estimates -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The most significant estimate impacting the accompanying
financial statements relates to revenue recognition under the
percentage-of-completion method.
Property and Equipment -- Leasehold improvements and equipment are stated
at cost. Depreciation is computed using the double-declining balance or
straight-line method over the estimated useful lives of the assets or the lease
term. The estimated useful lives of property and equipment for financial
reporting purposes are as follows:
<TABLE>
<S> <C>
Computer equipment and software 3-5 years
Furniture ...................... 5 years
Leasehold improvements ......... Lease term, not to exceed
the useful life of the asset
</TABLE>
Long-Lived Assets -- The Company reviews the carrying value of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable.
Measurement of any impairment would include a comparison of estimated
undiscounted future operating cash flows anticipated to be generated during the
remaining life of the assets with their net carrying value. An impairment loss
would be recognized as the amount by which the carrying value of the assets
exceeds their fair value.
Goodwill -- Goodwill represents the excess purchase price over the
estimated fair value of the tangible and separately measurable intangible net
assets acquired. Goodwill is amortized using the straight-line method over the
expected period to be benefited, generally over a 15- to 25-year period. The
Company assesses the recoverability of these intangible assets by determining
whether the amortization of the goodwill over their remaining lives can be
recovered through the undiscounted future operating cash flows of the acquired
business. The assessment of the recoverability of goodwill will be impacted if
estimated future cash flows are not achieved.
Deferred Income Taxes -- Deferred income tax assets and liabilities are
calculated based upon differences between the financial statement and tax basis
of assets and liabilities that will result in taxable or deductible amounts in
the future. Such deferred income tax asset or liability computations are based
on enacted tax laws and rates applicable to periods in which the differences
are expected to affect taxable income.
F-8
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
Financial Instruments -- The carrying amount of cash, accounts receivable,
accounts payable and accrued liabilities approximates their fair value because
of the short maturities of these instruments. The Company's bank borrowings
approximate fair value because of interest rates that are based on variable
reference rates. See Note 4 as to fair value of certain other obligations.
Foreign Currency -- Assets and liabilities denominated in foreign
currencies have been translated into U.S. dollars at the period-end exchange
rate. Revenues and expenses denominated in foreign currencies have been
translated into U.S. dollars at the weighted average exchange rate. Translation
gains and losses are accounted for in a separate component of stockholders'
equity. The exchange gains and losses arising on transactions are charged to
income as incurred and are not significant for any period presented.
New Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires an entity to recognize all
derivatives as either assets or liabilities in the consolidated balance sheet
and measure those instruments at fair value. SFAS No. 133 was amended by SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date for FASB Statement No. 133, which delays the
Company's effective date until the fiscal year ending April 2002. Management is
currently calculating the effects of SFAS No. 133 on the Company's financial
statements and current disclosures.
Net Income Per Share -- The calculation of diluted net income per share
considers the potential dilutive effect of warrants to purchase shares of
common stock at $0.01 per share as well as stock options to purchase shares of
common stock which were outstanding from May 30, 1997 to April 28, 2000. For
the years ended May 1, 1998, April 30, 1999 and April 28, 2000, the dilutive
effect of warrants was 157,198, 0 and 0, respectively. For the years ended May
1, 1998, April 30, 1999 and April 28, 2000, the dilutive effect of stock
options was 0, 0 and 9,615, respectively.
Supplemental Per Share Data -- Supplemental net income per share in the
accompanying 1998 financial statements has been prepared based upon the shares
outstanding giving effect to the issuance of common stock related to the
initial public offering pro rata for common stock used to pay certain
indebtedness. In addition, net income has been adjusted to give effect to the
initial public offering (the "Offering") and the fiscal 1998 business
acquisition as if the transactions had occurred at the beginning of the year.
Reclassifications -- Certain reclassifications have been made to the
fiscal 1998 and 1999 financial statements to conform to fiscal 2000
presentation.
2. BUSINESS ACQUISITIONS
JPJ Architects, Inc. Acquisition:
On October 30, 1998, the Company purchased all the issued and outstanding
common stock of JPJ Architects, Inc. for $2.4 million in cash, an aggregate of
240,000 shares of the Company's common stock, and subordinated promissory notes
in the aggregate principal amount of $1,160,000. The purchase agreement
specifies delivery of 30 percent of the aggregate shares of the Company's 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 aggregate
shares of stock and the principal amount of the promissory notes on October 30,
2002. Following the purchase, the Company and JPJ entered into a management
services agreement whereby the Company will manage all aspects of JPJ other
than the provision of professional architectural services.
F-9
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. BUSINESS ACQUISITIONS -- (Continued)
The acquisition has been accounted for using the purchase method of
accounting. The purchase price has been allocated to the assets and liabilities
acquired based on their estimated fair value at the acquisition date.
<TABLE>
<S> <C>
Working capital ................ $ 444,585
Property and equipment ......... 158,266
Other assets ................... 143,020
Goodwill ....................... 3,597,449
----------
Total .......................... $4,343,320
==========
</TABLE>
The following unaudited pro forma financial data is presented as if the
transaction occurred as of the beginning of the respective years:
<TABLE>
<CAPTION>
Years Ended
-----------------------------
May 1, 1998 April 30, 1999
------------- ---------------
<S> <C> <C>
Revenues ........... $45,677,796 $ 45,265,496
=========== ============
Net Income ......... $ 1,233,688 $ 957,421
=========== ============
Earnings Per Share:
Basic .............. $ 0.43
============
Diluted ............ $ 0.43
============
</TABLE>
G. A. Design International Holdings Ltd.
On January 29, 1999, the Company purchased 95 percent of the issued and
outstanding common stock of G. A. Design International Holdings Ltd. for a
combination of cash, 27,667 shares of HLM Design common stock and promissory
notes for a total of approximately $1,037,000. The purchase agreement specifies
delivery of 33.3% of the aggregate shares of the stock on each of January 29,
2000, January 2001 and January 2002. The acquisition has been accounted for
using the purchase method of accounting. The purchase price has been allocated
to the assets and liabilities acquired based on their estimated fair value at
the acquisition date resulting in an allocation of goodwill of approximately
$1,042,000. The pro forma effect, assuming the purchase had occurred at the
beginning of the year, would not be material to the Company's results of
operations.
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 allocation may ultimately be different depending on final
valuations. The pro forma effect, assuming the purchase had occurred at the
beginning of the year, would not be material to the Company's results of
operations.
F-10
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is as follows:
<TABLE>
<CAPTION>
April 30, April 28,
1999 2000
--------------- ---------------
<S> <C> <C>
Costs incurred on uncompleted projects (excluding overhead) ..... $ 52,092,171 $ 64,016,964
Estimated earnings thereon ...................................... 49,678,268 58,470,955
------------ ------------
Total ........................................................... 101,770,439 122,487,919
Less billings to date ........................................... 97,400,074 115,828,496
------------ ------------
Net underbillings ............................................... $ 4,370,365 $ 6,659,423
============ ============
</TABLE>
Net underbillings are included in the accompanying balance sheets as
follows:
<TABLE>
<CAPTION>
April 30, April 28,
1999 2000
-------------- --------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on uncompleted
projects ...................................................... $ 7,550,247 $ 8,412,159
Billings in excess of costs and estimated earnings on uncompleted
projects ...................................................... (3,179,882) (1,752,736)
------------ ------------
Net underbillings ............................................... $ 4,370,365 $ 6,659,423
============ ============
</TABLE>
4. FINANCING ARRANGEMENTS
A summary of changes in financing arrangements are as follows:
On February 7, 2000, the Company entered into a revolving credit, term
loan and capital expenditure loan for a total of $20,000,000 with its principal
lender. The three financing arrangements are discussed below:
Revolving Credit -- The maximum revolving advance amount is $17,000,000.
The amount available to borrow is calculated based on the aging of certain
assets. This loan matures in February 2003. The revolving credit facility bears
interest at the sum of the Eurodollar rate plus 2.75%. A portion of the
revolver was used to repay the First Charter revolver of $4,918,335 and note
payable of $250,000.
Term Loan -- The amount of the loan is $2,000,000. This loan matures in
February 2003 and bears interest at a maximum of prime plus 2%. A portion of
the proceeds from the term loan was used to repay $1,820,514 in indebtedness to
Berthel Fisher & Company Leasing, Inc. ("Berthel Fisher").
Capital Expenditure Loan -- The maximum capital expenditure amount is
$1,000,000. The amount is available for the financing of equipment used in the
Company's business. This loan matures in February 2005 and bears interest at a
maximum of prime plus 1%. At April 28, 2000, there were no borrowings under
this loan.
Substantially all assets are pledged under this financing arrangement. The
arrangement requires certain financial covenants to be maintained, such as
minimum net worth, maximum leverage and senior leverage ratios, maximum fixed
charge coverage and senior fixed charge coverage ratios and maximum capital
expenditure levels. At April 28, 2000, the Company was in compliance with these
financial covenants.
In the fourth quarter, the early extinguishment of the Berthel Fisher and
the First Charter debt noted above resulted in an extraordinary charge of
$228,355, net of income taxes of $128,004, that consisted of write-off of
related unamortized financing costs.
F-11
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. FINANCING ARRANGEMENTS -- (Continued)
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
April 30, 1999 April 28, 2000
---------------- ---------------
<S> <C> <C>
Revolving credit facility to IBJW, payable in February 2003, including interest at
Eurodollar Rate plus 2.75% (9.5% at April 28, 2000) ..................................... $ -- $ 7,257,470
Term note payable to IBJW, due in monthly payments of $55,556, plus interest at a
maximum of prime plus 2% (11.0% at April 28, 2000), with final payment due in
February 2003 ........................................................................... -- 1,888,889
Notes payable of $1,160,000 to former JPJ Architect, Inc. shareholders due in annual
installments of $348,000 beginning October 2000, plus interest at 7%, with final
payment of $464,000 due October 2002 .................................................... 918,720 1,011,520
Notes payable to former G.A. Design International Holdings Limited shareholder, due in
annual installments of $82,500, plus interest at 7%, with final payment in August 2002 .. 416,895 209,738
Notes payable to former G.A. Design International Holdings Limited shareholder, due in
various installments with final payment due January 2001 ................................ 187,550 55,000
Notes payable to former ESS Architects, Inc. shareholders, due in annual installments of
$125,000 beginning September 2000, plus interest at 7%, with final payment in
September 2001 .......................................................................... -- 230,833
Other .................................................................................... 115,638 66,303
Lease financing with Berthel Fisher, including interest at 14.07%, paid in 2000 .......... 1,969,609 --
Revolving credit facility to First Charter National Bank, including interest at prime plus
1%, paid in 2000 ........................................................................ 3,118,336 --
---------- -----------
Total long-term debt ..................................................................... 6,726,748 10,719,753
Less current maturities .................................................................. 1,054,369 1,216,468
---------- -----------
Long-term portion ........................................................................ $5,672,379 $ 9,503,285
========== ===========
</TABLE>
At April 28, 2000 and April 30, 1999, the fair value of the Company's
financing arrangements totaled $10,695,856 and $7,632,627, respectively.
In May 1997, HLMNA entered into a financing arrangement in the form of a
capital lease agreement with Berthel Leasing, a subsidiary of Berthel Fisher,
for $2.8 million. The substance of such agreement was a financing arrangement
and was presented as such in the financial statements.
Annual principal payments of the various financing agreements are as
follows:
<TABLE>
<S> <C>
Fiscal 2001 ......... $ 1,216,468
Fiscal 2002 ......... 1,143,468
Fiscal 2003 ......... 8,359,817
-----------
Total ............... $10,719,753
===========
</TABLE>
5. LEASE COMMITMENTS
The Company leases office space and equipment under non-cancelable
operating leases.
F-12
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. LEASE COMMITMENTS -- (Continued)
The total minimum rental commitment under such non-cancelable operating
leases at April 28, 2000, which has been reduced by minimum rentals to be
received under subleases, are as follows:
<TABLE>
<S> <C>
Fiscal 2001 ......... $ 2,548,378
Fiscal 2002 ......... 2,441,713
Fiscal 2003 ......... 2,018,784
Fiscal 2004 ......... 1,585,969
Fiscal 2005 ......... 1,228,152
Thereafter .......... 900,564
-----------
Total ............... $10,723,560
===========
</TABLE>
Rent expense was $2,102,353, $2,279,585 and $2,851,280 for the periods
ended May 1, 1998, April 30, 1999 and April 28, 2000, respectively.
6. CONTINGENCIES
The Company is involved in various disputes and legal actions related to
contract operations. In the opinion of Company management, the ultimate
resolution of these actions will not have a material effect on the Company's
financial position, future results of operations or cash flows.
7. RELATED PARTY TRANSACTIONS
During the year ended April 28, 2000, the Company paid $140,528 to certain
affiliate shareholders, under nominee shareholder agreements, to redeem their
interest as discussed further in Note 1. During the year ended April 30, 1999,
the Company incurred $40,000 in consulting fees for services provided by a
director. During the year ended May 1, 1998, the Company incurred $22,911 in
financing advisory fees related to debt financings for services provided by a
director.
8. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
May 1, April 30, April 28,
1998 1999 2000
----------- ----------- --------------
<S> <C> <C> <C>
Current expense (benefit):
Federal ...................... $190,424 $581,665 $ 1,717,617
State ........................ 132,611 115,536 246,447
Deferred ...................... 360,862 245,506 (1,110,170)
-------- -------- ------------
Total income tax expense ...... $683,897 $942,707 $ 853,894
======== ======== ============
</TABLE>
F-13
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. INCOME TAXES -- (Continued)
The reconciliation of the statutory federal income tax rate with the
Company's overall effective federal and state income rate is as follows:
<TABLE>
<CAPTION>
Year Ended
---------------------------------
May 1, April 30, April 28,
1998 1999 2000
---------- ----------- ----------
<S> <C> <C> <C>
Statutory federal rate ................ 34.0% 34.0% 34.0%
State income taxes, net of federal benef 4.0 4.7 4.2
Penalties ............................. 1.9 1.7 0.2
Meals and entertainment ............... 2.0 0.8 1.1
Goodwill amortization ................. 3.8 4.4 7.3
Other ................................. .4 1.2 0.3
----- ----- -----
Effective tax rate .................... 46.1% 46.8% 47.1%
===== ===== =====
</TABLE>
The tax effect of temporary differences giving rise to deferred income tax
assets and liabilities as of April 30, 1999 and April 28, 2000 is as follows:
<TABLE>
<CAPTION>
April 30, April 28,
1999 2000
---------------- ---------------
<S> <C> <C>
Deferred income tax liabilities:
Difference between the accrual basis and cash basis of
accounting related to certain assets and liabilities $ (1,881,680) $ (971,910)
Prepaid expenses .................................. (68,568) (43,757)
Other ............................................. -- (30,649)
------------ ------------
Total deferred income tax liabilities ............ (1,950,248) (1,046,316)
------------ ------------
Deferred income tax assets:
Property and equipment ............................ 268,105 447,957
Allowances ........................................ 385,093 397,506
Other deferred assets ............................. -- 13,973
------------ ------------
Total deferred income tax assets ................. 653,198 859,436
------------ ------------
Deferred income tax liabilities, net ............... $ (1,297,050) $ (186,880)
============ ============
</TABLE>
Management believes it is probable that the Company will realize the tax
benefits of the deductible differences that were available as of April 28,
2000.
The Company and its Managed Firms, except JPJ, file separate federal and
state income tax returns. The Company and JPJ file a consolidated federal
income tax return.
9. STOCKHOLDERS' EQUITY
Public Offering of Common Stock -- The Company completed the offering of
1,200,000 shares of its common stock on June 12, 1998 at a price of $6.00 per
share. Net proceeds of the offering of $5.92 million (after underwriting
discount and other offering expenses) were used to repay certain indebtedness
consisting of: (a) $2.0 million due under Pacific Capital/ Equitas, and (b)
$0.75 million term loan from Berthel Leasing and $0.2 million to employee
stockholders (See Note 4 -- Financing Arrangements). Remaining net proceeds
were 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.
F-14
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. STOCKHOLDERS' EQUITY -- (Continued)
Preferred Stock -- The Company's Certificate of Incorporation authorizes
the Board of Directors of the Company to issue 1,000,000 shares of preferred
stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights that could adversely
affect the voting power or other rights of the holders of the Company's Common
Stock. No shares of preferred stock have been issued.
Stock Split -- Prior to the initial public offering, the Company's board
of directors authorized a 12.75-to-1 stock split (effected in a series of
transactions) of HLM Design's Common Stock. All share and per share information
in the accompanying financial statements has been restated to give retroactive
recognition to the stock split for all periods presented.
Warrants -- In May 1997, warrants to purchase 183,244 shares of HLM Design
common stock (as adjusted for subsequent stock splits) were attached to the
notes issued to Pacific Capital and Equitas. In addition, warrants to purchase
43,631 shares of HLM Design common stock (as adjusted for subsequent stock
splits) were attached to the notes issued to Berthel Fisher in September 1997
and in December 1997. Each warrant allows holders to purchase a share of common
stock for $.01 per share for a five year period. At April 30, 1999, all of the
warrants held by Berthel Fisher, Pacific Capital and Equitas were exercised.
In connection with the Offering, the Company sold to the underwriters, for
a price of $0.01 per warrant, warrants to purchase 120,000 shares of common
stock exercisable at $7.20 per share. At April 28, 2000, all of these warrants
were outstanding.
10. EMPLOYEE BENEFIT PLANS
401(K) Plan -- Substantially all employees are eligible to participate in
a 401(k) plan. Contribution expense for the periods ended May 1, 1998, April
30, 1999 and April 28, 2000 was $27,933, $53,886 and $146,065, respectively.
Employee Stock Purchase Plan -- In February 1998, the Board of Directors
and stockholders of the Company adopted the HLM Design Inc. Employee Stock
Purchase Plan (the "ESPP"). A total of 57,954 shares of common stock has been
reserved under the ESPP, provided that the number of shares issued or issuable
under the ESPP and under the Stock Option Plan (discussed below) shall not
exceed in the aggregate 10% of the total number of shares of common stock
outstanding. On January 1 of each year, all eligible employees electing to
participate will be granted options to purchase shares of Common Stock. The
purchase price of common stock purchased through the ESPP will be 85% of the
lesser of (i) the fair market value of the common stock on the applicable Grant
Date and (ii) the fair market value of the common stock on the applicable
exercise date. Options will expire on the last exercise date of the calendar
year in which granted. As of April 28, 2000, 17,221 shares have been granted or
issued under the ESPP.
Stock Option Plan -- In February 1998, the Board of Directors and
stockholders of the Company adopted the HLM Design, Inc. Stock Option Plan (the
"Stock Option Plan") in order to attract and retain key personnel. Under the
Stock Option Plan, options to purchase an aggregate of 159,955 shares of common
stock may be granted to key employees of HLM Design and its Managed Firms and
to officers, directors, consultants and other individuals providing services to
the Company. During the year ended April 30, 1999, the Board of Directors of
HLM Design has approved the grant of 125,908 shares of common stock to two key
employees and certain Board Members. During the year ended April 28, 2000, the
Board of Directors approved the issuance of options to purchase 28,400 shares
of common stock to several key employees.
F-15
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. EMPLOYEE BENEFIT PLANS -- (Continued)
Option information is summarized below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price
Shares Per Share
---------- ---------------
<S> <C> <C>
Outstanding, May 1, 1998 .......... -- $ --
Granted ........................... 125,908 5.72
-------
Outstanding, April 30, 1999 ....... 125,908 5.72
Granted ........................... 28,400 3.61
-------
Outstanding, April 28, 2000 ....... 154,308 $ 5.34
======= ======
Exercisable, April 28, 2000 ....... 154,308 $ 5.34
======= ======
</TABLE>
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Remaining Exercise Exercise
Range of Exercise Price Options Term Price Options Price
---------------------------- --------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
$3.61 - $4.50 ......... 38,400 9.0 $ 3.84 38,400 $ 3.84
$5.50 - $6.60 ......... 115,908 6.6 5.83 115,908 5.83
------- -------
154,308 7.2 $ 5.34 154,308 $ 5.34
======= === ======= ======= =======
</TABLE>
The Company measures the compensation cost of its stock option plan under
the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, as permitted under SFAS No. 123, Accounting for
Stock-Based Compensation. Under the provisions of APB No. 25, compensation cost
is measured based on the intrinsic value of the equity instrument awarded.
Under the provisions of SFAS No. 123, compensation cost is measured based on
the fair value of the equity instrument awarded. The Company's net income and
net income per share would approximate the following pro forma amounts:
<TABLE>
<CAPTION>
As Pro
Reported Forma
------------- -------------
<S> <C> <C>
April 28, 2000:
Net income ................... $ 754,424 $ 753,000
Net income per share ......... $ 0.32 $ 0.32
April 30, 1999:
Net income ................... $ 792,037 $ 562,000
Net income per share ......... $ 0.39 $ 0.27
</TABLE>
The fair value of each grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the assumptions listed below:
<TABLE>
<CAPTION>
April 30, April 28,
1999 2000
----------- ----------
<S> <C> <C>
Weighted-average fair value per option$ 3.75 $ 3.75
Assumptions used:
Weighted-average expected volatility ...... 60% 60%
Weighted-average risk-free interest rate .. 5.2 % 5.2 %
Weighted-average expected life, in years .. 8 8
</TABLE>
F-16
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. HLM DESIGN FINANCIAL INFORMATION (UNAUDITED)
HLM Design's balance sheet as of April 30, 1999 and April 28, 2000 and
income statement for each of the three years in the period ended April 28, 2000
are as follows:
<TABLE>
<CAPTION>
May 1, April 30, April 28,
1998 1999 2000
-------------- -------------- --------------
<S> <C> <C> <C>
Balance Sheet
Current assets .............................. $11,401,686 $18,609,130
Non-current assets .......................... 8,944,285 10,252,070
----------- -----------
Total assets ................................ $20,345,971 $28,861,200
=========== ===========
Current liabilities ......................... $ 6,898,348 $ 9,343,867
Non-current liabilities ..................... 4,466,683 9,750,540
----------- -----------
Total liabilities ........................... 11,365,031 19,094,407
Total stockholders' equity .................. 8,980,940 9,766,793
----------- -----------
Total liabilities & stockholders' equity .... $20,345,971 $28,861,200
=========== ===========
Income Statement
Equity in earnings of affiliates ............ $ 1,443,958 $ 1,185,239 $ 1,501,799
Net interest, tax and other expense ......... 665,602 393,202 747,375
----------- ----------- -----------
Net income .................................. $ 778,356 $ 792,037 $ 754,424
=========== =========== ===========
</TABLE>
12. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
2000
-------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total revenues ............................. $ 11,453,195 $ 12,325,241 $ 14,317,484 $ 15,005,741
Net production income ...................... 8,081,286 8,437,040 8,642,287 9,719,832
Operating income ........................... 659,359 777,923 618,430 901,368
Net income ................................. 226,970 269,909 192,082 65,463
Net income per common share (B) ............ $ 0.10 $ 0.11 $ 0.08 $ 0.03
1999
--------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------ ------------ ------------
Total revenues ............................. $ 8,134,122 $ 7,510,423 $ 10,427,107 $ 11,686,001
Net production income ...................... 6,344,991 6,243,102 7,271,359 8,126,266
Operating income ........................... 557,129 576,811 612,439 989,986
Net income (loss) .......................... (89,227) 249,785 205,389 426,090
Net income (loss) per common share (A) ..... $ (0.06) $ 0.12 $ 0.09 $ 0.24
</TABLE>
(A) In the first quarter 1999, as a result of the Offering, certain debt was
repaid resulting in an extraordinary charge of $280,849, net of income
taxes of $171,842, that consisted of write-off of related unamortized
financing costs. Net income before such extraordinary item was $191,622
and net income per share was $0.13.
(B) In the fourth quarter 2000, certain debt was repaid resulting in an
extraordinary charge of $228,355, net of income taxes of $128,004, that
consisted of write-off of related unamortized financing costs and other
related costs. Net income before such extraordinary item was $293,818, and
net income per share was $0.13.
F-17
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. SUBSEQUENT EVENT
BL&P Engineers, Inc. Acquisition
As of April 29, 2000, the Company purchased all of the issued and
outstanding common stock and related goodwill of BL&P for $1.46 million in
cash, subordinated promissory notes bearing interest at 7 percent in the
aggregate amount of $2.04 million (the "Notes") and 50,000 shares of the
Company's common stock having a value of $0.26 million to be delivered on a
delayed delivery basis.
The Stock Purchase Agreement ("Agreement") provides for, among other
things, the delivery to BL&P's former stockholder of 30% of the number of
shares of the stock on each of April 29, 2002 and April 29, 2003 and 40% of the
number of shares of stock on April 29, 2004. The Notes provide for payment of
30% of the principal amount on each of October 29, 2001 and April 29, 2003 and
40% of the principal amount on April 29, 2004. Following the consummation of
the Agreement, the Company and BL&P entered into a Management and Services
Agreement, whereby the Company will manage all aspects of BL&P other than the
provision of professional engineering services.
In addition, the Company paid BL&P debt of $0.76 million upon closing.
The acquisition has been accounted for using the purchase method of
accounting. The purchase price has been preliminarily allocated to the assets
and liabilities acquired based on their estimated fair value at the acquisition
date.
<TABLE>
<S> <C>
Working capital ........... $ 877,659
Other assets .............. 79,964
Other liabilities ......... (461,180)
Goodwill .................. 4,027,041
----------
Total ..................... $4,523,484
==========
</TABLE>
F-18
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HLM DESIGN, INC.
By: /s/ VERNON B. BRANNON
------------------------------------
Vernon B. Brannon
Senior Vice President, Treasurer
and Chief Financial Officer
Date:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------------------------------------------- ---------------------------------------- ----------------
<S> <C> <C>
/s/ JOSEPH M. HARRIS President, Chief Executive Officer July 26, 2000
---------------------------------- (principal executive officer) and
Joseph M. Harris Chairman
/s/ VERNON B. BRANNON Senior Vice President, Treasurer, Chief July 26, 2000
---------------------------------- Financial Officer (principal financial
Vernon B. Brannon and accounting officer) and Director
/s/ JAMES E. FINLEY Director July 26, 2000
----------------------------------
James E. Finley
/s/ L. FRED POUNDS Director July 26, 2000
----------------------------------
L. Fred Pounds
/s/ D. SHANNON LEROY Director July 26, 2000
----------------------------------
D. Shannon LeRoy
</TABLE>
F-19
<PAGE>
SCHEDULE II
HLM DESIGN, INC.
VALUATION AND QUALIFYING ACCOUNTS
Years Ended May 1, 1998, April 30, 1999 and April 28, 2000
<TABLE>
<CAPTION>
Balance Charged
at to Costs Deductions Balance
Beginning and from at End
of Period Expenses Other Reserves of Period
----------- ---------- ---------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
2000 -- Allowance for doubtful accounts ......... $341,692 $ -- $ 4,368(A) $ -- $346,060
1999 -- Allowance for doubtful accounts ......... 150,000 -- 191,692(A) -- 341,692
1998 -- Allowance for doubtful accounts ......... 111,000 88,000 -- 49,000(B) 150,000
</TABLE>
NOTES:
(A) Increases to reserves reflecting acquisitions.
(B) Accounts charged off, recoveries, and other adjustments, net.
F-20
