-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MpDphSt6Pyb2D3PbUecUExeWiq4yr8e+8kbbvHqw0Yc3FZV4TmuVkSnAwUcr/us6 paHUd/bq4t6JNs+UydiNUA== 0000950168-98-003864.txt : 19981215 0000950168-98-003864.hdr.sgml : 19981215 ACCESSION NUMBER: 0000950168-98-003864 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981030 FILED AS OF DATE: 19981214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HLM DESIGN INC CENTRAL INDEX KEY: 0001049129 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 562018819 STATE OF INCORPORATION: DE FISCAL YEAR END: 0501 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24279 FILM NUMBER: 98769020 BUSINESS ADDRESS: STREET 1: 121 W TRADE ST STREET 2: STE 2950 CITY: CHARLOTTE STATE: NC ZIP: 28202 BUSINESS PHONE: 7043580779 MAIL ADDRESS: STREET 1: 121 WEST TRADE STREET STREET 2: SUITE 2950 CITY: CHARLOTTE STATE: NC ZIP: 28202 10-Q 1 HLM DESIGN INC. 10-Q U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ( X ) QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 30, 1998 ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ____________ to ____________ Commission file Number 001-14137 --------- HLM Design, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 56-2018819 (State or Other Jurisdiction (I.R.S Employer Identification No.) of Incorporation or Organization) 121 West Trade Street, Suite 2950 Charlotte, North Carolina 28202 (Address of principal executive offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (704) 358-0779 Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Title of Each Class Outstanding at November 30, 1998 Common stock, par value $.001 per share 2,315,087 shares HLM DESIGN, INC. AND AFFILIATES INDEX TO FORM 10-Q
PAGE NO. PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets - May 1, 1998 and October 30, 1998 3 Consolidated Statements of Operation - One month period ended May 30, 1997 (Predecessor), Six month periods ended October 31, 1997 and October 30, 1998 and Three month periods ended October 30, 1997 and October 30, 1998 5 Consolidated Statement of Stockholders' Equity - May 1, 1998 And October 30, 1998 6 Consolidated Statements of Cash Flows - One month period ended May 30, 1997 (Predecessor), and Six month periods ended October 31, 1997 and October 30, 1998 7 Notes to Unaudited Consolidated Financial Statements 8 ITEM 2. Management's Discussion and Analysis of Financial Operations And Results of Operations 13 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED BALANCE SHEETS
May 1, October 30, 1998 1998 ----- ------ (Unaudited) ASSETS: Current Assets: Cash $ 17,369 $ 721,122 Accounts Receivable: Trade and other receivables, less allowance for doubtful accounts at May 1 and October 30 $150,000 6,089,929 7,654,532 Costs and estimated earnings in excess of billings on uncompleted projects, net 5,513,854 6,381,747 Prepaid expenses 724,010 703,680 ----------------------------------- Total Current Assets 12,345,162 15,461,081 ----------------------------------- Other Assets: Deferred income taxes 465,601 509,776 Other 825,018 568,776 Goodwill, net 2,426,598 5,937,950 ----------------------------------- Total Other Assets 3,717,217 7,016,502 ----------------------------------- Property and Equipment: Leasehold improvements 782,609 1,064,528 Furniture and fixtures 1,786,250 2,301,346 ----------------------------------- Property and Equipment, at cost 2,568,859 3,365,874 Less Accumulated depreciation 768,904 1,233,436 ----------------------------------- Property and equipment, net 1,799,955 2,132,438 ----------------------------------- TOTAL ASSETS $ 17,862,334 24,610,021 ===================================
See notes to unaudited consolidated financial statements. 3 HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED BALANCE SHEETS
May 1, October 30, 1998 1998 ----- ------ (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current maturities of long-term debt and capital lease obligations $ 656,576 $ 548,604 Notes payable 2,250,000 2,451,335 Accounts payable 3,041,859 3,581,777 Accrued expenses 1,913,505 1,791,989 Income tax payable 215,950 633,486 Billings in excess of costs and estimated earnings on uncompleted projects 3,008,023 3,215,557 Deferred income taxes 1,517,146 1,501,055 ----------------------------------- Total Current Liabilities 12,603,059 13,723,803 ----------------------------------- LONG-TERM DEBT 4,164,401 2,635,642 ----------------------------------- TOTAL LIABILITIES 16,767,460 16,359,445 ----------------------------------- MINORITY INTEREST 15,187 15,422 ----------------------------------- COMMITMENT AND CONTINGENCIES WARRANTS OUTSTANDING 114,932 1,200 ----------------------------------- STOCKHOLDERS' EQUITY: Capital Stock: Common, $.001 par value, voting, authorized 9,000,000 shares: issued 776,134 and 2,315,087, respectively 776 2,315 Preferred, $.10 par value, voting, authorized 1,000,000 shares, no shares outstanding Additional paid in capital 185,623 7,292,725 Retained earnings 778,356 938,914 ----------------------------------- TOTAL STOCKHOLDERS' EQUITY 964,755 8,233,954 ----------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,862,334 $ 24,610,021 ===================================
See notes to unaudited consolidated financial statements. 4 HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF OPERATION (UNAUDITED)
(Predecessor Company) One Six Six Three Three Month Months Months Months Months Ended Ended Ended Ended Ended May 30, October 31, October 30, October 31, October 30, 1997 1997 1998 1997 1998 ----- ----- ---- ----- ---- REVENUES: Fee Income $1,998,611 $10,294,060 $12,815,480 $5,450,772 $5,159,664 Reimbursable Income 234,425 2,892,743 2,829,066 2,424,990 2,350,760 ----------- ----------- ----------- ----------- ----------- Total Revenues 2,233,036 13,186,803 15,644,546 7,875,762 7,510,424 ----------- ----------- ----------- ----------- ----------- CONSULTANT EXPENSE 192,862 1,976,901 2,142,048 1,128,313 885,093 ----------- ----------- ----------- ----------- ----------- PROJECT EXPENSES: Direct Expenses 35,404 535,341 345,968 318,033 151,879 Reimbursable expenses 68,617 369,677 568,437 228,085 230,350 ----------- ----------- ----------- ----------- ----------- Total project expenses 104,021 905,018 914,405 546,118 382,229 ----------- ----------- ----------- ----------- ----------- NET PRODUCTION INCOME 1,936,153 10,304,884 12,588,093 6,201,331 6,243,102 DIRECT LABOR 602,096 3,062,843 3,601,546 1,917,798 1,849,427 INDIRECT EXPENSES 1,172,712 5,991,828 7,852,607 3,381,704 3,816,864 ----------- ----------- ----------- ----------- ----------- OPERATING INCOME 161,345 1,250,213 1,133,940 901,829 576,811 ----------- ----------- ----------- ----------- ----------- OTHER EXPENSE: Interest Expense, net 36,951 496,370 327,547 345,187 123,557 Other 603 835 603 - ----------- ----------- ----------- ----------- ----------- Total Other Expense 36,951 496,973 328,382 345,790 123,557 ----------- ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 124,394 753,240 805,558 556,039 453,254 INCOME TAX 43,000 374,125 364,151 224,125 203,469 ----------- ----------- ----------- ----------- ----------- NET INCOME BEFORE EXTRAORDINARY ITEM 81,394 379,115 441,407 331,914 249,785 EXTRAORDINARY ITEM FOR EARLY EXTINGUISHMENT OF DEBT, NET OF TAX OF $171,842 280,849 ----------- ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 81,394 $ 379,115 $ 160,558 $ 331,914 $ 249,785 =========== =========== =========== =========== =========== NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM: Basic and diluted $ 0.24 $ 0.12 =========== =========== NET INCOME (LOSS) PER SHARE Basic and diluted $ 0.09 $ 0.12 =========== =========== NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Basic and diluted 1,812,339 2,075,087 =========== ===========
See notes to unaudited consolidated financial statements. 5 HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
Common Stock Additional Total ------------ Paid-In Retained Stockholders' Shares Amount Capital Earnings Equity ------ ------ -------- --------- ------ Balance, May 1, 1998 776,134 $ 776 $ 185,623 $ 778,356 $ 964,755 Issuance of Common Stock 1,298,953 1,299 6,036,342 6,037,641 (Note 4) Net Income 160,558 160,558 Issuance of Common Stock for purchase of JPJ Architects, Inc. (Note 5) 240,000 240 1,070,760 1,071,000 ------------------------------------------------------------------------- Balance, October 30, 1998 2,315,087 $ 2,315 $7,292,725 $ 938,914 $8,233,954 ========================================================================
See notes to unaudited consolidated financial statements. 6 HLM DESIGN, INC. AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Predecessor Company) One Six Six Month Months Months Ended Ended Ended May 30, October 31, October 30, 1997 1997 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 81,394 $ 379,115 $ 160,558 Adjustments to reconcile net income to net used in operating activities: Extraordinary item for early extinguishment of debt 280,849 Depreciation 55,544 118,176 464,532 Amortization of goodwill 9,571 71,496 86,097 Amortization of deferred loan fees 26,922 42,703 Deferred income taxes 54,907 308,413 117,450 Changes in assets and liabilities net of effects from purchase of of JPJ Architects, Inc.: (Increase) decrease in trade and other accounts receivable (1,500,472) (1,481,816) 863,724 (Increase) decrease in costs and estimated earnings compared to billings on uncompleted contracts, net 1,199,028 1,506,233 (1,065,871) (Increase) decrease in refundable income taxes (11,157) 41,835 Increase (decrease) in prepaid expenses and other assets (11,579) (101,899) 46,969 Increase (decrease) in accounts payable 233,659 (1,005,222) (866,191) Increase (decrease) in accrued expenses and other liabilities (263,500) 88,146 (620,254) Increase in income tax payable 50,022 ------------------------------------------- Net cash used in operating activities (152,605) (48,601) (439,412) ------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (2,023) (391,974) (638,749) Note receivable from officer (20,000) Payment for purchase of JPJ Architects, Inc., net of cash acquired (1,834,279) ------------------------------------------- Net cash used in investing activities (2,023) (411,974) (2,473,028) ------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowing on line of credit (2,360,000) 951,335 Net proceeds from issuance of common stock 11,693 5,922,709 Proceeds from long-term borrowings 2,800,000 3,750,000 Payment on short term borrowings (750,000) Payment on long-term borrowings (285,372) (240,916) (2,509,051) Payment of deferred loan fees (40,000) Payment of ESOP buyback (3,221,824) Proceeds from issuance of notes payable to shareholders 182,308 Proceeds from issuance of warrants 23,501 1,200 ------------------------------------------- Net cash provided by financing activities 154,628 464,762 3,616,193 ------------------------------------------- INCREASE IN CASH - 4,187 703,753 CASH BALANCE: Beginning of period 2,321 2,321 17,369 ------------------------------------------- End of period $ 2,321 $ 6,508 $ 721,122 =========================================== SUPPLEMENTAL DISCLOSURES: Cash paid (received) during the year for: Interest $ 6,827 $ 332,414 $ 460,175 Income tax payments (refunds) $ (750) $ (24,750) $ 184,526 Noncash investing and financing transactions: Issuance of warrants to certain debt holders $ 238,752 $ 226,577 $ 1,200 Acquisition of JPJ Architects, Inc.: Notes payable issued to JPJ Architects, Inc. shareholders $ 872,320 Fair value of assets acquired and liabilities assumed, net $ 180,150 Common stock to be issued on delayed delivery schedule $ 1,071,000
See notes to unaudited consolidated financial statements. 7 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business-HLM Design, Inc. ("HLM Design") is a management services company incorporated March 6, 1997 for the purpose of providing management and services to architectural, engineering and planning design entities under long term management and services agreements ("MSAs"). HLM Design, Inc entered into an MSA with each of HLM Design of North America, Inc. ("HLMNA"), HLM Design of the Southeast, P.C.("HLMSE"), and HLM Design of the Northwest, Architecture, Engineering and Planning, P.C. ("HLMNW") in May 1997. In July 1998, HLM Design, Inc. entered into an MSA with each of HLM Design of the Midwest, Inc. ("HLMMW"), HLM Design of the Midatlantic, P.C. ("HLMMA"), and HLM Design of the Northeast, Architecture, Engineering and Planning, P.C. ("HLMNE"). HLMNA, HLMSE, HLMNW, HLMMW, HLMMA and HLMNE are collectively referred to as "Managed Firms". At the same time, the Managed Firms and its stockholders entered into a stockholders agreement (which provides the stockholders of Managed Firms with nominee stockholder status); therefore, as of May 31, 1998 and thereafter, HLM Design, Inc. and Managed Firms financial statements are presented on a consolidated basis. HLM Design and the Managed Firms are referred to herein collectively as the "Company". Financial Statement Presentation - The accompanying unaudited financial information for the one month period ended May 30, 1997(Predecessor), and six month periods ended October 31, 1997 and October 30, 1998 have been prepared in accordance with generally accepted accounting principles pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and the results of operations for the periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These interim consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended May 1, 1998. In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 131 "Disclosure about Segments of an Enterprise and Related Information." This statement redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about the Company's fiscal year ending April 30, 1999, but will need not be applied to interim financial statements in the initial year of its application. The Company has not yet completed its' analysis of which operating segments it will disclose, if any. 8 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 2. CONTRACTS IN PROGRESS Information relative to contracts in progress is as follows: May 1, October 30, 1998 1998 ---- ---- Costs incurred on uncompleted projects (excluding overhead) $45,830,792 $44,988,932 Estimated earnings thereon 45,615,282 48,551,771 ----------- ------------- Total 91,446,074 93,540,703 Less billings to date 88,940,243 90,374,513 ----------- ------------- Net underbillings $ 2,505,831 $ 3,166,190 =========== ============= Net underbillings are included in the accompanying balance sheets as follows: May 1, October 30, 1998 1998 ---- ---- Costs and estimated earnings in excess of billings On uncompleted projects $5,513,854 $6,381,747 Billings in excess of costs and estimated earnings On uncompleted projects (3,008,023) (3,215,557) ------------ ----------- Net underbillings $2,505,831 $3,166,190 ========== ========== 3. FINANCING ARRANGEMENTS A summary of changes in financing arrangements are as follows: Notes Payable: The Company repaid its indebtedness to Berthel Fisher & Company Financial Services, Inc. ($.75 million) from the net proceeds of its initial public offering (the "Offering") in June 1998. Long-Term Debt: The Company repaid its obligation to Pacific Capital, L.P. and Equitas, L.P. ($2.0 million) and to employee stockholders ($.2 million) from the net proceeds of the Offering in June 1998. On August 31, 1998, the Company increased its revolving line of credit with First Charter National Bank from $1.5 million to $3.0 million. At October 30, 1998, the Company had borrowings outstanding of $1.9 million. The revolving line of credit is secured by, among other things, a security interest in all accounts receivable. Any outstanding balance under this loan bears interest at prime plus 1 percent. This loan matures on June 30, 1999. 9 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 4. INITIAL PUBLIC OFFERING In June 1998 pursuant to a Registration Statement on Form S-1 filed with the Securities and Exchange Commission, HLM Design consummated the Offering. Through the Offering, HLM Design offered and sold 1,200,000 shares of Common Stock at a price to the public of $6.00 per share. The net proceeds of the Offering totaling $5.92 million (after underwriting discount and other offering expenses) were used to repay certain indebtedness consisting of: (a)$2.0 million loan from Pacific Capital L.P. and Equitas L.P. and (b)$.75 million term loan from Berthel Fisher & Company Financial Services, Inc. and (c)$.2 million of indebtedness to employee stockholders. Remaining net proceeds will be used for development of new business and other general corporate purposes. The early extinguishment of the Pacific Capital, L.P., Equitas, L.P. and Berthel Fisher & Company Financial Services, Inc. debt resulted in an extraordinary charge of $280,849, net of income taxes of $171,842, that consisted of write-off of related unamortized financing costs. 5. ACQUISITION OF JPJ ARCHITECTS, INC. On October 30, 1998, HLM Design purchased all the issued and outstanding common stock of JPJ Architects, Inc. ("JPJ") for $2.4 million in cash, an aggregate of 240,000 shares of HLM Design's common stock, and subordinated promissory notes bearing interest at 7 percent in the aggregate principal amount of $1,160,000. Such purchase price may be adjusted downward if certain earnings and stockholders' equity levels are not achieved by JPJ for the year ended April 30, 1999. The purchase price agreement specifies delivery of 30 percent of the aggregate shares of the stock and the principal amount of the promissory notes on each of October 30, 2000 and October 30, 2001 and delivery of the remaining 40 percent of the aggregated shares of stock and the principal amount of the promisssory notes on October 30, 2002. Following the purchase, HLM Design and JPJ entered into Management Services Agreement whereby the Company will manage all aspects of JPJ other than the provisions of professional architectural services. 10 HLM DESIGN INC. AND AFFILIATES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 5. ACQUISITION OF JPJ ARCHITECTS, INC. (CONTINUED) The acquisition has been accounted for using the purchase method of accounting. The purchase price has been allocated on a preliminary basis as shown below to the assets and liabilities acquired based on their estimated fair value at the acquisition date. Such allocations may ultimately be different than amounts reflected depending on final valuations. Working capital $ 444,585 Property and equipment 158,266 Other assets 143,020 Goodwill 3,597,449 --------- $ 4,343,320 The following unaudited pro forma information presents a summary of consolidated results of operations as if the JPJ acquisition has occurred at the beginning of the period in which the acquisition was completed after giving effect to certain adjustments, including amortization of goodwill, interest expense on acquisition debt and related income tax effects. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that would have occurred had the acquisitions been completed at the beginning of the period presented. These results are not necessarily indicative of the results of future operations. It is not practicable to prepare comparative pro forma results of operations for the six months period ended October 31, 1997 due to the short time frame between consummation of the acquisitionn and required filing deadlines for the report of Form 10-Q. For the Six Months Ended 10/30/98 ----------------- Total revenues $23,152,439 Net income before extraordinary item 606,842 Net income before extraordinary item Per share (basic and fully diluted) $ 0.30 Net income 325,992 Net income per share (basic and fully Diluted) $ 0.16 11 HLM DESIGN INC. AND AFFILIATES NOTES TO UNAUDITED FINANCIAL STATEMENTS 6. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED) HLM Design, Inc.'s unconsolidated balance sheet as of October 30, 1998 and income statement for the six month period ended October 30, 1998 is as follows: Balance Sheet: Current assets $ 4,516,854 ------------ Non-current assets 10,616,386 ------------ Total assets $ 15,133,240 ============ Current liabilities 6,025,766 ------------ Non-current liabilities 873,520 ------------ Total liabilities 6,899,286 ------------ Total stockholders' equity 8,233,954 ------------ Total liabilities and stockholders' equity $ 15,133,240 ============ Income Statement: Equity in earnings of Affiliate $ 375,750 Net interest, extraordinary item, tax and other expense 215,192 ------------ Net income $ 160,558 ============ 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. As a result of the acquisition of HLMNA through the merger of BBH Corp. (an affiliate of HLM Design) into HLMNA, the consummation of the MSA between HLM Design and the Managed Firms and stockholders' agreements among the Managed Firms and its stockholders, the discussion and analysis of operating results for the six month period ended October 31, 1997 is presented on a pro forma basis that reflects such acquisition, MSA and stockholders' agreements as through they occurred at the beginning of the period. This pro forma financial information does not give effect to the Offering.
Pro Forma for Consolidated Consolidated Consolidated Consolidated Three Months Three Months Six Months Six Months Ended Ended Ended Ended October 31, October 30, October 31, October 30, 1997 1998 1997 1998 ---- ---- ---- ---- Revenues $7,875,762 $ 7,510,424 $15,419,839 $15,644,546 Costs and expenses: Direct cost of revenue 3,592,229 3,116,749 6,843,741 6,657,999 Operating expenses 3,381,704 3,816,864 7,137,540 7,852,607 ----------- ------------ ------------ ------------- Total costs and expenses 6,973,933 6,933,613 13,981,281 14,510,606 ----------- ------------ ------------ ------------ Income from operations 901,829 576,811 1,438,558 1,133,940 Other income (expense): Interest expense (345,790) (123,557) (590,321) (327,547) Other expense 0 (0) (603) (835) ------------ ------------ -------------- ------------- Total other expense (345,790) (123,557) (590,924) (328,382) ------------ ------------ -------------- ------------- Income before income taxes and Extraordinary item 556,039 453,254 847,634 805,558 Income tax expense 224,125 203,470 407,486 364,151 ------------ ------------- ------------ ------------- Net income before extraordinary item 331,914 249,785 440,148 441,407 Extraordinary item for early extinguishment of debt, Net of tax of $171,842 0 0 0 280,849 ----------- ------------ ------------ ------------ Net income $ 331,914 $ 249,785 $ 440,148 $ 160,558 =========== ============ ============ ============
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997 Revenues were $7.5 million and $7.9 million for the three month period ended October 30, 1998 and October 31, 1997, respectively. This decrease of 4.6% is principally due to a reduction in the use of subconsultants and related expenses to meet project requirements which is partially offset by management's continued focus on marketing efforts which have continued from the previous year. Direct costs primarily include, direct labor, subconsultant costs and reimbursable expenses. Direct costs were $3.1 million, or 41.5% of revenues, for the three month period ended October 30, 1998, as compared to $3.6 million, or 45.6% of revenues, for the three month period ended October 31, 1997. This decrease as a percent of revenues is due to a decreased use of subconsultants to meet project requirements as well as a decrease in direct labor costs incurred due to improved productivity as a result of Company's increased focus on cost containment for each project. Operating costs were $3.8 million, or 50.8% of revenues, for the three month period ended October 30, 1998, as compared to $3.4 million, or 42.9% of revenues, for the three month period ended October 31, 1997. This increase as a percent of revenues is principally due to an increase in expenses associated with being a public company and marketing expenses which is partially offset by a decrease in rent and occupancy costs in certain office locations as well as a decrease in legal expenses. Interest expense was $0.1 million and $0.3 million for the three month period ended October 30, 1998, and October 31, 1997, respectively. In June 1998, the Company repaid approximately $3.0 million in debt from the proceeds of its Offering. See Note 4 to Notes to Consolidated Financial Statements. Income tax expense was $0.2 million and $0.2 million for the three month period ended October 30, 1998, and October 31, 1997, respectively. The effective income tax rate was 44.8% and 40.3% for the three month period ended October 30, 1998 and October 31, 1997, respectively. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED FOR THE SIX MONTHS ENDED OCTOBER 30, 1998 AND OCTOBER 31, 1997 Revenues were $15.6 million and $15.4 million for the six month period ended October 30, 1998, and October 31, 1997, respectively. This increase of 1.5% is principally due to management's continued focus on marketing efforts which have continued from the previous year. This increase is partially offset by a reduction in the use of subconsultants and related expenses to meet project requirements as well as the Company's change in its fiscal year end date from the last Friday in April to the Friday nearest the end of April. This change resulted in a one week less revenues in the six months ended October 30, 1998 as compared to the six month period ended October 31, 1997. Direct costs primarily include, direct labor, subconsultant costs and reimbursable expenses. Direct costs were $6.7 million, or 42.6% of revenues, for the six month period ended October 30, 1998, as compared to $6.8 million, or 44.4% of revenues, for the six month period ended October 31, 1997. This decrease as a percent of revenues is due to a decreased use of subconsultants to meet project requirements as well as a decrease in direct labor costs incurred due to improved productivity as a result of Company's increased focus on cost containment for each project. Operating costs were $7.9 million, or 50.2% of revenues, for the six month period ended October 30, 1998, as compared to $7.1 million, or 46.3% of revenues, for the six month period ended October 31, 1997. This increase as a percent of revenues is principally due to an increase in expenses associated with being a public company and marketing expenses which is partially offset by a decrease in rent and occupancy costs in certain office locations as well as a decrease in legal expenses and travel expenses. Interest expense was $0.3 million and $0.6 million for the six month period ended October 30, 1998, and October 31, 1997, respectively. In June 1998, the Company repaid approximately $3.0 million in debt from the proceeds of its Offering. See Note 4 to Notes to Consolidated Financial Statements. Income tax expense was $0.4 million and $0.4 million for the six month period ended October 30, 1998, and October 31, 1997, respectively. The effective income tax rate was 45.2% and 48.1% for the six month period ended October 30, 1998 and October 31, 1997, respectively. This rate decrease is principally due to nondeductible items in 1997. 15 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERTIONS-CONTINUED LIQUIDITY AND CAPITAL RESOURCES At October 30, 1998, the Company's current assets of $15.5 million exceeded current liabilities of $13.7 million resulting in working capital of $1.7 million. During the six month period ended October 30, 1998, the Company used $0.4 million in operating activities primarily due to the decrease in accounts payable and accrued expenses and an increase in costs and estimated earnings compared to billings on uncompleted contracts which was partially offset by a decrease in accounts receivable, the reduction in deferred debt discount caused by the extraordinary item for early extinguishment of debt and depreciation. The Company used $2.5 million for investing activities primarily from the cash payment for the purchase of JPJ Architects, Inc., net of cash acquired, and to a lesser extent, the purchase of equipment. On October 30, 1998, the Company purchased all the issued and outstanding stock of JPJ Architects, Inc. for $2.4 million in cash, promissory notes bearing interest at 7 percent in the aggregate principal amount of $1.1 million and an aggregate of 240,000 shares of HLM Design common stock. See Note 5 in the unaudited consolidated financial statements. The Company's growth and operating strategy will require substantial capital and may result in the Company incurring additional debt, issuing equity securities or obtaining additional bank financing. As a management company, HLM Design will be responsible for the financing of working capital growth, capital growth and other cash needs of its managed firms. On August 31, 1998, the Company increased its revolving line of credit with First Charter National Bank from $1.5 million to $3.0 million. At October 30, 1998, the Company had borrowings outstanding of $1.9 million. The revolving line of credit is secured by, among other things, a security interest in all accounts receivable. Any outstanding balance under this loan bears interest at prime plus 1 percent. This loan matures on June 30, 1999. The Company believes that the net proceeds from the Offering, the First Charter National Bank line of credit, and anticipated funds from future operations will be sufficient to meet its operating cash needs for at least the next twelve months. AUTOMATED SYSTEMS AND YEAR 2000 The ability of automated systems to recognize the date change from December 31, 1999 to January 1, 2000 is commonly referred to as the Year 2000 matter. Similar to most other organizations, the Company has assessed the potential impact of the Year 2000 matter on its operations based on current and forseeable computer and other automated system applications. The Company believes any future costs associated with modifying its computer software and other automated systems for the Year 2000 matters will not be significant. 16 PART II-OTHER INFORMATION Item 5. Other Information As of October 27, 1998, the Board of Directors established a Compensation Committee consisting of Clay Caroland III and L. Fred Pounds. The Compensation Committee will address matters relating to executive officer compensation and will administer the Company's Employee Stock Purchase Plan and Stock Option Plan. Item 6. Exhibits and Reports on Form 8-K (a) The exhibits filed as part of this Form 10-Q are: Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule (b) On November 16, 1998 the Company filed a Current Report on Form 8-K, dated November 16, 1998, pursuant to Item 2 of such form, reporting the JPJ Architects, Inc. acquisition. 17 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HLM DESIGN, INC. (Registrant)
Date: December 14, 1998 By: /s/ Joseph M. Harris ----------------- --------------------- Joseph M. Harris President, Chairman and Director Date: December 14 , 1998 By: /s/ Vernon B. Brannon ------------------- ---------------------- Vernon B. Brannon Senior Vice President, Chief Financial Officer, Treasurer, Assistant Secretary And Director
18 EX-27 2 FDS HLM
5 6-MOS APR-30-1999 MAY-02-1998 APR-30-1999 721,122 0 7,804,532 150,000 0 15,461,781 3,365,874 1,233,436 24,610,021 13,723,803 0 0 0 2,315 16,036,171 24,610,021 15,644,546 15,644,546 0 14,510,606 835 0 327,547 805,558 364,151 441,407 0 280,849 0 160,558 .24 .24
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