EX-99.3 3 0003.txt FINANCIAL STATEMENTS Exhibit 99.3 BL&P Engineers, Inc. Independent Auditors' Report Financial Statements Years Ended December 31, 1998 and 1999, and Four Months Ended April 28, 2000 BL&P ENGINEERS, INC. FINANCIAL STATEMENTS TABLE OF CONTENTS --------------------------------------------------------------------------------
Page INDEPENDENT AUDITORS' REPORT F-1 FINANCIAL STATEMENTS: Balance Sheets at December 31, 1998 and 1999 and April 28, 2000 (Unaudited) F-2 - F-3 Statements of Operations for the Years Ended December 31, 1998 and 1999 for and the Four Months Ended April 30, 1999 and April 28, 2000 (Unaudited) F-4 Statements of Stockholders' Equity for the Years Ended December 31, 1998 and 1999 and for the Four Months Ended April 28, 2000 (Unaudited) F-5 Statements of Cash Flows for the Years Ended December 31, 1998 and 1999 and for the Four Months Ended April 30, 1999 and April 28, 2000 (Unaudited) F-6 - F-7 Notes to Financial Statements F-8 - F-13
INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders BL&P Engineers, Inc. Dallas, Texas We have audited the accompanying balance sheets of BL&P Engineers, Inc. (the "Company") as of December 31, 1998 and 1999, and the related statements of operations, stockholders' equity, and of cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1998 and 1999, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP June 30, 2000 F-1 BL&P ENGINEERS, INC. BALANCE SHEETS DECEMBER 31, 1998 AND 1999 AND APRIL 28, 2000 --------------------------------------------------------------------------------
Years Ended Four Months December 31, Ended ----------------------- April 28, ASSETS 1998 1999 2000 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 383,526 $ 66,015 $ 91,840 Trade and other receivables, less allowance for doubtful accounts of $312,000, $337,000 and $333,000 at December 31, 1999 and 1998 and April 28, 2000, respectively 1,326,353 1,927,184 1,434,083 Costs and estimated earnings in excess of billings on uncompleted projects (Note 2) - 154,517 21,608 Costs inccurred under completed contract method (Note 2) 1,287,222 754,536 1,004,290 Prepaid expenses and other 46,797 60,964 99,795 ---------- ---------- ---------- Total current assets 3,043,898 2,963,216 2,651,616 ---------- ---------- ---------- PROPERTY AND EQUIPMENT - NET (Note 3) 319,683 406,162 294,793 OTHER 5,921 5,921 79,964 ---------- ---------- ---------- TOTAL ASSETS $ 3,369,502 $ 3,375,299 $ 3,026,373 ============ ============ ===========
F-2 BL&P ENGINEERS, INC. BALANCE SHEETS DECEMBER 31, 1998 AND 1999 AND APRIL 28, 2000 --------------------------------------------------------------------------------
Years Ended Four Months December 31, Ended --------------------- April 28, LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999 2000 (Unaudited) CURRENT LIABILITIES: Short-term debt (Note 4) $ 328,307 $ 304,307 $ 492,307 Current portion of long-term debt and capital lease obligation (Notes 3 and 4) 92,342 133,340 139,079 Accounts payable 199,692 94,602 64,281 Accrued expenses 179,746 65,227 205,149 Income taxes payable (Note 6) 22,513 12,856 12,856 Billings for contracts under completed contract method (Note 2) 1,645,591 926,365 780,546 Accrued construction administration costs for contracts under completed contract method (Note 1) 127,287 121,926 76,810 Billings in excess of costs and estimated earnings on uncompleted projects (Note 2) 38,798 44,312 92,888 Deferred income taxes (Note 6) 218,090 548,036 461,180 ----------- ----------- ----------- Total current liabilities 2,852,366 2,250,971 2,325,096 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION (Notes 3 and 4) 369,010 339,058 261,537 DEFERRED INCOME TAXES (Note 6) 5,631 18,233 - ----------- ----------- ----------- Total liabilities 3,227,007 2,608,262 2,586,633 ----------- ----------- ----------- COMMITMENTS (Note 5) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, noncumulative, participating, 100,000 shares authorized, 10,000 issued and outstanding 100 100 100 Common stock, $1 par value, 10,000 shares authorized, issued and outstanding 10,000 10,000 10,000 Additional paid-in capital 43,895 43,895 43,895 Retained earnings 616,807 1,241,349 1,004,052 Treasury stock, at cost - 11,447 shares at December 31, 1999 and 1998, 11,547 shares at April 28, 2000 (528,307) (528,307) (618,307) ----------- ----------- ----------- Total stockholders' equity 142,495 767,037 439,740 ----------- ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,369,502 $ 3,375,299 $ 3,026,373 =========== =========== ===========
See notes to financial statements. F-3 BL&P ENGINEERS, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOUR MONTHS ENDED APRIL 30, 1999 AND APRIL 28, 2000 --------------------------------------------------------------------------------
Years Ended Four Months Ended December 31, ---------------------------------- ---------------------- April 30, April 28, 1998 1999 1999 2000 (Unaudited) REVENUES: Fee income $ 3,551,240 $ 5,085,225 $ 1,483,881 $ 1,342,583 Reimbursable income 76,329 157,793 25,760 37,823 ----------- ----------- ----------- ----------- Total revenues 3,627,569 5,243,018 1,509,641 1,380,406 ----------- ----------- ----------- ----------- PROJECT EXPENSES: Direct expenses 876,482 266,022 124,257 123,411 Reimbursable expenses 57,622 192,279 35,934 61,904 ----------- ----------- ----------- ----------- Total project expenses 934,104 458,301 160,191 185,315 ----------- ----------- ----------- ----------- NET PRODUCTION INCOME 2,693,465 4,784,717 1,349,450 1,195,091 DIRECT LABOR 947,683 1,784,715 369,244 671,302 INDIRECT EXPENSES (Note 5) 1,432,106 1,932,616 486,741 913,813 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) 313,676 1,067,386 493,465 (390,024) ----------- ----------- ----------- ----------- OTHER (INCOME) EXPENSE: Interest expense, net 49,586 67,196 22,603 23,152 Other (income) expense, net 1,468 15,743 (10,575) (44,769) ----------- ----------- ----------- ----------- Total other (income) expense, net 51,054 82,939 12,028 (21,617) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 262,622 984,447 481,437 (368,407) PROVISION (BENEFIT) FOR INCOME TAXES (Note 6) 102,650 359,905 180,158 (131,110) ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ 159,972 $ 624,542 $ 301,279 $ (237,297) =========== =========== =========== ===========
See notes to financial statements. F-4 BL&P ENGINEERS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOUR MONTHS ENDED APRIL 28, 2000 --------------------------------------------------------------------------------
Preferred Stock Common Stock Additional --------------- -------------------- Paid-in Shares Amount Shares Amount Capital BALANCE, JANUARY 1, 1998 10,000 $ 100 10,000 $ 10,000 $ 43,895 Purchase of treasury stock - - - - - Net income - - - - - --------- --------- -------- --------- --------- BALANCE, DECEMBER 31, 1998 10,000 100 10,000 10,000 43,895 Net income - - - - - --------- --------- -------- --------- --------- BALANCE, DECEMBER 31, 1999 10,000 100 10,000 10,000 43,895 Purchase of treasury stock - - - - - Net loss - - - - - --------- --------- -------- --------- --------- BALANCE, APRIL 28, 2000 (Unaudited) 10,000 $ 100 10,000 $ 10,000 $ 43,895 ========= ========= ======== ========= ========= Retained Total Treasury Earnings Stockholders' Stock (Deficit) Equity BALANCE, JANUARY 1, 1998 $ (148,372) $ 456,835 $ 362,458 Purchase of treasury stock (379,935) - (379,935) Net income - 159,972 159,972 ----------- ------------ ----------- BALANCE, DECEMBER 31, 1998 (528,307) 616,807 142,495 Net income - 624,542 624,542 ----------- ------------ ----------- BALANCE, DECEMBER 31, 1999 (528,307) 1,241,349 767,037 Purchase of treasury stock (90,000) - (90,000) Net loss - (237,297) (237,297) ----------- ------------ ----------- BALANCE, APRIL 28, 2000 (Unaudited) $ (618,307) $ 1,004,052 $ 439,740 =========== ============ ===========
See notes to financial statements. F-5 BL&P ENGINEERS, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOUR MONTHS ENDED APRIL 30, 1999 AND APRIL 28, 2000 --------------------------------------------------------------------------------
Four Months Years Ended Ended December 31, --------------------------- --------------------- April 30, April 28, 1998 1999 1999 2000 (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 159,972 $ 624,542 $ 301,279 $ (237,297) Adjustments to reconcile net income to net cash used in operating activities: (Gain) loss from disposals of property and equipment - 18,142 (9,675) 9,217 Bad debt expense 91,988 223,109 8,748 158,540 Depreciation and amortization 101,087 92,389 43,350 33,332 Write off of property and equipment - - - 68,820 Deferred income taxes 71,975 342,552 - (105,089) Changes in assets and liabilities which increased (decreased) cash: Trade and other receivables (431,054) (319,170) (768,132) 334,561 Costs and estimated earnings in excess of billings on uncompleted projects, net 38,798 (149,003) 101,578 181,485 Costs of construction under completed contract method (484,380) 27,916 (332,815) (249,754) Prepaid expenses and other assets 54,254 (14,165) 35,278 (112,874) Accounts payable (69) (105,090) (10,953) (30,321) Accrued expenses 1,359 (114,525) (78,322) 139,922 Billings for contracts under completed contract method 597,162 (719,225) 197,424 (145,819) Accrued construction administration costs for contracts under completed contract method 42,633 (5,361) 12,159 (45,116) Income taxes payable 28,513 (9,659) 157,642 - --------- -------- -------- -------- Net cash provided by (used in) operating activities 272,238 (107,548) (342,439) (393) --------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (207,388) (97,020) (62,376) - Proceeds from disposals of property and equipment - 17,446 - - --------- -------- -------- -------- Net cash used in investing activities (207,388) (79,574) (62,376) - --------- -------- -------- --------
F-6 BL&P ENGINEERS, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOUR MONTHS ENDED APRIL 30, 1999 AND APRIL 28, 2000 --------------------------------------------------------------------------------
Four Months Years Ended Ended December 31, ------------------------- --------------------- April 30, April 28, 1998 1999 1999 2000 (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: Net advances (payments) on revolving line of credit $ 128,307 $ (24,000) $ 105,000 $ 188,000 Principal advances of long-term debt 428,208 - - - Principal payments on long-term debt and capital lease obligation (47,141) (106,389) (13,341) (71,782) Purchases of treasury stock (379,935) - - (90,000) ------------- --------- ---------- ---------- Net cash provided by (used in) financing activities 129,439 (130,389) 91,659 26,218 ------------- --------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 194,289 (317,511) (313,156) 25,825 CASH AND CASH EQUIVALENTS: Beginning of period 189,237 383,526 383,526 66,015 ------------- --------- ---------- ---------- End of period $ 383,526 $ 66,015 $ 70,370 $ 91,840 ============= ========= ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - Cash paid during the period for: Interest $ 59,442 $ 74,700 $ 23,426 $ 24,146 ============= ========= ========== ========== Income taxes $ 24,675 $ 19,840 $ - $ 3,459 ============= ========= ========== ========== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES - Fixed assets acquired under capital leases $ - $ 117,435 $ 117,435 $ - ============= ========= ========== ==========
See notes to financial statements. F-7 BL&P ENGINEERS, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998 AND 1999 AND FOUR MONTHS ENDED APRIL 28, 2000 -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business - BL&P Engineers, Inc. (the "Company") is an engineering firm located in Dallas, Texas. The Company specializes in engineering services for architects, construction companies and the general public. The Company's financial statements are prepared on the accrual basis of accounting. 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 are typically liquidated in the normal course of contract completion, usually within one year. Cash and Cash Equivalents - The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Revenue and Cost Recognition - Revenue is recognized on certain longer term contracts (those six months or longer in length), at estimated collectible amounts, in the period the services are performed. More specifically, the Company recognizes revenues on these contracts 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. 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. For all other contracts, the Company recognizes revenues and reports profits under the completed contract method. This method is used because these contracts are completed in six months or less (execution of the contract until the engineering drawings are delivered and accepted by the customer) and the financial position and results of operations do not vary significantly from those results which would result from use of the percentage-of-completion method. Under the completed contract method, contract costs and billings are accumulated during periods of construction, but no revenues, costs or profits are recognized until the contract is substantially complete. Contracts are considered substantially complete when the engineering drawing for the project is complete and has been delivered and accepted by the customer. After the drawings are accepted and the contract has entered the construction administration phase, the Company estimates any liability for costs to be incurred and charges operations in the current period. Costs included in the liability "accrued construction administration costs for contracts under completed contract method" include direct material, direct labor and related overhead. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. F-8 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 - Property and equipment are recorded at cost. Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments required over the term of the lease or their fair value. Expenditures for maintenance and repairs are expensed as incurred. The estimated useful lives of property and equipment for financial reporting purposes are as follows:
Furniture and equipment 5 years Automobiles 5 years Assets held under capital leases 5 years Leasehold improvements Lease term, not to exceed the useful life of the asset
Advertising Costs - Advertising costs are expensed as incurred. Amounts expensed for the years ended December 31, 1998 and 1999 were insignificant. Income Taxes - The provision for income taxes includes federal and state taxes currently payable adjusted for the net change in the deferred taxes during the year. Deferred income tax assets and liabilities represent the future income tax effect of temporary differences between book and tax bases of assets and liabilities assuming they will be realized and settled at the amounts reported in the accompanying financial statements. Recent Accounting Pronouncements - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 was amended to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management is in the process of evaluating the impact of SFAS No. 133 on the Company's financial statements. F-9 2. CONTRACTS IN PROGRESS Information relative to contracts in progress under the percentage-of-completion method as of December 31, 1998 and 1999 and April 28, 2000 is as follows:
December 31, -------------------------------- April 28, 1998 1999 2000 (Unaudited) Costs incurred on uncompleted projects (excluding overhead) $ 476,869 $ 799,229 $ 1,561,970 Estimated earnings (loss) thereon (6,317) 28,425 359,008 --------------- --------------- --------------- Total 470,552 770,804 1,202,962 Less billings to date 509,350 660,599 1,274,242 --------------- --------------- --------------- Net under (over) billings $ (38,798) $ 110,205 $ (71,280) ============== ============== ================
Net underbillings are included in the accompanying balance sheets as follows:
December 31, ------------------- April 28, 1998 1999 2000 (Unaudited) Costs and estimated earnings in excess of billings on uncompleted projects $ - $ 154,517 $ 21,608 Billings in excess of costs and estimated earnings on uncompleted projects (38,798) (44,312) (92,888) ----------- ----------- ----------- Net under (over) billings $ (38,798) $ 110,205 $ (71,280) =========== =========== ===========
The components of costs and billings for contracts under the completed contract method at December 31, 1998 and 1999 and April 28, 2000 are as follows:
December 31, ------------------- April 28, 1998 1999 2000 (Unaudited) Costs of construction under completed contract method $ 1,287,222 $ 754,536 $ 1,004,290 ============= =========== ============= Billings for contracts under completed contract method $ 1,645,591 $ 926,365 $ 599,061 ============= =========== =============
F-10 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1998 and 1999 consists of the following:
1998 1999 Furniture and equipment $ 609,438 $ 518,756 Automobiles 131,879 134,734 Assets held under capital leases 61,476 61,476 Leasehold improvements 57,011 52,827 ------------- ------------- 859,804 767,793 Less accumulated depreciation and amortization (540,121) (361,631) ------------- ------------- Property and equipment, net $ 319,683 $ 406,162 ============= =============
Certain automobiles and equipment are pledged as collateral for related debt. 4. FINANCING ARRANGEMENTS Short-term debt at December 31, 1998 and 1999 consists of the following:
1998 1999 Unsecured revolving credit facility, up to $500,000, interest at 9.75%, maturing March 31, 2000, guaranteed by stockholder $ 328,307 $ 304,307
A summary of long-term debt and capital lease obligation at December 31, 1998 and 1999 is as follows:
1998 1999 Unsecured note payable to related party, due in monthly installments of $2,917, including interest at 6.50%, maturing December 19, 2003 $ 325,479 $ 268,624 Note payable to related party, secured by automobile, due in monthly installments of $872, including interest at 8.50%, maturing April 14, 2001 22,078 13,148 Notes payable to bank, secured by automobiles and equipment due in monthly installments ranging from $529 to of $1,058, plus interest ranging from 8.50% to 10% maturing May 14, 1999 through October 8, 2003 53,976 56,431 Capital leases due in monthly installments ranging from $1,261 to $5,024 including interest ranging from 8.50% to 9.75%, maturing from February 5, 2001 to October 1, 2003 59,819 134,195 ------- ------- Total long-term debt and capital lease obligation 461,352 472,398 Less current maturities (92,342) (133,340) ------- ------- Long-term portion $ 369,010 $ 339,058 ======== =========
F-11 Annual principal payments on long-term debt and capital lease obligation are as follows: 2000 $ 133,340 2001 138,229 2002 105,814 2003 95,015 --------- Total $ 472,398 ========= 5. COMMITMENTS The Company leases office space and certain equipment under noncancelable operating lease arrangements. The office space lease is subject to renewal upon its expiration in 2003. The total minimum rental commitment under these arrangements at December 31, 1999 is as follows: 2000 $ 152,146 2001 160,871 2002 143,315 2003 106,490 2004 36,093 -------- Total $ 598,915 ========= Rent expense was approximately $97,000 and $133,000 during 1998 and 1999 and is included in indirect expenses within the accompanying financial statements. 6. INCOME TAXES The provision for income taxes at December 31, 1998 and 1999 is as follows: 1998 1999 $ 35,175 $ 12,858 67,475 347,047 ----------- ---------- Current payable Deferred taxes $ 102,650 $ 359,905 =========== =========== Total F-12 The tax effect of temporary differences giving rise to deferred income tax liabilities as of December 31, 1998 and 1999 are as follows:
1998 1999 Differences between the accrual basis and cash basis of accounting related to certain assets and liabilities $ 213,098 $ 548,036 Differences between book and tax bases of property and equipment 10,623 18,233 ------- -------- Deferred income tax liabilities, net $ 223,721 $ 566,269 ========= =========
The Company's effective income tax rate during 1998 and 1999 was higher than the statutory federal rate of 34%. The significant item that increased the Company's tax rate over the federal statutory rate is the effect of state income taxes. 7. RELATED PARTY TRANSACTIONS As of December 31, 1998 and 1999, the Company has approximately $77,000 and $129,000 due from the majority stockholder and approximately $45,000 and $33,000 due from an entity controlled by a former stockholder included within accounts receivable. In addition, the Company has indebtedness of approximately $22,000 and $13,000 for a vehicle owned by the majority stockholder and indebtedness of approximately $325,000 and $269,000 for treasury stock purchased from a former stockholder that is included within long-term debt in the accompanying financial statements. Interest expense of approximately $25,000 and $21,000, respectively was incurred in connection with this related party indebtedness. 8. EMPLOYEE BENEFIT PLAN The Company has a defined contribution plan (the "Plan") that provides retirement and other related benefits to eligible employees. Employees can make contributions up to a specified level. Company contributions to the Plan were approximately $30,000 and $36,000 for the years ended December 31, 1998 and 1999, respectively. 9. SUBSEQUENT EVENT The stockholders of the Company have entered into an agreement with HLM Design, Inc. ("HLMD") whereby HLMD purchased all of the outstanding capital stock of the Company for $1.46 million in cash, promissory notes bearing interest at 7 percent in the aggregate amount of $2.0 million and an aggregate of 50,000 shares of HLMD common stock. The sale was finalized on April 29, 2000. ******** F-13