-----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, OZFLChINfw2OG6QPMDnBezZ/DDQLtzweNiMgH/vY98jgAQSV0UW8HME8fVkzNUsa mHR6VHVLBoJ2bh+Aey+i9Q== 0000950168-00-002565.txt : 20001212 0000950168-00-002565.hdr.sgml : 20001212 ACCESSION NUMBER: 0000950168-00-002565 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001127 FILED AS OF DATE: 20001211 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: 001-14137 FILM NUMBER: 786477 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 0001.txt FORM 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 27, 2000 ( ) 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 December 4, 2000 - ------------------- ------------------------------- Common stock, par value $.001 per share 2,179,510 shares HLM DESIGN, INC. AND AFFILIATES INDEX TO FORM 10-Q
PAGE NO. PART I FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets - April 28, 2000 and October 27, 2000 3 Condensed Consolidated Statements of Income - Six Month Periods Ended October 29, 1999 and October 27, 2000 and Three Month Periods Ended October 29, 1999 and October 27, 2000 5 Condensed Consolidated Statement of Stockholders' Equity - Six Month Period Ended October 27, 2000 6 Condensed Consolidated Statements of Cash Flows - Six Month Periods Ended October 29, 1999 and October 27, 2000 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 ITEM 2. Management's Discussion and Analysis of Financial Condition And Results of Operations 12 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16 PART II OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders 17 ITEM 6. Exhibits and Reports on Form 8-K 18 SIGNATURES 19
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
HLM DESIGN, INC. AND AFFILIATES CONDENSED CONSOLIDATED BALANCE SHEETS April 28, October 27, 2000 2000 ---- ---- (Unaudited) ASSETS: Current Assets: Cash $ 285,616 $ 84,839 Trade and other receivables, less allowance for doubtful accounts at April 28, 2000 and October 27, 2000 of $346,060 and $773,718, respectively 11,286,334 12,207,991 Costs and estimated earnings in excess of billings on uncompleted projects, net 8,412,159 9,738,139 Prepaid expenses and other 788,015 959,430 ----------- ----------- Total Current Assets 20,772,124 22,990,399 ----------- ----------- Other Assets: Goodwill, net 8,136,010 12,440,851 Other 887,137 687,089 ----------- ----------- Total Other Assets 9,023,147 13,127,940 ----------- ----------- Property and Equipment: Leasehold improvements 1,508,208 1,630,330 Furniture and fixtures 3,898,288 4,351,125 ----------- ----------- Property and Equipment, at cost 5,406,496 5,981,455 Less Accumulated depreciation 3,101,004 3,779,584 ----------- ----------- Property and equipment, net 2,305,492 2,201,871 ----------- ----------- TOTAL ASSETS $32,100,763 $38,320,210 =========== ===========
3
HLM DESIGN, INC. AND AFFILIATES CONDENSED CONSOLIDATED BALANCE SHEETS April 28, October 27, 2000 2000 ---- ---- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current maturities of long-term debt and capital lease obligations $ 1,216,468 $ 1,261,460 Accounts payable 7,425,799 9,044,094 Billings in excess of costs and estimated earnings on uncompleted projects 1,752,736 1,450,634 Accrued expenses and other 2,264,244 3,122,347 ------------ ------------ Total Current Liabilities 12,659,247 14,878,535 ------------ ------------ LONG-TERM DEBT AND OTHER 9,673,523 12,877,323 ------------ ------------ TOTAL LIABILITIES 22,332,770 27,755,858 ------------ ------------ COMMITMENT AND CONTINGENCIES STOCKHOLDERS' EQUITY: Capital Stock: Preferred, $.10 par value, voting, authorized 1,000,000 shares, no shares outstanding Common, $.001 par value, voting, authorized 9,000,000 shares; issued 2,359,975 and 2,415,953 at April 28, 2000 and October 27, 2000, respectively (includes 258,444 and 308,444 to be issued on a delayed delivery schedule at April 28, 2000 and October 27, 2000, respectively) 2,360 2,416 Additional paid in capital 7,450,261 7,725,290 Retained earnings 2,324,817 2,831,699 Accumulated other comprehensive income (loss) (9,445) 4,947 ------------ ------------ TOTAL STOCKHOLDERS' EQUITY 9,767,993 10,564,352 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,100,763 $ 38,320,210 ============ ============
See notes to unaudited condensed consolidated financial statements. 4 HLM DESIGN, INC. AND AFFILIATES CONDENDSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Six Six Three Three Months Months Months Months Ended Ended Ended Ended October 29, October 27, October 29, October 27, 1999 2000 1999 2000 ---- ---- ---- ---- REVENUES: Fee Income $22,137,677 $29,976,567 $11,473,611 $15,196,744 Reimbursable Income 1,640,759 1,963,189 851,630 872,336 ----------- ----------- ----------- ----------- Total Revenues 23,778,436 31,939,756 12,325,241 16,069,080 ----------- ----------- ----------- ----------- CONSULTANT EXPENSE 6,004,259 9,173,995 3,230,710 4,658,377 ----------- ----------- ----------- ----------- PROJECT EXPENSES: Direct Expenses 354,828 539,091 140,828 296,224 Reimbursable expenses 901,023 1,171,004 516,663 611,113 ----------- ----------- ----------- ----------- Total project expenses 1,255,851 1,710,095 657,491 907,337 ----------- ----------- ----------- ----------- NET PRODUCTION INCOME 16,518,326 21,055,666 8,437,040 10,503,366 DIRECT LABOR 4,853,626 6,717,173 2,547,202 3,439,475 INDIRECT EXPENSES 10,227,418 12,339,773 5,111,915 6,017,612 ----------- ----------- ----------- ----------- OPERATING INCOME 1,437,282 1,998,720 777,923 1,046,279 ----------- ----------- ----------- ----------- OTHER EXPENSE: Interest Expense, net 472,162 920,295 254,797 471,368 ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 965,120 1,078,425 523,126 574,911 INCOME TAX EXPENSE 468,241 571,543 253,217 305,166 ----------- ----------- ----------- ----------- NET INCOME $ 496,879 $ 506,882 $ 269,909 $ 269,745 =========== =========== =========== =========== NET INCOME PER SHARE Basic $ 0.21 $ 0.21 $ 0.11 $ 0.11 =========== =========== =========== =========== NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Basic 2,350,248 2,412,870 2,352,993 2,414,519 =========== =========== =========== =========== NET INCOME PER SHARE Diluted $ 0.21 $ 0.21 $ 0.11 $ 0.11 =========== =========== =========== =========== NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Diluted 2,350,248 2,416,121 2,352,993 2,414,556 =========== =========== =========== ===========
See notes to unaudited condensed consolidated financial statements. 5 HLM DESIGN, INC. AND AFFILIATES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Accumulated Additional Other Total Common Stock Paid-In Retained Comprehensive Stockholders' Shares Amount Capital Earnings Income (Loss) Equity ------ ------ ------- -------- ------------- ------ Balance, April 28, 2000 2,359,975 $ 2,360 $ 7,450,261 $ 2,324,817 $ (9,445) $ 9,767,993 Issuance of common stock for purchase of BL&P Engineers, Inc. (Note 3 ) 50,000 50 256,200 256,250 Issuance of Common Stock (Note 5 ) 5,978 6 18,829 18,835 Foreign Currency Translation 14,392 14,392 Adjustment Net Income 506,882 506,882 ------------------------------------------------------------------------------------------------ Balance, October 27, 2000 2,415,953 $ 2,416 $ 7,725,290 $ 2,831,699 $ 4,947 $10,564,352 ================================================================================================
See notes to unaudited condensed consolidated financial statements. 6 HLM DESIGN, INC. AND AFFILIATES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Six Months Months Ended Ended October 29, October 27, 1999 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 496,879 $ 506,882 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 419,949 480,598 Amortization of intangible assets 201,439 330,302 Amortization of deferred loan fees 39,275 100,906 Changes in assets and liabilities, net of effects from purchase of acquired companies: (Increase) decrease in trade and other accounts receivable (733,024) 562,426 Net increase in costs and estimated earnings in excess of billings on uncompleted projects (1,892,640) (2,157,740) Increase in prepaid expenses and other assets (76,514) (4,810) Increase in accounts payable 1,870,176 1,426,845 Decrease in accrued expenses and other (1,082,178) (202,379) ----------- ----------- Net cash (used in) provided by operating activities (756,638) 1,043,030 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (569,075) (376,977) Payment for purchase of minority interest in GAIH (21,330) Payment for purchase of ESS Architects, Inc., net of cash acquired (153,993) Payment for purchase of BL&P Engineers, Inc., net of cash acquired - (2,135,394) ----------- ----------- Net cash used in investing activities (744,398) (2,512,371) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on long-term borrowings (454,027) (486,189) Net borrowings on revolving credit facility 1,735,918 Borrowings on long-term debt 1,800,000 - Proceeds from issuance of common stock under the Employee Stock Purchase Plan 23,108 18,835 ----------- ----------- Net cash provided by financing activities 1,369,081 1,268,564 ----------- ----------- DECREASE IN CASH (131,955) (200,777) CASH BALANCE: Beginning of period 250,575 285,616 ----------- ----------- End of period $ 118,620 $ 84,839 =========== =========== SUPPLEMENTAL DISCLOSURES: Interest paid $ 382,272 $ 1,005,146 Income tax payments $ 703,943 $ 163,920 Noncash investing and financing transactions: Acquisition of BL&P Engineers, Inc. (net of imputed interest): Notes payable issued to BL&P Engineers, Inc. shareholder $ 1,871,496 Fair value of assets acquired and liabilities assumed, net $ 281,126 Common stock to be issued on delayed delivery schedule $ 256,250
See notes to unaudited condensed consolidated financial statements. 7 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business - HLM Design, Inc. (the "Company" or "HLM Design") is a management services company that provides management and services to architectural, engineering and planning design entities under long term management and services agreements ("MSAs"). As of October 27, 2000, the Company had wholly-owned subsidiaries of HLM Design and affiliates as follows: o HLM Design of North America, Inc. ("HLMNA"); o HLM Design USA, Inc. ("HLMUSA"); o HLM Design Architecture, Engineering and Planning, P.C. ("HLMAEP"); o JPJ Architects, Inc. ("JPJ"); o G.A. Design International Holdings, Ltd. ("GAIH"); and o BL&P Engineers, Inc. ("BL&P"). JPJ, GAIH and BL&P are subsidiaries of the Company. HLMNA, HLMUSA, HLMAEP, JPJ, GAIH and BL&P are referred to herein collectively as "Managed Firms". Financial Statement Presentation - The accompanying unaudited financial information for the three and six month periods ended October 29, 1999 and October 27, 2000 has been prepared in accordance with generally accepted accounting principles pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany accounts and transactions have been eliminated. These unaudited consolidated financial statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state the financial position and the results of operations for the interim periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended April 28, 2000. 8 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. CONTRACTS IN PROGRESS Information relative to contracts in progress is as follows:
April 28, October 27, 2000 2000 ---- ---- Costs incurred on uncompleted projects (excluding overhead) $ 64,016,964 $ 80,167,102 Estimated earnings thereon 58,470,955 70,009,078 ------------ ------------- Total 122,487,919 150,176,180 Less billings to date 115,828,496 141,888,675 ----------- ------------ Net underbillings $ 6,659,423 $ 8,287,505 ============ =============
Net underbillings are included in the accompanying balance sheets as follows:
April 28, October 27, 2000 2000 ---- ---- Costs and estimated earnings in excess of billings On uncompleted projects, net $ 8,412,159 $ 9,738,139 Billings in excess of costs and estimated earnings On uncompleted projects (1,752,736) (1,450,634) ----------- ------------ Net underbillings $ 6,659,423 $ 8,287,505 =========== ============
3. ACQUISITIONS BL&P Engineers, Inc. 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 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. 9 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. 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. Working capital $ 662,344 Other assets 79,964 Other assets (461,180) Goodwill 4,536,591 --------- Total $4,817,719 ========== 4. FINANCING ARRANGEMENTS A summary of changes in financing arrangements are as follows: 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. As of October 27, 2000, the Company has borrowings outstanding of $8,993,388, which represents substantially all of the amount available to borrow under the terms of the Company's revolving credit agreement at that date. Substantially all assets are pledged under this financing arrangement. This financing arrangement requires that 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 October 27, 2000, the Company was in compliance with these financial covenants. 5. STOCKHOLDERS' EQUITY In June 2000, 3,907 shares of common stock were issued under the HLM Design, Inc. Employee Stock Purchase Plan. In September 2000, 2,071 shares of common stock were issued under the HLM Design, Inc. Employee Stock Purchase Plan. 10 HLM DESIGN, INC. AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED) HLM Design's unconsolidated balance sheet and statement of income as of and for the six month period ended October 27, 2000 are as follows: Balance Sheet Current assets $19,768,358 Non-current assets 14,420,427 ------------ Total assets $34,188,785 ============ Current liabilities 11,584,900 Non-current liabilities 12,039,533 ------------ Total liabilities 23,624,433 Total stockholders' equity 10,564,352 ------------ Total liabilities and stockholders' equity $34,188,785 ============ Statement of Income Equity in earnings of affiliates $ 1,039,635 Net interest, income tax and other expense 532,753 ------------ Net income $ 506,882 ============ 7. NEW ACCOUNTING PRONOUNCEMENT 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 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. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. RESULTS OF OPERATIONS
Three Months Ended Three Months Ended Six Months Ended Six Months Ended October 29, October 27, October 29, October 27, 1999 2000 1999 2000 ---- ---- ---- ---- Revenues $12,325,241 $16,069,080 $23,778,436 $31,939,756 Consultant and project expenses 3,888,201 5,565,714 7,260,110 10,884,090 ----------- ----------- ----------- ----------- Net production income 8,437,040 10,503,366 16,518,326 21,055,666 ----------- ----------- ----------- ----------- Direct labor 2,547,202 3,439,475 4,853,626 6,717,173 Operating costs 5,010,455 5,849,361 10,025,979 12,009,471 Amortization of intangible assets 101,460 168,251 201,439 330,302 ----------- ----------- ----------- ----------- Total costs and expenses 7,659,117 9,457,087 15,081,044 19,056,946 ----------- ----------- ----------- ----------- Operating income 777,923 1,046,279 1,437,282 1,998,720 Interest expense, net 254,797 471,368 472,162 920,295 ----------- ----------- ----------- ----------- Income before income taxes 523,126 574,911 965,120 1,078,425 Income tax expense 253,217 305,166 468,241 571,543 ----------- ----------- ----------- ----------- Net income $ 269,909 $ 269,745 $ 496,879 $ 506,882 =========== =========== =========== =========== EBITDA (1) $ 1,123,820 $ 1,454,942 $ 2,058,670 $ 2,809,577 =========== =========== =========== ===========
(1) EBITDA represents net income before interest expense, income taxes, depreciation and amortization. While EBITDA is not intended to represent cash flow from operations as defined by GAAP and should not be considered as an indicator of operating performance or an alternative to cash flow (as measured by GAAP) as a measure of liquidity, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure, and working capital requirements. EBITDA, as calculated herein, may not be comparable to similarly entitled measures of other entities. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED RESULTS OF OPERATIONS For the three months ended October 27, 2000 and October 29, 1999 Revenues were $16.1 million for the three month period ended October 27, 2000 as compared to $12.3 million for the three month period ended October 29, 1999. This increase of 30% is due to internal growth in existing operations as well as the acquisition of BL&P which contributed 11% of the revenue growth. Direct costs, which include consultant costs and reimbursable project expenses, total $5.6 million, or 35% of revenues, for the three month period ended October 27, 2000 as compared to $3.9 million, or 32% of revenues, for the three month period ended October 29, 1999. This increase as a percentage of revenue is due to an increased use of consultants to meet project requirements primarily due to the tight labor market. Management believes that this trend may continue which will cause direct costs as a percent of revenues to increase in future periods. Direct labor cost was $3.4 million, or 33% of net production income, for the three month period ended October 27, 2000 as compared to $2.5 million, or 30% of net production income, for the three month period ended October 29, 1999. Although the volume of architecture, planning and engineering services has increased, it has been offset by an increase in salary and salary related costs which has not been passed through to the Company's clients in all cases. Operating costs were $5.8 million, or 56% of net production income, for the three month period ended October 27, 2000 as compared to $5.0 million, or 59% of net production income, for the three month period ended October 29, 1999. This decrease as a percentage of net production income is principally due to fixed costs which do not increase at the same pace as net production income. This decrease as a percentage of net production income is partially offset by an increase in indirect salaries related to our acquisition strategy and certain office expenses. Amortization of intangible assets was $168,251 for the three months ended October 27, 2000 as compared to $101,460 for the three months ended October 29, 1999. This increase is attributable to amortization expense arising from the acquisitions of BL&P and ESS Architects, Inc. ("ESS"). Income from operations was $1.0 million, or 10% of net production income, for the three month period ended October 27, 2000 as compared to $0.8 million, or 9% of net production income for the three months ended October 29, 1999. This increase as a percentage of net production income is principally due to a decrease in operating costs as a percentage of net production income which is partially offset by an increase in direct labor cost as a percentage of net production income and a reduction in certain higher margin projects. Interest expense was $0.5 million for the three month period ended October 27, 2000 as compared to $0.3 million for the three month period ended October 29, 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 ESS and BL&P and to a lesser extent, an increase in the effective interest rate in the current year as compared to the prior year. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED Income tax expense was $0.3 million for the three month period ended October 27, 2000 as compared to $0.3 million for the three month period ended October 29, 1999. The effective income tax rate was 53% and 48% for the three month periods ended October 27, 2000 and October 29, 1999, respectively. This effective tax rate is higher principally due to the increase in non-deductible goodwill amortization. Earnings per share was 0.11 for the three month period ended October 27, 2000 as compared to 0.11 for the three month period ended October 29, 1999. Earnings per share remained constant despite the increase in net production income due to the impact of increased interest expense primarily attributable to the acquisition of BL&P and ESS, as well as a reduction in certain higher margin projects. In addition, earnings per share is positively impacted by a decrease in operating costs as a percentage of net production income principally due to fixed costs which do not increase at the same pace as net production income. For the six months ended October 27, 2000 and October 29, 1999 Revenues were $31.9 million for the six month period ended October 27, 2000 as compared to $23.8 million for the six month period ended October 29, 1999. This increase of 34% is due to internal growth in existing operations as well as the acquisition of BL&P which contributed 12% of the revenue growth. Direct costs, which include consultant costs and reimbursable project expenses, total $10.9 million, or 34% of revenues, for the six month period ended October 27, 2000 as compared to $7.3 million, or 31% of revenues, for the six month period ended October 29, 1999. This increase as a percentage of revenue is due to an increased use of consultants to meet project requirements primarily due to the tight labor market. Management believes that this trend may continue which will cause direct costs as a percent of revenues to increase in future periods. Direct labor cost was $6.7 million, or 32% of net production income, for the six month period ended October 27, 2000 as compared to $4.9 million, or 30% of net production income, for the six month period ended October 29, 1999. Although the volume of architecture, planning and engineering services has increased, it has been offset by an increase in salary and salary related costs which has not been passed through to the Company's clients in all cases. Operating costs were $12.0 million, or 57% of net production income, for the six month period ended October 27, 2000 as compared to $10.0 million, or 61% of net production income, for the six month period ended October 29, 1999. This decrease as a percentage of net production income is principally due to fixed costs which do not increase at the same pace as net production income. This decrease as a percentage of net production income is partially offset by an increase in indirect salaries related to our acquisition strategy and certain office expenses. Amortization of intangible assets was $330,302 for the six months ended October 27, 2000 as compared to $201,439 for the six months ended October 29, 1999. This increase is attributable to amortization expense arising from the acquisitions of BL&P and ESS. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED Income from operations was $2.0 million, or 9% of net production income, for the six month period ended October 27, 2000 as compared to $1.4 million, or 9% of net production income for the six months ended October 29, 1999. Interest expense was $0.9 million for the six month period ended October 27, 2000 as compared to $0.5 million for the six month period ended October 29, 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 ESS and BL&P and to a lesser extent, the effective interest rate has increased in the current year as compared to the prior year. Income tax expense was $0.6 million for the six month period ended October 27, 2000 as compared to $0.5 million for the six month period ended October 29, 1999. The effective income tax rate was 53% and 49% for the six month periods ended October 27, 2000 and October 29, 1999, respectively. This effective tax rate is higher principally due to the increase in non-deductible goodwill amortization. Earnings per share was 0.21 for the six month period ended October 27, 2000 as compared to 0.21 for the six month period ended October 29, 1999. Earnings per share remained constant despite the increase in net production income due to the impact of increased interest expense primarily attributable to the acquisition of BL&P and ESS, as well as a reduction in certain higher margin projects. In addition, earnings per share is positively impacted by a decrease in operating costs as a percentage of net production income principally due to fixed costs which do not increase at the same pace as net production income. LIQUIDITY AND CAPITAL RESOURCES At October 27, 2000, the Company's current assets of $23.0 million exceeded current liabilities of $14.9 million, resulting in net working capital of $8.1 million. During the six month period ended October 27, 2000, the Company's operating activities provided $1.0 million cash, primarily due to a decrease in trade and other accounts receivable and an increase in accounts payable which is partially offset by an increase in costs and estimated earnings compared to billings on uncompleted projects. The Company used $2.5 million for investing activities, primarily as payment for the purchase of BL&P on April 29, 2000, and to a lesser extent, the purchase of equipment. 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). In addition, the Company paid BL&P debt of $0.76 million upon closing. The Company generated cash of $ 1.3 million from financing activities primarily on borrowings under the Company's revolving credit facility with IBJ Whitehall Business Credit Corporation. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED The Company's growth and operating strategy will require substantial capital and may result in the Company from time to time incurring additional debt, issuing equity securities or obtaining additional bank financing. As a management company, HLM Design is responsible for the financing of working capital growth, capital growth and other cash needs of its managed firms. During fiscal year end April 28, 2000, the Company entered into a revolving credit, term loan and capital expenditure loan for a total of $20 million. At October 27, 2000, the Company had borrowings outstanding of approximately $9.0 million under the revolving credit arrangement and $1.6 million under the term loan agreement. At October 27, 2000 there were no borrowings outstanding under the capital expenditure loan. Substantially all assets are pledged under this financing arrangement. This financing arrangement requires that 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 October 27, 2000, the Company was in compliance with these financial covenants. See Note 4 to the Company's Condensed Consolidated Financial Statements. The Company believes that its revolving line of credit and anticipated funds from future operations will be sufficient to meet the Company's operating needs for at least the next twelve months. 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 continue its growth strategy will be adversely affected. 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 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the opinion of management, there has been no material change in market risk since April 28, 2000. 16 PART II-OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on September 14, 2000 for the purpose of electing one director, approving an amendment to the 1998 Stock Option Plan, approving an amendment to the Employee Stock Purchase Plan, and ratifying the appointment of independent accountants. Proxies were solicited pursuant to Regulation 14A of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitations. Proposal 1: Election of director for term indicated:
Year of Annual Meeting of Stockholders that Shares Voted Shares Name Term Expires "For" "Withheld" ---- ------------ ----- ---------- D. Shannon LeRoy 2003 1,932,544 40,430 The following directors terms of office continued after the meeting: Joseph M. Harris, Vernon B. Brannon, James E. Finley and L. Fred Pounds. Proposal 2: Amendment of the HLM Design, Inc. 1998 Stock Option Plan was approved with the following vote: Shares Voted Shares Voted Shares "For" "Against" "Abstaining" ----- --------- ------------ 1,847,719 115,805 9,450 Proposal 3: Amendment of the HLM Design, Inc. Employee Stock Purchase Plan was approved with the following vote: Shares Voted Shares Voted Shares "For" "Against" "Abstaining" ----- --------- ------------ 1,863,744 103,430 5,800 Proposal 4: Ratification of appointment of Deloitte & Touche LLP as the Company's independent accountants was approved with the following vote: Shares Voted Shares Voted Shares "For" "Against" "Abstaining" ----- --------- ------------ 1,931,429 35,645 5,900
17 PART II-OTHER INFORMATION 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) HLM Design has not filed any reports on Form 8-K during the period covered by this report. 18 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 11, 2000 By: /s/ Joseph M. Harris ------------------ --------------------- Joseph M. Harris President, Chairman and Director Date: December 11, 2000 By: /s/ James B. Huff ----------------- ----------------- James B. Huff Vice President and Chief Financial Officer 19 EX-27 2 0002.txt EXHIBIT 27
5 0001049129 HLM DESIGN 6-MOS Apr-27-2001 Apr-29-2000 Oct-27-2000 84,839 0 12,981,709 773,718 0 22,990,399 5,981,455 3,779,584 38,320,210 14,878,535 0 0 0 2,416 10,561,936 38,320,210 0 31,939,756 0 0 29,941,036 0 920,295 1,078,425 571,543 506,882 0 0 0 506,882 0.21 0.21
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