-----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, H7050hpxNfEuHcRpwTtneDX+BzJCXen+FEi1F5Hzhb0Pahq1Sp4UUOYycIar/a7k dxAf7hZb1GWuerJKI9Drvg== 0000950168-01-000502.txt : 20010313 0000950168-01-000502.hdr.sgml : 20010313 ACCESSION NUMBER: 0000950168-01-000502 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010126 FILED AS OF DATE: 20010312 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: 1565982 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 HLM DESIGN 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 January 26, 2001 (_) 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 March 2, 2001 - ------------------- ---------------------------- Common stock, par value $.001 per share 2,188,732 shares HLM DESIGN, NC. 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 January 26, 2001 3 Condensed Consolidated Statements of Income - Nine Month Periods Ended January 28, 2000 and January 26, 2001 and Three Month Periods Ended January 28, 2000 and January 26, 2001 5 Condensed Consolidated Statement of Stockholders' Equity - Nine Month Period Ended January 26, 2001 6 Condensed Consolidated Statements of Cash Flows - Nine Month Periods Ended January 28, 2000 and January 26, 2001 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 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HLM DESIGN, INC. AND AFFILIATES CONDENSED CONSOLIDATED BALANCE SHEETS
April 28, January 26, 2000 2001 ---- ---- (Unaudited) ASSETS: Current Assets: Cash $ 285,616 $ 39,564 Trade and other receivables, less allowance for doubtful accounts at April 28, 2000 and January 26, 2001 of $346,060 and $695,947, respectively 11,286,334 12,965,058 Costs and estimated earnings in excess of billings on uncompleted projects, net 8,412,159 10,303,402 Prepaid expenses and other 788,015 1,719,443 -------------------------------- Total Current Assets 20,772,124 25,027,467 -------------------------------- Other Assets: Goodwill, net 8,136,010 12,314,407 Other 887,137 1,758,323 -------------------------------- Total Other Assets 9,023,147 14,072,730 -------------------------------- Property and Equipment: Leasehold improvements 1,508,208 1,659,608 Furniture and fixtures 3,898,288 4,425,049 -------------------------------- Property and Equipment, at cost 5,406,496 6,084,657 Less Accumulated depreciation 3,101,004 4,110,056 -------------------------------- Property and equipment, net 2,305,492 1,974,601 -------------------------------- TOTAL ASSETS $ 32,100,763 $ 41,074,798 ================================
See notes to unaudited consolidated financial statements. 3 HLM DESIGN, INC. AND AFFILIATES CONDENSED CONSOLIDATED BALANCE SHEETS
April 28, January 26, 2000 2001 ---- ---- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current maturities of long-term debt and capital lease obligations $ 1,216,468 $ 1,328,601 Accounts payable 7,425,799 9,462,075 Billings in excess of costs and estimated earnings on uncompleted projects 1,752,736 1,178,397 Accrued expenses and other 2,264,244 5,583,111 ---------------------------------- Total Current Liabilities 12,659,247 17,552,184 ---------------------------------- LONG-TERM DEBT AND OTHER 9,673,523 12,926,699 ---------------------------------- TOTAL LIABILITIES 22,332,770 30,478,883 ---------------------------------- COMMITMENT AND CONTINGENCIES STOCKHOLDERS' EQUITY: Capital Stock: Preferred, $.10 par value, voting, authorized 1,000,000 shares, no shares outstanding Common, $.001 par value, authorized 9,000,000 shares; issued 2,359,975 and 2,415,953 at April 28, 2000 and January 26, 2001, respectively (includes 258,444 and 236,443 to be issued on a delayed delivery schedule at April 28, 2000 and January 26, 2001, respectively) 2,360 2,416 Additional paid in capital 7,450,261 7,725,290 Retained earnings 2,324,817 2,893,932 Accumulated other comprehensive loss (9,445) (25,723) ---------------------------------- TOTAL STOCKHOLDERS' EQUITY 9,767,993 10,595,915 ---------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 32,100,763 $ 41,074,798 ==================================
See notes to unaudited condensed consolidated financial statements. 4 HLM DESIGN, INC. AND AFFILIATES CONDENDSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine Nine Three Three Months Months Months Months Ended Ended Ended Ended January 28, January 26, January 28, January 26, 2000 2001 2000 2001 ---- ---- ---- ---- REVENUES: Fee Income $ 35,212,629 $ 44,311,647 $ 13,074,952 $ 14,335,080 Reimbursable Income 2,883,291 3,006,213 1,242,532 1,043,024 ---------------- -------------- -------------- ------------- Total Revenues 38,095,920 47,317,860 14,317,484 15,378,104 ---------------- -------------- -------------- ------------- CONSULTANT EXPENSE 10,782,675 13,883,798 4,778,416 4,709,803 ---------------- -------------- -------------- ------------- PROJECT EXPENSES: Direct Expenses 587,959 763,946 233,131 224,855 Reimbursable expenses 1,564,673 1,693,604 663,650 522,600 ---------------- -------------- -------------- ------------- Total project expenses 2,152,632 2,457,550 896,781 747,455 ---------------- -------------- -------------- ------------- NET PRODUCTION INCOME 25,160,613 30,976,512 8,642,287 9,920,846 DIRECT LABOR 7,403,527 9,795,810 2,549,901 3,078,637 INDIRECT EXPENSES 15,701,374 18,541,171 5,473,956 6,201,398 ---------------- -------------- -------------- ------------- OPERATING INCOME 2,055,712 2,639,531 618,430 640,811 OTHER EXPENSE: Interest Expense, net 757,893 1,363,003 285,731 442,708 ---------------- -------------- -------------- ------------- INCOME BEFORE INCOME TAXES 1,297,819 1,276,528 332,699 198,103 INCOME TAX EXPENSE 608,858 707,413 140,617 135,870 ---------------- -------------- -------------- ------------- NET INCOME $ 688,961 $ 569,115 $ 192,082 $ 62,233 ================ ============== ============== ============= NET INCOME PER SHARE Basic $ 0.29 $ 0.24 $ 0.08 $ 0.03 ================ ============== ============== ============= NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Basic 2,351,702 2,413,897 2,354,609 2,415,953 ================ ============== ============== ============= NET INCOME PER SHARE Diluted $ 0.29 $ 0.24 $ 0.08 $ 0.03 ================ ============== ============== ============= NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Diluted 2,351,702 2,442,703 2,354,609 2,430,113 ================ ============== ============== =============
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 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 Comprehensive income: Foreign currency translation adjustment (16,278) Net Income 569,115 Total comprehensive income 552,837 --------------------------------------------------------------------------------------- Balance, January 26, 2001 2,415,953 $ 2,416 $7,725,290 $ 2,893,932 $ (25,723) $10,595,915 =======================================================================================
See notes to unaudited condensed consolidated financial statements. 6 HLM DESIGN, INC. AND AFFILIATES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Nine Months Months Ended Ended January 28, January 26, 2000 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 688,961 $ 569,115 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 637,738 711,680 Amortization of intangible assets 312,394 496,275 Amortization of deferred loan fees 58,912 154,284 Changes in assets and liabilities, net of effects from purchase of acquired companies: Increase in trade and other accounts receivable (1,585,291) (194,641) Net increase in costs and estimated earnings in excess of billings on uncompleted projects (3,231,356) (2,995,240) Decrease (increase) in prepaid expenses and other assets 227,516 (704,112) Increase in accounts payable 2,931,205 1,811,546 Increase (decrease) in accrued expenses and other (748,370) 1,003,956 ----------------------------- Net cash (used in) provided by operating activities (708,291) 852,863 ----------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (769,466) (380,789) 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 (944,789) (2,516,183) ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on long-term borrowings (586,903) (760,127) Net borrowings on revolving credit facility 2,158,560 Borrowings on long-term debt 2,050,000 - Proceeds from issuance of common stock under the Employee Stock Purchase Plan 23,108 18,835 ----------------------------- Net cash provided by financing activities 1,486,205 1,417,268 ----------------------------- DECREASE IN CASH (166,875) (246,052) CASH BALANCE: Beginning of period 250,575 285,616 ----------------------------- End of period $ 83,700 $ 39,564 ============================= SUPPLEMENTAL DISCLOSURES: Interest paid $ 956,924 $ 1,517,264 Income tax payments $ 717,475 $ 146,011 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 professional consultancy that provides management services to architectural, engineering and planning design entities under long term management and services agreements ("MSAs"). As of January 26, 2001, the Company had wholly-owned subsidiaries of HLM Design and affiliates as follows: . HLM Design of North America, Inc. ("HLMNA"); . HLM Design USA, Inc. ("HLMUSA"); . HLM Design Architecture, Engineering and Planning, P.C. ("HLMAEP"); . JPJ Architects, Inc. ("JPJ"); . G.A. Design International Holdings, Ltd. ("GAIH"); and . 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 nine month periods ended January 28, 2000 and January 26, 2001 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, January 26, 2000 2001 ---- ---- Costs incurred on uncompleted projects (excluding overhead) $ 64,016,964 $ 83,166,202 Estimated earnings thereon 58,470,955 72,336,052 ------------ ------------ Total 122,487,919 155,502,254 Less billings to date 115,828,496 146,377,249 ------------ ------------ Net underbillings $ 6,659,423 $ 9,125,005 ============ ============
Net underbillings are included in the accompanying balance sheets as follows:
April 28, January 26, 2000 2001 ---- ---- Costs and estimated earnings in excess of billings On uncompleted projects, net $ 8,412,159 $ 10,303,402 Billings in excess of costs and estimated earnings On uncompleted projects (1,752,736) (1,178,397) ------------ ------------ Net underbillings $ 6,659,423 $ 9,125,005 ============ ============
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 January 26, 2001, the Company has borrowings outstanding of $9,416,030, 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 January 26, 2001, 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 nine month period ended January 26, 2001 are as follows: Balance Sheet Current assets $22,144,041 Non-current assets 14,243,879 ----------- Total assets $36,387,920 =========== Current liabilities 12,447,816 Non-current liabilities 13,344,189 ----------- Total liabilities 25,792,005 Total stockholders' equity 10,595,915 ----------- Total liabilities and stockholders' equity $36,387,920 =========== Statement of Income Equity in earnings of affiliates $ 1,265,742 Net interest, income tax and other expense 696,627 ----------- Net income $ 569,115 ===========
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 believes that implementation of the provisions of this Statement will not have a material impact 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 Nine Months Ended Nine Months Ended January 28, January 26, January 28, January 26, 2000 2001 2000 2001 ---- ---- ---- ---- Revenues $14,317,484 $15,378,104 $38,095,920 $47,317,860 Consultant and project expenses 5,675,197 5,457,258 12,935,307 16,341,348 ----------- ----------- ----------- ----------- Net production income 8,642,287 9,920,846 25,160,613 30,976,512 ----------- ----------- ----------- ----------- Direct labor 2,549,901 3,078,637 7,403,527 9,795,810 Operating costs 5,363,001 6,035,425 15,388,980 18,044,896 Amortization of intangible assets 110,955 165,973 312,394 496,275 ----------- ----------- ----------- ----------- Total costs and expenses 8,023,857 9,280,035 23,104,901 28,336,981 ----------- ----------- ----------- ----------- Operating income 618,430 640,811 2,055,712 2,639,531 Interest expense, net 285,731 442,708 757,893 1,363,003 ----------- ----------- ----------- ----------- Income before income taxes 332,699 198,103 1,297,819 1,276,528 Income tax expense 140,617 135,870 608,858 707,413 ----------- ----------- ----------- ----------- Net income $ 192,082 $ 62,233 $ 688,961 $ 569,115 =========== =========== =========== =========== EBITDA (1) $ 947,174 $ 1,037,909 $ 3,005,844 $ 3,847,486 =========== =========== =========== ===========
(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 January 26, 2001 and January 28, 2000 Revenues were $15.4 million for the three month period ended January 26, 2001 as compared to $14.3 million for the three month period ended January 28, 2000. This increase of 7% is due principally to the acquisition of BL&P which contributed 6% of the revenue growth coupled with an increase in internal growth in existing operations. Direct costs, which include consultant costs and reimbursable project expenses, total $5.5 million, or 35% of revenues, for the three month period ended January 26, 2001 as compared to $5.7 million, or 40% of revenues, for the three month period ended January 28, 2000. This decrease as a percentage of revenue is primarily due to a decrease in the use of consultants. Direct labor cost was $3.1 million, or 31% of net production income, for the three month period ended January 26, 2001 as compared to $2.5 million, or 30% of net production income, for the three month period ended January 28, 2000. Although the volume of architecture, planning and engineering services performed by the Managed Firms 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, resulting in higher costs as a total of net production income. The Company's Chief Operating Officer is working directly with the project managers of the Managed Firms to improve the effectiveness and efficiency of each project and ultimately decrease direct labor cost as a percentage of net production income. Management believes the financial statements will be positively impacted by this focus on operations within the next six to twelve months. Operating costs were $6.0 million, or 61% of net production income, for the three month period ended January 26, 2001 as compared to $5.4 million, or 62% of net production income, for the three month period ended January 28, 2000. 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 incurred expenses and a decrease in direct labor as a result of the consolidation of two of our Managed Firms as well as an increase in certain office expenses. During the third quarter, the Company reduced certain operating expenses, eliminated certain overhead positions, reassigned a corporate Vice President to an operations position, and began to perform internally several functions that had previously been outsourced. Management believes that the financial statements will be positively impacted by the above changes within the next six to twelve months. Amortization of intangible assets was $165,973 for the three months ended January 26, 2001 as compared to $110,955 for the three months ended January 28, 2000. This increase is attributable to the amortization of goodwill arising from the acquisition of BL&P. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED Interest expense was $0.4 million for the three month period ended January 26, 2001 as compared to $0.3 million for the three month period ended January 28, 2000. This increase is principally due to the Company's increase in borrowings on its line of credit as well as debt resulting from the acquisition of BL&P and to a lesser extent, an increase in the effective interest rate in the current year as compared to the prior year. Income tax expense was $0.1 million for the three month period ended January 26, 2001 as compared to $0.1 million for the three month period ended January 28, 2000. The effective income tax rate was 69% and 42% for the three month periods ended January 26, 2001 and January 28, 2000, respectively. This effective tax rate is higher principally due to the increase in non-deductible goodwill amortization. For the nine months ended January 26, 2001 and January 28, 2000 Revenues were $47.3 million for the nine month period ended January 26, 2001 as compared to $38.1 million for the nine month period ended January 28, 2000. This increase of 24% is due to internal growth in existing operations as well as the acquisition of BL&P which contributed 10% of the revenue growth. During the third quarter, the internal growth in existing operations has declined which has negatively impacted the nine months ended increase in revenues from 30% for the six months ended October 27, 2000 to 24% for the nine months ended January 26, 2001. Direct costs, which include consultant costs and reimbursable project expenses, total $16.3 million, or 35% of revenues, for the nine month period ended January 26, 2001 as compared to $12.9 million, or 34% of revenues, for the nine month period ended January 28, 2000. 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 which is partially offset by a decline in the use of consultants during the third quarter of 2001. Direct labor cost was $9.8 million, or 32% of net production income, for the nine month period ended January 26, 2001 as compared to $7.4 million, or 29% of net production income, for the nine month period ended January 28, 2000. 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 resulting in higher costs as a total of net production income. The Company's Chief Operating Officer is working directly with the project managers of the managed firms to improve the effectiveness and efficiency of each project and ultimately decrease direct labor cost as a percentage of net production income. Management believes within the next six to twelve months, the financial statements will be positively impacted by this focus on operations. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED Operating costs were $18.0 million, or 58% of net production income, for the nine month period ended January 26, 2001 as compared to $15.4 million, or 61% of net production income, for the nine month period ended January 28, 2000. 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 incurred expenses and a decrease in direct labor as a result of the consolidation of two of our Managed Firms as well as an increase in certain office expenses. During the third quarter, the Company reduced certain operating expenses, eliminated certain overhead positions, reassigned a corporate Vice President to an operations position, and began to perform internally several functions that had previously been outsourced. Management believes that the financial statements will be positively impacted by the above changes within the next six to twelve months. Amortization of intangible assets was $496,275 for the nine months ended January 26, 2001 as compared to $312,394 for the nine months ended January 28, 2000. This increase is attributable to the amortization of goodwill arising from the acquisitions of BL&P and ESS. Interest expense was $1.4 million for the nine month period ended January 26, 2001 as compared to $0.8 million for the nine month period ended January 28, 2000. 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 $0.7 million for the nine month period ended January 26, 2001 as compared to $0.6 million for the nine month period ended January 28, 2000. The effective income tax rate was 55% and 47% for the nine month periods ended January 26, 2001 and January 28, 2000, respectively. This effective tax rate is higher principally due to the increase in non-deductible goodwill amortization. LIQUIDITY AND CAPITAL RESOURCES At January 26, 2001, the Company's current assets of $25.1 million exceeded current liabilities of $17.7 million, resulting in net working capital of $7.4 million. During the nine month period ended January 26, 2001, the Company's operating activities provided $0.9 million cash primarily from net income and amortization of intangible assets and deferred loan fees which are offset by an increase in prepaid expenses and other assets and accounts receivable. 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 $ 1.4 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 January 26, the Company had borrowings outstanding of approximately $9.4 million under the revolving credit arrangement and $1.4 million under the term loan agreement. At January 26, 2001, 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 January 26, 2001, the Company was in compliance with these financial covenants. Management believes that with its available revolving line of credit along with anticipated funds from future operations as well as expected improvements in direct labor costs and reduction in certain operating expenses, the Company should be able to meet its operating needs for 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 believes that implementation of the provisions of this Statement will not have a material impact on the Company's financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates affecting our credit arrangements, including a variable rate revolving credit arrangement and term loan agreement, which may adversely affect our results of operations and cash flows. We seek to minimize our interest rate risk through our day to day operating and financing activities. We do not engage in speculative or derivative financial or trading activities. A hypothetical 100 basis point adverse change (increase) in interest rates relating to our revolving credit arrangement and term loan agreement would have decreased pre-tax income for the nine months ended January 26, 2001 by approximately $80,000. 16 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: None (b) HLM Design has not filed any reports on Form 8-K during the period covered by this report. 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: March 12, 2001 By: /s/ Joseph M.Harris ------------------------- --------------------------- Joseph M. Harris President, Chairman and Director Date: March 12, 2001 By: /s/ James B. Huff ------------------------ ------------------------- James B. Huff Vice President and Chief Financial Officer 18 -----END PRIVACY-ENHANCED MESSAGE-----