-----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, PP8H79UIPs0bBrS5fZBUT5bed6e8lBK4E/EvPgAHI84+aqgcjF6qbcSeD/1g7YB1 cyB4oLS+k/Fsaw754ojJKw== 0000950168-01-501425.txt : 20020413 0000950168-01-501425.hdr.sgml : 20020413 ACCESSION NUMBER: 0000950168-01-501425 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20011102 FILED AS OF DATE: 20011217 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: 1934 Act SEC FILE NUMBER: 001-14137 FILM NUMBER: 1815746 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 d10q.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 November 2, 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 December 3, 2001 - ------------------- ------------------------------- Common stock, par value $.001 per share 2,213,193 shares HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES INDEX TO FORM 10-Q
PAGE NO. PART I. FINANCIAL INFORMATION ITEM 1 Financial Statements Condensed Consolidated Balance Sheets - April 27, 2001 and November 2, 2001 3 Condensed Consolidated Statements of Operations - Six Month Periods Ended October 27, 2000 and November 2, 2001 and Three Month Periods Ended October 27, 2000 and November 2, 2001 5 Condensed Consolidated Statement of Stockholders' Equity - Six Month Period Ended November 2, 2001 6 Condensed Consolidated Statements of Cash Flows - Six Month Periods Ended October 27, 2000 and November 2, 2001 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 ITEM 2. Management's Discussion and Analysis of Financial Condition And Results of Operations 14 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 21 PART II. OTHER INFORMATION ITEM 2. Changes in Securities and Use of Proceeds 21 ITEM 4. Submission of Matters to a Vote of Security Holders 22 ITEM 5. Other Information 22 ITEM 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONDENSED CONSOLIDATED BALANCE SHEETS
April 27, November 2, 2001 2001 ---- ---- (Unaudited) ASSETS: Current Assets: Cash $ 243,148 $ 1,620,920 Trade and other receivables, less allowance for doubtful accounts at April 27, 2001 and November 2, 2001 of $726,473 and $579,804, respectively 11,977,393 11,855,984 Costs and estimated earnings in excess of billings on uncompleted projects, net 9,767,618 8,438,589 Prepaid expenses and other 1,423,399 1,026,400 -------------------------------- Total Current Assets 23,411,558 22,941,893 -------------------------------- Other Assets: Goodwill, net 12,166,149 12,264,435 Non-compete agreement 60,417 331,250 Other 1,019,785 1,151,428 -------------------------------- Total Other Assets 13,246,351 13,747,113 -------------------------------- Property and Equipment: Leasehold improvements 1,925,075 2,031,775 Furniture and fixtures 4,523,544 4,841,811 -------------------------------- Property and equipment, at cost 6,448,619 6,873,586 Less Accumulated depreciation 4,362,817 5,044,313 -------------------------------- Property and equipment, net 2,085,802 1,829,273 -------------------------------- TOTAL ASSETS $ 38,743,711 $ 38,518,279 ================================
See notes to unaudited condensed consolidated financial statements. 3 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONDENSED CONSOLIDATED BALANCE SHEETS
April 27, November 2, 2001 2001 ---- ---- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current maturities of long-term debt and capital lease obligations $ 1,848,248 $ 3,099,250 Accounts payable 8,864,277 8,922,556 Billings in excess of costs and estimated earnings on uncompleted projects 1,646,954 2,206,984 Accrued expenses and other 4,883,141 5,057,619 ------------------------------- Total Current Liabilities 17,242,620 19,286,409 ------------------------------- Long-term debt and other 10,730,764 8,692,792 ------------------------------- TOTAL LIABILITIES 27,973,384 27,979,201 ------------------------------- Commitments 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 2,426,330 and 2,530,414 at April 27, 2001 and November 2, 2001, respectively (includes 227,221 and 317,221 to be issued on a delayed delivery schedule at April 27, 2001 and November 2, 2001, respectively) 2,427 2,531 Additional paid in capital 7,744,023 7,980,888 Retained earnings 3,066,074 2,574,348 Accumulated other comprehensive loss (42,197) (18,689) ------------------------------- Total stockholders' equity 10,770,327 10,539,078 ------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,743,711 $ 38,518,279 ===============================
See notes to unaudited condensed consolidated financial statements. 4 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONDENDSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Six Six Three Three Months Months Months Months Ended Ended Ended Ended October 27, November 2, October 27, November 2, 2000 2001 2000 2001 ---- ---- ---- ---- REVENUES: Fee Income $ 29,976,567 $ 28,042,919 $ 15,196,744 $ 13,685,307 Reimbursable Income 1,963,189 1,829,867 872,336 559,680 ---------------------------- --------------------------- Total Revenues 31,939,756 29,872,786 16,069,080 14,244,987 ---------------------------- --------------------------- CONSULTANT EXPENSE 9,173,995 9,751,352 4,658,377 5,158,579 ---------------------------- --------------------------- PROJECT EXPENSES: Direct Expenses 539,091 479,188 296,224 222,545 Reimbursable expenses 1,171,004 1,295,789 611,113 646,119 ---------------------------- --------------------------- Total project expenses 1,710,095 1,774,977 907,337 868,664 ---------------------------- --------------------------- NET PRODUCTION INCOME 21,055,666 18,346,457 10,503,366 8,217,744 DIRECT LABOR 6,717,173 6,539,676 3,439,475 3,035,629 INDIRECT EXPENSES 12,339,773 12,000,714 6,017,612 5,784,499 ---------------------------- --------------------------- OPERATING INCOME (LOSS) 1,998,720 (193,933) 1,046,279 (602,384) INTEREST EXPENSE 920,295 671,795 471,368 333,408 ---------------------------- --------------------------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 1,078,425 (865,728) 574,911 (935,792) INCOME TAX EXPENSE (BENEFIT) 571,543 (358,068) 305,166 (395,368) ---------------------------- --------------------------- INCOME (LOSS) BEFORE MINORITY INTEREST 506,882 (507,660) 269,745 (540,424) MINORITY INTEREST IN INCOME (LOSS) (15,934) 896 ---------------------------- --------------------------- NET INCOME (LOSS) $ 506,882 $ (491,726) $ 269,745 $ (541,320) ============================ =========================== NET INCOME (LOSS) PER SHARE Basic $ 0.21 $ (0.20) $ 0.11 $ (0.21) ============================ =========================== NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Basic 2,412,870 2,521,517 2,414,519 2,526,205 ============================ =========================== NET INCOME (LOSS) PER SHARE Diluted $ 0.21 $ (0.20) $ 0.11 $ (0.21) ============================ =========================== NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Diluted 2,416,121 2,521,517 2,414,556 2,526,205 ============================ ===========================
See notes to unaudited condensed consolidated financial statements. 5 HLM DESIGN, INC. AND SUBSIDIARIES 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 27, 2001 2,426,330 $ 2,427 $ 7,744,023 $ 3,066,074 $ (42,197) $ 10,770,327 Foreign Currency Translation Adjustment, net of tax 23,508 23,508 Net Loss (491,726) (491,726) --------------- Total Comprehensive Loss (468,218) --------------- Issuance of Common Stock for Purchase of Business 90,000 90 211,440 211,530 Issuance of Common Stock 14,084 14 25,425 25,439 ------------------------------------------------------------------------------------------- Balance, November 2, 2001 2,530,414 $ 2,531 $ 7,980,888 $ 2,574,348 $ (18,689) $ 10,539,078 ===========================================================================================
See notes to unaudited condensed consolidated financial statements. 6 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Six Months Months Ended Ended October 27, November 2, 2000 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 506,882 $ (491,726) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 480,598 483,124 Amortization of intangible assets 330,302 29,168 Amortization of deferred loan fees 100,906 99,870 Changes in assets and liabilities, net of effects from purchase of acquired companies: Decrease (increase) in trade and other accounts receivable 562,426 (86,802) Net (increase) decrease in costs and estimated earnings in excess of billings on uncompleted projects (2,157,740) 1,889,059 (Increase) decrease in prepaid expenses and other assets (4,810) 487,720 Increase (decrease) in accounts payable 1,426,845 (51,697) Decrease in accrued expenses and other (202,379) (88,457) -------------------------------- Net cash provided by operating activities 1,043,030 2,270,259 -------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (376,977) (226,595) Payment for acquisition activities and purchase of business, net of cash acquired (2,135,394) (141,576) -------------------------------- Net cash used in investing activities (2,512,371) (368,171) -------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on revolving credit facility 1,735,918 (531,385) Borrowings on long-term debt - 457,593 Payment on long-term borrowings (486,189) (475,963) Proceeds from issuance of common stock under the Employee Stock Purchase Plan 18,835 25,439 -------------------------------- Net cash provided by (used in) financing activities 1,268,564 (524,316) -------------------------------- (DECREASE) INCREASE IN CASH (200,777) 1,377,772 CASH BALANCE: Beginning of period 285,616 243,148 -------------------------------- End of period $ 84,839 $ 1,620,920 ================================ SUPPLEMENTAL DISCLOSURES: Interest paid $ 1,005,146 $ 475,391 Income tax payments (refunds) $ 163,920 $ (732,788) Noncash investing and financing transactions: Acquisition of acquired businesses, net of imputed interest: Notes payable issued to former acquired company shareholder $ 1,871,496 $ - Fair value of assets acquired and liabilities assumed, net $ 281,126 $ 243,669 Common stock to be issued on delayed delivery schedule $ 256,250 $ 211,530 Payment of note payable with trade accounts receivable $ - $ 237,213
See notes to unaudited condensed consolidated financial statements. 7 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business-HLM Design, Inc. ("HLM Design") and Subsidiaries and Affiliates ("the Company") is a professional consultancy that provides management services to architectural, engineering and planning design entities ("Managed Firms") under long-term management and services agreements ("MSAs"). As of November 2, 2001, the Company had wholly-owned affiliates and subsidiaries as follows: Affiliates: . HLM Design of North America, Inc. ("HLMNA"); . HLM Design USA, Inc. ("HLMUSA"); . HLM Design Architecture, Engineering and Planning, P.C. ("HLMAEP"); Subsidiaries: . JPJ Architects, Inc. ("JPJ"); . G.A. Design International Holdings, Ltd. ("GAIH"); and . BL&P Engineers, Inc. ("BL&P"). Financial Statement Presentation - The accompanying unaudited financial information for the three and six month periods ended October 27, 2000 and November 2, 2001 has been prepared in accordance with accounting principles generally accepted in the United States of America. 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 27, 2001. New Accounting Standards -In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. This new standard requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. As of April 28, 2001, the Company adopted SFAS No. 133. The adoption of this statement did not have a material impact on the Company's consolidated financial statements. 8 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES-continued In June 2001, the FASB issued SFAS 141, "Business Combinations", which requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method. SFAS 141 also sets forth guidelines for applying the purchase method of accounting in the determination of intangible assets, including goodwill acquired in a business combination, and expands financial disclosures concerning business combinations consummated after June 30, 2001. The application of SFAS 141 did not affect any of our previously reported amounts included in goodwill or other intangible assets. Effective April 28, 2001, the Company early adopted SFAS 142, "Goodwill and Other Intangible Assets", which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS 142, all goodwill amortization ceased effective April 28, 2001. The Company identified reporting units based on the current reporting structure, assigned all goodwill to the reporting units, as well as other assets and liabilities, to the extent that they related to the reporting unit. The Company has completed the first step of the transitional goodwill impairment test by comparing the fair value of each reporting unit to its carrying value and have determined that no impairment exists at the effective date of the implementation of the new standard. Fair value of each reporting unit was measured using a valuation by an independent third party as of April 28, 2001 which was based on the market multiple, comparable transactions and discounted cash flow methodologies. The valuation indicated an aggregate fair value of the reporting units significantly in excess of the Company's market capitalization as of April 28, 2001. The Company believes the market capitalization is not representative of the fair value of the Company because the common stock is not actively traded. On an ongoing basis the Company will obtain an independent valuation and perform our annual goodwill test. Impairment indicators which may be considered include, but are not limited to, the following: [X] A significant adverse change on legal factors or in the business climate [X] Unanticipated competition [X] A significant decline in the operating performance [X] Adverse action or assessment by a regulator. The Company's operations have improved significantly for the months of October and November 2001. At least quarterly, management will evaluate to determine if an event has occurred that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company will, if appropriate, perform a goodwill impairment test between the annual dates. Impairment adjustments recognized after adoption, if any, will be recognized as operating expenses. 9 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued The following financial information is presented as if SFAS No. 142 was adopted at the beginning of the fiscal year ended April 27, 2001:
Six Months Three Months October 27, October 27, 2000 2000 ---- ---- Reported net income (loss) $ 506,882 $ 237,135 Goodwill amortization 317,802 155,800 ----------- ----------- Adjusted net income (loss) $ 824,684 $ 392,937 =========== =========== Goodwill $12,440,851 $12,365,547 =========== =========== Basic income (loss) per share: Reported net income (loss) $ 0.21 $ 0.10 Goodwill amortization 0.13 0.06 ----------- ----------- Adjusted net income (loss) $ 0.34 $ 0.16 =========== =========== Reported diluted income (loss) per share: Reported net income (loss) $ 0.21 $ 0.10 Goodwill amortization 0.13 0.06 ----------- ----------- Adjusted net income (loss) $ 0.34 $ 0.16 =========== ===========
The financial information for acquired intangible assets included in other non-current assets is as follows:
April 27, November 2, 2001 2001 ---- ---- Amortized intangible assets-non compete agreements: Original Cost $100,000 $ 400,000 Accumulated Amortization $ 39,583 $ 68,750
The non-compete intangible assets are amortized over their contractual life ranging from four to nine years. Amortization expense for the three and six months ended November 2, 2001 was $14,585 and $29,168, respectively, and annual estimated amortization for the non-compete agreements are as follows: Estimated Amortization Expense ------------------------------ Fiscal 2002 $58,336 Fiscal 2003 $58,336 Fiscal 2004 $43,753 Fiscal 2005 $33,336 Fiscal 2006 $33,336 10 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- continued The changes in carrying amount of goodwill for the six months ended November 2, 2001 are as follows:
Total ----- Balance, April 27, 2001 $12,166,149 Goodwill acquired during the period 98,286 ----------- Balance, November 2, 2001 $12,264,435 ===========
Newly Issued Accounting Standards-In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," which supercedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," but retains many of its fundamental provision. Additionally, this statement expands the scope of discontinued operations to include more disposal transactions. The Company is currently assessing the impact of this statement, which will be effective for the Company for fiscal year 2003. 2. CONTRACTS IN PROGRESS Information relative to contracts in progress is as follows: April 27, November 2, 2001 2001 ---- ---- Costs incurred on uncompleted projects (excluding overhead) $ 90,872,392 $ 131,876,973 Estimated earnings thereon 77,505,622 103,307,413 ------------ ------------- Total 168,378,014 235,184,386 Less billings to date 160,257,350 228,952,781 ------------ ------------- Net underbillings $ 8,120,664 $ 6,231,605 ============ ============= Net underbillings are included in the accompanying balance sheets as follows: April 27, November 2, 2001 2001 ---- ---- Costs and estimated earnings in excess of billings on uncompleted projects $ 9,767,618 $ 8,438,589 Billings in excess of costs and estimated earnings on uncompleted projects (1,646,954) (2,206,984) ----------- ----------- Net underbillings $ 8,120,664 $ 6,231,605 =========== =========== 11 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3. FINANCING ARRANGEMENTS Effective December 18, 2001, the Company entered into an amendment to its revolving credit, term loan and capital expenditure loan with IBJ Whitehall Business Credit Corporation ("IBJ"). The amendment is summarized as follows: a. Revolving credit-The maximum revolving advance amount is $10,500,000. b. Revolving credit-Waiver of the leverage and senior leverage financial covenants as of quarter ended November 2, 2001. c. Revolving credit-Modification of certain future financial covenants. The amount available to borrow is calculated based on the aging of certain assets. As of November 2, 2001 the Company had borrowings outstanding under the revolver of $7,659,646. Substantially all assets are pledged under this financing arrangement. This financing arrangement requires that certain financial requirements be maintained such as minimum net worth, minimum earnings before interest, taxes, depreciation and amortization, maximum leverage and senior leverage ratios, maximum fixed charge coverage and senior fixed charge coverage ratios and maximum capital expenditure commitments. All covenants are determined quarterly and the leverage and senior leverage covenants are based on a trailing four quarters ending on each determination date. Due to lower than anticipated cash flow during the first and second quarter of fiscal year ended May 3, 2002, the Company extended its current year payment obligations under certain note agreements with former acquired company shareholders (the subordinated notes payable) as follows: Notes payable to former JPJ Architect, Inc. shareholders: The current year installment due October 2001 of $348,000 plus interest has been modified to agreed upon payments of $31,628 plus interest, $40,953 plus interest, $63,274 plus interest, $94,911 plus interest, $94,911 plus interest and $22,323 plus interest for the quarter ended November 2, 2001, February 1, 2002, May 3, 2002, August 2, 2002, November 1, 2002, and January 4, 2003, respectively. In addition, 72,001 shares scheduled to be delivered October 2001 were delayed until January 2002. Notes payable to former ESS Architects, Inc. shareholders: The current year installment due September 2001 of $125,000 plus interest has been modified to agreed upon payments of $31,285 plus interest and $93,715 plus interest for the quarter ended November 2, 2001 and May 3, 2002, respectively. Notes payable to former BL&P shareholder: The current year installment due October 2001 of $612,000 plus interest has been modified to agreed upon payments of $61,200 plus interest, $122,400 plus interest, $183,600 plus interest, $183,600 plus interest, and $61,200 plus interest for the quarter ended February 1, 2002, May 3, 2002, August 2, 2002, November 1, 2002, and January 4, 2003, respectively. In addition, in October 2001, the Company negotiated approximately $237,000 reduction in this note payable in exchange for a like amount of the Company's trade accounts receivable. The Company has obtained approval from IBJ Whitehall Business Credit Corporation(as required by The Revolving Credit, Term Loan and Capital Expenditure Loan Agreement) for the modification of the repayment dates of the subordinated notes payable discussed above. 12 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4. STOCKHOLDERS' EQUITY In June 2001 7,480 shares of common stock were issued under the HLM Design, Inc. Employee Stock Purchase Plan. In September 2001 6,604 shares of common stock were issued under the HLM Design, Inc. Employee Stock Purchase Plan. 5. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED) HLM Design's parent company condensed unconsolidated balance sheet and statement of income as of and for the six month period ended November 2, 2001 are as follows: Balance Sheet Current assets $ 17,149,885 Non-current assets 13,429,971 ------------ Total assets $ 30,579,856 ============ Current liabilities 12,008,571 Non-current liabilities 8,032,207 ------------ Total liabilities 20,040,778 Total stockholders' equity 10,539,078 ------------ Total liabilities and stockholders' equity $ 30,579,856 ============ Statement of Income Equity in earnings (loss) of affiliates $ (191,994) Net interest, income tax and other expense 299,732 ------------ Net income $ (491,726) ============ 13 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 Three Six Six Months Months Months Months Ended Ended Ended Ended October 27, November 2, October 27, November 2, 2000 2001 2000 2001 ---- ---- ---- ---- Revenues $ 16,069,080 $ 14,244,987 $ 31,939,756 $ 29,872,786 Consultant and project expenses 5,565,714 6,027,243 10,884,090 11,526,329 ------------ ------------ ------------ ------------ Net production income 10,503,366 8,217,744 21,055,666 18,346,457 ------------ ------------ ------------ ------------ Direct labor 3,439,475 3,035,629 6,717,173 6,539,676 Operating costs 5,849,361 5,769,914 12,009,471 11,971,546 Amortization of intangible assets 168,251 14,585 330,302 29,168 ------------ ------------ ------------ ------------ Total costs and expenses 9,457,087 8,820,128 19,056,946 18,540,390 ------------ ------------ ------------ ------------ Operating income (loss) 1,046,279 (602,384) 1,998,720 (193,933) Interest expense, net 471,368 333,408 920,295 671,795 ------------ ------------ ------------ ------------ Income (loss) before income taxes and minority interest 574,911 (935,792) 1,078,425 (865,728) Income tax expense (benefit) 305,166 (395,368) 571,543 (358,068) ------------ ------------ ------------ ------------ Income (loss) before minority interest 269,745 (540,424) 506,882 (507,660) Minority interest in income (loss) -- 896 -- (15,934) ------------ ------------ ------------ ------------ Net income (loss) $ 269,745 $ (541,320) $ 506,882 $ (491,726) ============ ============ ============ ============
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED RESULTS OF OPERATIONS For the three months ended November 2, 2001 and October 27, 2000 Revenues were $14.2 million for the three-month period ended November 2, 2001 as compared to $16.1 million for the three-month period ended October 27, 2000. This decrease of 11% is due to the (a) impact of the September 11, 2001 terrorist act as the Company's work was virtually stopped for ten days which resulted in a revenue loss through inefficiency and loss of productivity of more than $750,000, (b) economic downturn in the United States economy resulting in certain clients delaying project start dates which has delayed related revenue recognition, and (c) lack of new projects of certain clients in markets affected by the nation's economic downturn, principally in the commercial segment. The firm returned to profitability in October. Management believes that clients may continue to delay project start dates through the remainder of fiscal year ended 2002. Direct costs, which include consultant costs and reimbursable project expenses, total $6.0 million, or 42% of revenues, for the three month period ended November 2, 2001 as compared to $5.6 million, or 35% of revenues, for the three month period ended October 27, 2000. This increase is due to an increased use of consultants to meet certain project requirements. Direct labor cost was $3.0 million, or 37% of net production income, for the three month period ended November 2, 2001 as compared to $3.4 million, or 33% of net production income, for the three-month period ended October 27, 2000. This continued increase as a percentage of net production income is due to the: (a) over-utilization of personnel on projects, (b) tightening of project profit margins (c) certain clients delaying project start dates, (d) lack of new projects of certain clients and the time required to adjust to these changes, and (e) increase in salary and salary related costs which has not been passed through to the clients in all cases. During the second quarter ended November 2, 2001, the management reduced salary costs in an effort to offset the economic downturn. The Company's Chief Operating Officer is continuing to work 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. As a result, the Company achieved profitable operations for the month of October 2001. Management believes for the last six months of fiscal year ending 2002, the financial statements will be positively impacted by this focus on operations as well as the labor savings which occurred during the second quarter ended November 2, 2001. Operating costs were $5.8 million, or 70% of net production income, for the three-month period ended November 2, 2001 as compared to $5.8 million, or 56% of net production income, for the three-month period ended October 27, 2000. This increase as a percentage of net production income is principally due to an increase in indirect labor due in part to the effects of September 11, 2001 and related fringe benefits, professional liability insurance, equipment rentals, and rent and occupancy expenses. This increase as a percentage of net production income is partially offset by a decrease in travel expenses. Management plans to increase efforts to control operating costs over the last six months of fiscal year ending 2002. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED Amortization of intangible assets was $14,585 for the three months ended November 2, 2001 as compared to $168,251 for the three months ended October 27, 2000. This decrease is due to the Company's adoption of SFAS 142, Goodwill and Other Intangible Assets. In June 2001, the FASB issued SFAS 141, "Business Combinations", which requires all business combinations initiated after June 20, 2001 to be accounted for under the purchase method. SFAS 141 also sets forth guidelines for applying the purchase method of accounting in the determination of intangible assets, including goodwill acquired in a business combination, and expands financial disclosures concerning business combinations consummated after June 30, 2001. The application of SFAS 141 did not affect any of our previously reported amounts included in goodwill or other intangible assets. Effective April 28, 2001, the Company early adopted SFAS 142, "Goodwill and Other Intangible Assets", which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under SFAS 142, all goodwill amortization ceased effective April 28, 2001. The Company identified reporting units based on the current reporting structure, assigned all goodwill to the reporting units, as well as other assets and liabilities, to the extent that they related to the reporting unit. The Company has completed the first step of the transitional goodwill impairment test by comparing the fair value of each reporting unit to its carrying value and have determined that no impairment exists at the effective date of the implementation of the new standard. Fair value was measured using a valuation by an independent third party as of April 28, 2001 which was based on the market multiple, comparable transactions and discounted cash flow methodologies. This valuation indicated an aggregate fair value of the reporting units slightly higher than recorded book value as of April 28, 2001. The Company believes the market capitalization is not representative of the fair value of the Company because the common stock of the Company is not actively traded. On an ongoing basis the Company will obtain an independent valuation and perform our annual goodwill test. Impairment indicators which may be considered include, but are not limited to, the following: . A significant adverse change on legal factors or in the business climate . Unanticipated competition . A significant decline in the operating performance . Adverse action or assessment by a regulator. The Company's operations have improved significantly for the months of October and November 2001. At least quarterly, management will evaluate to determine if an event has occurred that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company will, if appropriate, perform a goodwill impairment test between the annual dates. Impairment adjustments recognized after adoption, if any, generally are required to be recognized as operating expenses. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED The following financial information is presented as if the statement was adopted at the beginning of the fiscal year ended April 27, 2001:
Six Months Three Months October 27, October 27, 2000 2000 ---- ---- Reported net income (loss) $ 506,882 $ 237,135 Goodwill amortization 317,802 155,800 ------------ ------------ Adjusted net income (loss) $ 824,684 $ 392,937 ============ ============ Goodwill $ 12,440,851 $ 12,365,547 ============ ============ Basic income (loss) per share: Reported net income (loss) $ 0.21 $ 0.10 Goodwill amortization 0.13 0.06 ------------ ------------ Adjusted net income (loss) $ 0.34 $ 0.16 ============ ============ Reported diluted income (loss) per share: Reported net income (loss) $ 0.21 $ 0.10 Goodwill amortization 0.13 0.06 ------------ ------------ Adjusted net income (loss) $ 0.34 $ 0.16 ============ =============
The financial information for acquired intangible assets is as follows:
April 27, November 2, 2001 2001 ---- ---- Amortized intangible assets-non compete agreements: Original Cost $ 100,000 $ 400,000 Accumulated Amortization $ 39,583 $ 68,750
The non-compete intangible assets are amortized over their contractual life ranging from four to nine years. Amortization expense for the three and the six months ended November 2, 2001 was 14,585 and $29,168, respectively, and annual estimated amortization for the non-compete agreements are as follows: Estimated Amortization Expense ------------------------------ Fiscal 2002 $58,336 Fiscal 2003 $58,336 Fiscal 2004 $43,753 Fiscal 2005 $33,336 Fiscal 2006 $33,336 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED The changes in carrying amount of goodwill for the six months ended November 2, 2001 are as follows:
Total ----- Balance, April 27, 2001 $12,166,149 Goodwill acquired during the period 98,286 ----------- Balance, November 2, 2001 $12,264,435 ===========
Interest expense was $0.3 million for the three-month period ended November 2, 2001 as compared to $0.5 million for the three-month period ended October 27, 2000. This decrease is principally due to: (a) a decrease in the Company's effective interest rate in the current year and (b) a decrease in the borrowings under the Company's revolving credit facility with IBJ Whitehall Business Credit Corporation ("IBJ"). Income tax expense (benefit) was ($0.4) million benefit for the three-month period ended November 2, 2001 as compared to $0.3 million expense for the three-month period ended October 27, 2000. The effective income tax rate was 42% and 53% for the three-month periods ended November 2, 2001 and October 27, 2000, respectively. This effective rate is lower principally due to the decrease in non-deductible goodwill amortization resulting from the adoption of SFAS No. 142 for the fiscal year beginning April 28, 2001. For the six months ended November 2, 2001 and October 27, 2000 Revenues were $29.9 million for the six-month period ended November 2, 2001 as compared to $31.9 million for the six-month period ended October 27, 2000. This decrease of 6% is due to the: (a) economic downturn in the United States economy resulting in certain clients delaying project start dates which has delayed related revenue recognition, (b) impact of the September 11, 2001 terrorist act as the Company's work was virtually stopped for ten days which resulted in a revenue loss through inefficiency and loss of productivity of more than $750,000, and (c) lack of new projects of certain clients in markets affected by the nation's economic downturn, principally in the commercial segment. The firm returned to profitability in October. Management believes that clients may continue to delay project start dates through the remainder of fiscal year ended 2002. Direct costs, which include consultant costs and reimbursable project expenses, total $11.5 million, or 39% of revenues, for the six-month period ended November 2, 2001 as compared to $10.9 million, or 34% of revenues, for the six-month period ended October 27, 2000. This increase is due to an increased use of consultants to meet certain project requirements. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED Direct labor cost was $6.5 million, or 36% of net production income, for the six-month period ended November 2, 2001 as compared to $6.7 million, or 32% of net production income, for the six-month period ended October 27, 2000. This increase as a percentage of net production income is due to the: (a) over-utilization of personnel on projects, (b) tightening of project profit margins, (c) certain clients delaying project start dates, (d) lack of new projects of certain clients and the time required to adjust to these changes, and (e) increase in salary and salary related costs which has not been passed through to the clients in all cases. During the second quarter ended November 2, 2001, the management reduced salary cost in an effort to offset the economic downturn. The Company's Chief Operating Officer is continuing to work 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. As a result, the Company achieved profitable operations for the month of October 2001. Management believes for the last six months of fiscal year ending 2002, the financial statements will be positively impacted by this focus on operations as well as the labor savings which occurred during the second quarter ended November 2, 2001. Operating costs were $12.0 million, or 65% of net production income, for the six-month period ended November 2, 2001 as compared to $12.0 million, or 57% of net production income, for the six-month period ended October 27, 2000. This increase as a percentage of net production income is principally due to an increase in indirect labor due in part to the effects of September 11, 2001 and related fringe benefits, professional liability insurance, and rent and occupancy expenses. This increase as a percentage of net production income is partially offset by a decrease in travel expenses. Management plans to increase efforts to control operating costs over the last six months of fiscal year ending 2002. Amortization of intangible assets was $29,168 for the six months ended November 2, 2001 as compared to $330,302 for the six months ended October 27, 2000. This decrease is due to the Company's adoption of SFAS 142, Goodwill and Other Intangible Assets as discussed in the three months ended November 2, 2002 section beginning on page 16 in Management's Discussion and Analysis of Financial Condition and Results of Operations. Interest expense was $0.7 million for the six-month period ended November 2, 2001 as compared to $0.9 million for the six-month period ended October 27, 2000. This decrease is principally due to: (a) a decrease in the Company's effective interest rate in the current year and (b) a decrease in the borrowings under the Company's revolving credit facility with IBJ. Income tax expense (benefit) was ($0.4) million benefit for the six-month period ended November 2, 2001 as compared to $0.6 million expense for the six-month period ended October 27, 2000. The effective income tax rate was 41% and 53% for the six-month periods ended November 2, 2001 and October 27, 2000, respectively. This effective rate is lower principally due to the decrease in non-deductible goodwill amortization resulting from the adoption of SFAS No. 142 for the fiscal year beginning April 28, 2001. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has met working capital and capital expenditure needs through cash from operations and bank financing. At November 2, 2001, the Company's current assets of $22.9 million exceeded current liabilities of $19.3 million, resulting in net working capital of $3.7 million. During the six month period ended November 2, 2001, the Company's operating activities provided $2.3 million cash from operations. The Company used $0.4 million primarily for capital expenditures, and to a lesser extent, acquisition activities. The Company used cash of $0.5 million from financing activities primarily on borrowings under the Company's revolving credit facility with IBJ, which was partially offset by an increase in borrowings under the term loan agreement with IBJ. 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 27, 2001, the Company entered into a revolving credit, term loan and capital expenditure loan for a total of $20 million. Effective June 2001, the Company entered into an amendment to (a) reduce the maximum revolving advance amount; (b) cancel the capital expenditure loan commitment and (c) increase the unpaid principal of the term loan to repay amounts under the revolving credit facility, which was based on an evaluation of the Company's revolving advance, term loan and capital expenditure loan needs. The amendment is summarized as follows: a. Revolving credit--The maximum revolving advance amount is $12,500,000. At November 2, 2001, the Company had borrowings outstanding of $7.7 million. The amount available to borrow is calculated based on the aging of certain assets and generally, the Company borrows the maximum amount available under the terms of this agreement. b. Term loan--The unpaid principal balance was increased to $1.6 million. At November 2, 2001, the Company had borrowings outstanding of $1.2 million. c. Capital expenditure loan--The Capital Expenditure Loan commitment has been cancelled. Effective December 18, 2001, the Company entered into an amendment to its revolving credit, term loan and capital expenditure loan with IBJ Whitehall Business Credit Corporation ("IBJ"). The amendment is summarized as follows: a. Revolving credit-The maximum revolving advance amount is $10,500,000. b. Revolving credit-Waiver of the leverage and senior leverage financial convenants as of quarter ended November 2, 2001. c. Revolving credit-Modification of certain future financial convenants. Substantially all assets are pledged under this financing arrangement. This financing arrangement requires that certain financial requirements be maintained such as minimum net worth, minimum earnings before interest, taxes, depreciation and amortization, maximum leverage and senior leverage ratios, maximum fixed charge coverage and senior fixed charge coverage ratios and maximum capital expenditure commitments. All covenants are determined quarterly and the leverage and senior leverage covenants are based on a trailing four quarters ending on each determination date. Due to lower than anticipated cash flow during the first and second quarter of fiscal year ended May 3, 2002, the Company extended its current year payment obligations under certain note agreements with former acquired company shareholders (the subordinated notes payable) as discussed in Note 3 in Notes to Unaudited Condensed Consolidated Financial Statements. The Company has obtained approval from IBJ (as required by The Revolving Credit, Term Loan and Capital Expenditure Loan Agreement) for the modification of the repayment dates of the subordinated notes payable. 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED The Company believes that its revolving line of credit, anticipated funds from future operations coupled with the modification of repayment terms on certain notes payable discussed above will be sufficient to meet the Company's 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 growth strategy will be adversely affected. This discussion contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those forward-looking statements. Factors that may cause actual results to differ materially include the Company's ability to contract with architectural engineering and planning firms, the limited number of management services agreements with such firms, the ability to receive payments from the managed firms, dependence on key personnel, dependence on the managed firms, the risks inherent in the provision of professional services, competition, the uncertainties concerning additional financings by the Company and government regulation, as described in Exhibit 99.1 to this Form 10-Q. 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 period ended November 2, 2001 by approximately $41,000. The Company has no other material exposure to market risk sensitive instruments. PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds The Company's Revolving Credit, Term Loan, Capital Expenditure Loan, Guaranty and Security Agreement, as amended as of June 29, 2001, provide that the Company may not pay cash dividends on its common stock. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on September 18, 2001 for the purpose of electing two directors, approving an amendment to the 1998 Stock Option Plan, and approving an amendment to the Employee Stock Purchase Plan. 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. 21 PART II. OTHER INFORMATION-CONTINUED Item 4. Submission of Matters to a Vote of Security Holders -continued Proposal 1: Election of directors for term indicated: Year of Annual Meeting of Stockholders that Shares Voted Shares Name Term Expires "For" "Withheld" ---- ------------ ----- ---------- James E. Finley 2004 2,041,558 1,200 L. Fred Pounds 2004 2,041,558 1,200 The following directors terms of office continued after the meeting: Joseph M. Harris, Vernon B. Brannon and D. Shannon LeRoy. 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" ----- --------- ------------ 990,946 47,312 5,903 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" ----- --------- ------------ 991,183 48,075 4,903 Item 5. Other Information V. Reitzel Snider Named to HLM Design, Inc. Board of Directors: - --------------------------------------------------------------- On November 6, 2001, V. Reitzel Snider was named to the HLM Design, Inc. Board of Directors. He was elected to fill the vacancy created by the death of James E. Finley. Mr. Snider is President and Chief Financial Officer of First LandMark, U.S.A., Inc. and President and Chief Executive Officer of SYNCO, both of Charlotte, North Carolina. First LandMark or its subsidiary, SYNCO, acquire, develop, hold and manage and selectively sell investment real estate. Mr. Snider has an AB Degree in Economics from Davidson College. James B. Huff Resigns as Chief Financial Officer: - ------------------------------------------------- On December 4, 2001, James B. Huff resigned his position as Chief Financial Officer to pursue other interests within the Company. His position will be replaced by Vernon B. Brannon, Chief Operating Officer. Mr. Brannon was formerly the Chief Financial Officer prior to Mr. Huff joining the Company. 22 PART II. OTHER INFORMATION-CONTINUED Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description - ----------- ----------- 10.29.2 Second Amendment to Revolving Credit, Term Loan, Capital Expenditure Loan, Guaranty and Security Agreement. 99.1 Cautionary Statement under Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. (b) Reports on Form 8-K None. Items 1 and 3 are not applicable and have been omitted. 23 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 17, 2001 By: /s/ Joseph M. Harris ------------------ -------------------- Joseph M. Harris President, Chairman and Director Date: December 17, 2001 By: /s/ Vernon B. Brannon ----------------- --------------------- Vernon B. Brannon Senior Vice President, Chief Operating Officer and Chief Financial Officer 24 EX-10.29.2 3 dex10292.txt SECONDARY AMENDMENT EXHIBIT 10.29.2 SECOND AMENDMENT TO REVOLVING CREDIT, TERM LOAN, CAPITAL EXPENDITURE LOAN, GUARANTY AND SECURITY AGREEMENT Preamble. THIS SECOND AMENDMENT TO REVOLVING CREDIT, TERM LOAN, CAPITAL - -------- EXPENDITURE LOAN, GUARANTY AND SECURITY AGREEMENT (hereinafter, together with all schedules and exhibits hereto, and any supplements, additions, modifications or amendments thereto made from time to time called the "Second Amendment"), ------------------ dated as of December 18, 2001 (the "Second Amendment Date"), is made by and ----------------------- among HLM DESIGN, INC., a Delaware corporation, as borrower ("Borrower"); all ---------- those parties identified in the Credit Agreement (defined below) as the "Affiliate Guarantors" (the "Affiliate Guarantors"); IBJ WHITEHALL BUSINESS CREDIT CORPORATION, a New York corporation (hereinafter, together with its successors and permitted assigns, called "IBJW"), as sole Lender thereunder and ------ as agent for all Lenders from time to time party thereto and any Issuer (IBJW, in such capacity, the "Agent"). ------- The Borrower, and the Affiliate Guarantors (collectively, the "Obligors"), and IBJW (the foregoing parties herein sometimes collectively - ---------- called the "Parties" and individually called a "Party") are parties to a certain --------- ------- Revolving Credit, Term Loan, Capital Expenditure Loan, Guaranty and Security Agreement, dated as of February 7, 2000 (which is, as amended pursuant to this Second Amendment, called herein the "Credit Agreement"), pursuant to which, ------------------ among other things, IBJW, as sole Lender, agreed to extend credit and other financial accommodations to the Borrower. The Parties have agreed to modify and amend the Credit Agreement in the manner, and subject to the terms and conditions, set forth hereinbelow in order to acknowledge the existence of certain Events of Default; evidence the waiver of such Events of Default; and further evidence the modification of certain of the covenants which gave rise to the Events of Default. NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, the Parties, each intending to be legally bound, hereby agree as follows: SECTION 1. Definitions. Capitalized terms used in this Second Amendment and ----------- not defined herein are defined in the Credit Agreement. SECTION 2. Events of Default and Waiver. As of the date hereof, certain ---------------------------- Events of Default exist (the "Current Defaults"), namely, in respect of ---------------- Borrower's continuing compliance with Sections 6.6 (Leverage Ratio) and 6.7 (Senior Leverage Ratio) for the fiscal quarter ended November 2, 2001 (the "Second Fiscal Quarter"). Agent hereby waives the Current Defaults. SECTION 3. Amendments. The Credit Agreement shall be amended as follows: ---------- (a) Change to Maximum Revolving Advance Amount. The existing, revised ------------------------------------------ definition of "Maximum Revolving Advance Amount," appearing in Section 1.1 of the Credit Agreement, shall be deleted and the following revised definition shall be substituted in its place: "Maximum Revolving Advance Amount" shall mean Ten Million Five Hundred Thousand Dollars ($10,500,000). To the extent outstanding Revolving Advances on the Amendment Date when aggregated with outstanding Letters of Credit exceed $10,500,000, Borrower shall reduce outstanding Revolving Advances, effective on the Amendment Date, so as to reduce such excess to zero (0). Revolving Advances shall continue to be evidenced by the existing Revolving Credit Note, executed on the Closing Date, which shall be deemed amended accordingly to reflect the foregoing terms. (b) Change to Operating Cash Flow Definition. Effective retroactive to ---------------------------------------- the first day of Borrower's fiscal quarter beginning November 3, 2001, the existing definition of "Operating Cash Flow" appearing in Section 1.1 of the Credit Agreement, shall be deleted and the following revised definition thereof shall be substituted in its place: "Operating Cash Flow" of Borrower on a consolidated ------------------- basis for any period, shall mean the sum of EBITDA minus capital expenditures (net of Indebtedness incurred to finance such expenditures from third parties, and not hereunder in an amount for such period not to exceed the amount permitted under Section 6.8). The provisions above appearing in bold type represent the amendments to such definition. (c) Change to Leverage Ratio. Existing Section 6.6 of the Credit ------------------------ Agreement is deleted and the following revised Section 6.6 is substituted in its place. 6.6 Leverage Ratio. Maintain as of the end of each -------------- fiscal quarter of the Borrowers, a Leverage Ratio, determined for the four (4) consecutive fiscal quarters ending on each such fiscal quarter end date, not to exceed: (i) 4.30:1, for the fiscal quarter of Borrowers ending closest to January 31, 2002; (ii) 4.00:1, for the fiscal quarter of Borrowers ending closest to April 30, 2002; and (iii) 3.50:1, for each succeeding fiscal quarter of Borrowers. (d) Change to Senior Leverage Ratio. Existing Section 6.7 of the Credit ------------------------------- Agreement is deleted and the following revised Section 6.7 is substituted in its place. 6.7 Senior Leverage Ratio. Maintain as of the end of --------------------- each fiscal quarter of the Borrowers, a Senior Leverage Ratio, determined for the four (4) consecutive fiscal quarters ending on each such fiscal quarter end date, not to exceed: (i) 3.25:1, for the fiscal quarter of Borrowers ending closest to January 31, 2002; (ii) 3.10:1, for the fiscal quarter of Borrowers ending closest to April 30, 2002; and (iii) 2.50:1, for each succeeding fiscal quarter of Borrowers. (e) Change to Fixed Charge Coverage Ratio. Existing Section 6.9 of the ------------------------------------- Credit Agreement is deleted and the following revised Section 6.9 is substituted in its place. -2- 6.9 Fixed Charge Coverage Ratio. Maintain as of the --------------------------- end of each fiscal quarter of the Borrowers, a Fixed Charge Coverage Ratio, determined for the four (4) consecutive fiscal quarters ending on each such date, of not less than: (i) 1.20:1, through the fiscal quarter ending closest to October 31, 2001; (ii) .80:1, for the fiscal quarters of Borrowers ending closest to January 31, 2002 and April 30, 2002, respectively; and (iii) 1.20:1, for each succeeding fiscal quarter of Borrowers. (f) Change to Senior Fixed Charge Coverage Ratio. Existing Section 6.10 -------------------------------------------- of the Credit Agreement is deleted and the following revised Section 6.10 is substituted in its place. 6.10 Senior Fixed Charge Coverage Ratio. Maintain as ---------------------------------- of the end of each fiscal quarter of Borrowers, a Senior Fixed Charge Coverage Ratio, determined for the four (4) consecutive fiscal quarters ending on each such date, of not less than: (i) 1.40:1, through the fiscal quarter ending closest to October 31, 2001; (ii) 1.30:1, for the fiscal quarter of Borrower ending closest to January 31, 2002; (iii) 1.10:1, for the fiscal quarter of Borrowers ending closest to April 30, 2002; and (iv) 1.40:1, for each succeeding fiscal quarter of Borrowers. (g) New Financial Covenant. There shall be deemed added to the Credit ---------------------- Agreement a new Section 6.10A, to be inserted in the Credit Agreement immediately after existing Section 6.1 thereof, to read as follows: 6.10A EBITDA. During the period from the fiscal month of Borrower ------ ending closest to October 31, 2001 through the fiscal month of Borrower ending closest to April 30, 2002, EBITDA, determined on a cumulative basis shall be at least the following amounts:
----------------------------------------- ----------------------------------------- Fiscal Month Ending Closest to: EBITDA (cumulative from fiscal month ending closest to October 31, 2001) ----------------------------------------- ----------------------------------------- October 31, 2001 $225,000 ----------------------------------------- ----------------------------------------- November 30, 2001 $500,000 ----------------------------------------- ----------------------------------------- December 31, 2001 $800,000 ----------------------------------------- ----------------------------------------- January 31, 2002 $1,100,000 ----------------------------------------- ----------------------------------------- February 28, 2002 $1,450,000 ----------------------------------------- ----------------------------------------- March 31, 2002 $1,800,000 ----------------------------------------- -----------------------------------------
-3-
----------------------------------------- ----------------------------------------- April 30, 2002 $2,125,000 ----------------------------------------- -----------------------------------------
(h) New Method of Determining Financial Covenants. Beginning with the --------------------------------------------- fiscal month of Borrower ending closest to October 31, 2002, and continuing at all times thereafter, all financial covenants set forth in the Credit Agreement, including those set forth in Sections 6.5 through 6.10A, inclusive, shall be computed on a consolidated basis for Borrower and its consolidated Domestic Subsidiaries only, and all financial statements of Borrower and its Subsidiaries required to be reported under the Credit Agreement henceforth shall be reported on consolidated (and consolidating) basis for both (a) Borrower and its Domestic Subsidiaries only, and (b) Borrower and all of its Subsidiaries, including Domestic Subsidiaries and Foreign subsidiaries. SECTION 4. Waiver of Claims. As a specific inducement to the other Parties ---------------- without which the Obligors acknowledge the other Parties would not enter into this Second Amendment, the Borrowers hereby waive any and all claims that it may have against any other Party, as of the date hereof, arising out of or relating to the Credit Agreement or any Other Document whether sounding in contract, tort, or any other basis. (a) Conditions of Effectiveness. This Second Amendment shall become --------------------------- effective December 17, 2001. Borrower shall pay immediately to IBJ; a fully earned, non-refundable amendment fee equal to $25,000. SECTION 5. Miscellaneous. ------------- 5.1 Reference to Credit Agreement. Upon the effectiveness of this ----------------------------- Second Amendment, each reference in the Credit Agreement to "this Credit Agreement" and each reference in the Other Documents to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. 5.2 Effect on Other Documents. Except as specifically amended above, ------------------------- all terms of the Credit Agreement and all Other Documents shall remain in full force and effect and are hereby ratified and confirmed. 5.3 No Waiver. The execution, delivery and effectiveness of this Second --------- Amendment shall not operate as a waiver of any right, power, or remedy of Lenders or the Agents under any of the Other Documents, nor constitute a waiver of any provision of any of the Other Documents. 5.4 Costs, Expenses and Taxes. The Borrowers agrees to pay on demand ------------------------- all costs and expenses of IBJW in connection with the preparation, reproduction, execution, and delivery of this Second Amendment and the other instruments and documents to be delivered hereunder, including the reasonable fees and out-of-pocket expenses of counsel for IBJW with respect hereto. 5.5 No Novation. Nothing contained herein intended, or shall be ----------- construed, to constitute a novation to the Credit Agreement or any Other Document. -4- 5.6 Governing Law. This Second Amendment shall be governed by and ------------- construed in accordance with the laws of the State of New York, without giving affect to conflict of law provisions. 5.7 Counterparts. This Second Amendment may be executed in ------------ counterparts. Each counterpart shall bind the Party or Parties executing same. All counterparts, taken together, shall constitute one and the same agreement. [SIGNATURES ON FOLLOWING PAGE] IN WITNESS WHEREOF, the Parties have caused this Second Amendment to be duly executed, under seal, by their respective authorized officers as of the day and year first above written. IBJ WHITEHALL BUSINESS CREDIT CORPORATION, as Lender and as Agent (SEAL) By: /s/ Joseph J. Zautra ------------------------ Name: Joseph J. Zautra ---------------- Title: Senior Vice President --------------------- HLM DESIGN, INC., as Borrower and Borrowing Agent By: /s/ Joseph M. Harris -------------------- Name: /s/ Joseph M. Harris --------------------- Title: President, Chief Executive Officer ---------------------------------- JPJ ARCHITECTS, INC., as Affiliate Guarantor By: /s/ Joseph M. Harris -------------------- Name: /s/ Joseph M. Harris --------------------- Title: President, Chief Executive Officer ---------------------------------- HLM DESIGN USA, INC., as Affiliate Guarantor By: /s/ Joseph M. Harris -------------------- Name: /s/ Joseph M. Harris --------------------- Title: President, Chief Executive Officer -5- HLM DESIGN ARCHITECTURE ENGINEERING AND PLANNING, P.C., as Affiliate Guarantor By: /s/ Joseph M. Harris -------------------- Name: /s/ Joseph M. Harris --------------------- Title: President, Chief Executive Officer ---------------------------------- HLM DESIGN OF NORTHAMERICA, INC., as Affiliate Guarantor By: /s/ Joseph M. Harris -------------------- Name: /s/ Joseph M. Harris --------------------- Title: President, Chief Executive Officer ---------------------------------- SOTA SOFTWARE SYSTEMS, INC., as Affiliate Guarantor By: /s/ Joseph M. Harris -------------------- Name: /s/ Joseph M. Harris --------------------- Title: President, Chief Executive Officer ---------------------------------- -6- EX-99.1 4 dex991.txt CAUTIONARY STATEMENT EXHIBIT 99.1 SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Private Securities Litigation Reform Act of 1995 (the "Act") provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies, so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. HLM Design, Inc. (the "Company") desires to take advantage of the "safe harbor" provisions of the Act. Certain information, particularly information regarding future economic performance, finances and management's plans and objectives, contained in this report is forward-looking. In some cases information regarding certain important factors that could cause actual results to differ materially from any such forward-looking statement appear together with such statement. Also, the following factors, in addition to other possible factors not listed, could affect the Company's actual results and cause such results to differ materially from those expressed in forward-looking statements: INNOVATIVE STRATEGY The Company's operating and growth strategies are predicated upon its ability to contract with architectural, engineering and planning firms("AEP Firm's") operations and to generate profits from those firms. The process of identifying suitable AEP Firms candidates for entering into Management and Services Agreements and proposing, negotiating and implementing economically feasible affiliations with AEP Firms is lengthy and complex. Such strategies require intense management direction in a dynamic marketplace that is increasingly subject to cost containment and other competitive pressures. There can be no assurance that these strategies will be successful or that modifications to the Company's strategies will not be required. MANAGEMENT AND SERVICES AGREEMENTS WITH A LIMITED NUMBER OF FIRMS The Company's revenues are derived solely from its contractual relationships with the Managed Firms (for whom, as indicated below, the Company will also provide required financing). Currently, the Company has Management and Services Agreements with three subsidiaries (JPJ, GAIH and BL&P) and three other firms. All of these other firms are related to each other and to the Company, by common principal stockholders, Joseph M. Harris and Vernon B. Brannon. There can be no assurance that the Company will be able to successfully enter into Management and Services Agreements with additional firms. UNCERTAINTIES CONCERNING ABILITY TO RECEIVE PAYMENTS FROM MANAGED FIRMS The Company earns, for services provided to the Managed Firms, 99% of the net income of the Managed Firms as determined in accordance with generally accepted accounting principles. However, for cash management purposes, the Company is to receive 99% of the positive cash flows of the Managed Firms (calculated for any period as the change in the cash balances from the beginning of the period to the end of the period). The Company's ability actually to receive payments in respect thereof during any particular period will be subject to the cash requirements of the Managed Firms. To the extent the cash requirements of the Managed Firms continue to exceed 1% of positive cash flows, the Company will be unable to receive payments against such receivable and such payments will continue to be delayed. The Company's ability to pay dividends on the Common Stock will depend on the ability of the Company to collect such receivables. DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT AND PERSONNEL RESOURCES The Company's success depends to a significant degree upon the continued contributions of its senior management team and professional personnel. The loss of the services of one or more of these key employees could have a material adverse effect on the Company. The Company carries key employee insurance on each of Joseph M. Harris and Vernon B. Brannon and has employment and/or noncompetition agreements with Messrs. Harris and Brannon as well as with several (although not all) of its senior professional staff. There can be no assurance, however, that a court would enforce the noncompetition agreements as currently in effect. If courts refuse to enforce the noncompetition agreements of the Company or the Managed Firms, such refusals could have a material adverse effect on the Company. In addition, as the Company expands it will likely be dependent on the senior professional staff of any firm with which the Company enters into a Management and Services Agreement. The loss of the services of key employees could have a material adverse effect on the Company. In addition, the lack of qualified professional staff or employees of the Company's potential candidates for Management and Services Agreements may limit the Company's ability to consummate future agreements. DEPENDENCE ON MANAGED FIRMS The Company's revenues depend on fees and revenues generated by various AEP Firms managed by the Company. Any material loss of revenue by such firms, whether as a result of the loss of professionals or otherwise, could have a material adverse effect on the Company. The Company itself is not engaged in the practice of architecture, engineering or planning and, as a result, does not control (i) the practice of architecture, engineering or planning by professionals or (ii) the compliance with certain regulatory requirements directly applicable to the Managed Firms. 2 RISKS INHERENT IN PROVISION OF SERVICES The Managed Firms and certain employees of the Managed Firms are involved in the delivery of services to the public and, therefore, are exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in substantial damage awards to the claimants that may exceed the limits of any applicable insurance coverage. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. Although the Company is indemnified under its Management and Services Agreements for claims against the Managed Firms and their employees, the Company maintains liability insurance for itself and negotiates liability insurance for its Managed Firms and the professionals employed by its Managed Firms. Successful malpractice claims asserted against the Managed Firms, their employees or the Company could have an adverse effect on the Company's profitability. COMPETITION The business of providing architectural, engineering and planning related services is highly competitive. The Company's competition includes many other firms, including large national firms as well as regional or small local firms. Several companies that have established operating histories and significantly greater resources than the Company provide some of the services provided by the Managed Firms. In addition, there are other companies with substantial resources that may in the future decide to engage in activities similar to those in which the Company engages. UNCERTAINTIES CONCERNING ADDITIONAL FINANCINGS The Company's operating and growth strategies require substantial capital resources, particularly since the Company, as the management company, will be responsible for the financing of working capital growth, capital growth and other cash needs of the Managed Firms. These requirements will result in the Company incurring long-term and short-term indebtedness and may result in the public or private issuance, from time to time, of additional debt or equity securities, including the issuance of such securities in connection with the execution of Management and Services Agreements. There can be no assurance that any such financing will be obtainable on terms acceptable to the Company. GOVERNMENT REGULATION The architectural and engineering industries are regulated at the state level. The Company believes its operations are in material compliance with applicable law. Nevertheless, because of the unique structure of the relationships between the Company and its Managed Firms, many aspects of these relationships have not been the subject of prior regulatory interpretation. The Company has not discussed its structure with or received approvals from any regulatory authorities, and is unaware of its business being reviewed by any such regulatory authorities. There can be no assurance that a review of the Company's business by applicable regulatory authorities will not result in determinations that may adversely affect the operations of the Company or prevent its continued 3 operation. There also can be no assurance that the regulatory environment will not change so as to restrict the Company's existing operations or limit the expansion of the Company's business. Expansion of the operations of the Company to certain jurisdictions could require structural and organizational modifications of the Company's relationships with its Managed Firms. Consequently, if the Company is unable or unwilling to undertake such modifications, it may be limited in its ability to expand into certain jurisdictions. As of the date hereof, the Company has not determined which jurisdictions would require structural or organizational modifications of the Company's relationships with the Managed Firms. Although the Company believes its operations are in material compliance with existing applicable law, there can be no assurance that the Company's existing Management and Services Agreements could not be successfully challenged as, for example, constituting the unlicensed practice of architecture, or that the enforceability of the provisions thereof, including non-disclosure agreements therein, will not be limited. 4 -----END PRIVACY-ENHANCED MESSAGE-----