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 August 3, 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 September 4, 2001 ------------------- -------------------------------- Common stock, par value $.001 per share 2,206,589 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 August 3, 2001 3 Condensed Consolidated Statements of Income - Three Month Periods Ended July 28, 2000 and August 3, 2001 5 Condensed Consolidated Statement of Stockholders' Equity - Three Month Period Ended August 3, 2001 6 Condensed Consolidated Statements of Cash Flows - Three Month Periods Ended July 28, 2000 and August 3, 2001 7 Notes to Unaudited Condensed Consolidated Financial Statements 8 ITEM 2. Management's Discussion and Analysis of Financial Condition And Results of Operations 13 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 SUBSIDIARIES AND AFFILIATES CONDENSED CONSOLIDATED BALANCE SHEETS
April 27, August 3, 2001 2001 ----- ---- (Unaudited) ASSETS: Current Assets: Cash $ 243,148 $ 212,845 Trade and other receivables, less allowance for doubtful accounts at April 27, 2001 and August 3, 2001 of $726,473 and $619,407, respectively 11,977,393 12,495,624 Costs and estimated earnings in excess of billings on uncompleted projects, net 9,767,618 9,407,346 Prepaid expenses and other 1,423,399 1,091,998 ------------------------------ Total Current Assets 23,411,558 23,207,813 ------------------------------ Other Assets: Goodwill, net 12,166,149 12,190,325 Other 1,080,202 1,571,244 ------------------------------ Total Other Assets 13,246,351 13,761,569 ------------------------------ Property and Equipment: Leasehold improvements 1,925,075 1,957,848 Furniture and fixtures 4,523,544 4,691,275 ------------------------------ Property and equipment, at cost 6,448,619 6,649,123 Less accumulated depreciation 4,362,817 4,703,424 ------------------------------ Property and equipment, net 2,085,802 1,945,699 ------------------------------ TOTAL ASSETS $ 38,743,711 $ 38,915,081 ==============================
See notes to unaudited condensed consolidated financial statements. 3 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONDENSED CONSOLIDATED BALANCE SHEETS
April 27, August 3, 2001 2001 ----- ---- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY: Current Liabilities: Current maturities of long-term debt and capital lease obligations $ 1,848,248 $ 2,138,452 Accounts payable 8,864,277 8,948,896 Billings in excess of costs and estimated earnings on uncompleted projects 1,646,954 2,076,499 Accrued expenses and other 4,883,141 4,767,609 ------------------------------- Total Current Liabilities 17,242,620 17,931,456 ------------------------------- Long-term debt and other 10,730,764 9,939,715 ------------------------------- TOTAL LIABILITIES 27,973,384 27,871,171 ------------------------------- 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 2,523,810 at April 27, 2001 and August 3, 2001, respectively (includes 227,221 and 317,221 to be issued on a delayed delivery schedule at April 27, 2001 and August 3, 2001, respectively) 2,427 2,524 Additional paid in capital 7,744,023 7,968,966 Retained earnings 3,066,074 3,115,668 Accumulated other comprehensive loss (42,197) (43,248) ------------------------------- Total stockholders' equity 10,770,327 11,043,910 ------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 38,743,711 $ 38,915,081 ===============================
See notes to unaudited condensed consolidated financial statements. 4 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONDENDSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Three Months Months Ended Ended July 28, August 3, 2000 2001 ---- ---- REVENUES: Fee Income $ 14,779,823 $ 14,357,612 Reimbursable Income 1,090,853 1,270,187 ----------------------------- Total Revenues 15,870,676 15,627,799 CONSULTANT EXPENSE 4,515,618 4,592,773 PROJECT EXPENSES: Direct Expenses 242,867 256,643 Reimbursable expenses 559,891 649,670 ----------------------------- Total project expenses 802,758 906,313 ----------------------------- NET PRODUCTION INCOME 10,552,300 10,128,713 DIRECT LABOR 3,277,698 3,504,047 INDIRECT EXPENSES 6,322,161 6,216,215 ----------------------------- OPERATING INCOME 952,441 408,451 INTEREST EXPENSE 448,927 338,387 ----------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 503,514 70,064 INCOME TAX EXPENSE 266,377 37,300 ----------------------------- INCOME BEFORE MINORITY INTEREST 237,137 32,764 ----------------------------- MINORITY INTEREST IN LOSS - (16,830) ----------------------------- NET INCOME $ 237,137 $ 49,594 ============================= NET INCOME PER SHARE Basic $ 0.10 $ 0.02 ============================= NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Basic 2,411,220 2,517,165 ============================= NET INCOME PER SHARE Diluted $ 0.10 $ 0.02 ============================= NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA Diluted 2,417,115 2,517,165 ============================= See notes to unaudited condensed consolidated financial statements. 5 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Accumulated Common Stock Additional Other Total ------------ Paid-In Retained Comprehensive Stockholders' Shares Amount Capital Earnings Loss Equity ------ ------ ------- -------- ---- ------ Balance, April 27, 2001 2,426,330 $ 2,427 $7,744,023 $ 3,066,074 $ (42,197) $10,770,327 Issuance of common stock for purchase of business 90,000 90 211,440 211,530 Issuance of common stock 7,480 7 13,503 13,510 Foreign currency translation (1,051) (1,051) adjustment Net income 49,594 49,594 ------------------------------------------------------------------------------------------- Balance, August 3, 2001 2,523,810 $ 2,524 $7,968,966 $ 3,115,668 $ (43,248) $11,043,910 ===========================================================================================
See notes to unaudited condensed consolidated financial statements. 6
HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Three Months Months Ended Ended July 28, August 3, 2000 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 237,137 $ 49,594 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 240,144 241,591 Amortization of intangible assets 162,050 14,583 Amortization of deferred loan fees 52,117 49,934 Changes in assets and liabilities, net of effects from purchase of acquired companies: Decrease (increase) in trade and other accounts receivable 2,897,512 (489,229) Net (increase) decrease in costs and estimated earnings in excess of billings on uncompleted projects (2,317,609) 789,817 Decrease in prepaid expenses and other assets 107,161 398,077 Increase in accounts payable 682,436 48,753 Increase (decrease) in accrued expenses and other 144,211 (403,026) -------------------------------------- Net cash provided by operating activities 2,205,159 700,094 -------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment (251,516) (101,488) Payment for acquisition activities and purchase of busines, net of cash acquired (2,135,394) (141,576) -------------------------------------- Net cash used in investing activities (2,386,910) (243,064) -------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on long-term borrowings (145,126) (179,952) Net borrowings on revolving credit facility 202,584 (753,236) Borrowings on long-term debt - 432,345 Proceeds from issuance of common stock under the Employee Stock Purchase Plan 12,454 13,510 -------------------------------------- Net cash provided by (used in) financing activities 69,912 (487,333) -------------------------------------- DECREASE IN CASH (111,839) (30,303) CASH BALANCE: Beginning of period 285,616 243,148 -------------------------------------- End of period $ 173,777 $ 212,845 ====================================== SUPPLEMENTAL DISCLOSURES: Interest paid $ 403,468 $ 229,657 Income tax payments (refunds) $ 118,020 $ (29,702) 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
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 August 3, 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 month periods ended July 28, 2000 and August 3, 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 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 Statement of Financial Accounting Standards ("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 July 2001, the FASB issued two new statements, SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001. Using the pooling of interest method will be prohibited. SFAS No. 142 changes the accounting for goodwill and intangibles assets with indefinite lives from an amortization method to an impairment approach. Other intangible assets will continue to be amortized over their estimated useful lives. Amortization of goodwill, including goodwill recorded in prior business combinations, will cease prospectively upon the adoption of the standard, which the Company adopted for the fiscal year beginning April 28, 2001. The Company will complete its initial assessment of the impairment using the requirements of SFAS No. 142 by the end of the second quarter of fiscal year ended May 3, 2002. However, management does not believe that a material adjustment will be necessary upon completion of this initial assessment. The information presented below could be adjusted based on the results of this initial assessment. The following financial information is presented as if the statement was adopted at the beginning of the quarter ended July 28, 2000: July 28, August 3, 2000 2001 ----------- ----------- Reported net income $ 237,137 $ 49,594 Goodwill amortization 155,800 - ----------- ----------- Adjusted net income $ 392,937 $ 49,594 =========== =========== Goodwill $12,365,547 $12,190,325 =========== =========== Basic income per share: Reported net income $ 0.10 $ 0.02 Goodwill amortization 0.06 - ----------- ----------- Adjusted net income $ 0.16 $ 0.02 =========== =========== Reported diluted income per share: Reported net income $ 0.10 $ 0.02 Goodwill amortization 0.06 - ----------- ----------- Adjusted net income $ 0.16 $ 0.02 =========== =========== 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 financial information for acquired intangible assets is as follows: April 27, August 3, 2001 2001 ---- ---- Amortized intangible assets-non compete agreements: Original Cost $100,000 $400,000 Accumulated Amortization $ 39,583 $ 54,167 Amortization expense for the quarter ended August 3, 2001 was $14,583 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 The changes in carrying amount of goodwill for the quarter ended August 3, 2001 by operating segment are as follows: United United States Kingdom Total ------ ------- ----- Balance, April 27, 2001 $11,102,300 $1,063,849 $12,166,149 Adjustments: Goodwill acquired during the quarter 24,176 - 24,176 ----------- ---------- ----------- Balance, August 3, 2001 $11,126,476 $1,063,849 $12,190,325 =========== ========== =========== 2. CONTRACTS IN PROGRESS Information relative to contracts in progress is as follows: April 27, August 3, 2001 2001 ---- ---- Costs incurred on uncompleted projects (excluding overhead) $ 90,872,392 $ 97,185,659 Estimated earnings thereon 77,505,622 82,213,064 ------------ ------------ Total 168,378,014 179,398,723 Less billings to date 160,257,350 172,067,876 ------------ ------------ Net underbillings $ 8,120,664 $ 7,330,847 ============ ============ 10 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2. CONTRACTS IN PROGRESS-continued Net underbillings are included in the accompanying balance sheets as follows: April 27, August 3, 2001 2001 ---- ---- Costs and estimated earnings in excess of billings On uncompleted projects $ 9,767,618 $ 9,407,346 Billings in excess of costs and estimated earnings On uncompleted projects (1,646,954) (2,076,499) ----------- ----------- Net underbillings $ 8,120,664 $ 7,330,847 =========== =========== 3. FINANCING ARRANGEMENTS The maximum revolving advance amount was changed during the quarter ended August 3, 2001 to $12,500,000. The amount available to borrow is calculated based on the aging of certain assets. As of August 3, 2001 the Company has borrowings outstanding of $7,437,795. 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 August 3, 2001, the Company was in compliance with these financial covenants. Due to lower than anticipated cash flow for the quarter ended August 3, 2001, the Company is negotiating its obligations under certain note agreements with former acquired company shareholders (the subordinated notes payable). The Company is in discussion with these note holders to modify the repayment terms to later dates. The Company has obtained approval from IBJ (as required by The Revolving Credit, Term Loan and Capital Expenditure Loan Agreement) to negotiate the anticipated modification of the repayment dates of the subordinated notes payable. The Company anticipates a favorable outcome from the above negotiations by the end of the second quarter of fiscal year ended May 3, 2002. 4. STOCKHOLDERS' EQUITY In June 2001 7,480 shares of common stock were issued under the HLM Design, Inc. Employee Stock Purchase Plan. 11 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED) HLM Design's condensed unconsolidated balance sheet and statement of income as of and for the three month period ended August 3, 2001 are as follows: Balance Sheet Current assets $18,398,457 Non-current assets 13,527,687 ----------- Total assets $31,926,144 =========== Current liabilities 12,351,243 Non-current liabilities 8,530,391 ----------- Total liabilities 20,881,634 Total stockholders' equity 11,044,510 ----------- Total liabilities and stockholders' equity $31,926,144 =========== Statement of Income Equity in earnings of affiliates $ 404,366 Net interest, income tax and other expense 354,772 ----------- Net income $ 49,594 =========== 6. SEGMENT INFORMATION The Company's operations are divided into operating segments based on geography. The Company has aggregated the operations of the Managed Firms located in the United States and the United Kingdom. July 28, 2000 August 3, 2001 ------------- -------------- Revenue Assets Revenue Assets United States $15,191,362 $36,548,208 $14,868,290 $36,407,170 United Kingdom 679,314 2,195,503 759,509 2,507,911 ----------- ----------- ----------- ----------- $15,870,676 $38,743,711 $15,627,799 $38,915,081 =========== =========== =========== =========== 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the financial statements and related notes thereto included elsewhere in this report. RESULTS OF OPERATIONS Three Months Three Months Ended Ended July 28, August 3, 2000 2001 ---- ---- Revenues $15,870,676 $15,627,799 Consultant and project expenses 5,318,376 5,499,086 ----------- ----------- Net production income 10,552,300 10,128,713 ----------- ----------- Direct labor 3,277,698 3,504,047 Operating costs 6,160,111 6,201,632 Amortization of intangible assets 162,050 14,583 ----------- ----------- Total costs and expenses 9,599,859 9,720,262 ----------- ----------- Operating income 952,441 408,451 Interest expense, net 448,927 338,387 ----------- ----------- Income before income taxes and minority interest 503,514 70,064 Income tax expense 266,377 37,300 ----------- ----------- Income before minority interest 237,137 32,764 Minority interest in loss - (16,830) ----------- ----------- Net income $ 237,137 $ 49,594 =========== =========== 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED RESULTS OF OPERATIONS For the three months ended August 3, 2001 and July 28, 2000 Revenues were $15.6 million for the three-month period ended August 3, 2001as compared to $15.9 million for the three-month period ended July 28, 2000. This decrease of 2% is due to a decline in the volume of architecture, planning and engineering services principally attributable to certain clients delaying project start dates which will delay related revenue recognition to future periods. Management believes that this trend may continue through the remainder of fiscal year ended 2002. Direct costs, which include consultant costs and reimbursable project expenses, total $5.5 million, or 35% of revenues, for the three-month period ended August 3, 2001 as compared to $5.3 million, or 34% of revenues, for the three-month period ended July 28, 2000. This increase is due to an increased use of consultants to meet project requirements. Direct labor cost was $3.5 million, or 35% of net production income, for the three-month period ended August 3, 2001 as compared to $3.3 million, or 31% of net production income, for the three-month period ended July 28, 2000. This increase as a percentage of net production income is due to a continued reduction in certain higher margin projects and, to a lesser extent, an increase in salary and salary related costs which has not been passed through to the Managed Firm's clients in all cases. 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 fiscal year ending 2002, the financial statements will be positively impacted by this focus on operations. Operating costs were $6.2 million, or 61% of net production income, for the three-month period ended August 3, 2001 as compared to $6.2 million, or 58% of net production income, for the three-month period ended July 28, 2000. This increase as a percentage of net production income is principally due to an increase in indirect labor 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 office expenses, travel expenses, and education and seminars. Amortization of intangible assets was $14,583 for the three-months ended August 3, 2001 as compared to $162,050 for the three-months ended July 28, 2000. This decrease is due to the Company's adoption of SFAS 142, Goodwill and Other Intangible Assets. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment approach. As a result, amortization of goodwill, including goodwill recorded in prior business combinations, has ceased for the beginning of the fiscal year April 28, 2001. At July 28, 2000, net income would be $392,937 if the statement had been adopted at the beginning of the period. . The Company has not completed its evaluation of the effect of the impairment, however, management does not believe that a material adjustment will be necessary. Interest expense was $0.3 million for the three-month period ended August 3, 2001 as compared to $0.4 million for the three-month period ended July 28, 2000. This decrease is principally due to: (i) a decrease in the Company's effective interest rate in the current year and (ii) a decrease in the borrowings under the Company's revolving credit facility with IBJ Whitehall Business Credit Corporation ("IBJ"). 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED Income tax expense was $37,300 for the three-month period ended August 3, 2001 as compared to $0.3 million for the three-month period ended July 28, 2000. The effective income tax rate was 53% for both the three month periods ended August 3, 2001 and July 28, 2000, respectively. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has met working capital and capital expenditure needs through cash from operations and bank financing. At August 3, 2001, the Company's current assets of $23.2 million exceeded current liabilities of $17.9 million, resulting in net working capital of $5.3 million. During the three- month period ended August 3, 2001, the Company's operating activities provided $0.4 million cash from operations before working capital changes which provided and additional $0.3 million. The Company used $0.2 million primarily for acquisition activities , and to a lesser extent, capital expenditures. The Company used cash of $0.5 million from financing activities primarily on borrowings under the Company's revolving credit facility with IBJ Whitehall Business Credit Corporation ("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 August 3, 2001, the Company had borrowings outstanding of $7.4 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 August 3, 2001, the Company had borrowings outstanding of $1.4 million. c. Capital expenditure loan--The Capital Expenditure Loan commitment has been cancelled. 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 August 3, 2001, the Company was in compliance with these financial covenants. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CONTINUED Due to lower than anticipated cash flow for the quarter ended August 3, 2001, the Company is negotiating its obligations under certain note agreements with former acquired company shareholders (the subordinated notes payable). The Company is in discussion with these note holders to modify the repayment terms to later dates. The Company has obtained approval from IBJ (as required by The Revolving Credit, Term Loan and Capital Expenditure Loan Agreement) to negotiate the anticipated modification of the repayment dates of the subordinated notes payable. The Company anticipates a favorable outcome from the above negotiations by the end of the second quarter of fiscal year ended May 3, 2002. The Company believes that its revolving line of credit, anticipated funds from future operations coupled with the anticipated 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. 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 quarter ended August 3, 2001 by approximately $20,000. The Company has no other material exposure to market risk sensitive instruments. 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: Exhibit No. Description ---------- ----------- 10.1* First Amendment to Revolving Credit, Term Loan, Capital Expenditure Loan, Guaranty and Security Agreement dated as of June 29, 2001 between HLM Design, Inc. and IBJ Whitehall Business Credit Corporation (incorporated by reference to Exhibit 10.29.1 to the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2001). *Incorporated by reference to documents previously filed as exhibits to other filings with the Commission. (b) Reports on Form 8-K None. 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: September 17, 2001 By: /s/ Joseph M. Harris ------------------- --------------------- Joseph M. Harris President, Chairman and Director Date: September 17, 2001 By: /s/ James B. Huff ------------------ --------------------- James B. Huff Vice President and Chief Financial Officer 18