U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 28, 2000
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to ____________
Commission file Number 001-14137
HLM Design, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 56-2018819
(State or Other Jurisdiction (I.R.S Employer Identification No.)
of Incorporation or Organization)
121 West Trade Street, Suite 2950
Charlotte, North Carolina 28202
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (704) 358-0779
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Title of Each Class Outstanding at March 7, 2000
- ------------------- ----------------------------
Common stock, par value $.001 per share 2,096,165 shares
HLM DESIGN, INC. AND AFFILIATES
INDEX TO FORM 10-Q
PAGE
NO.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - April 30, 1999 and
January 28, 2000 3
Condensed Consolidated Statements of Income - Nine Month Periods
Ended January 29, 1999 and January 28, 2000 and Three Month
Periods Ended January 29, 1999 and January 28, 2000 5
Condensed Consolidated Statement of Stockholders' Equity - Nine
Month Period Ended January 28, 2000 6
Condensed Consolidated Statements of Cash Flows - Nine Month
Periods Ended January 29, 1999 and January 28, 2000 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, January 28,
1999 2000
---- ----
(Unaudited)
ASSETS:
Current Assets:
Cash $ 250,575 $ 83,700
Trade and other receivables, less allowance for
doubtful accounts at April 30, 1999 and January 28, 2000
of $341,692 and $401,641, respectively 8,311,068 9,913,959
Costs and estimated earnings in excess of billings on
uncompleted projects, net 7,550,247 8,707,771
Prepaid expenses and other 482,740 581,895
--------------------------------------
Total Current Assets 16,594,630 19,287,325
--------------------------------------
Other Assets:
Goodwill, net 7,442,301 8,227,620
Other 1,225,909 938,942
--------------------------------------
Total Other Assets 8,668,210 9,166,562
--------------------------------------
Property and Equipment:
Leasehold improvements 1,114,337 1,491,193
Furniture and fixtures 1,291,633 1,762,151
Assets under capital leases 1,638,043 1,953,205
--------------------------------------
Property and equipment, at cost 4,044,013 5,206,549
Less Accumulated depreciation and amortization 1,832,611 2,754,496
--------------------------------------
Property and equipment, net 2,211,402 2,452,053
--------------------------------------
TOTAL ASSETS $ 27,474,242 $ 30,905,940
======================================
See notes to unaudited condensed consolidated financial statements.
3
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, January 28,
1999 2000
---- ----
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,054,369 $ 1,325,363
Accounts payable 4,853,283 8,012,710
Billings in excess of costs and estimated earnings
on uncompleted projects 3,179,882 1,106,050
Accrued expenses and other 2,385,121 3,043,305
-----------------------------------------
Total Current Liabilities 11,472,655 13,487,428
-----------------------------------------
LONG-TERM DEBT AND OTHER 7,020,647 7,724,009
-----------------------------------------
TOTAL LIABILITIES 18,493,302 21,211,437
-----------------------------------------
STOCKHOLDERS' EQUITY:
Capital Stock:
Common, $.001 par value, voting, authorized 9,000,000
shares: issued 2,345,077 and 2,354,609, April 30, 1999 2,345 2,355
and January 28, 2000, respectively (includes 267,667 and
258,444 shares to be issued on a delayed delivery schedule
at April 30, 1999 and January 28, 2000, respectively)
Preferred, $.10 par value, voting, authorized 1,000,000
shares, no shares outstanding
Additional paid in capital and other 7,408,864 7,431,962
Retained earnings 1,570,393 2,259,354
Accumulated other comprehensive income (loss) (662) 832
-----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,980,940 9,694,503
-----------------------------------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 27,474,242 $ 30,905,940
=========================================
See notes to unaudited condensed consolidated financial statements.
4
HLM DESIGN, INC. AND AFFILIATES
CONDENDSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine Nine Three Three
Months Months Months Months
Ended Ended Ended Ended
January 29, January 28, January 29, January 28,
1999 2000 1999 2000
REVENUES:
Fee Income $ 24,540,622 $ 35,212,629 $ 9,695,487 $ 13,074,952
Reimbursable Income 1,531,030 2,883,291 731,620 1,242,532
-------------------------------- --------------------------------
Total Revenues 26,071,652 38,095,920 10,427,107 14,317,484
-------------------------------- --------------------------------
CONSULTANT EXPENSE 4,685,098 10,782,675 2,543,050 4,778,416
-------------------------------- --------------------------------
PROJECT EXPENSES:
Direct Expenses 576,282 587,959 230,314 233,131
Reimbursable expenses 950,821 1,564,673 382,384 663,650
-------------------------------- --------------------------------
Total project expenses 1,527,103 2,152,632 612,698 896,781
-------------------------------- --------------------------------
NET PRODUCTION INCOME 19,859,451 25,160,613 7,271,359 8,642,287
DIRECT LABOR 5,767,302 7,403,527 2,165,755 2,549,901
INDIRECT EXPENSES 12,346,606 15,701,374 4,493,165 5,473,956
-------------------------------- --------------------------------
OPERATING INCOME 1,745,543 2,055,712 612,439 618,430
-------------------------------- --------------------------------
OTHER EXPENSE:
Interest Expense, net 525,175 757,893 197,628 285,731
-------------------------------- --------------------------------
Total Other Expense 525,175 757,893 197,628 285,731
-------------------------------- --------------------------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 1,220,368 1,297,819 414,811 332,699
INCOME TAX 573,573 608,858 209,422 140,617
-------------------------------- --------------------------------
NET INCOME BEFORE EXTRAORDINARY ITEM 646,795 688,961 205,389 192,082
EXTRAORDINARY ITEM FOR EARLY
EXTINGUISHMENT OF DEBT, NET OF TAX OF $171,842 280,849
-------------------------------- --------------------------------
NET INCOME $ 365,946 $ 688,961 $ 205,389 $ 192,082
================================ ================================
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic and Diluted $ 0.33 $ 0.29 $ 0.09 $ 0.08
================================ ================================
NET INCOME PER SHARE
Basic and Diluted $ 0.18 $ 0.29 $ 0.09 $ 0.08
================================ ================================
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic and Diluted 1,981,784 2,351,702 2,315,087 2,354,609
================================ ================================
See notes to unaudited condensed consolidated financial statements.
5
HLM DESIGN, INC. 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) Income Equity
------ ------ ------- -------- ------------- ------
Balance, April 30, 1999 2,345,077 $ 2,345 $ 7,408,864 $ 1,570,393 $ (662) $ 8,980,940
Issuance of Common Stock 9,532 10 23,098 23,108
(Note 5)
Comprehensive Income-
Foreign Currency Translation Adjustment 1,494 1,494
Net Income 688,961 688,961
------------------------------------------------------------------------------------
Balance, January 28, 2000 2,354,609 $ 2,355 $ 7,431,962 $ 2,259,354 $ 832 $ 9,694,503
====================================================================================
See notes to unaudited condensed consolidated financial statements.
6
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Nine
Months Months
Ended Ended
January 29, January 28,
1999 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 365,947 $ 688,961
Adjustments to reconcile net income to net cash used in operating activities:
Extraordinary item for early extinguishment of debt 280,849
Depreciation 441,594 637,738
Amortization of intangible assets 167,332 312,394
Amortization of deferred loan fees 62,340 58,912
Changes in assets and liabilities, net of effects from purchase of
acquired companies:
Increase in trade and other accounts receivable (86,593) (1,585,291)
Increase in costs and estimated earnings compared to billings
on uncompleted contracts, net (2,240,178) (3,231,356)
Decrease in prepaid expenses and other assets 522,378 227,516
Increase (decrease) in accounts payable (17,274) 2,931,205
Increase (decrease) in accrued expenses and other (350,119) (748,370)
------------------------------------------
Net cash used in operating activities (853,724) (708,291)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (657,042) (769,466)
Payment for purchase of minority interest in GAIH (21,330)
Payment for purchase of GA Design International Holdings Ltd (357,830)
Payment for purchase of JPJ Architects, Inc., net of cash acquired (1,332,030)
Payment for purchase of ESS Architects, Inc., net of cash acquired (153,993)
------------------------------------------
Net cash used in investing activities (2,346,902) (944,789)
------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing on line of credit and short term borrowings 394,586 2,050,000
Net proceeds from issuance of common stock 5,922,709
Payment on short term borrowings (750,000)
Payment on long-term borrowings (2,381,528) (586,903)
Proceeds from issuance of warrants 1,200
Proceeds from issuance of common stock under the Employee Stock Purchase Plan 23,108
------------------------------------------
Net cash provided by financing activities 3,186,967 1,486,205
------------------------------------------
DECREASE IN CASH (13,659) (166,875)
CASH BALANCE:
Beginning of period 17,369 250,575
------------------------------------------
End of period $ 3,710 $ 83,700
==========================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 537,893 $ 956,924
Income tax payments $ 21,116 $ 717,475
Noncash investing and financing transactions:
Issuance of warrants to certain debt holders $ 1,200
Acquisition of JPJ Architects, Inc.:
Notes payable issued to JPJ Architects, Inc. shareholders $ 872,320
Fair value of assets acquired and liabilities assumed, net $ 180,150
Common stock to be issued on delayed delivery schedule $ 1,071,000
See notes to unaudited condensed consolidated financial statements.
7
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS - HLM Design, Inc. (the "Company" or "HLM
Design") is a management services company that provides management and
services to architectural, engineering and planning design entities
under long term management and services agreements ("MSAs"). As of
January 28, 2000, the Company had wholly-owned subsidiaries of HLM
Design and affiliates as follows:
o HLM Design of North America, Inc. ("HLMNA")
o HLM Design USA, Inc. ("HLMUSA")
o HLM Design Architecture, Engineering and Planning, P.C. ("HLMAEP")
o JPJ Architects, Inc. ("JPJ")
o G.A. Design International Holdings, Ltd. ("GAIH")
o ESS Architects, Inc. ("ESS")
HLMNA, HLMUSA, HLMAEP, JPJ, GAIH and ESS are referred to herein
collectively as "Managed Firms". In December 1999, ESS was merged into
HLMUSA.
FINANCIAL STATEMENT PRESENTATION - The accompanying unaudited financial
information for the three and nine-month periods ended January 29, 1999
and January 28, 2000 has been prepared in accordance with generally
accepted accounting principles pursuant to the rules and regulations of
the Securities and Exchange Commission. All significant intercompany
accounts and transactions have been eliminated. These unaudited
consolidated financial statements reflect, in the opinion of
management, all material adjustments (which include only normal
recurring adjustments) necessary to fairly state the financial position
and the results of operations for the interim periods presented. The
results for interim periods are not necessarily indicative of the
results to be expected for the entire fiscal year. These interim
financial statements should be read in conjunction with the Company's
audited consolidated financial statements for the year ended April 30,
1999.
STOCKHOLDER REDEMPTION RIGHTS - Pursuant to the right of certain
affiliate shareholders, under nominee shareholder agreements, to redeem
their interests, the Company has recognized a liability (and goodwill)
in the amount of approximately $470,000. Because certain of these
rights may be exercised prior to December 31, 2000, approximately
$350,000 of this liability is included within current liabilities in
the accompanying balance sheet.
In the initial consolidation of the Company and HLMNA, the Company
eliminated the common stock and additional paid-in-capital of HLMNA
against goodwill. Upon further evaluation, the Company reclassified in
consolidation the common stock and additional paid-in-capital of HLMNA
as a liability and an increase in goodwill of approximately $470,000 in
the quarter ended January 28, 2000. The effect on prior year's
financial position and results of operations is not material. The
effect on future periods will be to increase goodwill amortization by
$30,000 on an annual basis.
8
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. CONTRACTS IN PROGRESS
Information relative to contracts in progress is as follows:
April 30, January 28,
1999 2000
---- ----
Costs incurred on uncompleted projects
(excluding overhead) $ 52,092,171 $ 60,460,728
Estimated earnings thereon 49,678,268 54,197,439
------------ -------------
Total 101,770,439 114,658,167
Less billings to date 97,400,074 107,056,446
------------ -------------
Net underbillings $ 4,370,365 $ 7,601,721
============ =============
Net underbillings are included in the accompanying balance sheets as follows:
April 30, January 28,
1999 2000
---- ----
Costs and estimated earnings in excess of billings
On uncompleted projects $7,550,247 $8,707,771
Billings in excess of costs and estimated earnings
On uncompleted projects (3,179,882) (1,106,050)
------------ -----------
Net underbillings $4,370,365 $7,601,721
========== ==========
3. ACQUISITIONS
ESS ARCHITECTS, INC.
On September 16, 1999, HLM Design purchased all the issued and
outstanding common stock of ESS for a combination of cash and
promissory notes for a total of $425,000. The purchase price has been
allocated on a preliminary basis to the assets and liabilities acquired
based on their estimated fair value at the acquisition date resulting
in an allocation of goodwill of approximately $515,450. Such
allocations may ultimately be different than amounts referenced herein
depending on final valuations.
9
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCING ARRANGEMENTS
A summary of changes in financing arrangements are as follows:
$5,000,000 Revolving Line of Credit with First Charter National Bank
("First Charter"): As of January 28, 2000, the Company has borrowings
outstanding of $4,918,335. This loan was scheduled to mature on August
31, 2000.
Notes Payable with First Charter: In November 1999, the Company entered
into a secured $250,000 debt agreement with the lender. This note bears
interest at prime plus 1 percent and was scheduled to mature on
February 8, 2000.
On February 7, 2000, the Company entered into a revolving credit, term
loan and capital expenditure loan for a total of $20,000,000 with its
lender. The three financing arrangements are discussed below:
a. Revolving Credit: The maximum revolving advance amount is
$17,000,000. The amount available to borrow is calculated based on the
aging of certain assets. This loan matures in February 2003. This
revolving credit facility bears interest at the sum of the Eurodollar
rate plus 2.75%. A portion of the revolver was used to repay the First
Charter revolver of $4,918,335 and the note payable of $250,000.
b. Term loan: The amount of the loan is $2,000,000. This loan matures
in February 2003 and bears interest at a maximum of prime plus 2%. A
portion of the proceeds from this term loan was used to repay
$1,820,514 in indebtedness to Berthel Fisher & Company Leasing, Inc.
("Berthel Fisher").
c. Capital Expenditure Loan. The maximum capital expenditure amount is
$1,000,000. The amount is available for the financing of equipment used
in the Company's business. This loan matures in February 2005 and bears
interest at a maximum of prime plus 1%.
Substantially all assets are pledged under this financing arrangement.
This financing arrangement requires 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.
As a result of the firm commitment to refinance the First Charter and
Berthel Fisher debt, all amounts of the First Charter and Berthel
Fisher debt outstanding at January 28, 2000 were reclassified as
long-term.
In the fourth quarter, the early extinguishment of the Berthel Fisher
and the First Charter debt noted above resulted in an extraordinary
charge of approximately $226,000, net of income taxes of approximately
$199,000, that consisted of write-off of related unamortized financing
costs.
10
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. STOCKHOLDERS' EQUITY
During the first three quarters ended January 28, 2000, 9,532 shares of
stock were issued under the HLM Design, Inc. Employee Stock Purchase
Plan.
In September 1999, the Company purchased the remaining 5 percent of the
issued and outstanding common stock of GAIH for $25,960.
On July 21, 1999, 28,400 stock options were issued to certain Company
employees at a grant price of $3.61 under the Company's 1998 Stock
Option Plan.
6. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED)
HLM Design's unconsolidated balance sheet as of and for the nine month
period ended January 28, 2000 is as follows:
Balance Sheet
Current assets $15,939,793
-----------
Non-current assets 10,027,816
-----------
Total assets $25,967,609
===========
Current liabilities 9,836,830
-----------
Non-current liabilities 6,436,276
-----------
Total liabilities 16,273,106
-----------
Total stockholders' equity 9,694,503
-----------
Total liabilities and stockholders' equity $25,967,609
===========
Statement of Income
Equity in earnings of affiliate $ 1,327,973
Net interest, income tax and other expense 639,012
-----------
Net income $ 688,961
===========
7. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES". SFAS No. 133 requires an
entity to recognize all derivatives as either assets or liabilities in
the consolidated balance sheet and measure those instruments at fair
value. SFAS No. 133 was amended by SFAS No. 137, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE FOR FASB STATEMENT NO. 133", which delays the Company's
effective date until the second quarter of the fiscal year ending April
2002. Management is currently calculating the effects of SFAS No. 133
on the Company's financial statements and current disclosures.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this report.
RESULTS OF OPERATIONS
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
January 29, January 28, January 29, January 28,
1999 2000 1999 2000
---- ---- ---- ----
Revenues $10,427,107 $14,317,484 $26,071,652 $38,095,920
Consultant and project expenses 3,155,748 5,675,197 6,212,201 12,935,307
----------- ----------- ----------- -----------
Net production income 7,271,359 8,642,287 19,859,451 25,160,613
----------- ----------- ----------- -----------
Direct labor 2,165,755 2,549,901 5,767,302 7,403,527
Operating costs 4,411,930 5,363,001 12,179,274 15,388,980
Amortization of intangible assets 81,235 110,955 167,332 312,394
----------- ----------- ----------- -----------
Total costs and expenses 6,658,920 8,023,857 18,113,908 23,104,901
----------- ----------- ----------- -----------
Income from operations 612,439 618,430 1,745,539 2,055,712
Interest expense, net 197,628 285,731 525,175 757,893
----------- ----------- ----------- -----------
Income before income taxes and
Extraordinary item 414,811 332,699 1,220,368 1,297,819
Income tax expense 209,422 140,617 573,573 608,858
----------- ----------- ----------- -----------
Net income before extraordinary item 205,389 192,082 646,795 688,961
Extraordinary item for early extinguishment
of debt, net of tax of $171,842 280,849
----------- ----------- ----------- -----------
Net income $ 205,389 $ 192,082 $ 365,946 $ 688,961
=========== =========== =========== ===========
EBITDA (1) $ 669,900 $ 947,174 $ 2,354,469 $ 3,005,844
=========== =========== =========== ===========
(1) EBITDA represents net income before interest expense, income taxes,
depreciation, amortization and extraordinary items. While EBITDA is not intended
to represent cash flow from operations as defined by GAAP and should not be
considered as an indicator of operating performance or an alternative to cash
flow (as measured by GAAP) as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of the Company to
meet its future debt service, capital expenditure, and working capital
requirements.
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 28, 2000 AND JANUARY 29, 1999
Revenues were $14.3 million for the three month period ended January
28, 2000 as compared to $10.4 million for the three month period ended January
29, 1999. This increase is due to internal growth in existing operations.
Direct costs which primarily include consultant costs and
reimbursable project expenses total $5.7 million, or 40% of revenues, for the
three month period ended January 28, 2000 as compared to $3.2 million, or 30% of
revenues, for the three month period ended January 29, 1999. This increase as a
percentage of revenue is due to an increased use of consultants to meet project
requirements primarily due to the tight labor market. Management believes that
this trend may continue which will cause direct costs as a percent of revenues
to increase in future periods.
Direct labor cost was $2.6 million, or 30% of net production income,
for the three month period ended January 28, 2000 as compared to $2.2 million,
or 30% of net production income, for the three month period ended January 29,
1999. Although the volume of architecture, planning and engineering services has
increased, it is offset by (a) an increase in salary and salary related costs
which has not been passed through to the Company's clients in all cases; and (b)
a reduction in certain higher margin projects.
Operating costs were $5.4 million, or 62% of net production income, for
the three month period ended January 28, 2000 as compared to $4.4 million, or
61% of net production income, for the three month period ended January 29, 1999.
This increase as a percentage of net production income is principally due to
increases (a) in indirect labor as a result of a slowdown in work in November
and December imposed by several commercial clients while they concentrated on
Y2K issues and winter storms across the country that closed several offices; (b)
in education and seminars due to the Company's expanded training and education
program for its employees; and (c) in depreciation expense due to the Company's
investment in certain computer and related equipment. This increase as a
percentage of net production income is partially offset by a decrease in certain
recurring expenses relating to the Company's obligations as a public company as
well as the Company's internally performing several functions that have
previously been outsourced.
Amortization of intangible assets was $110,955 for the three months
ended January 28, 2000 as compared to $81,235 for the three months ended January
29, 1999. This increase is attributable to amortization expense arising from the
acquisition GAIH and ESS in January 1999 and September 1999, respectively.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Interest expense was $0.3 million for the three month period ended
January 28, 2000 as compared to $0.2 million for the three month period ended
January 29, 1999. This increase is principally due to the Company's increase in
borrowings on its line of credit as well as debt resulting from the acquisitions
of JPJ, GAIH and ESS.
Income tax expense was $0.1 million for the three month period ended
January 28, 2000 as compared to $0.2 million for the three month period ended
January 29, 1999. The effective income tax rate was 42% and 51% for the three
month periods ended January 28, 2000 and January 29, 1999, respectively. This
effective tax rate is lower principally due to the changes in the effect of
state income taxes.
FOR THE NINE MONTHS ENDED JANUARY 28, 2000 AND JANUARY 29, 1999
Revenues were $38.1 million for the nine month period ended January 28,
2000 as compared to $26.1 million for the nine month period ended January 29,
1999. This increase of 46% is attributable to internal growth in existing
operations and prior year acquisitions.
Direct costs (primarily including consultant costs and reimbursable
project expenses) total $12.9 million, or 34% of revenues, for the nine month
period ended January 28, 2000 as compared to $6.2 million, or 24% of revenues,
for the nine month period ended January 29, 1999. This increase as a percentage
of revenue is due to an increased use of consultants to meet project
requirements partially due to the acquisitions since November1998 as well as the
tight labor market. Management believes that this trend may continue which will
cause direct costs as a percentage of revenues to increase in future periods.
Direct labor cost was $7.4 million, or 29% of net production income,
for the nine month period ended January 28, 2000 as compared to $5.8 million, or
29% of net production income, for the nine month period ended January 29, 1999.
Although the volume of architecture, planning and engineering services has
increased, it is offset by (a) an increase in salary and salary related costs
which has not been passed through to the Company's clients in all cases and (b)
a reduction in certain higher margin projects.
14
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Operating costs were $15.4 million, or 61% of net production income,
for the nine month period ended January 28, 2000 as compared to $12.2 million,
or 61% of net production income, for the nine month period ended January 29,
1999. Operating costs as a percentage of net production income has been
negatively impacted in the current period by (a) an increase in indirect labor
as a result of a slowdown in work in November and December imposed by several
commercial clients while they concentrated on Y2K issues and winter storms
across the country that closed several offices; (b) an increase in education and
seminars due to the Company's increased focus on training and education of its
employees; and (c) an increase in depreciation expense due to the Company's
increased focus on improvement of certain computer and related equipment.
Conversely, operating costs as a percentage of net production income was
positively impacted in the current period by a decrease in certain recurring
expenses relating to the Company's obligations as a public company as well as
the Company's internally performing several functions that have previously been
outsourced.
Amortization of intangible assets was $0.3 million for the nine months
ended January 28, 2000 as compared to $0.2 million for the nine months ended
January 29, 1999. This increase is attributable to amortization expense arising
from the acquisitions of JPJ and GAIH in October 1998 and January 1999,
respectively.
Interest expense was $0.8 million for the nine month period ended
January 28, 2000 as compared to $0.5 million for the nine month period ended
January 29, 1999. This increase is principally due to the Company's increase in
borrowings on its line of credit as well as debt resulting from the acquisition
of JPJ and GAIH which is partially offset by the repayment of approximately $3.0
million in debt from the proceeds of its Offering.
Income tax expense was $0.6 million for the nine month period ended
January 28, 2000 as compared to $0.6 million for the nine month period ended
January 29, 1999. The effective income tax rate was 47% and 47% for the nine
month periods ended January 28, 2000 and January 29, 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At January 28, 2000, the Company's current assets of $19.3 million
exceeded current liabilities of $13.5 million resulting in net working capital
of $5.8 million. During the nine month period ended January 28, 2000, the
Company used $0.7 million in operating activities primarily due to the increase
in costs and estimated earnings compared to billings on uncompleted projects and
accounts, partially offset by an increase in accounts payable. The Company used
$0.9 million for investing activities, primarily the purchase of equipment, as
well as payment for the purchase of ESS in September 1999. The Company generated
$1.5 million in financing activities primarily from borrowings under the
Company's revolving line of credit which was partially offset by payment on
certain long-term borrowings.
15
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The Company's growth and operating strategy will require substantial
capital and may result in the Company incurring additional debt, issuing equity
securities or obtaining additional bank financing. As a management company, HLM
Design will be responsible for the financing of working capital growth, capital
growth and other cash needs of its managed firms.
On February 7, 2000, the Company entered into a revolving credit, term
loan and capital expenditure loan for a total of $20,000,000 with its lender.
The three financing arrangements are discussed below:
a. Revolving Credit: The maximum revolving advance amount is
$17,000,000. The amount available to borrow is calculated based on the
aging of certain assets. This loan matures in February 2003. This
revolving credit facility bears interest at the sum of the Eurodollar
rate plus 2.75%. A portion of the revolver was used to repay a
previously outstanding revolver of $4,918,335 and a note payable of
$250,000 that were included on the Company's January 28, 2000 balance
sheet.
b. Term loan amount is $2,000,000. This loan matures in February 2003
and bears interest at a maximum of prime plus 2%. A portion of the
proceeds from this term loan was used to repay $1,820,514 in
indebtedness to Berthel Fisher.
c. Capital Expenditure Loan. The maximum capital expenditure amount is
$1,000,000. The amount is available for the financing of equipment used
in the Company's business. This loan matures in February 2005 and bears
interest at a maximum of prime plus 1%.
Substantially all assets are pledged under this financing arrangement.
This financing arrangement requires 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.
The Company believes that its revolving line of credit and anticipated
funds from future operations will be sufficient to meet the Company's operating
needs for at least the next twelve months.
YEAR 2000 COMPLIANCE
Prior to December 31, 1999, the Company had instituted a comprehensive Year 2000
review for compliance both internal and with all key vendors and suppliers. The
transition to Year 2000 resulted in no significant disruptions to the Company's
operations. Since many of the Company's information technology purchases were
made after January 1997, the Company's computer systems were expected to be Year
2000 compliant. Specifically, no significant expenditures were incurred as a
result of Year 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the opinion of management, there has been no material change in
market risk since April 30, 1999.
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
- ----------- -----------
27 Financial Data Schedule
(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: March 13, 2000 By: /s/ Joseph M. Harris
--------------- ---------------------
Joseph M. Harris
President, Chairman
and Director
Date: March 13, 2000 By: /s/ Vernon B. Brannon
--------------- ---------------------
Vernon B. Brannon
Senior Vice President,
Chief Financial Officer,
Treasurer, Assistant Secretary
And Director
18