EXHIBIT 99.4
JPJ ARCHITECTS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
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PAGE
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS:
Balance Sheets as of April 30, 1997 and 1998 and October 31, 1998 F-2
Statements of Income for the Years Ended April 30, 1997 and 1998 and the Six
Months Ended October 31, 1997 and 1998 F-3
Statement of Stockholders' Equity for the Years Ended April 30, 1997 and 1998 and
the Six Months Ended October 31, 1998 F-4
Statements of Cash Flows for the Years Ended April 30, 1997 and 1998 and the Six
Months Ended October 31, 1998 and 1997 F-5
Notes to Financial Statements F-6 - F-10
INDEPENDENT AUDITORS' REPORT
Board of Directors
JPJ Architects, Inc.
Dallas, Texas
We have audited the accompanying balance sheets of JPJ Architects, Inc. (the
"Company") as of April 30, 1998 and 1997, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended April 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of April 30, 1998 and 1997,
and the results of its operations and its cash flows for each of the three years
in the period ended April 30, 1998 in conformity with generally accepted
accounting principles.
September 25, 1998
F-1
JPJ ARCHITECTS, INC.
BALANCE SHEETS
APRIL 30, 1997 AND 1998 AND OCTOBER 31, 1998
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Years Ended Six Months
April 30, Ended
----------------------------- October 31,
ASSETS 1997 1998 1998
(Unaudited)
CURRENT ASSETS:
Cash $ 194,907 $ 102,573 $ 565,721
Trade and other receivables, less allowance for doubtful
accounts of $18,100 at April 30, 1997 and $118,285 at
April 30, 1998 and October 31, 1998 1,420,886 3,132,732 2,528,327
Costs and estimated earnings in excess of billings on
uncompleted projects (Note 2) 132,893 236,982 239,333
Refundable income taxes 63,016 27,898 95,070
Prepaid expenses 18,301 19,382 27,701
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Total current assets 1,830,003 3,519,567 3,456,152
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OTHER ASSETS:
Other noncurrent assets 134,789 133,103 136,894
Investment in affiliate 45,385 47,466 12,000
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Total other assets 180,174 180,569 148,894
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PROPERTY AND EQUIPMENT:
Leasehold improvements 28,546 60,579 60,579
Furniture and fixtures 343,960 354,955 374,586
Computer equipment 225,801 300,025 300,025
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Total property and equipment 598,307 715,559 735,190
Less accumulated depreciation (464,792) (539,245) (576,921)
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Property and equipment, net 133,515 176,314 158,269
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TOTAL ASSETS $ 2,143,69 $ 3,876,450 $ 3,763,315
============ =========== ============
See notes to financial statements.
Years Ended Six Months
April 30, Ended
----------------------------- October 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1998 1998
(Unaudited)
CURRENT LIABILITIES:
Notes payable (Note 3) $ 335,000 $ - $ -
Current portion of long-term debt (Note 3) 59,367 30,703 -
Accounts payable 736,363 1,730,384 1,406,109
Billings in excess of costs and estimated earnings on
uncompleted projects (Note 2) 397,643 639,296 644,845
Deferred income taxes 28,064 304,768 367,516
Other accrued expenses 500,550 544,850 498,974
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Total current liabilities 2,056,987 3,250,001 2,917,444
LONG-TERM DEBT (Note 3) 14,400 32,607 -
----------- ---------- ----------
TOTAL LIABILITIES 2,071,387 3,282,608 2,917,444
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COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY:
Capital stock - common, $1 par value, voting,
authorized 1,000,000 shares; issued 10,000
shares at April 30, 1998 and 4,401 at
October 31, 1998 10,000 10,000 4,401
Additional paid-in capital 8,980 8,980 -
Treasury stock (766,577) (850,093) -
Retained earnings 819,902 1,424,955 841,470
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Total stockholders' equity 72,305 593,842 845,871
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,143,692 $3,876,450 $3,763,315
========== =========== ==========
F-2
JPJ ARCHITECTS, INC.
STATEMENTS OF INCOME
YEARS ENDED APRIL 30, 1997 AND 1998 AND SIX MONTHS ENDED
OCTOBER 31, 1998 AND 1997
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Years Ended Six Months Ended
April 30, October 31,
---------------------------- -------------------------
1997 1998 1997 1998
(Unaudited)
REVENUES:
Fee income $5,173,663 $11,430,555 $4,932,961 $6,301,730
Reimbursable income 882,985 2,717,515 1,380,850 1,206,163
------------ ------------- ------------ ------------
Total revenues 6,056,648 14,148,070 6,313,811 7,507,893
CONSULTANT EXPENSES 2,091,516 6,730,598 2,980,458 4,260,562
PROJECT EXPENSES:
Direct expenses 117,009 206,365 59,874 101,082
Reimbursable expenses 247,582 605,313 245,274 381,437
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Total project expenses 364,591 811,678 305,148 482,519
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NET PRODUCTION INCOME 3,600,541 6,605,794 3,028,205 2,764,812
DIRECT LABOR 1,273,571 2,038,914 957,319 1,078,950
INDIRECT EXPENSES 2,291,875 3,639,546 1,669,113 1,358,876
------------ ------------- ------------ ------------
OPERATING INCOME (LOSS) 35,095 927,334 401,773 326,986
------------ ------------- ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (36,295) (16,423) (8,341) (2,574)
Other income 219,186 70,842 57,696 110,284
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Total other income (expense),
net 182,891 54,419 49,355 107,710
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INCOME BEFORE TAXES 217,986 981,753 451,128 434,696
PROVISION FOR INCOME TAXES (80,658) (376,700) (171,429) (171,912)
------------ ------------- ------------ ------------
NET INCOME $ 137,328 $ 605,053 $ 279,699 $ 262,784
============ ============= ============ ============
See notes to financial statements.
F-3
JPJ ARCHITECTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1997 AND 1998 AND THE SIX MONTHS ENDED OCTOBER 31, 1998
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Common Stock Additional Total
------------------- Paid-in Treasury Retained Stockholders'
Shares Amount Capital Stock Earnings Equity
BALANCE, APRIL 30, 1996 10,000 $10,000 $8,980 $(636,437) $ 682,574 $ 65,117
Redemption of common stock - - - (130,140) - (130,140)
Net income - - - - 137,328 137,328
------- ------- ------ ---------- ---------- ----------
BALANCE, APRIL 30, 1997 10,000 10,000 8,980 (766,577) 819,902 72,305
Redemption of common stock - - - (83,516) - (83,516)
Net income - - - - 605,053 605,053
------- ------- ------ ---------- ---------- ----------
BALANCE, APRIL 30, 1998 10,000 10,000 8,980 (850,093) 1,424,955 593,842
Retirement of treasury stock - (5,599) (8,980) 850,093 (846,269) (10,755)
Net income - - - - 262,784 262,784
------- ------- ------ ---------- ---------- ----------
BALANCE, OCTOBER 31, 1998
(Unaudited) 10,000 $ 4,401 $ - $ - $ 841,470 $ 845,871
======= ======= ====== ========== ========== ==========
See notes to financial statements.
F-4
JPJ ARCHITECTS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1997 AND 1998 AND THE SIX MONTHS ENDED
OCTOBER 31, 1997 AND 1998
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Six Months
Years Ended Ended
April 30, October 31,
----------------------- ------------------
1997 1998 1997 1998
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 137,328 $ 605,053 $ 279,699 $ 262,784
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 45,548 74,453 44,232 37,676
Deferred income taxes (5,590) 276,704 138,400 62,748
Income from investment in affiliate (49,371) (90,081) (57,696) (110,284)
Changes in certain working capital items:
(Increase) decrease in trade and other receivables (792,831) (1,711,846) (2,120,754) 604,405
(Increase) decrease in costs and estimated
earnings in excess of billings on
uncompleted projects (66,751) (104,089) 15,959 (2,351)
Increase in billings in excess of costs and
estimated earnings on uncompleted
contracts, net 224,941 241,653 591,950 5,549
(Increase) decrease in prepaid expenses 3,362 (1,081) 46,142 (8,319)
Decrease (increase) in other assets 25,211 1,686 (38,887) (3,791)
Increase (decrease) in accounts payable 259,859 994,021 1,028,146 (324,275)
Increase (decrease) in accrued expenses 443,700 44,300 414,434 (45,876)
Increase (decrease) in income taxes payable 78,748 35,118 28,464 (67,172)
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Net cash provided by operating activities 304,154 365,891 370,089 411,094
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (81,008) (117,252) (87,022) (19,631)
Dividends from affiliate 17,500 88,000 88,000 145,750
-------------- ---------- ----------- ---------
Net cash (used in) provided by investing
activities (63,508) (29,252) 978 126,119
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on line of credit (15,000) (335,000) (310,000) -
Proceeds from long-term borrowings - - 88,367 -
Payments on long-term borrowings 60,050 (10,457) (44,967) (63,310)
Repurchase of common stock (130,140) (83,516) (80,925) (10,755)
----------------- ---------- ----------- ----------
Net cash used in financing activities (85,090) (428,973) (347,525) (74,065)
----------------- ---------- ----------- ----------
INCREASE (DECREASE) IN CASH 155,556 (92,334) 23,542 463,148
CASH BALANCE:
Beginning of year 39,351 194,907 194,907 102,573
----------------- ---------- ----------- ---------
End of year $ 194,907 $ 102,573 $ 218,449 $565,721
================= =========== =========== =========
SUPPLEMENTAL DISCLOSURES - Cash paid during the year for:
Interest $ 33,018 $ 16,363 $ 32,372 $ 2,574
================= =========== =========== =========
Income tax payments $ 7,500 $ 57,800 $ 5,742 $ -
================= =========== =========== =========
See notes to financial statements.
F-5
JPJ ARCHITECTS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 30, 1997 AND 1998 AND THE SIX MONTHS ENDED OCTOBER 31, 1998
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1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS - JPJ Architects, Inc. (the "Company") is an
architectural and interior design firm located in Dallas, Texas. The
Company specializes in the design of corporate headquarters and office
buildings, higher education facilities and K-12 schools, and buildings for
public agencies, institutions, and local, state, and federal governments.
The Company's financial statements are prepared on the accrual basis of
accounting.
OPERATING CYCLE - Assets and liabilities related to long-term contracts are
included in current assets and current liabilities in the accompanying
balance sheets, as they will be liquidated in the normal course of contract
completion, although this may require more than one year.
REVENUE RECOGNITION - Revenue is recognized, at estimated collectible
amounts, in the period the services are performed. More specifically, the
Company recognizes revenues either on the percentage-of-completion method
whereby the extent of the contract performance is measured by the
percentage of cost incurred to date to estimated total cost for each
contract, or based upon actual hours spent on the project times the agreed
upon hourly rate. Consultant expenses, project expenses, direct labor and
indirect expenses are charged to expense as incurred. Provisions for
estimated losses on uncompleted projects are made in the period in which
such losses are first subject to reasonable estimation. Unanticipated
changes in project performance, project conditions and estimated
profitability may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
The asset "costs and estimated earnings in excess of billings on
uncompleted projects" represents revenues recognized in excess of amounts
billed. The liability "billings in excess of costs and estimated earnings
on uncompleted projects" represents billings in excess of revenues
recognized.
MAJOR CUSTOMERS - Sales to two customers represented 21% and 16% of total
revenues in 1997 and 56% and 15% of total revenues in 1998.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates. The most significant estimate impacting the accompanying
financial statements relates to revenue recognition.
F-6
PROPERTY AND EQUIPMENT - Leasehold improvements and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets or the lease term, including
anticipated renewals. The estimated useful lives of property and equipment
for financial reporting purposes are as follows:
Computer equipment and software 5 years
Furniture and fixtures 5 years
Leasehold improvements Lease term, not to exceed the useful life of the asset
ADVERTISING COSTS - Advertising costs are expensed as incurred. Amounts
expensed for each of the three years ending April 30, 1998 were immaterial.
DEFERRED INCOME TAXES - Deferred income tax assets and liabilities are
calculated based upon differences between the financial statement and tax
basis of assets and liabilities that will result in taxable or deductible
amounts in the future. Such deferred income tax asset or liability
computations are based on enacted tax laws and rates applicable to periods
in which the differences are expected to affect taxable income.
FINANCIAL INSTRUMENTS - The carrying amount of cash, accounts receivable,
accounts payable and accrued liabilities approximates their fair value
because of the short maturities of these instruments.
LONG-LIVED ASSETS - During fiscal 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF. It requires that long-lived assets and certain identifiable intangibles
to be held and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Management of the Company reviewed all long-lived
assets and intangible assets as of April 30, 1997 and 1998 and believes
that the carrying amounts reported in the balance sheets will be recovered
over the remaining useful lives of those assets.
2. CONTRACTS IN PROGRESS
Information relative to contracts in progress as of April 30, 1997 and 1998
and October 31, 1998 is as follows:
APRIL 30,
----------------------- OCTOBER 31,
1997 1998 1998
Costs incurred on uncompleted projects
(excluding overhead) $ 1,806,549 $ 2,949,032 $ 3,893,472
Estimated earnings thereon 1,729,333 2,568,575 2,533,603
--------------- ------------ ------------
Total 3,535,882 5,517,607 6,427,075
Less billings to date 3,800,632 5,919,921 6,832,587
--------------- ------------ ------------
Net overbillings $ (264,750) $ (402,314) $ (405,512)
=============== ============ ============
F-7
Net overbillings as of April 30, 1997 and 1998 and October 31, 1998 are
included in the accompanying balance sheets as follows:
APRIL 30,
------------------------ OCTOBER 31,
1997 1998 1998
Costs and estimated earnings in excess of billings
on uncompleted projects $ 132,893 $ 236,982 $ 239,333
Billings in excess of costs and estimated earnings
on uncompleted projects (397,643) (639,296) (644,845)
------------ ------------ ------------
Net overbillings $ (264,750) $ (402,314) $ (405,512)
============ ============ ============
3. FINANCING ARRANGEMENTS
A summary of notes payable as of April 30, 1997 and 1998 is as follows:
1997 1998
Line of credit, up to $500,000 and interest at prime plus 0.75%,
maturity date of July 2, 1998 $335,000 $
========= ======
A summary of long-term debt as of April 30, 1997 and 1998 is as follows:
1997 1998
Note payable to Everett D. Spaeth due in three annual installments
of $14,400 plus interest at a rate of 10% per annum, with a final
payment due April 1999 $28,800 $14,400
Note payable to James R. Baker due in three annual installments of
$16,303 plus interest at a rate of 10% per annum, with a final
payment due June 2000 - 48,910
Notes payable to CAN Insurance Company (paid off in fiscal 1998) 44,967 -
------- ------
Total long-term debt 73,767 63,310
Less current maturities 59,367 30,703
------- ------
Long-term portion $14,400 $32,607
======== =======
Annual principal payments on long-term debt are as follows:
Fiscal 1999 $30,703
Fiscal 2000 32,607
------
Total $63,310
========
F-8
4. LEASE COMMITMENTS
The Company leases office space and certain office equipment under
operating lease arrangements. The total minimum rental commitment under
noncancelable operating leases at April 30, 1998 are as follows:
Fiscal 1999 $428,127
Fiscal 2000 90
--
Total $428,217
===========
Rent expense was $453,816 and $450,885 during 1997 and 1998, respectively,
and is included in indirect expenses.
5. INCOME TAXES
The provision for income taxes for the years ended April 30, 1997 and 1998
is as follows:
1997 1998
Current provision (benefit):
Federal $ 86,248 $ 87,411
State - 12,585
Deferred (5,590) 276,704
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Provision (benefit) for income taxes $ 80,658 $ 376,700
========== =========
The reconciliation of the statutory federal income tax rate with the
Company's overall effective federal and state income rate for the years
ended April 30, 1997 and 1998 is as follows:
1997 1998
Statutory federal rate 34.0% 34.0%
State income taxes, net of federal benefit 4.8 3.1
Meals and entertainment 2.9 .8
Officers life insurance (3.2) .8
Other (1.5) (.4)
-------- -------
Effective tax rates 37.0% 38.3%
======== =======
F-9
The tax effect of temporary differences giving rise to deferred income tax
assets and liabilities as of April 30, 1997 and 1998 is as follows:
1997 1998
Deferred income tax liabilities - differences between the
accrual basis and cash basis of accounting related to
certain assets and liabilities $(66,951) $(362,921)
---------- ----------
Deferred income tax assets:
Allowance for bad debts 6,969 45,540
State net operating loss carryforwards - -
Deferred state taxes 1,161 12,613
Nondeductible reserve 30,757 -
--------- ----------
Total deferred income tax assets 38,887 58,153
-------- ----------
Deferred income tax liabilities, net $(28,064) $(304,768)
========= ===========
The net deferred tax assets and liabilities are allocated between current
and noncurrent amounts in the accompanying balance sheets according to the
classification of the related asset and liability.
6. RELATED PARTY TRANSACTIONS
The Company holds a 50% ownership in Premier Reprographics, Inc.
("Premier"). Premier, which is accounted for under the equity method of
accounting, was formed in 1991 and provides blue line reprographic services
to the Company. During 1997 and 1998, the Company purchased services from
Premier amounting to $234,177 and $518,177, respectively.
7. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution plan (the "Plan") that provides
retirement and other related benefits to eligible employees. Employees can
make contributions up to a specified level. Company contributions to the
Plan were $16,588, and $25,926 for the years ended April 30, 1997, and
1998, respectively.
8. SUBSEQUENT EVENTS
The Company has entered into an agreement with HLM Design ("HLM") whereby
HLM will purchase all of the outstanding capital stock of the Company for
$2.4 million in cash, promissory notes bearing interest at 7 percent in the
aggregate amount of $1.1 million and aggregate of 240,000 shares of HLM
Design common stock. This sale was finalized on October 30, 1998.
The Company is in the process of negotiating a new lease for office space.
The Company's current lease expires in April 1999.
********
F-10