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 29, 1999
( ) 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 February 26, 1999
- ------------------- --------------------------------
Common stock, par value $.001 per share 2,342,754 shares
HLM DESIGN, INC. AND AFFILIATES
INDEX TO FORM 10-Q
PAGE
NO.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets - May 1, 1998 and January 29, 1999 3
Consolidated Statements of Operation - One month period ended May
30, 1997 (Predecessor), Nine month periods ended
January 30, 1998 and January 29, 1999 and Three month periods
ended January 30, 1998 and January 29,1999 5
Consolidated Statement of Stockholders' Equity - May 1, 1998
And January 29, 1999 6
Consolidated Statements of Cash Flows - One month period ended
May 30, 1997 (Predecessor), and Nine month periods ended
January 30, 1998 and January 29, 1999 7
Notes to Unaudited Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Operations
And Results of Operations 13
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
CONSOLIDATED BALANCE SHEETS
May 1, January 29,
1998 1999
-------- -----------
(Unaudited)
ASSETS:
Current Assets:
Cash $ 17,369 $ 3,710
Accounts Receivable:
Trade and other receivables, less allowance for
doubtful accounts at May 1, 1998 and
January 29, 1999 of 150,000 and 268,285, respectively 6,089,929 8,907,522
Costs and estimated earnings in excess of billings on
uncompleted projects 5,513,854 7,973,442
Prepaid expenses 724,010 510,040
-------------------------------------
Total Current Assets 12,345,162 17,394,714
-------------------------------------
Other Assets:
Deferred income taxes 465,601 1,401,182
Other 825,018 451,090
Goodwill, net 2,426,598 7,181,055
-------------------------------------
Total Other Assets 3,717,217 9,033,327
-------------------------------------
Property and Equipment:
Leasehold improvements 782,609 1,092,297
Furniture and fixtures 1,786,250 2,703,351
-------------------------------------
Property and Equipment, at cost 2,568,859 3,795,648
Less Accumulated depreciation 768,904 1,508,542
-------------------------------------
Property and equipment, net 1,799,955 2,287,106
-------------------------------------
TOTAL ASSETS $ 17,862,334 28,715,147
====================================
See notes to unaudited consolidated financial statements.
3
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
May 1, January 29,
1998 1999
-------- -----------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 656,576 $ 1,235,402
Notes payable 2,250,000 2,618,335
Accounts payable 3,041,859 4,912,488
Accrued expenses 1,913,505 2,156,725
Income tax payable 215,950 855,344
Billings in excess of costs and estimated earnings
on uncompleted projects 3,008,023 3,632,945
Deferred income taxes 1,517,146 2,263,294
------------------------------------
Total Current Liabilities 12,603,059 17,674,533
------------------------------------
LONG-TERM DEBT 4,164,401 2,454,880
------------------------------------
TOTAL LIABILITIES 16,767,460 20,129,413
------------------------------------
MINORITY INTEREST 15,187 36,426
------------------------------------
COMMITMENT AND CONTINGENCIES
WARRANTS OUTSTANDING 114,932 1,200
------------------------------------
STOCKHOLDERS' EQUITY:
Capital Stock:
Common, $.001 par value, voting, authorized 9,000,000
shares: issued 776,134 and 2,342,754, respectively 776 2,343
Preferred, $.10 par value, voting, authorized 1,000,000
shares, no shares outstanding
Additional paid in capital 185,623 7,401,462
Retained earnings 778,356 1,144,303
------------------------------------
TOTAL STOCKHOLDERS' EQUITY 964,755 8,548,108
------------------------------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 17,862,334 $ 28,715,147
====================================
See notes to unaudited consolidated financial statements.
4
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATION
(Unaudited) (Predecessor
Company)
One Nine Nine Three Three
Month Months Months Months Months
Ended Ended Ended Ended Ended
May 30, January 30, January 29, January 30, January 29,
1997 1998 1999 1998 1999
----- ----- ----- ----- ----
REVENUES:
Fee Income $ 1,998,611 $ 16,160,923 $ 21,074,849 $ 5,866,863 $ 8,259,369
Reimbursable Income 234,425 5,382,493 4,996,804 2,489,750 2,167,738
------------- ------------- -------------- ------------- -------------
Total Revenues 2,233,036 21,543,416 26,071,653 8,356,613 10,427,107
------------- ------------- -------------- ------------- -------------
CONSULTANT EXPENSE 192,862 3,802,734 4,685,098 1,825,833 2,543,050
------------- ------------- -------------- ------------- -------------
PROJECT EXPENSES:
Direct Expenses 35,404 744,579 576,282 209,238 230,314
Reimbursable expenses 68,617 630,190 950,821 260,513 382,384
------------- ------------- -------------- ------------- -------------
Total project expenses 104,021 1,374,769 1,527,103 469,751 612,698
------------- ------------- -------------- ------------- -------------
NET PRODUCTION INCOME 1,936,153 16,365,913 19,859,452 6,061,029 7,271,359
DIRECT LABOR 602,096 4,802,078 5,767,302 1,739,235 2,165,755
INDIRECT EXPENSES 1,172,712 9,744,540 12,345,772 3,752,712 4,493,165
------------- ------------- -------------- ------------- -------------
OPERATING INCOME 161,345 1,819,295 1,746,378 569,082 612,439
------------- ------------- -------------- ------------- -------------
OTHER EXPENSE:
Interest Expense, net 36,951 748,621 525,175 251,648 197,628
Other 834 -
------------- ------------- -------------- ------------- -------------
Total Other Expense 36,951 748,621 526,009 251,648 197,628
------------- ------------- -------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 124,394 1,070,674 1,220,369 317,434 414,811
INCOME TAX 43,000 514,063 573,573 139,938 209,422
------------- ------------- -------------- ------------- -------------
NET INCOME BEFORE EXTRAORDINARY ITEM 81,394 556,611 646,796 177,496 205,389
EXTRAORDINARY ITEM FOR EARLY
EXTINGUISHMENT OF DEBT, NET OF TAX OF $171,842 280,849 -
============= ============= ============== ============= =============
NET INCOME $ 81,394 $ 556,611 $ 365,947 $ 177,496 $ 205,389
============= ============= ============== ============= =============
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic and diluted $ 0.33 $ 0.09
============== =============
NET INCOME PER SHARE
Basic and diluted $ 0.18 $ 0.09
============== =============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic and diluted 1,981,784 2,315,087
============== =============
See notes to unaudited consolidated financial statements.
5
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock Additional Total
------------ Paid-In Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
Balance, May 1, 1998 776,134 $ 776 $ 185,623 $ 778,356 $ 964,755
Issuance of Common Stock 1,298,953 1,299 6,036,342 6,037,641
(Note 4)
Net Income 365,947 365,947
Issuance of Common Stock
for purchase of JPJ Architects,
Inc. (Note 5) 240,000 240 1,070,760 1,071,000
Issuance of Common Stock
for purchase of GA Design
International Limited (Note 5) 27,667 28 108,737 108,765
----------------------------------------------------------------------------------
Balance, January 29, 1999 2,342,754 $ 2,343 $ 7,401,462 $ 1,144,303 $ 8,548,108
==================================================================================
See notes to unaudited consolidated financial statements.
6
HLM DESIGN, INC. AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Predecessor
Company)
One Nine Nine
Month Months Months
Ended Ended Ended
May 30, January 30, January 29,
1997 1998 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 81,394 $ 556,611 $ 365,947
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Extraordinary item for early extinguishment of debt-net of tax 280,849
Depreciation 55,544 247,463 441,594
Amortization of goodwill 9,571 114,549 167,332
Amortization of deferred loan fees 108,526 62,340
Deferred income taxes 54,907 (17,844) (183,558)
Changes in assets and liabilities net of effects from purchase of of JPJ
Architects, Inc.:
Decrease in trade and other accounts receivable (1,500,472) (622,088) (86,593)
(Increase) decrease in costs and estimated earnings compared to billings
on uncompleted contracts, net 1,199,028 38,310 (2,240,178)
(Increase) in refundable income taxes (11,157) 504,400
Increase (decrease) in prepaid expenses and other assets (11,579) (504,505) 522,378
Increase (decrease) in accounts payable 233,659 (913,522) (17,274)
Increase (decrease) in accrued expenses and other liabilities (263,500) 643,475 (438,441)
Increase in income tax payable 271,880
---------------------------------------------------
Net cash provided by (used in) operating activities (152,605) 155,375 (853,724)
---------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,023) (549,848) (657,042)
Note receivable from officer 30,000
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)
---------------------------------------------------
Net cash used in investing activities (2,023) (519,848) (2,346,902)
---------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowing on line of credit (2,360,000) 394,586
Net proceeds from issuance of common stock 5,922,709
Proceeds from long-term borrowings 2,800,000 6,712,307
Payment on short term borrowings (750,000)
Payment on long-term borrowings (285,372) (3,305,100) (2,381,528)
Payment of deferred loan fees (56,300)
Payment of ESOP buyback (3,221,824)
Proceeds from issuance of common stock 28,910
Proceeds from exercise of warrants (135)
Proceeds from issuance of notes payable to shareholders 182,308
Proceeds from issuance of warrants 24,757 1,200
---------------------------------------------------
Net cash provided by financing activities 154,628 364,923 3,186,967
---------------------------------------------------
INCREASE (DECREASE) IN CASH - 450 (13,659)
CASH BALANCE:
Beginning of period 2,321 2,321 17,369
---------------------------------------------------
End of period $ 2,321 $ 2,771 $ 3,710
===================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the year for:
Interest $ 6,827 $ 584,695 $ 537,893
Income tax payments (refunds) $ (750) $ 21,244 $ 21,116
Noncash investing and financing transactions:
Issuance of warrants to certain debt holders $ 238,752 $ 238,752 $ 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 consolidated financial statements.
7
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business-HLM Design, Inc. ("HLM Design") is a
management services company incorporated March 6, 1997 for the purpose
of providing management and services to architectural, engineering and
planning design entities under long term management and services
agreements ("MSAs"). HLM Design, Inc entered into an MSA with each of
HLM Design of North America, Inc. ("HLMNA"), HLM Design of the
Southeast, P.C.("HLMSE"), and HLM Design of the Northwest, Architecture,
Engineering and Planning, P.C. ("HLMNW") in May 1997. In July 1998, HLM
Design, Inc. entered into an MSA with each of HLM Design of the Midwest,
Inc. ("HLMMW"), HLM Design of the Midatlantic, P.C. ("HLMMA"), and HLM
Design of the Northeast, Architecture, Engineering and Planning, P.C.
("HLMNE"). In October 1998, HLM Design, Inc. entered into an MSA with
JPJ Architects, Inc.("JPJ"). HLMNA, HLMSE, HLMNW, HLMMW, HLMMA, HLMNE
and JPJ are collectively referred to as "Managed Firms". The Managed
Firms (other than JPJ) and its stockholders have also entered into a
stockholders agreement (which provides the stockholders of Managed Firms
with nominee stockholder status); therefore, as of May 31, 1997 and
thereafter, HLM Design, Inc. and Managed Firms financial statements are
presented on a consolidated basis. HLM Design and the Managed Firms are
referred to herein collectively as the "Company".
Financial Statement Presentation - The accompanying unaudited financial
information for the one month period ended May 30, 1997(Predecessor),
and nine month periods ended January 30, 1998 and January 29, 1999 have
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 periods presented. The results for interim periods are not
necessarily indicative of the results to be expected for the entire
fiscal year. These interim consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial
statements for the year ended May 1, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
of Accounting Standards ("SFAS") No. 131 "Disclosure about Segments of
an Enterprise and Related Information." This statement redefines how
operating segments are determined and requires disclosure of certain
financial and descriptive information about the Company's fiscal year
ending April 30, 1999, but will need not be applied to interim financial
statements in the initial year of its application. Management has
determined that the adoption of SFAS 131 has no material impact on the
Company's disclosures of its one operating segment, providing
architectural, engineering and planning services.
8
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
2. CONTRACTS IN PROGRESS
Information relative to contracts in progress is as follows:
May 1, January 29,
1998 1999
---- ----
Costs incurred on uncompleted projects
(excluding overhead) $ 45,830,792 $ 57,761,290
Estimated earnings thereon 45,615,282 55,827,134
------------ --------------
Total 91,446,074 113,588,424
Less billings to date 88,940,243 109,247,927
------------ -------------
Net underbillings $ 2,505,831 $ 4,340,497
=========== =============
Net underbillings are included in the accompanying balance sheets as
follows:
May 1, January 29,
1998 1999
---- ----
Costs and estimated earnings in excess of billings
On uncompleted projects $5,513,854 $7,973,443
Billings in excess of costs and estimated earnings
On uncompleted projects (3,008,023) (3,632,945)
---------- ----------
Net underbillings $2,505,831 $4,340,497
========== ==========
3. FINANCING ARRANGEMENTS
A summary of changes in financing arrangements are as follows: Notes
Payable: The Company repaid its indebtedness to Berthel Fisher & Company
Financial Services, Inc. ($.75 million) from the net proceeds of its
initial public offering (the "Offering") in June 1998. Long-Term Debt:
The Company repaid its obligation to Pacific Capital, L.P. and Equitas,
L.P. ($2.0 million) and to employee stockholders ($.2 million) from the
net proceeds of the Offering in June 1998.
On August 31, 1998, the Company increased its revolving line of credit
with First Charter National Bank from $1.5 million to $3.0 million. At
January 29, 1999, the Company had borrowings outstanding of $2.6
million. The revolving line of credit is secured by, among other things,
a security interest in all accounts receivable. Any outstanding balance
under this loan bears interest at prime plus 1 percent. This loan
matures on June 30, 1999.
9
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4. INITIAL PUBLIC OFFERING
In June 1998 pursuant to a Registration Statement on Form S-1 filed with
the Securities and Exchange Commission, HLM Design consummated the
Offering. Through the Offering, HLM Design offered and sold 1,200,000
shares of Common Stock at a price to the public of $6.00 per share.
The net proceeds of the Offering totaling $5.92 million (after
underwriting discount and other offering expenses) were used to repay
certain indebtedness consisting of: (a)$2.0 million loan from Pacific
Capital L.P. and Equitas L.P. and (b)$.75 million term loan from Berthel
Fisher & Company Financial Services, Inc. and (c)$.2 million of
indebtedness to employee stockholders. Remaining net proceeds were used
for development of new business and other general corporate purposes.
The early extinguishment of the Pacific Capital, L.P., Equitas, L.P. and
Berthel Fisher & Company Financial Services, Inc. debt resulted in an
extraordinary charge of $280,849, net of income taxes of $171,842, that
consisted of write-off of related unamortized financing costs.
4. ACQUISITIONS
JPJ ARCHITECTS, INC.
On October 30, 1998, HLM Design purchased all the issued and outstanding
common stock of JPJ for $2.4 million in cash, an aggregate of 240,000
shares of HLM Design's common stock, and subordinated promissory notes
bearing interest at 7 percent in the aggregate principal amount of
$1,160,000. Such purchase price may be adjusted downward if certain
earnings and stockholders' equity levels are not achieved by JPJ for the
year ended April 30, 1999. The purchase price agreement specifies
delivery of 30 percent of the aggregate shares of the stock and the
principal amount of the promissory notes on each of October 30, 2000 and
October 30, 2001 and delivery of the remaining 40 percent of the
aggregated shares of stock and the principal amount of the promisssory
notes on October 30, 2002. Following the purchase, HLM Design and JPJ
entered into Management Services Agreement whereby the Company will
manage all aspects of JPJ other than the provisions of professional
architectural services.
10
HLM DESIGN INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. ACQUISITIONS (CONTINUED)
The acquisition has been accounted for using the purchase method of
accounting. The purchase price has been allocated on a preliminary basis
as shown below to the assets and liabilities acquired based on their
estimated fair value at the acquisition date. Such allocations may
ultimately be different than amounts reflected depending on final
valuations.
Working capital $ 444,585
Property and equipment 158,266
Other assets 143,020
Goodwill 3,597,449
---------
$4,343,320
G A Design International Holdings Ltd
On January 29, 1999, HLM Design purchased 95 percent of the issued and
outstanding common stock of G A Design International Holdings Ltd
("GAIH") for a combination of cash, 27,667 shares of HLM Design common
stock and promissory notes for a total of approximately $1,037,000. The
acquisition has been accounted for using the purchase method of
accounting. 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 $1,042,000. Such allocations may ultimately be different
than amounts reflected depending on final valuations.
11
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED)
HLM Design, Inc.'s consolidated balance sheet as of January 29, 1999 and
income statement for the nine month period ended January 29, 1999 is as
follows:
Balance Sheet:
Current assets $ 4,379,949
------------
Non-current assets 17,711,252
------------
Total assets $ 22,091,201
============
Current liabilities 12,716,760
Non-current liabilities 826,333
Total liabilities 13,543,093
------------
Total stockholders' equity 8,548,108
-------------
Total liabilities and stockholders' equity $ 22,091,201
============
Income Statement:
Equity in earnings of Affiliate $ 1,052,635
Net interest, extraordinary item, tax and other expense 686,688
------------
Net income $ 365,947
============
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.
As a result of the acquisition of HLMNA through the merger of BBH Corp. (an
affiliate of HLM Design) into HLMNA, the consummation of the MSA between HLM
Design and the Managed Firms (other than JPJ) and stockholders' agreements among
the Managed Firms (other than JPJ) and its stockholders, the discussion and
analysis of operating results for the nine month period ended January 30, 1998
is presented on a pro forma basis that reflects such acquisition, MSA and
stockholders' agreements as through they occurred at the beginning of the
period.
This pro forma financial information does not give effect to the
Offering.
Pro Forma for
Consolidated Consolidated Consolidated Consolidated
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
January 30, January 29, January 30, January 29,
1998 1999 1998 1999
---- ---- ---- ----
Revenues $8,356,613 $10,427,107 $23,776,452 $26,071,653
Costs and expenses:
Direct cost of revenue 4,034,819 5,321,503 10,878,560 11,979,503
Operating expenses 3,752,712 4,493,165 10,890,252 12,345,772
----------- ------------ ------------ -------------
Total costs and expenses 7,787,531 9,814,668 21,768,812 24,325,275
----------- ------------ ------------ -------------
Income from operations 569,082 612,439 2,007,640 1,746,378
Other income (expense):
Interest expense (251,648) (197,628) (841,969) ( 525,174)
Other expense 0 0 (603) (835)
------------ -------------- -------------- --------------
Total other expense (251,648) (197,628) (842,572) ( 526,009)
------------ -------------- -------------- --------------
Income before income taxes and 317,434 414,811 1,165,068 1,200,369
Extraordinary item
Income tax expense 139,938 209,422 547,413 573,573
------------ -------------- -------------- --------------
Net income before extraordinary item 177,496 205,389 617,655 665,405
Extraordinary item for early
extinguishment of debt,
Net of tax of $171,842 0 0 0 280,849
------------ ------------- ------------- -------------
Net income $ 177,496 $ 205,389 $ 617,655 $ 365,947
============ ============= ============= =============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -CONTINUED
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 29, 1999 AND JANUARY 30, 1998
Revenues were $10.4 million and $8.4 million for the three month period ended
January 29, 1999 and January 30, 1998, respectively. This increase of 24.8% is
principally due to the acquisition of JPJ in October 1998, and to a lesser
extent, internal growth of the Company before JPJ resulting from increased
marketing efforts.
Direct costs primarily include, direct labor, subconsultant costs and
reimbursable expenses. Direct costs were $5.3 million, or 51.0% of revenues, for
the three month period ended January 29, 1999, as compared to $4.0 million, or
48.3% of revenues, for the three month period ended January 30, 1998. This
increase as a percent of revenues is due to JPJ's use of subconsultants to meet
contract and project requirements.
Operating costs were $4.5 million, or 43.1% of revenues, for the three month
period ended January 29, 1999, as compared to $3.8 million, or 44.9% of
revenues, for the three month period ended January 30, 1998. This decrease as a
percent of revenues is principally due increased revenues. which is partially
offset by an increase in expenses associated with being a public company and
depreciation and amortization expense related to property and equipment.
Interest expense was $0.2 million and $0.3 million for the three month period
ended January 29, 1999, and January 30, 1998, respectively. This decrease is
principally due to the initial public offering in June 1998 whereby Company
repaid approximately $3.0 million in debt from the proceeds of its Offering. See
Note 4 to Notes to Consolidated Financial Statements. This decrease is partially
offset by increased borrowings in the third quarter of 1999 as a result of the
Company's acquisition of JPJ.
Income tax expense was $0.2 million and $0.1 million for the three month period
ended January 29, 1999, and January 30, 1998, respectively. The effective income
tax rate was 50.5% and 44.1% for the three month period ended January 29, 1999
and January 30, 1998, respectively. This rate increase is principally due to
nondeductible items such as increases in goodwill.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-CONTINUED
FOR THE NINE MONTHS ENDED JANUARY 29, 1999 AND JANUARY 30, 1998
Revenues were $26.1 million and $23.8 million for the nine month period ended
January 29, 1999, and January 30, 1998, respectively. This increase of 9.7% is
principally due to the acquisition of JPJ in October 1998. This increase is
partially offset by the Company's change in its fiscal year end date from the
last Friday in April to the Friday nearest the end of April. This change
resulted in one week less revenues for the nine months ended January 29, 1999 as
compared to the nine month period ended January 30, 1998.
Direct costs primarily include, direct labor, subconsultant costs and
reimbursable expenses. Direct costs were $12.0 million, or 46.0% of revenues,
for the nine month period ended January 29, 1999, as compared to $10.9 million,
or 45.8% of revenues, for the nine month period ended January 30, 1998. This
increase as a percent of revenues is due to JPJ's use of subconsultants to meet
project requirements which is partially offset by a decrease in direct labor
costs incurred due to improved productivity as a result of Company's increased
focus on cost containment for each project.
Operating costs were $12.3 million, or 47.4% of revenues, for the nine month
period ended January 29, 1999, as compared to $10.9 million, or 45.8% of
revenues, for the nine month period ended January 29, 1998. This increase as a
percent of revenues is principally due to an increase in expenses associated
with being a public company and depreciation and amortization expenses
associated with property and equipment.
Interest expense was $0.5 million and $0.7 million for the nine month period
ended January 29, 1999, and January 30, 1998, respectively. This decrease is
principally due to the initial public offering in June 1998 whereby Company
repaid approximately $3.0 million in debt from the proceeds of its Offering. See
Note 4 to Notes to Consolidated Financial Statements. This decrease is partially
offset by increased borrowings in the third quarter of 1999 as a result of the
Company's acquisition of JPJ.
Income tax expense was $0.6 million and $0.5 million for the nine month period
ended January 29, 1999, and January 30, 1998, respectively. The effective income
tax rate was 47.0% and 48.0% for the nine month period ended January 29, 1999
and January 30, 1998, respectively. The effective rate is higher than statutory
rate due primarily to goodwill.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-CONTINUED
LIQUIDITY AND CAPITAL RESOURCES-
At January 29, 1999, the Company's current liabilities of $17.7 million exceeded
current assets of $17.4 million resulting in a working capital deficiency of
$0.3 million. During the nine month period ended January 29, 1999, the Company
used $0.9 million in operating activities primarily due to the increase in costs
and estimated earnings compared to billings on uncompleted contracts and a
decrease in accrued expenses which was partially offset by an increase in
prepaid expenses and other assets, the reduction in deferred debt discount
caused by the extraordinary item for early extinguishment of debt and
depreciation. The Company used $2.4 million for investing activities primarily
from the cash payment for the purchase of JPJ Architects, Inc., net of cash
acquired, and to a lesser extent, the purchase of equipment and the acquisition
of GAIH on January 29, 1999. On October 30, 1998, the Company purchased all the
issued and outstanding stock of JPJ Architects, Inc. for $2.4 million in cash,
promissory notes bearing interest at 7 percent in the aggregate principal amount
of $1.1 million and an aggregate of 240,000 shares of HLM Design common stock.
In addition, On January 29, 1999, the Company purchased GAIH for $0.3 million in
cash, promissory notes bearing interest at 7 percent in the aggregate principal
amount of $0.1 million and an aggregate of 27,667 shares of HLM Design common
stock.
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 August 31, 1998, the Company increased
its revolving line of credit with First Charter National Bank from $1.5 million
to $3.0 million. At January 29, 1999, the Company had borrowings outstanding of
$2.6 million. The revolving line of credit is secured by, among other things, a
security interest in all accounts receivable. Any outstanding balance under this
loan bears interest at prime plus 1 percent. This loan matures on June 30, 1999.
The Company believes that the First Charter National Bank line of credit and
anticipated funds from future operations will be sufficient to meet its
operating cash needs for at least the next twelve months.
AUTOMATED SYSTEMS AND YEAR 2000
The ability of automated systems to recognize the date change from December 31,
1999 to January 1, 2000 is commonly referred to as the Year 2000 matter. Similar
to most other organizations, the Company has assessed the potential impact of
the Year 2000 matter on its operations based on current and forseeable computer
and other automated system applications. The Company believes any future costs,
if any, associated with modifying its computer software and other automated
systems for the Year 2000 matters will not be significant.
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PART II-OTHER INFORMATION
Item 5. Other Information
None.
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) On November 16, 1998, the Company filed a Current Report on Form 8-K
reporting the acquisition of JPJ Architects, Inc. (the "JPJ 8-K"). On January
15, 1999, the Company filed an amendment to the JPJ 8-K which included financial
statements and pro forma financial information relating to the acquisition of
JPJ Architects, Inc.
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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 15, 1998 By: /s/ Joseph M. Harris
------------------- ---------------------
Joseph M. Harris
President, Chairman and Director
Date: March 15, 1998 By: /s/ Vernon B. Brannon
--------------- ---------------------
Vernon B. Brannon
Senior Vice President, Chief Financial
Officer, Treasurer, Assistant Secretary
And Director
18