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 July 30, 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 September 2, 1999
- ------------------- --------------------------------
Common stock, par value $.001 per share 2,084,531 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
July 30, 1999 3
Condensed Consolidated Statements of Operation - Three Month Periods
Ended July 31, 1998 and July 30, 1999 5
Condensed Consolidated Statement of Stockholders' Equity - Three
Month Period Ended July 30, 1999 6
Condensed Consolidated Statements of Cash Flows - Three Month
Periods Ended July 31, 1998 and July 30, 1999 7
Notes to Unaudited Condensed Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, July 30,
1999 1999
------------ -------------
(Unaudited)
ASSETS:
Current Assets:
Cash $ 250,575 $ 101,695
Trade and other receivables, less allowance for
doubtful accounts at April 30 and July 30
of $341,692 and $387,336, respectively 8,311,068 8,559,032
Costs and estimated earnings in excess of billings on
uncompleted projects, net 7,550,247 7,901,758
Prepaid expenses and other 482,740 637,958
------------------------------------------
Total Current Assets 16,594,630 17,200,443
------------------------------------------
Other Assets:
Goodwill, net 7,442,301 7,370,237
Other 1,225,909 2,187,211
------------------------------------------
Total Other Assets 8,668,210 9,557,448
------------------------------------------
Property and Equipment:
Leasehold improvements 1,114,337 1,245,544
Furniture and fixtures 1,291,633 1,490,430
Assets under capital leases 1,638,043 1,737,391
------------------------------------------
Property and Equipment, at cost 4,044,013 4,473,365
Less Accumulated depreciation 1,832,611 2,090,619
------------------------------------------
Property and equipment, net 2,211,402 2,382,746
==========================================
TOTAL ASSETS $ 27,474,242 $ 29,140,637
==========================================
See notes to unaudited condensed consolidated financial statements.
3
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, July 30,
1999 1999
------------ -------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current maturities of long-term debt
and capital lease obligations $ 1,054,369 $ 1,051,440
Accounts payable 4,853,283 5,211,664
Billings in excess of costs and estimated earnings
on uncompleted projects 3,179,882 2,054,445
Accrued expenses and other 2,385,121 2,934,394
-----------------------------------------
Total Current Liabilities 11,472,655 11,251,943
-----------------------------------------
LONG-TERM DEBT AND OTHER 6,997,517 8,637,206
-----------------------------------------
TOTAL LIABILITIES 18,470,172 19,889,149
-----------------------------------------
MINORITY INTEREST 21,930 21,930
-----------------------------------------
COMMITMENT AND CONTINGENCIES
WARRANTS OUTSTANDING 1,200 1,200
-----------------------------------------
STOCKHOLDERS' EQUITY:
Capital Stock:
Common, $.001 par value, voting, authorized 9,000,000
shares: issued 2,345,077 and 2,352,198, respectively 2,345 2,352
(April 30, 1999 and July 30, 1999) (includes 267,667 shares
to be issued on a delayed delivery schedule)
Preferred, $.10 par value, voting, authorized 1,000,000
shares, no shares outstanding
Additional paid in capital 7,408,864 7,425,881
Retained earnings 1,570,393 1,797,363
Foreign currency translation (662) 2,762
-----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 8,980,940 9,228,358
-----------------------------------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 27,474,242 $ 29,140,637
=========================================
See notes to unaudited condensed consolidated financial statements.
4
HLM DESIGN, INC. AND AFFILIATES
CONDENDSED CONSOLIDATED STATEMENTS OF OPERATION
(UNAUDITED)
Three Three
Months Months
Ended Ended
July 31, July 30,
1998 1999
------------ ------------
REVENUES:
Fee Income $ 7,655,816 $ 10,664,066
Reimbursable Income 478,306 789,129
--------------------------------
Total Revenues 8,134,122 11,453,195
--------------------------------
CONSULTANT EXPENSE 1,256,955 2,773,549
--------------------------------
PROJECT EXPENSES:
Direct Expenses 194,089 214,000
Reimbursable expenses 338,087 384,360
--------------------------------
Total project expenses 532,176 598,360
--------------------------------
NET PRODUCTION INCOME 6,344,991 8,081,286
DIRECT LABOR 1,752,119 2,306,424
INDIRECT EXPENSES 4,036,578 5,115,503
--------------------------------
OPERATING INCOME 556,294 659,359
--------------------------------
OTHER EXPENSE:
Interest Expense, net 203,990 217,365
--------------------------------
Total Other Expense 203,990 217,365
--------------------------------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY
ITEM 352,304 441,994
INCOME TAX 160,682 215,024
--------------------------------
NET INCOME BEFORE EXTRAORDINARY ITEM 191,622 226,970
EXTRAORDINARY ITEM FOR EARLY
EXTINGUISHMENT OF DEBT, NET OF TAX OF $171,842 280,849
================================
NET INCOME (LOSS) $ (89,227) $ 226,970
================================
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM:
Basic and Diluted $ 0.13 $ 0.10
================================
NET INCOME (LOSS) PER SHARE
Basic and Diluted $ (0.06) $ 0.10
================================
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic and Diluted 1,489,844 2,347,503
================================
SUPPLEMENTAL NET INCOME (LOSS) PER SHARE:
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM
Basic and Diluted $ 0.11
================
NET LOSS PER SHARE
Basic and Diluted $ (0.05)
================
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic and Diluted 1,764,012
================
See notes to unaudited condensed consolidated financial statements.
5
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Common Stock Additional Foreign Total
--------------------- Paid-In Retained Currency Stockholders'
Shares Amount Capital Earnings Translation Equity
------ ------ ------- -------- ----------- ------
Balance, April 30, 1999 2,345,077 $ 2,345 $ 7,408,864 $1,570,393 $ (662) $ 8,980,940
Issuance of Common Stock 7,121 7 17,017 17,024
(Note 4)
Foreign Currency Translation 3,424 3,424
Net Income 226,970 226,970
------------------------------------------------------------------------------------------
Balance, July 30, 1999 2,352,198 $ 2,352 $ 7,425,881 $1,797,363 $ 2,762 $ 9,228,358
==========================================================================================
See notes to unaudited condensed consolidated financial statements.
6
HLM DESIGN, INC. AND AFFILIATES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Three
Months Months
Ended Ended
July 31, July 30,
1998 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (89,227) $ 226,970
Adjustments to reconcile net income (loss) to net used in operating activities:
Extraordinary item for early extinguishment of debt 280,849
Depreciation 232,266 258,008
Amortization of goodwill 43,024 99,979
Amortization of deferred loan fees 31,056 19,637
Other 129,431
Changes in certain working capital items:
Increase in trade and other accounts receivable (362,709) (247,964)
Decrease (increase) in costs and estimated earnings compared to billings
on uncompleted contracts, net 115,631 (1,476,948)
Decrease (increase) in prepaid expenses and other assets 436,166 (1,136,157)
Increase (decrease) in accounts payable (986,016) 330,466
Increase (decrease) in accrued expenses and other (574,225) 549,273
------------------------------------
Net cash (used in) provided by operating activities (743,754) (1,376,736)
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (178,762) (429,352)
------------------------------------
Net cash used in investing activities (178,762) (429,352)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 1,750,000
Net proceeds from issuance of common stock 5,922,709
Net increase (decrease) on short term borrowings (750,000) 3,424
Payment on long-term borrowings (2,348,401) (113,240)
Proceeds from issuance of warrants 1,200
Proceeds from issuance of common stock under the Employee Stock Purchase Plan 17,024
------------------------------------
Net cash provided by financing activities 2,825,508 1,657,208
------------------------------------
INCREASE (DECREASE) IN CASH 1,902,992 (148,880)
CASH BALANCE:
Beginning of period 17,369 250,575
====================================
End of period $ 1,920,361 $ 101,695
====================================
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 263,509 $ 185,957
Income tax payments $ 139,170 $ 645,158
Noncash investing and financing transactions:
Issuance of warrants to certain debt holders $ 1,200
See notes to unaudited condensed 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. (the "Company" or "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"). In May 1997, HLM Design executed long
term MSAs with HLM Design of North America, Inc. ("HLMNA"), HLM of the
Southeast. P.C. ("HLMSE") and HLM of the Northwest, Architecture,
Engineering and Planning, P.C. ("HLMNW"). HLMSE and HLMNW were
organized in 1996 and had no operations through May 1, 1998. In July
1998, HLM Design 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 October1998, HLM Design entered into an
MSA with JPJ Architects, Inc. ("JPJ"). In January 1999, HLM Design
entered into an MSA with G.A. Design International Holdings, Ltd.
("GAIH"). HLMNA, HLMSE, HLMNW, HLMMW, HLMMA, HLMNE, JPJ and GAIH are
referred to herein collectively as "Managed Firms".
Financial Statement Presentation - The accompanying unaudited financial
information for the three month periods ended July 31, 1998 and July
30, 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 financial statements
should be read in conjunction with the Company's audited consolidated
financial statements for the year ended April 30, 1999.
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:
April 30, July 30,
1999 1999
------------ -------------
Costs incurred on uncompleted projects
(excluding overhead) $52,092,171 $52,573,526
Estimated earnings thereon 49,678,268 47,827,530
------------ -------------
Total 101,770,439 100,401,056
Less billings to date 97,400,074 94,553,743
------------ -------------
Net underbillings $ 4,370,365 $ 5,847,313
============ =============
Net underbillings are included in the accompanying balance sheets as
follows:
April 30, July 30,
1999 1999
---------- ----------
Costs and estimated earnings in excess of billings
On uncompleted projects $7,550,247 $7,901,758
Billings in excess of costs and estimated earnings
On uncompleted projects (3,179,882) (2,054,445)
---------- ----------
Net underbillings $4,370,365 $5,847,313
========== ==========
3. FINANCING ARRANGEMENTS
A summary of changes in financing arrangements are as follows:
$5,000,000 Revolving Line of Credit: As of July 30, 1999, the Company
has borrowings outstanding of $4,868,335. In August 1999, the Company's
revolving line of credit maturity date was extended from June 30, 2000
to August 31, 2000.
4. STOCKHOLDERS' EQUITY
In June 1999, 7,121 shares of stock were issued under the HLM Design,
Inc. Employee Stock Purchase Plan.
9
HLM DESIGN, INC. AND AFFILIATES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5. HLM DESIGN, INC. FINANCIAL INFORMATION (UNAUDITED)
HLM Design's unconsolidated balance sheet for the three month period
ended July 30, 1999 is as follows:
Balance Sheet
Current assets $ 6,068,377
-----------
Non-current assets 14,122,833
-----------
Total assets $20,191,210
===========
Current liabilities 7,494,557
-----------
Non-current liabilities 3,468,295
-----------
Total liabilities 10,962,852
-----------
Total stockholders' equity 9,228,358
-----------
Total liabilities and stockholders' equity $20,191,210
===========
Income Statement
Revenues and equity in earnings of affiliate $ 4,180,400
Net interest, extraordinary item, tax and other expense 3,953,430
-----------
Net income $ 226,970
===========
10
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
First Quarter 1999 Compared with First Quarter 1998
Consolidated Consolidated
Three Months Three Months
Ended Ended
July 31, July 30,
1998 1999
----------- -----------
Revenues $ 8,134,122 $11,453,195
Consultant and project expenses 1,789,131 3,371,909
----------- -----------
Net production income 6,344,991 8,081,286
----------- -----------
Direct labor 1,752,119 2,306,424
Operating costs 3,993,555 5,015,525
Amortization of intangible assets 43,023 99,978
----------- -----------
Total costs and expenses 5,788,697 7,421,926
----------- -----------
Income from operations 556,294 659,359
Other income (expense)
Interest expense 203,990 217,365
----------- -----------
Total other expense 203,990 217,365
----------- -----------
Income before income taxes and extraordinary item 352,304 441,994
Income tax expense 160,682 215,024
----------- -----------
Net income before extraordinary item 191,622 226,970
Extraordinary item for early extinguishment of debt, net
of tax of $171,842 280,849
----------- -----------
Net income (loss) $ (89,227) $ 226,970
=========== ===========
11
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
Revenues were $11.5 million for the three month period ended July 30,
1999 as compared to $8.1 million for the three month period ended July 31, 1998.
This increase of 40.8% is principally attributable to the acquisition of JPJ in
October 1998.
Direct costs primarily include consultant costs and reimbursable
project expenses total $3.4 million, or 29.4% of revenues, for the three month
period ended July 30, 1999 as compared to $1.8 million, or 22.0% of revenues,
for the three month period ended July 31, 1998. This increase as a percent of
revenue is due to an increased use of consultants to meet project requirements
(24.2%and 15.5% of revenue for the three month periods ended July 30, 1999 and
July 31, 1998, respectively). This increase is primarily due to JPJ's use of
consultants since November 1998. Management believes that JPJ will continue to
use consultants which will cause direct costs as a percent of revenues to
increase in future periods as JPJ consultant expenses are reflected for a twelve
month period.
Direct labor cost was $2.3 million, or 28.5% of net production income,
for the three month period ended July 30, 1999 as compared to $1.8 million, or
27.6% of net production income, for the three month period ended July 31, 1998.
Indirect expenses were $5.1 million, or 63.3% of net production income,
for the three month period ended July 30, 1999 as compared to $4.0 million, or
63.6% of net production income, for the three month period ended July 31, 1998.
This decrease as a percent of net production income is principally due to a
decrease in marketing expenses, office expenses, and publicly held expenses
which is partially offset by an increase due to a one-time nonrecurring expense
due to the relocation of the firm's Dallas office as a result of its lease
expiration.
Amortization of intangible assets was $99,979 for the three months
ended July 30, 1999 as compared to $43,024 for the three months ended July 31,
1998. This increase is attributable to amortization expense arising from the
acquisition of JPJ and GAIH in October 1998 and January 1999, respectively.
Interest expense was $0.2 million for the three month period ended July
30, 1999 as compared to $0.2 million for the three month period ended July 31,
1998. The Company repaid approximately $3.0 million in debt from the proceeds of
its Offering.
Income tax expense was $0.2 million for the three month period ended
July 30, 1999 as compared to $0.2 million for the three month period ended July
31, 1998. The effective income tax rate was 48.6% and 45.6% for the three month
periods ended July 30, 1999 and July 31, 1998, respectively. This effective rate
is higher principally due to increased goodwill amortization.
12
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
LIQUIDITY AND CAPITAL RESOURCES
At July 30, 1999, the Company's current assets of $17.2 million
exceeded current liabilities of $11.3 million resulting in working capital of
$5.9 million. During the three month period ended July 30, 1999, the Company
used $1.4 million in operating activities primarily due to the increase in costs
and estimated earnings compared to billings on uncompleted projects and prepaid
expenses and other assets which was partially offset by an increase in accounts
payable and accrued expenses and other. The Company used $0.4 million for
investing activities, primarily the purchase of equipment. In addition, the
Company generated $1.7 million in financing activities primarily from borrowings
under the Company's revolving line of credit.
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. In August 1999, the Company's
$5.0 million revolving line of credit maturity date was extended from June 30,
2000 to August 31, 2000. As of July 30, 1999, the Company has borrowings
outstanding under this line of credit of $4.9 million.
The Company has received verbal indication from its lender, First
Charter National Bank ("FCNB") of its willingness to increase the Company's
revolving line of credit from $5.0 million to $6.0 million; however, FCNB has
not entered into any commitment to do so. 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. 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 ability to implement its growth
strategy will be adversely affected.
YEAR 2000 COMPLIANCE
Some computer systems will not be able to process dates beyond 1999
and will need to be modified or replaced prior to the year 2000. Many of the
Company's information technology purchases were made after January 1997, and
management believes the Company's internal software and hardware systems will
function properly with respect to dates in the year 2000 and thereafter. Year
2000 issues are also addressed as the Company's network and internal systems are
upgraded in the normal course of business. As of July 30, 1999, the Company's
expenditures toward year 2000 compliance has been minimal and management does
not expect its additional expenditures directly related to year 2000 compliance
to exceed $100,000. Management continually reassesses the estimated costs and
status of the Company's year 2000 compliance effort.
13
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS-CONTINUED
The Company began conducting verification testing of all its internal
information technology and information systems in 1998. The testing is a
multi-phased process which includes, but is not limited to, simulating several
key dates and times in the year 2000 and performing normal daily activities. The
infrastructure, servers and workstations, as well as primary software systems,
have been tested and validated using this process. The final phase is scheduled
to be completed in late 1999.
While management believes that its hardware and software applications
are year 2000 compliant, there can be no assurance until the year 2000 occurs
that all systems will then function adequately. The Company is monitoring all
key vendors and suppliers for year 2000 compliance by various methods including,
but not limited to, gathering information from detailed surveys sent by the
Company to each key vendor. Most of the Company's significant suppliers and
vendors have advised the Company that they are, or anticipate being, year 2000
compliant. If, however, other software applications of other suppliers or of
local exchange carriers, long distance carriers, service providers, competitive
access providers, or others on whose services the Company depends are not year
2000 compliant, a material adverse effect on the Company's financial condition
and results of operations could result. The Company is not aware of any
significant vendor who may be unable to provide service to the Company as a
result of year 2000 non-compliance. The Company currently has a disaster
recovery plan in place which will serve as a foundation for its contingency plan
in the event some suppliers and vendors are not year 2000 compliant. The full
contingency plan is currently being developed and will be complete late in 1999.
14
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) HLM Design has not filed any reports on Form 8-K during the period covered
by this report.
15
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 13, 1999 By: /s/ Joseph M. Harris
------------------ ---------------------
Joseph M. Harris
President, Chairman and Director
Date: September 13, 1999 By: /s/ Vernon B. Brannon
------------------ ---------------------
Vernon B. Brannon
Senior Vice President, Chief Financial
Officer, Treasurer, Assistant Secretary
And Director
16