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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended May 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
OF 1934
For the transition period from_________________ to _______________
Commission file number 001-14137
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HLM DESIGN, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
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DELAWARE 56-2018819
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
121 WEST TRADE STREET
SUITE 2950
CHARLOTTE, NORTH CAROLINA 28202
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(704) 358-0779
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
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Securities registered pursuant to Section 12(g) of the Act:
$.001 Par Value Common Stock
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(Title of Class)
Indicate by check mark 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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At July 24, 1998, the aggregate market value of the voting stock held by
non-affiliates was $7,348,438, based on the closing sales price of the
registrant's Common Stock on that date, of $5.19 per share. As of July 24,
1998, the registrant had a total of 2,075,087 shares of Common Stock
outstanding.
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<PAGE>
FORM 10-K TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business ................................................................................ 3
Item 2. Properties .............................................................................. 7
Item 3. Legal Proceedings ....................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............... 8
Item 6. Selected Financial Data ................................................................. 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ... 11
Item 8. Financial Statements and Supplementary Data ............................................. 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .... 15
PART III
Item 10. Directors and Executive Officers of the Registrant ...................................... 15
Item 11. Executive Compensation .................................................................. 17
Item 12. Security Ownership of Certain Beneficial Owners and Management .......................... 21
Item 13. Certain Relationships and Related Transactions .......................................... 22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ........................ 23
INDEX TO FINANCIAL STATEMENTS ................................................................... F-1
SIGNATURES ......................................................................................
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FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections, which reflect management's best judgment based on factors
currently known, involve risks and uncertainties. Words such as "expects,"
"anticipates," "believes," "intends," and "hopes," variations of such words and
similar expressions are intended to identify such forward-looking statements.
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including but
not limited to, the factors discussed in such sections and those set forth in
the cautionary statements contained in Exhibit 99.1 to this Form 10-K. (See
Exhibit 99.1 -- Safe Harbor Under the Private Securities Litigation Reform Act
of 1995.) Forward-looking information provided by the Registrant in such
sections pursuant to the safe harbor established under the Private Securities
Litigation Reform Act of 1995 should be evaluated in the context of these
factors.
EXPLANATORY NOTE
UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS REPORT GIVES EFFECT TO
(A) AN EFFECTIVE 12.75-TO-1 STOCK SPLIT (EFFECTED IN A SERIES OF TRANSACTIONS)
OF REGISTRANT'S COMMON STOCK (THE "STOCK SPLIT") COMPLETED, AND (B) THE
EXERCISE OF CERTAIN WARRANTS (AS DEFINED HEREIN) EXERCISED PRIOR TO, THE
CONSUMMATION OF THE REGISTRANT'S INITIAL PUBLIC OFFERING AS DESCRIBED HEREIN
(THE "IPO" OR "OFFERING"). UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES
HEREIN TO THE "COMPANY" MEAN HLM DESIGN, INC. AND THE ARCHITECTURAL,
ENGINEERING AND PLANNING FIRMS ("AEP FIRMS") IT MANAGES CONSIDERED AS ONE
ENTERPRISE, REFERENCES TO A "MANAGEMENT AND SERVICES AGREEMENT" MEAN A
LONG-TERM AGREEMENT BETWEEN HLM DESIGN AND AN AEP FIRM AS DESCRIBED HEREIN, AND
REFERENCES TO THE "MANAGED FIRMS" MEAN HLMI, HLMNC AND HLMO (EACH AS DEFINED
BELOW) AND SUCH OTHER AEP FIRMS WITH WHICH HLM DESIGN SHALL, FROM TIME TO TIME,
ENTER INTO MANAGEMENT AND SERVICES AGREEMENTS. "HLM" IS A REGISTERED TRADEMARK
OF HLM DESIGN.
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PART I
ITEM 1. BUSINESS
OVERVIEW
HLM Design, Inc. is a management company that enters into management and
services relationships with full service AEP Firms. It was formed in March 1997
to pursue a strategy of consolidating non-professional operations and providing
management expertise to individual AEP Firms. HLM Design believes it is the
first company to pursue such a consolidation strategy in order to take
advantage of operating efficiencies and provide geographic and service
diversification for clients. Prior to March 1997, the current management team
of HLM Design operated HLM Design of Northamerica, Inc. (formerly named Hansen
Lind Meyer Inc.), an Iowa corporation ("HLMI"), HLM Design of the Southeast,
P.C. (formerly named HLM of North Carolina, P.C.) ("HLMNC") and HLM Design of
the Northwest, Architecture, Engineering and Planning, P.C. (formerly named HLM
of Oregon, Architecture and Planning, P.C.) ("HLMO").
HLMI was founded in Iowa City, Iowa in 1962 to provide architecture,
engineering and planning services. In 1987, the original founders of HLMI sold
their ownership in the company to the HLMI Employee Stock Ownership Plan (the
"ESOP") and a board of directors consisting of senior principals took control
of HLMI. On May 23, 1997, following consummation of a merger transaction,
Messrs. Harris and Brannon owned all the outstanding stock of HLMI. See
"Certain Relationships and Related Transactions -- Merger Transaction." HLMI's
headquarters were moved from Iowa City, Iowa to Charlotte, North Carolina in
1996. HLMNC and HLMO were organized in 1996 but have had no operations to date.
These three AEP Firms each entered into a forty-year Management and
Services Agreement with HLM Design in May 1997. The Managed Firms operate
offices in Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando,
Florida, Bethesda, Maryland, Denver, Colorado, Sacramento, California,
Philadelphia, Pennsylvania, Portland, Oregon and Charlotte, North Carolina. HLM
DESIGN IS NOT ENGAGED IN THE PRACTICE OF ARCHITECTURE, ENGINEERING OR PLANNING.
Joseph M. Harris and Vernon B. Brannon, executive officers and principal
stockholders of HLM Design, are also the principal stockholders and officers of
the Managed Firms, HLMI, HLMNC and HLMO. As officers of the Managed Firms, they
caused the Managed Firms to enter into Management and Services Agreements with
HLM Design and as stockholders of each of the Managed Firms they entered into
Stockholders' Agreements (as described below). See "Certain Relationships and
Related Transactions -- Relationships with Managed Firms" for additional
information.
A full-service AEP Firm provides a spectrum of services in various
specialties to customers through a broad range of professionals, including
architects, mechanical, electrical, structural and civil engineers, landscape
architects, interior designers and construction administration personnel. HLM
Design has chosen to focus its effort on the management of full-service AEP
Firms because it believes these firms offer a competitive advantage -- the
ability to provide a full line of high-quality, cost effective services -- over
firms that provide a more narrow range of services. HLM Design believes that
its consolidation strategy will assist in attracting new AEP Firms as a result
of two major trends: (1) the increasing complexity, cost and competitiveness of
the design practice conducted by AEP Firms requiring operating and cost
efficiencies and (2) AEP Firms' need for access to a wider pool of
geographically dispersed professionals in order to provide solutions for the
evolving needs of their clients.
As a management company, HLM Design's relationship with the Management
Firms is contractual; it has no ownership interest in the Managed Firms. As a
result, stockholders in HLM Design will have no direct or indirect ownership
interest in the Managed Firms.
HLM Design's strategy is to expand revenues through (1) the development of
new long-term Management and Services Agreements with full-service AEP Firms
throughout the United States and (2) the expansion of services to existing
clients. Currently, HLM is not engaged in negotiations with any AEP Firms.
OPERATING STRATEGY
The creation of a management relationship between HLM Design and an AEP
Firm involves, among other things, the signing of a Management and Services
Agreement between HLM Design and the AEP Firm. Under the terms of the
Management and Services Agreement, HLM Design is the sole and exclusive manager
and administrator of all of the Managed Firm's day-to-day business functions.
These functions include financial planning, facilities, equipment and supplies,
and management and administrative services. Management and administrative
services include bookkeeping and accounts, general administration services,
contract negotiation and administration for all non-architectural and
non-engineering aspects of
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all agreements pertaining to the provision of architectural and engineering
services by Managed Firms to third parties, personnel, security and
maintenance, architectural and engineering recruiting and training, insurance,
issuance of debt and additional capital stock and billing and collections. In
connection with these services, HLM Design receives all but 1% of the firm's
positive cash flow (as determined in accordance with generally accepted
accounting principles applied on a consistent basis). See " -- HLM Design
Operations -- Management and Services Agreements."
In addition to the Management and Services Agreement, HLM Design requires
stockholders of Managed Firms to enter into Stockholders' Agreements, which
provide the stockholders of those entities with nominee stockholder status.
Generally, the Stockholders' Agreements provide for the following: (i) the
repurchase by the Managed Firm of the stockholder's stock upon such
stockholder's death, (ii) restrictions on transferability of the stock, (iii) a
"call-right" on the stock by the Managed Firm and (iv) a voting agreement among
the stockholders and the Managed Firm. See " -- HLM Design Operations --
Stockholders' Agreements."
The architects, engineers and planners employed by the Managed Firms offer
a broad range of specialty and ancillary services. The Managed Firms offer
services in master planning, architectural design, mechanical, electrical,
structural and civil engineering, interior design, environmental graphics,
landscape architecture, construction services and facility management. Each
office varies in the number and types of specialties offered. The Managed Firms
provide excellence in design and over the years have designed over a billion
square feet of buildings and completed hundreds of planning and feasibility
studies. Clients of the firms range from small companies to America's most
prestigious corporations. The professionals at the Managed Firms specialize in
the design of hospitals, criminal justice buildings and high-tech research
facilities. Design experience of professionals employed by the Managed Firms
includes corporate headquarters, physician office buildings, investment office
buildings, multi-use office complexes and related facilities. The Managed
Firms' professionals maintain full control over their architectural and
engineering practices, determine which projects to pursue and set their own
standards of practice in order to promote high-quality provision of services
and retain ownership of all contracts with clients. HLM Design is not engaged
in the practice of architecture, engineering or planning.
The following more fully describes the services provided by the Managed
Firms:
FOCUS ON HEALTHCARE. The Managed Firms design healthcare facilities that
help their clients improve patient care and reduce operating costs. During the
last 33 years, HLMI has designed over one billion square feet of healthcare
facilities. Its experience includes more than 325 healthcare clients and over
825 major healthcare engagements including:
o 205 health facility master plans
o 118 ambulatory care centers
o 77 ambulatory surgery centers
o 120 academic medical centers and teaching facilities
o 64 cancer centers
o 69 women's facilities
o 13 replacement hospitals
o 44 medical office buildings
FOCUS ON JUSTICE. The Managed Firms design justice facilities that help
their clients build efficient and effective public facilities in times where
financing of construction and operation of these public facilities is
continually being scrutinized. Its experience includes:
o 25 federal and state projects
o 1.8 million square feet for the federal government
o 3 million square feet of courthouse renovation
By integrating design and planning, the Company's professionals meet
project objectives by improving staff efficiency, accelerating the project
schedule or even addressing sensitive urban design issues. Teams explore
options to optimize the return on construction dollars, for example, by
creatively combining renovation and new construction. The Company helps bridge
the gap between need and public acceptance through public information campaigns
and cost control. The results are buildings -- courts, police, detention or
corrections facilities -- that meet stringent cost requirements yet still
achieve a high quality of design.
FOCUS ON RESEARCH FACILITIES. The Managed Firms design laboratories for
clients that focus on optimizing space utilization and provide flexibility to
adapt to changing technology or funding constraints. Systems are designed to
control operating costs while protecting the demands of the research function
and making safety and security the highest priority. Often, the goal is to
produce environments that stimulate creativity, promote interaction, enhance
the client's ability to recruit the
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best and brightest and attract funding. The Managed Firms have completed 30
research facility projects totalling over 3 million square feet valued at $540
million in construction costs.
GROWTH STRATEGY
HLM Design intends to implement an aggressive, yet disciplined, expansion
program by pursuing Management and Services Agreements with (i) large
"regional" AEP Firms with established operating histories located in large
metropolitan and high-growth suburban geographic markets that the Company does
not currently serve and (ii) small firms that provide operational diversity in
geographic areas that will complement the services that are either currently
provided by the Company in such geographic areas or that are intended to be
provided in the future. HLM Design believes its approach will be attractive to
these large and small AEP Firms because it will provide these firms with
economies of scale and the synergies that result from increased purchasing
power, a greater breadth of services, an increased pool of professionals and
geographical diversity. Furthermore, this strategy will give these regional and
local AEP Firms, as a part of the Company, the ability to provide services to
existing and future clients with national operations that might otherwise have
turned to "non-local" firms to service their needs. The goal is for the Company
to be the single source provider for large national clients with geographically
diverse operations.
HLM Design generally expects that AEP Firms that sign Management and
Services Agreements will retain existing high-quality professional staff and
continue to operate in an effective and efficient manner with personnel who
understand the local market. Additionally, management believes it is positioned
to pursue larger, well established AEP Firms as a result of the depth of HLM
Design's management team, its capital structure and the reputation of the
management team in the design industry. Management also believes these goals
can be achieved at less cost than that which would be incurred by AEP firms
operating on a stand alone basis.
HLM DESIGN OPERATIONS
Pursuant to its Management and Services Agreements, HLM Design manages all
aspects of the Managed Firm other than the provision of professional
architectural, engineering and planning services. The provision of these
services is controlled by the Managed Firms themselves. HLM Design enhances
firm growth by assisting in the recruitment of new professionals and by
expanding and adding ancillary services.
One of HLM Design's goals is to negotiate national arrangements and
provide cost savings to Managed Firms through economies of scale in areas such
as malpractice insurance, supplies, equipment and business functions.
MANAGEMENT AND SERVICES AGREEMENTS
The Management and Services Agreements with the Managed Firms are for a
period of forty years. Although these agreements are terminable by HLM Design,
with or without cause, upon 60 days' notice to the Managed Firms (with the
approval of a majority of the Board of Directors and a majority of its
independent directors), they cannot be terminated by the Managed Firms without
a material default or bankruptcy. Under these agreements, HLM Design is
appointed as the sole and exclusive manager and administrator of all of the
Managed Firms' day-to-day business functions, including financial planning,
facilities, equipment and supplies, management and administrative services
(including bookkeeping and accounts, general administration services, contract
negotiation and administration for all non-architectural and non-engineering
aspects of all agreements pertaining to the provision of architectural and
engineering services by Managed Firms to third parties), personnel, security
and maintenance, architectural and engineering recruiting and training,
insurance, billing and collections and marketing support. HLM Design has no
authority, directly or indirectly, to perform any function of the Managed
Firm's operations pertaining to services, which are required to be performed by
duly licensed architects and engineers pursuant to any and all applicable laws,
rules or regulations adopted by any authority regulating the licensing of
architects or engineers. The Managed Firms will retain ownership of all
contracts with clients. Additionally, HLM Design has the authority to approve
or deny, on behalf of the Managed Firm, any and all proposals by stockholders
of such firm to encumber, sell, pledge, give or otherwise transfer the capital
stock of the Managed Firm, as well as the authority to approve issuance of
common stock or incurrence of indebtedness.
As compensation for the provision of its services under the Management and
Services Agreement, HLM Design earns 99% of the net income of the Managed
Firms, as determined in accordance with generally accepted accounting
principles. However, for cash management purposes, the Management and Services
Agreements state that HLM Design is to receive all but 1% of the positive cash
flow (calculated as the change in the cash balances from the beginning of the
period to the end of the period for the Managed Firms). As the management
company, HLM Design will be responsible for the financing of working capital
growth, capital growth and other cash needs. The Management and Services
Agreements are structured so
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as not to force the Managed Firms to borrow money to satisfy their
inter-company obligations for the management fee (defined as 99% of the net
income of the Managed Firm). For the year ended May 1, 1998, HLM Design earned
$1,441,305; however, due to cash requirements of the Managed Firms, the
management fee required to be paid at May 1, 1998 was $450. The remaining
balance of $1,440,855 has been recorded as a receivable by HLM Design, which
will be paid with future positive cash flows. All significant balances and
transactions between HLM Design and the Managed Firms have been eliminated in
the consolidated financial statements included elsewhere herein.
Effective January 1, 1998, all HLMI employees were transferred to HLM
Design and now provide services to HLMI as HLM Design employees. From May 30,
1997 (the date of inception of the Management and Services Agreements currently
in effect), until December 31, 1997, HLMI accrued no compensation bonuses for
HLMI stockholder officers.
STOCKHOLDERS' AGREEMENTS
Stockholders of Managed Firms have entered into a Stockholders' Agreement,
which generally restricts the ability of these stockholders to exercise certain
rights commonly associated with ownership of common stock and effectively
provides stockholders of such entities with nominee stockholder status.
Generally, such Stockholders' Agreements provide that:
(i) upon the death of a stockholder, the Managed Firm will purchase, and
the personal representative of such stockholder's estate will sell to the
Managed Firm, all the stock owned by such deceased stockholder; provided,
however, in certain circumstances the sale of such stockholder's stock may
be made to one or more third parties, subject to the approval of the
Managed Firm;
(ii) stockholders may not sell, pledge, give or otherwise transfer any or
all of their stock to any third party, either voluntarily or involuntarily,
without first obtaining the Managed Firm's written approval of such
transfer, provided, that if the Managed Firm denies such approval, it shall
purchase such stock;
(iii) the Managed Firm has the right at any time to purchase all, but not
less than all, of the stock then owned by any or all of the stockholders;
and
(iv) the stockholders agree that with respect to all matters submitted to
stockholder vote (and, to the extent that all or any of the stockholders
serve as a director of the Managed Firm, then also with respect to all
matters submitted to a vote of the board of directors), the stockholders
will, if not in unanimous agreement, follow specified procedures to achieve
unity in voting among all stockholders.
In addition, the Stockholders' Agreements contain an acknowledgment on the
part of each stockholder that it is in the parties' best interest that certain
of the Managed Firm's administrative and managerial functions be performed
pursuant to a Management and Services Agreement with HLM Design and that in
order to ensure consistency and continuity in the management of the firm's
business and affairs, with respect to all matters pertaining to the initiation
of stock "calls" and the approval or denial of proposed stock transfers, the
Managed Firm will in all cases act in accordance with the written
recommendation of HLM Design. The Stockholders' Agreements provide that they
may be terminated upon the occurrence of any of the following events:
(i) cessation of the Managed Firm's business,
(ii) bankruptcy, receivership or dissolution of the Managed Firm, or
(iii) the voluntary agreement of all parties bound by the terms of such
Stockholders' Agreement.
It is anticipated that Stockholders' Agreements among stockholders of the
AEP Firms with whom HLM Design enters into Management and Services Agreements
in the future will have similar terms.
COMPETITION
The business of providing architectural, engineering and planning services
is highly competitive. Although HLM Design is not aware of any other company
actively pursuing a strategy of consolidating firms' administrative and
management functions, it believes that additional companies with similar
objectives will be organized in the future. Potential sources of competition
include larger, nationally known, multi-specialty professional groups or
professional firms and others, a number of which may have significantly greater
resources than those of the Company.
The Managed Firms are in competition with many other AEP firms, including
large, national firms as well as many small, local firms. The Managed Firms
compete with these firms on the basis of technical capabilities, qualifications
and availability of personnel, experience, reputation, quality performance and,
to a lesser extent, price of services.
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GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
Each state has enacted legislation governing the registration of
architects and engineers, and, in some cases, landscape architects, fire
protection engineers and interior designers. These state laws impose licensing
requirements upon individual design professionals and architectural-engineering
firms and are implemented by a more detailed set of administrative rules and
regulations overseen by a registration board. In general, the state laws define
the practice of architecture and engineering, restrict the use of the titles
ARCHITECT and ENGINEER to licensed individuals, establish rules for entry into
the profession, explain how professionals licensed in other states may become
reciprocally registered to practice in the jurisdiction and define and enforce
standards of professional conduct and misconduct.
The state laws, or the regulations established by a registration board,
may also establish requirements for the practice of architecture or engineering
by a corporation or partnership. A few states do not permit the practice of
architecture or engineering in a corporate form. Some states require design
professionals who want to incorporate to do so as a professional corporation
authorized and certified by the secretary of state. Most states permit practice
through either a professional corporation or a general business corporation.
Even if a state permits practice in a corporate form, the state may require
that a certain number of principals in the corporation must be registered
architects or engineers. Some states specify that a certain percentage of the
principals, directors or stockholders of a corporate entity must be registered
architects or engineers in order to practice in the state. A corporation
seeking to practice in a state other than that in which it is incorporated must
register as a foreign corporation in the other state and satisfy all of the
registration requirements.
There can be no assurance that the regulatory environment in which the
Company operates will not change significantly in the future.
Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.
EMPLOYEES
Prior to January 1, 1998, all employees were employed with HLMI; however,
under HLMI's Management and Services Agreement and consistent with HLM Design's
strategy, all employees were transferred to HLM Design as of January 1, 1998.
As of January 1, 1998, HLM Design employed approximately 246 persons of which
approximately 92 were registered professionals (engineers, architects and
others), approximately 102 were degreed professionals and approximately 52 were
administrative personnel. None of HLM Design's employees or the Managed Firm's
employees is represented by a labor union. HLM Design considers its relations
with its employees and the employees of the Managed Firms to be satisfactory.
The registered professional architects and engineers generally have
degrees from accredited architecture or engineering schools, several years of
work experience and have passed licensing examinations. Both registered and
degreed architects have either a five year architectural degree or a four year
degree and a two year advanced architectural degree. The Company's degreed
professionals who are not registered have not yet passed the required licensing
examinations.
ITEM 2. PROPERTIES
HLM Design's principal executive offices are located at 121 West Trade
Street, Suite 2950, Charlotte, North Carolina and its telephone number is (704)
358-0779, where the Company leases 7,254 square feet. Its lease of such offices
is for a term of 5 years and expires in 2000. The Company believes the office
facility is adequate for its current uses and anticipated growth. In addition
to HLM Design's principal executive offices, the Company leases office space in
Sacramento, California, Denver, Colorado, Orlando, Florida, Atlanta, Georgia,
Iowa City, Iowa, Chicago, Illinois, Bethesda, Maryland, Portland, Oregon and
Philadelphia, Pennsylvania.
ITEM 3. LEGAL PROCEEDINGS
From time to time HLM Design or one or more of the Managed Firms are named
in claims involving contractual disputes or other matters arising in the
ordinary course of business. Currently, no legal proceedings are pending
against or involve HLM Design or the Managed Firms that, in the opinion of
management, when considering insurance coverage, could reasonably be expected
to have a material adverse effect on the business, financial condition or
results of operations of HLM Design.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of HLM Design's fiscal year ended May 1, 1998,
prior to consummation of its IPO and prior to HLM Design's becoming subject to
rules and regulations under the Securities Exchange Act of 1934, as amended,
HLM Design took action by consent of its majority stockholders as follows:
On February 3, 1998, the majority stockholders (1) approved an amendment
to HLM Design's certificate of incorporation as part of the series of
transactions constituting the Stock Split, (2) approved the 1998 Stock Option
Plan (as described below) (the "Stock Option Plan"), (3) approved certain
grants under the Stock Option Plan and (4) approved the HLM Design, Inc,
Employee Stock Purchase Plan.
On February 12, 1998, the majority stockholders approved a further
amendment to HLM Design's certificate of incorporation as part of a series of
transactions constituting the Stock Split.
On April 27, 1998, the majority stockholders approved two further
amendments to HLM Design's certificate of incorporation as part of a series of
transactions constituting the Stock Split.
Each of the foregoing majority stockholders consents was effected by
consent of holders of a total of 618,375 shares out of a total of 875,087
shares of HLM Design's common stock then outstanding. No other stockholders
participated in such action or otherwise registered a vote, against or
abstaining with respect to such actions.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to June 12, 1998, the Company was privately held and there was no
market for the Common Stock. Effective June 12, 1998, the common stock of the
Company, par value of $.001 per share (the "Common Stock"), began trading on
the NASDAQ Small Cap Market under the symbol "HLMD". As of July 24, 1998,
2,075,087 shares of Common Stock were outstanding and issued to a total of
approximately 650 record and beneficial holders. The closing sales price for
the Common Stock on July 24, 1998 was $5.19.
HLM Design has never declared or paid a dividend on its Common Stock. HLM
Design intends to retain all of its earnings to finance the growth and
development of its business, including through the execution of new Management
and Services Agreements, and does not anticipate paying any cash dividends on
its Common Stock for the foreseeable future. Any future change in HLM Design's
dividend policy will be made at the discretion of the Board of Directors of HLM
Design and will depend upon HLM Design's operating results, financial
condition, capital requirements, general business conditions and such other
factors as the Board of Directors deems relevant.
On June 12, 1998, HLM Design's Registration Statement on Form S-1 (SEC
File Number 333-40617) with respect to the Offering (the "Registration
Statement") was declared effective, and HLM Design commenced the Offering. On
June 18, 1998, HLM Design received $5.92 million in net proceeds (after giving
effect to payment of the underwriters' discount and other expenses) from the
IPO, which consisted of 1,200,000 shares of Common Stock sold at an aggregate
price to the public of $7.2 million. On July 12, 1998, an over-allotment option
for an aggregate of 180,000 shares of Common Stock (the "Over-Allotment
Option") granted by HLM Design to the underwriters' expired unexercised.
Berthel Fisher & Company Financial Services, Inc. ("Berthel Fisher"),
Westport Resources Investment Services, Inc. and Marion Bass Securities
Corporation acted as managing underwriters in the Offering.
From the aggregate price to the public, $.72 million has been applied as
the underwriters' discount and $.56 million has been applied to the total
actual other expenses of the IPO payable to third parties. As of June 26, 1998,
net proceeds from the IPO were applied or, where indicated, are held for
application as follows:
<TABLE>
<S> <C> <C>
Repayment of Pacific/Equitas Loan (as defined below) ................... $ 2.0 million
Repayment of Berthel Leasing Loan (as defined below) ................... .75 million
Repayment of notes payable to employee stockholders .................... .2 million
Held for application to new business development and working capital and
general corporate purposes ............................................. 2.97 million
-----
Total Net Proceeds ..................................................... $ 5.92 million
======
</TABLE>
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" for additional information.
8
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES.
Except as hereinafter set forth, there have been no sales of unregistered
securities by HLM Design in fiscal 1998. The information set forth below is
provided on a pre-Stock Split basis.
On May 16, 1997, May 19, 1997, May 28, 1997, July 7, 1997, July 8, 1997,
July 14, 1997, August 22, 1997 and November 1, 1997 HLM Design issued an
aggregate of 2,340 shares of Common Stock to senior level employees of the
Company in exchange for $14.81 per share (except that in the case of the
November 1, 1997 issuance, 200 shares of Common Stock were issued in the form of
a stock bonus). As of May 30, 1997, September 10, 1997 and December 24, 1997,
HLM Design issued warrants to purchase 17,794 shares of Common Stock for an
aggregate of $23,500 in connection with financing arrangements. On November 10,
1997, Clay R. Caroland exercised his Warrant and purchased 862 shares of Common
Stock. On December 26, 1997 Berthel Leasing exercised its Warrant and purchased
3,422 shares of Common Stock. On February 12, 1998 Equitas exercised its Warrant
and purchased 5,749 shares of Common Stock. In connection with each such
exercise of Warrants, the Company received consideration of $11.00, $43.64 and
$110.67, respectively. In each of the foregoing transactions, the securities
were not registered under the Securities Act, in reliance upon the exemption
from registration provided by Section 4(2) of said Act in view of the
sophistication of the foregoing purchasers, their access to material
information, the disclosures actually made to them by HLM Design and the
absence of any general solicitation or advertising.
Information concerning the Stock Split, the issuance of shares in
connection therewith and the issuance of shares after year-end, is set forth
elsewhere in this report.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the Predecessor Company (as
defined below) for each of the three fiscal years ended April 25, 1997 are
derived from audited financial statements. The following selected financial
data for the Predecessor Company for the fiscal year ended April 30, 1994 are
derived from unaudited financial statements. The selected financial data
(Predecessor Company) for the one month ended May 30, 1997 are derived from the
unaudited financial statements of HLMI. The selected financial data for the
year ended May 1, 1998 are derived from the audited consolidated financial
statements of HLM Design, which reflect the results of operations of HLM Design
for twelve months and the results of operations of HLMI, HLMNC and HLMO for the
eleven month period from May 31, 1997 to May 1, 1998. In the opinion of
management, these unaudited financial statements reflect all adjustments
necessary for a fair presentation of its results of operations and financial
condition. All of the data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes included elsewhere
herein.
9
<PAGE>
<TABLE>
<CAPTION>
(PREDECESSOR COMPANY) (1)
-------------------------------------------------------------------
FOR THE YEAR ENDED
-------------------------------------------------------------------
APRIL 30, APRIL 30, APRIL 26, APRIL 25,
1994 1995 1996 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue ....................................... $ 27,841,902 $ 29,122,557 $ 28,554,424 $ 26,754,710
------------ ------------ ------------ ------------
Costs and Expenses:
Direct cost of revenue ........................ 15,925,434 15,685,671 14,261,952 13,376,251
Operating costs ............................... 13,516,392 14,098,729 13,104,278 12,414,739
ESOP expenses ................................. 564,918 573,837 584,202 408,765
Amortization on intangible assets ............. 5,952 5,952 99,145 107,670
------------ ------------ ------------ ------------
Total costs and expenses ...................... 30,012,696 30,364,189 28,049,577 26,307,425
------------ ------------ ------------ ------------
Income (loss) from operations ................. (2,170,794) (1,241,632) 504,847 447,285
------------ ------------ ------------ ------------
Other income (expense):
Net interest .................................. (43,058) (142,744) (383,552) (396,007)
Non-operating income (expense) ................ -- 428,475 850,273 285,635
------------ ------------ ------------ ------------
Total other income
(expense) ................................ (43,058) 285,731 466,721 (110,372)
------------ ------------ ------------ ------------
Income (loss) before income taxes and
minority interest ........................... (2,213,852) (955,901) 971,568 336,913
Income tax expense (benefit) .................. (779,000) (360,080) 435,459 219,799
------------ ------------ ------------ ------------
Net income (loss) before minority
interest (3) ................................ $ (1,434,852) $ (595,821) $ 536,109 $ 117,114
Minority interest in earnings ................. -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) ............................. $ (1,434,852) $ (595,821) $ 536,109 $ 117,114
============ ============ ============ ============
NET INCOME PER SHARE
Basic .......................................
Diluted .....................................
NUMBER OF SHARES USED TO COMPUTE
PER SHARE DATA
Basic .......................................
Diluted .....................................
SUPPLEMENTAL NET INCOME PER SHARE (6):
NET INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM
Basic .......................................
Diluted .....................................
NET INCOME PER SHARE
Basic .......................................
Diluted .....................................
NUMBER OF SHARES USED TO COMPUTE
PER SHARE DATA
Basic .......................................
Diluted .....................................
BALANCE SHEET DATA:
Working capital(deficiency) ................... $ 1,229,211 $ (1,029,547) $ (1,620,488) $ (1,902,363)
Total assets .................................. 10,147,420 10,519,859 12,577,992 12,874,503
Long-term debt ................................ 1,050,330 840,302 564,577 103,792
Total liabilities ............................. 9,713,789 10,690,072 11,819,796 11,670,962
Warrants outstanding (4) ......................
Stockholders' equity (deficiency) (5) ......... 433,631 (170,213) 758,196 1,203,541
<CAPTION>
HLM DESIGN
CONSOLIDATED
ONE MONTH YEAR
ENDED ENDED
MAY 30, MAY 1,
1997 1998 (2)
--------------- ---------------
<S> <C> <C>
Revenue ....................................... $2,233,036 $29,296,690
---------- -----------
Costs and Expenses:
Direct cost of revenue ........................ 898,979 13,124,743
Operating costs ............................... 1,163,141 13,465,102
ESOP expenses .................................
Amortization on intangible assets ............. 9,571 147,269
---------- -----------
Total costs and expenses ...................... 2,071,691 26,737,114
---------- -----------
Income (loss) from operations ................. 161,345 2,559,576
---------- -----------
Other income (expense):
Net interest .................................. (36,951) (1,027,368)
Non-operating income (expense) ................ (55,370)
-----------
Total other income
(expense) ................................ (36,951) (1,082,738)
---------- -----------
Income (loss) before income taxes and
minority interest ........................... 124,394 1,476,838
Income tax expense (benefit) .................. 43,000 683,897
---------- -----------
Net income (loss) before minority
interest (3) ................................ $ 81,394 $ 792,941
Minority interest in earnings ................. -- 14,585
---------- -----------
Net income (loss) ............................. $ 81,394 $ 778,356
========== ===========
NET INCOME PER SHARE
Basic ....................................... $ 1.12
===========
Diluted ..................................... $ .91
===========
NUMBER OF SHARES USED TO COMPUTE
PER SHARE DATA
Basic ....................................... 697,255
===========
Diluted ..................................... 854,453
===========
SUPPLEMENTAL NET INCOME PER SHARE (6):
NET INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM
Basic ....................................... $ 0.78
===========
Diluted ..................................... $ 0.70
===========
NET INCOME PER SHARE
Basic ....................................... $ 0.57
===========
Diluted ..................................... $ 0.51
===========
NUMBER OF SHARES USED TO COMPUTE
PER SHARE DATA
Basic ....................................... 1,305,774
===========
Diluted ..................................... 1,462,976
===========
BALANCE SHEET DATA:
Working capital(deficiency) ................... (2,238,531) (257,897)
Total assets .................................. 17,639,673 17,862,334
Long-term debt ................................ 2,476,008 4,164,401
Total liabilities ............................. 16,354,738 16,767,460
Warrants outstanding (4) ...................... 114,932
Stockholders' equity (deficiency) (5) ......... 1,284,935 964,755
</TABLE>
10
<PAGE>
- - ---------
(1) The "Predecessor Company" is HLMI.
(2) Includes information for HLM Design and for the Managed Firms for the
eleven months from May 31, 1997 to May 1, 1998 on a consolidated basis.
HLM Design's operations for the month ended May 30, 1997 reflected herein
include no revenues or expenses.
(3) Historical net income per share is not presented, as the historical
capital structure prior to the Offering is not comparable with the capital
structure of the Company after the Offering.
(4) Reflects Warrants held by Pacific Capital, L.P. ("Pacific") as of May 1,
1998. Pacific exercised its Warrants in June 1998 immediately prior to the
effective date of the Registration Statement.
(5) Neither HLM Design nor the Predecessor Company has paid cash dividends
from May 1, 1992 to May 1, 1998.
(6) Supplemental net income per share has been prepared based upon the shares
outstanding giving effect to the issuance of common stock related to the
Offering pro rata for common stock used to pay certain indebtedness. In
addition, net income has been adjusted to give effect to the Offering and
the May 1997 merger transactions described elsewhere herein as if the
transactions had occurred at the beginning of fiscal 1998.
ITEM 7. 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 HLM Design and the
Managed Firms' financial statements and the Predecessor Company's financial
statements and the related notes thereto included elsewhere herein.
OVERVIEW
HLM Design is a management company which enters into management and
services relationships with full-service architectural, engineering and
planning firms. Currently, HLM Design has entered into Management and Services
Agreements with HLMI, HLMNC and HLMO. HLMNC and HLMO were organized in 1996 but
have had no operations to date. These three firms operate in ten offices in
Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando, Florida,
Bethesda, Maryland, Denver, Colorado, Sacramento, California, Philadelphia,
Pennsylvania, Portland, Oregon, and Charlotte, North Carolina. A full service
AEP Firm provides a spectrum of services in various specialties to customers
through a broad range of professionals, including architectural, mechanical,
electrical, structural and civil engineers, landscape architects, interior
designers and construction administration personnel.
In May 1997, BBH Corp., a corporation controlled by Joseph Harris and
Vernon Brannon, controlling shareholders of HLM Design, merged into HLMI with
HLMI being the surviving corporation. Funding for the acquisition through the
merger and "cash-out" of HLMI's existing stockholders, including the redemption
of the ESOP, was provided by loans of $3.2 million from HLM Design to BBH Corp.
See "Certain Relationships and Related Transactions -- Merger Transaction."
Immediately following the merger, the Managed Firms, HLMI, HLMNC and HLMO,
entered into Management and Services Agreements with HLM Design. HLM Design,
under the terms of such agreements, is the sole and exclusive manager and
administrator of all of the Managed Firms' day-to-day business functions,
including financial planning, facilities, equipment and supplies, management
and administrative services, and earns 99% of the net income of the Managed
Firms and, for cash management purposes, receives all but 1% of each Managed
Firm's positive cash flow.
PRO FORMA RESULTS OF OPERATIONS (EXCLUDING THE EFFECT OF THE OFFERING)
As a result of the acquisition of HLMI through the merger of BBH Corp.
into HLMI and the consummation of the Management and Services Agreements and
Stockholders' Agreements, the discussion and analysis of results of operations
for the year ended May 1, 1998 compared to year ended April 25, 1997 is
presented on a pro forma basis that reflects the acquisition of the assets of
HLMI through the merger of BBH Corp. into HLMI and the consummation of the
Management and Services Agreements and Stockholders' Agreements as though they
occurred at the beginning of the respective periods.
11
<PAGE>
FISCAL 1998 COMPARED WITH FISCAL 1997 -- PRO FORMA
This pro forma financial data does not give effect to the Offering.
<TABLE>
<CAPTION>
CONSOLIDATED CONSOLIDATED
PRO FORMA PRO FORMA
APRIL 25, MAY 1,
1997 1998
-------------- ---------------
<S> <C> <C>
Revenue ................................... $ 26,754,710 $ 31,529,726
Costs and expenses:
Direct cost of revenue .................... 13,376,251 14,023,722
Operating costs ........................... 12,031,739 14,638,291
Amortization of intangible assets ......... 168,000 172,124
------------ ------------
Total costs and expenses .................. 25,575,990 28,834,137
------------ ------------
Income from operations .................... 1,178,720 2,695,589
Other income (expense)
Interest expense .......................... (1,096,509) (1,124,357)
Non-operating income ...................... 292,137 --
------------ ------------
Total other expense ...................... (804,372) (1,124,357)
------------ ------------
Income before income taxes ................ 374,348 1,571,232
Income tax expense ........................ 298,378 714,897
------------ ------------
Net income ................................ 75,970 856,335
============ ============
</TABLE>
Revenues were $31.5 million in fiscal 1998 as compared to $26.8 million in
fiscal 1997, which is an increase of 17.8%. This increase is attributable to
management's stronger focus on marketing efforts during the fiscal year ended
1998.
Direct costs primarily include, direct labor, subconsultant cost and
reimbursable expenses. Direct costs were $14.0 million, or 44.5% of revenues,
in fiscal 1998 as compared to $13.4 million, or 50% of revenues, in fiscal
1997. This decrease as a percent of revenues is principally due to a decrease
in direct labor incurred as a percentage of revenues due to improved
productivity as a result of management's closer monitoring of each project, as
well as a decrease in subconsultant costs.
Operating expenses were $14.6 million, or 46.4% of revenues, in fiscal
1998 as compared to $12.0 million, or 45.0% of revenues, in fiscal 1997. The
increase is primarily due to increased marketing expenses during the fiscal
1998.
Amortization of intangible assets were $0.2 million in both fiscal 1998
and 1997. The amortization expense relates to the goodwill arising from the
acquisition of HLMI by BBH Corp. through the merger of BBH Corp. into HLMI. See
Note 2 to the Consolidated Financial Statements included elsewhere herein.
Interest expense was $1.1 million in fiscal 1998 as compared to $1.1
million in 1997.
Non-operating income was $0.3 million in fiscal 1997. The Company reported
no non-operating income in fiscal 1998. Non-operating income is principally due
to the gain on a lease terminations as a result of the cumulative excess of
lease expense over the lease payments made as of the termination dates. In
fiscal 1997, terminated facility leases resulted in a gain of $0.3 million.
Income tax expense was $0.7 million in fiscal 1998 as compared to $0.3
million in fiscal 1997. The effective income tax rate was 46% in fiscal 1998 as
compared to 80% in fiscal 1997. The effective income tax rate was higher in
fiscal 1997 principally due to nondeductible penalties in fiscal 1997.
PREDECESSOR RESULTS OF OPERATIONS
The following discussion and analysis and results of operations for the
fiscal years ended April 25, 1997 and 1996 relate to the Predecessor Company,
HLMI. HLM Design was incorporated on March 6, 1997 had no operations as of
April 25, 1997.
FISCAL 1997 COMPARED WITH FISCAL 1996
Revenues were $26.8 million in fiscal 1997 compared to $28.6 million in
fiscal 1996, which was a decline of 6.3%. The decline in revenues was primarily
attributable to HLMI's decentralization of architectural personnel from one
location to multiple locations, a shift in HLMI's mix from large academic
education facilities to smaller healthcare and criminal justice projects, and
HLMI's efforts to focus on the estimating process and selecting contracts with
profitability as the major
12
<PAGE>
goal, which resulted in some potential contracts not being pursued. During
fiscal 1997 and fiscal 1996, approximately 70% of HLMI's revenues were related
to health care projects and approximately 30% were from criminal justice and
other projects.
Direct costs include, among other things, direct labor, subconsultant cost
and reimbursable expenses. Direct costs were $13.4 million, or 50.0% of
revenues, in fiscal 1997 as compared to $14.3 million, or 49.9% of revenues, in
fiscal 1996. This increase as a percent of revenue is principally due to an
increase in the use of subconsultants to meet project requirements (18.2% and
16.7% of revenue in fiscal 1997 and fiscal 1996, respectively) and an increase
in reimbursable expenses incurred (4.4% and 3.3% of revenue in fiscal 1997 and
fiscal 1996, respectively). This increase is offset by a decrease in direct
labor incurred due to improved productivity as a result of HLMI's focus on cost
containment of each project (24.7% and 26.7% of revenue in fiscal 1997 and
fiscal 1996, respectively). As a result of these fluctuations and decreased
sales, gross profit from revenue (revenue less direct cost of revenue)
decreased to $13.4 million in fiscal 1997 from $14.3 million in fiscal 1996.
Operating expenses decreased 5.3% to $12.4 million, or 46.4% of revenues,
in fiscal 1997 from $13.1 million, or 45.9% of revenues, in fiscal 1996. The
decrease of 5.3% is principally due to a reduction in personnel costs resulting
from HLMI's efforts to increase utilization of labor.
ESOP expenses were $0.4 million in fiscal 1997 as compared to $0.6 million
in fiscal 1996. These expenses represent principal and interest payments on the
ESOP debt.
Amortization of intangible assets was $0.1 million for both fiscal 1997
and 1996. The amortization relates to the goodwill arising from the acquisition
of MPB Architects, Inc. in April 1995.
Interest expense was $0.4 million for both fiscal 1997 and 1996.
Non-operating income was $0.3 million in fiscal 1997 compared to $0.9
million in fiscal 1996. Non-operating income is principally due to the gain on
lease terminations as a result of the cumulative excess of lease expense over
the lease payments made as of the termination dates. In fiscal 1997 and fiscal
1996, HLMI terminated facility leases resulting in a gain of $0.3 million and
$0.8 million, respectively.
Income tax expense was $0.2 million in fiscal 1997 compared to $0.4
million in fiscal 1996. The effective income tax rate in fiscal 1997 was 65.2%
compared to 44.8% in fiscal 1996. The effective tax rate was higher for fiscal
1997 as compared to fiscal 1996 due principally to nondeductible penalties
(17.4% in 1997) and meals and entertainment expenses (9.3% in 1997). The
increase in penalty expense was due to HLMI's inability to timely fund payroll
taxes.
LIQUIDITY AND CAPITAL RESOURCES
At May 1, 1998, the Company's current liabilities of $12.6 million
exceeded current assets of $12.3 million resulting in a working capital
deficiency of $.3 million. During the year ended May 1, 1998, the Company
generated $0.6 million in cash from operating activities. The Company used $0.7
million for investing activities, primarily the purchase of equipment. The
Company generated $0.1 million from financing activities, primarily from
long-term borrowings reduced by the payment of the ESOP buyback.
The Company received proceeds, in June 1997, from financing, in the form
of a 60 month, triple net capital lease, of $2.8 million (the "Lease
Financing") from Berthel Fisher & Company Leasing, Inc. ("Berthel Leasing").
The proceeds were used to repay a line of credit and a note payable due to
Firstar Bank of Iowa, N.A. In connection with the Lease Financing (which
carried a rental payment of $64,501 per month and a $1 purchase option at the
end of the lease term), HLMI granted a security interest in all of its personal
property to Berthel Leasing, and Joseph Harris and Vernon Brannon partially
guaranteed the amount due to Berthel Leasing. HLM Design also entered into a
$0.75 million term loan, in September 1997, with Berthel Leasing for working
capital purposes (the "Berthel Leasing Loan"). Such loan, which matured as of
July 1, 1998, was also secured by a pledge of HLM Design assets and guaranties
by HLMI, Joseph Harris and Vernon Brannon. In consideration for this borrowing,
HLM Design sold warrants to purchase 43,631 shares of Common Stock (after
giving effect to the Stock Split), subject to adjustment in certain
circumstances, to Berthel Leasing (the "Berthel Warrants") and granted certain
registration rights, which begin in 2000 with respect to such shares. In
December 1997, Berthel Leasing exercised its warrants and purchased 43,631
shares of Common Stock (after giving effect to the Stock Split) at an exercise
price of $.01 per share. In connection with the IPO, the Berthel Leasing Loan
was repaid from the proceeds thereof. See Note 9 to the Consolidated Financial
Statements included elsewhere herein.
13
<PAGE>
In connection with the merger agreement with BBH Corp. and the payment of
the merger consideration to holders of HLMI common stock, the Company (i)
issued indebtedness in the aggregate principal amount of $2 million to Pacific
and Equitas, L.P. ("Equitas") (the "Pacific/Equitas Loan") (such indebtedness
being repaid in connection with, and from proceeds of, the IPO), (ii) obtained
financing from First Charter National Bank in the form of a revolving line of
credit in an aggregate principal amount of $1 million (together with a $0.5
million line of credit with First Charter National Bank previously in effect
with HLMI (the "First Charter Loan") under which the Company currently has
borrowings outstanding of $1.5 million) and obtained notes payable to employee
stockholders for $0.2 million (such indebtedness being repaid in connection
with, and from proceeds of, the IPO). The Pacific/Equitas Loan was secured by,
among other things, a collateral assignment of HLM Design's interest in its
Management and Services Agreements and the HLMI Note (as defined below) and a
security interest in HLM Design's personal property and fixtures. Additionally,
HLMI, and under certain circumstances, Joseph Harris and Vernon Brannon
guaranteed the Pacific/Equitas Loan. HLM Design also sold warrants to purchase
183,242 shares of Common Stock (after giving effect to the Stock Split),
subject to adjustment in certain circumstances, to Pacific, Equitas, Shannon
LeRoy, then a representative of Equitas on the Board of HLM Design, and Clay R.
Caroland, then a representative of Pacific on the Board of HLM Design (the
"Pacific/Equitas Warrants" and, together with the Berthel Warrants, the
"Warrants"). See "Certain Relationships and Related Transactions -- Merger
Transactions" and Note 4 to the Consolidated Financial Statements. In November
1997, Mr. Caroland exercised his warrants and purchased 10,991 shares of Common
Stock (after giving effect to the Stock Split) at an exercise price of $.01 per
share and Mr. LeRoy transferred his warrants to purchase 10,991 shares of
Common Stock (after giving effect to the Stock Split) to Equitas. In February
1998, Equitas exercised its warrants and purchased 73,300 shares of Common
Stock (after giving effect to the Stock Split) at an exercise price of $.01 per
share. In June 1998, Pacific exercised its warrants and purchased 98,953 shares
of Common Stock (after giving effect to the Stock Split) at an exercise price
of $.01 per share. The First Charter Loan is secured by an unconditional
guaranty from HLMI, and is secured by a security interest in all of HLMI's
accounts receivable. Joseph Harris, Vernon Brannon and a former director have
also guaranteed the First Charter Loan. For additional information concerning
the First Charter Loan, see Note 4 to the Consolidated Financial Statements.
Subsequent to May 1, 1998, HLM Design completed its IPO. The Company
received $5.92 million in net proceeds (after giving effect to payment of
underwriters' discount and other expenses) from the sale of 1,200,000 shares of
Common Stock sold at an aggregate price to the public of $7,200,000. The net
proceeds were used to repay certain indebtedness as further described above:
(a) $2.0 million loan from under the Pacific/Equitas Loan; (b) $0.75 million
due under the Berthel Leasing Loan; and (c) $0.2 million due to employee
stockholders. The remaining net proceeds of $2.97 million will be used for new
business development as well as working capital and general corporate purposes.
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 the management company,
HLM Design will be responsible for the financing of working capital growth,
capital growth and other cash needs of the Managed Firms. See "Business -- HLM
Design Operations -- Management and Services Agreements". As indicated above,
HLM Design has already maximized its borrowings under the First Charter Loan.
Such line of credit, as extended, matures as of August 31, 1998, unless it is
renewed by First Charter. Although HLM Design has received both verbal and
written indications from First Charter of its willingness to renew and increase
HLM Design's line of credit following a successful completion of the Offering,
First Charter has not entered into any commitment to do so. The Company
believes that the net proceeds from the Offering, the new revolving line of
credit and anticipated funds from future operations will be sufficient to meet
its working capital needs for at least the next twelve months. If HLM Design is
unable to obtain a new revolving line of credit, however, its ability to
implement its growth strategy will be adversely affected.
The Company's operations are professional services and as such are not
capital intensive. However, in order to enhance productivity, the Company has
increased its purchase of computer hardware and software. The Company currently
has no material commitments for purchases of additional equipment. Capital
expenditures during fiscal 1998 were $0.7 million.
HLM Design expects to fund AEP Firm affiliations with proceeds from the
Offering and future financings.
SEASONALITY
The Company's operations are not seasonal in nature.
EFFECTS OF INFLATION
Due to the relatively low levels of inflation in fiscal years 1996, 1997
and 1998, inflation did not have a significant effect on the Company's results
of operations for those periods.
14
<PAGE>
AUTOMATED SYSTEMS AND THE 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 base on current and
foreseeable computer and other automated system applications. The Company
believes any future costs associated with modifying its computer software and
other automated systems for the Year 2000 matters will not be significant.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." This Statement establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This Statement will be effective for HLM Design's fiscal
year ending April 30, 1999. The Company does not intend to adopt this Statement
prior to the effective date.
In June 1997, the Financial Accounting Standards Board also issued SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information."
This standard redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about the Company's
operating segments. This statement is effective for fiscal years beginning after
December 15, 1997. The Company has not yet completed its analysis of which
operating segments it will report, if any.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Information which appears on F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS; KEY PERSONNEL
The executive officers, directors and key personnel of the Company, and
their ages as of the date of this report, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
- - -------------------------------- ----- -----------------------------------------------------------
<S> <C> <C>
Joseph M. Harris 53 President, Chairman of the Board and Director*
Vernon B. Brannon 54 Senior Vice President, Chief Financial Officer, Treasurer,
Assistant Secretary and Director*
Clay R. Caroland III 43 Director
D. Shannon LeRoy 41 Director
Thomas G. Pinkerton, Sr. 53 Senior Vice President of HLMI
Bradley A. Earl 50 Vice President of HLMI
Viktor A. Lituczy 44 Vice President of HLMI
Frank E. Talbert 41 Vice President of HLMI
Robert P. Ludden 42 Vice President of HLMI
</TABLE>
- - ---------
* Executive Officer
JOSEPH M. HARRIS, AIA, RIBA, has been President, Chairman of the Board and
a Director of HLM Design since its organization in 1997. He has been President
and Chief Executive Officer of HLMI for the past three years. Prior to joining
HLMI in 1994, he served as President of Heery Architects and Engineers, Inc.
and an Executive Vice President and Director of Technical Services of Heery
International, Inc., one of the country's largest full-service
multi-disciplinary professional service firms. Prior to that, Mr. Harris was
one of the founders and served as President of Clark, Tribble, Harris and Li,
Architects, P.A. a multi-service architectural firm. Mr. Harris has over 30
years of professional experience and is an architect licensed in 32 states and
in the United Kingdom. It is expected that Mr. Harris's initial term as a
director of HLM
15
<PAGE>
Design will expire at the third annual meeting of stockholders of HLM Design
following classification of the Board of Directors pursuant to the Bylaws.
VERNON B. BRANNON has been Senior Vice President, Chief Financial Officer
and a Director of HLM Design since its organization in 1997. Along with Mr.
Harris, he is a stockholder of HLMI, which he joined in 1994 as Chief Financial
Officer and was appointed Senior Vice President soon after joining the firm.
Prior to joining HLMI, from 1988 to 1994, Mr. Brannon was Chief Operating
Officer of UAV Corporation, a video distribution firm, with responsibility for
manufacturing, finance, accounting and all other functions except sales. It is
expected that Mr. Brannon's initial term as a director of HLM Design will
expire at the third annual meeting of stockholders of HLM Design following
Board classification.
CLAY R. CAROLAND III has been a partner since 1987 in Health Investors, LP
and its affiliates. From 1996 to 1997, he also served as President of the
General Partner of Pacific Capital, L.P. Health Investors and Pacific are
investment firms. In 1989, he, along with Health Investors, organized and
capitalized ClinTrials, Inc., which grew to become a leading CRO. In 1981, he
co-founded Liberty Street Capital, NY, a Wall Street investment boutique and
was Managing Director there until 1987. Mr. Caroland has served on the boards
of directors of a number of companies including EquiVision and ClinTrials. It
is expected that Mr. Caroland's initial term as a director of HLM Design will
expire at the second annual meeting of stockholders of HLM Design following
Board classification.
D. SHANNON LEROY currently serves as President of Tennessee Business
Investments, Inc., the general partner of Equitas, L.P., a licensed Small
Business Investment Company. From 1988 until 1994, Mr. LeRoy served as a Senior
Vice President of First Union National Bank of Tennessee, where he managed
commercial banking. Mr. LeRoy is a Director of Power Designs, Inc., a
manufacturer of power supply and power line conditional products, and Laure
Beverage Company, a consumer beverage company. It is expected that Mr. LeRoy's
initial term as a director of HLM Design will expire at the first annual
meeting of stockholders of HLM Design following Board classification.
BRADLEY A. EARL is a Vice President managing the Philadelphia office of
HLMI. He joined HLMI in 1996. Prior to that he served in various leadership
positions in architectural firms and as an independent architect. He was
Director of Architecture at The Klett Organization from 1994 to 1996 and
Executive Architect to Children's Hospital of Philadelphia from 1992 to 1994.
He is a registered architect with 21 years of experience.
VIKTOR A. LITUCZY rejoined HLMI in 1996 as Vice President managing HLMI's
Portland, Oregon office. Prior to leaving HLMI in 1989. Mr. Lituczy was
Corporate Vice President for the Chicago office as well as director of
high-tech laboratory projects firmwide. From 1992 until 1996, he had his own
architectural practice in Portland and consulted with a number of healthcare
clients and architects on projects. From 1989 until 1992 he was an Associate
Principal for KMD Architects & Planners in Portland. He is a registered
architect with 20 years of experience.
ROBERT P. LUDDEN is a Vice President managing the Orlando office of HLMI.
He joined HLMI in 1993. Prior to that, from 1986 to 1993, he was a Vice
President at Cannon, a large architectural firm that focuses on healthcare
architecture. Mr. Ludden's career has focused on the leadership and direction
of significant architectural and engineering projects. His work spans a number
of markets including justice, healthcare, research and commercial. He is a
registered architect.
THOMAS G. PINKERTON is a Senior Vice President of HLMI. He joined the firm
in 1994 as National Director of Justice Architecture. Prior to joining HLMI he
was an associate with Hellmuth, Obata & Kassabaum, Inc., one of the largest
architectural firms in the country. A registered architect with 33 years of
experience, he has devoted his practice exclusively to the design of justice
facilities.
FRANK E. TALBERT is a registered architect with 17 years experience. He
joined HLMI in 1994 and is Vice President managing the Chicago office of HLMI.
Prior to joining HLMI, he was President of FibreCem Corporation from 1992 to
1994 where he led the successful turnaround of that company. His success was
achieved with a combination of an intensive, hands-on sales effort and a
reorganization of operations. From 1990 to 1992 he managed the Carolinas office
of Kajima International Inc., the world's largest turnkey developer/builder
where he established a program for financial enhancements on free standing not
leased retail projects. Mr. Talbert is a registered architect.
HLM Design will maintain two individuals not employed by or affiliated
with HLM Design to HLM Design's Board of Directors. These directors will have
access to regular outside legal counsel of HLM Design, or independent counsel
of their choosing, at the expense of the Company in either event.
The Board of Directors of the Company is divided into three classes, each
of which, after a transitional period, will serve for three years, with one
class being elected each year. The executive officers are elected annually by,
and serve at the discretion of, HLM Design's Board of Directors.
16
<PAGE>
HLM Design has agreed that Berthel Fisher shall be entitled, for a period
of three years following consummation of the Offering, to have a representative
receive notice of, attend and observe, all Board meetings of HLM Design. Such
representative shall not be a Board Member and shall have no voting rights at
any such meeting.
ITEM 11. EXECUTIVE COMPENSATION
Set forth below is information for the fiscal years 1998, 1997 and 1996
with respect to compensation for services to the Company or the Managed Firms:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- AWARDS
NUMBER OF
OTHER SHARES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION(S) YEAR SALARY(1) BONUS(2) COMPENSATION OPTIONS(3) COMPENSATION(4)
- - -------------------------- ------ ----------- ---------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Joseph M. Harris 1998 $300,000 $ -0- -0- -0- -0-
Chairman, President 1997 230,878 50,000 -0- -0- -0-
and Director 1996 192,307 0
Vernon B. Brannon 1998 250,000 -0- -0- -0- -0-
Senior Vice President 1997 178,847 50,000 -0- -0- -0-
Chief Financial Officer 1996 144,281 0
and Director
</TABLE>
- - ---------
(1) For additional information, see " -- Employment Agreements." Does not
include the dollar value of perquisites and other personal benefits.
(2) The amounts shown are cash bonuses earned in the specified year and paid in
the first quarter of the following year.
(3) The Company's Stock Option Plan was adopted in February 1998. No options
were granted to any of the Company's executive officers in fiscal years
1998, 1997 or 1996. See " -- Employment Agreements" for information
concerning options granted in June 1998.
(4) The aggregate amount of perquisites and other personal benefits received
did not exceed the lesser of $50,000 or 10% of the total annual salary and
bonus reported for such executive officer.
EMPLOYMENT AGREEMENTS
HLM Design has entered into employment agreements with Messrs. Harris and
Brannon (the "Employment Agreements"), which provide for an annual base salary
and certain other benefits. Pursuant to the Employment Agreements, the base
salaries of Messrs. Harris and Brannon will be $300,000 and $250,000,
respectively (consistent with base salaries in effect since March 1997).
Messrs. Harris and Brannon will also receive a monthly automobile allowance of
$1,000 and such additional compensation as may be determined by the Board of
Directors. Each of the Employment Agreements is for a term of three years and
will automatically be renewed for successive periods of one year. Additionally,
Messrs. Harris and Brannon each have been approved for grant of options
pursuant to the Stock Option Plan (that became effective in June 1998,
immediately before completion of the Offering), for 57,954 shares of Common
Stock, exercisable, in the case of incentive stock options, at $6.60 per share,
and in the case of nonstatutory stock options, at $5.50 per share. See " --
Stock Option Plan."
The Employment Agreements contain similar noncompetition provisions. These
provisions, during the term of the Employment Agreement, (i) prohibit the
disclosure or use of confidential Company information, and (ii) prohibit the
solicitation of the Company's clients, the participation or operation in any
business or service provided by the Company and, in the case of Mr. Harris, the
lending of his name to any business which provides architectural and
engineering services to persons who were clients or prospective clients of the
Company. The provisions referred to in (ii) above shall also apply for a period
of three years (with a corresponding severance arrangement tied to the
foregoing base salaries upon a termination or non-renewal without cause)
following the expiration or termination of an Employment Agreement.
17
<PAGE>
STOCK OPTION PLAN
In February 1998, the Board of Directors and stockholders of HLM Design
adopted the HLM Design, Inc. 1998 Stock Option Plan (the "Stock Option Plan")
in order to attract and retain key personnel. The following discussion of the
material features of the Stock Option Plan is qualified by reference to the
text of such plan filed as an exhibit to this Annual Report on Form 10-K.
Under the Stock Option Plan, options to purchase up to an aggregate of
159,955 shares of Common Stock may be granted to key employees of HLM Design
and its Managed Firms and to officers, directors, consultants and other
individuals providing services to the Company. Unless designated as "incentive
stock options" ("ISOs") intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), options granted under the Stock
Option Plan are intended to be "nonstatutory stock options" ("NSOs").
The Compensation Committee of the Board of Directors of HLM Design will
administer the Stock Option Plan and will determine, among other things, the
persons who are to receive options, the number of shares to be subject to each
option, and the vesting schedule of options; provided, that the Board of
Directors of HLM Design will make such determinations with respect to the
initial grants made under the Stock Option Plan. Members of the Board of
Directors who serve on the Compensation Committee must qualify as "non-employee
directors," as that term is defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended. The Board of Directors of HLM
Design will determine the terms and conditions upon which HLM Design may make
loans to enable an optionee to pay the exercise price of an option. In
selecting individuals for options and determining the terms thereof, the
Compensation Committee may consider any factors it considers relevant,
including present and potential contributions to the success of the Company.
Options granted under the Stock Option Plan must be exercised within a period
fixed by the Compensation Committee, which period, subject to early termination
upon the occurrence of certain events, may not exceed ten years from the date
of the grant of the option or, in the case of ISOs granted to any holder on the
date of the grant of more than ten percent of the total combined voting power
of all classes of stock of HLM Design and its affiliated firms, five years from
the date of grant of the option. Options may be made exercisable in whole or in
installments, as determined by the Compensation Committee. However, the
aggregate market value of the Common Stock with respect to which ISOs are
exercisable for the first time by the holder during any calendar year may not
exceed the limitation set forth in Section 422(d) of the Code (currently
$100,000). For this purpose, the market value shall be determined as of the
time the ISOs are granted.
Options generally may not be transferred other than by will or the laws of
descent and distribution and during the lifetime of an optionee may be
exercised only by the optionee. Notwithstanding the foregoing, the Compensation
Committee, in its discretion, subject to certain limitations, may grant
transferable options if such options are not ISOs. The exercise price of
options that are NSOs will be determined at the discretion of the Compensation
Committee, but will not be less than 85% of the market value of the Common
Stock on the date of grant of the NSOs. The exercise price of ISOs may not be
less than the market value of the Common Stock on the date of the grant of the
option. In the case of ISOs granted to any holder on the date of grant of more
than ten percent of the total combined voting power of all classes of stock of
HLM Design and its affiliated firms, the exercise price may not be less than
110% of the market value of the Common Stock on the date of the grant of the
ISOs. The exercise price may be paid in cash, in shares of Common Stock owned
by the optionee, in NSOs granted under the Stock Option Plan (except that the
exercise price of an ISO may not be paid in NSOs) or in any combination of
cash, shares and NSOs.
Options granted under the Stock Option Plan may include the right to
acquire a "reload" option. In such case, if an optionee pays all or part of the
exercise price of an option with shares of Common Stock held by the optionee
for at least six months, then, upon exercise of the option, the optionee is
granted a second option to purchase, at the fair market value as of the date of
exercise of the original option, the number of whole shares used by the
optionee in payment of the exercise price of the original option. A reload
option is not exercisable until one year after the grant date of such reload
option or the expiration date of the original option. If the exercise price of
a reload option is paid for with shares of Common Stock that have been held by
the Optionee for more than six (6) months, then another reload option will be
issued. Shares of Common Stock covered by a reload option will not reduce the
number of shares of Common Stock available under the Stock Option Plan.
The Stock Option Plan provides that, in the event of changes in the
corporate structure of HLM Design or certain events affecting the Common Stock,
adjustments will automatically be made in the number and kind of shares
available for issuance and in the number and kind of shares and option price
thereof covered by outstanding options. It further provides that, in connection
with any merger or consolidation in which HLM Design is not the surviving
corporation and which results in the holders of the Common Stock owning less
than a majority of the surviving corporation or any sale or transfer by HLM
18
<PAGE>
Design of all or substantially all its assets or any tender offer or exchange
offer for or the acquisition, directly or indirectly, by any person or group of
all or a majority of the then-outstanding voting securities of HLM Design, all
outstanding options under the Stock Option Plan will become exercisable in full
on and after (i) the 15th day prior to the effective date of such merger,
consolidation, sale, transfer or acquisition or (ii) the date of commencement
of such tender offer or exchange offer, as the case may be.
Effective on June 12, 1998, immediately before the consummation of the
Offering, the Company granted NSOs to purchase 40,568 shares of Common Stock
and ISOs to purchase 17,386 shares of Common Stock to each of Joseph Harris and
Vernon Brannon.
The issuance and exercise of ISOs have no federal income tax consequences
to the Company. While the issuance and exercise of ISOs generally have no
ordinary income tax consequences to the holder, upon the exercise of an ISO,
the holder will treat the excess of the Common Stock's fair market value on the
date of exercise over the exercise price as an item of tax adjustment for
alternative minimum tax purposes. If the holder of Common Stock acquired upon
the exercise of an ISO holds such stock until a date that is more than two
years following the grant of the ISO and one year following the exercise of the
ISO, the disposition of such Common Stock will ordinarily result in long-term
capital gain or loss to the holder for federal income tax purposes equal to the
difference between the amount realized on disposition of the Common Stock and
the option exercise price. If the holding period requirements described above
are not met, the holder will recognize ordinary income for federal income tax
purposes upon disposition of the Common Stock in an amount equal to the lesser
of (i) the excess of the Common Stock's fair market value on the date of
exercise over the option exercise price and (ii) the excess of the amount
realized on disposition of the Common Stock over the option exercise price. Any
additional gain upon the disposition will be taxed as capital gains. Any
capital gain will be subject to reduced rates of tax if such shares were held
more than twelve months, and will be subject to further reduced rates if such
shares were held more than eighteen months. The Company will be entitled to a
compensation expense deduction for the Company's taxable year in which the
disposition occurs equal to the amount of ordinary income recognized by the
holder.
The issuance of NSOs has no federal income tax consequences to the Company
or the holder. Upon the exercise of an NSO, NSO holders will recognize ordinary
income for federal income tax purposes at the time of option exercise equal to
the amount by which the fair market value of the underlying shares on the date
of exercise exceeds the exercise price. The Company generally will be allowed a
federal income tax deduction in the same amount. In the event of the
disposition of shares acquired by exercise of a NSO, any appreciation or
depreciation after the exercise date generally will be taxed as capital gain or
loss; provided, that any gain will be subject to reduced rates of tax if such
shares were held for more than twelve months and will be subject to further
reduced rates if such shares were held for more than eighteen months.
If the option exercise price under any NSO is paid for by surrendering
shares of Common Stock previously acquired, then the optionee will recognize
ordinary income on the exercise as described above with respect to any shares
acquired under the NSO in excess of the number of shares surrendered (such
shares being treated as having been acquired without consideration), but will
not recognize any taxable gain or loss on the difference between the optionee's
basis in the surrendered shares and their current fair market value. For
federal income tax purposes, the number of newly acquired shares equal to the
number of shares surrendered will have the same basis and holding period as the
surrendered shares. Any newly acquired shares in excess of the number of shares
surrendered will have a tax basis equal to the amount of ordinary income
recognized on such exercise (i.e., fair market value at exercise) and a holding
period which begins on the date the optionee recognizes ordinary income for tax
purposes.
HLM Design intends to register the shares underlying the Stock Option Plan
if required by the federal securities laws. If such registration is not
required, such shares may be issued upon option exercise in reliance upon the
private offering exemption codified in Section 4(2) of the Securities Act.
Resale of such shares may be permitted subject to the limitations of Rule 144.
The Company will not permit the total number of shares subject to
outstanding warrants (exclusive of the Underwriters' Warrants (as defined
herein)) and options granted or authorized to be granted to exceed 10% of all
shares of Common Stock outstanding.
EMPLOYEE STOCK PURCHASE PLAN
In February 1998, the Board of Directors and stockholders of HLM Design
adopted the HLM Design, Inc. Employee Stock Purchase Plan (the "ESPP"). The
ESPP is intended to promote the interests of the Company by providing employees
of the Company the opportunity to acquire a proprietary interest in the Company
through the purchase of Common Stock.
19
<PAGE>
The following discussion of the material features of the ESPP is qualified by
reference to the text of such plan filed as an exhibit to this Annual Report on
Form 10-K.
The ESPP is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Code. The ESPP is administered by the Compensation
Committee, which, subject to the terms of the ESPP, has plenary authority in
its discretion to interpret and construe the ESPP. The Compensation Committee
will construe the provisions of the ESPP so as to extend and limit
participation in a manner consistent with the requirements of Section 423 of
the Code. A total of 57,954 shares of Common Stock has been reserved for
purchase under the ESPP, provided that the number of shares issued or issuable
under the ESPP and under the Stock Option Plan shall not at any time exceed in
the aggregate 10% of the total number of shares of Common Stock outstanding.
On January 1 of each year during the term of the ESPP (and also as soon as
administratively practicable following the effective date of the ESPP) (the
"Grant Date"), all eligible employees electing to participate in the ESPP
("Participating Employees") will be granted options to purchase shares of
Common Stock. As of each Grant Date, each Participating Employee will be deemed
to have been granted an option to purchase that number of shares of Common
Stock that equals: (i) the Participating Employee's base pay (as defined in the
ESPP) as of the Grant Date divided by 1000, with fractional amounts of .50 or
more rounded up to the next dollar and fractional amounts of less than .50
disregarded, multiplied by (ii) two. No Participating Employee may be granted
an option which would permit such employee to purchase stock under the ESPP and
all other employee stock purchase plans of HLM Design and its subsidiaries at a
rate which exceeds $25,000 of the fair market value of such stock (determined
at the time such option is granted) for each calendar year in which such option
is outstanding at any time.
A Participating Employee may elect to designate a limited percentage of
such employee's base pay (as defined in the ESPP) to be deferred by payroll
deduction as a contribution to the ESPP. To the extent a Participating Employee
has accumulated enough funds, his or her contributions to the ESPP will be used
to exercise the option granted under the ESPP through purchases of Common Stock
on the last business day of March, June, September and December, on which the
principal trading market for the Common Stock is open for trading and on any
other interim dates during the year which the Compensation Committee designates
for such purpose (the "Exercise Date"). Contributions which are not enough to
purchase a whole share of Common Stock will be carried forward and applied on
the next Exercise Date in that calendar year.
The purchase price at which Common Stock will be purchased through the
ESPP shall be 85% of the lesser of (i) the fair market value of the Common Stock
on the applicable Grant Date, and (ii) the fair market value of the Common Stock
on the applicable Exercise Date. Any option granted to a Participating Employee
will be exercised automatically on each Exercise Date during the calendar year
of the option's Grant Date in whole or in part such that the Participating
Employee's accumulated contributions as of such Exercise Date will be applied to
the purchase of the maximum number of whole shares of Common Stock that such
contribution will permit at the applicable option price, limited to the number
of shares available for purchase under the option.
Any option granted to a Participating Employee will expire on the last
Exercise Date of the calendar year in which granted. However, if a
Participating Employee withdraws from the ESPP or terminates employment prior
to such Exercise Date, the option may expire earlier.
Upon termination of a Participating Employee's employment for any reason
other than cause or death, such employee may, at his or her election, request
the return of contributions not yet used to purchase Common Stock or continue
participation in the ESPP until the Exercise Date next following the date of
termination of employment such that any unexpired option held will be exercised
automatically on such Exercise Date. If a Participating Employee dies while
employed by the Company or prior to the Exercise Date next following the date
of termination of employment, such employee's estate will have the right to
elect to withdraw all contributions not yet used to purchase Common Stock or to
exercise the Participating Employee's option for the purchase of Common Stock
on the Exercise Date next following the date of such employee's death.
The Board of Directors of HLM Design may at any time amend, suspend or
terminate the ESPP; provided, however, that the ESPP may not be amended to
increase the maximum number of shares of Common Stock for which options may be
granted under the ESPP, other than in connection with a change in
capitalization, without obtaining the approval of HLM Design stockholders.
No federal taxable income will be recognized by Participating Employees
upon the grant of an option to purchase Common Stock under the ESPP. In
addition, a Participating Employee will not recognize federal taxable income on
the exercise of an option granted under the ESPP.
20
<PAGE>
If the Participating Employee holds shares of Common Stock acquired upon
the exercise of an option granted under the ESPP until a date that is more than
two years from the Grant Date of the relevant option and one year from the date
of option exercise (or dies while owning such shares), the employee must report
as ordinary income in the year of disposition of the shares (or at death) the
lesser of (a) the excess of the fair market value of the shares at the time of
disposition (or death) over the option exercise price and (b) the excess of the
fair market value of the shares on the date the relevant option was granted
over the option exercise price. For this purpose, the option exercise price is
85% of the fair market value of the shares on the date the relevant option was
granted (assuming the shares are offered at a 15% discount). Any additional
income is treated as long-term capital gain. If these holding period
requirements are met, the Company is not entitled to any deduction for income
tax purposes. If the Participating Employee does not meet the holding period
requirements, the employee recognizes at the time of disposition of the shares
ordinary income equal to the amount by which the fair market value of the
shares on the date of exercise exceeds the option exercise price for the
shares, irrespective of the price at which the employee disposes of the shares,
and an amount equal to such ordinary income is generally deductible by the
Company. Any additional gain realized on the disposition of the shares will
generally be capital gain or loss; provided that any gain will be subject to
reduced rates of tax if the shares were held for more than twelve months and
will be subject to further reduced rates if the shares were held for more than
eighteen months.
Because the ESPP is based on voluntary participation, benefits thereunder
are not determinable.
The Company intends to register the shares underlying the ESPP if required
by the federal securities laws. If such registration is not required, such
shares may be issued upon option exercise in reliance upon the private offering
exemption codified in Section 4(2) of the Securities Act. Resale of such shares
may be permitted subject to the limitations of Rule 144.
DIRECTOR COMPENSATION
Members of the Board of Directors who are not employees of the Company
will be compensated for their services in amounts to be determined. The Company
will also reimburse all directors for their expenses incurred in connection
with their activities as directors of the Company. Directors who are also
employees of the Company receive no compensation for serving on the Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Since HLM Design's organization in March 1997, all matters concerning
executive officer compensation have been addressed by the entire Board of
Directors. Since HLM Design's organization, Vernon Brannon and Joseph Harris
have been executive officers of HLM Design and, together with Clay R. Caroland
III and Shannon LeRoy (who each, prior to completion of the Offering,
represented creditors of HLM Design), have constituted the majority of the
Board of Directors. HLM Design will maintain two independent directors who will
comprise its Compensation Committee.
Although no formal appointment to the Compensation Committee has been made
to date, it is anticipated that Messrs. Caroland and LeRoy, who no longer
represent creditors on the Board (although Mr. LeRoy continues to serve as
president of the general partner of Equitas), will initially serve as the
independent directors comprising the Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of HLM Design's Common Stock as of July 27, 1998 by (i)
each stockholder who is known by HLM Design to own beneficially more than five
percent of the outstanding Common Stock, (ii) each director of HLM Design,
(iii) each executive officer of HLM Design and (iv) all directors and
executive officers of HLM Design as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF ALL
OF COMMON STOCK OUTSTANDING
NAME (1) OWNED COMMON STOCK
- - ------------------------------------------------------------------------ ------------------ ------------------
<S> <C> <C>
Joseph M. Harris(2)(3) .......................................... 367,142 17.2%
Vernon B. Brannon(2)(3) ......................................... 367,141 17.2%
Clay R. Caroland III(2) ......................................... 10,991 *
D. Shannon LeRoy(2)(4) .......................................... -- --
All directors and executive officers as a group (4 persons) ..... 745,274 35.9%
</TABLE>
- - ---------
* Less than one percent.
21
<PAGE>
(1) Unless otherwise noted, each person has sole voting and investment power
over the shares listed opposite his name subject to community property
laws where applicable.
(2) The address of such person is care of HLM Design at 121 West Trade Street,
Suite 2950, Charlotte, North Carolina 28202.
(3) Gives effect to currently exercisable options under the Stock Option Plan
which became effective upon consummation of the Offering. See "Executive
Compensation -- Stock Option Plan."
(4) Although he serves as president of its general partner, Mr. LeRoy disclaims
beneficial ownership of the 73,300 shares of Common Stock (3.5%) held by
Equitas.
In connection with this Offering, HLM Design agreed to sell to the
underwriters, for a price of $.01 per warrant, warrants (the "Underwriters'
Warrants") to purchase 120,000 shares (including 60,000 shares allocated to
Berthel Fisher) of Common Stock. The Underwriters' Warrants are exercisable at a
price of $7.20 per share for a period of four years commencing June 12, 1999
subject to customary terms and conditions including limitations on transfer,
provisions relating to fundamental corporate changes and antidilution
protection.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATIONSHIPS WITH MANAGED FIRMS
Joseph Harris and Vernon Brannon, executive officers and principal
stockholders of HLM Design, are also the principal stockholders and officers of
the Managed Firms, HLMI, HLMNC and HLMO. As officers of the Managed Firms, they
caused the Managed Firms to enter into Management and Services Agreements with
HLM Design and as stockholders of each of the Managed Firms they entered into
Stockholders' Agreements. The primary purpose of the Stockholders' Agreement is
to restrict the ability of stockholders to exercise the rights commonly
associated with ownership of common stock and to effectively provide
stockholders of the Managed Firms with nominee stockholder status in order to
facilitate the execution and operation of the Management and Services
Agreements.
For information concerning certain advances from Messrs. Harris and
Brannon to HLMI, with respect to which there was an aggregate outstanding
balance due from the Company at May 1, 1998 of $27,000, see Note 4 to the
Consolidated Financial Statements included elsewhere herein. Such balance was
paid by the Company subsequent to year-end.
HLMI is the tenant under a triple net lease of certain warehouse space in
Charlotte, North Carolina entered into in December 1995 with a partnership of
which Messrs. Harris and Brannon (and family members) are the partners, as
landlord. Rental payments under such lease, which expires in 2005, are $3,500
per month.
Future material transactions between HLM Design or any of the Managed
Firms and any of the Company's officers, directors or controlling persons will
be made or entered into on terms that are no less favorable to HLM Design than
those that can be obtained from unaffiliated third parties. Additionally, any
future material transactions between HLM Design and any of the Company's
officers, directors or controlling persons or any of their affiliates
(including affiliated Managed Firms) will be approved by a majority of HLM
Design's directors and by a majority of its independent directors who do not
have an interest in the transactions. Terminations by HLM Design of Management
and Services Agreements with affiliated Managed Firms would also require such
independent director approval.
MERGER TRANSACTION
In April 1997, HLMI and BBH Corp., a Delaware corporation controlled by
Joseph Harris and Vernon Brannon, entered into a Merger Agreement (the "Merger
Agreement") whereby HLMI and BBH Corp. merged, with HLMI being the surviving
corporation. Upon consummation of the transactions contemplated by the Merger
Agreement each share of HLMI common stock (excluding shares of HLMI common
stock held by BBH Corp., which were (i) contributed to BBH Corp. by Messrs.
Harris and Brannon as their initial capital contribution to BBH Corp. and (ii)
purchased from HLMI with the proceeds of a $3.2 million loan from HLM Design
(the note evidencing such loan, bearing interest at a nominal rate of 13.5% per
annum and maturing June 1, 2002, with monthly principal payments commencing
June 1, 2000, referred to herein as the "HLMI Note")) was converted into the
right to receive $64.00 in cash (the "Merger Consideration") and each share of
BBH Corp. then outstanding was converted into one share of HLMI common stock.
Following the consummation of the transactions contemplated by the Merger
Agreement, Joseph Harris and Vernon Brannon owned all of the outstanding common
stock of HLMI.
The payment of the Merger Consideration was financed indirectly by the
Pacific/Equitas Loan and the First Charter Loan through the purchase of
additional HLMI capital stock by BBH Corp., effective simultaneously with the
Merger. In
22
<PAGE>
connection with the Pacific/Equitas Loan, HLM Design issued the Pacific/Equitas
Warrants to Pacific, Equitas and Messrs. Caroland and LeRoy and granted certain
registration rights which begin in 2000, with respect to the Common Stock which
underlies the Pacific/Equitas Warrants. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The Company repaid the outstanding balance on the Pacific/
Equitas Loan from the proceeds of the Offering. Upon such repayment, Messrs.
Harris and Brannon were released from their personal guarantees of the
Pacific/Equitas Loan, and agreements relating to the Pacific/Equitas Loan,
subjecting the Company to certain affirmative and negative covenants and
providing rights to each of Pacific and Equitas to have a representative on the
HLM Design board and to each of Pacific and Equitas (and their representatives)
to participate in any proposed sale of HLM Design stock by Messrs. Harris and
Brannon, terminated.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The exhibits and other documents filed as part of this Annual Report on
Form 10-K, including those exhibits which are incorporated by reference herein,
are:
(a) (1) Financial Statements
See the Index to Financial Information which appears on page F-1
herein.
(2) Financial Statement Schedules
No financial statement schedules are required to be filed as part
of this Annual Report on Form 10-K.
(3) Exhibits:
Exhibits required in connection with this Annual Report on Form
10-K are listed below. Certain of such exhibits, indicated by an
asterisk (*), are incorporated by reference to documents previously
filed as exhibits to other filings with the Commission.
(b) HLM Design has not filed any reports on Form 8-K during the last
quarter of the period covered by this report.
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ------------ --------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1* Certificate of Incorporation of the Registrant, as amended to date (incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (SEC File No. 333-40617) (the "Form S-1")).
3.2* Bylaws of the Registrant, as amended to date (incorporated by reference to Exhibit 3.2 to the Form S-1).
4.1* Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Form S-1).
4.2* Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Form S-1).
4.3* Registration Rights Agreement dated as of May 30, 1997 by and among HLM Design, Inc., Pacific Capital, L.P.
and Equitas, L.P. (incorporated by reference to Exhibit 4.3 to the Form S-1).
4.4* Registration Rights Agreement dated as of September 10, 1997 by and among HLM Design, Inc. and Berthel
Fisher & Company Leasing, Inc. (incorporated by reference to Exhibit 4.4 to the Form S-1).
10.1* Management and Services Agreement dated as of May 29, 1997 by and between Hansen Lind Meyer Inc. and
HLM Design (incorporated by reference to Exhibit 10.1 to the Form S-1).
10.2* Management and Services Agreement dated as of May 29, 1997 by and between HLM of North Carolina, P.C.
and HLM Design (incorporated by reference to Exhibit 10.2 to the Form S-1).
10.3* Management and Services Agreement dated as of May 29, 1997 by and between HLM of Oregon, Architecture
and Planning, P.C. and HLM Design (incorporated by reference to Exhibit 10.3 to the Form S-1).
10.4* Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and
Hansen Lind Meyer Inc. (incorporated by reference to Exhibit 10.4 to the Form S-1).
10.5* Stockholders' Agreement dated as of May 29, 1997, by and among Joseph M. Harris, Vernon B. Brannon, Phillip
J. Antis and HLM of North Carolina, P.C. (incorporated by reference to Exhibit 10.5 to the Form S-1).
10.6* Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon, Viktor
A. Lituczy and HLM of Oregon, Architecture and Planning, P.C. (incorporated by reference to Exhibit 10.6 to
the Form S-1).
10.7 Security Escrow Agreement among HLM Design, Inc., certain security holders and First Union National Bank,
as escrow agent.
10.8* Note Purchase Agreement dated as of May 30, 1997 by and among HLM Design, Inc., Hansen Lind Meyer Inc.,
BBH Corp., Pacific Capital, L.P., and Equitas, L.P. (incorporated by reference to Exhibit 10.8 to the Form S-1).
10.9* Promissory Note A-1 dated as of May 30, 1997 by HLM Design, Inc. in favor of Pacific Capital, L.P.
(incorporated by reference to Exhibit 10.9 to the Form S-1).
10.10* Promissory Note A-2 dated as of May 30, 1997 by HLM Design, Inc. in favor of Equitas, L.P. (incorporated by
reference to Exhibit 10.10 to the Form S-1).
10.11* Collateral Assignment of Contract Rights dated as of May 30, 1997 by and between HLM Design, Inc. and
Pacific Capital, L.P. and Equitas, L.P. (incorporated by reference to Exhibit 10.11 to the Form S-1).
10.12* Security Agreement dated as of May 30, 1997 by and between HLM Design, Inc. and Pacific Capital, L.P. and
Equitas, L.P. (incorporated by reference to Exhibit 10.12 to the Form S-1).
10.13* Affiliate Promissory Note dated May 30, 1997 by BBH Corp. in favor of HLM Design, Inc. (incorporated by
reference to Exhibit 10.13 to the Form S-1).
10.14* Collateral Assignment of Promissory Note dated as of May 30, 1997 by and between HLM Design, Inc. and
Pacific Capital, L.P. and Equitas, L.P. (incorporated by reference to Exhibit 10.14 to the Form S-1).
10.15* Unconditional Guaranty dated as of May 30, 1997 by and between Hansen Lind Meyer Inc. and BBH Corp. in
favor of Pacific Capital, L.P. and Equitas, L.P. (incorporated by reference to Exhibit 10.15 to the Form S-1).
10.16* Guaranty dated as of May 30, 1997 by Joe Harris in favor of Pacific Capital, L.P. and Equitas, L.P. (incorporated
by reference to Exhibit 10.16 to the Form S-1).
10.17* Guaranty dated as of May 30, 1997 by Vernon Brannon in favor of Pacific Capital, L.P. and Equitas, L.P.
(incorporated by reference to Exhibit 10.17 to the Form S-1).
10.18* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer
Inc. and Joseph M. Harris (incorporated by reference to Exhibit 10.18 to the Form S-1).
10.19* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer
Inc. and Vernon B. Brannon (incorporated by reference to Exhibit 10.19 to the Form S-1).
10.20* Guaranty (Limited in Amount) dated as of May 30, 1997 by and among Vernon B. Brannon, Joseph M. Harris,
and a former director (incorporated by reference to Exhibit 10.20 to the Form S-1).
10.20.1* Addendum B to Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company
Leasing, Inc. and Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.20.1 to the Form S-1).
10.20.2* Letter Agreement dated as of January 9, 1998 amending the Berthel Lease (incorporated by reference to Exhibit
10.20.2 to the Form S-1).
10.21* Security Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and
Hansen Lind Meyer Inc. (incorporated by reference to Exhibit 10.21 to the Form S-1).
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ----------- --------------------------------------------------------------------------------------------------------------------
<S> <C>
10.22* Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and
Hansen Lind Meyer Inc. (the "Berthel Lease") (incorporated by reference to Exhibit 10.22 to the Form S-1).
10.23 HLM Design, Inc. Stock Option Plan.
10.24 HLM Design, Inc. Employee Stock Purchase Plan.
10.25* Employment Agreement between HLM Design, Inc. and Joseph M. Harris, as amended to date (incorporated by
reference to Exhibit 10.25 to the Form S-1).
10.26* Employment Agreement between HLM Design, Inc. and Vernon B. Brannon, as amended to date (incorporated
by reference to Exhibit 10.26 to the Form S-1).
10.27* Promissory Note dated as of May 30, 1997 issued by HLM Design, Inc. in favor of First Charter National Bank
(incorporated by reference to Exhibit 10.27 to the Form S-1).
10.28* First Amendment to Management and Services Agreement dated as of May 29, 1997 by and between HLM
Design of Northamerica, Inc. (formerly Hansen Lind Meyer Inc.) and HLM Design (incorporated by reference to
Exhibit 10.28 to the Form S-1).
10.29* First Amendment to Management and Services Agreement dated as of May 29, 1997 by and between HLM
Design of the Southeast, P.C. (formerly HLM of North Carolina, P.C.) and HLM Design (incorporated by
reference to Exhibit 10.29 to the Form S-1).
10.30* First Amendment to Management and Services Agreement dated as of May 29, 1997 by and between HLM
Design of the Northwest, Architecture, Engineering and Planning, P.C. (formerly HLM of Oregon Architecture
and Planning, P.C.) and HLM Design (incorporated by reference to Exhibit 10.30 to the Form S-1).
10.31 Statutory Incentive Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan
between HLM Design, Inc. and Joseph M. Harris.
10.32 Statutory Incentive Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan
between HLM Design, Inc. and Vernon B. Brannon.
10.33 Nonstatutory Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Plan between HLM
Design, Inc. and Joseph M. Harris.
10.34 Nonstatutory Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan between
HLM Design, Inc. and Vernon B. Brannon.
10.35* Stockholders Agreement dated as of July 29, 1997 among HLM Design, Inc., Joseph M. Harris, Vernon B.
Brannon, Pacific Capital, L.P., Equitas, L.P., Clay Caroland, Shannon LeRoy, and a former director (incorporated
by reference to Exhibit 10.35 to the Form S-1).
10.36* Promissory Note dated as of December 10, 1996 issued by Hansen Lind Meyer, Inc. in favor of First Charter
National Bank (incorporated by reference to Exhibit 10.36 to the Form S-1).
10.37* Modification and Extension Agreement dated as of June 2, 1997 between First Charter National Bank and
Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.37 to the Form S-1).
10.38* Commercial Guaranty dated as of May 30, 1997 by Hansen Lind Meyer, Inc. in favor of First Charter National
Bank (incorporated by reference to Exhibit 10.38 to the Form S-1).
10.39* Security Agreement dated as of June 2, 1997 between Hansen Lind Meyer, Inc. and First Charter National Bank
(incorporated by reference to Exhibit 10.39 to the Form S-1).
10.40* Commercial Security Agreement dated as of May 30, 1997 between Hansen Lind Meyer, Inc. and First Charter
National Bank (incorporated by reference to Exhibit 10.40 to the Form S-1).
10.41* Subordination Agreement dated as of May 30, 1997 among Berthel Fisher & Company Leasing, Inc., First
Charter National Bank, HLM Design, Inc. and Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit
10.41 to the Form S-1).
10.42* Note and Security Agreement dated as of September 10, 1997 by and among HLM Design, Inc., Hansen Lind
Meyer, Inc., certain individual guarantors and Berthel Fisher & Company Leasing, Inc., as amended to date
(incorporated by reference to Exhibit 10.42 to the Form S-1).
10.43* Note and Security Agreement dated as of September 16, 1997 by and among HLM Design, Inc., Hansen Lind
Meyer, Inc., certain individual guarantors and Berthel Fisher & Company Leasing, Inc., as amended to date
(incorporated by reference to Exhibit 10.43 to the Form S-1).
10.44* Intercreditor Agreement dated as of September 10, 1997 between and among Berthel Fisher & Company
Leasing, Inc., Pacific Capital, L.P. and Equitas L.P. (incorporated by reference to Exhibit 10.44 to the Form S-1).
10.45* Commercial Guaranty dated as of May 30, 1997 by Joseph M. Harris in favor of First Charter National Bank
(relating to Promissory Note of HLM Design, Inc. of even date therewith) (incorporated by reference to Exhibit
10.45 to the Form S-1).
10.46* Commercial Guaranty dated as of May 30, 1997 by Vernon B. Brannon in favor of First Charter National Bank
(relating to Promissory Note of HLM Design, Inc. of even date therewith) (incorporated by reference to Exhibit
10.46 to the Form S-1).
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ----------- --------------------------------------------------------------------------------------------------------------
<S> <C>
10.47* Modification and Extension Agreement dated as of May 30, 1998 between First Charter National Bank and
HLM Design, Inc. (incorporated by reference to Exhibit 10.47 to the Form S-1).
10.48* Modification and Extension Agreement dated as of May 30, 1998 between First Charter National Bank and
Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.48 to the Form S-1).
10.49* Lease Agreement dated as of December 18, 1995 between CTHL Properties and Hanson Lind Meyer, Inc.
(incorporated by reference to Exhibit 10.49 to the Form S-1).
10.50* Promissory Note dated as of March 20, 1997 issued by Hansen Lind Meyer, Inc. in favor of Joseph M. Harris, as
extended to date (incorporated by reference to Exhibit 10.50 to the Form S-1).
10.51* Promissory Note dated as of March 20, 1997 issued by Hansen Lind Meyer, Inc. in favor of Vernon B. Brannon,
as extended to date (incorporated by reference to Exhibit 10.51 to the Form S-1).
10.52* Guaranty dated as of December 10, 1996 by Joseph M. Harris in favor of First Charter National Bank (relating
to Promissory Note of Hansen Lind Meyer, Inc. of even date therewith) (incorporated by reference to Exhibit
10.52 to the Form S-1).
10.53* Guaranty dated as of December 10, 1996 by Vernon B. Brannon in favor of First Charter National Bank (relating
to Promissory Note of Hansen Lind Meyer, Inc. of even date therewith) (incorporated by reference to Exhibit
10.53 to the Form S-1).
10.54* Common Stock Purchase Warrant dated as of May 30, 1997 issued to Pacific Capital, L.P. (incorporated by
reference to Exhibit 10.54 to the Form S-1).
10.55* Second Amendment to Management and Services Agreement dated as of June 5, 1998 by and between HLM
Design of Northamerica, Inc. and HLM Design (incorporated by reference to Exhibit 10.55 to the Form S-1).
10.56* Second Amendment to Management and Services Agreement dated as of June 5, 1998 by and between HLM
Design of the Southeast, P.C. and HLM Design (incorporated by reference to Exhibit 10.56 to the Form S-1).
10.57* Second Amendment to Management and Services Agreement dated as of June 5, 1998 by and between HLM
Design of the Northwest, Architecture, Engineering and Planning, P.C. and HLM Design (incorporated by
reference to Exhibit 10.57 to the Form S-1).
10.58 Letter Agreement among Messrs. Harris and Brannon, Berthel Leasing and HLM Design.
21.1* Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Form S-1).
27 Financial Data Schedule
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
</TABLE>
- - ---------
* Incorporated by reference to documents previously filed as exhibits to other
filings with the Commission.
26
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HLM DESIGN, INC. AND AFFILIATES:
INDEPENDENT AUDITORS' REPORT ............................................................ F-2
FINANCIAL STATEMENTS:
Balance Sheet at April 25, 1997 and Consolidated Balance Sheet at May 1, 1998 ......... F-3
Statements of Income for the years ended April 26, 1996 (Predecessor), April 25, 1997
(Predecessor), the one
month ended May 30, 1997 (Predecessor) and the Consolidated Statements of Income for
the year ended
May 1, 1998 (HLM Design Inc.) ........................................................ F-4
Statements of Stockholders' Equity for the period ended April 25, 1997 and
Consolidated statement of
stockholder's equity for the year ended May 1, 1998 .................................. F-5
Statements of Cash Flows for the years ended April 26, 1996 (Predecessor), April 25,
1997 (Predecessor), the
one month ended May 30, 1997 (Predecessor) and Consolidated Statements of Cash Flows
for the year
ended May 1, 1998 (HLM Design Inc.) .................................................. F-6
Notes to Financial Statements ......................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
HLM DESIGN, INC.
Charlotte, North Carolina
We have audited the accompanying balance sheet of HLM Design, Inc. (the
"Company") as of April 25, 1997 and May 1, 1998, and the related statements of
stockholders' equity, for the period from inception March 6, 1997 (inception)
to April 25, 1997 and the related statements of income, stockholders' equity,
and cash flows for the year ended May 1, 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of April 25,
1997 and May 1, 1998 and the changes in stockholders equity for the period from
March 6, 1997 (inception) to April 25, 1997 and the year ended May 1, 1998 as
well as the results of its operations and cash flows for the year ended May 1,
1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
July 6, 1998
Charlotte, North Carolina
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
HANSEN LIND MEYER INC.
Charlotte, North Carolina
We have audited the accompanying statements of income, stockholders'
equity, and cash flows of Hansen Lind Meyer Inc. ("HLMI") for each of the two
years in the period ended April 25, 1997. These financial statements are the
responsibility of HLMI'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, the HLMI financial statements referred to above present
fairly, in all material respects, the results of its operations and its cash
flows for each of the two years in the period ended April 25, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
October 31, 1997
Charlotte, North Carolina
F-2
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
BALANCE SHEETS
APRIL 25, 1997 AND MAY 1, 1998
<TABLE>
<CAPTION>
HLM
DESIGN CONSOLIDATED
APRIL 25, MAY 1,
1997 1998
(NOTE 1) (NOTE 1)
----------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................................................. $ 17,369
Trade and other receivables, less allowance for doubtful accounts of $150,000
at May 1, 1998 ....................................................................... 6,089,929
Costs and estimated earnings in excess of billings on uncompleted projects (Note 3) ... 5,513,854
Prepaid expenses ...................................................................... 724,010
-----------
Total current assets ................................................................ 12,345,162
-----------
OTHER ASSETS:
Deferred income taxes (Note 8) ........................................................ 465,601
Goodwill, less amortization of $147,269 at May 1, 1998 (Note 2)........................ 2,426,598
Other noncurrent assets ............................................................... 825,018
-----------
Total other assets .................................................................. 3,717,217
-----------
PROPERTY AND EQUIPMENT:
Leasehold improvements ................................................................ 782,609
Furniture and fixtures ................................................................ 1,786,250
-----------
Total property and equipment ........................................................ 2,568,859
-----------
Less accumulated depreciation ......................................................... (768,904)
-----------
Property and equipment, net ......................................................... 1,799,955
-----------
TOTAL ASSETS ............................................................................ $17,862,334
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 4) ................................................................ $ 2,250,000
Accounts payable ...................................................................... 3,041,859
Accrued expenses ...................................................................... 1,913,505
Income taxes payable .................................................................. 215,950
Billings in excess of costs and estimated earnings on uncompleted projects (Note 3) ... 3,008,023
Deferred income taxes (Note 8) ........................................................ 1,517,146
Current maturities of long-term debt (Note 4) ......................................... 656,576
-----------
Total current liabilities ........................................................... 12,603,059
-----------
LONG-TERM DEBT (Note 4) ................................................................. 4,164,401
-----------
TOTAL LIABILITIES ....................................................................... 16,767,460
-----------
MINORITY INTEREST (Note 1) .............................................................. 15,187
-----------
COMMITMENTS AND CONTINGENCIES (Note 5 and 6)
WARRANTS OUTSTANDING (Note 4) ........................................................... 114,932
-----------
STOCKHOLDERS' EQUITY:
Capital Stock
Common, $.001 par value, voting, authorized 9,000,000 shares; issued 618,375 and
776,134, respectively ............................................................... $ 618 776
Preferred, $.10 par value, voting, authorized 1,000,000, no shares outstanding........
Additional paid in capital ............................................................ 2,382 185,623
Retained earnings ..................................................................... 778,356
Stock subscription receivable ......................................................... (3,000) --
-------- -----------
Total stockholders' equity .............................................................. 964,755
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................................. $ $17,862,334
======== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
STATEMENTS OF INCOME
YEARS ENDED APRIL 26, 1996 AND APRIL 25, 1997,
ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR)
AND YEAR ENDED MAY 1, 1998 (CONSOLIDATED)
<TABLE>
<CAPTION>
(HLM
DESIGN)
CONSOLIDATED
(PREDECESSOR) (NOTE 1) (NOTE 1)
-------------------------------------------- ---------------
YEAR YEAR ONE MONTH YEAR
ENDED ENDED ENDED ENDED
-------------- -------------- -------------- ---------------
APRIL 26, APRIL 25, MAY 30, MAY 1,
1996 1997 1997 1998
-------------- -------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES (Note 1):
Fee income ................................................. $27,206,637 $24,839,560 $1,998,611 $ 27,401,122
Reimbursable income ........................................ 1,347,787 1,915,150 234,425 1,895,568
----------- ----------- ---------- ------------
Total revenues .......................................... 28,554,424 26,754,710 2,233,036 29,296,690
----------- ----------- ---------- ------------
CONSULTANT EXPENSES ......................................... 4,782,482 4,857,891 192,862 4,664,605
----------- ----------- ---------- ------------
PROJECT EXPENSES:
Direct expenses ............................................ 936,962 716,449 35,404 890,873
Reimbursable expenses ...................................... 928,479 1,183,618 68,617 837,194
----------- ----------- ---------- ------------
Total project expenses .................................. 1,865,441 1,900,067 104,021 1,728,067
----------- ----------- ---------- ------------
NET PRODUCTION INCOME ....................................... 21,906,501 19,996,752 1,936,153 22,904,018
DIRECT LABOR ................................................ 7,614,029 6,618,293 602,096 6,732,071
INDIRECT EXPENSES ........................................... 13,787,625 12,931,174 1,172,712 13,612,371
----------- ----------- ---------- ------------
OPERATING INCOME ............................................ 504,847 447,285 161,345 2,559,576
----------- ----------- ---------- ------------
OTHER INCOME (EXPENSE):
Interest income ............................................ 10,516 6,502 54 2,983
Interest expense ........................................... (394,068) (402,509) (37,005) (1,030,351)
Gain on lease termination (Note 5) ......................... 841,809 344,059
Gain (loss) on sale of property ............................ 8,464 (58,424) (55,370)
----------- ----------- ------------
Total other income (expense), net ....................... 466,721 (110,372) (36,951) (1,082,738)
----------- ----------- ---------- ------------
INCOME BEFORE TAXES AND MINORITY INTEREST ................... 971,568 336,913 124,394 1,476,838
INCOME TAXES (Note 8):
Current tax expense (benefit) .............................. (114,560) (4,461) (11,907) 323,035
Deferred tax expense ....................................... 550,019 224,260 54,907 360,862
----------- ----------- ---------- ------------
Total income tax expense ................................ 435,549 219,799 43,000 683,897
----------- ----------- ---------- ------------
NET INCOME BEFORE MINORITY INTEREST ......................... 536,109 117,114 81,394 792,941
MINORITY INTEREST IN EARNINGS OF AFFILIATE (Note 1) ......... 14,585
------------
NET INCOME .................................................. $ 536,109 $ 117,114 $ 81,394 $ 778,356
=========== =========== ========== ============
NET INCOME PER SHARE (NOTE 1)
Basic ...................................................... $ 1.12
============
Diluted .................................................... $ .91
============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (NOTE 1)
Basic ...................................................... 697,255
============
Diluted .................................................... 854,453
============
SUPPLEMENTAL NET INCOME PER SHARE (NOTE 1):
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM ..............
Basic ...................................................... $ 0.78
============
Diluted .................................................... $ 0.70
============
NET INCOME PER SHARE
Basic ...................................................... $ 0.57
============
Diluted .................................................... $ 0.51
============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic ...................................................... 1,305,774
============
Diluted .................................................... 1,462,976
============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 26, 1996 AND APRIL 25, 1997,
ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR), AND
INCEPTION MARCH 6, 1997 TO APRIL 25, 1997 AND THE
YEAR ENDED MAY 1, 1998 (CONSOLIDATED)
HANSEN LIND MEYER INC. (PREDECESSOR)
<TABLE>
<CAPTION>
COMMON STOCK ESOP DEBT TOTAL
------------------- RETAINED GUARANTEE STOCKHOLDERS'
CLASS A CLASS B EARNINGS (NOTES 4 AND 9) EQUITY
--------- --------- ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, APRIL 30, 1995 .......................... $573 $11 $ 705,525 $ (876,322) $ (170,213)
Net income ...................................... 536,109 536,109
Issuance of 44 shares of common stock ........... 2,489 2,489
Retirement of 1,743 shares of common stock ...... (10) (7) (103,720) (103,737)
Payments on Employee Stock Ownership Plan debt .. 493,548 493,548
Class A common stock exchanged for Class B common
stock ......................................... (3) 3
------- -----
BALANCE, APRIL 26, 1996 .......................... 560 7 1,140,403 (382,774) 758,196
Net income ...................................... 117,114 117,114
Retirement of 927 shares of common stock ........ (9) (54,534) (54,543)
Payments on Employee Stock Ownership Plan debt .. 382,774 382,774
Class A common stock exchanged for Class B common
stock ......................................... (13) 13
------ -----
BALANCE, APRIL 25, 1997 .......................... 547 11 1,202,983 1,203,541
====== ===== ========== ==========
Net income ...................................... 81,394 81,394
---------- ----------
BALANCE, MAY 30, 1997 (unaudited) ................ $547 $11 $1,284,377 $1,284,935
====== ===== ========== ==========
</TABLE>
- - --------------------------------------------------------------------------------
HLM DESIGN, INC.
<TABLE>
<CAPTION>
COMMON STOCK STOCK TOTAL
------------------ ADDITIONAL RETAINED SUBSCRIPTION STOCKHOLDERS'
SHARES AMOUNT PAID-IN-CAPITAL EARNINGS RECEIVABLE EQUITY
--------- -------- ----------------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ORGANIZATION OF HLM DESIGN,
MARCH 6, 1997 ............................ $ $ $ $ $
Issuance of HLM Design, Inc. shares
(subscription receivable) .............. 618,375 618 2,382 (3,000)
------- ---- -------- --------
BALANCE, APRIL 25, 1997 ................... 618,375 618 2,382 (3,000)
------- ---- -------- --------
Payment for common stock (subscription
receivable) HLM Design ................. 157,759 158 183,241 3,000 186,399
Net Income -- Consolidated ............... 778,356 778,356
-------- --------
BALANCE MAY 1, 1998 -- CONSOLIDATED ....... 776,134 $776 $185,623 $778,356 $ $964,755
======= ==== ======== ======== ======== ========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 26, 1996, APRIL 25, 1997,
ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR),
<TABLE>
<CAPTION>
AND YEAR ENDED MAY 1, 1998 (CONSOLIDATED)
(HLM
DESIGN)
CONSOLIDATED
(PREDECESSOR) (NOTE 1) (NOTE 1)
--------------------------------------------- ---------------
YEAR YEAR ONE MONTH YEAR
ENDED ENDED ENDED ENDED
--------------- ------------- --------------- ---------------
APRIL 26, APRIL 25, MAY 30, MAY 1,
1996 1997 1997 1998
--------------- ------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 536,109 $ 117,114 $ 81,394 $ 778,356
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation ............................................... 680,779 671,877 55,544 468,556
Amortization of goodwill ................................... 99,145 107,670 9,571 147,269
Amortization of deferred loan fees ......................... 172,905
Deferred rent .............................................. (1,093,278) (356,803) --
Deferred income taxes ...................................... 550,019 224,260 54,907 (48,432)
Other ...................................................... (49,345) (15,000) -- --
Minority interest .......................................... 14,585
Changes in certain working capital items:
(Increase) decrease in trade and other receivables ........ (1,181,640) 1,343,508 (1,500,472) (373,675)
Increase in costs and estimated earnings compared to
billings on uncompleted contracts, net .................. (1,857,829) (883,880) 1,199,028 (184,513)
(Increase) decrease in refundable income taxes ............ 87,777 72,056 (11,157) 485,047
Increase in prepaid expenses and other assets ............. (176,989) (258,403) (11,579) (742,948)
Increase (decrease) in accounts payable ................... 2,642,228 (352,617) 233,659 (1,418,834)
Increase (decrease) in accrued expenses ................... (455,379) (218,959) (278,500) 1,112,959
Increase in income taxes payable .......................... 215,950
Increase (decrease) in other non-current liabilities ...... 15,000 --
------------ ------------
Net cash (used in) provided by operating activities ..... (218,403) 450,823 (152,605) 627,225
------------ ---------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ......................... (704,859) (601,120) (2,023) (737,356)
Note receivable from officer ................................ (30,000) 30,000
------------ ------------
Net cash used in investing activities ................... (734,859) (601,120) (2,023) (707,356)
------------ ---------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit ............................ 700,000 410,000
Payment on line of credit ................................... (2,360,000)
Proceeds from long-term borrowings .......................... 500,000 145,000 2,800,000 6,712,307
Payments on long-term borrowings ............................ (238,134) (410,952) (285,372) (3,584,491)
Payment of deferred loan fees ............................... (56,300)
Payment on ESOP buyback ..................................... (3,221,824)
Proceeds from issuance of notes payable to shareholders ..... 182,308
Proceeds from the issuance of warrants ...................... 24,757
Proceeds from exercise of warrants .......................... (77)
Proceeds from issuance of common stock ...................... 2,489 34,899
Retirement of common stock .................................. (5,650) (2,560)
Proceeds from payment of stock subscription receivable ...... -- -- -- 3,600
------------ ---------- ------------ ------------
Net cash provided by financing activities ............... 958,705 141,488 154,628 95,179
------------ ---------- ------------ ------------
INCREASE (DECREASE) in Cash ................................... 5,443 (8,809) -- 15,048
CASH BALANCE:
Beginning of year ........................................... 5,687 11,130 2,321 2,321
------------ ---------- ------------ ------------
End of year ................................................. $ 11,130 $ 2,321 $ 2,321 $ 17,369
============ ========== ============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the year for:
Interest ................................................... $ 392,292 $ 370,167 $ 6,827 833,674
Interest on Employee Stock Ownership Plan debt ............. $ 55,199 $ 24,243
Income tax payments (refunds) .............................. $ (280,466) $ (86,091) $ (750) 47,194
Noncash investing and financing transactions:
Retirement of common stock through issuance of note
payable ................................................... $ 98,087 $ 51,983
Reduction of ESOP debt ..................................... $ 493,540 $ 382,774
Issuance of warrants to certain debt holders ............... $ 238,752
</TABLE>
See notes to financial statements.
F-6
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS
INCEPTION MARCH 6, 1997 TO APRIL 25, 1997 AND THE YEAR ENDED APRIL 25, 1997
(PREDECESSOR), THE ONE MONTH PERIOD ENDED MAY 30, 1997 (UNAUDITED)
(PREDECESSOR) AND THE YEAR ENDED MAY 1, 1998 CONSOLIDATED
1. DESCRIPTION OF BUSINESS AND 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 services agreements ("MSAs").
In May 1997, HLM Design executed long term MSAs with Hansen Lind Meyer
Inc. ("HLMI"), HLM of North Carolina, P.C. ("HLMNC") and HLM of Oregon,
Architecture and Planning, P.C. ("HLMO"). HLMNC and HLMO, organized in 1996 and
have had no operations as of May 1, 1998 (HLMI, HLMNC and HLMO are referred to
herein collectively as "AEPs"). Design and AEPs are referred to herein
collectively as "the Company". In May 1997, HLMI entered into a merger
agreement with BBH Corp., a newly formed entity controlled by the principal
shareholders of HLM Design, whereby HLM Design loaned BBH Corp. $3.2 million
which BBH Corp. utilized to buy common stock in HLMI. Under the merger
agreement, BBH Corp. merged into HLMI with HLMI being the surviving entity. As
a part of the merger agreement, HLMI redeemed previously outstanding common
stock of HLMI from its Employee Stock Ownership Plan ("ESOP") and other
shareholders that represented over 90% of the pre-merger voting interest. As a
result of the change in control, the assets and liabilities of HLMI were fair
valued using purchase accounting principles and the excess of the fair value
over the identified tangible net assets was reflected as goodwill.
The MSAs are for a term of 40 years. HLM Design is the sole and exclusive
manager and administrator of all of the Managed Firms' day-to-day business
functions including financial planning, facilities, equipment and supplies and
management and administrative services (bookkeeping and accounts, general
administration services, contract negotiation and administration for all
non-architectural and non-engineering aspects of all agreements, personnel,
security and maintenance, architectural and engineering recruiting and
training, insurance, issuance of debt and capital stock and billing and
collections). For these services, HLM Design receives all but 1% of the AEP's
net income and positive cash flow (as determined in accordance with generally
accepted accounting principles applied on a consistent basis).
During fiscal year ended May 1, 1998 the Company reported interim
financial information on a combined basis. For the fiscal year ended May 1,
1998, the Company changed their accounting method to comply with EITF 97-2
- - -"Application of FASB Statement No. 94, Consolidation of All Majority-Owned
Subsidiaries, and APB Opinion No. 16, Business Combinations, to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements" and, therefore, the statements for the year ended May
1, 1998 are reflected on a consolidated basis. The effect of the change was
immaterial. In addition, as a result of the consummation of the MSAs and the
stockholders' agreements with the AEPs, the financial statements of HLM Design
and the AEPs are presented on a consolidated basis from May 31, 1997.
FINANCIAL STATEMENT PRESENTATION
The financial statements included herein reflect the following:
o HLM Design, Inc. as of April 25, 1997, HLM Design, Inc. had no operations
or cash flows from March 6, 1997, date of inception, to April 25, 1997.
o HLMI (Predecessor) for the one month ended May 30, 1997 (unaudited), for
the years ended April 25, 1997 and April 26, 1996 (Predecessor).
o HLM Design, Inc. consolidated with HLMI, HLMNC and HLMO, all from May 31,
1997 the effective date of the MSAs a shareholders agreements, as of May
1, 1998, and for the year then ended. All significant balances and
transactions between HLM Design and HLMI, HLMNC and HLMO have been
eliminated in the consolidated financial statements.
HLMI provides architectural and engineering consulting and design services
from offices in Iowa City, Chicago, Denver, Orlando, Atlanta, Bethesda,
Philadelphia, Portland and Sacramento.
F-7
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
FISCAL YEAR-END POLICY -- Prior to April 28, 1997, the Company used a
52-53 week fiscal year for accounting purposes which defined the fiscal
year-end date as the last Friday in April. In fiscal 1998, the Company changed
its year-end to the Friday nearest the end of April, which is May 1, 1998 and
contains 53 weeks.
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.
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.
PROPERTY AND EQUIPMENT -- Leasehold improvements and equipment are stated
at cost. Depreciation is computed using the double-declining balance or
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:
<TABLE>
<CAPTION>
PREDECESSOR COMBINED
------------------------------ -----------------------------
<S> <C> <C>
Computer equipment and softwa 5 years 5 years
Furniture .................. 7 years 5 years
Lease term, not to exceed Lease term, not to exceed
Leasehold improvements ..... the useful life of the asset the useful life of the asset
</TABLE>
GOODWILL -- Goodwill represents the excess of purchase price over the
estimated fair value of the net tangible assets acquired and is being amortized
over a 15 year period (Consolidated) and over a four year period for the
acquisition of MPB Architects (Predecessor). The Company periodically evaluates
the recoverability of goodwill based on expected future undiscounted operating
cash flows.
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. The Company's bank borrowings
approximate fair value because their interest rates are based on variable
reference rates.
PREFERRED STOCK -- HLM Design's Certificate of Incorporation authorizes
the Board of Directors of HLM Design to issue 1,000,000 shares of preferred
stock with such designations, rights and preferences as may be determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue
F-8
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely effect the voting power or other rights of the holders of
HLM Design's Common Stock. As of May 1, 1998 there were no preferred shares
outstanding.
STOCK SUBSCRIPTIONS RECEIVABLE -- Stock subscription receivable as of
April 25, 1997 represents the amount due from shareholders for outstanding
common stock and is reflected as a reduction of stockholders' equity.
NEW ACCOUNTING STANDARD -- Effective April 27, 1996, HLMI 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, during the year. 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
has reviewed all long-lived assets and intangible assets as of April 25, 1997
and May 1, 1998 and believes that the carrying amounts reported in the balance
sheet will be recovered over the remaining useful lives of those assets.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This Standard establishes standards of
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. This Statement will be effective for
the Company's fiscal year ending April 30, 1999. The Company does not intend to
adopt this Statement prior to its effective date and the effect of adoption of
such statement based on the fiscal year end May 1, 1998 amounts would not be
material.
On November 20, 1997, EITF 97-2, "Application of FASB Statement No. 94,
CONSOLIDATION OF ALL MAJORITY-OWNED SUBSIDIARIES, and APB Opinion No. 16,
BUSINESS COMBINATIONS, to Physician Practice Management Entities and Certain
Other Entities with Contractual Management Arrangements", was issued which
reached a consensus that arrangements similar to HLM Design and the AEP's
should be accounted for on a consolidated basis. Effective May 1, 1998, the
Company retroactively adopted the provisions of EITF 97-2 with effect from May
31, 1997. Adoption of EITF 97-2 resulted in a reduction to Stockholders' Equity
by $15,187, an increase in minority interest by $15,187 and a decrease in Net
Income of $14,585.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosure about Segments of an Enterprise and Related Information." This
standard redefines how operating segments are determined and requires
disclosure of certain financial and descriptive information about the Company's
operating segments. The statement is effective for fiscal years beginning after
December 15, 1997. The Company has not yet completed its analysis of which
operating segments it will report, if any.
NET INCOME PER SHARE -- Effective May 1, 1998, the Company adopted the
provisions of SFAS No. 128 "Earnings Per Share," which specifies the
computation, presentation and disclosure requirements for basic and diluted
earnings per share. The calculation of diluted net income per share considers
the potential dilutive effect of warrants to purchase shares of common stock at
$0.01 per share which were outstanding from May 30, 1997 to May 1, 1998.
SUPPLEMENTAL NET INCOME PER SHARE -- Supplemental net income per share in
the accompanying financial statements has been prepared based upon the shares
outstanding giving effect to the issuance of common stock related to the
initial public offering pro rata for common stock used to pay certain
indebtedness as discussed in Note 9. In addition, net income has been adjusted
to give effect to the initial public offering (the "Offering") and the business
acquisition (as discussed in Note 2) as if the transactions had occurred at the
beginning of the year.
STOCK SPLIT -- All share and per share amounts for HLM Design included in
the accompanying consolidated financial statements for all periods presented
have been adjusted to reflect stock splits and a reverse stock split occurring
January 30, 1998, February 13, 1998 and February 27, 1998 for an effective
12.75 for 1 stock split ("Stock Split"). In addition, the Common Stock par
value was reduced to $.001 effective as of February 13, 1998. Net income per
share in the accompanying financial statements has been prepared based upon the
shares outstanding without giving effect to the issuance of common stock
related to the Offering which occurred in June 1998 (See Note 9).
F-9
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITION
Effective May 23, 1997, HLMI sold 50,000 newly issued shares to BBH Corp.,
a Delaware corporation, for approximately $3.2 million. On May 23, 1997, BBH
Corp. merged into HLMI and each BBH Corp. share outstanding at the time of
merger was converted into one share of HLMI's stock. All HLMI shares held by
BBH Corp. were canceled and retired.
Effective as of May 31, 1997, HLMI repurchased all 46,858 shares of its
common stock from the ESOP for $64 per share as part of a merger agreement with
BBH Corp. As a result of this transaction, the ESOP will effectively cease once
the proceeds of the sale have been distributed by the Trustee to the ESOP's
participants following IRS approval of the ESOP's termination.
The total purchase price, including direct acquisition costs has been
allocated to the assets acquired and the liabilities assumed at their estimated
fair values at acquisition date as follows:
<TABLE>
<S> <C>
Accounts receivable ............ $ 5,716,254
Property and equipment ......... 1,531,155
Other assets ................... 6,320,087
Liabilities assumed ............ (12,761,346)
Goodwill ....................... 2,573,867
-------------
Total .......................... $ 3,380,017
=============
</TABLE>
The following unaudited pro forma financial data is presented as if the
transaction had occured at the beginning of the respective years.
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
APRIL 25, 1997 MAY 1, 1998
---------------- ----------------
<S> <C> <C>
Revenues ................. $26,754,710 $ 31,529,729
=========== ============
Net Income ............... $ 75,970 $ 856,335
=========== ============
Earnings Per Share
Basic .................... $ 1.23
============
Diluted .................. $ 1.00
============
</TABLE>
The pro forma information presented above is not necessarily indicative of
the operating results that would have occurred had the transaction occurred at
the beginning of the respective periods. These results are also not necessarily
indicative of the results of future operations.
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is as follows:
<TABLE>
<CAPTION>
(PREDECESSOR)
-----------------------------
APRIL 26, APRIL 25, MAY 1,
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Costs incurred on uncompleted projects (excluding overhead) ..... $ 67,612,169 $53,448,215 $45,830,792
Estimated earnings thereon ...................................... 42,252,119 33,500,189 45,615,282
------------ ----------- -----------
Total ........................................................... 109,864,288 86,948,404 91,446,074
Less billings to date ........................................... 107,227,822 83,428,058 88,940,243
------------ ----------- -----------
Net underbillings ............................................... $ 2,636,466 $ 3,520,346 $ 2,505,831
============ =========== ===========
</TABLE>
F-10
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. CONTRACTS IN PROGRESS -- (Continued)
Net underbillings are included in the accompanying balance sheets as
follows:
<TABLE>
<CAPTION>
(PREDECESSOR)
-----------------------------
APRIL 26, APRIL 25, MAY 1,
1996 1997 1998
------------- --------------- ---------------
<S> <C> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted projects .............................. $3,512,711 $ 5,181,432 $ 5,513,854
Billings in excess of costs and estimated earnings on
uncompleted projects .............................. (876,245) (1,661,086) (3,008,023)
---------- ------------ ------------
Net underbillings ................................... $2,636,466 $ 3,520,346 $ 2,505,831
========== ============ ============
</TABLE>
4. FINANCING ARRANGEMENTS
A summary of notes payable at May 1, 1998 is as follows:
In September 1996, the Company entered into a financing facility with
First Charter National Bank, which provides a line of credit of up to $500,000.
Interest is charged at the bank's prime rate plus 1.5% and principal payments
are to be made at the Company's discretion. The loan has an annual maturity
date which is subject to review.
In May 1997, the Company entered into a financing facility with First
Charter National Bank, which provides a line of credit of up to $1,000,000.
Interest is charged at the bank's prime rate plus 1.5% and principal payments
are to be made at the Company's discretion. The loan has a maturity date of
August 31, 1998. As of May 1, 1998 the outstanding balance on the line of
credit was $1,000,000.
In September 1997, the Company entered into debt agreements with Berthel
Fisher, an underwriter of the Offering, of $250,000 and $500,000. Interest is
charged at 12% and monthly interest payments are due through July 1, 1998. The
final payment for all accrued interest and principal was due on July 1, 1998.
The Company repaid this obligation from the net proceeds of the Offering in
June 1998 (See Note 9).
F-11
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS -- (Continued)
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
(PREDECESSOR)
APRIL 25, 1997 MAY 1, 1998
---------------- ------------
<S> <C> <C>
Notes payable to Messrs. Harris and Brannon at 15%, with a final payment due July 31,
1998 in full ............................................................................ $145,000 $ 27,000
Notes payable to a former stockholder, due in annual payments of $49,522, plus interest at
the prime rate of Chase Manhattan Bank as of the date each installment is due (8.25% at
April 25, 1997 and at May 1, 1998); collateralized by 3,088 shares of the HLMI's
unissued common stock, with a final payment due April 2000 .............................. 148,567 148,567
Notes payable to former stockholders, due in installments plus interest at prime plus 1%
at
various dates to October 1999 ........................................................... 66,673 4,755
Notes payable, MPB Architects, due in annual payments, including interest at a rate of
10.5%, with a final payment due April 1, 1998 ........................................... 114,850 64,850
Notes payable to Pacific Capital/Equitas, payable June 1, 2002 including interest of 13.5%
due in monthly payments ................................................................. -- 1,980,000
Notes payable to shareholders at 6% with final payment due at various dates to August
2002 .................................................................................... -- 165,260
Note payable to Firstar, due to monthly payments of $16,405, including interest at 2.5%
over
the Banks prime rate .................................................................... 271,134
Lease financing with Berthel Fisher, due in monthly payments of $64,501, including
interest
at 14.07%, with final lease and interest payments due on April 30, 2002 ................. -- 2,430,545
-------- ----------
Total long-term debt ..................................................................... 746,224 4,820,977
Less current maturities .................................................................. 642,432 656,576
-------- ----------
Long-term portion ........................................................................ $103,792 $4,164,401
======== ==========
</TABLE>
In May 1997 HLMI entered into a financing arrangement, in the form of a
capital lease agreement, with Berthel Leasing, a subsidiary of Berthel Fisher,
for $2.8 million. The substance of such agreement is a financing arrangement
and has been presented as such in the financial statements.
As of May 1, 1998, HLMI was in negotiations with MPB Architects as to the
amount of the final payment. It is management's belief final resolution will
result in a final payment of $64,850 or less.
Substantially all assets are pledged under financing agreements described
above.
Annual principal payments of the various financing agreements are as
follows:
<TABLE>
<S> <C>
Fiscal 1999 ......... $ 656,576
Fiscal 2000 ......... 579,679
Fiscal 2001 ......... 609,775
Fiscal 2002 ......... 701,349
Fiscal 2003 ......... 693,598
Thereafter .......... 1,580,000
----------
Total ............... $4,820,977
==========
</TABLE>
In May 1997, warrants to purchase 183,244 shares of HLM Design common
stock (as adjusted for subsequent stock splits) were attached to the notes
issued to Pacific Capital and Equitas. In addition, warrants to purchase 43,631
shares of HLM Design common stock (as adjusted for subsequent stock splits)
were attached to the notes issued to Berthel Fisher in September 1997 and in
December 1997. Each warrant allows holders to purchase a share of common stock
for $.01 per share for a five year period. At May 1, 1998, all of the warrants
held by Berthel Fisher and Equitus were exercised. All other warrants issued
with debt were outstanding at May 1, 1998. (See Note 9).
F-12
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS -- (Continued)
In the event that the indebtedness owed by HLM Design to the holder of the
warrants ("Holder") pursuant to that Note issued to Holder from HLM Design is
not repaid in full on or before the two year anniversary of the issuance then
the number of shares of HLM Design's common stock that may be purchased by the
Holder of this warrant shall increase by a predetermined amount on each annual
anniversary thereafter, until the indebtedness is paid in full.
The Holders of the warrants have the right and option to sell to HLM
Design this warrant for a period of 30 days immediately prior to the expiration
at a purchase price equal to the fair market value of the shares of common
stock issuable to the Holder upon exercise of this warrant less the exercise
price.
The Company obtained, as of May 1997, a valuation of the Company as a
basis for assigning value to the warrants. The portion of such determined value
in excess of the amounts paid for the warrants was $238,753 and has been
reflected as deferred financing fees and is being amortized over the respective
loan terms using an effective yield method. (See Note 9).
See Note 9 for discussion of warrant activity subsequent to May 1, 1998.
5. LEASE COMMITMENTS
The total minimum rental commitment under non-cancellable operating leases
at May 1, 1998, which has been reduced by minimum rentals to be received under
subleases, are as follows:
<TABLE>
<S> <C>
Fiscal 1999 ......... $ 2,110,276
Fiscal 2000 ......... 2,089,238
Fiscal 2001 ......... 2,003,027
Fiscal 2002 ......... 1,864,931
Fiscal 2003 ......... 1,111,302
Thereafter .......... 5,491,048
-----------
Total ............... $14,669,822
===========
</TABLE>
In 1996 and 1997, HLMI terminated facility leases that were being
accounted for as operating leases, resulting in gains of $841,809 and $344,059,
respectively. The recorded gain represent the cumulative excess of lease
expense over the lease payments made as of the termination date.
6. CONTINGENCIES
The Company is involved in various disputes and legal actions related to
contract operations. In the opinion of Company management, the ultimate
resolution of these actions will not have a material effect on the Company's
financial position or future results of operations.
7. RELATED PARTY TRANSACTIONS
During the year ended May 1, 1998, the Company incurred $22,911 in
financing advisory fees related to debt financings, for services provided by a
director. During the years ended April 25, 1997 and April 26, 1996, HLMI
incurred $257,017 and $254,137, respectively, in financing advisory fees
related to debt financing arranged by a director. Such director resigned
effective October 1997.
See Note 4 for related party transactions with respect to financing
arrangements.
F-13
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
(PREDECESSOR) YEAR
YEAR ENDED ENDED
-------------------------- -----------
APRIL 26, APRIL 25, MAY 1,
1996 1997 1998
-------------- ----------- -----------
<S> <C> <C> <C>
Current provision (benefit):
Federal ......................... $ (100,240) $ (3,903) $190,424
State ........................... (14,320) (558) 132,611
Deferred ......................... 550,019 224,260 360,862
---------- -------- --------
Provision for Income Taxes ....... $ 435,459 $219,799 $683,897
========== ======== ========
</TABLE>
The reconciliation of the statutory federal income tax rate with the
Company's overall effective federal and state income rate is as follows:
<TABLE>
<CAPTION>
(PREDECESSOR) YEAR
YEAR ENDED ENDED
----------------------- ----------
APRIL 26, APRIL 25, MAY 1,
1996 1997 1998
----------- ----------- ----------
<S> <C> <C> <C>
Statutory federal rate ......................... 35.0% 35.0% 34.0%
State income taxes, net of federal benefit ..... 3.3 3.3 4.0
Penalties ...................................... 0.4 17.4 1.9
Meals and entertainment ........................ 4.4 9.3 2.0
Goodwill ....................................... 3.8
Other .......................................... 1.8 .3 .4
---- ---- ----
Effective Tax Rates ........................... 44.9% 65.3% 46.1%
==== ==== ====
</TABLE>
The tax effect of temporary differences giving rise to deferred income tax
assets and liabilities as of April 25, 1997 (Predecessor Company) and May 1,
1998 is as follows:
<TABLE>
<CAPTION>
(PREDECESSOR)
APRIL 25, MAY 1,
1997 1998
---------------- ----------------
<S> <C> <C>
Deferred income tax liabilities -- difference between the accrual basis and cash
basis of accounting related to certain assets and liabilities ................... $ (1,255,765) $ (1,517,146)
Deferred income tax assets:
Contribution carryforwards ...................................................... 64,361 42,554
Property and equipment .......................................................... 96,177 258,908
Net operating loss carryforwards ................................................ 304,156 76,273
Deferred state taxes ............................................................ 60,280
Other deferred assets ........................................................... 27,586
------------ ------------
Total deferred income tax assets ................................................. 464,694 465,601
------------ ------------
Deferred income tax liabilities, net ............................................. $ (791,071) $ (1,051,545)
============ ============
</TABLE>
Management believes it is probable that the Company will realize the tax
benefits of the deductible differences that were available as of May 1, 1998.
At May 1, 1998, HLM Design has federal net operating loss carryforwards of
approximately $190,500 expiring in 2018 and state net operating loss
carryforwards of approximately $190,500. HLMI has credit carryforwards of
approximately $28,000.
HLM Design, and its AEPs file separate federal and state income tax
returns.
F-14
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. SUBSEQUENT EVENTS
PUBLIC OFFERING OF COMMON STOCK -- The Company completed the Offering of
1,200,000 shares of its common stock on June 12, 1998 at a price of $6.00 per
share. Net proceeds of the Offering of $5.92 million (after underwriting
discount and other offering expenses) were used to repay certain indebtness
consisting of: (a) $2.0 million due under Pacific Capital/ Equitas, and (b)
$0.75 million term loan from Berthel Leasing and $0.2 million to employee
stockholders (See Note 4 -- Financing Arrangements). The aggregate of the loans
paid off is classified in the balance sheet as long term in accordance with
original terms. Remaining net proceeds will be used for development of new
business and other general corporate purposes.
In June 1998, 98,953 warrants were exercised resulting in the issuance of
98,953 shares of Common Stock (as adjusted for subsequent HLM Design stock
splits).
10. EMPLOYEE BENEFIT PLANS
Substantially all employees are eligible to participate in a 401(k) plan.
Contribution expense for the year ended May 1, 1998 was $27,933. Prior to
fiscal 1998, there was no company contribution.
EMPLOYEE STOCK PURCHASE PLAN -- In February 1998, the Board of Director
and stockholders of the Company adopted the HLM Design Inc. Employee Stock
Purchase Plan (the "ESPP"). A total of 57,954 shares of common stock has been
reserved under the ESPP, provided that the number of shares issued or issuable
under the ESPP and under the Stock Option Plan (discussed below) shall not
exceed in the aggregate 10% of the total number of shares of common stock
outstanding. On January 1 of each year, all eligible employees electing to
participate will be granted options to purchase shares of Common Stock. The
purchase price of common stock purchased through the ESPP will be 85% of the
lesser of (i) the fair market value of the common stock on the applicable Grant
Date and (ii) the fair market value of the common stock on the applicable
exercise date. Options will expire on the last exercise date of the calendar
year in which granted. As of May 1, 1998, no shares had been granted or issued
under the ESPP.
STOCK OPTION PLAN -- In February 1998, the Board of Directors and
stockholders of the Company adopted the HLM Design, Inc. Stock Option Plan (the
"Stock Option Plan") with respect to common stock in order to attract and
retain key personnel. Under the Stock Option Plan, options to purchase an
aggregate of 159,955 shares of common stock may be granted to key employees of
HLM Design and its Managed Firms and to officers, directors, consultants and
other individuals providing services to the Company. The Board of Directors of
HLM Design has approved the grant of 115,908 shares of common stock to two key
employees.
F-15
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. HLM DESIGN FINANCIAL INFORMATION (UNAUDITED)
HLM Design's balance sheet as of May 1, 1998 and income statement for the
year ended May 1, 1998 are as follows:
<TABLE>
<S> <C>
BALANCE SHEET
Current assets .............................. $ 122,150
----------
Non-current assets .......................... 5,639,400
----------
Total assets ................................ $5,761,550
==========
Current liabilities ......................... $2,073,271
----------
Non-current liabilities ..................... 2,723,524
----------
Total liabilities ........................... 4,796,795
==========
Total stockholders equity ................... 964,755
----------
Total liabilities & stockholders equity ..... $5,761,550
==========
INCOME STATEMENT
Equity in Earnings of Affiliate ............. $1,443,958
Net interest, tax and other expense ......... 665,602
----------
Net income .................................. $ 778,356
==========
</TABLE>
F-16
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ VERNON B. BRANNON
------------------------------------
VERNON B. BRANNON
SENIOR VICE PRESIDENT, TREASURER
AND CHIEF FINANCIAL OFFICER
Date: July 29, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ---------------------------------------- ---------------------------------------- --------------
<S> <C> <C>
/s/ JOSEPH M. HARRIS President, Chief Executive Officer July 29, 1998
---------------------------------- (principal executive officer) and
JOSEPH M. HARRIS Chairman
/s/ VERNON B. BRANNON
---------------------------------- Senior Vice President, Treasurer, Chief July 29, 1998
VERNON B. BRANNON Financial Officer (principal financial
and accounting officer) and Director
/s/ CLAY R. CAROLAND, III Director July 29, 1998
----------------------------------
CLAY R. CAROLAND, III
Director July 29, 1998
----------------------------------
SHANNON LEROY
</TABLE>
EXHIBIT 10.7
SECURITY ESCROW AGREEMENT
THIS ESCROW AGREEMENT made and entered into this 18th day of June, 1998,
among the persons and parties who have signed this Agreement as security holders
(herein collectively referred to as the "Security Holders"), HLM Design, Inc., a
Delaware corporation (the "Issuer"), and First Union National Bank (the "Escrow
Agent");
WITNESSETH THAT:
A. Each of the Security Holders is the owner of the number of shares of
common stock, par value $.001 per share (the "Common Stock") of the Issuer or
possesses options to acquire shares of Common Stock of the Issuer listed
opposite his or its name on Exhibit A attached hereto.
B. The Issuer has applied to the state securities administrators of
certain states for registration of 1,200,000 shares of Common Stock for sale to
the residents of such states (the "Registration"). As a condition of such
Registration, certain administrators (the "Administrators") have required that
the Security Holders, the Escrow Agent and the Issuer enter into this Agreement
and agree to be bound by applicable rules and regulations of the Administrators
pertaining to such agreements.
C. Each of the Security Holders has deposited the securities listed
opposite his or its name and documents evidencing options to acquire the
securities on Exhibit A with the Escrow Agent, and the Escrow Agent hereby
acknowledges receipt thereof. Such securities are herein collectively referred
to as "Escrowed Stock" or "Shares".
NOW, THEREFORE, the persons and parties hereto agree as follows:
1. DEPOSIT OF CERTIFICATES. Simultaneously with the execution of this
Agreement, each Security Holder is depositing with the Escrow Agent, and the
Escrow Agent hereby acknowledges receipt of, the certificates and documents
representing the Escrowed Stock listed on Exhibit A. At the written request of
the Issuer, the Escrow Agent shall make available to the Issuer and any affected
Securities Holder, such documents as are necessary to exercise the foregoing
options to acquire Shares.
2. TERM. The term of this Agreement shall commence on the date that the
Registration is declared effective by the Administrators. The certificates or
documents evidencing the Shares are to be deposited with the Escrow Agent and
are to be held pursuant hereto, for a period of three years from the date of
acquisition of such Shares unless released earlier in accordance with the terms
of this Agreement.
<PAGE>
3. RELEASE OF SHARES. The Shares shall be released to Security Holders
prior to the end of the term provided in paragraph 2 above as follows:
a. One-hundred percent (100%) of the Shares shall be
released from escrow after the Issuer has had annual
net earnings per share as determined in accordance
with generally acceptance accounting principles
(GAAP) equal to, or greater than, five percent (5%)
of the per share public offering price, after taxes
and excluding extraordinary items, for any two
consecutive fiscal years after the dated of
effectiveness; or,
b. One-hundred percent (100%) of the Shares shall be
released from escrow after the Issuer's Shares have
traded in a reliable public market at a price of at
least one-hundred seventy-five percent (175%) of the
initial public offering price for at least ninety
(90) consecutive trading days after at least one year
from the date of effectiveness.
4. DOCUMENTATION TO ESCROW AGENT REGARDING RELEASE OF SHARES. A request
for termination of the escrow, based on the satisfaction of either paragraph
3.a. or 3.b. above, shall be forwarded to the Escrow Agent. A request for
termination of the escrow based upon paragraph 3.a shall be accompanied by an
earnings per share calculation audited and reported on by an independent
certified public accountant.
5. TERMINATION OR PARTIAL OFFERING. The foregoing notwithstanding, the
Shares will be released by the Escrow Agent if the public offering has been
terminated and no securities were sold pursuant thereto.
6. RESTRICTION ON TRANSFER. The Escrowed Stock may be transferred by
will, or pursuant to the laws of descent and distribution, or through
appropriate legal proceedings, but in all cases the Shares shall remain in
escrow and subject to the terms of this Agreement until released pursuant to
paragraph 2 or paragraph 3 above. Upon the death of the holder of any Escrowed
Stock, the Escrowed Stock of the deceased holder may be hypothecated, subject to
all of the terms of this Agreement, to the extent necessary to pay the expenses
of the estate. The Shares in escrow may be transferred by gift to family
members, provided that the Shares shall remain subject to the terms of this
Agreement. The Shares may not be pledged to secure a debt except as noted above,
and except that Joseph M. Harris and Vernon B. Brannon shall each be permitted
to maintain the pledge of 70,000 Shares currently provided to First Charter
National Bank to secure certain indebtedness.
7. VOTING POWER. The Escrowed Stock shall have all voting rights to
which the non-escrowed shares are entitled.
8. DIVIDENDS. Any dividends paid on the Shares shall be paid to the
Escrow Agent by checks of the Issuer made payable to the Escrow Agent with a
notation of this Agreement thereon, and any such dividends shall be held
pursuant to the terms of this
2
<PAGE>
Agreement. The Escrow Agent shall treat such dividends as assets of the Issuer,
available for distribution under the terms of paragraph 9 below, except as
provided herein. The Escrow Agent shall place the dividends in an interest
bearing account. The dividends and the interest earned thereon will be disbursed
in proportion to the number of Shares released from the escrow at the time the
Shares are released pursuant to paragraph 2 or paragraph 3 above, unless they
are applied to the payment of the fees of the Escrow Agent under paragraph 13
below.
9. STOCK DIVIDENDS OR SPLITS. Stock dividends on, and shares resulting
from stock splits of, the Escrowed Stock shall be delivered to the Escrow Agent
and shall be held pursuant to this Agreement as if they were original shares of
Escrowed Stock deposited hereunder. In the event of any stock dividend, stock
split or recapitalization of the Issuer, the price per share figures herein
shall be adjusted appropriately.
10. ADDITIONAL SHARES. Upon the exercise by any Security Holder of his
or its options to acquire additional shares of the Issuer pursuant to the
documents listed on Exhibit A, the additional shares received from the exercise
of such options shall forthwith be deposited in escrow with the Escrow Agent and
shall be subject to the terms and conditions of this Agreement.
11. DISSOLUTION PREFERENCE. The Security Holders agree that in the
event of dissolution, liquidation, merger, consolidation, sale of assets,
exchange, or any transaction or proceeding that results in the distribution of
the assets of the Issuer, the Security Holders hereby waive all their rights,
title and interests and participations in the assets of the Issuer until the
holders of all non-escrowed shares have been paid, or have had irrevocably set
aside for them, an amount equal to one hundred percent (100%) of the public
offering price per share, adjusted for stock splits and stock dividends.
Subsequently, the Shares shall be entitled to receive an amount per share equal
to one hundred percent (100%) of the amount per share paid to, or set aside for,
the non-escrowed shares. Thereafter, the Security Holders shall participate on a
pro rata basis with all shareholders. Mergers, consolidations, or
reorganizations may proceed on terms and conditions different than those stated
above if a majority of shares held by persons, other than promoters and Security
Holders, approve the terms and conditions by vote at a meeting held for such
purpose.
12. RELIANCE BY ESCROW AGENT. The Escrow Agent may conclusively rely
on, and shall be protected, when it acts in good faith upon, any statement,
certificate, notice, request, consent, order or other document which it believes
to be genuine and signed by the proper party. The Escrow Agent shall have no
duty or liability to verify any such statement, certificate, notice, request,
consent, order or other document and its sole responsibility shall be to act
only as expressly set forth in this Agreement. The Escrow Agent shall be under
no obligation to institute or defend any action, suit or proceeding in
connection with this Agreement unless it is indemnified to its satisfaction. The
Escrow Agent may consult counsel with respect to any question arising under this
Agreement and the Escrow Agent shall not be liable for any action taken, or
omitted, in good faith upon advice of counsel. In performing any of its duties
hereunder, the Escrow Agent shall not incur any liability to anyone for any
damages, losses or
3
<PAGE>
expenses except for willful default or negligence, and it shall accordingly not
incur any such liability with respect to: (i) any action taken or omitted in
good faith upon advice of its counsel or counsel for the Issuer given with
respect to any questions relating to the duties and responsibility of the Escrow
Agent under this Agreement, or (ii) any action taken or omitted in reliance upon
any instrument, including written advice provided for herein, not only as to its
due execution and the validity and effectiveness of its provisions, but also as
to the truth and accuracy of any information contained therein, which the Escrow
Agent shall in good faith believe to be genuine, to have been signed or
presented by the proper person or persons, and to conform with the provisions of
this Agreement. All Shares and funds held pursuant to this Agreement shall
constitute trust property. The Escrow Agent shall not be liable for any interest
on the Shares.
13. COMPENSATION TO ESCROW AGENT. The Escrow Agent shall be entitled to
receive from the Issuer reasonable compensation for its services as set forth in
Exhibit B attached hereto. In the event that the Escrow Agent renders any
additional services not provided for herein, or if any controversy arises
hereunder, or if the Escrow Agent is made a party to, or intervenes in any
action, suit or proceeding pertaining to this Agreement, the Issuer shall
provide reasonable compensation for such additional services. Upon notice to the
Security Holders, the Escrow Agent may deduct its compensation from any cash
dividends or distributions held pursuant to paragraph 8 above.
14. QUALIFICATION AND INDEPENDENCE OF ESCROW AGENT. The Issuer
hereby represents that a complete list of its officers, directors and promoters
is attached hereto as Exhibit C. Based thereon, the Escrow Agent hereby
represents and warrants that it is not affiliated with the Issuer, any officer,
director or promoter of the Issuer or any Security Holder.
15. INDEMNIFICATION. The Issuer and the Security Holders agree to hold
the Escrow Agent harmless from, and indemnify the Escrow Agent for, any and all
costs of investigation or claims, costs, expenses, attorney fees or other
liabilities or disbursements arising out of any administrative investigation or
proceeding or any litigation, commenced or threatened, relating to this
Agreement, including without limitation, the implementation of this Agreement,
the distribution of the Shares or funds, the investment of funds, the
interpretation of this Agreement or similar matters, provided that the Escrow
Agent shall not be indemnified for any claims, costs, expenses or other
liability arising from its bad faith or negligence or that of its employees,
officers, directors or agents.
16. SCOPE. This agreement shall be binding upon, and inure to the
benefit of, the parties hereto, their heirs, successors and assigns.
17. TERMINATION. Except for the indemnification provisions of paragraph
15 above, which shall survive in any event, this Agreement shall terminate in
its entirety when all the
4
<PAGE>
Shares have been released as provided in paragraph 2 or paragraph 3 above.
5
<PAGE>
IN WITNESS WHEREOF, the Security Holders, the Issuer and the Escrow
Agent have entered into this Agreement as of the date first above written, in
multiple counterparts, each of which shall be considered an original.
SECURITY HOLDERS:
/s/ Joseph M. Harris
------------------------------------
Joseph M. Harris
/s/ Vernon B. Brannon
------------------------------------
Vernon B. Brannon
BERTHEL FISHER & COMPANY
LEASING, INC.
/s/ Nancy L. Lowenberg
------------------------------------
By: Nancy L. Lowenberg
Its: Vice President & Chief Operating
Officer
ISSUER:
HLM DESIGN, INC.
By: /s/ Vernon B. Brannon
-------------------------------
Its: Senior Vice President, Treasurer
and Chief Financial Officer
ESCROW AGENT
FIRST UNION NATIONAL BANK
/s/ Terry Baker
------------------------------------
By: Terry Baker
Its: Vice President
6
<PAGE>
EXHIBIT A
Securities
Name of Holder Number of Shares Number of Options
- - -------------- ---------------- -----------------
Joseph M. Harris 309,188 57,954
Vernon B. Brannon 309,187 57,954
Berthel Fisher & Company Leasing, Inc. 43,631
7
<PAGE>
EXHIBIT B
Escrow Agent Fees
8
<PAGE>
EXHIBIT C
Officers and Directors
Officers Directors
- - -------- ---------
Joseph M. Harris Joseph M. Harris
Vernon B. Brannon Vernon B. Brannon
Karen Kaplan Clay R. Caroland III
D. Shannon LeRoy
9
HLM DESIGN, INC.
1998 STOCK OPTION PLAN
1. PURPOSES OF PLAN. The purposes of the Plan, which shall be known as
the HLM Design, Inc. 1998 Stock Option Plan and is hereinafter referred to as
the "Plan", are (i) to provide incentives for key employees, directors,
consultants and other individuals providing services to HLM Design, Inc. (the
"Company") and its subsidiaries (within the meaning of Section 424(f) of the
Internal Revenue Code of 1986, as amended (the "Code"), each of which is
referred to herein as a "Subsidiary") by encouraging their ownership of the
Common Stock, $.001 par value, of the Company (the "Stock") and (ii) to aid the
Company in retaining such key employees, directors, consultants and other
individuals upon whose efforts the Company's success and future growth depends,
and attracting other such employees, directors, consultants and other
individuals.
2. ADMINISTRATION. The Plan shall be administered by a committee of the
Board of Directors of the Company (the "Committee"). The Committee shall be
appointed from time to time by the Board of Directors of the Company (the "Board
of Directors") and shall consist of not fewer than two of its members. Each
Committee member shall be a "non-employee director" within the meaning of Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the
"Act"). In the event that no such Committee exists or is appointed, the powers
to be exercised by the Committee hereunder shall be exercised by the Board of
Directors.
For purposes of administration, the Committee, subject to the terms of
the Plan, shall have plenary authority to establish such rules and procedures,
to make such determinations and interpretations, and to take such other
administrative actions, as it deems necessary or advisable. All determinations
and interpretations made by the Committee shall be final, conclusive and binding
on all persons, including those granted options hereunder ("Optionees") and
their legal representatives and beneficiaries.
Notwithstanding any other provisions of the Plan, the Committee may
impose such conditions on any options as may be required to satisfy the
requirements of Rule 16b-3 of the Act or Section 162(m) of the Code.
The Committee shall hold its meetings at such times and places as it
may determine. A majority of its members shall constitute a quorum. All
determinations of the Committee shall be made by a majority of its members. Any
decision or determination reduced to writing and signed by all members shall be
as effective as if it had been made by a majority vote at a meeting duly called
and held. The Committee may appoint a secretary (who need not be a member of the
Committee). No member of the Committee shall be liable for any act or omission
with respect to such member's service on the Committee, if such member acts in
good faith and in a manner he or she reasonably believes to be in or not opposed
to the best interests of the Company.
3. STOCK AVAILABLE FOR OPTIONS. There shall be available for options
under the Plan a total of 159,955 shares of Stock, subject to any adjustments
which may be made pursuant to Section 5(f) hereof. Shares of Stock used for
purposes of the Plan may be either authorized and unissued shares, or previously
issued shares held in the treasury of the Company, or both. Shares of Stock
covered by options which have terminated or expired prior to exercise or which
have been tendered as payment upon exercise of other options pursuant to Section
5(c) shall be available for further option grants hereunder.
4. ELIGIBILITY. Options under the Plan may be granted to key employees
of the Company or any Subsidiary, including officers or directors of the Company
or any Subsidiary, and to directors, consultants and
1
<PAGE>
other individuals providing services to the Company or any Subsidiary. Options
may be granted to eligible employees whether or not they hold or have held
options previously granted under the Plan or otherwise granted or assumed by the
Company. In selecting employees for options, the Committee may take into
consideration any factors it may deem relevant, including its estimate of the
employee's present and potential contributions to the success of the Company and
its Subsidiaries. Service as a director, officer or consultant of or to the
Company or any Subsidiary shall be considered employment for purposes of the
Plan (and the period of such service shall be considered the period of
employment for purposes of Section 5(d) of the Plan); provided, however, that
incentive stock options may be granted under the Plan only to an individual who
is an "employee" (as such term is used in Section 422 of the Code) of the
Company or any Subsidiary.
5. TERMS AND CONDITIONS OF OPTIONS. The Committee shall, in its
discretion, prescribe the terms and conditions of the options to be granted
hereunder, which terms and conditions need not be the same in each case, subject
to the following:
(a) Option Price. The price at which each share of Stock
covered by an incentive stock option granted under the Plan may be
purchased shall not be less than the market value per share of Stock on
the date of grant of the option. In the case of any option intended to
be an incentive stock option granted to an individual owning (directly
or by attribution as provided in Section 424(d) of the Code), on the
date of grant, stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary
(which individual shall hereinafter be referred to as a "10%
Stockholder"), the price at which each share of Stock covered by the
option may be purchased shall not be less than 110% of the market value
per share of Stock on the date of grant of the option. The date of the
grant of an option shall be the date specified by the Committee in its
grant of the option. The price at which each share of Stock covered by
an option granted under the Plan (but not as an incentive stock option)
may be purchased shall be the price determined by the Committee, in its
absolute discretion, to be suitable to attain the purposes of this
Plan. Notwithstanding the foregoing, the price at which each share of
Stock covered by an option that is not an incentive stock option shall
in no event be less than 85% of the market value of the Stock on the
date of grant of the option.
(b) Option Period. The period for exercise of an option shall
in no event be more than ten years from the date of grant, or in the
case of an option intended to be an incentive stock option granted to a
10% Stockholder, more than five years from the date of grant. Options
may, in the discretion of the Committee, be made exercisable in
installments during the option period. Any shares not purchased on any
applicable installment date may be purchased thereafter at any time
before the expiration of the option period.
(c) Exercise of Options. In order to exercise an option, the
Optionee shall deliver to the Company written notice specifying the
number of shares of Stock to be purchased, together with cash or a
certified or bank cashier's check payable to the order of the Company
in the full amount of the purchase price therefor; provided that, for
the purpose of assisting an Optionee to exercise an option, the Company
may make loans to the Optionee or guarantee loans made by third parties
to the Optionee, on such terms and conditions as the Board of Directors
may authorize; and provided further that such purchase price may be
paid in shares of Stock, or in nonstatutory options granted under the
Plan (provided, however, that the purchase price of Stock acquired
under an incentive stock option may not be paid in options), in either
case owned by the Optionee and having a market value on the date of
exercise not less than the aggregate purchase price, or in any
combination of cash, Stock and such options. For purposes of this
Section 5(c), the market value per share of Stock shall be the last
sale price regular way on the date of reference, or, in case no sales
take place on such date, the average of the
2
<PAGE>
closing high bid and low asked prices regular way, in either case on
the principal national securities exchange on which the Stock is listed
or admitted to trading, or if the Stock is not listed or admitted to
trading on any national securities exchange, the last sale price
reported on the National Market System of the National Association of
Securities Dealers Automated Quotation system ("NASDAQ") on such date,
or the average of the closing high bid and low asked prices of the
Stock in the over-the-counter market reported on NASDAQ on such date,
as furnished to the Committee by any New York Stock Exchange member
selected from time to time by the Committee for such purpose. If there
is no bid or asked price reported on any such date, the market value
shall be determined by the Committee in accordance with the regulations
promulgated under Section 2031 of the Code, or by any other appropriate
method selected by the Committee. For purposes of this Section 5(c),
the market value of an option granted under the Plan shall be the
market value of the underlying Stock, determined as aforesaid, less the
exercise price of the option. If the Optionee so requests, shares of
Stock purchased upon exercise of an option may be issued in the name of
the Optionee or another person. An Optionee shall have none of the
rights of a stockholder until the shares of Stock are issued to him.
(d) Effect of Termination of Employment.
(i) An option may not be exercised after the Optionee
has ceased to be in the employ of the Company or any
Subsidiary for any reason other than the Optionee's death,
Disability or Involuntary Termination Without Cause. Any
cessation of employment, for purposes of incentive stock
options only, shall include any leave of absence in excess of
90 days unless the Optionee's reemployment rights are
guaranteed by law or by contract. "Cause" shall mean any act,
action or series of acts or actions or any omission,
omissions, or series of omissions which result in, or which
have the effect of resulting in, (i) the commission of a crime
by the Optionee involving moral turpitude, which crime has a
material adverse impact on the Company or any Subsidiary, (ii)
gross negligence or willful misconduct which is continuous and
results in material damage to the Company or any Subsidiary,
or (iii) the continuous, willful failure of the person in
question to follow the reasonable directives of the Board of
Directors. "Disability" shall mean the inability or failure of
a person to perform those duties for the Company or any
Subsidiary traditionally assigned to and performed by such
person because of the person's then-existing physical or
mental condition, impairment or incapacity. The fact of
disability shall be determined by the Committee, which may
consider such evidence as it considers desirable under the
circumstances, the determination of which shall be final and
binding upon all parties. "Involuntary Termination Without
Cause" shall mean either (i) the dismissal of, or the request
for the resignation of, a person, by court order, order of any
court- appointed liquidator or trustee of the Company, or the
order or request of any creditors' committee of the Company
constituted under the federal bankruptcy laws, provided that
such order or request contains no specific reference to Cause;
or (ii) the dismissal of, or the request for the resignation
of, a person, by a duly constituted corporate officer of the
Company or any Subsidiary, or by the Board, for any reason
other than for Cause.
(ii) During the three months after the date of the
Optionee's Involuntary Termination Without Cause, the Optionee
shall have the right to exercise the options granted under the
Plan, but only to the extent the options were exercisable on
the date of the cessation of the Optionee's employment.
(iii) During the twelve months after termination of
the Optionee's employment with the Company or any Subsidiary
as a result of the Optionee's Disability, the Optionee shall
have
3
<PAGE>
the right to exercise the options granted under the Plan, but
only to the extent the options were exercisable on the date of
the cessation of the Optionee's employment.
(iv) In the event of the death of the Optionee while
employed or, in the event of the death of the Optionee after
cessation of employment described in subparagraph (ii) or
(iii) above, but within the three-month or twelve-month period
described in subparagraph (ii) or (iii) above, the option
shall thereupon become exercisable in full until the
expiration of twelve months following the Optionee's death.
During such extended period, the option may be exercised by
the person or persons to whom the deceased Optionee's rights
under the option agreement shall pass by will or by the laws
of descent and distribution, but only to the extent the option
was exercisable on the date of the cessation of the Optionee's
employment. The provisions of the foregoing sentence shall
apply to any outstanding options which are incentive stock
options to the extent permitted by Section 422(d) of the Code
and such outstanding options in excess thereof shall,
immediately upon the occurrence of the event described in the
preceding sentence, be treated for all purposes of the Plan as
nonstatutory stock options and shall be immediately
exercisable as such as provided in the foregoing sentence.
In no event shall any option be exercisable beyond the
applicable exercise period provided in Section 5(b) of the Plan.
Nothing in the Plan or in any option granted pursuant to the Plan (in
the absence of an express provision to the contrary) shall confer on
any individual any right to continue in the employ of the Company or
any Subsidiary or interfere in any way with the right of the Company or
Subsidiary to terminate the individual's employment at any time.
(e) Nontransferability of Options. Except as otherwise set
forth herein, during the lifetime of an Optionee, options held by the
Optionee shall be exercisable only by the Optionee, and no option shall
be transferable other than by will or by the laws of descent and
distribution. Notwithstanding the foregoing, the Committee may, in its
absolute discretion, grant nonstatutory stock options that are
transferable, subject to applicable law and the terms and restrictions
imposed by the option agreement or otherwise by the Committee.
(f) Adjustments for Change in Stock Subject to Plan. In the
event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, rights offering
or any other change in the corporate structure or shares of the
Company, corresponding adjustments automatically shall be made to the
number and kind of shares available for issuance under this Plan and
the number and kind of shares and option price thereof covered by
outstanding options under this Plan.
(g) Acceleration of Exercisability of Options Upon Occurrence
of Certain Events. In connection with any merger or consolidation in
which the Company is not the surviving corporation and which results in
the holders of the outstanding voting securities of the Company
(determined immediately prior to such merger or consolidation) owning
less than a majority of the outstanding voting securities of the
surviving corporation (determined immediately following such merger or
consolidation), or any sale or transfer by the Company of all or
substantially all of its assets or any tender offer or exchange offer
for or the acquisition, directly or indirectly, by any person or group
of all or a majority of the then-outstanding voting securities of the
Company, all outstanding options under the Plan shall become
exercisable in full, notwithstanding any other provision of the Plan or
of any outstanding options granted thereunder, on and after (i) the
fifteenth day prior to the effective date of such merger,
consolidation, sale, transfer or acquisition or (ii) the date of
commencement of such tender offer or exchange offer, as the case may
be. The provisions of the foregoing sentence shall apply to any
4
<PAGE>
outstanding options which are incentive stock options to the extent
permitted by Section 422(d) of the Code and such outstanding options in
excess thereof shall, immediately upon the occurrence of the event
described in clause (i) or (ii) of the foregoing sentence, be treated
for all purposes of the Plan as nonstatutory stock options and shall be
immediately exercisable as such as provided in the foregoing sentence.
Notwithstanding the foregoing, in no event shall any option be
exercisable beyond the applicable period of such option specified in
Sections 5(b) and 5(d).
(h) Registration, Listing and Qualification of Shares of
Stock. Each option shall be subject to the requirement that if at any
time the Board of Directors shall determine that the registration,
listing or qualification of shares of Stock covered thereby upon any
securities exchange or under any federal or state law, or the consent
or approval of any governmental regulatory body, is necessary or
desirable as a condition of, or in connection with, the granting of
such option or the purchase of shares of Stock thereunder, no such
option may be exercised unless and until such registration, listing,
qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Board of Directors. The
Company may require that any person exercising an option shall make
such representations and agreements and furnish such information as it
deems appropriate to assure compliance with the foregoing or any other
applicable legal requirement.
(i) Other Terms and Conditions. The Committee may impose such
other terms and conditions, not inconsistent with the terms hereof, on
the grant or exercise of options, as it deems advisable.
(j) Reload Options. If upon the exercise of an option granted
under the Plan (the "Original Option") the Optionee pays the purchase
price for the Original Option pursuant to Section 5(c) in whole or in
part in shares of Stock owned by the Optionee for at least six months,
the Company shall grant to the Optionee on the date of such exercise an
additional option under the Plan (the "Reload Option") to purchase that
number of shares of Stock equal to the number of shares of Stock so
held for at least six months transferred to the Company in payment of
the purchase price in the exercise of the Original Option. The price at
which each share of Stock covered by the Reload Option may be purchased
shall be the market value per share of Stock (as specified in Section
5(c)) on the date of exercise of the Original Option. The Reload Option
shall not be exercisable until one year after the date the Reload
Option is granted or after the expiration date of the Original Option.
Upon the payment of the purchase price for a Reload Option granted
hereunder in whole or in part in shares of Stock held for more than six
months pursuant to Section 5(c), the Optionee is entitled to receive a
further Reload Option in accordance with this Section 5(j). Shares of
Stock covered by a Reload Option shall not reduce the number of shares
of Stock available under the Plan pursuant to Section 3.
6. ADDITIONAL PROVISIONS APPLICABLE TO INCENTIVE STOCK OPTIONS. The
Committee may, in its discretion, grant options under the Plan to eligible
employees which constitute "incentive stock options" within the meaning of
Section 422 of the Code, provided, however, that (a) the aggregate market value
of the Stock with respect to which incentive stock options are exercisable for
the first time by the Optionee during any calendar year shall not exceed the
limitation set forth in Section 422(d) of the Code and (b) Section 5(d)(ii)
hereof shall not apply to any incentive stock option.
7. EFFECTIVENESS OF PLAN. The Plan shall be effective when it is
adopted and approved by the Board of Directors, provided that the Plan is
approved within twelve months before or after such adoption by a majority of the
votes cast thereon by the stockholders of the Company at a meeting of
stockholders duly called and held for such purpose or by unanimous written
consent of such stockholders, and no option granted hereunder shall be
exercisable prior to such approval.
5
<PAGE>
8. AMENDMENT AND TERMINATION. The Board of Directors may at any time
amend the Plan or the term of any option outstanding under the Plan; provided,
however, that, except as contemplated in Section 5(f), the Board of Directors
shall not, without approval by a majority of the votes cast by the stockholders
of the Company at a meeting of stockholders at which a proposal to amend the
Plan is voted upon, (i) increase the maximum number of shares of Stock for which
options may be granted under the Plan, or (ii) except as otherwise provided in
the Plan, amend the requirements as to the class of employees eligible to
receive options. Unless the Plan shall theretofore have been terminated as
hereinafter provided, the Plan shall terminate, and no option shall be granted
hereunder, after ten years from the date the Plan is adopted by the Board of
Directors or approved by the stockholders as described in Section 7, whichever
first occurs; provided, however, that the Board of Directors may at any time
prior to that date terminate the Plan. No amendment or termination of the Plan
or any option outstanding under the Plan may, without the consent of an
Optionee, adversely affect the rights of such Optionee under any option held by
such Optionee.
9. WITHHOLDING. It shall be a condition to the obligation of the
Company to issue shares of Stock upon exercise of an option that the Optionee
(or any beneficiary or person entitled to act under Section 5(d) hereof) pay to
the Company, upon its demand, such amount as may be requested by the Company for
the purpose of satisfying any taxes. If the amount requested is not paid, the
Company may refuse to issue such shares of Stock.
10. OTHER ACTIONS. Nothing contained in the Plan shall be construed to
limit the authority of the Company to exercise its corporate rights and powers,
including, but not by way of limitation, the right of the Company to grant or
assume options for proper corporate purposes other than under the Plan with
respect to any employee or other person, firm, corporation or association.
6
EXHIBIT 10.24
HLM DESIGN, INC.
EMPLOYEE STOCK PURCHASE PLAN
<PAGE>
HLM DESIGN, INC.
EMPLOYEE STOCK PURCHASE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I PURPOSE; DEFINITIONS; CONSTRUCTION.....................................................................1
1.1 Purpose of Plan.................................................................................1
1.2 Definitions.....................................................................................1
(a) "Account"..............................................................................1
(b) "Base Pay".............................................................................1
(c) "Board of Directors"...................................................................1
(d) "Business Day".........................................................................1
(e) "Cause"................................................................................1
(f) "Code".................................................................................1
(g) "Committee"............................................................................1
(h) "Company"..............................................................................2
(i) "Company Stock"........................................................................2
(j) "Contributions"........................................................................2
(k) "Employee".............................................................................2
(l) "Employer".............................................................................2
(m) "Exercise Date"........................................................................2
(n) "Grant Date"...........................................................................2
(o) "Option"...............................................................................2
(p) "Participant"..........................................................................2
(q) "Plan".................................................................................2
1.3 Construction....................................................................................2
ARTICLE II ADMINISTRATION.........................................................................................3
2.1 Appointment and Procedures of Committee.........................................................3
2.2 Authority of Committee..........................................................................3
ARTICLE III PARTICIPATION........................................................................................3
3.1 Eligibility to Participate......................................................................3
3.2 Restrictions on Participation...................................................................3
3.3 Leave of Absence................................................................................4
ARTICLE IV CONTRIBUTIONS.........................................................................................4
4.1 Payroll Deductions..............................................................................4
4.2 Contributions to Accounts.......................................................................4
4.3 Leave of Absence................................................................................4
4.4 Withdrawal of Contributions from Plan...........................................................5
4.5 Termination of Employment.......................................................................5
ARTICLE V OPTIONS................................................................................................5
5.1 Company Stock Available for Options.............................................................5
<PAGE>
5.2 Granting of Options.............................................................................5
5.3 Option Price....................................................................................5
5.4 Option Period...................................................................................6
5.5 Exercise of Options.............................................................................6
(a) Automatic Exercise.....................................................................6
(b) Nontransferability of Options..........................................................6
(c) Effect of Termination of Employment....................................................6
(i) Termination of Employment Related to Cause....................................6
(ii) Termination of Employment Due to Death........................................6
(iii) Other Termination of Employment...............................................7
(d) Leave of Absence.......................................................................7
(e) Delivery of Stock......................................................................8
(f) Acceleration of Exercisability of Options Upon Occurrence
of Certain Events......................................................................8
(g) Registration, Listing and Qualification of Shares of Stock.............................8
ARTICLE VI MISCELLANEOUS.........................................................................................8
6.1 Adjustments Upon Changes in Capitalization......................................................8
6.2 Approval of Shareholders........................................................................8
6.3 Amendment, Suspension and Termination...........................................................9
6.4 Intent to Comply With Code Section 423..........................................................9
6.5 Equal Rights and Privileges.....................................................................9
6.6 Use of Funds....................................................................................9
6.7 Withholding.....................................................................................9
6.8 Effect of Plan..................................................................................9
6.9 No Employment Rights............................................................................9
6.10 Governing Law..................................................................................10
6.11 Other Actions..................................................................................10
</TABLE>
ii
<PAGE>
HLM DESIGN, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I
PURPOSE; DEFINITIONS; CONSTRUCTION
1.1 Purpose of Plan. The purpose of the Plan, which shall be known as
the HLM Design, Inc. Employee Stock Purchase Plan (the "Plan"), is to provide
employees of HLM Design, Inc. (the "Company") and its participating subsidiaries
(which hereinafter shall be referred to collectively with the Company as the
"Employer") an opportunity to acquire a proprietary interest in the Company
through the purchase of the Common Stock, $.001 par value, of the Company. This
Plan is intended to qualify as an "employee stock purchase plan" within the
meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the
"Code").
1.2 Definitions. Throughout this Plan, the following terms shall have
the meanings indicated:
(a) "Account" shall mean a memorandum account maintained to
record each Participant's Contributions pending purchase of Company Stock.
(b) "Base Pay" shall mean the Participant's regular base
salary (excluding overtime pay, bonuses, shift premiums, commissions, fringe
benefits, other special payments and imputed income) determined without
reduction for Contributions made under this Plan or contributions to any Code
Section 401(k) or Section 125 Plan. The Committee may establish additional rules
for determining a Participant's Base Pay for purposes of this Plan.
(c) "Board of Directors" shall mean the Board of Directors of
the Company.
(d) "Business Day" shall mean any day other than a Saturday,
Sunday or holiday.
(e) "Cause" shall mean any act, action or series of acts or
actions or any omission, omissions or series of omissions which, in the opinion
of the Committee, result in, or which have the effect of resulting in, (i) the
commission of a crime by the Participant involving moral turpitude, which crime
has a material adverse impact on the Employer, (ii) gross negligence or willful
misconduct which is continuous and results in material damage to the Employer,
or (iii) the continuous, willful failure of the person in question to follow the
reasonable directives of the Employer.
(f) "Code" shall mean the Internal Revenue Code of 1986, as
amended, any successor revenue laws of the United States, and the rules and
regulations promulgated thereunder.
(g) "Committee" shall mean the committee of directors of the
Company appointed by the Board of Directors in accordance with Section 2.1 to
administer this Plan, or
<PAGE>
in the event that no such committee exists or is appointed, "Committee" shall
mean the Board of Directors.
(h) "Company" shall mean HLM Design, Inc., a company organized
and existing under the laws of the State of Delaware.
(i) "Company Stock" shall mean the Common Stock, $.001 par
value, of the Company.
(j) "Contributions" shall mean the after-tax payroll
deductions contributed to the Plan by Participants pursuant to Article IV.
(k) "Effective Date" shall mean the date of the closing of the
Company's initial public offering.
(l) "Employee" shall mean any person who (i) is employed on a
full-time or part-time basis by a participating Employer, (ii) is regularly
scheduled to work more than twenty hours per week, and (iii) is customarily
employed more than five months in any calendar year. Independent contractors and
outside directors shall not be included in the definition of Employee for
purposes of this Plan.
(m) "Employer" shall mean the Company and any of its present
or future subsidiaries (within the meaning of Section 424(f) of the Code) which
the Committee may designate from time to time as participating Employers under
this Plan.
(n) "Exercise Date" shall mean the last Business Day of March,
June, September and December on which the principal trading market for Company
Stock is open for trading, plus any other interim dates during the year which
the Committee designates as Exercise Dates.
(o) "Grant Date" shall mean (i) the date initial grants are
made pursuant to this Plan, which date shall be as soon as administratively
practicable following the Effective Date; and (ii) on or about each January 1
thereafter.
(p) "Option" shall mean an option to purchase shares of
Company Stock granted by the Committee to a Participant pursuant to this Plan.
(q) "Participant" shall mean an Employee participating in this
Plan in accordance with Article III.
(r) "Plan" shall mean this HLM Design, Inc. Employee Stock
Purchase Plan, as amended from time to time.
1.3 Construction. The masculine gender, where appearing in the Plan,
shall be deemed to include the feminine gender, unless the context clearly
indicates to the contrary. The words "hereof," "herein," "hereunder" and other
similar compounds of the word "here" shall mean and refer to the entire Plan and
not to any particular provision or Section.
2
<PAGE>
ARTICLE II
ADMINISTRATION
2.1 Appointment and Procedures of Committee. The Plan shall be
administered by the Committee as appointed from time to time by the Board of
Directors. The Committee shall consist of not fewer than two members of the
Board of Directors. Each Committee member shall be a "non-employee director"
within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended. No member of the Board of Directors who serves on the
Committee shall be eligible to participate in the Plan. The Committee shall hold
its meetings at such times and places as it may determine. A majority of its
members shall constitute a quorum. All determinations of the Committee shall be
made by a majority of its members. Any decision or determination reduced to
writing and signed by all members shall be as effective as if it had been made
by a majority vote at a meeting duly called and held. The Committee may appoint
a secretary (who need not be a member of the Committee).
2.2 Authority of Committee. The Committee, subject to the terms of the
Plan, shall have plenary authority in its discretion to interpret and construe
the Plan (including, without limitation, any of its terms which are uncertain,
doubtful or disputed); to decide all questions of Employee eligibility
hereunder; to determine the amount, manner and timing of all Options and
purchases of Company Stock hereunder; to establish, amend and rescind rules and
regulations pertaining to the administration of the Plan; and to make
determinations and interpretations and take such other administrative actions as
it deems necessary or advisable for the administration of this Plan. The express
grant in the Plan of any specific power to the Committee shall not be construed
as limiting any power or authority of the Committee. No member of the Committee
shall be liable for any act, determination or omission with respect to his
service on the Committee, if he acts in good faith and in a manner he reasonably
believes to be in or not opposed to the best interest of the Employer. All
expenses of administering this Plan shall be borne by the Employer.
ARTICLE III
PARTICIPATION
3.1 Eligibility to Participate. Subject to the restrictions of Section
3.2 below, any Employee employed on the Effective Date shall be eligible to
participate in this Plan as of the initial Grant Date under the Plan (provided
that the Employee is still employed on such Grant Date). Each other Employee
shall be eligible to participate in the Plan as of the Grant Date coincident
with or next following his date of employment with the Employer (provided that
the Employee is still employed on such Grant Date).
3.2 Restrictions on Participation. Notwithstanding the foregoing
Section 3.1, no Employee shall be eligible to participate in the Plan if such
Employee owns or holds options to purchase (or upon participation in this Plan
would own or hold options to purchase) stock possessing an aggregate of 5% or
more of the total combined voting power or value of all classes
3
<PAGE>
of stock of the Company or any Subsidiary (as determined in accordance with the
rules of Section 424(d) of the Code relating to attribution of stock ownership).
3.3 Leave of Absence. For purposes of becoming a participant in the
Plan, a person on a leave of absence shall be deemed to be an Employee for the
first ninety days of such leave of absence and such Employee's employment shall
be deemed to have terminated at the close of business on the ninetieth day of
such leave of absence unless such Employee shall have returned to regular
full-time or part-time employment prior to the close of business on such
ninetieth day. Termination by the Company of any Employee's leave of absence,
other than termination of such leave of absence on return to regular full-time
or part-time employment, shall terminate an Employee's employment for all
purposes of the Plan.
ARTICLE IV
CONTRIBUTIONS
4.1 Payroll Deductions. By written election, made and filed with the
Committee pursuant to the Committee's rules and procedures, a Participant may
elect to designate a whole percentage between one percent and ten percent (or
such higher or lower percentage as may be allowed by the Committee's rules and
procedures) of his Base Pay to be deferred by payroll deduction as a
Contribution to the Plan. Payroll deductions shall commence as soon as
administratively practicable following the filing of such written election with
the Committee. The Committee in its discretion may develop additional rules and
procedures regarding payroll deduction elections.
A Participant may change or revoke his payroll deduction amount by
filing, on such forms and in accordance with such rules and procedures as the
Committee in its discretion may prescribe, a revised written election with the
Committee. Such modification or revocation shall take effect as soon as
administratively practicable after the Committee's receipt of such revised
election. Notwithstanding the foregoing, a Participant may change his payroll
deduction election only once each calendar quarter, or as otherwise specifically
allowed by the Committee's rules and procedures. If payroll deductions are
discontinued, payroll deductions may not be resumed by the Participant until the
payroll period which begins on or after the next Exercise Date, or as otherwise
specifically allowed by the Committee's rules and procedures. Under no
circumstances may a Participant's payroll deduction election be made, modified
or revoked retroactively.
4.2 Contributions to Accounts. A memorandum Account shall be
established by the Committee for each Participant for the purpose of accounting
for Contributions. Contributions shall be credited to Accounts as soon as
administratively practicable following payroll withholding. Amounts credited to
Accounts will not accrue interest.
4.3 Leave of Absence. If a Participant is on a leave of absence, such
Participant shall have the right to elect to (a) withdraw from the Plan and
receive a distribution of the balance in his Account pursuant to Section 4.4,
(b) discontinue Contributions to the Plan but remain a Participant in the Plan,
or (c) remain a Participant in the Plan during such leave of absence,
authorizing deductions to be made from payments by the Company to the
Participant during such leave of absence.
4
<PAGE>
4.4 Withdrawal of Contributions from Plan. Prior to an Exercise Date, a
Participant may elect to withdraw the Contributions then credited to his Account
by filing written notice thereof with the Committee on such forms and in
accordance with such procedures as the Committee may prescribe. The
Participant's Contributions shall be distributed to him as soon as
administratively practicable after the Committee's receipt of his notice of
withdrawal and no further payroll deductions shall be made from his Base Pay.
4.5 Termination of Employment. Upon termination of a Participant's
employment for any reason, such Participant may no longer make Contributions to
the Plan or be granted Options under the Plan. A Participant's right, if any, to
exercise any unexpired Option he holds as of his termination of employment shall
be determined in accordance with Section 5.5(c).
ARTICLE V
OPTIONS
5.1 Company Stock Available for Options. There shall be available for
Options under the Plan an aggregate maximum of 57,954 shares of Company Stock,
subject to any adjustments which may be made pursuant to Section 6.1 of the Plan
in connection with changes in capitalization of the Company AND PROVIDED THAT
THE NUMBER OF SHARES ISSUED OR ISSUABLE HEREUNDER AND UNDER THE COMPANY'S 1998
STOCK OPTION PLAN SHALL NOT AT ANY TIME EXCEED IN THE AGGREGATE 10% OF THE TOTAL
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING. Shares of Company Stock used for
purposes of the Plan may be either authorized and unissued shares, or previously
issued shares held in the treasury of the Company, or both. Shares of Company
Stock covered by Options which have expired prior to exercise shall be available
for further Options granted hereunder.
5.2 Granting of Options. The Plan shall be implemented by annual
offerings of approximately twelve months duration (except for the initial
offering or as otherwise provided in Section 5.4). As of each Grant Date, each
eligible Participant shall be deemed to have been granted an Option to purchase
that number of shares of Company Stock that equals: (i) the Participant's Base
Pay as of the Grant Date divided by 1000, with fractional amounts of .50 or more
rounded up to the next dollar and fractional amounts of less than .50
disregarded, multiplied by (ii) two. Notwithstanding the foregoing, no
Participant may be granted an Option which permits his rights to purchase stock
under this Plan and all other employee stock purchase plans of the Company or
Employer to accrue at a rate which exceeds $25,000 of the fair market value of
such stock (determined at the time such Option is granted) for each calendar
year in which such Option is outstanding at any time.
5.3 Option Price. The purchase price at which shares of Company Stock
may be acquired pursuant to the exercise of all or any portion of an Option
granted under this Plan shall be eighty-five percent of the lesser of (i) the
fair market value of the Company Stock on the applicable Grant Date, and (ii)
the fair market value of the Company Stock on the applicable Exercise Date. For
purposes of this Section 5.3, the fair market value per share of Company Stock
shall be the closing price on the last Business Day prior to the date of
reference, or in the event that no sales take place on such date, the average of
the closing high bid and low asked
5
<PAGE>
prices, in either case on the principal national securities exchange on which
the Company Stock is listed or admitted to trading, or if the Company Stock is
not listed or admitted to trading on any national securities exchange, the last
sale price reported on the National Market System of the National Association of
Securities Dealers Automated Quotation system ("NASDAQ") on such date, or the
average of the closing high bid and low asked prices of the Company Stock in the
over-the-counter market reported on NASDAQ on such date, as furnished to the
Committee by any New York Stock Exchange member selected from time to time by
the Committee for such purposes. If there is no bid or asked price reported on
any such date, the market value shall be determined by the Committee in
accordance with the regulations promulgated under Section 2031 of the Code, or
by any other appropriate method selected by the Committee.
5.4 Option Period. Each Option granted to a Participant under the Plan
shall expire on the earliest of (a) the last Exercise Date of the calendar year
in which the Option was granted, (b) the Participant's (or, in the case of the
Participant's death, his estate's) voluntary withdrawal from the Plan following
termination of employment, and (c) the date of the Participant's termination of
employment related to Cause, or the Exercise Date immediately following the
Participant's termination of employment for any reason unrelated to Cause. In no
event will the duration of an Option period exceed twenty-seven months (or such
other applicable period permitted under Section 423(b)(7) of the Code) from the
date on which such Option is granted.
5.5 Exercise of Options.
(a) Automatic Exercise. Any Option granted to a Participant
shall be exercised automatically on each Exercise Date during the calendar year
of the Option's Grant Date in whole or in part such that the Participant's
accumulated Contributions as of such Exercise Date shall be applied to the
purchase of the maximum number of whole shares of Company Stock that his
Contributions will allow at the applicable Option price (determined in
accordance with Section 5.3), limited to the number of shares subject to such
Option. In the event that the number of shares of Company Stock that may be
purchased by all Participants in the Plan exceeds the number of shares then
available for issuance under the Plan, the Committee shall make a pro rata
allocation of the available shares in as uniform a manner as it determines to be
practicable and equitable. Any remaining Contributions in the Participant's
Account amounting to less than the Option price of a whole share of Company
Stock shall be carried forward and applied on the next Exercise Date; provided
that, Contributions remaining after the last Exercise Date of the calendar year
may be distributed to the Participant at his election.
(b) Nontransferability of Options. During a Participant's
lifetime, Options held by such Participant shall be exercisable only by that
Participant. No Option shall be transferable other than by will or by the laws
of descent and distribution.
(c) Effect of Termination of Employment.
(i) Termination of Employment Related to Cause. Upon
termination of a Participant's employment related to Cause, the Participant's
participation in the Plan also shall terminate. Any unexpired Option he holds
will expire as of the date of his termination of employment. Remaining
contributions credited to his Account shall be distributed to the Participant as
soon as administratively practicable following termination of employment.
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(ii) Termination of Employment Due to Death. In the
event of the death of the Participant while employed, or during the period
following his termination of employment for any reason unrelated to Cause but
prior to the next Exercise Date, the Participant's estate shall have the right
to elect by written notice to the Committee prior to the earlier of the
expiration of sixty days commencing with the date of the Participant's death and
the Exercise Date next following the date of the Participant's death:
(A) To withdraw all of the Contributions
credited to the Participant's Account under the Plan, or
(B) To exercise any unexercised Option held
by the Participant
as of the date of his death for the purchase of Company Stock on the Exercise
Date next following the date of the Participant's death in accordance with
Section 5.5(a) but only to the extent such Option was exercisable on the date of
the Participant's death, with any remaining Contributions credited to the
Participant's Account being distributed to the Participant's estate as soon as
administratively practicable after such Exercise Date.
In the event that no such written election is timely and properly received by
the Committee, all Contributions credited to the Participant's Account shall be
distributed to the Participant's estate. In no event shall any Option be
exercisable beyond the applicable exercise period specified in Section 5.4 of
the Plan.
(iii) Other Termination of Employment. Upon
termination of a Participant's employment for any reason unrelated to Cause or
death, the Participant may at his election:
(A) Withdraw from the Plan pursuant to
Section 4.4 and request the return of the remaining Contributions then credited
to his Account, or
(B) Continue participation in the Plan until
the Exercise Date next following his date of termination of employment for the
limited purpose of allowing any unexpired Option he holds as of his termination
of employment to be exercised automatically in accordance with Section 5.5(a) on
the Exercise Date next following his termination of employment but only to the
extent such Option was exercisable on the date of the Participant's termination
of employment, with any remaining Contributions credited to the Participant's
Account being distributed to the Participant as soon as administratively
practicable after such Exercise Date.
(d) Leave of Absence. A Participant on a leave of absence
shall, subject to the election made by such Participant pursuant to Section 4.3,
continue to be a Participant in the Plan so long as such Participant is on
continuous leave of absence. A Participant who has been on leave of absence for
more than ninety days and who therefore is not an Employee for the purposes of
the Plan shall not be entitled to participate in any offering commencing on any
Grant Date following the ninetieth day of such leave of absence. Notwithstanding
THE FOREGOING AND any other provisions of the Plan, unless a Participant on a
leave of absence returns to eligible regular full-time or part-time employment
with the Employer at the earlier of (i) the termination
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of such leave of absence, or (ii) THE NINETY-FIRST day of such leave of absence,
such PARTICIPANT'S EMPLOYMENT SHALL BE DEEMED TO HAVE TERMINATED FOR PURPOSES OF
THE PLAN on whichever of such dates first occurs (unless the Participant's right
to reemployment is guaranteed by statute or contract).
(e) Delivery of Stock. As soon as administratively practicable
after each Exercise Date, the Company or the Committee will deliver to each
Participant, as applicable, certificates evidencing shares of Company Stock
purchased under this Plan.
(f) Acceleration of Exercisability of Options Upon Occurrence
of Certain Events. In connection with any merger or consolidation in which the
Company is not the surviving corporation and which results in the holders of the
outstanding voting securities of the Company (determined immediately prior to
such merger or consolidation) owning less than a majority of the outstanding
voting securities of the surviving corporation (determined immediately following
such merger or consolidation), or any sale or transfer by the Company of all or
substantially all of its assets or any tender offer or exchange offer for or the
acquisition, directly or indirectly, by any person or group of all or a majority
of the then-outstanding voting securities of the Company, all outstanding
Options under the Plan shall become exercisable in full, notwithstanding any
other provision of the Plan or of any outstanding Options granted hereunder, on
and after (i) the fifteenth day prior to the effective date of such merger,
consolidation, sale, transfer or acquisition or (ii) the date of commencement of
such tender offer or exchange offer, as the case may be. Notwithstanding the
foregoing, in no event shall any Option be exercisable beyond the applicable
exercise period of such Option specified in Section 5.4.
(g) Registration, Listing and Qualification of Shares of
Stock. Each Option shall be subject to the requirement that if at any time the
Board of Directors shall determine that the registration, listing or
qualification of shares of Company Stock covered thereby upon any securities
exchange or under any federal or state law, or the consent or approval of any
governmental regulatory body, is necessary or desirable as a condition of, or in
connection with, the granting of such option or the purchase of shares of
Company Stock thereunder, no such Option may be exercised unless and until such
registration, listing, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Board of
Directors. The Employer may require that any person exercising an Option shall
make such representations and agreements and furnish such information as it
deems appropriate to assure compliance with the foregoing or any other
applicable legal requirement.
ARTICLE VI
MISCELLANEOUS
6.1 Adjustments Upon Changes in Capitalization. In the event of a
reorganization, stock split, stock dividend, combination of shares, merger,
consolidation, rights offering or any other change in the corporate structure of
shares of the Company, corresponding adjustments shall be made to the number and
kind of shares of Company Stock available for issuance under this Plan and the
number and kind of shares of Company Stock covered by outstanding Options under
this Plan. Any adjustments made pursuant to this Section 6.1 remain subject to
the limitations of Section 423 of the Code (including its $25,000 annual
limitation).
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6.2 Approval of Shareholders. Within twelve months before or after the
Plan is adopted by the Board of Directors, this Plan must be approved by a
majority of the votes cast thereon by the stockholders of the Company at a
meeting of stockholders duly called and held for such purpose or by unanimous
written consent of such stockholders, and no Option granted hereunder shall be
exercisable prior to such approval.
6.3 Amendment, Suspension and Termination. The Board of Directors may
at any time amend, suspend or terminate this Plan; provided, however, that the
Board of Directors shall not increase the maximum number of shares of Company
Stock for which Options may be granted under the Plan, except as provided in
Section 6.1, without obtaining approval of the stockholders in the manner
described in Section 6.2. The Plan will continue until terminated by the Board
of Directors or until all of the shares of Company Stock reserved for issuance
under the Plan have been issued, whichever first occurs. No amendment,
suspension or termination of the Plan may, without the consent of the
Participants then holding Options to purchase Company Stock, adversely affect
the rights of such Participants under such Options.
6.4 Intent to Comply With Code Section 423. It is intended that this
Plan qualify as an "employee stock purchase plan" under Section 423 of the Code.
The provisions of this Plan shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that Section of
the Code. In the event of an inconsistency between the Plan and Section 423 of
the Code, the Plan shall be interpreted in a manner which complies with the
requirements of Section 423 of the Code and the regulations thereunder, without
further act or amendment by the Company or the Board of Directors unless
otherwise required pursuant to Section 6.3 of this Plan.
6.5 Equal Rights and Privileges. All Participants granted Options under
this Plan shall have equal rights and privileges within the meaning of Section
423(b)(5) of the Code and the regulations thereunder.
6.6 Use of Funds. All Contributions received and held by the Employer
under this Plan may be used by the Employer for any corporate purpose and the
Employer shall not be obligated to segregate such Contributions.
6.7 Withholding. It shall be a condition to the obligation of the
Company to issue shares of Company Stock upon exercise of an Option that the
Participant (or his estate pursuant to Section 5.5(c)(ii)) pay to the Company,
upon its demand, such amount as may be requested by the Company for the purpose
of satisfying taxes, including taxes owed by the Participant due to the
disposition of Company Stock by the Participant prior to the expiration of the
holding periods described in Section 423(a) of the Code.
6.8 Effect of Plan. This Plan shall be binding upon each Participant
and his successors, including, without limitation, such Participant's estate and
the executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such
Participant.
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6.9 No Employment Rights. Nothing in this Plan or in any Option granted
pursuant to the Plan shall be construed as a contract of employment between the
Employer and any employee, or as a right of any employee to continue in the
employ of the Employer, or as a limitation of the right of the Employer to
discharge any of its employees, with or without cause.
6.10 Governing Law. This Plan and all rights and obligations hereunder
shall be construed in accordance with and governed by the laws of the State of
North Carolina, except to the extent such laws are preempted by the laws of the
United States.
6.11 Other Actions. Nothing contained in the Plan shall be construed to
limit the authority of the Company to exercise its corporate rights and powers,
including, but not by way of limitation, the right of the Company to grant or
assume options for proper corporate purposes other than under the Plan with
respect to any employee or other person, firm, corporation or association.
10
EXHIBIT 10.31
STATUTORY INCENTIVE STOCK OPTION AGREEMENT AND GRANT
PURSUANT TO
HLM DESIGN, INC. 1998 STOCK OPTION PLAN
This Statutory Incentive Stock Option Agreement and Grant is entered
into as of this 12th day of June, 1998 between HLM Design, Inc., a
Delaware corporation (the "Company"), and Joseph M. Harris (the "Optionee").
WHEREAS, the Company and its stockholders have approved the HLM Design,
Inc. 1998 Stock Option Plan (the "Plan") pursuant to which the Company may, from
time to time, make awards of Options (as defined below) and enter into Statutory
Incentive Stock Option Agreements with eligible employees of the Company or of
any Subsidiary (as defined below);
WHEREAS, pursuant to the Plan, the Company has determined to grant to
the Optionee an Option to purchase Common Stock (as defined below) of the
Company, which Option shall be subject to the terms and conditions of this
Statutory Incentive Stock Option Agreement and Grant;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
1. DEFINITIONS.
For purposes of this Statutory Incentive Stock Option Agreement and
Grant, the following terms shall have the meanings indicated:
(a) "ACT" shall mean the Securities Act of 1933, as amended.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CAUSE" shall mean any act, action or series of acts or
actions or any omission, omissions, or series of omissions which result in, or
which have the effect of resulting in, (i) the commission of a crime by the
Optionee involving moral turpitude, which crime has a material adverse impact on
the Company or any Subsidiary, (ii) gross negligence or willful misconduct which
is continuous and results in material damage to the Company or any Subsidiary,
or (iii) the continuous, willful failure of the person in question to follow the
reasonable directives of the Board of Directors.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as
amended, any successor revenue laws of the United States and the rules and
regulations promulgated thereunder.
(e) "COMMITTEE" shall mean the committee of members of the
Board that is designated by the Board to administer the Plan. In the event that
no such Committee exists or is appointed, "COMMITTEE" shall mean the Board.
<PAGE>
(f) "COMMON STOCK" shall mean the Common Stock, par value
$.001 per share, of the Company.
(g) "DISABILITY" shall mean the inability or failure of a
person to perform those duties for the Company or any Subsidiary traditionally
assigned to and performed by such person because of the person's then-existing
physical or mental condition, impairment or incapacity. The fact of disability
shall be determined by the Committee, which may consider such evidence as it
considers desirable under the circumstances, the determination of which shall be
final and binding upon all parties.
(h) "EXERCISE DATE" shall mean the business day, during the
Option Period, upon which the Optionee delivers to the Company the written
notice and consideration contemplated by Section 5(c) of the Plan.
(i) "FAIR MARKET VALUE" shall mean, with respect to the Common
Stock on any day, its market value determined as provided in Section 5(c) of the
Plan.
(j) "INVOLUNTARY TERMINATION WITHOUT CAUSE" shall mean either
(i) the dismissal of, or the request for the resignation of, a person, by court
order, order of any court-appointed liquidator or trustee of the Company, or the
order or request of any creditors' committee of the Company constituted under
the federal bankruptcy laws, provided that such order or request contains no
specific reference to Cause; or (ii) the dismissal of, or the request for the
resignation of, a person, by a duly constituted corporate officer of the Company
or any Subsidiary, or by the Board, for any reason other than for Cause.
(k) "OPTION" shall mean the option to purchase shares of
Common Stock granted to the Optionee pursuant to this Option Agreement.
(l) "OPTION AGREEMENT" shall mean this Statutory Incentive
Stock Option Agreement and Grant between the Company and the Optionee by which
the Option is granted to the Optionee pursuant to the Plan.
(m) "OPTION PERIOD" shall mean the period commencing from the
date of this Option Agreement and ending at the close of business ten years from
the date of this Option Agreement (or five years from the date of this Option
Agreement in the case of an Optionee who is a Ten Percent Stockholder) or such
earlier date as when this Option Agreement may be terminated by its terms.
(n) "OPTION SHARES" shall mean the shares of Common Stock
purchased upon exercise of the Option.
(o) "OPTIONEE" shall mean the individual executing this Option
Agreement and, as applicable, the estate, personal representative or beneficiary
to whom this Option may be transferred pursuant to this Option Agreement by will
or by the laws of descent and distribution.
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<PAGE>
(p) "PLAN" shall mean the HLM Design, Inc. 1998 Stock Option
Plan and any amendments thereto.
(q) "RETIREMENT" shall mean, with respect to the Optionee,
retirement from the Company and any Subsidiary in accordance with the Company's
and/or Subsidiary's retirement policy as may be in effect from time to time.
(r) "SUBSIDIARY" shall mean any subsidiary corporation of HLM
Design, Inc. as defined in Sections 424(f) and 424(g) of the Code.
(s) "TEN PERCENT STOCKHOLDER" shall mean an individual owning,
directly or by attribution as provided in Section 424(d) of the Code, on the
date of grant, stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company or any Subsidiary.
(t) "TERMINATION" shall mean the cessation, for any reason, of
the employer-employee relationship between the Company and any Subsidiary and
the Optionee.
(u) "TOTAL OPTION PRICE" shall mean the consideration payable
to the Company by the Optionee upon exercise of the Option pursuant to Section
5(c) of the Plan.
2. GRANT OF OPTION. Effective upon the date of the commencement of the
Company's initial public offering and subject to the terms and conditions set
forth herein, the Company hereby grants to the Optionee the Option to purchase
from the Company, at an exercise price per share equal to the price at which
Common Stock is offered to the public in the Company's initial public offering
(or, in the case of an Optionee who is a Ten Percent Stockholder, at an exercise
price per share equal to 110% of the price at which Common Stock is offered to
the public in the Company's initial public offering), up to but not exceeding in
the aggregate 17,386 shares of Common Stock.
3. EXERCISE OF OPTION. The Option granted in paragraph 2 above may be
exercised as follows:
(a) The Option shall be exercisable at any time and from time
to time during the Option Period; provided however, that in the first calendar
year of the Option Period, the Option shall become exercisable only to the
extent of that number of shares of Common Stock having an aggregate fair market
value of $100,000 based on the per share value of the Common Stock at the time
of the effectiveness of the grant of the Option (this per share value being
equal to the price at which the Common Stock is offered to the public in the
Company's initial public offering). In each subsequent calendar year of the
Option Period, the Option shall become exercisable to the extent of an
additional number of shares of Common Stock having an aggregate fair market
value of $100,000 determined as provided in the preceding sentence. The Option
shall terminate on the expiration of the Option Period, if not earlier
terminated; provided that, in the event of the Optionee's Retirement, the
Committee in its sole and absolute discretion may accelerate the Exercise Date,
which acceleration may, in the sole discretion of the Committee, be subject to
further terms and conditions mandated by the Committee.
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<PAGE>
(b) No less than 100 shares of Common Stock may be purchased
on any Exercise Date unless the number of shares purchased at such time is the
total number of shares in respect of which the Option is then exercisable.
(c) If at any time and for any reason the Option covers a
fraction of a share, then, upon exercise of the Option, the Optionee shall
receive the Fair Market Value of such fractional share in cash.
(d) The Option shall be exercised by the Optionee in
accordance with the terms and conditions of Section 5(c) of the Plan.
(e) As soon as administratively practicable following the
Exercise Date, subject to the receipt of payment of the Total Option Price and
of any payment in cash of federal, state or local income tax withholding or
other employment tax that may be due upon the issuance of the Option Shares as
determined and computed by the Company pursuant to paragraph 6 below, the
Company shall issue to the Optionee the number of shares with respect to which
such Option shall be so exercised and shall deliver to the Optionee a
certificate or certificates therefor.
(f) The Option is not transferable by the Optionee otherwise
than by will or the laws of descent and distribution. No assignment or transfer
of this Option, or of the rights represented thereby, whether voluntary or
involuntary, by operation of law or otherwise, except by will or the laws of
descent and distribution, shall vest in the assignee or transferee any interest
or right herein whatsoever; but immediately upon any attempt to assign or
transfer this Option, except as expressly permitted herein, the same shall
terminate and be of no force or effect.
(g) The Optionee agrees to maintain the status of the entire
Option as an "incentive stock option" as defined under Section 422 of the Code.
4. TERMINATION. The Option granted hereby shall terminate and be of no
force or effect upon and following the occurrence of any of the following
events:
(a) The expiration of the Option Period.
(b) The Termination of the Optionee's employment for any
reason other than the Optionee's death, Disability or Involuntary Termination
Without Cause.
(c) The expiration of three months after the date of the
Optionee's Involuntary Termination Without Cause. During such three-month
period, the Optionee shall have the right to exercise the Option hereby granted
in accordance with the terms of this Option Agreement, but only to the extent
the Option was exercisable on the date of the Termination of the Optionee's
employment.
(d) The expiration of twelve months after Termination of the
Optionee's employment with the Company and any Subsidiary as a result of the
Optionee's Disability. During such twelve-month period, the Optionee shall have
the right to exercise the Option hereby granted in accordance with the terms of
this Option Agreement, but only to the extent the Option was exercisable on the
date of the Termination of the Optionee's employment.
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(e) To the extent permitted for incentive stock options under
Section 422 of the Code, in the event of the death of the Optionee while in the
employ of the Company or any Subsidiary or, in the event of the death of the
Optionee after Termination described in subparagraph (c) or (d), above, but
within the three-month or twelve-month period described in subparagraph (c) or
(d), above, upon the expiration of twelve months following the Optionee's death.
During such extended period, the Option may be exercised subject to Section
5(d)(iv) of the Plan by the person or persons to whom the deceased Optionee's
rights under the Option Agreement shall pass by will or by the laws of descent
and distribution, but only to the extent the Option was exercisable on the date
of the Termination of the Optionee's employment.
(f) To the extent set forth in paragraph 7 below, upon the
dissolution, liquidation, consolidation or merger of the Company, and, to the
extent set forth in subparagraph 3(f), above, upon an attempted assignment or
transfer of the Option otherwise than as expressly permitted herein.
Any determination made by the Committee with respect to any matter
referred to in this paragraph 4 shall be final and conclusive on all persons
affected thereby.
5. RIGHTS AS STOCKHOLDER. An Optionee shall have no rights as a
stockholder of the Company with respect to any shares underlying the Option
until the day of the issuance of a stock certificate to him or her for those
shares upon payment of the exercise price in accordance with the terms and
provisions hereof. Subject to paragraph 7 below, no adjustments shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued.
6. PAYMENT OF WITHHOLDING TAXES. Upon the Optionee's exercise of his or
her Option with respect to any of the Option Shares in accordance with the
provisions of paragraph 3 above, the Optionee shall pay to the Company upon
exercise of the Option the amount of any federal, state or local income tax
withholding or other employment tax that may be due upon such exercise. The
determination of the amount of any such federal, state or local income tax
withholding or other employment tax due in such event shall be made by the
Company and shall be binding upon the Optionee.
7. RECAPITALIZATION; REORGANIZATION. The shares underlying this Option
are shares of Common Stock as constituted on the date of this Option Agreement,
but if, during the Option Period and prior to the delivery by the Company of all
of the shares of Common Stock with respect to which this Option is granted, the
Company shall effect a subdivision or consolidation of shares or other capital
readjustment, the payment of a stock dividend or some other increase or decrease
in the number of shares of Common Stock outstanding, without receiving
compensation therefor in money, services or property, then, (a) in the event of
any increase in the number of such shares outstanding, the number of shares of
Common Stock then remaining subject to this Option shall be proportionately
increased (except that any fraction of a share resulting from any such
adjustment shall be excluded from the operation of this Option Agreement), and
the exercise price per share shall be proportionately reduced, and, (b) in the
event of a reduction in the number of such shares outstanding, the number of
shares of Common Stock then remaining subject to this Option shall be
proportionately reduced (except that any fractional share resulting from any
such adjustment shall
5
<PAGE>
be excluded from the operation of this Option Agreement), and the exercise price
per share shall be proportionately increased.
In the event of a merger of one or more corporations into the Company
with respect to which the Company shall be the surviving or resulting
corporation, the Optionee shall, at no additional cost, be entitled upon any
exercise of this Option to receive (subject to any required action by
shareholders), in lieu of the number of shares as to which this Option shall
then be so exercised, the number and class of shares of stock or other
securities to which the Optionee would have been entitled pursuant to the terms
of the agreement of merger if, immediately prior to such merger, the Optionee
had been the holder of record of a number of shares of Common Stock of the
Company equal to the number of shares as to which such Option shall be so
exercised; provided, however, that, anything herein contained to the contrary
notwithstanding, upon the occurrence of any event described in Section 5(g) of
the Plan, this Option shall be subject to acceleration as provided in such
Section 5(g).
In the event of a change in the Common Stock as presently constituted,
which change is limited to a change of all of the authorized shares with par
value into the same number of shares with a different par value or without par
value, the shares resulting from any such change shall be deemed to be the
Common Stock within the meaning of the Plan.
The existence of this Option shall not affect in any way the right or
power of the Company or its shareholders to make or authorize any or all
adjustments, dividends, stock dividends, recapitalization, reorganizations or
other changes in the Company's capital structure or its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
other stocks with preference ahead of or convertible into, or otherwise
affecting, the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
8. NO REGISTRATION RIGHTS. Anything in this Option Agreement to the
contrary notwithstanding, if, at any time specified herein for the issuance of
Option Shares, any law, regulation or requirements of any governmental authority
having jurisdiction in the premises shall require either the Company or the
Optionee, in the opinion of the Company's counsel, to take any action in
connection with the shares then to be issued, the issue of such shares shall be
deferred until such action shall have been taken. Nothing in this Option
Agreement shall be construed to obligate the Company at any time to file or
maintain the effectiveness of a registration statement under the Act, or under
the securities laws of any state or other jurisdiction, or to take or cause to
be taken any action which may be necessary in order to provide an exemption from
the registration requirements of the Act under Rule 144 or any other exemption
with respect to the Option Shares or otherwise for resale or other transfer by
the Optionee (or by the executor or administrator of such Optionee's estate or a
person who acquired the Option or any Option Shares or other rights by bequest
or inheritance or by reason of the death of the Optionee) as a result of the
exercise of an Option granted pursuant to this Option Agreement.
9. RESOLUTION OF DISPUTES. Any dispute or disagreement that arises
under, or as a result of, or pursuant to, this Option Agreement shall be
determined by the Committee in its absolute and uncontrolled discretion, and any
such determination or other determination by the Committee under
6
<PAGE>
or pursuant to this Option Agreement, and any interpretation by the Committee of
the terms of this Option Agreement, shall be final, binding and conclusive on
all parties affected thereby.
10. COMPLIANCE WITH THE ACT. Notwithstanding any provision herein or in
the Plan to the contrary, the Company shall be under no obligation to issue any
shares of Common Stock to the Optionee upon exercise of the Option granted
hereby unless and until the Company has determined that such issuance is either
exempt from registration, or is registered, under the Act and is either exempt
from registration and qualification, or is registered or qualified, as
applicable, under all applicable state securities or "blue sky" laws.
11. MISCELLANEOUS.
(a) BINDING ON SUCCESSORS AND REPRESENTATIVES. This Option
Agreement shall be binding not only upon the parties, but also upon their heirs,
executors, administrators, personal representatives, successors and assigns
(including any transferee of a party to this Agreement); and the parties agree,
for themselves and their successors, assigns and representatives, to execute any
instrument which may be necessary legally to effect the terms and conditions of
this Option Agreement.
(b) ENTIRE AGREEMENT. This Option Agreement, together with the
Plan, constitutes the entire agreement of the parties with respect to the Option
and supersedes any previous agreement, whether written or oral, with respect
thereto. This Option Agreement has been entered into in compliance with the
terms of the Plan; wherever a conflict may arise between the terms of this
Option Agreement and the terms of the Plan, the terms of the Plan shall control.
(c) AMENDMENT. Neither this Option Agreement nor any of the
terms and conditions herein set forth may be altered or amended orally, and any
such alteration or amendment shall be effective only when reduced to writing and
signed by each of the parties or their respective successors and assigns.
(d) CONSTRUCTION OF TERMS. Any reference herein to the
singular or plural shall be construed as plural or singular whenever the context
requires.
(e) NOTICES. All notices, requests and amendments under this
Option Agreement shall be in writing, and notices shall be deemed to have been
given when personally delivered or sent prepaid registered mail:
(i) if to the Company, at the following address:
HLM Design, Inc.
121 West Trade Street, Suite 2950
Charlotte, North Carolina 28202
Attention: Chief Financial Officer
or at such other address as the Company shall designate by notice.
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(ii) if to the Optionee, to the Optionee's
address appearing in the Company's
employment records, or at such other address
as the Optionee shall designate by notice.
(f) GOVERNING LAW. This Option Agreement shall be governed by,
and construed in accordance with, the laws of the State of North Carolina
(excluding the principles of conflict of laws thereof).
(g) SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Option Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provisions were omitted.
(h) AN INCENTIVE STOCK OPTION. The Option granted hereunder is
intended to be an "Incentive Stock Option" under Section 422 of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Option
Agreement as of the day and year first written above.
HLM DESIGN, INC.
By: /s/ Vernon B. Brannon
-----------------------------------------
Title: Senior Vice President, Treasurer
and Chief Financial Officer
OPTIONEE: JOSEPH M. HARRIS
/s/ Joseph M. Harris (SEAL)
---------------------------------------------
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EXHIBIT 10.32
STATUTORY INCENTIVE STOCK OPTION AGREEMENT AND GRANT
PURSUANT TO
HLM DESIGN, INC. 1998 STOCK OPTION PLAN
This Statutory Incentive Stock Option Agreement and Grant is entered
into as of this 12th day of June, 1998 between HLM Design, Inc., a
Delaware corporation (the "Company"), and Vernon B. Brannon (the "Optionee").
WHEREAS, the Company and its stockholders have approved the HLM Design,
Inc. 1998 Stock Option Plan (the "Plan") pursuant to which the Company may, from
time to time, make awards of Options (as defined below) and enter into Statutory
Incentive Stock Option Agreements with eligible employees of the Company or of
any Subsidiary (as defined below);
WHEREAS, pursuant to the Plan, the Company has determined to grant to
the Optionee an Option to purchase Common Stock (as defined below) of the
Company, which Option shall be subject to the terms and conditions of this
Statutory Incentive Stock Option Agreement and Grant;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
1. DEFINITIONS.
For purposes of this Statutory Incentive Stock Option Agreement and
Grant, the following terms shall have the meanings indicated:
(a) "ACT" shall mean the Securities Act of 1933, as amended.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CAUSE" shall mean any act, action or series of acts or
actions or any omission, omissions, or series of omissions which result in, or
which have the effect of resulting in, (i) the commission of a crime by the
Optionee involving moral turpitude, which crime has a material adverse impact on
the Company or any Subsidiary, (ii) gross negligence or willful misconduct which
is continuous and results in material damage to the Company or any Subsidiary,
or (iii) the continuous, willful failure of the person in question to follow the
reasonable directives of the Board of Directors.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as
amended, any successor revenue laws of the United States and the rules and
regulations promulgated thereunder.
(e) "COMMITTEE" shall mean the committee of members of the
Board that is designated by the Board to administer the Plan. In the event that
no such Committee exists or is appointed, "COMMITTEE" shall mean the Board.
<PAGE>
(f) "COMMON STOCK" shall mean the Common Stock, par value
$.001 per share, of the Company.
(g) "DISABILITY" shall mean the inability or failure of a
person to perform those duties for the Company or any Subsidiary traditionally
assigned to and performed by such person because of the person's then-existing
physical or mental condition, impairment or incapacity. The fact of disability
shall be determined by the Committee, which may consider such evidence as it
considers desirable under the circumstances, the determination of which shall be
final and binding upon all parties.
(h) "EXERCISE DATE" shall mean the business day, during the
Option Period, upon which the Optionee delivers to the Company the written
notice and consideration contemplated by Section 5(c) of the Plan.
(i) "FAIR MARKET VALUE" shall mean, with respect to the Common
Stock on any day, its market value determined as provided in Section 5(c) of the
Plan.
(j) "INVOLUNTARY TERMINATION WITHOUT CAUSE" shall mean either
(i) the dismissal of, or the request for the resignation of, a person, by court
order, order of any court-appointed liquidator or trustee of the Company, or the
order or request of any creditors' committee of the Company constituted under
the federal bankruptcy laws, provided that such order or request contains no
specific reference to Cause; or (ii) the dismissal of, or the request for the
resignation of, a person, by a duly constituted corporate officer of the Company
or any Subsidiary, or by the Board, for any reason other than for Cause.
(k) "OPTION" shall mean the option to purchase shares of
Common Stock granted to the Optionee pursuant to this Option Agreement.
(l) "OPTION AGREEMENT" shall mean this Statutory Incentive
Stock Option Agreement and Grant between the Company and the Optionee by which
the Option is granted to the Optionee pursuant to the Plan.
(m) "OPTION PERIOD" shall mean the period commencing from the
date of this Option Agreement and ending at the close of business ten years from
the date of this Option Agreement (or five years from the date of this Option
Agreement in the case of an Optionee who is a Ten Percent Stockholder) or such
earlier date as when this Option Agreement may be terminated by its terms.
(n) "OPTION SHARES" shall mean the shares of Common Stock
purchased upon exercise of the Option.
(o) "OPTIONEE" shall mean the individual executing this Option
Agreement and, as applicable, the estate, personal representative or beneficiary
to whom this Option may be transferred pursuant to this Option Agreement by will
or by the laws of descent and distribution.
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(p) "PLAN" shall mean the HLM Design, Inc. 1998 Stock Option
Plan and any amendments thereto.
(q) "RETIREMENT" shall mean, with respect to the Optionee,
retirement from the Company and any Subsidiary in accordance with the Company's
and/or Subsidiary's retirement policy as may be in effect from time to time.
(r) "SUBSIDIARY" shall mean any subsidiary corporation of HLM
Design, Inc. as defined in Sections 424(f) and 424(g) of the Code.
(s) "TEN PERCENT STOCKHOLDER" shall mean an individual owning,
directly or by attribution as provided in Section 424(d) of the Code, on the
date of grant, stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company or any Subsidiary.
(t) "TERMINATION" shall mean the cessation, for any reason, of
the employer-employee relationship between the Company and any Subsidiary and
the Optionee.
(u) "TOTAL OPTION PRICE" shall mean the consideration payable
to the Company by the Optionee upon exercise of the Option pursuant to Section
5(c) of the Plan.
2. GRANT OF OPTION. Effective upon the date of the commencement of the
Company's initial public offering and subject to the terms and conditions set
forth herein, the Company hereby grants to the Optionee the Option to purchase
from the Company, at an exercise price per share equal to the price at which
Common Stock is offered to the public in the Company's initial public offering
(or, in the case of an Optionee who is a Ten Percent Stockholder, at an exercise
price per share equal to 110% of the price at which Common Stock is offered to
the public in the Company's initial public offering), up to but not exceeding in
the aggregate 17,386 shares of Common Stock.
3. EXERCISE OF OPTION. The Option granted in paragraph 2 above may be
exercised as follows:
(a) The Option shall be exercisable at any time and from time
to time during the Option Period; provided however, that in the first calendar
year of the Option Period, the Option shall become exercisable only to the
extent of that number of shares of Common Stock having an aggregate fair market
value of $100,000 based on the per share value of the Common Stock at the time
of the effectiveness of the grant of the Option (this per share value being
equal to the price at which the Common Stock is offered to the public in the
Company's initial public offering). In each subsequent calendar year of the
Option Period, the Option shall become exercisable to the extent of an
additional number of shares of Common Stock having an aggregate fair market
value of $100,000 determined as provided in the preceding sentence. The Option
shall terminate on the expiration of the Option Period, if not earlier
terminated; provided that, in the event of the Optionee's Retirement, the
Committee in its sole and absolute discretion may accelerate the Exercise Date,
which acceleration may, in the sole discretion of the Committee, be subject to
further terms and conditions mandated by the Committee.
3
<PAGE>
(b) No less than 100 shares of Common Stock may be purchased
on any Exercise Date unless the number of shares purchased at such time is the
total number of shares in respect of which the Option is then exercisable.
(c) If at any time and for any reason the Option covers a
fraction of a share, then, upon exercise of the Option, the Optionee shall
receive the Fair Market Value of such fractional share in cash.
(d) The Option shall be exercised by the Optionee in
accordance with the terms and conditions of Section 5(c) of the Plan.
(e) As soon as administratively practicable following the
Exercise Date, subject to the receipt of payment of the Total Option Price and
of any payment in cash of federal, state or local income tax withholding or
other employment tax that may be due upon the issuance of the Option Shares as
determined and computed by the Company pursuant to paragraph 6 below, the
Company shall issue to the Optionee the number of shares with respect to which
such Option shall be so exercised and shall deliver to the Optionee a
certificate or certificates therefor.
(f) The Option is not transferable by the Optionee otherwise
than by will or the laws of descent and distribution. No assignment or transfer
of this Option, or of the rights represented thereby, whether voluntary or
involuntary, by operation of law or otherwise, except by will or the laws of
descent and distribution, shall vest in the assignee or transferee any interest
or right herein whatsoever; but immediately upon any attempt to assign or
transfer this Option, except as expressly permitted herein, the same shall
terminate and be of no force or effect.
(g) The Optionee agrees to maintain the status of the entire
Option as an "incentive stock option" as defined under Section 422 of the Code.
4. TERMINATION. The Option granted hereby shall terminate and be of no
force or effect upon and following the occurrence of any of the following
events:
(a) The expiration of the Option Period.
(b) The Termination of the Optionee's employment for any
reason other than the Optionee's death, Disability or Involuntary Termination
Without Cause.
(c) The expiration of three months after the date of the
Optionee's Involuntary Termination Without Cause. During such three-month
period, the Optionee shall have the right to exercise the Option hereby granted
in accordance with the terms of this Option Agreement, but only to the extent
the Option was exercisable on the date of the Termination of the Optionee's
employment.
(d) The expiration of twelve months after Termination of the
Optionee's employment with the Company and any Subsidiary as a result of the
Optionee's Disability. During such twelve-month period, the Optionee shall have
the right to exercise the Option hereby granted in accordance with the terms of
this Option Agreement, but only to the extent the Option was exercisable on the
date of the Termination of the Optionee's employment.
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<PAGE>
(e) To the extent permitted for incentive stock options under
Section 422 of the Code, in the event of the death of the Optionee while in the
employ of the Company or any Subsidiary or, in the event of the death of the
Optionee after Termination described in subparagraph (c) or (d), above, but
within the three-month or twelve-month period described in subparagraph (c) or
(d), above, upon the expiration of twelve months following the Optionee's death.
During such extended period, the Option may be exercised subject to Section
5(d)(iv) of the Plan by the person or persons to whom the deceased Optionee's
rights under the Option Agreement shall pass by will or by the laws of descent
and distribution, but only to the extent the Option was exercisable on the date
of the Termination of the Optionee's employment.
(f) To the extent set forth in paragraph 7 below, upon the
dissolution, liquidation, consolidation or merger of the Company, and, to the
extent set forth in subparagraph 3(f), above, upon an attempted assignment or
transfer of the Option otherwise than as expressly permitted herein.
Any determination made by the Committee with respect to any matter
referred to in this paragraph 4 shall be final and conclusive on all persons
affected thereby.
5. RIGHTS AS STOCKHOLDER. An Optionee shall have no rights as a
stockholder of the Company with respect to any shares underlying the Option
until the day of the issuance of a stock certificate to him or her for those
shares upon payment of the exercise price in accordance with the terms and
provisions hereof. Subject to paragraph 7 below, no adjustments shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued.
6. PAYMENT OF WITHHOLDING TAXES. Upon the Optionee's exercise of his or
her Option with respect to any of the Option Shares in accordance with the
provisions of paragraph 3 above, the Optionee shall pay to the Company upon
exercise of the Option the amount of any federal, state or local income tax
withholding or other employment tax that may be due upon such exercise. The
determination of the amount of any such federal, state or local income tax
withholding or other employment tax due in such event shall be made by the
Company and shall be binding upon the Optionee.
7. RECAPITALIZATION; REORGANIZATION. The shares underlying this Option
are shares of Common Stock as constituted on the date of this Option Agreement,
but if, during the Option Period and prior to the delivery by the Company of all
of the shares of Common Stock with respect to which this Option is granted, the
Company shall effect a subdivision or consolidation of shares or other capital
readjustment, the payment of a stock dividend or some other increase or decrease
in the number of shares of Common Stock outstanding, without receiving
compensation therefor in money, services or property, then, (a) in the event of
any increase in the number of such shares outstanding, the number of shares of
Common Stock then remaining subject to this Option shall be proportionately
increased (except that any fraction of a share resulting from any such
adjustment shall be excluded from the operation of this Option Agreement), and
the exercise price per share shall be proportionately reduced, and, (b) in the
event of a reduction in the number of such shares
outstanding, the number of shares of Common Stock then remaining subject to this
Option shall be proportionately reduced (except that any fractional share
resulting from any such adjustment shall be
5
<PAGE>
excluded from the operation of this Option Agreement), and the exercise price
per share shall be proportionately increased.
In the event of a merger of one or more corporations into the Company
with respect to which the Company shall be the surviving or resulting
corporation, the Optionee shall, at no additional cost, be entitled upon any
exercise of this Option to receive (subject to any required action by
shareholders), in lieu of the number of shares as to which this Option shall
then be so exercised, the number and class of shares of stock or other
securities to which the Optionee would have been entitled pursuant to the terms
of the agreement of merger if, immediately prior to such merger, the Optionee
had been the holder of record of a number of shares of Common Stock of the
Company equal to the number of shares as to which such Option shall be so
exercised; provided, however, that, anything herein contained to the contrary
notwithstanding, upon the occurrence of any event described in Section 5(g) of
the Plan, this Option shall be subject to acceleration as provided in such
Section 5(g).
In the event of a change in the Common Stock as presently constituted,
which change is limited to a change of all of the authorized shares with par
value into the same number of shares with a different par value or without par
value, the shares resulting from any such change shall be deemed to be the
Common Stock within the meaning of the Plan.
The existence of this Option shall not affect in any way the right or
power of the Company or its shareholders to make or authorize any or all
adjustments, dividends, stock dividends, recapitalization, reorganizations or
other changes in the Company's capital structure or its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
other stocks with preference ahead of or convertible into, or otherwise
affecting, the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
8. NO REGISTRATION RIGHTS. Anything in this Option Agreement to the
contrary notwithstanding, if, at any time specified herein for the issuance of
Option Shares, any law, regulation or requirements of any governmental authority
having jurisdiction in the premises shall require either the Company or the
Optionee, in the opinion of the Company's counsel, to take any action in
connection with the shares then to be issued, the issue of such shares shall be
deferred until such action shall have been taken. Nothing in this Option
Agreement shall be construed to obligate the Company at any time to file or
maintain the effectiveness of a registration statement under the Act, or under
the securities laws of any state or other jurisdiction, or to take or cause to
be taken any action which may be necessary in order to provide an exemption from
the registration requirements of the Act under Rule 144 or any other exemption
with respect to the Option Shares or otherwise for resale or other transfer by
the Optionee (or by the executor or administrator of such Optionee's estate or a
person who acquired the Option or any Option Shares or other rights by bequest
or inheritance or by reason of the death of the Optionee) as a result of the
exercise of an Option granted pursuant to this Option Agreement.
9. RESOLUTION OF DISPUTES. Any dispute or disagreement that arises
under, or as a result of, or pursuant to, this Option Agreement shall be
determined by the Committee in its absolute and uncontrolled discretion, and any
such determination or other determination by the Committee under
6
<PAGE>
or pursuant to this Option Agreement, and any interpretation by the Committee of
the terms of this Option Agreement, shall be final, binding and conclusive on
all parties affected thereby.
10. COMPLIANCE WITH THE ACT. Notwithstanding any provision herein or in
the Plan to the contrary, the Company shall be under no obligation to issue any
shares of Common Stock to the Optionee upon exercise of the Option granted
hereby unless and until the Company has determined that such issuance is either
exempt from registration, or is registered, under the Act and is either exempt
from registration and qualification, or is registered or qualified, as
applicable, under all applicable state securities or "blue sky" laws.
11. MISCELLANEOUS.
(a) BINDING ON SUCCESSORS AND REPRESENTATIVES. This Option
Agreement shall be binding not only upon the parties, but also upon their heirs,
executors, administrators, personal representatives, successors and assigns
(including any transferee of a party to this Agreement); and the parties agree,
for themselves and their successors, assigns and representatives, to execute any
instrument which may be necessary legally to effect the terms and conditions of
this Option Agreement.
(b) ENTIRE AGREEMENT. This Option Agreement, together with the
Plan, constitutes the entire agreement of the parties with respect to the Option
and supersedes any previous agreement, whether written or oral, with respect
thereto. This Option Agreement has been entered into in compliance with the
terms of the Plan; wherever a conflict may arise between the terms of this
Option Agreement and the terms of the Plan, the terms of the Plan shall control.
(c) AMENDMENT. Neither this Option Agreement nor any of the
terms and conditions herein set forth may be altered or amended orally, and any
such alteration or amendment shall be effective only when reduced to writing and
signed by each of the parties or their respective successors and assigns.
(d) CONSTRUCTION OF TERMS. Any reference herein to the
singular or plural shall be construed as plural or singular whenever the context
requires.
(e) NOTICES. All notices, requests and amendments under this
Option Agreement shall be in writing, and notices shall be deemed to have been
given when personally delivered or sent prepaid registered mail:
(i) if to the Company, at the following address:
HLM Design, Inc.
121 West Trade Street, Suite 2950
Charlotte, North Carolina 28202
Attention: Chief Financial Officer
or at such other address as the Company shall designate by notice.
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<PAGE>
(ii) if to the Optionee, to the Optionee's
address appearing in the Company's
employment records, or at such other address
as the Optionee shall designate by notice.
(f) GOVERNING LAW. This Option Agreement shall be governed by,
and construed in accordance with, the laws of the State of North Carolina
(excluding the principles of conflict of laws thereof).
(g) SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Option Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provisions were omitted.
(h) AN INCENTIVE STOCK OPTION. The Option granted hereunder is
intended to be an "Incentive Stock Option" under Section 422 of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Option
Agreement as of the day and year first written above.
HLM DESIGN, INC.
By: /s/ Joseph M. Harris
-----------------------------------------
Title: President
OPTIONEE: /s/ VERNON B. BRANNON (SEAL)
------------------------------
8
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EXHIBIT 10.33
NONSTATUTORY STOCK OPTION AGREEMENT AND GRANT
PURSUANT TO
HLM DESIGN, INC. 1998 STOCK OPTION PLAN
This Nonstatutory Stock Option Agreement and Grant is entered into as
of this 12th day of June, 1998 between HLM Design, Inc., a Delaware
corporation (the "Company"), and Joseph M. Harris (the "Optionee").
WHEREAS, the Company and its stockholders have approved the HLM Design,
Inc. 1998 Stock Option Plan (the "Plan") pursuant to which the Company may, from
time to time, make awards of Options (as defined below) and enter into
Nonstatutory Stock Option Agreements with, eligible employees of the Company or
of any Subsidiary (as defined below);
WHEREAS, pursuant to the Plan, the Company has determined to grant to
the Optionee an Option to purchase Common Stock (as defined below) of the
Company, which Option shall be subject to the terms and conditions of this
Nonstatutory Stock Option Agreement and Grant;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
1. DEFINITIONS.
For purposes of this Nonstatutory Stock Option Agreement and Grant, the
following terms shall have the meanings indicated:
(a) "ACT" shall mean the Securities Act of 1933, as amended.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CAUSE" shall mean any act, action or series of acts or
actions or any omission, omissions, or series of omissions which result in, or
which have the effect of resulting in, (i) the commission of a crime by the
Optionee involving moral turpitude, which crime has a material adverse impact on
the Company or any Subsidiary, (ii) gross negligence or willful misconduct which
is continuous and results in material damage to the Company or any Subsidiary,
or (iii) the continuous, willful failure of the person in question to follow the
reasonable directives of the Board of Directors.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as
amended, any successor revenue laws of the United States and the rules and
regulations promulgated thereunder.
(e) "COMMITTEE" shall mean the committee of members of the
Board that is designated by the Board to administer the Plan. In the event that
no such Committee exists or is appointed, "COMMITTEE" shall mean the Board.
<PAGE>
(f) "COMMON STOCK" shall mean the Common Stock, par value
$.001 per share, of the Company.
(g) "DISABILITY" shall mean the inability or failure of a
person to perform those duties for the Company or any Subsidiary traditionally
assigned to and performed by such person because of the person's then-existing
physical or mental condition, impairment or incapacity. The fact of disability
shall be determined by the Committee, which may consider such evidence as it
considers desirable under the circumstances, the determination of which shall be
final and binding upon all parties.
(h) "EXERCISE DATE" shall mean the business day, during the
Option Period, upon which the Optionee delivers to the Company the written
notice and consideration contemplated by Section 5(c) of the Plan.
(i) "FAIR MARKET VALUE" shall mean, with respect to the Common
Stock on any day, its market value determined as provided in Section 5(c) of the
Plan.
(j) "IMMEDIATE FAMILY" shall mean the Optionee's spouse,
children, present or former stepchildren, grandchildren, present or former
stepgrandchildren, parents, present or former stepparents, grandparents,
siblings (including half brothers and sisters), in-laws and individuals whose
relationship with the Optionee arises due to legal adoption.
(k) "INVOLUNTARY TERMINATION WITHOUT CAUSE" shall mean either
(i) the dismissal of, or the request for the resignation of, a person, by court
order, order of any court-appointed liquidator or trustee of the Company, or the
order or request of any creditors' committee of the Company constituted under
the federal bankruptcy laws, provided that such order or request contains no
specific reference to Cause; or (ii) the dismissal of, or the request for the
resignation of, a person, by a duly constituted corporate officer of the Company
or any Subsidiary, or by the Board, for any reason other than for Cause.
(l) "OPTION" shall mean the option to purchase shares of
Common Stock granted to the Optionee pursuant to this Option Agreement.
(m) "OPTION AGREEMENT" shall mean this Nonstatutory Stock
Option Agreement and Grant between the Company and the Optionee by which the
Option is granted to the Optionee pursuant to the Plan.
(n) "OPTION PERIOD" shall mean the period commencing from the
date of this Option Agreement and ending at the close of business ten years from
the date of this Option Agreement or such earlier date as when this Option
Agreement may be terminated by its terms.
(o) "OPTION SHARES" shall mean the shares of Common Stock
purchased upon exercise of the Option.
(p) "OPTIONEE" shall mean the individual executing this Option
Agreement and, as applicable, the estate, personal representative, beneficiary
or Permitted Transferee to whom this Option may be transferred pursuant to this
Option Agreement by will, by the laws of descent and
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distribution, pursuant to a domestic relations order as defined in the Code, or
as otherwise permitted by paragraph 3(f) below.
(q) "PERMITTED TRANSFEREE" shall mean a member of the
Optionee's Immediate Family, a trust established solely for the benefit of one
or more members of the Optionee's Immediate Family or a partnership or limited
liability company of which the only individuals or entities who are or could be
partners or shareholders are members of the Optionee's Immediate Family and/or a
trust established solely for the benefit of one or more members of the
Optionee's Immediate Family.
(r) "PLAN" shall mean the HLM Design, Inc. 1998 Stock Option
Plan and any amendments thereto.
(s) "RETIREMENT" shall mean, with respect to the Optionee,
retirement from the Company and any Subsidiary in accordance with the Company's
and/or Subsidiary's retirement policy as may be in effect from time to time.
(t) "SUBSIDIARY" shall mean any subsidiary corporation of HLM
Design, Inc. as defined in Sections 424(f) and 424(g) of the Code.
(u) "TERMINATION" shall mean the cessation, for any reason, of
the employer-employee relationship between the Company and any Subsidiary and
the Optionee.
(v) "TOTAL OPTION PRICE" shall mean the consideration payable
to the Company by the Optionee upon exercise of the Option pursuant to Section
5(c) of the Plan.
2. GRANT OF OPTION. Effective upon the date hereof, and subject to the
terms and conditions set forth herein, the Company hereby grants to the Optionee
the Option to purchase from the Company, at an exercise price of $5.50 (but not
less than 85% of the initial public offering price) per share, up to but not
exceeding in the aggregate 40,568 shares of Common Stock.
3. EXERCISE OF OPTION. The Option granted in paragraph 2 above may be
exercised as follows:
(a) The Option shall be exercisable at any time and from time
to time during the Option Period. The Option shall terminate on the expiration
of the Option Period, if not earlier terminated; provided that, in the event of
the Optionee's Retirement, the Committee in its sole and absolute discretion may
accelerate the Exercise Date, which acceleration may, in the sole discretion of
the Committee, be subject to further terms and conditions mandated by the
Committee.
(b) No less than 100 shares of Common Stock may be purchased
on any Exercise Date unless the number of shares purchased at such time is the
total number of shares in respect of which the Option is then exercisable.
(c) If at any time and for any reason the Option covers a
fraction of a share, then, upon exercise of the Option, the Optionee shall
receive the Fair Market Value of such fractional share in cash.
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(d) The Option shall be exercised by the Optionee in
accordance with the terms and conditions of Section 5(c) of the Plan.
(e) As soon as administratively practicable following the
Exercise Date, subject to the receipt of payment of the Total Option Price and
of any payment in cash of federal, state or local income tax withholding or
other employment tax that may be due upon the issuance of the Option Shares as
determined and computed by the Company pursuant to paragraph 6 below, the
Company shall issue to the Optionee the number of shares with respect to which
such Option shall be so exercised and shall deliver to the Optionee a
certificate or certificates therefor.
(f) The Option is not transferable by the Optionee otherwise
than (i) by will or the laws of descent and distribution; (ii) pursuant to a
domestic relations order as defined in the Code; or (iii) by transfer without
consideration to a Permitted Transferee, with the consent of and subject to the
rules, terms and conditions imposed by the Committee and provided that the
Committee is notified in advance in writing of any proposed transfer to a
Permitted Transferee and the Committee determines that the proposed transfer
complies with the requirements of the Plan and this Nonstatutory Stock Option
Agreement. No assignment or transfer of this Option, or of the rights
represented thereby, whether voluntary or involuntary, by operation of law or
otherwise, except as described above, shall vest in the assignee or transferee
any interest or right herein whatsoever; but immediately upon any attempt to
assign or transfer this Option, except as expressly permitted herein, the same
shall terminate and be of no force or effect.
4. TERMINATION. The Option granted hereby shall terminate and be of no
force or effect upon and following the occurrence of any of the following
events:
(a) The expiration of the Option Period.
(b) The Termination of the Optionee's employment for any
reason other than the Optionee's death, Disability or Involuntary Termination
Without Cause.
(c) The expiration of three months after the date of the
Optionee's Involuntary Termination Without Cause. During such three-month
period, the Optionee shall have the right to exercise the Option hereby granted
in accordance with the terms of this Option Agreement, but only to the extent
the Option was exercisable on the date of the Termination of the Optionee's
employment.
(d) The expiration of twelve months after Termination of the
Optionee's employment with the Company and any Subsidiary as a result of the
Optionee's Disability. During such twelve-month period, the Optionee shall have
the right to exercise the Option hereby granted in accordance with the terms of
this Option Agreement, but only to the extent the Option was exercisable on the
date of the Termination of the Optionee's employment.
(e) In the event of the death of the Optionee while in the
employ of the Company or, in the event of the death of the Optionee after
Termination described in subparagraph (c) or (d), above, but within the
three-month or twelve-month period described in subparagraph (c) or (d), above,
upon the expiration of twelve months following the Optionee's death. During such
extended
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period, the Option may be exercised by the person or persons to whom the
deceased Optionee's rights under the Option Agreement shall pass by will or by
the laws of descent and distribution, but only to the extent the Option was
exercisable on the date of the Termination of the Optionee's employment.
(f) To the extent set forth in paragraph 7 below, upon the
dissolution, liquidation, consolidation or merger of the Company, and, to the
extent set forth in subparagraph 3(f) above, upon an attempted assignment or
transfer of the Option otherwise than as expressly permitted herein.
Any determination made by the Committee with respect to any matter
referred to in this paragraph 4 shall be final and conclusive on all persons
affected thereby.
5. RIGHTS AS STOCKHOLDER. An Optionee shall have no rights as a
stockholder of the Company with respect to any shares underlying the Option
until the day of the issuance of a stock certificate to him or her for those
shares upon payment of the exercise price in accordance with the terms and
provisions hereof. Subject to paragraph 7 below, no adjustments shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued.
6. PAYMENT OF WITHHOLDING TAXES. Upon the Optionee's exercise of his or
her Option with respect to any of the Option Shares in accordance with the
provisions of paragraph 3 above, the Optionee shall pay to the Company upon
exercise of the Option the amount of any federal, state or local income tax
withholding or other employment tax that may be due upon such exercise. The
determination of the amount of any such federal, state or local income tax
withholding or other employment tax due in such event shall be made by the
Company and shall be binding upon the Optionee.
7. RECAPITALIZATION; REORGANIZATION. The shares underlying this Option
are shares of Common Stock as constituted on the date of this Option Agreement,
but if, during the Option Period and prior to the delivery by the Company of all
of the shares of Common Stock with respect to which this Option is granted, the
Company shall effect a subdivision or consolidation of shares or other capital
readjustment, the payment of a stock dividend or some other increase or decrease
in the number of shares of Common Stock outstanding, without receiving
compensation therefor in money, services or property, then, (a) in the event of
any increase in the number of such shares outstanding, the number of shares of
Common Stock then remaining subject to this Option shall be proportionately
increased (except that any fraction of a share resulting from any such
adjustment shall be excluded from the operation of this Option Agreement), and
the exercise price per share shall be proportionately reduced, and, (b) in the
event of a reduction in the number of such shares outstanding, the number of
shares of Common Stock then remaining subject to this Option shall be
proportionately reduced (except that any fractional share resulting from any
such adjustment shall be excluded from the operation of this Option Agreement),
and the exercise price per share shall be proportionately increased.
In the event of a merger of one or more corporations into the Company
with respect to which the Company shall be the surviving or resulting
corporation, the Optionee shall, at no additional cost, be entitled upon any
exercise of this Option to receive (subject to any required action by
shareholders), in lieu of the number of shares as to which this Option shall
then be so exercised, the
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number and class of shares of stock or other securities to which the Optionee
would have been entitled pursuant to the terms of the agreement of merger if,
immediately prior to such merger, the Optionee had been the holder of record of
a number of shares of Common Stock of the Company equal to the number of shares
as to which such Option shall be so exercised; provided, however, that, anything
herein contained to the contrary notwithstanding, upon the occurrence of any
event described in Section 5(g) of the Plan, this Option shall be subject to
acceleration as provided in such Section 5(g).
In the event of a change in the Common Stock as presently constituted,
which change is limited to a change of all of the authorized shares with par
value into the same number of shares with a different par value or without par
value, the shares resulting from any such change shall be deemed to be the
Common Stock within the meaning of the Plan.
The existence of this Option shall not affect in any way the right or
power of the Company or its shareholders to make or authorize any or all
adjustments, dividends, stock dividends, recapitalization, reorganizations or
other changes in the Company's capital structure or its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
other stocks with preference ahead of or convertible into, or otherwise
affecting, the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
8. NO REGISTRATION RIGHTS. Anything in this Option Agreement to the
contrary notwithstanding, if, at any time specified herein for the issuance of
Option Shares, any law, regulation or requirements of any governmental authority
having jurisdiction in the premises shall require either the Company or the
Optionee, in the opinion of the Company's counsel, to take any action in
connection with the shares then to be issued, the issue of such shares shall be
deferred until such action shall have been taken. Nothing in this Option
Agreement shall be construed to obligate the Company at any time to file or
maintain the effectiveness of a registration statement under the Act, or under
the securities laws of any state or other jurisdiction, or to take or cause to
be taken any action which may be necessary in order to provide an exemption from
the registration requirements of the Act under Rule 144 or any other exemption
with respect to the Option Shares or otherwise for resale or other transfer by
the Optionee (or by the executor or administrator of such Optionee's estate or a
person who is a Permitted Transferee or who acquired the Option or any Option
Shares or other rights by bequest or inheritance or by reason of the death of
the Optionee) as a result of the exercise of an Option granted pursuant to this
Option Agreement.
9. RESOLUTION OF DISPUTES. Any dispute or disagreement that arises
under, or as a result of, or pursuant to, this Option Agreement shall be
determined by the Committee in its absolute and uncontrolled discretion, and any
such determination or other determination by the Committee under or pursuant to
this Option Agreement, and any interpretation by the Committee of the terms of
this Option Agreement, shall be final, binding and conclusive on all parties
affected thereby.
10. COMPLIANCE WITH THE ACT. Notwithstanding any provision herein or in
the Plan to the contrary, the Company shall be under no obligation to issue any
shares of Common Stock to the Optionee upon exercise of the Option granted
hereby unless and until the Company has determined that such issuance is either
exempt from registration, or is registered, under the Act and is either
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exempt from registration and qualification, or is registered or qualified, as
applicable, under all applicable state securities or "blue sky" laws.
11. MISCELLANEOUS.
(a) BINDING ON SUCCESSORS AND REPRESENTATIVES. This Option
Agreement shall be binding not only upon the parties, but also upon their heirs,
executors, administrators, personal representatives, successors and assigns
(including any transferee of a party to this Agreement); and the parties agree,
for themselves and their successors, assigns and representatives, to execute any
instrument which may be necessary legally to effect the terms and conditions of
this Option Agreement.
(b) ENTIRE AGREEMENT. This Option Agreement, together with the
Plan, constitutes the entire agreement of the parties with respect to the Option
and supersedes any previous agreement, whether written or oral, with respect
thereto. This Option Agreement has been entered into in compliance with the
terms of the Plan; wherever a conflict may arise between the terms of this
Option Agreement and the terms of the Plan, the terms of the Plan shall control.
(c) AMENDMENT. Neither this Option Agreement nor any of the
terms and conditions herein set forth may be altered or amended orally, and any
such alteration or amendment shall be effective only when reduced to writing and
signed by each of the parties or their respective successors and assigns.
(d) CONSTRUCTION OF TERMS. Any reference herein to the
singular or plural shall be construed as plural or singular whenever the context
requires.
(e) NOTICES. All notices, requests and amendments under this
Option Agreement shall be in writing, and notices shall be deemed to have been
given when personally delivered or sent prepaid registered mail:
(i) if to the Company, at the following address:
HLM Design, Inc.
121 West Trade Street, Suite 2950
Charlotte, North Carolina 28202
Attention: Chief Financial Officer
or at such other address as the Company shall designate by notice.
(ii) if to the Optionee, to the Optionee's
address appearing in the Company's
employment records, or at such other address
as the Optionee shall designate by notice.
(f) GOVERNING LAW. This Option Agreement shall be governed by,
and construed in accordance with, the laws of the State of North Carolina
(excluding the principles of conflict of laws thereof).
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(g) SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Option Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provisions were omitted.
(h) NOT AN INCENTIVE STOCK OPTION. The Option granted
hereunder is not intended to be an "Incentive Stock Option" under Section 422 of
the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Option
Agreement as of the day and year first written above.
HLM DESIGN, INC.
By: /s/ Vernon B. Brannon
----------------------------------------------
Title: Senior Vice President, Treasurer and
Chief Financial Officer
OPTIONEE: JOSEPH M. HARRIS
/s/ Joseph M. Harris (SEAL)
--------------------------------------------------
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EXHIBIT 10.34
NONSTATUTORY STOCK OPTION AGREEMENT AND GRANT
PURSUANT TO
HLM DESIGN, INC. 1998 STOCK OPTION PLAN
This Nonstatutory Stock Option Agreement and Grant is entered into as
of this 12th day of June, 1998 between HLM Design, Inc., a Delaware
corporation (the "Company"), and Vernon B. Brannon (the "Optionee").
WHEREAS, the Company and its stockholders have approved the HLM Design,
Inc. 1998 Stock Option Plan (the "Plan") pursuant to which the Company may, from
time to time, make awards of Options (as defined below) and enter into
Nonstatutory Stock Option Agreements with, eligible employees of the Company or
of any Subsidiary (as defined below);
WHEREAS, pursuant to the Plan, the Company has determined to grant to
the Optionee an Option to purchase Common Stock (as defined below) of the
Company, which Option shall be subject to the terms and conditions of this
Nonstatutory Stock Option Agreement and Grant;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
1. DEFINITIONS.
For purposes of this Nonstatutory Stock Option Agreement and Grant, the
following terms shall have the meanings indicated:
(a) "ACT" shall mean the Securities Act of 1933, as amended.
(b) "BOARD" shall mean the Board of Directors of the Company.
(c) "CAUSE" shall mean any act, action or series of acts or
actions or any omission, omissions, or series of omissions which result in, or
which have the effect of resulting in, (i) the commission of a crime by the
Optionee involving moral turpitude, which crime has a material adverse impact on
the Company or any Subsidiary, (ii) gross negligence or willful misconduct which
is continuous and results in material damage to the Company or any Subsidiary,
or (iii) the continuous, willful failure of the person in question to follow the
reasonable directives of the Board of Directors.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as
amended, any successor revenue laws of the United States and the rules and
regulations promulgated thereunder.
(e) "COMMITTEE" shall mean the committee of members of the
Board that is designated by the Board to administer the Plan. In the event that
no such Committee exists or is appointed, "COMMITTEE" shall mean the Board.
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(f) "COMMON STOCK" shall mean the Common Stock, par value
$.001 per share, of the Company.
(g) "DISABILITY" shall mean the inability or failure of a
person to perform those duties for the Company or any Subsidiary traditionally
assigned to and performed by such person because of the person's then-existing
physical or mental condition, impairment or incapacity. The fact of disability
shall be determined by the Committee, which may consider such evidence as it
considers desirable under the circumstances, the determination of which shall be
final and binding upon all parties.
(h) "EXERCISE DATE" shall mean the business day, during the
Option Period, upon which the Optionee delivers to the Company the written
notice and consideration contemplated by Section 5(c) of the Plan.
(i) "FAIR MARKET VALUE" shall mean, with respect to the Common
Stock on any day, its market value determined as provided in Section 5(c) of the
Plan.
(j) "IMMEDIATE FAMILY" shall mean the Optionee's spouse,
children, present or former stepchildren, grandchildren, present or former
stepgrandchildren, parents, present or former stepparents, grandparents,
siblings (including half brothers and sisters), in-laws and individuals whose
relationship with the Optionee arises due to legal adoption.
(k) "INVOLUNTARY TERMINATION WITHOUT CAUSE" shall mean either
(i) the dismissal of, or the request for the resignation of, a person, by court
order, order of any court-appointed liquidator or trustee of the Company, or the
order or request of any creditors' committee of the Company constituted under
the federal bankruptcy laws, provided that such order or request contains no
specific reference to Cause; or (ii) the dismissal of, or the request for the
resignation of, a person, by a duly constituted corporate officer of the Company
or any Subsidiary, or by the Board, for any reason other than for Cause.
(l) "OPTION" shall mean the option to purchase shares of
Common Stock granted to the Optionee pursuant to this Option Agreement.
(m) "OPTION AGREEMENT" shall mean this Nonstatutory Stock
Option Agreement and Grant between the Company and the Optionee by which the
Option is granted to the Optionee pursuant to the Plan.
(n) "OPTION PERIOD" shall mean the period commencing from the
date of this Option Agreement and ending at the close of business ten years from
the date of this Option Agreement or such earlier date as when this Option
Agreement may be terminated by its terms.
(o) "OPTION SHARES" shall mean the shares of Common Stock
purchased upon exercise of the Option.
(p) "OPTIONEE" shall mean the individual executing this Option
Agreement and, as applicable, the estate, personal representative, beneficiary
or Permitted Transferee to whom this Option may be transferred pursuant to this
Option Agreement by will, by the laws of descent and
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distribution, pursuant to a domestic relations order as defined in the Code, or
as otherwise permitted by paragraph 3(f) below.
(q) "PERMITTED TRANSFEREE" shall mean a member of the
Optionee's Immediate Family, a trust established solely for the benefit of one
or more members of the Optionee's Immediate Family or a partnership or limited
liability company of which the only individuals or entities who are or could be
partners or shareholders are members of the Optionee's Immediate Family and/or a
trust established solely for the benefit of one or more members of the
Optionee's Immediate Family.
(r) "PLAN" shall mean the HLM Design, Inc. 1998 Stock Option
Plan and any amendments thereto.
(s) "RETIREMENT" shall mean, with respect to the Optionee,
retirement from the Company and any Subsidiary in accordance with the Company's
and/or Subsidiary's retirement policy as may be in effect from time to time.
(t) "SUBSIDIARY" shall mean any subsidiary corporation of HLM
Design, Inc. as defined in Sections 424(f) and 424(g) of the Code.
(u) "TERMINATION" shall mean the cessation, for any reason, of
the employer-employee relationship between the Company and any Subsidiary and
the Optionee.
(v) "TOTAL OPTION PRICE" shall mean the consideration payable
to the Company by the Optionee upon exercise of the Option pursuant to Section
5(c) of the Plan.
2. GRANT OF OPTION. Effective upon the date hereof, and subject to the
terms and conditions set forth herein, the Company hereby grants to the Optionee
the Option to purchase from the Company, at an exercise price of $5.50 (but not
less than 85% of the initial public offering price) per share, up to but not
exceeding in the aggregate 40,568 shares of Common Stock.
3. EXERCISE OF OPTION. The Option granted in paragraph 2 above may be
exercised as follows:
(a) The Option shall be exercisable at any time and from time
to time during the Option Period. The Option shall terminate on the expiration
of the Option Period, if not earlier terminated; provided that, in the event of
the Optionee's Retirement, the Committee in its sole and absolute discretion may
accelerate the Exercise Date, which acceleration may, in the sole discretion of
the Committee, be subject to further terms and conditions mandated by the
Committee.
(b) No less than 100 shares of Common Stock may be purchased
on any Exercise Date unless the number of shares purchased at such time is the
total number of shares in respect of which the Option is then exercisable.
(c) If at any time and for any reason the Option covers a
fraction of a share, then, upon exercise of the Option, the Optionee shall
receive the Fair Market Value of such fractional share in cash.
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(d) The Option shall be exercised by the Optionee in
accordance with the terms and conditions of Section 5(c) of the Plan.
(e) As soon as administratively practicable following the
Exercise Date, subject to the receipt of payment of the Total Option Price and
of any payment in cash of federal, state or local income tax withholding or
other employment tax that may be due upon the issuance of the Option Shares as
determined and computed by the Company pursuant to paragraph 6 below, the
Company shall issue to the Optionee the number of shares with respect to which
such Option shall be so exercised and shall deliver to the Optionee a
certificate or certificates therefor.
(f) The Option is not transferable by the Optionee otherwise
than (i) by will or the laws of descent and distribution; (ii) pursuant to a
domestic relations order as defined in the Code; or (iii) by transfer without
consideration to a Permitted Transferee, with the consent of and subject to the
rules, terms and conditions imposed by the Committee and provided that the
Committee is notified in advance in writing of any proposed transfer to a
Permitted Transferee and the Committee determines that the proposed transfer
complies with the requirements of the Plan and this Nonstatutory Stock Option
Agreement. No assignment or transfer of this Option, or of the rights
represented thereby, whether voluntary or involuntary, by operation of law or
otherwise, except as described above, shall vest in the assignee or transferee
any interest or right herein whatsoever; but immediately upon any attempt to
assign or transfer this Option, except as expressly permitted herein, the same
shall terminate and be of no force or effect.
4. TERMINATION. The Option granted hereby shall terminate and be of no
force or effect upon and following the occurrence of any of the following
events:
(a) The expiration of the Option Period.
(b) The Termination of the Optionee's employment for any
reason other than the Optionee's death, Disability or Involuntary Termination
Without Cause.
(c) The expiration of three months after the date of the
Optionee's Involuntary Termination Without Cause. During such three-month
period, the Optionee shall have the right to exercise the Option hereby granted
in accordance with the terms of this Option Agreement, but only to the extent
the Option was exercisable on the date of the Termination of the Optionee's
employment.
(d) The expiration of twelve months after Termination of the
Optionee's employment with the Company and any Subsidiary as a result of the
Optionee's Disability. During such twelve-month period, the Optionee shall have
the right to exercise the Option hereby granted in accordance with the terms of
this Option Agreement, but only to the extent the Option was exercisable on the
date of the Termination of the Optionee's employment.
(e) In the event of the death of the Optionee while in the
employ of the Company or, in the event of the death of the Optionee after
Termination described in subparagraph (c) or (d), above, but within the
three-month or twelve-month period described in subparagraph (c) or (d), above,
upon the expiration of twelve months following the Optionee's death. During such
extended
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period, the Option may be exercised by the person or persons to whom the
deceased Optionee's rights under the Option Agreement shall pass by will or by
the laws of descent and distribution, but only to the extent the Option was
exercisable on the date of the Termination of the Optionee's employment.
(f) To the extent set forth in paragraph 7 below, upon the
dissolution, liquidation, consolidation or merger of the Company, and, to the
extent set forth in subparagraph 3(f) above, upon an attempted assignment or
transfer of the Option otherwise than as expressly permitted herein.
Any determination made by the Committee with respect to any matter
referred to in this paragraph 4 shall be final and conclusive on all persons
affected thereby.
5. RIGHTS AS STOCKHOLDER. An Optionee shall have no rights as a
stockholder of the Company with respect to any shares underlying the Option
until the day of the issuance of a stock certificate to him or her for those
shares upon payment of the exercise price in accordance with the terms and
provisions hereof. Subject to paragraph 7 below, no adjustments shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued.
6. PAYMENT OF WITHHOLDING TAXES. Upon the Optionee's exercise of his or
her Option with respect to any of the Option Shares in accordance with the
provisions of paragraph 3 above, the Optionee shall pay to the Company upon
exercise of the Option the amount of any federal, state or local income tax
withholding or other employment tax that may be due upon such exercise. The
determination of the amount of any such federal, state or local income tax
withholding or other employment tax due in such event shall be made by the
Company and shall be binding upon the Optionee.
7. RECAPITALIZATION; REORGANIZATION. The shares underlying this Option
are shares of Common Stock as constituted on the date of this Option Agreement,
but if, during the Option Period and prior to the delivery by the Company of all
of the shares of Common Stock with respect to which this Option is granted, the
Company shall effect a subdivision or consolidation of shares or other capital
readjustment, the payment of a stock dividend or some other increase or decrease
in the number of shares of Common Stock outstanding, without receiving
compensation therefor in money, services or property, then, (a) in the event of
any increase in the number of such shares outstanding, the number of shares of
Common Stock then remaining subject to this Option shall be proportionately
increased (except that any fraction of a share resulting from any such
adjustment shall be excluded from the operation of this Option Agreement), and
the exercise price per share shall be proportionately reduced, and, (b) in the
event of a reduction in the number of such shares outstanding, the number of
shares of Common Stock then remaining subject to this Option shall be
proportionately reduced (except that any fractional share resulting from any
such adjustment shall be excluded from the operation of this Option Agreement),
and the exercise price per share shall be proportionately increased.
In the event of a merger of one or more corporations into the Company
with respect to which the Company shall be the surviving or resulting
corporation, the Optionee shall, at no additional cost,
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<PAGE>
be entitled upon any exercise of this Option to receive (subject to any required
action by shareholders), in lieu of the number of shares as to which this Option
shall then be so exercised, the number and class of shares of stock or other
securities to which the Optionee would have been entitled pursuant to the terms
of the agreement of merger if, immediately prior to such merger, the Optionee
had been the holder of record of a number of shares of Common Stock of the
Company equal to the number of shares as to which such Option shall be so
exercised; provided, however, that, anything herein contained to the contrary
notwithstanding, upon the occurrence of any event described in Section 5(g) of
the Plan, this Option shall be subject to acceleration as provided in such
Section 5(g).
In the event of a change in the Common Stock as presently constituted,
which change is limited to a change of all of the authorized shares with par
value into the same number of shares with a different par value or without par
value, the shares resulting from any such change shall be deemed to be the
Common Stock within the meaning of the Plan.
The existence of this Option shall not affect in any way the right or
power of the Company or its shareholders to make or authorize any or all
adjustments, dividends, stock dividends, recapitalization, reorganizations or
other changes in the Company's capital structure or its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
other stocks with preference ahead of or convertible into, or otherwise
affecting, the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
8. NO REGISTRATION RIGHTS. Anything in this Option Agreement to the
contrary notwithstanding, if, at any time specified herein for the issuance of
Option Shares, any law, regulation or requirements of any governmental authority
having jurisdiction in the premises shall require either the Company or the
Optionee, in the opinion of the Company's counsel, to take any action in
connection with the shares then to be issued, the issue of such shares shall be
deferred until such action shall have been taken. Nothing in this Option
Agreement shall be construed to obligate the Company at any time to file or
maintain the effectiveness of a registration statement under the Act, or under
the securities laws of any state or other jurisdiction, or to take or cause to
be taken any action which may be necessary in order to provide an exemption from
the registration requirements of the Act under Rule 144 or any other exemption
with respect to the Option Shares or otherwise for resale or other transfer by
the Optionee (or by the executor or administrator of such Optionee's estate or a
person who is a Permitted Transferee or who acquired the Option or any Option
Shares or other rights by bequest or inheritance or by reason of the death of
the Optionee) as a result of the exercise of an Option granted pursuant to this
Option Agreement.
9. RESOLUTION OF DISPUTES. Any dispute or disagreement that arises
under, or as a result of, or pursuant to, this Option Agreement shall be
determined by the Committee in its absolute and uncontrolled discretion, and any
such determination or other determination by the Committee under or pursuant to
this Option Agreement, and any interpretation by the Committee of the terms of
this Option Agreement, shall be final, binding and conclusive on all parties
affected thereby.
10. COMPLIANCE WITH THE ACT. Notwithstanding any provision herein or in
the Plan to the contrary, the Company shall be under no obligation to issue any
shares of Common Stock to the Optionee upon exercise of the Option granted
hereby unless and until the Company has determined that such issuance is either
exempt from registration, or is registered, under the Act and is either
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exempt from registration and qualification, or is registered or qualified, as
applicable, under all applicable state securities or "blue sky" laws.
11. MISCELLANEOUS.
(a) BINDING ON SUCCESSORS AND REPRESENTATIVES. This Option
Agreement shall be binding not only upon the parties, but also upon their heirs,
executors, administrators, personal representatives, successors and assigns
(including any transferee of a party to this Agreement); and the parties agree,
for themselves and their successors, assigns and representatives, to execute any
instrument which may be necessary legally to effect the terms and conditions of
this Option Agreement.
(b) ENTIRE AGREEMENT. This Option Agreement, together with the
Plan, constitutes the entire agreement of the parties with respect to the Option
and supersedes any previous agreement, whether written or oral, with respect
thereto. This Option Agreement has been entered into in compliance with the
terms of the Plan; wherever a conflict may arise between the terms of this
Option Agreement and the terms of the Plan, the terms of the Plan shall control.
(c) AMENDMENT. Neither this Option Agreement nor any of the
terms and conditions herein set forth may be altered or amended orally, and any
such alteration or amendment shall be effective only when reduced to writing and
signed by each of the parties or their respective successors and assigns.
(d) CONSTRUCTION OF TERMS. Any reference herein to the
singular or plural shall be construed as plural or singular whenever the context
requires.
(e) NOTICES. All notices, requests and amendments under this
Option Agreement shall be in writing, and notices shall be deemed to have been
given when personally delivered or sent prepaid registered mail:
(i) if to the Company, at the following address:
HLM Design, Inc.
121 West Trade Street, Suite 2950
Charlotte, North Carolina 28202
Attention: Chief Financial Officer
or at such other address as the Company shall designate by notice.
(ii) if to the Optionee, to the Optionee's
address appearing in the Company's
employment records, or at such other address
as the Optionee shall designate by notice.
(f) GOVERNING LAW. This Option Agreement shall be governed by,
and construed in accordance with, the laws of the State of North Carolina
(excluding the principles of conflict of laws thereof).
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<PAGE>
(g) SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Option Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provisions were omitted.
(h) NOT AN INCENTIVE STOCK OPTION. The Option granted
hereunder is not intended to be an "Incentive Stock Option" under Section 422 of
the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Option
Agreement as of the day and year first written above.
HLM DESIGN, INC.
By: /s/ Joseph M. Harris
-----------------------------------------
Title: President
OPTIONEE: VERNON B. BRANNON
/s/ Vernon B. Brannon (SEAL)
---------------------------------------------
8
Exhibit 10.58
June 18, 1998
HLM Design, Inc.
121 West Trade Street
Suite 2850
Charlotte, North Carolina 28202
Ladies and Gentlemen:
This will confirm the agreement and understanding of the undersigned that,
notwithstanding the provisions of Section 3 of that certain Security Escrow
Agreement dated the date hereof among the undersigned, HLM Design, Inc. and
First Union National Bank, as escrow agent (the "Agreement") the Shares (as
defined in the Agreement) shall not be released from escrow under the Agreement
pursuant to such Section 3 to the extent such release would result in the
recognition of compensation expense to the Company in connection therewith.
Very truly yours,
/s/ Joseph M. Harris
-------------------------------------
Joseph M. Harris
/s/ Vernon B. Brannon
------------------------------------
Vernon B. Brannon
BERTHEL FISHER & COMPANY LEASING, INC.
By /s/ illegible signature
------------------------------------
Acknowledged and agreed, the
day and year first above written
HLM Design, Inc.
By /s/ Vernon B. Brannon
-----------------------------
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> MAY-01-1998
<PERIOD-START> APR-26-1997
<PERIOD-END> MAY-01-1998
<CASH> 17,369
<SECURITIES> 0
<RECEIVABLES> 6,239,929
<ALLOWANCES> (150,000)
<INVENTORY> 0
<CURRENT-ASSETS> 12,345,162
<PP&E> 2,568,859
<DEPRECIATION> (768,904)
<TOTAL-ASSETS> 17,862,334
<CURRENT-LIABILITIES> 12,603,059
<BONDS> 0
0
0
<COMMON> 776
<OTHER-SE> 963,979
<TOTAL-LIABILITY-AND-EQUITY> 17,862,334
<SALES> 0
<TOTAL-REVENUES> 29,296,690
<CGS> 0
<TOTAL-COSTS> 22,072,509
<OTHER-EXPENSES> 52,387
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,030,351
<INCOME-PRETAX> 1,476,838
<INCOME-TAX> 683,897
<INCOME-CONTINUING> 792,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 778,356
<EPS-PRIMARY> 1.12
<EPS-DILUTED> .91
</TABLE>
EXHIBIT 99.1
SAFE HARBOR UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides
a "safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. HLM Design desires to
take advantage of the "safe harbor" provisions of the Act. Certain information,
particularly information regarding future economic performance, finances and
management's plans and objectives, contained in this report is forward-looking.
In some cases information regarding certain important factors that could cause
actual results to differ materially from any such forward-looking statement
appear together with such statement. Also, the following factors, in addition to
other possible factors not listed, could affect the Company's actual results and
cause such results to differ materially from those expressed in forward-looking
statements:
INNOVATIVE STRATEGY
HLM Design's operating and growth strategies are predicated upon its
ability to achieve significant consolidation of AEP Firm operations and to
generate profits from those firms. The process of identifying suitable
candidates for entering into Management and Services Agreements and proposing,
negotiating and implementing economically feasible affiliations with AEP Firms
is lengthy and complex. Such strategies require intense management direction in
a dynamic marketplace that is increasingly subject to cost containment and other
competitive pressures. There can be no assurance that these strategies will be
successful or that modifications to the Company's strategies will not be
required.
MANAGEMENT AND SERVICES AGREEMENTS WITH ONLY THREE FIRMS
HLM Design's revenues are derived solely from its contractual
relationships with the Managed Firms (for whom, as indicated below, HLM Design
will also provide required financing). Currently, HLM Design has Management and
Services Agreements with three firms, only one (HLMI) of which had active
operations at January 30, 1998. All three of these firms are related to each
other and to HLM Design, by common principal stockholders, Joseph M. Harris and
Vernon B. Brannon. There can be no assurance that HLM Design will be able to
successfully enter into Management and Services Agreements with additional
firms.
UNCERTAINTIES CONCERNING ABILITY TO RECEIVE PAYMENTS FROM MANAGED FIRMS
HLM Design earns, for services provided to the Managed Firms, 99% of the
net income of the Managed Firms as determined in accordance with generally
accepted accounting principles. However, for cash management purposes, HLM
Design is to receive 99% of the positive cash flows of the Managed Firms
(calculated for any period as the change in the cash balances from the beginning
of the period to the end of the period). HLM Design's ability actually to
receive payments
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<PAGE>
in respect thereof during the period will be subject to the cash requirements of
the Managed Firms for the period. For the year ended May 1, 1998, HLM Design
earned aggregate management fees under Management and Services Agreements with
Managed Firms of $1,441,305. As of May 1, 1998, $450 in management fees had
actually been paid by the Managed Firms to HLM Design and $1,440,855 was carried
by HLM Design as an account receivable. Such receivable is to be paid with
future positive cash flows. To the extent, however, the cash requirements of the
Managed Firms continue to exceed 1% of positive cash flows, HLM Design will be
unable to receive payments against such receivable and such payments will
continue to be delayed. HLM Design's ability to pay dividends on the Common
Stock will depend on the ability of HLM Design to collect such receivables.
DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT AND PERSONNEL RESOURCES
The Company's success depends to a significant degree upon the continued
contributions of its management team (particularly its senior management) and
professional personnel. The loss of the services of one or more of these key
employees could have a material adverse effect on the Company. The Company
carries key employee insurance on each of Joseph M. Harris and Vernon B. Brannon
and has employment and/or noncompetition agreements with Messrs. Harris and
Brannon as well as with several members of its senior professional staff, but
does not have such agreements with all of its key personnel. There can be no
assurance that a court would enforce the noncompetition agreements as currently
in effect. A court might, for example, narrow the geographical or client
restrictions contained in such agreement, lessen the length of the agreements
or, in some cases, refuse to enforce any provisions thereof. If courts refuse to
enforce the noncompetition agreements of HLM Design or the Managed Firms, such
refusals could have a material adverse effect on HLM Design.
In addition, as the Company expands it may need to hire additional
personnel and will likely be dependent on the senior professional staff of any
firm with which HLM Design enters into a Management and Services Agreement. The
market for qualified employees in the industry and in the regions in which the
Company operates is competitive and may subject the Company to increased labor
costs in periods of low unemployment. The loss of the services of key employees
or the inability to attract additional qualified professional staff could have a
material adverse effect on the Company. In addition, the lack of qualified
professional staff or employees of the Company's potential candidates for
Management and Services Agreements may limit the Company's ability to consummate
future agreements. See "Business--Growth Strategy," "Business--Competition,"
"Directors and Executive Officers of the Registrant" and "Executive
Compensation--Employment Agreements."
DEPENDENCE ON MANAGED FIRMS
HLM Design's revenues depend on fees and revenues generated by various AEP
Firms managed by HLM Design. Any material loss of revenue by such firms, whether
as a result of the loss of professionals or otherwise, could have a material
adverse effect on HLM Design. HLM Design is not engaged in the practice of
architecture, engineering or planning and, as a result, does not
2
<PAGE>
control (i) the practice of architecture, engineering or planning by
professionals or (ii) the compliance with certain regulatory requirements
directly applicable to the Managed Firms.
RISKS INHERENT IN PROVISION OF SERVICES
The Managed Firms and certain employees of the Managed Firms are involved
in the delivery of services to the public and, therefore, are exposed to the
risk of professional liability claims. Claims of this nature, if successful,
could result in substantial damage awards to the claimants that may exceed the
limits of any applicable insurance coverage. Insurance against losses related to
claims of this type can be expensive and varies widely from state to state.
Although HLM Design is indemnified under its Management and Services Agreements
for claims against the Managed Firms and their employees, HLM Design maintains
liability insurance for itself and negotiates liability insurance for its
Managed Firms and the professionals employed by its Managed Firms. Successful
malpractice claims asserted against the Managed Firms, their employees or HLM
Design could have an adverse effect on the Company's profitability.
COMPETITION
The business of providing architectural, engineering and planning related
services is highly competitive. The Company's competition includes many other
firms, including large national firms as well as regional or small local firms.
Several companies that have established operating histories and significantly
greater resources than the Company provide some of the services provided by the
Managed Firms. In addition, there are other companies with substantial resources
that may in the future decide to engage in activities similar to those in which
the Company engages. See "Business-- Competition."
UNCERTAINTIES CONCERNING ADDITIONAL FINANCINGS AND COMPANY'S ABILITY TO OBTAIN
NEW LINE OF CREDIT
HLM Design's operating and growth strategies require substantial capital
resources, particularly since HLM Design, as the management company, will be
responsible for the financing of working capital growth, capital growth and
other cash needs of the Managed Firms. See "Business--HLM Design
Operations--Management and Services Agreements." These requirements will result
in HLM Design incurring long-term and short-term indebtedness and may result in
the public or private issuance, from time to time, of additional debt or equity
securities, including the issuance of such securities in connection with the
execution of Management and Services Agreements. There can be no assurance that
any such financing will be obtainable on terms acceptable to HLM Design. As
further discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources," HLM
Design has already incurred borrowings under its existing revolving line of
credit equal to the full amount of its borrowing capacity thereunder.
Furthermore, such line of credit, as extended, matures as of August 31, 1998,
unless it is renewed by the lender. Although HLM Design has received both verbal
and written indications of the willingness of the lender to renew and increase
HLM Design's line of credit following a successful completion of the Offering,
the lender has not entered into any
3
<PAGE>
commitment to do so. If HLM Design is unable to obtain a new revolving line of
credit, its ability to implement its growth strategy will be adversely affected.
GOVERNMENT REGULATION
The architectural and engineering industries are regulated at the state
level. The Company believes its operations are in material compliance with
applicable law. Nevertheless, because of the unique structure of the
relationships between HLM Design and its Managed Firms, many aspects of these
relationships have not been the subject of prior regulatory interpretation. The
Company has not discussed its structure with or received approvals from any
regulatory authorities, and is unaware of its business being reviewed by any
such regulatory authorities. There can be no assurance that a review of the
Company's business by applicable regulatory authorities will not result in
determinations that may adversely affect the operations of the Company or
prevent its continued operation. There also can be no assurance that the
regulatory environment will not change so as to restrict the Company's existing
operations or limit the expansion of the Company's business. Expansion of the
operations of the Company to certain jurisdictions could require structural and
organizational modifications of HLM Design's relationships with its Managed
Firms. Consequently, if the Company is unable or unwilling to undertake such
modifications, it may be limited in its ability to expand into certain
jurisdictions. As of the date hereof, the Company has not determined which
jurisdictions would require structural or organizational modifications of HLM
Design's relationships with the Managed Firms. Although the Company believes its
operations are in material compliance with existing applicable law, there can be
no assurance that the Company's existing Management and Services Agreements
could not be successfully challenged as, for example, constituting the
unlicensed practice of architecture, or that the enforceability of the
provisions thereof, including non-disclosure agreements therein, will not be
limited.
4
