<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998
REGISTRATION NO. 333-40617
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HLM DESIGN, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8712 56-2018819
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
121 WEST TRADE STREET, SUITE 2950
CHARLOTTE, NORTH CAROLINA 28202
TELEPHONE (704) 358-0779
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
------------------------
MR. JOSEPH M. HARRIS
PRESIDENT AND CHAIRMAN OF THE BOARD
HLM DESIGN, INC.
121 WEST TRADE STREET, SUITE 2950
CHARLOTTE, NORTH CAROLINA 28202
TELEPHONE (704) 358-0779
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
GARY C. IVEY, ESQ. MICHAEL K. DENNEY, ESQ.
PARKER, POE, ADAMS & BERNSTEIN L.L.P. BRADLEY & RILEY, P.C.
2500 CHARLOTTE PLAZA 100 FIRST STREET, S.W.
CHARLOTTE, NORTH CAROLINA 28244 CEDAR RAPIDS, IOWA 52404
TELEPHONE (704) 372-9000 TELEPHONE (319) 363-0101
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1998
PROSPECTUS
1,200,000 SHARES
HLM DESIGN, INC.
COMMON STOCK
------------------------
All of the 1,200,000 shares (the "Shares") of common stock, par value $.001
per share (the "Common Stock"), are offered hereby (the "Offering") by HLM
Design, Inc. ("HLM Design").
Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the public offering price will be
between $6.00 and $7.50 per share. See "Underwriting" for information relating
to factors to be considered in determining the initial public offering price.
HLM Design intends to apply for quotation of the Common Stock on the Nasdaq
SmallCap Market under the symbol "HLMD."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
[CAPTION]
<TABLE>
<S> <C> <C> <C>
==================================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC DISCOUNT (1) COMPANY(2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share........................................... $ $ $
- ----------------------------------------------------------------------------------------------------------------------------------
Total (3)........................................... $ $ $
==================================================================================================================================
</TABLE>
(1) HLM Design has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, payable by HLM Design, estimated at $500,000.
(3) HLM Design has granted to the Underwriters an option, exercisable within 45
days of the date hereof, to purchase up to an aggregate of 180,000
additional shares of Common Stock solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to HLM Design will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as and if issued to and accepted by them, subject to approval of
certain legal matters by counsel for the Underwriters and certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Shares will be made in New York, New York on or about
, 1998.
BERTHEL FISHER & COMPANY FINANCIAL SERVICES, INC.
WESTPORT RESOURCES INVESTMENT SERVICES, INC.
MARION BASS SECURITIES CORPORATION
------------------------
The date of this Prospectus is , 1998.
<PAGE>
[Photographs of various projects completed by the Company]
------------------------
HLM Design intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors and will
make available copies of its quarterly results for the first three quarters of
each year.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS
(INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (A) GIVES RETROACTIVE
EFFECT TO AN EFFECTIVE 19.25-TO-1 STOCK SPLIT (EFFECTED IN THE FORM OF A STOCK
DIVIDEND) OF HLM DESIGN'S COMMON STOCK TO BE CONSUMMATED PRIOR TO THE
CONSUMMATION OF THE OFFERING (THE "STOCK SPLIT") AND (B) ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "UNDERWRITING." 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 IN "BUSINESS -- HLM DESIGN OPERATIONS -- MANAGEMENT AND
SERVICES AGREEMENTS", AND REFERENCES TO THE "MANAGED FIRMS" MEAN (I) WITH
RESPECT TO THE PERIOD PRIOR TO THE DATE OF THIS PROSPECTUS, HLMI, HLMNC AND HLMO
(EACH AS DEFINED BELOW) WHICH ARE THE AEP FIRMS CURRENTLY OPERATING UNDER
MANAGEMENT AND SERVICES AGREEMENTS WITH HLM DESIGN, AND (II) WITH RESPECT TO THE
PERIOD FROM AND AFTER THE DATE OF THIS PROSPECTUS, HLMI, HLMNC AND HLMO 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.
THE COMPANY
HLM Design, Inc. ("HLM Design") is a management company that enters into
management and services relationships with full service AEP Firms. HLM Design
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 has been in
operation for over thirty years. HLMNC and HLMO were organized in 1996 but have
had no operations to date. These three AEP Firms have each entered into a
Management and Services Agreement with HLM Design. 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
Transactions -- Relationships with Managed Firms."
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 requiring operating and cost efficiencies, and (2) the 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 Managed 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 Design is not engaged in negotiations with any AEP
Firms.
HLM Design's principal executive office is located at 121 West Trade
Street, Suite 2950, Charlotte, North Carolina and its telephone number is (704)
358-0779.
3
<PAGE>
OPERATING STRATEGY
The Company provides, primarily through HLMI, a complement of
architectural, engineering and planning services to a variety of clients in
several industries. These services include, in addition to the provision of
architectural and engineering services, all phases of a project starting with
assistance in the funding process, development of a master plan at the inception
of a project, and oversight of all phases of the construction project. The
services also may involve the redesign of a workplace to make it efficient,
reliable and easy to maintain. The Company has developed a strength and is
recognized as a national leader in the following markets:
(Bullet) Healthcare -- In the last five years, HLMI has designed and
constructed more than 15 million square feet of healthcare facilities. Clients
have ranged from 20-bed hospitals in the rural mid-west to America's most
prestigious academic medical centers. Healthcare clients include Duke University
Medical Center, University of Chicago Hospitals, University of Iowa Hospitals
and Clinics, Rush-Presbyterian-St. Lukes Medical Center, Thomas Jefferson
University Hospital and Georgetown University Medical Center.
(Bullet) Justice -- HLMI has designed over 10 million square feet of
justice facilities in the last ten years. It has designed jail and prison
projects valued at over $500 million and has designed emerging court facility
projects valued at over $555 million.
(Bullet) High-tech Research Facilities -- HLMI has designed research
facilities valued at over $500 million. The Company's clients in this market
include some of the most prestigious in the country including Johns Hopkins
University, the National Institutes of Health, the Mayo Foundation, and
Georgetown University. Planning for high-tech research facilities is intended to
optimize space utilization and provide flexibility to adapt to changing
technology and funding constraints.
All of the Company's architecture, engineering and planning services are
provided through the Managed Firms, and not by HLM Design.
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 that have geographically diverse
operations.
HLM Design generally expects that AEP Firms that sign Management and
Services Agreements will retain existing high-quality professional employees and
continue to operate in an effective and efficient manner with architects,
engineers and planning professionals who understand the local market. HLM
Design's management team will provide all management and administrative services
to the AEP Firms. Additionally, management believes they are positioned to
pursue larger, well established AEP Firms as a result of the depth of HLM
Design's management team, HLM Design's 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.
CERTAIN RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. Prospective
purchasers should consider that:
(Bullet) 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;
(Bullet) Conflicts of interest could arise between HLM Design and Joseph
Harris and Vernon Brannon, the President and Chief Financial
Officer, respectively, of HLM Design, in connection with the
operation and enforcement of the provisions of Stockholders'
Agreements and the Management and Services Agreements;
4
<PAGE>
(Bullet) HLM Design's revenues are currently derived from Management and
Services Agreements with three firms, only one of which had active
operations at October 31, 1997 and all of which are related to
each other, and to HLM Design, by common and principal
stockholders, Messrs. Harris and Brannon;
(Bullet) HLM Design's operating and growth strategies require substantial
capital resources resulting in the incurrence of 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 new Management and Services
Agreements;
(Bullet) AEP Firms that have entered into Management and Services
Agreements with HLM Design have the right to terminate such
agreements upon the filing by HLM Design of a petition of
involuntary bankruptcy and assignment for the benefit of
creditors, or upon other action taken voluntarily or involuntarily
under any federal or state law for the benefit of debtors;
(Bullet) Because of the unique structure of the relationship between HLM
Design and its Managed Firms, many aspects of these relationships
have not been the subject of prior regulatory interpretations and
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 operations;
(Bullet) The Company's success depends to a significant degree upon the
continued contributions of Messrs. Harris and Brannon; and
(Bullet) There is no existing market for the Common Stock and no assurance
that one will develop following the Offering can be given.
PROSPECTIVE INVESTORS SHOULD ALSO BE AWARE THAT AS OF THE DATE HEREOF, HLM
DESIGN HAS ONLY ENTERED INTO MANAGEMENT AND SERVICES AGREEMENTS WITH AFFILIATED
ENTITIES AND NO ASSURANCES MAY BE GIVEN THAT HLM DESIGN WILL BE SUCCESSFUL IN
ENTERING INTO SUCH AGREEMENTS WITH OTHER AEP FIRMS.
See "Risk Factors" beginning on page 7 for a discussion of factors that
should be considered by prospective purchasers of the Common Stock offered
hereby.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by HLM Design.................... 1,200,000 shares (1)
Common Stock to be outstanding after the Offering..... 2,371,805 shares (1)(2)(3)
Total............................................ 2,371,805 shares
Use of proceeds....................................... The net proceeds of the Offering will be used to repay certain
indebtedness of HLM Design, for working capital and for general
corporate purposes, including the funding of HLM Design's rights to
cash flows under future Management and Services Agreements. See "Use
of Proceeds."
Trading............................................... The Company intends to apply for quotation of the Common Stock on the
Nasdaq SmallCap Market ("Nasdaq"), under the symbol "HLMD."
</TABLE>
- ---------------
(1) Does not include up to an aggregate of 180,000 shares that may be sold by
HLM Design upon exercise of the over-allotment option granted to the
Underwriters. See "Underwriting."
(2) Excludes (i) 241,500 shares of Common Stock reserved for future issuance
under HLM Design's Stock Option Plan (as defined herein), including an
option to purchase 175,000 shares of Common Stock that will be granted
immediately before the completion of the Offering, (ii) 87,500 shares of
Common Stock reserved for future issuance under HLM Design's ESPP (as
defined herein) and (iii) 149,399 shares of Common Stock reserved for future
issuance upon exercise of the Warrants (as defined herein).
(3) Gives effect to the Stock Split.
5
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The following summary historical and financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of HLM Design and
Affiliates and the Predecessor Company as defined below and the related notes
thereto included elsewhere in this Prospectus.
The following summary historical financial data for the Predecessor Company
for each of the three fiscal years ended April 25, 1997 are derived from audited
financial statements, which are included elsewhere in this Prospectus. The
summary financial data (Predecessor Company) for the one month ended May 30,
1997, and the six months ended October 25, 1996 are derived from the unaudited
financial statements of HLMI, which are included elsewhere in this Prospectus.
The selected financial data for the six months ended October 31, 1997 are
derived from the unaudited combined financial statements of HLM Design and for
the five months ended October 31, 1997 for, HLMI, HLMNC and HLMO, which are
included elsewhere in this Prospectus. 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. The results
of operations for an interim period are not necessarily indicative of results of
operations for a full fiscal year or any other interim period. 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 in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY (1)
-----------------------------------------------------------------------
SIX
FOR THE YEAR ENDED MONTHS ONE MONTH
----------------------------------------- ENDED ENDED
APRIL 30, APRIL 26, APRIL 25, OCTOBER 25, MAY 30,
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Revenue........................................ $29,122,557 $28,554,424 $26,754,710 $13,503,623 $2,233,036
----------- ----------- ----------- ----------- -----------
Costs and Expenses:
Direct cost of revenue......................... 15,685,671 14,261,952 13,376,251 7,534,491 898,979
Operating costs................................ 14,098,729 13,104,278 12,414,739 6,074,195 1,163,141
ESOP expenses.................................. 573,837 584,202 408,765 271,652
Amortization on intangible assets.............. 5,952 99,145 107,670 54,702 9,571
----------- ----------- ----------- ----------- -----------
Total costs and expenses....................... 30,364,189 28,049,577 26,307,425 13,935,040 2,071,691
----------- ----------- ----------- ----------- -----------
Income (Loss) from Operations.................. (1,241,632) 504,847 447,285 (431,417) 161,345
----------- ----------- ----------- ----------- -----------
Other Income (Expense):
Net Interest................................... (142,744) (383,552) (396,007) (192,794) (36,951)
Non-Operating income........................... 428,475 850,273 285,635
----------- ----------- ----------- ----------- -----------
Total Other Income (Expense)............... 285,731 466,721 (110,372) (192,794) (36,951)
----------- ----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes.............. (955,901) 971,568 336,913 (624,211) 124,394
Income tax expense (benefit)................... (360,080) 435,459 219,799 (192,346) 43,000
----------- ----------- ----------- ----------- -----------
Net Income (Loss) (4).......................... $ (595,821) $ 536,109 $ 117,114 $ (431,865) $ 81,394
============ ============ ============= =========== ============
BALANCE SHEET DATA:
Working capital(deficiency).................... $(1,029,547) $(1,620,488) $(1,902,363) $(1,717,490) $(2,238,531)
Total assets................................... 10,519,859 12,577,992 12,874,503 12,376,973 17,639,673
Long-term debt................................. 840,302 564,577 103,792 453,870 2,476,008
Total liabilities.............................. 10,690,072 11,819,796 11,670,962 11,639,830 16,354,738
Warrants outstanding...........................
Stockholders' equity (deficiency) (3).......... (170,213) 758,196 1,203,541 737,143 1,284,935
<CAPTION>
HLM DESIGN
(COMBINED)
SIX
MONTHS
ENDED
OCTOBER 31,
1997 (2)
-----------
INCOME STATEMENT DATA:
<S> <C>
Revenue........................................ $13,186,803
-----------
Costs and Expenses:
Direct cost of revenue......................... 5,944,762
Operating costs................................ 5,920,332
ESOP expenses..................................
Amortization on intangible assets.............. 71,496
-----------
Total costs and expenses....................... 11,936,590
-----------
Income (Loss) from Operations.................. 1,250,213
-----------
Other Income (Expense):
Net Interest................................... (496,973)
Non-Operating income...........................
-----------
Total Other Income (Expense)............... (496,973)
-----------
Income (Loss) Before Income Taxes.............. 753,240
Income tax expense (benefit)................... 374,125
-----------
Net Income (Loss) (4).......................... $ 379,115
==============
BALANCE SHEET DATA:
Working capital(deficiency).................... $ 613,024
Total assets................................... 17,426,156
Long-term debt................................. 4,474,234
Total liabilities.............................. 16,768,230
Warrants outstanding........................... 250,078
Stockholders' equity (deficiency) (3).......... 407,848
</TABLE>
- ---------------
(1) The Predecessor Company is HLMI.
(2) Includes information for HLM Design and for the Managed Firms for the five
months from May 31, 1997 to October 31, 1997 on a combined basis. HLM
Design's operations for the month ended May 30, 1997 reflected herein
include no revenues or expenses.
(3) The Company has paid no cash dividends from May 1, 1994 to October 31, 1997.
(4) Historical net income per share is not presented, as the historical capital
structure of the Company prior to the Offering is not comparable with the
capital structure that will exist after the Offering.
6
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE
INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE PRINCIPAL RISK FACTORS
SET FORTH BELOW.
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.
CONFLICTS OF INTEREST
Joseph Harris and Vernon Brannon, the President and the Chief Financial
Officer, respectively, of HLM Design, are also principal stockholders in each of
HLMI, HLMNC and HLMO and have entered into stockholders' agreements with respect
to those firms that, among other things, permit the management by HLM Design of
each of HLMI, HLMNC and HLMO. Conflicts of interest could arise between HLM
Design and Messrs. Harris and Brannon in connection with the operation and
enforcement of the provisions of these stockholders' agreements and the
Management and Services Agreements. See "Certain Transactions." The interests of
HLM Design could be materially adversely affected if circumstances arose in
which it would be in the interest of Joseph Harris and Vernon Brannon to
interfere with the performance by HLMI, HLMNC or HLMO of the Management and
Services Agreements. Upon the execution of new Management and Services
Agreements with AEP Firms, similar conflicts of interest would arise between HLM
Design and stockholders of such firms.
BENEFITS OF OFFERING TO INSIDERS
Joseph M. Harris and Vernon B. Brannon, stockholders, directors and
executive officers of HLM Design, will benefit personally from the Offering in
several ways. Both Mr. Harris and Mr. Brannon will be released from personal
guaranties in connection with the Pacific/Equitas Loan (as defined below) upon
the consummation of the Offering and the repayment of the Pacific/Equitas Loan
from the proceeds of the Offering. The Offering will result in increased
liquidity for Messrs. Harris and Brannon, as well as all other current
stockholders of HLM Design, with respect to the shares of Common Stock each such
person currently holds in HLM Design. For a description of restrictions on such
person's ability to freely transfer Common Stock outstanding on the date hereof
and not sold in the Offering, see "Shares Eligible for Future Sale."
Additionally, in connection with the consummation of the Offering, Messrs.
Harris and Brannon have entered into Employment Agreements with HLM Design
whereby each will receive compensation and other benefits as well as options to
purchase 87,500 shares of HLM Design Common Stock. See "Management -- Employment
Agreements."
MANAGEMENT AND SERVICES AGREEMENTS WITH ONLY THREE FIRMS
HLM Design's revenues are derived solely from its contractual relationships
with the Managed Firms. Currently, HLM Design has Management and Services
Agreements with three firms, only one (HLMI) of which had active operations at
October 31, 1997. 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.
ADDITIONAL FINANCINGS
HLM Design's operating and growth strategies require substantial capital
resources. These requirements will result in HLM Design incurring long- 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. Additionally, issuing securities in
connection with the execution of Management and Services Agreements will dilute
the percentage of Common Stock owned by stockholders prior to such issuance.
There is also no assurance that such financings will not cause dilution in the
book value per share of the Common Stock.
7
<PAGE>
EFFECT OF BANKRUPTCY
AEP Firms that have entered into Management and Services Agreements with
HLM Design have the right to terminate such agreements upon the filing by HLM
Design of a petition in voluntary bankruptcy, an assignment for the benefit of
creditors, or upon other action taken voluntarily or involuntarily under any
federal or state law for the benefit of debtors. Because the substantial
majority of the assets of the Company are owned by the Managed Firms, if such
agreements are terminated, HLM Design would proceed through bankruptcy without
any meaningful assets. In such circumstances, it is likely that no significant
assets would be available for distribution to stockholders upon a liquidation.
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 form of 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 will
not be successfully challenged as, for example, constituting the unlicensed
practice of architecture, or that the enforceability of the provisions thereof,
including non-competition agreements, will not be limited.
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 most important 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
agreement or, in some cases, refuse to enforce any provision of the agreement.
If courts refuse to enforce noncompetition agreements of HLM Design or the
Managed Firms, such decisions 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"
and "Management."
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 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.
8
<PAGE>
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 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.
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."
CONCENTRATION OF VOTING POWER AND ANTI-TAKEOVER PROVISIONS
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 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. In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of preferred stock, there can be no assurance that the Company will
not do so in the future. The application of any such provisions or the issuance
of preferred stock could prevent stockholders from realizing a premium upon the
sale of their shares of Common Stock upon an acquisition of the Company. See
"Description of Capital Stock."
Certain provisions of the Company's Certificate of Incorporation and Bylaws
make it more difficult for stockholders of the Company to effect certain
corporate actions. See "Description of Capital Stock -- Delaware Law and Certain
Charter and Bylaw Provisions." Under the Company's Stock Option Plan, options
outstanding thereunder become immediately exercisable upon a change in control
of the Company. See "Management -- Stock Option Plan." Additionally, HLM
Design's Bylaws provide: (i) for a Board of Directors divided into three classes
serving staggered terms, (ii) that special meetings of stockholders may be
called only by the President or by the Company's Secretary or Assistant
Secretary at the request in writing of the majority of the Board of Directors
and (iii) that any stockholder seeking to bring business before an annual
meeting of stockholders, or to nominate candidates for election as directors at
an annual or special meeting of stockholders, must provide timely notice thereof
in writing. These provisions will impair the stockholders' ability to influence
or control the Company or to effect a change in control of the Company, and may
prevent stockholders from realizing a premium on the sale of their shares of
Common Stock upon an acquisition of the Company. See "Description of Capital
Stock."
NO PRIOR PUBLIC MARKET FOR COMMON STOCK AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. HLM Design intends to apply for quotation of its Common Stock on the
NASDAQ SmallCap Market. The initial public offering price of the Common Stock
will be determined by negotiations among the Company and representatives of the
Underwriters. See "Underwriting." There can be no assurance that the market
price of the Common Stock prevailing at any time after this Offering will equal
or exceed the initial public offering price. Quarterly and annual operating
results of the Company, variations between such results and the results expected
by investors and analysts, changes in local or general economic conditions or
developments affecting the architecture or engineering industries, the Company
or its competitors could cause the market price of the Common Stock to fluctuate
substantially. As a result of these factors, as well as other factors common to
initial public offerings, the market price could fluctuate substantially from
the initial offering price. In addition, the stock market has, from time to
time, experienced extreme price and volume fluctuations, which could adversely
effect the market price for the Common Stock without regard to the financial
performance of the Company.
LACK OF INDEPENDENT DIRECTORS
Upon completion of the Offering, the majority of the members of HLM
Design's Board of Directors will be employees or representatives of holders of
Warrants (as defined herein). Although HLM Design intends to maintain at least
two independent directors on its Board following completion of the Offering,
such directors will not constitute a majority of the Board,
9
<PAGE>
and HLM Design's Board may not have a majority of independent directors at any
time in the future. In the absence of a majority of independent directors, HLM
Design's executive officers, who also are principal stockholders and directors,
could establish policies and enter into transactions without independent review
and approval thereof, subject to certain restrictions under HLM Design's
Certificate of Incorporation. In addition, although HLM Design intends to
establish audit and compensation committees which will consist entirely of
outside directors, until those committees are established, transactions and
compensation policies could be approved without independent review. These and
other transactions could present the potential for a conflict of interest
between HLM Design and its stockholders generally and the controlling officers,
stockholders or directors. See "Management."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution in the amount of $4.10 per share in net tangible book value
per share from the initial offering price. See "Dilution."
POTENTIAL ADVERSE MARKET PRICE EFFECT OF ADDITIONAL SHARES ELIGIBLE FOR FUTURE
SALE
The 1,171,805 shares of Common Stock owned beneficially by existing
stockholders of HLM Design, the 241,500 shares of Common Stock subject to
options to be granted under the Stock Option Plan on or before the consummation
of the Offering and the 149,399 shares of Common Stock underlying the Warrants
(as defined herein) are "restricted securities" as defined in Rule 144 under the
Securities Act, and may in the future be resold in compliance with Rule 144. See
"Management -- Stock Option Plan" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." No prediction can be made as to the effect that resale of shares of
Common Stock, or the availability of shares of Common Stock for resale, will
have on the market price of the Common Stock prevailing from time to time. The
resale of substantial amounts of Common Stock, or the perception that such
resales may occur, could adversely affect prevailing market prices for the
Common Stock and the ability of HLM Design to raise equity capital in the
future. HLM Design has agreed, subject to certain exceptions, not to issue, and
all executive officers of HLM Design and the Managed Firms have agreed not to
resell, any shares of Common Stock or other equity securities of HLM Design for
365 days after the date of this Prospectus without the prior written consent of
the representatives of the Underwriters. See "Shares Eligible for Future Sale"
and "Underwriting."
USE OF PROCEEDS
The net proceeds to HLM Design from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $5.98 million ($6.95 million if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $6.00 per share (the lowpoint of the range of
the initial public offering price set forth on the cover page of the Prospectus)
and after deducting the underwriting discount and estimated expenses of the
Offering.
HLM Design intends to use approximately $3.0 million of the net proceeds to
repay certain indebtedness consisting of (i) the $2.0 million due under the
Pacific/Equitas Loan (payable June 1, 2002 at an interest rate of 13.5%), (ii) a
$0.8 million term loan from Berthel Fisher & Company Leasing, Inc. ("Berthel
Leasing"), an affiliate of one of the Underwriters (payable May 1, 1998, with an
interest rate of 12% due in monthly installments), and (iii) notes payable in an
aggregate principal amount of $0.2 million to employee stockholders (payable at
various dates until August 2002 including interest of 6.0%). The $3.0 million of
indebtedness currently has an effective weighted interest cost at an annual rate
equal to 25%. In connection with the merger agreement between HLMI and BBH Corp.
described elsewhere in this Prospectus and the payment of the merger
consideration to holders of HLMI's common stock, the Company (i) incurred
indebtedness in the aggregate principal amount of $2 million to Pacific Capital,
L.P. ("Pacific") and Equitas, L.P. ("Equitas") (the "Pacific/Equitas Loan") and
took on the notes payable to employee stockholders, while the Berthel Leasing
proceeds were used for working capital. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
HLM Design intends to use the remaining expected net proceeds of the
Offering for working capital and other general corporate purposes, including
payments made by HLM Design, for the rights to future cashflows, in connection
with the execution of new Management and Services Agreements. Until utilized,
the Company will invest the net proceeds in short-term, interest bearing,
investment grade instruments.
10
<PAGE>
DIVIDEND POLICY
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 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Capital Stock."
CAPITALIZATION
The following table sets forth, as of October 31, 1997, the combined
capitalization of HLM Design and Affiliates (a) on an actual basis, and (b) on a
pro forma basis, as adjusted to reflect the Offering and the application of the
estimated net proceeds thereof to be received by the Company. See "Use of
Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the unaudited pro forma financial statements of HLM Design and Affiliates and
the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1997
------------------------
PRO FORMA
FOR THE
OFFERING
ACTUAL (1)
---------- ----------
<S> <C> <C>
Short-term debt:
Notes payable................................................................................... $2,250,000 $1,500,000
Current maturities of long-term debt............................................................ 728,011 728,011
---------- ----------
Total short-term debt........................................................................ $2,978,011 $2,228,011
============ ===========
Long-term debt, excluding current maturities...................................................... $4,474,233 $2,311,925
---------- ----------
Warrants outstanding.............................................................................. 250,078 250,078
---------- ----------
Stockholders' equity:
Preferred Stock of HLM Design, $.10 par value, 1,000,000 shares authorized; no shares issued and
outstanding.................................................................................. 0 0
Common Stock of HLM Design, $.001 par value, 9,000,000 shares authorized; 974,820 shares issued
and outstanding, actual; 2,174,820 shares issued and outstanding, as adjusted (2)............ 975 2,175
Common Stock of HLMI, $.01 par value; Class A, voting authorized 2,000,000 shares; issued 200;
Class B, nonvoting, authorized 1,000,000 shares, no shares outstanding....................... 2 2
Common Stock of HLMNC $.01 par value, 10,000 shares authorized; 300 shares issued and
outstanding.................................................................................. 3 3
Common Stock of HLMO $.01 par value, 10,000 shares authorized; 300 shares issued and
outstanding.................................................................................. 3 3
Additional Paid-in capital...................................................................... 34,312 6,013,112
Retained earnings............................................................................... 379,115 379,115
Stock Subscription Receivable -- HLM Design, HLMNC, HLMO (3).................................... (6,562) (6,562)
---------- ----------
Total stockholders' equity................................................................... 407,848 6,387,848
---------- ----------
Total capitalization....................................................................... $5,132,159 $8,949,851
=========== ===========
</TABLE>
- ---------------
(1) Adjusted to give effect to the Offering and the application of the net
proceeds thereof. See "Use of Proceeds" and "Certain Transactions."
(2) 2,354,820 shares if the Underwriters' over-allotment option is exercised in
full. See "Underwriting" and "Principal Stockholders." Excludes (i) 241,500
shares of Common Stock reserved for future issuance under HLM Design's Stock
Option Plan (including up to 175,000 shares of Common Stock reserved for
issuance upon exercise of options to be granted on or before the
consummation of the Offering pursuant to the Stock Option Plan), (ii) 87,500
shares of Common Stock reserved for issuance under HLM Design's ESPP, and
(iii) 149,399 shares of Common Stock reserved for issuance under the
Warrants (as defined herein). See "Management's Discussion of Financial
Condition and Results of Operations -- Liquidity and Capital Resources,"
"Management -- Stock Option Plan" and "Management -- Employee Stock Purchase
Plan".
(3) Common stock had not been funded as of October 31, 1997.
11
<PAGE>
DILUTION
The net tangible book deficit of the Company (defined as the combined net
tangible book value (deficit) of HLM Design, HLMI, HLMNC, and HLMO) as of
October 31, 1997 was $1,844,445, or $1.89 per share of Common Stock. Net
tangible book value (deficit) per share is determined by dividing the tangible
net worth of the Company by the total number of outstanding shares of Common
Stock. After giving effect to the sale of the 1,200,000 shares of Common Stock
offered hereby and the receipt of an assumed $5.98 million of net proceeds from
the Offering (based on an assumed initial public offering price of $6.00 per
share and net of underwriting discounts and estimated offering expenses), net
tangible book value of the Company at October 31, 1997 would have been $1.90 per
share. This represents an immediate increase in the net tangible book value of
$3.79 per share to existing stockholders and an immediate dilution of $4.10 per
share to new investors purchasing Common Stock in the Offering. The following
table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C>
Assumed initial public offering price per share...................................................................... $ 6.00
Net tangible book value per share before giving effect to the Offering............................................. (1.89)
Increase in net tangible book value per share attributable to the Offering......................................... 3.79
Pro forma net tangible book value per share after giving effect to the Offering...................................... 1.90
Dilution per share to new investors(1)............................................................................... $ 4.10
</TABLE>
- ---------------
(1) Dilution is determined by subtracting the net tangible book value per share
of Common Stock after the Offering from the public offering price per share.
12
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the Predecessor Company for each
of the three fiscal years ended April 25, 1997 are derived from audited
financial statements, which are included elsewhere in this Prospectus. The
following selected financial data for the Predecessor Company for each of the
two fiscal years ended April 30, 1994 are derived from unaudited financial
statements, which are not included in this Prospectus. The selected financial
data (Predecessor Company) for the one month ended May 30, 1997, and the six
months ended October 25, 1996 are derived from the unaudited financial
statements of HLMI, which are included elsewhere in this Prospectus. The
selected financial data for the six months ended October 31, 1997 are derived
from the unaudited combined financial statements of HLM Design, and for the five
months ended October 31, 1997 for HLMI, HLMNC and HLMO, which are included
elsewhere in this Prospectus. 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. The results of operations
for an interim period are not necessarily indicative of results of operations
for a full fiscal year or any other interim period. 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 in this Prospectus.
<TABLE>
<CAPTION>
(PREDECESSOR COMPANY) (1)
-------------------------------------------------------------------------------------------------
SIX
FOR THE YEAR ENDED MONTHS ONE MONTH
------------------------------------------------------------------- ENDED ENDED
APRIL 30, APRIL 30, APRIL 30, APRIL 26, APRIL 25, OCTOBER 25, MAY 30,
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ----------- ------------ ------------
Revenue.......................... $33,464,656 $27,841,902 $29,122,557 $28,554,424 $26,754,710 $13,503,623 $ 2,233,036
<S> <C> <C> <C> <C> <C> <C> <C>
----------- ----------- ----------- ----------- ----------- ------------ ------------
Costs and Expenses:
Direct cost of revenue........... 18,371,876 15,925,434 15,685,671 14,261,952 13,376,251 7,534,491 898,979
Operating costs.................. 15,376,045 13,516,392 14,098,729 13,104,278 12,414,739 6,074,195 1,163,141
ESOP expenses.................... 474,403 564,918 573,837 584,202 408,765 271,652
Amortization on intangible
assets......................... 4,464 5,952 5,952 99,145 107,670 54,702 9,571
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total costs and expenses......... 34,226,788 30,012,696 30,364,189 28,049,577 26,307,425 13,935,040 2,071,691
----------- ----------- ----------- ----------- ----------- ------------ ------------
Income (Loss) from Operations.... (762,132) (2,170,794) (1,241,632) 504,847 447,285 (431,417) 161,345
----------- ----------- ----------- ----------- ----------- ------------ ------------
Other Income (Expense):
Net Interest..................... (18,438) (43,058) (142,744) (383,552) (396,007) (192,794) (36,951)
Non-Operating income............. -- -- 428,475 850,273 285,635
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total Other Income
(Expense)................... (18,438) (43,058) 285,731 466,721 (110,372) (192,794) (36,951)
----------- ----------- ----------- ----------- ----------- ------------ ------------
Income (Loss) Before Income
Taxes.......................... (780,570) (2,213,852) (955,901) 971,568 336,913 (624,211) 124,394
Income tax expense (benefit)..... (260,000) (779,000) (360,080) 435,459 219,799 (192,346) 43,000
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net Income (Loss) (4)............ $ (520,570) $(1,434,852) $ (595,821) $ 536,109 $ 117,114 $ (431,865) $ 81,394
=========== =========== ============ =========== =========== ============ ============
BALANCE SHEET DATA:
Working capital(deficiency)...... $2,059,840 $1,229,211 $(1,705,986) $(1,620,488) $(1,902,363) (1,717,490) (2,238,531)
Total assets..................... 11,586,309 10,147,420 10,519,859 12,577,992 12,874,503 12,376,973 17,639,673
Long-term debt................... 1,598,727 1,050,330 840,302 564,577 103,792 453,870 2,476,008
Total liabilities................ 10,020,182 9,713,789 10,690,072 11,819,796 11,670,962 11,639,830 16,354,738
Warrants outstanding.............
Stockholders' equity (deficiency)
(3)............................ 1,566,127 433,631 (170,213) 758,196 1,203,541 737,143 1,284,935
<CAPTION>
HLM DESIGN
(COMBINED)
SIX
MONTHS
ENDED
OCTOBER 31,
1997 (2)
-----------
Revenue.......................... $13,186,803
<S> <C>
-----------
Costs and Expenses:
Direct cost of revenue........... 5,944,762
Operating costs.................. 5,920,332
ESOP expenses....................
Amortization on intangible
assets......................... 71,496
-----------
Total costs and expenses......... 11,936,590
-----------
Income (Loss) from Operations.... 1,250,213
-----------
Other Income (Expense):
Net Interest..................... (496,973)
Non-Operating income.............
-----------
Total Other Income
(Expense)................... (496,973)
-----------
Income (Loss) Before Income
Taxes.......................... 753,240
Income tax expense (benefit)..... 374,125
-----------
Net Income (Loss) (4)............ $ 379,115
===========
BALANCE SHEET DATA:
Working capital(deficiency)...... 613,024
Total assets..................... 17,426,156
Long-term debt................... 4,474,234
Total liabilities................ 16,768,230
Warrants outstanding............. 250,078
Stockholders' equity (deficiency)
(3)............................ 407,848
</TABLE>
- ---------------
(1) The Predecessor Company is HLMI.
(2) Includes information for HLM Design and for the Managed Firms for the five
months from May 31, 1997 to October 31, 1997 on a combined basis. HLM
Design's operations for the month ended May 30, 1997 reflected herein
include no revenues or expenses.
(3) The Company has paid no cash dividends from May 1, 1992 to October 31, 1997.
(4) Historical net income per share is not presented, as the historical capital
structure of the Company prior to the Offering is not comparable with the
capital structure that will exist after the Offering.
13
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The following unaudited pro forma combined financial information includes
HLM Design, HLMI, HLMNC and HLMO to reflect their results assuming the
acquisition of HLMI through the merger of BBH Corp., a non-operating entity
controlled by the controlling stockholders of HLM Design, into HLMI had occurred
at the beginning of the respective periods and the Management and Services
Agreements and related stockholder agreements had been effective as of the
beginning of the respective periods.
The Company believes that the assumptions used in the following statements
provide a reasonable basis on which to present the pro forma financial data. The
unaudited proforma combined financial data is provided for informational
purposes only and should not be construed to be indicative of the Company's
financial condition or results of operations had the transactions and events
described above been consummated on the dates assumed, and are not intended to
project the Company's financial condition on any future date or its results of
operation for any future period.
<TABLE>
<CAPTION>
(COMBINED)
(PREDECESSOR HLM DESIGN PRO FORMA
COMPANY) (COMBINED) FOR THE SIX
ONE MONTH SIX MONTHS PRO FORMA MONTHS ENDED
ENDED ENDED (1) ADJUSTMENTS PRO FORMA
MAY 30, OCTOBER 31, PRO FORMA FOR THE OCTOBER 31,
1997 1997 ADJUSTMENTS OFFERING 1997
----------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue................................... $ 2,233,036 $13,186,803 $15,419,839
Costs and Expenses:
Direct cost of revenue.................... 898,979 5,944,762 6,843,741
Operating costs........................... 1,163,141 5,920,332 $ (3,800)(7) 7,051,673
(28,000)(3)
Amortization of intangible assets......... 9,571 71,496 4,800(2) 85,867
----------- ----------- ------------- ------------- ------------
Total costs and expenses.................. 2,071,691 11,936,590 (27,000) 13,981,281
----------- ----------- ------------- ------------- ------------
Income from Operations.................... 161,345 1,250,213 27,000 1,438,558
Other Income (Expense)
Interest expense.......................... (36,951) (496,973) 26,000(4) $ (270,000)(6) (864,924 )
(35,000)(4) 200,000(6)
(48,000)(5) (204,000)(12)
----------- ----------- ------------- ------------- ------------
Total Other Expense..................... (36,951) (496,973) (57,000) (274,000) (864,924 )
----------- ----------- ------------- ------------- ------------
Income Before Income Taxes................ 124,394 753,240 (30,000) (274,000) 573,634
Income tax expense (benefit).............. 43,000 374,125 (9,639)(9) (104,805)(8) 302,681
----------- ----------- ------------- ------------- ------------
Net Income................................ $ 81,394 $ 379,115 $ (20,361) $ (169,195) $ 270,953
============= ============ =============== =============== ==============
Pro forma net income per share (11)(14)... $ .11
------------
Weighted average shares outstanding
(000s).................................. 2,475
==============
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
14
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR THE TWELVE (1) ADJUSTMENTS FOR THE TWELVE
MONTHS ENDED PRO FORMA FOR THE MONTHS ENDED
APRIL 25, 1997 ADJUSTMENTS OFFERING APRIL 25, 1997
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Revenue.................................................. $ 26,754,710 $ 26,754,710
Costs and Expenses:
Direct cost of revenue................................... 13,376,251 13,376,251
Operating costs.......................................... 12,414,739 $(338,000)(3) 12,031,739
(45,000)(7)
ESOP expenses............................................ 408,765 (408,765)(10)
Amortization of intangible assets........................ 107,670 60,330(2) 168,000
-------------- ----------- ----------- --------------
Total costs and expenses................................. 26,307,425 (731,435) 25,575,990
-------------- ----------- ----------- --------------
Income from Operations................................... 447,285 731,435 1,178,720
-------------- ----------- ----------- --------------
Other Income (Expense)
Interest expense......................................... (402,509) 311,000(4) $(240,000)(6) (1,118,509)
(425,000)(4) 400,000(6)
(580,000)(5) (182,000)(12)
Non-Operating income..................................... 292,137 292,137
-------------- ----------- ----------- --------------
Total Other Expense.................................... (110,372) (694,000) (22,000) (826,372)
-------------- ----------- ----------- --------------
Income Before Income Taxes............................... 336,913 37,435 (22,000) 352,348
Income tax expense (benefit)............................. 219,799 78,579(9) (8,415)(8) 289,963
-------------- ----------- ----------- --------------
Net Income (loss)........................................ $ 117,114 $ (41,144) $ (13,585) $ 62,385
=============== ============ ============== ===============
Pro forma net income per share (13)(14).................. $ .03
--------------
Weighted average shares outstanding (000s)............... 2,454
================
</TABLE>
- ---------------
(1) On May 23, 1997 BBH Corp., affiliated with HLM Design through a
majority-in-interest of common stockholders, acquired HLMI in a transaction
accounted for under the purchase method of accounting. BBH Corp. purchased
50,000 shares in HLMI for $3.2 million, and in connection with this
transaction, BBH Corp. was merged into HLMI with HLMI being the surviving
entity. Upon the merger, each share of common stock in BBH Corp.
outstanding at the time of merger was converted into one share of common
stock in HLMI. All Common Stock of HLMI held by BBH Corp. (including HLMI
Common Stock contributed to BBH Corp. by Messrs. Harris and Brannon as
their initial capital contribution to BBH Corp.) were canceled and retired.
As a part of the foregoing, the stockholders of HLMI (other than BBH
Corp.), including the HLMI Employee Stock Ownership Plan (the "ESOP"),
redeemed their HLMI common stock for $64 a share. As a result, there was a
90% change in voting control. The assets and liabilities of HLMI were
restated to fair value as of May 31, 1997. Purchase accounting was effected
May 31, 1997 as it was not materially different than May 23, 1997, May 30,
1997 was the normal accounting close for HLMI and a portion of the
acquisition funding commitment was not finalized until May 30, 1997. The
excess of the purchase cost over the fair value of tangible net assets was
recorded as goodwill and will be amortized over fifteen years.
(2) Reflects the adjustment necessary for the amortization of goodwill arising
from the acquisition of HLMI by BBH Corp. and the merger of BBH Corp. into
HLMI.
(3) Reflects the adjustment necessary to record the net decrease in
depreciation expense as a result of the extended lives of depreciable
assets (furniture and fixtures) due to the establishment of remaining lives
subsequent to the acquisition by BBH. Management estimated the remaining
useful lives of such assets from their date of acquisition or the term of
lease if less.
(4) Reflects the increase in interest expense resulting from the financing
arrangement, which was in the form of a sale-leaseback agreement and which
is reduced by the interest costs associated with bank loans that were
repaid. Although the transaction was structured in the form of a sale
leaseback, the transaction was in substance a financing, and, therefore, no
gain or loss resulted.
(5) Reflects the adjustment to record interest expense for the debt incurred to
effect the acquisition of HLMI by BBH Corp. through the merger of BBH Corp.
into HLMI.
(6) Reflects the decrease in interest expense resulting from the repayment of
certain indebtedness which is offset by an increase in deferred fee expense
associated with the pay off of such indebtedness. See "Use of Proceeds".
(7) Reflects the adjustment necessary to record decreased depreciation expense
due to the reduction to fair value of certain leasehold improvements.
15
<PAGE>
(8) Reflects the change in provision for income taxes resulting from adjustment
(5) above.
(9) Reflects the change in provision for income taxes resulting from
adjustments above.
(10) Reflects the elimination of ESOP expenses as a result of the acquisition of
HLMI by BBH Corp. through the merger of BBH Corp. into HLMI.
(11) Pro forma net income per share is based upon the assumption that 2,174,820
shares of Common Stock are outstanding after the Offering. This amount
represents 1,200,000 shares of Common Stock to be issued in the Offering,
and 974,820 shares of Common Stock owned by the Company's stockholders
prior to the Offering and inclusion of Common Stock equivalents of 325,075
related to Warrants.
(12) Reflects the increase in interest expense resulting from warrants attached
to certain indebtedness which was repaid with proceeds of the Offering. See
"Use of Proceeds".
(13) Pro forma net income per share is based upon the assumption that 2,133,625
shares of Common Stock are outstanding after the Offering. This amount
represents 1,200,000 shares of Common Stock to be issued in the Offering
and 933,625 shares of Common Stock owned by the Company's stockholders
prior to the Offering and inclusion of Common Stock equivalents of 325,075
related to Warrants.
(14) Fully diluted earnings per share are not materially different.
16
<PAGE>
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
Affiliate's financial statements and Predecessor's financial statements and the
related notes thereto included elsewhere in this Prospectus.
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. 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 of 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 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 receives as compensation all but 1% of each firm's
positive cash flow following the payment by each firm of all such firm's
expenses.
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 six months ended October 31, 1997 compared to six months ended October
25, 1996 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.
SIX MONTHS ENDED OCTOBER 31, 1997 COMPARED WITH SIX MONTHS ENDED OCTOBER 31,
1996 -- PRO FORMA
This pro forma financial data does not reflect the results of the effect of
the Offering.
<TABLE>
<CAPTION>
COMBINED COMBINED
PRO FORMA PRO FORMA
OCTOBER 25, OCTOBER 31,
1996 1997
----------- -----------
<S> <C> <C>
Revenue........................................................................................ $13,503,623 $15,419,839
Costs and expenses:
Direct cost of revenue......................................................................... 7,534,491 6,843,741
Operating costs................................................................................ 5,909,546 7,051,673
Amortization of intangible assets.............................................................. 84,000 85,867
----------- -----------
Total costs and expenses....................................................................... 13,528,037 13,981,281
----------- -----------
Income (loss) from operations.................................................................. (24,414) 1,438,558
Other income (expense)
Interest expense............................................................................... (539,794) (590,924)
----------- -----------
Total other expense.......................................................................... (539,794) (590,924)
----------- -----------
Income (loss) before income taxes.............................................................. (564,208) 847,634
Income tax expense (benefit)................................................................... (147,344) 407,486
----------- -----------
Net Income (loss).............................................................................. $ (416,864) $ 440,148
============== =============
</TABLE>
Revenues were $15.4 million for the six months ended October 31, 1997
compared to $13.5 million for the six months ended October 25, 1996, which is an
increase of 14.2%. The increase in revenues is attributable to management's
stronger focus on marketing efforts during the six months ended October 31,
1997.
17
<PAGE>
Direct costs primarily include, direct labor, subconsultant costs, and
reimbursable expenses. Direct costs were $6.8 million, or 44.4% of revenues, for
the six months ended October 31, 1997, as compared to $7.5 million, or 55.8% of
revenues for the six months ended October 25, 1996. This decrease as a percent
of revenue 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 $7.0 million, or 45.7% of revenues, for the six
months ended October 31, 1997 as compared to $5.9 million, or 43.8% of revenues,
for the six months ended October 25, 1996. This increase is principally due to
an increase in indirect labor and related costs as a result of aggressive
marketing efforts to increase revenues and an increase in rent expense
associated with rental of certain computer and software equipment.
Amortization of intangible assets were $0.1 million for both the six months
ended October 31, 1997 and October 25, 1996. 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 Notes to Combined Financial
Statements.
Interest expense was $0.6 million for the six months ended October 31, 1997
as compared to $0.5 million for the six months ended October 25, 1996.
Income tax expense for the six months ended October 31, 1997 was $0.4
million as compared to an income tax benefit of $0.1 million for the six months
ended October 25, 1996. The effective income tax rate was 48.1% for the six
months ended October 31, 1997 as compared to 26.1% for the six months ended
October 25, 1996. The effective income tax rate was higher due to non-deductible
goodwill amortization and the ratio of non-deductible penalties and meals and
entertainment expense to pre-tax income or loss.
PREDECESSOR RESULTS OF OPERATIONS
The following discussion of analysis and results of operations for the
fiscal years ended 1997, 1996 and 1995 relate to the predecessor company HLMI.
HLM Design was incorporated on March 6, 1997 had no significant activity 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, 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 goal, which resulted in some potential contracts not
being pursued. During fiscal 1997 and fiscal 1996, approximately 70% of HLMI's
revenues are related to health care projects and approximately 30% are from
criminal justice and other projects.
Direct costs include, among other things, direct labor, subconsultant
costs, 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 from an
increase in the use of subconsultants to meet the requirements of the projects
(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 the six months
ended October 31, 1997 and October 25, 1996. The amortization relates to the
goodwill arising from the acquisition of MBP Architects, Inc. in April 1995. See
Note 2 to HLMI Financial Statements.
Interest expense was $0.4 million for both fiscal 1997 and fiscal 1996.
18
<PAGE>
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
a lease termination, 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 (17.42% in
1997) and meals and entertainment expenses (9.3% in 1997). The increase in
penalty expense is due to HLMI's inability to timely fund payroll taxes.
FISCAL 1996 COMPARED WITH FISCAL 1995
Revenues were $28.6 million in fiscal 1996 compared to $29.1 million in
fiscal 1995, a decline of 2.0%. The decline in revenues was primarily
attributable to HLMI's decentralization of architectural services from one
location to multiple locations and its efforts to focus on the estimating
process and selecting contracts with profitability as the major goal, which
resulted in some potential contracts not being pursued. During fiscal 1996,
approximately 70% of HLMI's revenues were related to health care projects and
approximately 30% were from criminal justice and other projects as compared to
during fiscal 1995, approximately 73% of HLMI's revenues were related to health
care projects and approximately 27% were from criminal justice and other
projects.
Direct costs include, among other things, direct labor, subconsultants
costs, and reimbursable expenses. Direct costs were $14.3 million, or 49.9% of
revenues, in fiscal 1996 as compared to $15.7 million, or 53.9% of revenues, in
fiscal 1995. This decrease as a percent of revenues is principally from a
decrease in the use of subconsultants to meet the requirements of the projects
(16.7% and 18.4% of revenue in fiscal 1996 and fiscal 1995, respectively), a
decrease in direct labor incurred as a result of HLMI's focus on cost
containment of each project (26.7% and 27.3% of revenue in fiscal 1996 and
fiscal 1995, respectively) and a decrease in reimbursable expenses incurred
(3.3% and 5.3% of revenue in fiscal 1996 and fiscal 1995, respectively). As a
result of these reductions, gross profit from revenue (revenue less direct cost
of revenue) increased to $14.3 million in fiscal 1996 from $13.4 million in
fiscal 1995.
Operating expenses decreased 7.1% to $13.1 million, or 45.9% of revenues,
in fiscal 1996 from $14.1 million, or 48.4% of revenues, in fiscal 1995. The
decrease is principally due to a decrease in rent and occupancy costs resulting
from management's renegotiation of certain office leases and, to a lesser
extent, a decrease in the costs incurred for contingencies related to various
disputes and legal actions related to contract operations due to HLMI's focus on
prevention and resolution of such matters on an on going basis. This is
partially offset by an increase in salary and related costs and reproduction
costs.
ESOP expenses were $0.6 million for both fiscal 1996 and 1995. The expenses
represent principal and interest payments on the ESOP debt.
Amortization of intangible assets were $0.1 million in fiscal 1996 and
$5,952 in fiscal 1995. This increase relates to the goodwill arising from the
acquisition of MBP Architects, Inc. in April 1995. See Note 2 to Notes to HLMI
Financial Statements.
Interest expense was $0.4 million for fiscal 1996 and $0.2 million for
fiscal 1995. This increase is primarily due to increased borrowing for working
capital needs in fiscal 1996.
Non-operating income was $0.9 million in fiscal 1996 compared to $0.4
million in fiscal 1995. In fiscal 1996, the Company terminated facility leases
resulting in a gain of $0.8 million. In fiscal 1995, HLMI sold its airplane
which generated a gain on sale of assets of $0.4 million. See Note 4 to Notes to
HLMI Financial Statements.
Income tax expense was $0.4 million in fiscal 1996 compared to an income
tax benefit of $0.4 million in fiscal 1995. The effective income tax rate in
fiscal 1996 was 44.8% compared to 37.7% in fiscal 1995. The effective tax rate
was higher for fiscal 1996 as compared to fiscal 1995 due to the ratio of
non-deductible meals and entertainment expense to pre-tax income or loss.
LIQUIDITY AND CAPITAL RESOURCES
At April 25, 1997, HLMI's current liabilities of $11.6 million exceeded
current assets of $9.7 million, resulting in a working capital deficit of $1.9
million. During fiscal 1997, HLMI generated $0.5 million in cash from operating
activities. HLMI used $0.7 million in investing activities, primarily the
purchase of equipment. HLMI received proceeds from new debt
19
<PAGE>
of $0.5 million and repaid borrowings on notes payable of $0.4 million. These
transactions resulted in a net decrease in cash of $8,809 for the fiscal year.
At October 31, 1997, the Company's current assets of $11.7 million exceeded
current liabilities of $12.3 million resulting in a working capital of $0.6
million. During the six months ended October 31, 1997, the Company used $48,600
in cash from operating activities. The Company used $0.4 million for investing
activities, primarily the purchase of equipment. The Company generated $0.5
million for 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 capital lease of $2.8 million (the "Lease Financing") from 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, HLMI granted
a security interest in all of its personal property to Berthel Leasing and
Joseph Harris, Vernon Brannon and William Blalock, a former director of HLM
Design, partially guaranteed the amount due to Berthel Leasing. HLM Design also
entered into a term loan, in September 1997, of $0.8 million with Berthel
Leasing for working capital purposes. In consideration for this borrowing, HLM
Design sold warrants to purchase 3,422 shares of Common Stock (65,874 shares
after giving effect to the Stock Split), subject to adjustment in certain
circumstances, to Berthel Leasing (the "Berthel Warrants"). See "Certain
Transactions -- Berthel Leasing Lease Financing" and "Description of Capital
Stock -- Warrants." In December 1997, Berthel Leasing exercised its Warrants and
purchased 3,422 shares of Common Stock (65,874 shares after giving effect to the
Stock Split) at an exercise price of $.01 per share.
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, (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 (the
"First Charter Loan") and obtained notes payable to employee stockholders for
$0.2 million. The Pacific/Equitas Loan is secured by, among other things, a
collateral assignment of HLM Design's interest in its Management and Services
Agreements and a security interest in HLM Design's personal property and
fixtures. Additionally, HLMI, as well as Joseph Harris and Vernon Brannon has,
under certain circumstances, guaranteed the Pacific/Equitas Loan. HLM Design
also sold warrants to purchase 14,372 shares of Common Stock (276,661 shares
after giving effect to the Stock Split), subject to adjustment in certain
circumstances, to Pacific, Equitas, Shannon LeRoy, a representative of Equitas
and a member of the Board of HLM Design and Clay R. Caroland, a representative
of Pacific and a member of the Board of HLM Design (the "Pacific/Equitas
Warrants" and, together with the Berthel Warrants, the "Warrants"). See "Certain
Transactions -- Merger Transaction," "Description of Capital Stock -- Warrants"
and Note 4 to the Combined Financial Statements. In November 1997, Mr. Caroland
exercised his Warrants and purchased 862 shares of Common Stock (16,594 shares
after giving effect to the Stock Split) at an exercise price of $.01 per share
and Mr. LeRoy transferred his Warrants to purchase 862 shares of Common Stock
(16,594 shares after giving effect to the Stock Split) to Equitas. In February
1998, Equitas exercised its Warrants and purchased 5,749 shares of Common Stock
(110,668 shares 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, which is secured by a security interest in all of HLMI's accounts
receivable. Joseph Harris, Vernon Brannon and William Blalock, a former director
of HLM Design, have also guaranteed the First Charter Loan.
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. The Company has received an
oral commitment from First Charter Bank for a new revolving line of credit,
contingent upon the Offering and other customary terms and conditions. The
Company believes that the net proceeds from the Offering, the new revolving line
of credit from First Charter Bank and anticipated funds from future operations
will be sufficient to meet its working capital needs for at least the next
twelve months.
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 year 1997 were $0.7 million. The Company expects
fiscal 1998 capital expenditures to be comparable to expenditures in fiscal
1997.
Subsequent to the Offering, the Company expects to fund AEP affiliations
with proceeds from the Offering and future offerings.
SEASONALITY
The Company's operations are not seasonal in nature.
20
<PAGE>
EFFECTS OF INFLATION
Due to the relatively low levels of inflation in fiscal years 1995, 1996
and 1997, inflation did not have a significant effect on the Company's results
of operations for those periods.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 128, "Earnings Per Share." This Statement specifies
the computation, presentation and disclosure requirements for earnings per
share. The Company believes that the adoption of such Statement would not result
in earnings per share materially different than pro forma earnings per share
presented in the accompanying pro forma statements of income. It will be
effective for periods ending after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 HLMI's fiscal year ending April 24, 1998, and
the Company does not intend to adopt this statement prior to the effective date.
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 Managed
Firms should be accounted for on a consolidated basis. The Company intends to
reflect this change prospectively in the fiscal year ended April 24, 1998
financial statements. If the change had been effected for the six months ended
October 31, 1997, the effect would have been a reduction to Stockholder's Equity
by approximately $3,956, an increase in minority interest by approximately
$3,956 and a decrease in Net Income of approximately $3,948.
21
<PAGE>
BUSINESS
OVERVIEW
HLMI was founded in Iowa City, Iowa in 1962 to provide architectural,
engineering and planning services. HLMI enjoyed steady growth, expanding
geographically and establishing a national presence and is now recognized as a
leader in the healthcare arena. In 1987, the original founders of HLMI sold
their ownership in the company to the ESOP and a board of directors, consisting
of senior principals, took control of HLMI.
In 1994, as a result of the poor financial performance of HLMI, Joseph M.
Harris was hired as Chief Executive Officer and Vernon B. Brannon was hired as
Chief Financial Officer. Messrs. Harris and Brannon instituted significant
changes, cutting costs and personnel, with a focus on returning HLMI to
profitability. In 1996, HLMO and HLMNC were formed and the headquarters of HLMI
was moved from Iowa City, Iowa to Charlotte, North Carolina. HLMI, HLMO and
HLMNC currently 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.
On May 23, 1997, BBH Corp. merged into HLMI. See "Certain
Transactions -- Merger Transaction." Following the merger of BBH Corp. into
HLMI, Messrs. Harris and Brannon owned all of the outstanding common stock in
HLMI.
In March 1997, HLM Design was formed with the intent of managing the
nonprofessional operations of AEP Firms through Management and Services
Agreements. HLM Design believes it is the first company in the architectural,
engineering and planning industry to actively pursue the strategy of
consolidating non-professional operations and providing management expertise to
AEP Firms. Currently, HLM Design is not engaged in negotiations with any AEP
Firms. HLM Design believes its strategy will take advantage of operating
efficiencies for AEP Firms and provide diversification, including services and
geography, for the AEP Firm's clients. The process of developing and entering
into management and services relationships is complex and will likely require
several months to complete. In May 1997, HLM Design entered into forty-year
Management and Services Agreements with HLMI, HLMNC and HLMO. All three of these
firms are related through common principal stockholders and these stockholders
have entered into Stockholders' Agreements. See "Certain Transactions."
As a management company, HLM Design's relationship with the Managed 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.
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 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, billing and collections. For
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) following the payment by the AEP Firm of all such
firm's expenses. See " -- HLM Design Operations -- Management and Services
Agreements."
In addition to the Management and Services Agreement, HLM Design will
require stockholders of Managed Firms to enter into stockholders' agreements
(the "Stockholders' Agreements") which will provide the stockholders of those
entities with nominee stockholder status. Generally, the Stockholders'
Agreements will 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 AEP
Firm and (iv) a voting agreement among the stockholders and 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
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<PAGE>
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:
(Bullet) 201 health facility master plans
(Bullet) 118 ambulatory care centers
(Bullet) 77 ambulatory surgery centers
(Bullet) 119 academic medical centers and teaching facilities
(Bullet) 64 cancer centers
(Bullet) 69 women's facilities
(Bullet) 13 replacement hospitals
(Bullet) 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:
(Bullet) 25 federal and state projects
(Bullet) 1.8 million square feet for the federal government
(Bullet) 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 best and brightest and attract funding. The
Managed Firms have completed 30 projects totalling over 3 million square feet
valued at $540 million in construction.
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 they are
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
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<PAGE>
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. These agreements cannot be terminated by HLM Design or
the Managed Firm 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, and 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, and billing and collections. 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 receives all but 1% of each Managed Firm's positive cash flow (as
determined in accordance with generally accepted accounting principles applied
on a consistent basis) following the payment by the Managed Firm of all such
firm's expenses. Further, the Management and Services Agreements state that the
Managed Firms retain 1% of their net income after payment of such Managed Firms
expenses. Expenses in this context are normal operating expenses incurred by the
Managed Firm which included employee salaries until January 1, 1998, at which
time the HLMI's employees were transferred to HLM Design and now provide
services to HLMI as HLM Design employees. Based on the Management and Services
Agreements, HLM Design is entitled to 99% of the net income of HLMI, and HLM
Design accrues 99% of such net income. 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.
As the management company, HLM Design will do all financing of working
capital growth, capital growth and other cash needs. Thus, the Management
Services Agreement was structured so as not to force the Managed Firms to borrow
money to satisfy the inter-company obligation for the management fee (defined as
99% of the net income of the Managed Firm).
STOCKHOLDERS' AGREEMENTS
Stockholders of Managed Firms will enter into a Stockholders' Agreement
which will generally restrict the ability of these stockholders to exercise
certain rights commonly associated with ownership of common stock and will
effectively provide stockholders of such entities with nominee stockholder
status. Generally, such Stockholders' Agreements will 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 AEP Firm's written approval of
such transfer;
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<PAGE>
(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 which are
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 which are 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 will 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, that 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' Agreement will 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.
Each of the stockholders of HLMI, HLMNC, and HLMO have entered into
Stockholders' Agreements which provide each stockholder with nominee stockholder
status. It is anticipated that stockholders' agreements among stockholders of
the AEP Firm with whom HLM Design enters into Management and Services Agreements
in the future will have similar terms.
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. The lease 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.
COMPETITION
The business of providing architectural, engineering and planning services
is highly competitive. HLM Design, however, is not aware of any other company
actively pursuing a strategy of consolidating firms' administrative and
management functions. The Company believes, however, 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.
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
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<PAGE>
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 shareholders 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 the 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.
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.
MANAGEMENT
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 Prospectus, 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
Bradley A. Earl 50 Vice President
Viktor A. Lituczy 44 Vice President
Frank E. Talbert 41 Vice President
Robert P. Ludden 42 Vice President
</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
26
<PAGE>
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. Mr. Harris' initial term as a director of HLM Design will
expire at the annual meeting of stockholders of HLM Design to be held in 1999.
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. Mr.
Brannon's initial term as a director of HLM Design will expire at the annual
meeting of stockholders of HLM Design to be held in 1999.
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. Mr. Caroland's
initial term as a director of HLM Design will expire at the annual meeting of
stockholders of HLM Design to be held in 1998.
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. Mr. LeRoy's initial term as a
director of HLM Design will expire at the annual meeting of stockholders of HLM
Design to be held in 1998.
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. LITUZAY rejoined HLMI in 1996 as Vice President managing the
firm'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 the Company. 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 the
firm. 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.
As soon as practicable after the Offering, HLM Design intends to name two
individuals not employed by or affiliated with HLM Design to HLM Design's Board
of Directors.
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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.
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 represent creditors of HLM Design, have
constituted the majority of the Board of Directors. As soon as practicable after
the Offering, HLM Design intends to name two independent directors who will
thereafter comprise its Compensation Committee.
LIMITATIONS OF DIRECTORS' LIABILITY
HLM Design's Certificate of Incorporation includes a provision that
effectively eliminates the liability of directors to HLM Design or to HLM
Design's stockholders for monetary damages for breach of the fiduciary duties of
a director, except for breaches of the duty of loyalty, acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, certain actions with respect to unlawful dividends, stock repurchases or
redemptions and any transaction from which the director derived an improper
personal benefit. This provision does not prevent stockholders from seeking
nonmonetary remedies covering any such action, nor does it affect liabilities
under the federal securities laws. HLM Design's Bylaws further provide that HLM
Design shall indemnify each of its directors and officers, to the fullest extent
authorized by Delaware law, with respect to any threatened, pending or completed
action, suit or proceeding to which such person may be a party by reason of
serving as a director or officer. Delaware law currently authorizes a
corporation to indemnify its directors and officers against expenses (including
attorney's fees), judgments, fines and amounts paid in settlements actually and
reasonably incurred by them in connection with any action, suit or proceeding
brought by a third party if such officers or directors acted in good faith and
in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reason to believe their conduct was unlawful. Indemnification
is permitted in more limited circumstances with respect to derivative actions.
HLM Design believes that these provisions of its Certificate of Incorporation
and Bylaws are necessary to attract and retain qualified persons to serve as
directors and officers.
COMMITTEES OF THE BOARD
The Board of Directors of HLM Design intends to establish a Compensation
Committee and an Audit Committee consisting of independent directors upon the
election of at least two independent directors. The Compensation Committee will
review and approve compensation for the executive officers, and administer, and
determine awards under, the Stock Option Plan and any other incentive
compensation plan for employees of the Company. See " -- Stock Option Plan" and
" -- Employee Stock Purchase Plan." The Audit Committee will recommend the
selection of auditors for the Company and will review the results of the audit
and other reports and services provided by the Company's independent auditors.
HLM Design has not previously had either of these committees.
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.
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<PAGE>
EXECUTIVE COMPENSATION
Set forth below is information for the years ended April 1997, 1996 and
1995 with respect to compensation for services to the Managed Firms:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL 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 1997 $ 230,878 $ 50,000 -0- -0- -0-
Chairman, President 1996 192,307 0
and Director 1995 188,784 60,000
Vernon B. Brannon 1997 178,847 50,000 -0- -0- -0-
Senior Vice President 1996 144,281 0
Chief Financial Officer 1995 117,614 30,000
and Director
</TABLE>
- ---------------
(1) 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 January 1998. No options were
granted to any of the Company's executive officers in the years ended April
1997, 1996 or 1995.
(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. Messrs. Harris and Brannon will also receive a monthly automobile
allowance of $2,500 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 will receive options pursuant to
the Stock Option Plan, for 87,500 shares of Common Stock, exercisable, in the
case of incentive stock options, at 110% of the initial public offering price,
and in the case of nonstatutory stock options, at $5.71 per share.
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 following the expiration or termination of an Employment Agreement.
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 the Registration Statement of which this
Prospectus is a part.
Under the Stock Option Plan, options to purchase up to an aggregate of
241,500 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").
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<PAGE>
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 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.
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 absolute discretion, may grant transferable options if such options are
not ISOs. The exercise price of options that are not ISOs will be determined at
the discretion of the Compensation Committee. 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 options 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 the Company 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 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 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.
The Board of Directors of HLM Design on or before the consummation of the
Offering intends to grant NSOs to purchase 61,250 shares of Common Stock and
ISOs to purchase 26,250 shares of Common Stock to each of Joseph Harris and
Vernon Brannon. No other grants of ISOs or NSOs will be made on or before the
consummation of the Offering.
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 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
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<PAGE>
capital gains. 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. 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 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.
HLM Design intends to register the shares underlying the Stock Option Plan
as 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.
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. The following discussion of the material
features of the ESPP is qualified by reference to the text of such Plan filed in
an exhibit to the Registration Statement of which this Prospectus is a part.
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 87,500
shares of Common Stock have been reserved for purchase under the ESPP.
On January 1 of each year during the term of the ESPP (and also on 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 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 January, April, July and October, 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 eighty-five percent 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.
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<PAGE>
Upon termination of a Participating Employee's employment for any reason
other than cause, death or leave of absence in excess of ninety days, 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.
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 difference between the option exercise price for the shares and the
fair market value of the shares on the date of exercise, 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 gain or loss
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 as 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.
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<PAGE>
CERTAIN 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.
VOTING AGREEMENT
Joseph Harris, Vernon Brannon and William Blalock, as stockholders in HLM
Design, are all parties to a Voting Agreement. Pursuant to the Voting Agreement,
Messrs. Harris, Brannon and Blalock agree to cast all of their votes in unity
with respect to all matters of "Fundamental Significance" (as defined below)
which are submitted to them in their capacity as stockholders. Matters of
Fundamental Significance are defined to be (i) the issuance, exercise, purchase
or redemption by HLM Design of any capital stock, stock warrant, stock option or
debenture of HLM Design, (ii) the formation, acquisition or divestiture by HLM
Design of any business entity, whether in the form of a division, subsidiary or
other affiliated or non-affiliated entity, (iii) the incurring of indebtedness,
directly or indirectly (including, without way of limitation, the guaranty of
debt of any other person or entity) by HLM Design, or the modification of any
such existing indebtedness or instrument, or (iv) the merger, share exchange, or
dissolution of HLM Design, or any sale of HLM Design's assets other than in the
ordinary course of business. The Voting Agreement will be terminated upon the
cessation of HLM Design's business, the bankruptcy, receivership or dissolution
of HLM Design, or the voluntary agreement of Messrs. Harris, Brannon and
Blalock.
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. would merge, 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 HLM with a $3.2 million loan from HLM Design) would be
converted into the right to receive $64.00 in cash (the "Merger Consideration")
and each share of BBH Corp. then outstanding would be 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 connection with the Pacific/Equitas Loan, HLM Design issued the
Pacific/Equitas Warrants to Pacific, Equitas and Messrs. Caroland and LeRoy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company intends to repay the
principal of and interest on the Pacific/Equitas Loan from the proceeds of the
Offering. Once such loan is repaid, Messrs. Harris and Brannon will be released
from their personal guarantees of the Pacific/Equitas Loan.
BERTHEL LEASING LEASE FINANCING
Berthel Leasing, an affiliate of Berthel Fisher & Company Financial
Services, Inc., one of the Underwriters in the Offering, has entered into the
Lease Financing with HLMI and has provided HLM Design with an $0.8 million term
loan for working capital purposes. In addition, Berthel Leasing received the
Berthel Warrants and received certain registration rights which begin in
September 2000, with respect to the Common Stock which underlies the Berthel
Warrants. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." A portion of the
proceeds of the Offering will be used to repay the $0.8 million term loan.
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<PAGE>
CONSULTING AGREEMENT
Blalock and Company, an investment banking firm controlled by William
Blalock, a stockholder of HLM Design and a former member of the Board of
Directors of HLM Design, entered into a financial advisory agreement (the
"Advisory Agreement") with HLMI in February 1995. Blalock and Company agreed to
serve as a financial advisor to HLMI in connection with the structuring of one
or more potential transactions, including, but not limited to, a financing or
financings through the issuance of debt and/or equity, a merger, divestiture or
acquisition, or a joint venture. Compensation under such agreement was
originally $15,000 per month (plus reimbursement for reasonable out-of-pocket
expenses) but has been increased to $20,000 per month (plus reimbursement for
reasonable out-of-pocket expenses). During the years ended April 26, 1996 and
April 25, 1997 Blalock and Company earned $254,137 and $257,017, respectively
under the Advisory Agreement.
BOARD REPRESENTATION
It is a condition of the Underwriting Agreement that HLM Design has agreed
to use its best efforts to cause a designee of Berthel Fisher & Company
Financial Services, Inc. (one of the Underwriters in the Offering), who is
reasonably satisfactory to HLM Design, to be elected as a full voting member of
the Board of Directors of HLM Design upon the consummation of this Offering. As
of the date of this Prospectus, Berthel Fisher & Company Financial Services,
Inc. has not named a designee for election to board membership.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of HLM Design's Common Stock as of February 13, 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, and as adjusted to reflect the sale by HLM
Design of the shares of Common Stock in this Offering.
<TABLE>
<CAPTION>
PERCENTAGE OF ALL
OUTSTANDING
COMMON STOCK
NUMBER OF SHARES -----------------------
OF COMMON STOCK BEFORE AFTER
NAME (1) OWNED(2) OFFERING OFFERING(3)
- --------- --------------- ----------- ----------
<S> <C> <C> <C>
Joseph M. Harris(4)(5) 482,125 32.2% 17.9%
Vernon B. Brannon(4)(5) 482,125 32.2% 17.9%
Clay R. Caroland III(4) 16,594 1.1% *
D. Shannon LeRoy(4) -- -- --
Berthel Leasing(6) 65,874 4.4% 2.4%
Pacific(7)(8) 149,399 10.0% 5.5%
Equitas(9) 110,668 7.4% 4.1%
William Blalock(10) 144,375 9.7% 5.4%
All directors and executive officers as a group (4 persons) 980,844 65.6% 36.4%
</TABLE>
- ---------------
* Less than one percent.
(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. Messr. Harris, Brannon and Blalock are parties to a
Voting Agreement. See "Certain Transactions -- Voting Agreement."
(2) After giving effect to the Stock Split.
(3) If the Underwriters' over-allotment option is exercised in full, then after
the Offering the percentages of shares outstanding would be as follows:
Joseph Harris, 16.8%; Vernon Brannon, 16.8%; Clay Caroland III, less than
1%; Berthel Leasing, 2.3%; Pacific, 5.2%; Equitas, 3.8%; William Blalock,
5.0% and all directors and executive officers as a group, 34.1%.
(4) The address of such person is care of HLM Design at 121 West Trade Street,
Suite 2950, Charlotte, North Carolina 28202.
(5) Gives effect to options granted under HLM Design's Stock Option Plan. See
"Management -- Stock Option Plan."
(6) The address of such person is 100 Second Street Southeast, Cedar Rapids,
Iowa 52407.
(7) Includes shares of Common Stock which underlie currently exercisable
Warrants held by such person.
(8) The address of such person is Suite 1070, 3100 West End Avenue, Nashville,
Tennessee 37203.
(9) The address of such person is Suite 100, 2000 Glen Echo Road, Nashville,
Tennessee 37215.
(10) The address of such person is 133 Laurens Street, S.W., Aiken, South
Carolina 29801.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
HLM Design's authorized capital stock consists of (i) 9,000,000 shares of
Common Stock, $.001 par value, and (ii) 1,000,000 shares of Preferred Stock,
$.10 par value. Upon completion of this Offering, HLM Design will have 2,371,805
outstanding shares of Common Stock (giving effect to the Stock Split and not
including Common Stock which underlies the Warrants and options granted pursuant
to the Stock Option Plan) and no shares of preferred stock.
The following summary description of HLM Design's capital stock does not
purport to be complete and is qualified in its entirety by reference to HLM
Design's Certificate of Incorporation, which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, and the Delaware
General Corporation Law (the "DGCL"). Reference is made to such exhibit and the
DGCL for a detailed description of the provisions thereof summarized below.
COMMON STOCK
The holders of validly issued and outstanding shares of Common Stock are
entitled to one vote per share of record on all matters to be voted upon by
stockholders. At a meeting of stockholders at which a quorum is present, a
majority of the votes cast decides all questions, unless the matter is one upon
which a different vote is required by express provision of law or HLM Design's
Certificate of Incorporation or Bylaws. There is no cumulative voting with
respect to the election of directors (or any other matter), but HLM Design's
Board of Directors is classified. The holders of a majority of the shares at a
meeting at which a quorum is present can, therefore, elect all of the directors
of the class then to be elected if they choose to do so, and, in such event, the
holders of the remaining shares would not be able to elect any directors of that
class.
The holders of Common Stock have no preemptive rights and have no rights to
convert their Common Stock into any other securities.
Subject to the rights of holders of Preferred Stock, if any, in the event
of a liquidation, dissolution or winding up of HLM Design, holders of Common
Stock are entitled to participate equally, share for share, in all assets
remaining after payment of liabilities.
The holders of Common Stock are entitled to receive ratably such dividends
as the Board of Directors may declare out of funds legally available therefor,
when and if so declared. The payment by HLM Design of dividends, if any, rests
within the discretion of its Board of Directors and will depend upon HLM
Design's results of operations, financial condition and capital expenditure
plans, as well as other factors considered relevant by the Board of Directors.
See "Dividends."
TRANSFER AGENT AND REGISTRAR
HLM Design has appointed First Union National Bank as the transfer agent
and registrar for the Common Stock.
WARRANTS
In May 1997, September 1997 and December 1997, HLM Design issued Warrants
to purchase an aggregate of 342,535 shares of Common Stock at an exercise price
of $.01 per share to Pacific, Equitas and Berthel Leasing and two
representatives of Pacific and Equitas in connection with financing
arrangements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources." By their terms,
the Pacific/Equitas Warrants will expire in July 2002 and the Berthel Warrants
will expire in September of that year; however, for a period of 30 days prior to
expiration the holder of any or all of the Warrants has the right and option to
sell to HLM Design any or all of the Warrants at a purchase price equal to the
Fair Market Value (as defined therein) of the shares of Common Stock issuable to
the holder upon exercise of the Warrant less the exercise price. The kind of
securities purchasable upon the exercise of the Warrants and the number of
shares of Common Stock purchasable upon exercise of the Warrants is subject to
adjustment upon the occurrence of certain events such as reclassification of
securities, consolidation or merger of HLM Design, subdivision or combination of
Common Stock or stock dividends. Additionally, if the indebtedness pursuant to
which the Warrants were issued is not repaid in full on or before May 30, 1999,
the number of shares of Common Stock each Warrant holder is able to purchase
will increase and will further increase on each May 30 thereafter until such
indebtedness is repaid in full. The Common Stock underlying the Berthel Warrants
and the Warrants issued to Pacific and Equitas are subject to certain
registration rights which begin in September 2000. Pursuant to the applicable
registration rights agreement, upon the request of holders of at least 25% of
Registrable Securities (as defined therein) HLM Design will, within 90 days,
effect registration under the Securities Act. Additionally, such agreements
provide Berthel Leasing, Pacific and Equitas with certain piggyback registration
rights that permit them to have their shares of Common Stock, as selling
security holders, included in any registration statements pertaining to the
registration of Common Stock for issuance by the Company or for resale by other
selling security holders. These registration rights will be limited or
restricted to the extent an underwriter of an offering, if an underwritten
offering, determines that marketing factors require a limitation of the number
of shares to be underwritten.
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<PAGE>
PREFERRED STOCK
No shares of Preferred Stock are outstanding. HLM Design's Certificate of
Incorporation authorizes the Board of Directors to issue up to 1,000,000 shares
of Preferred Stock in one or more series and to establish such designations and
such relative voting, dividend, liquidation, conversion and other rights,
preferences and limitations as the Board of Directors may determine without
further approval of the stockholders of HLM Design. The issuance of Preferred
Stock by the Board of Directors could, among other things, adversely affect the
voting power of the holders of Common Stock and, under certain circumstances,
make it more difficult for a person or group to gain control of HLM Design.
The issuance of any series of Preferred Stock, and the relative
designations, rights, preferences and limitations of such series, if and when
established, will depend upon, among other things, the future capital needs of
the Company, the then-existing market conditions and other factors that, in the
judgment of the Board of Directors, might warrant the issuance of Preferred
Stock. As of the date of this Prospectus, there are no plans, agreements or
understandings for the issuance of any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of the DGCL and of HLM Design's Certificate of
Incorporation and Bylaws, summarized in the following paragraphs, may be
considered to have an antitakeover effect and may delay, deter or prevent a
tender offer, proxy contest or other takeover attempt that a stockholder might
consider to be in such stockholder's best interest, including such an attempt as
might result in payment of a premium over the market price for shares held by
stockholders.
DELAWARE ANTITAKEOVER LAW. HLM Design, a Delaware corporation, is subject
to the provisions of the DGCL, including Section 203. In general, Section 203
prohibits a public Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which such person became an interested
stockholder unless: (i) prior to such date, the Board of Directors approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder; or (ii) upon becoming an
interested stockholder, the stockholder then owned at least 85% of the voting
stock, as defined in Section 203; or (iii) subsequent to such date, the business
combination is approved by both the Board of Directors and by holders of at
least 66 2/3% of the corporation's outstanding voting stock, excluding shares
owned by the interested stockholder. For these purposes, the term "business
combination" includes mergers, asset sales and other similar transactions with
an "interested stockholder." An "interested stockholder" is a person who,
together with affiliates and associates, owns (or, within the prior three years,
did own) 15% or more of the corporation's voting stock. Although Section 203
permits a corporation to elect not to be governed by its provisions, HLM Design
to date has not made this election.
SPECIAL MEETINGS OF STOCKHOLDERS. HLM Design's Bylaws provide that special
meetings of stockholders may be called only by the President or by the Secretary
or any Assistant Secretary at the request in writing of a majority of the Board
of Directors of HLM Design. This provision may make it more difficult for
stockholders to take action opposed by the Board of Directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. HLM Design's Bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual or a special meeting of stockholders, must
provide timely notice thereof in writing. To be timely, a stockholder's notice
must be delivered to, or mailed and received at, the principal executive office
of the Company, (i) in the case of an annual meeting that is called for a date
that is within 30 days before or after the anniversary date of the immediately
preceding annual meeting of stockholders, not less than 60 days nor more than 90
days prior to such anniversary date, and, (ii) in the case of an annual meeting
that is called for a date that is not within 30 days before or after the
anniversary date of the immediately preceding annual meeting, or in the case of
a special meeting of stockholders called for the purpose of electing directors,
not later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever occurs first. The Bylaws also specify certain
requirements for a stockholder's notice to be in proper written form. These
provisions may preclude some stockholders from bringing matters before the
stockholders at an annual meeting or from making nominations for directors at an
annual or special meeting.
CLASSIFIED BOARD OF DIRECTORS. HLM Design's Bylaws provide for the Board of
Directors to be divided into three classes of directors serving staggered
three-year terms. As a result, approximately one-third of the Board of Directors
will be elected each year. Classification of the Board of Directors expands the
time required to change the composition of a majority of directors and may tend
to discourage a takeover bid for HLM Design. Moreover, under Delaware Law, in
the case of a corporation having a classified board of directors, the
stockholders may remove a director only for cause. This provision, when coupled
with the provision of the Bylaws authorizing only the board of directors to fill
vacant directorships, will preclude stockholders of HLM Design from removing
incumbent directors without cause, simultaneously gaining control of the Board
of Directors by filing the vacancies with their own nominees.
36
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, HLM Design will have outstanding
2,371,805 shares of Common Stock (excluding shares of Common Stock which
underlie currently exercisable Warrants, options granted under the Stock Option
Plan and assuming no exercise of the Underwriters' over-allotment option). Of
such amount, the 1,200,000 Shares sold in this Offering will be freely
transferable and may be resold without further registration under the Securities
Act, except for any shares purchased by an "affiliate" of HLM Design (as defined
below), which shares will be subject to the resale limitations of Rule 144 under
the Securities Act ("Rule 144"). The 805,844 shares (the "Restricted Shares")
of Common Stock held by affiliates of the Company are "restricted securities"
within the meaning of Rule 144. The 690,361 shares of Common Stock, which (i)
are held by non-affiliates of the company or (ii) which underlie (x) options to
be granted on or before the consummation of Offering under the Company's Stock
Option Plan, and (y) the Warrants, may be resold only pursuant to a registration
statement under the Securities Act or applicable exemption from registration
thereunder, such as an exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year may, under certain circumstances, resell within any
three-month period, such number of shares as does not exceed the greater of one
percent of the then-outstanding shares of Common Stock or the average weekly
trading volume of Common Stock during the four calendar weeks prior to such
resale. Rule 144 also permits, under certain circumstances, the resale of shares
without any quantity limitation by a person who has satisfied a two-year holding
period and who is not, and has not been for the preceding three months, an
affiliate of HLM Design. In addition, holding periods of successive
non-affiliate owners are aggregated for purposes of determining compliance with
these one-and two-year holding period requirements.
Upon completion of this Offering, none of the 1,171,805 shares of Common
Stock outstanding on the date of this Prospectus and not sold in the Offering
will have been held for at least one year. Since all such shares are restricted
securities, none of them may be resold pursuant to Rule 144 upon completion of
this Offering.
The Restricted Shares will not be eligible for sale under Rule 144 until
the expiration of the one-year holding period from the date such Restricted
Shares were acquired.
The availability of shares for sale or actual sales under Rule 144 and the
perception that such shares may be sold may have an adverse effect on the market
price of the Common Stock. Sales under Rule 144 also could impair the Company's
ability to market additional equity securities.
HLM Design and all directors and executive officers of HLM Design have
agreed not to offer, sell, contract to sell, or otherwise dispose of, any shares
of Common Stock or securities convertible into or exchangeable for Common Stock
for 365 days from the date of this Prospectus without the prior written consent
of the representatives of the Underwriters.
37
<PAGE>
UNDERWRITING
Each of the underwriters named below (the "Underwriters") have severally
agreed, subject to the terms and conditions of the Underwriting Agreement, to
purchase from the Company the number of shares of Common Stock set forth
opposite their respective names below. The nature of the obligations of the
Underwriters is such that if any of such shares are purchased, all must be
purchased.
NUMBER OF
UNDERWRITERS SHARES
- ------------- ----------
Berthel Fisher & Company Financial Services, Inc...............
Westport Resources Investment Services, Inc....................
Marion Bass Securities Corporation.............................
---------
Total.....................................................
---------
The Underwriters have advised HLM Design that they propose initially to
offer the Common Stock offered hereby to the public at the price to the public
set forth on the cover page of this Prospectus. The Underwriters may allow a
concession to selected dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD") not in excess of $
per share, and the Underwriters may allow, and such dealers may reallow, to
members of the NASD a concession not in excess of $ per share. After the
public offering, the price to the public, the concession and the reallowance may
be changed by the Underwriters.
HLM Design has granted an option to the Underwriters, exercisable within 45
business days after the date of the Prospectus, to purchase up to an aggregate
of 180,000 additional shares of Common Stock at the initial price to the public,
less the underwriting discount, set forth on the cover page of this Prospectus.
The Underwriters may exercise the option only for the purpose of covering
over-allotments. To the extent that the Underwriters exercise such option, each
Underwriter will be committed, subject to certain conditions, to purchase from
HLM Design on a pro rata basis that number of additional shares of Common Stock
which is proportionate to such Underwriters' initial commitment.
HLM Design, certain shareholders and certain executive officers have
agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell,
grant any option to purchase or otherwise transfer or dispose of any Common
Stock or securities convertible into or exchangeable or exercisable for Common
Stock, or file a registration statement under the Securities Act with respect to
the foregoing or (ii) enter into any swap or other agreement or transaction that
transfers, in whole or part, the economic consequence of ownership of the Common
Stock, without the prior written consent of Berthel Fisher, for a period of 365
days after the date of this Prospectus.
At the request of HLM Design, the Underwriters have reserved up to 14,000
shares of the Common Stock for sale at the initial public offering price, and
otherwise on the same terms as sales pursuant to the Offering, to persons
designated by HLM Design. The number of shares of Common Stock available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the other
shares offered hereby.
Prior to this Offering, there has been no market for the Common Stock and
there can be no assurance that a regular trading market will develop upon the
completion of this Offering. The initial public offering price was determined by
negotiations between the Company and the Underwriters. The primary factors
considered in determining such offering price included the history of and
prospects for the Company's business and the industry in which the Company
competes, market valuation of comparable companies, market conditions for public
offerings, the prospects for future earnings of the Company, an assessment of
the Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies and other relevant
factors.
HLM Design has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments the Underwriter may be required to make in respect
thereof. Generally, such indemnification or contribution rights relate to
losses, claims, damages or liabilities resulting from (i) untrue statements of
material fact contained in the Registration Statement or any application or
other document filed to qualify the Common Stock under "blue sky" or securities
laws of any state, or the omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading.
38
<PAGE>
The Underwriters have advised HLM Design that they do not intend to confirm
sales of Common Stock offered hereby to any accounts over which they exercise
discretionary authority.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriter and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, I.E., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain members of the
underwriting group and selling group members. This means that if an Underwriter
purchases shares of Common Stock in the open market to reduce the Underwriter's
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriter and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither HLM Design nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
HLM Design nor any of the Underwriters make any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
HLM Design has agreed to pay to the Underwriters a nonaccountable expense
allowance of 3% of the gross proceeds derived from the sale of the shares of
Common Stock underwritten (including the sale of any shares of Common Stock
subject to the Underwriters' overallotment option), none of which has been paid
as of the date of this Prospectus. HLM Design has also agreed to pay all
expenses in connection with qualifying the Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
filing fees and fees and expenses of counsel retained for such purposes by the
Underwriters, and registering the Offering with the NASD.
In connection with this Offering, HLM Design has agreed to sell to the
Underwriters, for a price of $.01 per warrant, warrants (the "Underwriters'
Warrants") to purchase shares of Common Stock equal to 10% of the total number
of shares of Common Stock sold pursuant to this Offering, excluding shares
subject to the over-allotment option. The Underwriters' Warrants are exercisable
at a price equal to 120% of the initial public offering price ($7.20 assuming an
initial public offering price of $6.00 per share (the low point of the range set
forth on the cover of this prospectus)) for a period of four years commencing
one year from the date of this Prospectus (the "Exercise Period"). The
Underwriters' Warrants grant to the holders thereof, with respect to the
registration under the Securities Act of the securities directly and indirectly
issuable upon exercise of the Underwriters' Warrants, one demand registration
right during the Exercise Period, as well as piggyback registration rights at
any time.
HLM Design has agreed with the Underwriters to use its best efforts to
cause a designee of Berthel Fisher & Co. Financial Services, Inc. who is
reasonably satisfactory to HLM Design to be elected as a full voting member of
its Board of Directors. As of the date of this Prospectus, Berthel Fisher & Co.
Financial Services Inc. has not named a designee for election to board
membership. See "Certain Transactions."
Berthel Leasing, an affiliate of Berthel Fisher & Company Financial
Services, Inc., provided lease financing to HLMI in an aggregate principal
amount of $2.8 million under the Lease Financing and provided HLM Design with a
$0.8 million term loan for working capital purposes. More than 10% of the net
proceeds of the Offering will be received by Berthel Leasing, by reason of the
use of such proceeds to repay a portion of such borrowings. Accordingly, the
Offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8),
which requires that the public offering price of the Common Stock be no higher
than the price recommended by a Qualified Independent Underwriter which has
participated in the preparation of the Registration Statement and performed its
usual standard of due diligence with respect thereto. Westport Resources
Investment Services, Inc. will act as the Qualified Independent Underwriter for
the Offering, and the public offering price will not be higher than the price
recommended by Westport Resources Investment Services, Inc.
39
<PAGE>
LEGAL MATTERS
Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina, counsel
to the Company, will render an opinion that the Shares offered hereby, when
issued and paid for in accordance with the terms of the Underwriting Agreement,
will be duly authorized, validly issued, fully paid and nonassessable. Bradley &
Riley, P.C., Cedar Rapids, Iowa, has served as counsel to the Underwriters in
connection with this Offering.
EXPERTS
The audited financial statements of HLMI (Predecessor) as of April 25, 1997
and for each of the years in the three-year period ended April 25, 1997, and the
audited financial statements of HLM Design, Inc. as of April 25, 1997 and from
inception, March 6, 1997, to the period ended April 25, 1997, included in this
Prospectus and elsewhere in the Registration Statement of which this Prospectus
is a part, have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the registration
statement, and have been so included in reliance upon the reports of such firm
given upon the authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement on Form S-1 under the Securities Act with
respect to the Shares offered hereby. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Shares offered hereby, reference is made to the Registration Statement,
including the exhibits and schedules filed as part thereof. Statements contained
in this Prospectus as to the contents of any contract or any other documents are
not necessarily complete, and, in each such instance, reference is made to the
copy of the contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such reference
thereto. The Registration Statement, together with its exhibits and schedules,
may be inspected at the Public Reference Section of the SEC at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048 and at
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any part of such materials may be obtained from
any such office upon payment of the fees prescribed by the SEC. Such information
may also be inspected and copied at the office of Nasdaq at 1735 K Street, NW
Washington, DC 20006-1500. The Commission also maintains a Website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
40
<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 unaudited Combined Balance Sheet at October 31, 1997.......................... F-3
Statements of Operations (unaudited) for the six months ended October 26, 1996 (Predecessor), the one month ended
May 30, 1997 (Predecessor) and the Combined Statements of Income for the six months ended October 31, 1997 (HLM
Design Inc.)..................................................................................................... F-4
Statements of Stockholders' Equity for the period ended April 25, 1997 and (unaudited) Combined statement of
stockholder's equity for the six months ended October 31, 1997................................................... F-5
Statements of Cash Flows (unaudited) for the six months ended October 26, 1996 (unaudited) (Predecessor), the one
month ended May 30, 1997 (Predecessor) and Combined Statements of Cash Flows for the six months ended October 31,
1997 (HLM Design Inc.)........................................................................................... F-6
Notes to Financial Statements..................................................................................... F-7
HANSEN LIND MEYER, INC. ("HLMI")
INDEPENDENT AUDITORS' REPORT......................................................................................... F-14
FINANCIAL STATEMENTS:
Balance Sheets at April 26, 1996 and April 25, 1997............................................................... F-15
Statements of Operations for the years ended April 30, 1995, April 26, 1996 and April 25, 1997.................... F-16
Statements of Stockholders' Equity for the years ended April 30, 1995, April 26, 1996 and April 25, 1997.......... F-17
Statements of Cash Flows for the years ended April 30, 1995, April 26, 1996 and April 25, 1997.................... F-18
Notes to Financial Statements..................................................................................... F-19
</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 the related statements of stockholders'
equity, for the period from inception March 6, 1997 to April 25, 1997. 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 the changes in stockholders equity for the period from inception March
6, 1997 to April 25, 1997 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
November 11, 1997 (January 30, 1998 and February 13, 1998 as to Note 1)
Charlotte, North Carolina
F-2
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
BALANCE SHEETS
APRIL 25, 1997 AND OCTOBER 31, 1997
<TABLE>
<CAPTION>
HLM
DESIGN COMBINED
APRIL 25, OCTOBER 31,
1997 1997
--------- -----------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash.............................................................................................. $ 6,508
Trade and other receivables, less allowance for doubtful accounts of $192,000 at October 31,
1997........................................................................................... 7,215,108
Costs and estimated earnings in excess of billings on uncompleted projects (Note 3)............... 4,149,864
Prepaid expenses.................................................................................. 309,492
-----------
Total current assets......................................................................... 11,680,972
-----------
OTHER ASSETS:
Deferred income taxes (Note 8).................................................................... 671,865
Goodwill, less amortization of $71,496 at October 31, 1997 (Note 2)............................... 2,502,371
Other noncurrent assets........................................................................... 765,995
-----------
Total other assets........................................................................... 3,940,231
-----------
PROPERTY AND EQUIPMENT:
Leasehold improvements............................................................................ 745,760
Furniture and fixtures............................................................................ 1,342,947
Construction in progress..........................................................................
-----------
Total property and equipment................................................................. 2,088,707
-----------
Less accumulated depreciation..................................................................... (283,754)
-----------
Property and equipment, net.................................................................. 1,804,953
-----------
TOTAL ASSETS........................................................................................ $17,426,156
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 4)............................................................................ $ 2,250,000
Accounts payable.................................................................................. 3,455,471
Accrued expenses.................................................................................. 888,692
Income taxes payable.............................................................................. 30,571
Billings in excess of costs and estimated earnings on uncompleted projects (Note 3)............... 3,334,779
Deferred income taxes (Note 7).................................................................... 1,606,472
Current maturities of long-term debt (Note 4)..................................................... 728,011
-----------
Total current liabilities.................................................................... 12,293,996
-----------
LONG-TERM DEBT (Note 4)............................................................................. 4,474,234
-----------
TOTAL LIABILITIES................................................................................... 16,768,230
-----------
COMMITMENTS AND CONTINGENCIES (Note 5)
WARRANTS OUTSTANDING (Note 4)....................................................................... 250,078
-----------
STOCKHOLDERS' EQUITY:
HLM Design, Inc. Capital Stock
Common, $.001 par value, voting, authorized 9,000,000 shares; issued 933,625 and 974,820,
respectively.................................................................................. 934 975
Preferred, $.10 par value, voting, authorized 1,000,000, no shares outstanding.................
HLMNC and HLMO, Capital Stock, common, $.01 par value, authorized, outstanding 600................ 6
Hansen Lind Meyer Inc. Capital stock, common, $.01 par value (Note 6):
Class A, voting, authorized 2,000,000 shares; issued 200....................................... 2
Class B, nonvoting, authorized 1,000,000 shares, no shares outstanding......................... -- --
Additional paid in capital........................................................................ 2,066 34,312
Retained earnings................................................................................. 379,115
Stock Subscription Receivable..................................................................... (3,000) (6,562)
--------- -----------
Total stockholders' equity.......................................................................... 407,848
--------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................................................... $ $17,426,156
=========== ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
STATEMENTS OF OPERATIONS
ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR) AND SIX MONTHS ENDED
OCTOBER 25, 1996 (PREDECESSOR) AND OCTOBER 31, 1997 (COMBINED)
<TABLE>
<CAPTION>
(HLM
(PREDECESSOR (PREDECESSOR DESIGN)
COMPANY) COMPANY) COMBINED
----------- ---------- -----------
SIX MONTHS ONE MONTH SIX MONTHS
ENDED ENDED ENDED
----------- ---------- -----------
OCTOBER 25, MAY 30, OCTOBER 31,
1996 1997 1997
----------- ---------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES (Note 1):
Fee income..................................................................... $12,759,941 $1,852,249 $10,294,060
Reimbursable income............................................................ 743,682 380,787 2,892,743
----------- ---------- -----------
Total revenues............................................................ 13,503,623 2,233,036 13,186,803
----------- ---------- -----------
CONSULTANT EXPENSES.............................................................. 3,004,859 192,862 1,976,901
----------- ---------- -----------
PROJECT EXPENSES:
Direct expenses................................................................ 360,099 35,404 535,341
Reimbursable expenses.......................................................... 685,456 68,617 369,677
----------- ---------- -----------
Total project expenses.................................................... 1,045,555 104,021 905,018
----------- ---------- -----------
NET PRODUCTION INCOME............................................................ 9,453,209 1,936,153 10,304,884
DIRECT LABOR..................................................................... 3,484,077 602,096 3,062,843
INDIRECT EXPENSES................................................................ 6,400,549 1,172,712 5,991,828
----------- ---------- -----------
OPERATING INCOME (LOSS).......................................................... (431,417) 161,345 1,250,213
----------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest income................................................................ 2,192 54 1,561
Interest expense............................................................... (194,986) (37,005) (498,534)
----------- ---------- -----------
Total other income (expense), net......................................... (192,794) (36,951) (496,973)
----------- ---------- -----------
INCOME (LOSS) BEFORE TAXES....................................................... (624,211) 124,394 753,240
INCOME TAXES (Note 7):
Current tax expense (benefit).................................................. 5,115 (11,907) 65,712
Deferred tax expense (benefit)................................................. (197,461) 54,907 308,413
----------- ---------- -----------
Total income tax expense (benefit)........................................ (192,346) 43,000 374,125
----------- ---------- -----------
NET INCOME (LOSS)................................................................ $ (431,865) $ 81,394 $ 379,115
============= =========== ============
PRO FORMA NET INCOME PER SHARE (NOTE 1).......................................... $ .30
============
PRO FORMA NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (NOTE 1)............... 1,275,072
============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
STATEMENTS OF STOCKHOLDERS' EQUITY
INCEPTION MARCH 6, 1997 TO APRIL 25, 1997 AND THE
SIX MONTHS ENDED OCTOBER 31, 1997 COMBINED
<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.......... 933,625 934 2,066 (3,000)
-------- ------ --------------- ------------
BALANCE, APRIL 25, 1997........................ 933,625 934 2,066 (3,000)
-------- ------ --------------- -------- ------------ -------------
Equity of Combining Entities May 31, 1997
(UNAUDITED):
HLMI.................................... 200 2 2
HLMNC................................... 300 3 297 (300)
HLMO.................................... 300 3 297 (300)
Stock Issuance - HLM Design (unaudited)...... 41,195 41 31,652 (2,962) 28,731
Net Income -- Combined (unaudited)........... 379,115 379,115
-------- ------ --------------- -------- ------------ -------------
BALANCE OCTOBER 31, 1997 -- COMBINED
(UNAUDITED).................................. 975,620 $ 983 $34,312 $379,115 $ (6,562) $ 407,848
========== ====== =============== ======== ============== =============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
STATEMENTS OF CASH FLOWS
ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR),
AND THE SIX MONTHS ENDED OCTOBER 25, 1996 (PREDECESSOR) AND OCTOBER 31, 1997
(COMBINED)
<TABLE>
<CAPTION>
(PREDECESSOR COMPANY) (HLM
------------------------------ DESIGN)
COMBINED
SIX MONTHS ONE MONTH SIX MONTHS
ENDED ENDED ENDED
------------- ------------- -----------
OCTOBER 25, MAY 30, OCTOBER 31,
1996 1997 1997
------------- ------------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................ $ (431,865) $ 81,394 $ 379,115
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation.................................................................. 287,382 55,544 118,176
Amortization of goodwill...................................................... 54,702 9,571 71,496
Amortization of deferred loan fees............................................ 26,922
Deferred rent................................................................. 18,739
Deferred income taxes......................................................... (197,461) 54,907 308,413
Changes in certain working capital items:
(Increase) decrease in trade and other receivables.......................... 336,683 (1,500,472) (1,481,816)
Increase in costs and estimated earnings compared to billings on uncompleted
contracts, net............................................................. 1,282,939 1,199,028 1,506,233
(Increase) decrease in refundable income taxes.............................. 7,520 (11,157) 41,835
(Increase) decrease in prepaid expenses..................................... 33,926 (10,427) (101,899)
(Increase) decrease in other assets......................................... (122,251) (1,152)
Increase (decrease) in accounts payable..................................... (505,214) 233,659 (1,005,222)
Increase (decrease) in accrued expenses..................................... (214,198) (278,500) 88,146
Increase (decrease) in other non-current liabilities........................ 15,000
------------- ------------- -----------
Net cash (used in) provided by operating activities...................... 550,902 (152,605) (48,601)
------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............................................. (440,428) (2,023) (391,974)
Note receivable from officer..................................................... (20,000)
------------- ------------- -----------
Net cash provided by (used in) investing activities...................... (440,428) (2,023) (411,974)
------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on line of credit........................................................ (2,360,000)
Proceeds from long-term borrowings............................................... 2,800,000 3,750,000
Payments on long-term borrowings................................................. (120,275) (285,372) (240,916)
Payment of deferred loan fees.................................................... (40,000)
Payment on ESOP buyback.......................................................... (3,221,824)
Proceeds from issuance of notes payable to shareholders.......................... 182,308
Proceeds from the issuance of warrants........................................... 23,501
Proceeds from issuance of common stock........................................... 11,693
------------- ------------- -----------
Net cash provided by (used in) financing activities...................... (120,275) 154,628 464,762
------------- ------------- -----------
INCREASE (DECREASE) in Cash........................................................ (9,801) 4,187
CASH BALANCE:
Beginning of year................................................................ 11,130 2,321 2,321
------------- ------------- -----------
End of year...................................................................... $ 1,329 $ 2,321 $ 6,508
============== ============== ============
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the year for:
Interest...................................................................... $ 180,458 $ 6,827 $ 332,414
Income tax payments (refunds)................................................. $ 7,169 $ (750) $ (24,750)
Noncash investing and financing transactions:
Retirement of common stock through issuance of note payable................... $ 10,170
Reduction of ESOP debt........................................................ $ 206,093
Issuance of warrants to certain debtholders................................... $ 226,577
</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 SIX MONTHS ENDED
OCTOBER 25, 1996
(PREDECESSOR -- UNAUDITED), THE ONE MONTH PERIOD ENDED MAY 30, 1997
(PREDECESSOR -- UNAUDITED) AND THE SIX MONTHS ENDED OCTOBER 31, 1997
COMBINED -- UNAUDITED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- HLM Design, Inc. ("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 agreement.
In May 1997, Design executed long term management and services agreements
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 October 31, 1997 (HLMI, HLMNC
and HLMO are referred to herein collectively as "AEP"). Design and AEP 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 Design, whereby 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, except
the shareholders of BBH Corp. the shares redeemed 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 management and service agreements are for 40 years. HLM Design is the
sole and exclusive manager and administrator of all of the Managed Firm's
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 (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 capital stock, billing and collections). For 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) following the payment by the Managed Firm of all such
firm's expenses.
In addition, as a result of the consummation of the Management and Services
Agreements and the stockholders' agreements with the AEP's, the financial
statements of Design and the managed firm's are presented on a Combined basis
from May 31, 1997.
FINANCIAL STATEMENT PRESENTATION
The financial statements included herein reflect the following:
(Bullet) 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
(Bullet) Hansen Lind Meyer Inc. (Predecessor Company) for the one month
ended May 30, 1997 (unaudited) and for the six months ended
October 25, 1996 (unaudited)
(Bullet) HLM Design, Inc. combined with HLMI, HLMNC and HLMO, all from May
31, 1997 the effective date of the Management Services Agreements
a shareholders agreements, as of October 31, 1997 and for the six
months then ended (unaudited).
HLMI provides architectural and engineering consulting and design services,
which constitutes one business segment nationally from offices in Iowa City,
Chicago, Denver, Orlando, Atlanta, Bethesda, Philadelphia, Portland and
Sacramento.
PROPOSED STOCK OFFERING -- HLM Design intends to undertake an initial
public offering of HLM Design's Common Stock (the "Offering"). In connection
with the anticipated Offering, HLM Design intends to issue shares of its common
stock.
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 -- The Company uses a 52-53 week fiscal year for
accounting purposes which defines the fiscal year-end date as the last Friday in
April. Thus, the current fiscal year-end is April 25, 1997.
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
measured by the percentage of cost incurred to date to estimated total cost for
each contract, or based upon a fixed 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 are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMBINED
----------------------------- -----------------------------
<S> <C> <C>
Computer equipment and
software..................... 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 assets acquired (HLMI) and is being amortized
over a fifteen-year period (Combined) and over a four year period for
predecessor acquisition of MPB Architects.
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 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 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
October 31, 1997 there were no preferred shares outstanding.
F-8
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
STOCK SUBSCRIPTIONS RECEIVABLE -- The amount due from shareholders for
outstanding Common Stock.
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 has reviewed all long-lived assets and
intangible assets as of October 25, 1996 and October 31, 1997 and believes that
the carrying amounts reported in the balance sheet will be recovered over the
remaining useful lives of those assets.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Standards No. 128, "Earnings Per Share." This Statement specifies
the computation, presentation and disclosure requirements for earnings per
share. It will be effective for periods ending December 15, 1997. The Company
believes that the adoption of such statement would not result in earnings
materially different than pro forma earnings per share presented in accompanying
statements of income.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 24, 1998,
and the Company does not intend to adopt this Statement prior to the effective
date.
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 Managed
Firms should be accounted for on a consolidated basis. The Company intends to
reflect this change prospectively in the fiscal year ended April 24, 1998
financial statements. If the change had been effected for the six months ended
October 31, 1997, the effect would have been a reduction to Stockholder's Equity
by approximately $3,956, an increase in minority interest by approximately
$3,956 and a decrease in Net Income of approximately $3,948.
INTERIM FINANCIAL INFORMATION -- The accompanying unaudited financial
information for the six months ended October 25, 1996 (Predecessor) and October
31, 1997 (Combined) has been prepared on substantially the same basis as the
audited financial statements, and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
information set forth therein. The results for interim periods are not
necessarily indicative of the results to be expected for the entire fiscal year.
STOCK SPLIT AND PRO FORMA NET INCOME PER SHARE -- All share and per share
amounts included in the accompanying financial statements for all periods
presented have been adjusted to reflect an 11 for 1 stock split of the HLM
Design Common Stock effective as of January 30, 1998 and a 1.75 for 1 stock
split effective as of February 13, 1998, for an effective 19.25 for 1 stock
split ("Stock Split"). In addition, there was a reduction in Common Stock par
value to $.001 effective as of February 13, 1998. Pro forma 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.
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 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 as well as acquisition costs has been allocated to
the assets and liabilities acquired at their estimated fair market value 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 six month periods.
<TABLE>
<CAPTION>
6 MONTHS ENDED OCTOBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenues................................................... $13,503,623 $15,419,839
=========== ===========
Net Income (loss).......................................... $ (416,864) $ 440,148
============== ============
</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 six month periods. These results are also not
necessarily indicative of the results of future operations.
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress at October 31, 1997 is as
follows:
<TABLE>
<CAPTION>
OCTOBER 31,
1997
-----------
<S> <C>
Costs incurred on uncompleted projects......................................................................... $33,960,220
Estimated earnings thereon..................................................................................... 35,776,610
-----------
Total.......................................................................................................... 69,736,830
Less billings to date.......................................................................................... 68,921,745
-----------
Net underbillings.............................................................................................. $ 815,085
============
</TABLE>
Net underbillings are included in the accompanying balance sheet as
follows:
<TABLE>
<CAPTION>
OCTOBER 31,
1997
-----------
<S> <C>
Costs and estimated earnings in excess of billings on
uncompleted projects......................................................................................... $ 4,149,864
Billings in excess of costs and estimated earnings on
uncompleted projects......................................................................................... (3,334,779)
-----------
Net underbillings.............................................................................................. $ 815,085
============
</TABLE>
F-10
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. FINANCING ARRANGEMENTS
A summary of notes payable at October 31, 1997 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 maturity date of May
1998.
In September 1997, the Company entered into debt agreements with Berthel
Fisher, a planned Underwriter of the Offering, of $250,000 and $500,000.
Interest is charged at 12%, and monthly interest payments are due through May 1,
1998. The final payment for all accrued interest and principal is due on May 1,
1998.
A summary of long-term debt at October 31, 1997 is as follows:
<TABLE>
<CAPTION>
10/31/97
----------
<S> <C>
Notes payable to two key employees of the Company at 15%, with a final payment due December 31, 1997 in full.... $ 125,000
Notes payable to a former stockholder, due in annual payments of $49,522, plus interest at the prime interest
rate of Chase Manhattan Bank as of the date each installment is due (8.25% at April 25, 1997 and April 26,
1996); collateralized by 3,088 shares of the Company's unissued common stock, with a final payment due April
2000.......................................................................................................... 148,567
Notes payable to former stockholders, due in installments plus interest at prime plus 1% at various dates to
October 1999.................................................................................................. 13,594
Notes payable, MPB Architects, due in annual payments of $127,500, including interest at a rate of 10.5%, with a
final payment due April 1, 1998............................................................................... 114,850
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...................... 182,308
Lease financing with Berthel Fisher, due in monthly payments of $64,501, including interest at 14.07%, with
final lease and interest payments made on 4/30/2002........................................................... 2,637,926
----------
Total long-term debt............................................................................................ 5,202,245
----------
Less current maturities (based on refinanced terms)............................................................. 728,011
----------
Long-term portion............................................................................................... $4,474,234
==========
</TABLE>
In May 1997 HLMI entered into a financing arrangement, in the form of a
capital lease agreement, with Berthel Fisher Leasing, a subsidiary of Berthel
Fisher, the proposed underwriter, for $2.8 million. The substance of such
agreement is a financing arrangement and has been presented as such in the
financial statements.
Substantially all assets are pledged under lending agreements.
Under certain of the lending arrangements the company is restricted from
paying cash dividends. Certain of the financing agreements contain debt service
coverage ratios. As of October 31, 1997 the Company was in compliance with such
covenants.
Repayment of the various financing agreements are as follows:
<TABLE>
<S> <C>
Six months ended April 24, 1998................................. $ 576,877
Fiscal 1999..................................................... 559,441
Fiscal 2000..................................................... 592,345
Fiscal 2001..................................................... 991,006
Fiscal 2002..................................................... 2,449,243
Thereafter...................................................... 33,333
----------
Total......................................................... $5,202,245
===========
</TABLE>
F-11
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. FINANCING ARRANGEMENTS -- Continued
In May 1997, warrants to purchase 14,372 shares of common stock (276,661
shares after giving effect to the Stock Split) were attached to the notes issued
to Pacific Capital and Equitas. In addition, warrants to purchase 2,515 shares
of common stock (48,414 shares after giving effect to the Stock Split) were
attached to the notes issued to Berthel Fisher in September 1997. All of the
warrants issued with the debt were outstanding at October 31, 1997. Each warrant
allows holders to purchase a share of stock for $.01 a share for a five year
period.
In the event that the indebtedness owed by HLM Design to the 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.
HLM Design issued to the Holders 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 $226,605 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 for discussion of warrant activity subsequent to October 31,
1997.
5. LEASE COMMITMENTS
The total minimum rental commitment under non-cancellable operating leases
at October 31, 1997, which has been reduced by minimum rentals to be received
under subleases, are as follows:
<TABLE>
<S> <C>
6 months ended April 24, 1998.......................................................... $ 1,167,997
Fiscal 1999............................................................................ 2,072,140
Fiscal 2000............................................................................ 1,913,474
Fiscal 2001............................................................................ 1,798,392
Fiscal 2002............................................................................ 1,721,236
Thereafter............................................................................. 6,664,881
-----------
Total $15,338,120
==============
</TABLE>
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 six months ended October 31, 1997, the Company incurred $22,911
in financing advisory fees related to debt financings, for services provided by
a director.
See Note 4 for related party transactions with respect to debt financing.
8. INCOME TAXES
The provision for income taxes is as follows:
F-12
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. INCOME TAXES -- Continued
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 25, OCTOBER 31,
1996 1997
----------- -----------
<S> <C> <C>
Current:
Federal................................................................... $ 4,476 $ 57,827
State..................................................................... 639 7,885
Deferred.................................................................... (197,461) 308,413
----------- -----------
Provision for Income Taxes.................................................. $ (192,346) $ 374,125
============= ===========
</TABLE>
The reconciliation of the statutory federal income tax rate with the
Company's federal and state overall effective income rate is as follows:
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
OCTOBER 25, OCTOBER 31,
1996 1997
----------- -----------
<S> <C> <C>
Statutory federal rate...................................................... (35.0)% 35.0%
State Income Taxes, net of federal benefit.................................. (3.3) 3.3
Penalties................................................................... 4.9 3.8
Meals and Entertainment..................................................... 2.5 2.5
Goodwill.................................................................... -- 5.9
Other....................................................................... .1 (1.0)
----------- -----------
Effective Tax Rates....................................................... (30.8)% 49.5%
============ ============
</TABLE>
The tax effect of temporary differences giving rise to deferred income tax
assets and liabilities as of October 31, 1997 is as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
1997
-----------
<S> <C>
Deferred income tax liabilities -- difference between the accrual basis and cash basis
of accounting related to certain assets and liabilities.............................. $(1,606,472)
-----------
Deferred income tax assets:
Contribution carryforwards........................................................... 42,980
Property and equipment............................................................... 357,565
Net operating loss carryforward...................................................... 271,320
-----------
Total deferred income tax assets....................................................... 671,865
-----------
Deferred income tax liabilities, net................................................... $ (934,607)
============
</TABLE>
9. SUBSEQUENT EVENTS
In November 1997, 862 warrants were exercised resulting in the issuance of
862 shares of common stock (16,594 shares after giving effect to the Stock
Split).
10. HLM DESIGN FINANCIAL INFORMATION (UNAUDITED)
HLM Design's balance sheet and income statement for the six months ended
October 31, 1997 are as follows:
<TABLE>
<S> <C>
BALANCE SHEET
Current assets........................................................................... 402,017
---------
Non-current assets....................................................................... 3,446,128
---------
Total assets............................................................................. 3,848,145
==========
Current liabilities...................................................................... 1,163,169
---------
Non-current liabilities.................................................................. 2,162,307
---------
</TABLE>
F-13
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. HLM DESIGN FINANCIAL INFORMATION (UNAUDITED) -- Continued
<TABLE>
<S> <C>
Total liabilities........................................................................ 3,325,476
=========
Total stockholders equity................................................................ 522,669
---------
Total liabilities & S/E.................................................................. 3,848,145
=========
INCOME STATEMENT
Revenues................................................................................. 390,830
Net interest, tax and other expense...................................................... 146,971
---------
Net income............................................................................... 243,859
==========
</TABLE>
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
HANSEN LIND MEYER INC.
Charlotte, North Carolina
We have audited the accompanying balance sheets of Hansen Lind Meyer Inc.
("HLMI") as of April 25, 1997 and April 26, 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three 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 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 HLMI as of April 25, 1997
and April 26, 1996, and the results of its operations and its cash flows for
each of the three 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-15
<PAGE>
HLMI
BALANCE SHEETS
APRIL 26, 1996 AND APRIL 25, 1997
<TABLE>
<CAPTION>
APRIL 26, APRIL 25,
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................................................... $ 11,130 $ 2,321
Trade and other receivables, less allowance for doubtful accounts of $399,000 at April 26,
1996; $111,000 at April 25, 1997.......................................................... 5,559,290 4,215,782
Costs and estimated earnings in excess of billings on uncompleted projects (Note 3).......... 3,512,711 5,181,432
Refundable income taxes...................................................................... 141,521 59,891
Prepaid expenses............................................................................. 106,250 205,381
----------- -----------
Total current assets.................................................................... 9,330,902 9,664,807
----------- -----------
OTHER ASSETS:
Deferred income taxes (Note 8)............................................................... 492,505 464,694
Goodwill, less amortization of $93,193 at April 26, 1996; $196,646 at April 25, 1997......... 345,807 242,354
Other noncurrent assets...................................................................... 352,700 511,972
----------- -----------
Total other assets...................................................................... 1,191,012 1,219,020
----------- -----------
PROPERTY AND EQUIPMENT:
Leasehold improvements....................................................................... 2,153,312 2,307,040
Furniture and fixtures....................................................................... 6,953,360 7,365,909
Automobiles.................................................................................. 16,813 16,813
Construction in progress..................................................................... 28,309
----------- -----------
Total property and equipment............................................................ 9,151,794 9,689,762
----------- -----------
Less accumulated depreciation................................................................ (7,095,716) (7,699,086)
----------- -----------
Property and equipment, net............................................................. 2,056,078 1,990,676
----------- -----------
TOTAL ASSETS................................................................................... $12,577,992 $12,874,503
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 4)....................................................................... $ 2,450,000 $ 2,860,000
Current maturities of long-term debt (Note 4)................................................ 778,392 642,432
Accounts payable............................................................................. 4,579,651 4,227,034
Accrued expenses............................................................................. 1,139,812 920,853
Billings in excess of costs and estimated earnings on uncompleted projects (Note 3).......... 876,245 1,661,086
Deferred income taxes (Note 8)............................................................... 1,059,316 1,255,765
Deferred rent (Note 5)....................................................................... 67,974
----------- -----------
Total current liabilities............................................................... 10,951,390 11,567,170
----------- -----------
LONG-TERM DEBT (Note 4)........................................................................ 564,577 103,792
----------- -----------
DEFERRED RENT (Note 5)......................................................................... 288,829
----------- -----------
OTHER NONCURRENT LIABILITIES................................................................... 15,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 7, 9 and 10)
STOCKHOLDERS' EQUITY:
Capital stock, common, $.01 par value (Note 6):
Class A, voting, authorized 2,000,000 shares; issued 55,998 and 54,700, respectively...... 560 547
Class B, nonvoting, authorized 1,000,000 shares; issued 740 and 1,111, respectively....... 7 11
Retained earnings......................................................................... 1,140,403 1,202,983
----------- -----------
1,140,970 1,203,541
Less ESOP debt guarantee (Notes 4 and 9)....................................................... (382,774)
----------- -----------
Total stockholders' equity.............................................................. 758,196 1,203,541
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................................... $12,577,992 $12,874,503
============ ============
</TABLE>
See notes to financial statements.
F-16
<PAGE>
HLMI
STATEMENTS OF OPERATIONS
YEARS ENDED APRIL 30, 1995, APRIL 26, 1996 AND APRIL 25, 1997
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
APRIL 30, APRIL 26, APRIL 25,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Fee income.................................................................... $27,388,379 $27,206,637 $24,839,560
Reimbursable income........................................................... 1,734,178 1,347,787 1,915,150
----------- ----------- -----------
Total revenues........................................................... 29,122,557 28,554,424 26,754,710
----------- ----------- -----------
CONSULTANT EXPENSES............................................................. 5,351,073 4,782,482 4,857,891
----------- ----------- -----------
PROJECT EXPENSES:
Direct expenses............................................................... 854,540 936,962 716,449
Reimbursable expenses......................................................... 1,529,272 928,479 1,183,618
----------- ----------- -----------
Total project expenses................................................... 2,383,812 1,865,441 1,900,067
----------- ----------- -----------
NET PRODUCTION INCOME........................................................... 21,387,672 21,906,501 19,996,752
DIRECT LABOR.................................................................... 7,950,786 7,614,029 6,618,293
INDIRECT EXPENSES............................................................... 14,678,518 13,787,625 12,931,174
----------- ----------- -----------
OPERATING INCOME (LOSS)......................................................... (1,241,632) 504,847 447,285
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income............................................................... 13,936 10,516 6,502
Interest expense.............................................................. (156,680) (394,068) (402,509)
Gain on lease termination (Note 5)............................................ 841,809 344,059
Gain (loss) on sale of property............................................... 428,475 8,464 (58,424)
----------- ----------- -----------
Total other income (expense), net........................................ 285,731 466,721 (110,372)
----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES...................................................... (955,901) 971,568 336,913
INCOME TAXES (Note 8):
Current tax benefit........................................................... (3,080) (114,560) (4,461)
Deferred tax expense (benefit)................................................ (357,000) 550,019 224,260
----------- ----------- -----------
Total income tax expense (benefit)....................................... (360,080) 435,459 219,799
----------- ----------- -----------
NET INCOME (LOSS)............................................................... $ (595,821) $ 536,109 $ 117,114
============ =========== =============
</TABLE>
See notes to financial statements.
F-17
<PAGE>
HLMI
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED APRIL 30, 1995, APRIL 26, 1996 AND APRIL 25, 1997
<TABLE>
<CAPTION>
COMMON STOCK ESOP DEBT
------------------ RETAINED GUARANTEE
CLASS A CLASS B EARNINGS (NOTES 4 AND 9)
------- ------- ---------- ---------------
<S> <C> <C> <C> <C>
BALANCE, APRIL 30, 1994....................................... $ 638 $ 3 $1,693,915 $(1,260,925)
Net Loss.................................................... (595,821)
Issuance of 2,119 shares of common stock.................... 21 135,616
Retirement of 7,782 shares of common stock.................. (75) (3) (528,185)
Class A common stock exchanged for Class B
common stock............................................. (11) 11
Proceeds on Employee Stock Ownership Plan debt.............. (106,000)
Payments on Employee Stock Ownership Plan debt.............. 490,603
------- ------- ---------- ---------------
BALANCE, APRIL 30, 1995....................................... 573 11 705,525 (876,322)
Net income.................................................. 536,109
Issuance of 44 shares of common stock....................... 2,489
Retirement of 1,743 shares of common stock.................. (10) (7) (103,720)
Payments on Employee Stock Ownership Plan debt.............. 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)
Net income.................................................. 117,114
Retirement of 927 shares of common stock.................... (9) (54,534)
Payments on Employee Stock Ownership Plan debt.............. 382,774
Class A common stock exchanged for Class B
common stock............................................. (13) 13
------- ------- ---------- ---------------
BALANCE, APRIL 25, 1997....................................... $ 547 $11 $1,202,983 $
======== ======== =========== ================
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, APRIL 30, 1994....................................... $ 433,631
Net Loss.................................................... (595,821)
Issuance of 2,119 shares of common stock.................... 135,637
Retirement of 7,782 shares of common stock.................. (528,263)
Class A common stock exchanged for Class B
common stock.............................................
Proceeds on Employee Stock Ownership Plan debt.............. (106,000)
Payments on Employee Stock Ownership Plan debt.............. 490,603
-------------
BALANCE, APRIL 30, 1995....................................... (170,213)
Net income.................................................. 536,109
Issuance of 44 shares of common stock....................... 2,489
Retirement of 1,743 shares of common stock.................. (103,737)
Payments on Employee Stock Ownership Plan debt.............. 493,548
Class A common stock exchanged for Class B
common stock.............................................
-------------
BALANCE, APRIL 26, 1996....................................... 758,196
Net income.................................................. 117,114
Retirement of 927 shares of common stock.................... (54,543)
Payments on Employee Stock Ownership Plan debt.............. 382,774
Class A common stock exchanged for Class B
common stock.............................................
-------------
BALANCE, APRIL 25, 1997....................................... $ 1,203,541
=============
</TABLE>
See notes to financial statements.
F-18
<PAGE>
HLMI
STATEMENTS OF CASH FLOWS
YEARS ENDED APRIL 30, 1995, APRIL 26, 1996 AND APRIL 25, 1997
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
APRIL 30, APRIL 26, APRIL 25,
1995 1996 1997
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................... $ (595,821) $ 536,109 $ 117,114
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation................................................................. 515,636 680,779 671,877
Amortization................................................................. 5,952 99,145 107,670
Deferred rent................................................................ (384,644) (1,093,278) (356,803)
Loss (gain) on sale of property.............................................. (428,475) (8,464) 58,424
Deferred income taxes........................................................ (357,000) 550,019 224,260
Other, net................................................................... 3,229 (49,345) (15,000)
Changes in certain working capital items:
(Increase) decrease in trade and other receivables......................... 990,949 (1,181,640) 1,343,508
Increase in costs and estimated earnings compared to billings on
uncompleted contracts, net................................................ (1,540,637) (1,857,829) (883,880)
(Increase) decrease in refundable income taxes............................. 144,707 87,777 72,056
(Increase) decrease in prepaid expenses.................................... 160,417 (176,989) (99,131)
Increase in other assets................................................... (159,272)
Increase (decrease) in accounts payable.................................... 401,561 2,642,228 (352,617)
Increase (decrease) in accrued expenses.................................... 410,559 (455,379) (218,959)
----------- ----------- ----------
Net cash (used in) provided by operating activities..................... (673,567) (226,867) 509,247
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business............................................................ (206,500)
Proceeds from sale of equipment................................................. 600,000 12,084 2,635
Purchases of property and equipment............................................. (882,719) (708,479) (662,179)
Note receivable from officer.................................................... (30,000)
----------- ----------- ----------
Net cash used in investing activities................................... (489,219) (726,395) (659,544)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit................................................ 1,600,000 700,000 410,000
Proceeds from long-term borrowings.............................................. 500,000 145,000
Payments on long-term borrowings................................................ (90,189) (238,134) (410,952)
Proceeds from issuance of common stock.......................................... 135,616 2,489
Retirement of common stock...................................................... (528,185) (5,650) (2,560)
----------- ----------- ----------
Net cash provided by financing activities............................... 1,117,242 958,705 141,488
----------- ----------- ----------
(DECREASE) INCREASE IN CASH....................................................... (45,544) 5,443 (8,809)
CASH BALANCE:
Beginning of year............................................................... 51,231 5,687 11,130
----------- ----------- ----------
End of year..................................................................... $ 5,687 $ 11,130 $ 2,321
============ ============ ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the year for:
Interest..................................................................... $ 138,783 $ 392,292 $ 370,167
Interest on Employee Stock Ownership Plan debt............................... $ 82,459 $ 55,199 $ 24,243
Income tax refunds........................................................... $ (150,867) $ (280,466) $ (86,091)
Noncash investing and financing transactions:
Retirement of common stock through issuance of note payable.................. $ $ 98,087 $ 51,983
Reduction of ESOP debt....................................................... $ 384,603 $ 493,548 $ 382,774
Purchase of business financed through issuance of note payable............... $ 311,500
</TABLE>
See notes to financial statements.
F-19
<PAGE>
HLMI
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED APRIL 25, 1997 AND APRIL 26, 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- Hansen Lind Meyer Inc. ("HLMI") provides
architectural and engineering consulting and design services nationally from
offices in Iowa City, Chicago, Denver, Orlando, Philadelphia, Atlanta, Bethesda,
Sacramento and Portland. Approximately 75%, 70% and 73% of HLMI's 1997, 1996 and
1995 revenues, respectively, are related to health care projects and
approximately 25%, 30% and 27% are from criminal justice and other projects. The
Company operates in one business segment.
FISCAL YEAR-END POLICY -- HLMI uses a 52-53 week fiscal year for accounting
purposes which defines the fiscal year-end date as the last Friday in April.
Thus, the current fiscal year-end is April 25, 1997. There were 52 weeks in this
fiscal year.
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, HLMI
recognizes revenues either on the percentage-of-completion method measured by
the percentage of cost incurred to date to estimated total cost for each
contract, or based upon a fixed 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 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Computer equipment and software......................... 5 years
Furniture............................................... 7 years
Leasehold improvements.................................. Lease term, not to exceed the useful life of the asset
</TABLE>
GOODWILL -- Goodwill represents the excess of purchase price over the
estimated fair value of the net assets acquired from MPB Architects and is being
amortized over a four-year period.
DEFERRED INCOME TAXES -- Deferred income tax assets and liabilities are
calculated based upon differences between the financial statement and tax bases
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 fair value because of the
short maturities of these instruments. HLMI's bank borrowings approximate fair
value because their interest rates are based on variable reference rates.
F-20
<PAGE>
HLMI
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- Continued
RECLASSIFICATION -- Certain amounts in the 1996 financial statements have
been reclassified to conform with the 1997 financial statement presentation.
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 has reviewed all long-lived assets and
intangible assets as of April 25, 1997 and April 26, 1996 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 Statement of
Financial Accounting Standards 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 HLMI's fiscal year ending April 24, 1998, and
HLMI does not intend to adopt this Statement prior to the effective date.
2. BUSINESS ACQUISITIONS
On April 1, 1995, HLMI acquired MPB Architects, Inc., an architectural firm
located in Philadelphia, Pennsylvania, for a total purchase price of $518,000.
The acquisition has been accounted for as a purchase and the results of
operations of MPB Architects, Inc., have been included in the accompanying
financial statements from the date of acquisition. The total purchase price has
been allocated to the assets acquired at their estimated fair market value at
acquisition date as follows:
<TABLE>
<CAPTION>
<S> <C>
Property and equipment........................................................ $ 79,000
Goodwill...................................................................... 439,000
--------
Total......................................................................... $518,000
========
</TABLE>
The following unaudited pro forma financial data is presented as if MPB
Architects, Inc. was acquired on May 1, 1994.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30, 1995
-------------------------
<S> <C>
Revenues......................................................... $31,743,366
----------------
Net Loss......................................................... $ (782,024)
=================
</TABLE>
The pro forma information presented above is not necessarily indicative of
the operating results that would have occurred had MPB Architects, Inc. been
acquired on May 1, 1994. These results are also not necessarily indicative of
the results of future operations.
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress at April 30, 1995, April 26,
1996 and April 25, 1997 is as follows:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, APRIL 25,
1995 1996 1997
------------ ------------ -----------
<S> <C> <C> <C>
Costs incurred on uncompleted projects....................................... $ 77,486,548 $ 67,612,169 $53,448,215
Estimated earnings thereon................................................... 46,358,806 42,252,119 33,500,189
------------ ------------ -----------
Total........................................................................ 123,845,354 109,864,288 86,948,404
Less billings to date........................................................ 123,066,717 107,227,822 83,428,058
------------ ------------ -----------
Net underbillings............................................................ $ 778,637 $ 2,636,466 $ 3,520,346
============ ============= ===========
</TABLE>
F-21
<PAGE>
HLMI
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
3. CONTRACTS IN PROGRESS -- Continued
Net underbillings are included in the accompanying balance sheet as
follows:
<TABLE>
<CAPTION>
APRIL 30, APRIL 26, APRIL 25,
1995 1996 1997
----------- ---------- -----------
<S> <C> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted projects............................................................ $ 2,571,447 $3,512,711 $ 5,181,432
Billings in excess of costs and estimated earnings on
uncompleted projects............................................................ (1,792,810) (876,245) (1,661,086)
----------- ---------- -----------
Net underbillings................................................................. $ 778,637 $2,636,466 $ 3,520,346
=========== =========== ============
</TABLE>
4. FINANCING ARRANGEMENTS
Effective October 14, 1996, HLMI entered into a new financing arrangement
with Firstar Bank Iowa, N.A. ("Firstar"). In connection with this new financing
arrangement, two previous lines of credit, with a combined balance outstanding
at April 26, 1996 of $2,450,000, were consolidated into one revolving line of
credit providing for availability up to the lesser of $2,450,000 or 80% of
eligible accounts receivable through March 1, 1997. The line of credit will be
payable in full on May 1, 1998. Interest is payable monthly at Firstar's prime
rate plus 3% (11.5% at April 25, 1997).
Three term loans payable to Firstar with a combined amount outstanding at
April 26, 1996 of $423,903 were consolidated into one new term loan. Interest is
charged at the bank's prime rate plus 2%, and monthly principal and interest
payments of $45,000 are payable through February 1, 1997. The original loans
were made to enable the Company's ESOP (see Note 8) to acquire common stock from
certain stockholders.
This financing facility is collateralized by substantially all of HLMI's
assets.
In September 1996, HLMI 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 HLMI's discretion. The loan has an annual maturity date which
is subject to review.
See Note 12 for financing events occurring subsequent to April 25, 1997.
A summary of notes payable at April 26, 1996 and April 25, 1997 is as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Line of credit -- Firstar......................................................................... $$2,450,000 $2,360,000
Line of credit -- First Charter................................................................... 500,000
---------- ----------
Total............................................................................................. $2,450,000 $2,860,000
========== ============
</TABLE>
F-22
<PAGE>
HLMI
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
4. FINANCING ARRANGEMENTS -- Continued
A summary of long-term debt at April 25, 1997 and April 26, 1996 is as
follows:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Term loan payable to Firstar, due in monthly payments of $45,000, including interest at 2% over the
Bank's prime rate................................................................................. $ 423,903 $
Note payable to Firstar, due in monthly payments of $16,405, including interest at 2.5% over the
Bank's prime rate................................................................................. 428,399 271,134
Notes payable to two key employees of the Company at 15%, with a final payment due December 31, 1997
in full........................................................................................... 145,000
Notes payable to a former stockholder, due in annual payments of $49,522, plus interest at the prime
interest rate of Chase Manhattan Bank as of the date each installment is due (8.25% at April 25,
1997 and April 26, 1996); collateralized by 3,088 shares of the Company's unissued common stock,
with a final payment due April 2000............................................................... 198,090 148,567
Notes payable to former stockholders, due in installments plus interest at prime plus 1% at various
dates to October 1999............................................................................. 74,270 66,673
Notes payable, MPB Architects, due in annual payments of $127,500, including interest at a rate of
10.5%, with a final payment due April 1, 1998..................................................... 218,307 114,850
---------- --------
Total long-term debt................................................................................ 1,342,969 746,224
Less current maturities (based on refinanced terms)................................................. 778,392 642,432
---------- --------
Long-term portion................................................................................... $ 564,577 $103,792
========== =========
</TABLE>
Scheduled maturities of long-term debt based on refinanced terms are as
follows:
<TABLE>
<S> <C>
Fiscal Year:
1999........................................................................... $642,432
2000........................................................................... 49,522
Thereafter..................................................................... 54,270
--------
Total............................................................................ $746,224
==========
</TABLE>
Borrowings from Firstar are subject to certain restrictive covenants. At
April 25, 1997, HLMI was in violation of the negative working capital and the
current ratio requirements. As set forth in Note 12, all outstanding debt due to
Firstar has been repaid subsequent to April 25, 1997.
On May 30, 1997, HLMI entered into financing arrangement in the form of a
sale-leaseback agreement. Under this arrangement, HLMI sold all of its property,
excluding leasehold improvements, for $2.8 million. This property is being
leased back over 60 months. The proceeds of this transaction were used to repay
the line of credit and the note payable due to Firstar.
Under certain of the lending arrangements the Company is restricted from
paying cash dividends.
5. LEASE COMMITMENTS
At April 26, 1996, rent payments due under certain leases were less than
the amount of rent expense computed on a straight-line basis. The deferred rent
liability at April 26, 1996 was $356,803. There was no deferred rent liability
as of April 25, 1997.
In 1996, and 1997, HLMI terminated facility leases which were being
accounted for as operating leases, resulting in a gain of $841,809 and $344,059,
respectively. There were no facility lease terminations in 1995 which resulted
in a gain. The recorded gains represent the cumulative excess of lease expense
over the lease payments made as of the termination dates.
The Iowa City, Orlando, McLean and Charlotte facilities require the payment
of certain operating expenses in addition to the base rents.
F-23
<PAGE>
HLMI
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. LEASE COMMITMENTS -- Continued
Rent expense of $2,946,542 $1,112,562 and $1,606,678 as of April 30, 1995,
April 26, 1996 and April 25, 1997 is included in indirect expenses.
The total minimum rental commitment under non-cancellable operating leases,
at April 25, 1997, which has been reduced by minimum rentals to be received
under subleases, are as follows:
<TABLE>
<S> <C>
Fiscal Year:
1998..................................................................... $ 2,172,403
1999..................................................................... 1,899,397
2000..................................................................... 1,881,442
2001..................................................................... 1,798,392
2002..................................................................... 1,721,236
Thereafter............................................................... 6,664,881
-----------
Total...................................................................... $16,137,751
===========
</TABLE>
6. CAPITAL STOCK
HLMI's authorized capital consists of 3,000,000 shares of $.01 par value
common stock, consisting of two classes, 2,000,000 shares of Class A voting and
1,000,000 shares of Class B nonvoting. Class A stock may only be owned by
employees of the Company. Class A stock will be immediately converted to Class B
stock following the termination of a shareholder's employment with the Company.
See Note 12 for subsequent events regarding HLMI's ESOP.
7. RESTRICTIONS OF TRANSFER OF COMMON STOCK
The bylaws of HLMI contain certain restrictions on transfer of common
stock. Upon the death, disability or retirement of a stockholder, HLMI is
obligated to purchase the common stock if the estate of the stockholder or the
stockholder offers to sell. The stockholder's estate or the stockholder has the
right to offer the shares to the Employee Stock Ownership Plan which has the
right of first refusal with regard to this stock. The sale price shall be based
upon the most recent appraised value of HLMI stock. If a stockholder voluntarily
terminates employment, the employee shall sell, and the ESOP may acquire the
shares, or HLMI shall purchase all of the stockholder's stock based on the most
recent appraisal. If a stockholder is involuntarily terminated, the stockholder
may offer his stock to the ESOP or HLMI, and the ESOP may, or HLMI shall
purchase all of the shares based on the most recent appraisal. A stockholder who
is terminated from employment for cause shall sell, and the ESOP may, or HLMI
shall purchase all of the stockholder's shares at a price equal to 80% of the
most recent appraisal. The purchase price of any purchase will be paid by first
applying life insurance proceeds, if any, with the balance being paid in a
single payment or installments depending upon the circumstances of the sale and
upon the amount of the purchase price. If the aggregate of principal payments
for the purchase of stock shall exceed $120,000 within any six-month period,
HLMI may adjust downward all current payments proportionately to limit the
payments to the $120,000 amount. Transfers of shares of HLMI's stock to or from
the Employee Stock Ownership Plan Trust are exempt from the provisions of the
bylaws on restrictions of transfer.
8. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- --------
<S> <C> <C> <C>
Current:
Federal............................................................................... $ (2,695) $(100,240) $ (3,903)
State................................................................................. (385) (14,320) (558)
Deferred................................................................................ (357,000) 550,019 224,260
--------- --------- --------
Provision for income taxes.............................................................. $(360,080) $ 435,459 $219,799
=========== ========== =========
</TABLE>
F-24
<PAGE>
HLMI
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. INCOME TAXES -- Continued
The reconciliation of the statutory federal income tax rate with the
Company's federal and state overall effective income rate is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------ ----- -----
<S> <C> <C> <C>
Statutory federal rate.............................................................................. (35.0)% 35.0% 35.0%
State Income Taxes.................................................................................. (2.0) 3.3 3.3
Penalties........................................................................................... .2 .4 17.4
Meals and Entertainment............................................................................. 4.3 4.4 9.3
Other............................................................................................... (5.1) 1.8 .3
------ ----- -----
Effective Tax rates............................................................................... (37.6)% 44.9% 65.3%
======= ====== ======
</TABLE>
The tax effect of temporary differences giving rise to deferred income tax
assets and liabilities as of April 25, 1997 and April 26, 1996 is as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred income tax liabilities -- difference between the accrual basis and cash basis of
accounting related to certain assets and liabilities.......................................... $(1,059,316) $(1,255,765)
----------- -----------
Deferred income tax assets:
Contribution carryforwards.................................................................... 52,892 64,361
Property and equipment........................................................................ 63,368 96,177
Deferred rent liability....................................................................... 136,477 --
Net operating loss carryforward............................................................... 239,768 304,156
----------- -----------
Total deferred income tax assets................................................................ 492,505 464,694
----------- -----------
Deferred income tax liabilities, net............................................................ $ (566,811) $ (791,071)
============ =============
</TABLE>
As of April 26, 1996 and April 25, 1997, HLMI had approximately $627,000
and $795,000 of net operating loss carryforwards, respectively, for federal tax
purposes and no loss carryforwards for financial reporting purposes. These tax
net operating losses will respectively expire in fiscal years 2012 and 2011.
9. EMPLOYEE STOCK OWNERSHIP PLAN
In September 1987, HLMI established an Employee Stock Ownership Plan to
provide retirement benefits to its employees. In October 1987, the Plan obtained
a $4,800,000 bank loan, the proceeds of which were used to purchase 32,000
shares of common stock from certain stockholders. During the year ended April
30, 1991, the Plan acquired 11,597 shares of common stock from a shareholder at
a cost of $1,054,389, a portion of which was financed by borrowings from a bank
in the amount of $687,389. During the year ended April 30, 1995, the Plan
acquired 2,000 shares of common stock from a shareholder at a cost of $106,000,
which was financed by borrowings from a bank. HLMI is committed to make cash
payments to the Plan in an amount sufficient for the Plan to meet the debt
service requirements of these three notes. Accordingly, the debt was recorded in
the accompanying financial statements with a corresponding deduction from
stockholders' equity. The debt and the deduction from stockholders' equity are
reduced as principal payments are made on the loans. The terms of the notes
payable are disclosed in Note 4. These notes were repaid in full during the year
ended April 25, 1997.
Subject to certain provisions of the Plan, in the event a terminated plan
participant desires to sell his or her shares of HLMI's stock, or for certain
employees who elect to diversify their account balances, HLMI may be required to
purchase the shares from the participant at their fair market value. During the
year ended April 26, 1996, HLMI had stock purchases of 557 shares from plan
participants. As of April 26, 1996, 43,343 shares were allocated to participant
accounts and the fair value per share was $56.50 based on an April 30, 1995
valuation.
During the year ended April 25, 1997, HLMI did not purchase any shares from
plan participants and as of April 25, 1997, 46,858 shares were allocated to
participant accounts.
F-25
<PAGE>
HLMI
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. CONTINGENCIES
HLMI is involved in various disputes and legal actions related to contract
operations. In the opinion of HLMI management, the ultimate resolution of these
actions will not have a material effect on HLMI's financial position or future
results of operations.
11. RELATED PARTY TRANSACTIONS
During the years ended April 26, 1996 and April 25, 1997, HLMI incurred
$254,137 and $257,017, respectively, in financing advisory fees related to debt
financings, for services provided by a director.
12. OTHER MATTERS
On May 29, 1997, HLMI executed a Management and Services Agreement with HLM
Design Inc ("HLM, Design"). The majority shareholders of Design are officers of
HLMI and own 100% of the common stock of HLMI. Under the Management and Services
Agreement, Design will manage all functions of HLMI except for architectural
services regulated by the various states in which HLMI operates. As compensation
for such management services, Design will be entitled to substantially all the
net cash flow generated by HLMI. In addition, HLM, Design and the shareholders
of HLMI have entered into agreements that provide HLM Design with the right of
first refusal, by selection of qualified individuals, for any purchase or sale
of shares of HLMI's stock.
Effective May 23, 1997, HLMI sold 50,000 newly issued shares to BBH Corp.,
a Delaware corporation, purchased 50,000 shares in HLMI for $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 of HLMI's
shares held by BBH Corp. were canceled and retired.
Effective as of May 31, 1997, HLMI repurchased all 46,858 shares 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.
F-26
<PAGE>
=========================================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY HLM DESIGN OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 7
Use of Proceeds...................................... 10
Dividend Policy...................................... 11
Capitalization....................................... 11
Dilution............................................. 12
Selected Financial Data.............................. 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 17
Business............................................. 22
Management........................................... 26
Certain Transactions................................. 33
Principal Stockholders............................... 34
Description of Capital Stock......................... 35
Shares Eligible for Future Sale...................... 37
Underwriting......................................... 38
Legal Matters........................................ 40
Experts.............................................. 40
Additional Information............................... 40
Index to Financial Statements........................ F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
=================================================================
=================================================================
1,200,000 SHARES
HLM DESIGN, INC.
COMMON STOCK
----------------
PROSPECTUS
----------------
BERTHEL FISHER & COMPANY
FINANCIAL SERVICES, INC.
WESTPORT RESOURCES
INVESTMENT SERVICES, INC.
MARION BASS
SECURITIES CORPORATION
, 1998
===============================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by the Registrant
in connection with the issuance and distribution of the securities being
registered hereby other than underwriting discounts and commissions. All the
amounts shown are estimates, except for the registration fee with the Securities
and Exchange Commission, the NASD filing fee and the Nasdaq fees.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration fee................................................................... $ 2,121.22
NASD filing fee........................................................................ 1,200
Nasdaq fees............................................................................ 7,500
Transfer agent and registrar fees...................................................... 15,000
Accounting fees and expenses........................................................... 235,000
Legal fees and expenses................................................................ 120,000
"Blue Sky" fees and expenses (including legal fees).................................... 15,000
Costs of printing and engraving........................................................ 90,000
Miscellaneous.......................................................................... 14,178.78
-----------
Total............................................................................. $500,000.00
============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Bylaws effectively provide that the Registrant shall, to
the full extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as amended from time to time ("Section 145"), indemnify all
persons whom it may indemnify pursuant thereto. In addition, the Registrant's
Certificate of Incorporation eliminates personal liability of its directors to
the full extent permitted by Section 102(b)(7) of the General Corporation Law of
the State of Delaware, as amended from time to time ("Section 102(b)(7)").
Section 145 permits a corporation to indemnify its directors and officers
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by a third party if such directors or
officers acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, indemnification may be made only for expenses
actually and reasonably incurred by directors and officers in connection with
the defense or settlement of an action or suit and only with respect to matters
as to which they shall have acted in good faith and in a manner they reasonably
believed to be in or not opposed to the best interest of the corporation, except
that no indemnification shall be made if such person shall have been adjudged
liable to the corporation, unless and only to the extent that the court in which
the action or suit was brought shall determine upon application that the
defendant officers or directors are reasonably entitled to indemnification for
such expenses despite such adjudication of liability.
Section 102(b)(7) provides that a corporation may eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for willful or negligent conduct
in paying dividends or repurchasing stock out of other than lawfully available
funds or (iv) for any transaction from which the director derived an improper
personal benefit. No such provisions shall eliminate or limit the liability of a
director for any act or omission occurring prior to the date when such provision
becomes effective.
The Company intends to obtain, prior to the effective date of the
Registration Statement, insurance against liabilities under the Securities Act
of 1933 for the benefit of its officers and directors.
Section 6.01 of the Underwriting Agreement (filed as Exhibit 1.1 to this
Registration Statement) provides that the Underwriters severally and not jointly
will indemnify and hold harmless the Registrant and each director, officer or
controlling person of the Registrant from and against any liability caused by
any statement or omission in the Registration Statement or Prospectus based upon
information furnished to the Registrant by the Underwriters for use therein.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Except as hereinafter set forth, there have been no sales of unregistered
securities by the Registrant within the past three years. The following
information excludes the effect of the Stock Split.
As of March 20, 1997, as part of the original organization of HLM Design,
the Registrant issued 20,500 shares of Common Stock to Joseph Harris, 20,500
shares of Common Stock to Vernon Brannon and 7,500 shares of Common Stock to
William Blalock in exchange for $1,000 from each person.
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 the Registrant issued an
aggregate of 2,340 shares of Common Stock to senior level employees of the
Company in exchange for $14.81 per share. As of May 30, 1997, September 10, 1997
and December 24, 1997, the Registrant 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 at an excercise price of $.01 per share. On
December 26, 1997 Berthel Leasing exercised its Warrant and purchased 3,422
shares of Common Stock at an exercise price of $.01 per share. On February 12,
1998 Equitas exercised its Warrant and purchased 5,749 shares of Common Stock at
an exercise price of $.01 per share. 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 the Registrant and the
absence of any general solicitation or advertising.
On or before the consummation of the Offering, the Registrant will issue to
two of its officers and employees, pursuant to the Registrant's Stock Option
Plan, options to purchase 175,000 shares of Common Stock in the aggregate. Such
securities will not be registered under the Securities Act because such grants
will be without consideration to the Registrant and, consequently, will not
constitute offers or sales within Section 5 of the Securities Act.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ---------------
<C> <S>
1.1** Form of Underwriting Agreement
3.1* Certificate of Incorporation of the Registrant
3.2* Bylaws of the Registrant
4.1** Form of Common Stock Certificate
4.2** Form of Common Stock Purchase Warrant
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.
4.4 Registration Rights Agreement dated as of September 10, 1997 by and among HLM Design, Inc. and Berthel Fisher
& Company Leasing, Inc.
5.1* Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities
registered.
10.1* Management and Services Agreement dated as of May 29, 1997 by and between Hansen Lind Meyer Inc. and HLM
Design.
10.2* Management and Services Agreement dated as of May 29, 1997 by and between HLM of North Carolina, P.C. and HLM
Design.
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.
10.4* Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and Hansen
Lind Meyer Inc.
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.
10.6* Stockholders' Agreememt 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.
10.7* Stockholders' Voting Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and
William J. Blalock.
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.
10.9* Promissory Note A-1 dated as of May 30, 1997 by HLM Design, Inc. in favor of Pacific Capital, L.P.
10.10* Promissory Note A-2 dated as of May 30, 1997 by HLM Design, Inc. in favor of Equitas, L.P.
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.
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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------------------------------------------------------------
<C> <S>
10.13* Affiliate Promissory Note dated May 30, 1997 by BBH Corp. in favor of HLM Design, Inc.
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.
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.
10.16* Guaranty dated as of May 30, 1997 by Joe Harris in favor of Pacific Capital, L.P. and Equitas, L.P.
10.17* Guaranty dated as of May 30, 1997 by Vernon Brannon in favor of Pacific Capital, L.P. and Equitas, L.P.
10.18* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc. and
Joseph M. Harris.
10.19* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc. and
Vernon B. Brannon.
10.20 Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and Hansen
Lind Meyer Inc.
10.21 Security Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and Hansen
Lind Meyer Inc.
10.22 Guaranty (Limited in Amount) dated as of May 30, 1997 by and among Vernon B. Brannon, William J. Blalock and
Joseph M. Harris.
10.23* Form of HLM Design, Inc. Stock Option Plan.
10.24* Form of HLM Design, Inc. Employee Stock Purchase Plan.
10.25* Form of Employment Agreement between HLM Design, Inc. and Joseph M. Harris.
10.26* Form of Employment Agreement between HLM Design, Inc. and Vernon B. Brannon.
10.27* Financial Advisory Agreement dated as of February 17, 1995 by and between Blalock and Company and HLMI.
10.28* Promissory Note dated as of May 30, 1997 issued by HLM Design, Inc. in favor of First Charter National Bank.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2* Form of Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration
Statement)
24.1* Power of Attorney (contained on the signature page to the Registration Statement)
</TABLE>
- ---------------
* Filed previously
** To be furnished by Amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing or closings specified in the Underwriting
Agreement, certificates in such denominations and registered in such names as
may be required by the Underwriters in order to permit prompt delivery to each
purchaser.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Charlotte, North
Carolina on February 13, 1998.
HLM DESIGN, INC.
By: /s/ VERNON B. BRANNON
---------------------------
VERNON B. BRANNON
SENIOR VICE PRESIDENT, TREASURER
AND CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
----------- ------- ------
<S> <C> <C>
/s/ * President, Chief Executive Officer (principal February 13, 1998
------------------
JOSEPH M. HARRIS executive officer) and Chairman
/s/ VERNON B. BRANNON Senior Vice President, Treasurer, Chief February 13, 1998
-----------------------
VERNON B. BRANNON Financial Officer (principal financial and
accounting officer) and Director
/s/ * Director February 13, 1998
------------------------
CLAY R. CAROLAND III
/s/ * Director February 13, 1998
------------------------
SHANNON LEROY
</TABLE>
*By: /s/_____VERNON B. BRANNON______
VERNON B. BRANNON
(ATTORNEY-IN-FACT FOR EACH
OF THE PERSONS INDICATED)
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------- ------------
<C> <S>
1.1** Form of Underwriting Agreement
3.1* Certificate of Incorporation of the Registrant
3.2* Bylaws of the Registrant
4.1** Form of Common Stock Certificate
4.2** Form of Common Stock Purchase Warrant
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.
4.4 Registration Rights Agreement dated as of September 10, 1997 by and among HLM Design, Inc. and Berthel
Fisher & Company Leasing, Inc.
5.1* Form of opinion letter of Parker, Poe, Adams & Bernstein L.L.P. regarding the legality of the securities
registered.
10.1* Management and Services Agreement dated as of May 29, 1997 by and between Hansen Lind Meyer Inc. and HLM
Design.
10.2* Management and Services Agreement dated as of May 29, 1997 by and between HLM of North Carolina, P.C. and
HLM Design.
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.
10.4* Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and
Hansen Lind Meyer Inc.
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.
10.6* Stockholders' Agreememt 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.
10.7* Stockholders' Voting Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon
and William J. Blalock.
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.
10.9* Promissory Note A-1 dated as of May 30, 1997 by HLM Design, Inc. in favor of Pacific Capital, L.P.
10.10* Promissory Note A-2 dated as of May 30, 1997 by HLM Design, Inc. in favor of Equitas, L.P.
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.
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.
10.13* Affiliate Promissory Note dated May 30, 1997 by BBH Corp. in favor of HLM Design, Inc.
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.
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.
10.16* Guaranty dated as of May 30, 1997 by Joe Harris in favor of Pacific Capital, L.P. and Equitas, L.P.
10.17* Guaranty dated as of May 30, 1997 by Vernon Brannon in favor of Pacific Capital, L.P. and Equitas, L.P.
10.18* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc.
and Joseph M. Harris.
10.19* Noncompetition Agreement dated as of May 30, 1997 by and between HLM Design, Inc., Hansen Lind Meyer Inc.
and Vernon B. Brannon.
10.20 Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and Hansen
Lind Meyer Inc.
10.21 Security Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and
Hansen Lind Meyer Inc.
10.22 Guaranty (Limited in Amount) dated as of May 30, 1997 by and among Vernon B. Brannon, William J. Blalock
and Joseph M. Harris.
10.23* Form of HLM Design, Inc. Stock Option Plan.
10.24* Form of HLM Design, Inc. Employee Stock Purchase Plan.
10.25* Form of Employment Agreement between HLM Design, Inc. and Joseph M. Harris.
10.26* Form of Employment Agreement between HLM Design, Inc. and Vernon B. Brannon.
10.27* Financial Advisory Agreement dated as of February 17, 1995 by and between Blalock and Company and HLMI.
10.28* Promissory Note dated as of May 30, 1997 issued by HLM Design, Inc. in favor of First Charter National
Bank.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
23.2* Form of Consent of Parker, Poe, Adams & Bernstein L.L.P. (included in Exhibit 5.1 to this Registration
Statement)
24.1* Power of Attorney (contained on the signature page to the Registration Statement)
</TABLE>
- -----------------------------------------------------------
* Filed previously
** To be furnished by Amendment.
<PAGE>
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") made as
of this 10th day of September, 1997 by and among HLM DESIGN, INC., a Delaware
corporation (the ACompany@) and BERTHEL FISHER & COMPANY LEASING, INC., an Iowa
corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Purchaser has purchased from the Company Common Stock
Purchase Warrants, of even date herewith (the "Warrants"); and
WHEREAS, the parties hereto wish to provide for certain
registration rights with respect to securities of the Company that may be
acquired by the Purchaser upon exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and mutual
covenants and agreements and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged herein contained, the
parties hereto agree as follows:
1. Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission
or any other Federal agency at the time administering the Securities Act.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Holder" shall mean the holder of the Registrable Securities
(including the Initiating Holders and the Non-Initiating Holders), either
individually or jointly, as the case may be.
"Initiating Holders" shall mean (i) for purposes of Section 3
hereof, Holders of more than fifty percent (50%) of the shares of the
Registrable Securities then outstanding who initiate a request for registration
pursuant to Section 3(a) hereof, and (ii) for purposes of Section 5 hereof,
Holders of more than twenty percent (20%) of the shares of the Registrable
Securities then outstanding who initiate a request for registration pursuant to
Section 5(a) hereof.
"Non-Initiating Holders" shall mean, with respect to any
request for registration pursuant to Sections 3 or 5 hereof, the Holders not
party to such request for registration.
<PAGE>
The terms "register," "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness of
such registration statement.
"Registrable Securities" shall mean, at any time, shares of
the Company's securities described in Section 2 hereof which are required to
bear the restrictive legend set forth in such Section.
"Registration Expenses" shall mean all expenses incurred by
the Company in compliance with Sections 3, 4 and 5 hereof, including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Company, blue sky fees and expenses, the fees
and expenses of one counsel for all the selling Holders and other security
holders and the expense of any special audits incident to or required by any
such registration (but excluding the Selling Expenses and the compensation of
regular employees of the Company, which shall in any event be paid by the
Company).
"Securities Act" shall mean the Securities Act of 1933, as
amended.
"Selling Expenses shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel, if any, separately retained by any Holder
(not including the fees and disbursements of one such counsel included in
Registration Expenses).
2. Restrictive Legend. Each certificate representing shares of
common stock issued upon exercise of the Warrant shall (unless otherwise
permitted or unless the securities evidenced by such certificate shall have been
registered under the Securities Act) be stamped or otherwise imprinted with a
legend in the following form (in addition to any legend required under
applicable state securities laws):
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. THEY
MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Upon request of a holder of such a certificate, the
Company shall remove the foregoing legend from the certificate or issue to
such holder a new certificate therefor free of any transfer legend, if, (x)
with such request, the Company shall have received either an opinion of
counsel satisfactory to the Company to the effect that any transfer by such
holder of the securities evidenced by such certificate will not violate the
Securities
<PAGE>
Act and applicable state securities laws or (y) in accordance with
paragraph (k) of Rule 144, such holder is not and has not during the last
three months been an affiliate of the Company and such holder has held the
securities represented by such certificate for a period of at least one
year. The Company will use its best efforts to assist any holder in
complying with the provisions of this Section 2 for removal of the legend
set forth above.
3. Requested Registration.
(a) Request for Registration. If at any time after three
(3) years from the date of this Agreement, the Company shall receive from
Initiating Holders a written request that the Company effect any
registration with respect to all, or, if not all, at least 25%, of the
Registrable Securities held by the Initiating Holders, the Company shall do
the following:
(i) within ten (10) days of receipt of such
request from the Initiating Holders, give written notice of the proposed
registration to the Non-Initiating Holders; and
(ii) as soon as practicable, but in any event no
later than ninety (90) days after receipt of such request from the
Initiating Holders, effect such registration and appropriate qualification
under applicable blue sky or other state securities laws and appropriate
compliance with applicable regulations issued under the Securities Act as
may be so requested and as would permit or facilitate the sale and
distribution of all Registrable Securities as are specified in such
request, together with all Registrable Securities of any Non-Initiating
Holder(s) joining in such request as are specified in a written request by
the Non-Initiating Holders (subject to limitation in accordance with
Section 3(b) below) within thirty (30) days after receipt of such written
notice from the Company; provided, however, that the Company shall not be
obligated to effect, or to take any action to effect, any such registration
pursuant to this Section 3 after the Company has effected two (2)
registrations pursuant to this Section 3 and each such registration has
been declared or ordered effective by the Commission and the sale of such
Registrable Securities has closed or been effected.
(b) Underwriting.
(i) Any request for registration pursuant to
Section 3(a) hereof may involve a registered underwritten public offering
of the Registrable Securities to be included in the registration. In such
event, the Company shall include any information that it shall have
received as to the nature of the underwriting in the written notice of the
Company referred to in Section 3(a)(i) above, including the name of the
underwriter or representative thereof selected for such underwriting. The
right of any Non-Initiating Holder to registration pursuant to this Section
3 shall be conditioned upon such Non-Initiating Holder participating in
such underwriting and the inclusion of such
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<PAGE>
Non-Initiating Holder's Registrable Securities in such underwriting to the
extent provided herein.
(ii) In the event of an underwritten requested
registration, the Company shall (together with all Holders proposing to
distribute their Registrable Securities through such underwriting) enter
into an underwriting agreement in customary form with the underwriter or
representative thereof selected for such underwriting. Notwithstanding any
other provision of this Section 3, if the underwriter or representative
thereof advises the Initiating Holders in writing that, in its opinion,
marketing factors require a limitation on the number of shares to be
underwritten, the Initiating Holders shall so advise all Holders whose
Registrable Securities would otherwise be underwritten pursuant hereto, and
the number of shares of Registrable Securities that are entitled to be
included in the registration and underwriting shall be allocated in the
following manner:
(A) first, the securities of any stockholder
joining in the request for registration
who is not a Holder shall be excluded
from such registration; in the event
that less than all of such stockholders'
securities are required to be excluded,
the remaining number of shares shall be
allocated as among such stockholders in
such proportion, as nearly as
practicable, to the relative amount of
securities then held by each such
stockholder;
(B) then, if a limitation on the number of
shares is still required, the
Registrable Securities held by the
Non-Initiating Holders joining in the
request for registration shall be
excluded from such registration to the
extent required by such limitation; in
the event that less than all of such
Non-Initiating Holders' Registrable
Securities are required to be excluded,
the remaining number of shares shall be
allocated as among such Non-Initiating
Holders in proportion, as nearly as
practicable, to the relative amount of
Registrable Securities then held by each
such Non-Initiating Holder;
(C) then, if a limitation on the number of
shares is still required, the
Registrable Securities held by the
Initiating Holders joining in the
request for registration shall be
excluded from such registration to the
extent required by such limitation; in
the event that less than all of such
Initiating Holders' Registrable
Securities are required to be excluded,
the remaining number of shares shall be
allocated as among such Initiating
Holders in proportion, as nearly as
practicable, to the relative amount of
Registrable Securities
4
<PAGE>
then held by each such Initiating
Holder.
(iii) In the event that the number of shares of
Registrable Securities of any Holder included in any registration is
reduced below 75% of the shares requested to be included in such
registration as a result of allocations pursuant to this Section 3(b), then
such registration shall not be deemed a registration for purposes of
Section 3 and shall not diminish the number of registrations to which the
Holders are entitled pursuant to this Section 3.
(iv) If any Holder who has requested inclusion in
such registration as provided above disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice
to the Company, the underwriter and the Initiating Holders. The securities
so withdrawn shall also be withdrawn from registration.
4. "Piggyback" Registration.
(a) Company Registration. If at any time the Company shall
determine to register any of its securities either for its own account or
the account of security holder(s) exercising its or their respective demand
registration rights other than pursuant to Section 3 above on any
registration form suitable for inclusion of the Registrable Securities, the
Company shall do the following:
(i) promptly give to each Holder written notice
thereof (which shall include a list of the jurisdictions in which the
Company intends to attempt to qualify such securities under the applicable
"blue sky" or other state securities laws); and
(ii) include in such registration, and in any
underwriting involved therein, all the Registrable Securities specified in
a written request or requests, made by any Holder within thirty (30) days
after receipt of the written notice from the Company described in clause
(i) above, except as limited by the provisions of Section 4(b)(ii) below.
Such Holder's written request may specify all or a part of a Holder's
Registrable Securities.
There shall be no limitation on the number of registrations which may be
requested and obtained under this Section 4.
(b) Underwriting.
(i) If the registration of which the Company
gives notice is for a registered public offering involving an underwriting,
the Company shall so advise the Holders as part of the written notice given
pursuant to Section 4(a)(i). In such event, the right of any Holder to
registration pursuant to Section 4 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such
5
<PAGE>
Holder's Registrable Securities in the underwriting to the extent provided
herein.
(ii) The Company shall (together with all Holders
proposing to distribute their securities through such underwriting) enter
into an underwriting agreement in customary form with the underwriter or
representative thereof selected by the Company. Notwithstanding any other
provision of this Section 4, if the Underwriter or representative thereof
advises the Company in writing that, in its opinion, marketing factors
require a limitation on the number of shares to be underwritten, the
underwriter or representative thereof may (subject to the allocation
priority set forth below), (A) if the registration of which the Company
gives notice is for the first registered public offering of securities of
the Company, exclude all of the Holders' Registrable Securities provided
that no other selling shareholders' shares are included in the offering, or
(B) in any other event, limit the number of the Holders' Registrable
Securities and securities being registered by any other selling
shareholders to be included in the registration and underwriting to an
amount not less than thirty percent (30%) of the total number of shares
being registered in such registration and underwriting. If such limitation
is required, the Company shall so advise all holders of securities
requesting registration, and the number of shares of securities that are
entitled to be included in the registration and underwriting shall be
allocated first to the Company for its own account, and then in the
following manner: the Registrable Securities of the Holders joining in the
request for registration and the securities to be sold by other selling
shareholders participating in the registration shall be excluded from such
registration in the ratio of eighty (80) to twenty (20) so that 80% of the
shares included in the registration (other than Company shares) are
Registrable Securities of the Holders and 20% are shares owned by other
shareholders joining in the registration.
(iii) If any Holder of Registrable Securities or
any other stockholder disapproves of the terms of any such underwriting,
such stockholder may elect to withdraw therefrom by written notice to the
Company and the underwriter. Any Registrable Securities or other securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
5. Registration on Form S-3.
(a) The Company shall use its best efforts to qualify for
registration on Form S-3 or any comparable or successor form. To that end
the Company shall register (whether or not required by law to do so) the
Common Stock under the Exchange Act in accordance with the provisions of
the Exchange Act following the effective date of the first registration of
any securities of the Company on Form S-1 or any comparable or successor
form or forms.
(b) After the Company has qualified for the use of Form
S-3, in
6
<PAGE>
addition to the rights contained in the foregoing provisions of this
Agreement, the Holders shall have the right to request from time to time
registrations on Form S-3. Such requests shall be initiated by the
Initiating Holders, shall be in writing and shall state the number of
shares of Registrable Securities to be disposed of and the intended methods
of disposition of such shares by such Holders. Whenever the Company is
required by this Section 5 to effect the registration of the Registrable
Securities, each of the procedures and requirements of Section 3
(including, without limitation, the requirement that the Company notify the
Non-Initiating Holders in order to provide them with the opportunity to
participate in the offering) shall apply to such registration; provided,
however, that there shall be no limitation on the number of registrations
on Form S-3 which may be requested and obtained under this Section 5, other
than a limit of two (2) such registrations in any calendar year.
6. Expenses of Registration. The Company shall bear all
Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to this Agreement. All Selling
Expenses shall be borne by the holders, including the Company, of the
securities so registered pro rata on the basis of the number of their
shares so registered.
7. Registration Procedures. In the case of each
registration effected by the Company pursuant to Sections 3, 4 or 5, the
Company will keep each Holder advised in writing as to the initiation of
each registration and as to the completion thereof. At its expense, the
Company will do the following:
(a) Keep such registration effective for a period of three
months or until the Holders have completed the distribution described in
the registration statement relating thereto, whichever first occurs, but in
any event not longer than six (6) months; provided, however, that in the
case of any registration of Registrable Securities on Form S-3 which are
intended to be offered on a continuous or delayed basis, such period shall
be extended, if necessary, to keep the registration statement effective
until all such Registrable Securities are sold;
(b) Prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition
of securities covered by such registration statement;
(c) Furnish such number of prospectuses and other
documents incident thereto, including any amendment of or supplement to the
prospectus, as a Holder from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered
by such
7
<PAGE>
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or incomplete in
the light of the circumstances then existing, and at the request of any
such seller, prepare and furnish to such seller a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchaser of such shares,
such prospectus shall not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or incomplete in the light of
the circumstances then existing;
(e) If at the time of any request to register Registrable
Securities, the Company is engaged or has fixed plans to engage within 60
days of the time of the request in a registered public offering as to which
the Holders may include Registrable Securities hereunder or is engaged in
any other activity which, in the good faith determination of the Company's
Board of Directors, would be adversely affected by the requested
registration to the material detriment of the Company, then the Company may
at its option direct that such request be delayed for a period not in
excess of ninety (90) days from the effective date of such offering or the
date of commencement of such other material activity, as the case may be,
such right to delay a request to be exercised by the Company not more than
once in any twelve (12) month period.
(f) Cause all such Registrable Securities to be listed on
each securities exchange or trading market on which similar securities
issued by the Company are then listed or traded;
(g) Provide a transfer agent and registrar for all
Registrable Securities and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such
registration;
(h) Make available for inspection by any seller of
Registrable Securities, any underwriter participating in any disposition
pursuant to such registration statement, and any attorney or accountant
retained by any such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and
cause the Company's officers and directors to supply all information
reasonably requested by any such seller, underwriter, attorney or
accountant in connection with such registration statement; provided,
however, that such seller, underwriter, attorney or accountant shall agree
to hold in confidence and trust all information so provided;
(i) Furnish to each selling Holder a signed counterpart,
addressed to the selling Holder, of
8
<PAGE>
(i) an opinion of counsel for the Company, dated
the effective date of the registration statement in usual and customary
form for registered public offerings, and
(ii) "comfort" letters signed by the Company's
independent public accountants who have examined and reported on the
Company's financial statements included in the registration statement, to
the extent permitted by the standards of the AICPA or other relevant
authorities, covering substantially the same matters with respect to the
registration statement (and the prospectus included therein) and (in the
case of the accountants' "comfort" letters) with respect to events
subsequent to the date of the financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' "comfort"
letters delivered to the underwriters in underwritten public offerings of
securities;
(j) Furnish to each selling Holder a copy of all documents
filed with and all correspondence from or to the Commission in connection
with any such offering other than non-substantive cover letters and the
like;
(k) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings
statement covering the period of at least twelve months, but not more than
eighteen months, beginning with the first month after the effective date of
the Registration Statement, which earnings statement shall satisfy the
provisions of Section 11(a) of the Securities Act; and
(l) In connection with any underwritten offering pursuant
to a registration statement filed pursuant to Section 3 hereof, the Company
shall enter into any underwriting agreement reasonably necessary to effect
the offer and sale of the Registrable Securities, provided such
underwriting agreement shall contain customary underwriting provisions.
8. Indemnification.
(a) The Company shall indemnify each Holder, each of its
officers, directors and partners, and each person controlling such Holder,
with respect to which registration, qualification or compliance has been
effected pursuant to Sections 3, 4 or 5 and each underwriter, if any, and
each person who controls any underwriter, against all claims, losses,
damages and liabilities (or actions, proceedings or settlements in respect
thereof) arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification
or compliance, or based on any omission (or alleged omission)
9
<PAGE>
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading or incomplete, or any
violation by the Company of the Securities Act or any rule or regulation
thereunder applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Holder, each of
its officers, directors and partners, and each person controlling such
Holder, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses as they are reasonably
incurred in connection with investigating and defending any such claim,
loss, damages, liability or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by such
Holder or underwriter.
(b) Each Holder shall, if Registrable Securities held by
it are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify the Company, each
of its directors and officers and each underwriter, if any, of the
Company's securities covered by such a registration statement, each person
who controls the Company or such underwriter within the meaning of the
Securities Act and the rules and regulations thereunder, each other Holder
and each of their officers, directors and partners, and each person
controlling such Holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained
in any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading or incomplete, and will reimburse the Company and
such Holders, directors, officers, partners, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus,
offering circular or other document in reliance upon and in conformity with
written information furnished to the Company by such Holder for the purpose
of being included in such registration statement, prospectus, offering
circular or other document; provided, however, that the obligations of such
Holders hereunder shall be limited to an amount equal to the net proceeds
(after Selling Expenses) to each such Holder of securities sold as
contemplated herein.
(c) Each party entitled to indemnification under this
Section 8 (the "Indemnified Party") shall give notice to the party required
to provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or any
10
<PAGE>
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not be unreasonably withheld), and the Indemnified
Party may participate in such defense at such party's expense, and provided
further that the failure of any Indemnified Party to give notice as
provided herein shall not relieve the Indemnifying Party of its obligations
under this Section 8. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which
does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation. Each Indemnified Party
shall furnish such information regarding itself or the claim in question as
an Indemnifying Party may reasonably request in writing and as shall be
reasonably required in connection with defense of such claim and litigation
resulting therefrom.
(d) If the indemnification provided for in this Section 8
is unavailable to an Indemnified Party in respect of any losses, claims,
damages or liabilities referred to therein, then each Indemnifying Party,
in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the
one hand and all shareholders offering securities in the offering (the
"Selling Shareholders") on the other, or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company on the one hand
and the Selling Shareholders on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities,
as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Selling
Shareholders on the other hand shall be the net proceeds from the offering
(before deducting expenses) received by the Company on the one hand and the
Selling Shareholders on the other. The relative fault of the Company on the
one hand and the Selling Shareholders on the other shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company or by the
Selling Shareholders and the parties' relevant intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Company and the Selling Shareholders agree that it would not
be just and equitable if contribution pursuant to this Section 8(d) were
based solely upon the number of entities from whom contribution was
requested or by any other method of allocation which does not take account
of the equitable considerations referred to above in this Section 8(d). The
amount paid or payable by an Indemnified Party as a result of the losses,
claims, damages and liabilities referred to above in this Section 8(d)
shall be deemed to include any legal or other expenses reasonably incurred
by such Indemnified Party in connection with investigating or defending any
such action or claim, subject to the provisions of Section 8(d) hereof.
Notwithstanding the provisions of this Section 8(d), no Selling Shareholder
shall be required to contribute any amount or
11
<PAGE>
make any other payments under this Agreement which in the aggregate exceed
the net proceeds (after Selling Expenses) received by such Selling
Shareholder. No person guilty of fraudulent misrepresentation (within the
meaning of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
9. Information by Holder. Each Holder of Registrable
Securities shall furnish to the Company such information regarding such
Holder and the distribution proposed by such Holder as the Company may
reasonably request in writing and as shall be reasonably required in
connection with any registration, qualification or compliance referred to
in Sections 3, 4 or 5.
10. "Stand-Off" Agreement. Each Holder, if requested by
the Company and the Managing Underwriter of an offering by the Company of
Common Stock or other securities of the Company pursuant to a Registration
Statement, shall agree not to sell publicly or otherwise transfer or
dispose of any Registrable Securities or other securities of the Company
held by such Holder for a specified period of time (not to exceed 180 days)
following the effective date of such Registration Statement; provided,
that:
(a) such agreement shall only apply to the first
Registration Statement covering Common Stock to be sold on its behalf to
the public in an underwritten offering; and
(b) all Holders holding not less than the number of shares
of Common Stock held by such Holder (including shares of Common Stock
issuable upon the conversion of Shares, or other convertible securities, or
upon the exercise of options, warrants or rights) and all officers and
directors of the Company enter into similar agreements.
11. Limitations on Registration of Issues of Securities.
From and after the date of this Agreement, the Company shall not enter into
any agreement with any holder or prospective holder of any securities of
the Company giving such holder or prospective holder a right to require the
Company to initiate any registration of any securities of the Company or to
require the Company, upon any registration of any of its securities, to
include, among the securities which the Company is then registering,
securities owned by such Holder which is on a parity with or superior to
the rights given to the Holders hereunder unless waived as provided in
Section 15 below.
12. Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the Commission which may
permit the sale of the Registrable Securities to the public without
registration, the Company agrees to:
(a) Use its best efforts to make and keep public
information available as
12
<PAGE>
those terms are understood and defined in Rule 144 under the Securities Act
at all times from and after ninety (90) days following the effective date
of the first registration under the Securities Act filed by the Company for
an offering of its securities to the general public;
(b) Use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act at any time after it has become
subject to such reporting requirements; and
(c) So long as the Holders own any Registrable Securities,
furnish to the Holders forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of Rule 144
(at any time from and after ninety (90) days following the effective date
of the first registration statement filed by the Company for an offering of
its securities to the general public), and of the Securities Act and the
Exchange Act (at any time after it has become subject to such reporting
requirements), a copy of the most recent annual or quarterly report of the
Company, and such other reports and documents so filed as the Holders may
reasonably request in availing itself of any rule or regulation of the
Commission allowing the Holder to sell any such securities without
registration.
13. Transfer or Assignment of Registration Rights. The
rights to cause the Company to register securities granted to the Holders
by the Company under Sections 3, 4 and 5 may be transferred or assigned by
the Purchaser, provided that the Company is given written notice at the
time of or within a reasonable time after said transfer or assignment,
stating the name and address of said transferee or assignee and identifying
the Registrable Securities with respect to which such registration rights
are being transferred or assigned, and provided further that the transferee
or assignee of such rights assumes the obligations of the Holders under
this Agreement.
14. Termination. The provisions of this Section 3, 4 and 5
of this Agreement shall terminate when there shall no longer be any
Registrable Securities.
15. Entire Agreement; Amendment; Waiver. This Agreement
constitutes the entire agreement between the parties hereto with respect to
the subject matter hereof. No amendment, alteration or modification of this
Agreement shall be valid unless in each instance such amendment, alteration
or modification is expressed in a written instrument executed by the
parties hereto. No waiver of any provision of this Agreement shall be valid
unless it is expressed in a written instrument duly executed by the party
or parties making such waiver. The failure of any party to insist, in any
one or more instances, on performance of any of the terms and conditions of
this Agreement shall not be construed as a waiver or relinquishment of any
rights granted hereunder or of the future performance of any such term,
covenant or condition but the obligation of any party with
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<PAGE>
respect thereto shall continue in full force and effect.
16. Specific Performance. The parties hereby declare that
it is impossible to measure in money the damages which will accrue to a
party hereto by reason of a failure to perform any of the obligations under
this Agreement. Therefore, all parties hereto shall have the right to
specific performance of the obligations of the other parties under this
Agreement, and if any party hereto shall institute an action or proceeding
to enforce the provisions hereof, any person (including the Company)
against whom such action or proceeding is brought hereby waives the claim
or defense therein that such party has an adequate remedy at law, and such
person shall not urge in any such action or proceeding the claim or defense
that such remedy at law exists.
17. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be mailed first
class registered with postage prepaid as follows:
(a) If to a Purchaser, to the following:
Berthel Fisher & Company Leasing, Inc.
100 Second Street
Cedar Rapids, Iowa 52401
(b) If to the Company, to the following:
HLM Design, Inc.
Suite 2950
121 West Trade Street
Charlotte, NC 28202
FAX: 704-358-0229
with a copy to:
Shirley J. Linn
Underwood Kinsey Warren & Tucker, P.A.
2020 Charlotte Plaza
201 South College Street
Charlotte, N.C. 28244-2020
FAX: 704-377-9630
Alternatively, to such other address as a party hereto
supplies to each other party in writing.
14
<PAGE>
18. Successors and Assigns. All the terms and provisions
of this Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective transferees, successors and assigns of the
parties hereto, whether so expressed or not.
19. Governing Law. This Agreement is to be governed by and
interpreted under the laws of the State of Tennessee without giving effect
to the principles of conflicts of laws thereof.
20. Titles and Subtitles. The titles of the sections of
this Agreement are for the convenience of reference only and are not to be
considered in construing this Agreement.
21. Severability. The invalidity or unenforceability of
any provisions of this Agreement shall not be deemed to affect the validity
or enforceability of any other provision of this Agreement.
22. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be an original, but all of
which together shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Registration Rights Agreement as of the date first above written.
HLM DESIGN, INC.
By:_________________________________________
Name:_______________________________________
Title:________________________________________
BERTHEL FISHER & COMPANY LEASING, INC.
By:_________________________________________
Name:_______________________________________
Title:________________________________________
15
GUARANTY
LIMITED IN AMOUNT
THIS GUARANTY is given by the undersigned (hereinafter referred to as the
"Guarantors") to induce Berthel Fisher & Company Leasing, Inc., (hereinafter
referred to as "Lender") to extend credit to, or otherwise become the creditor
or Hansen Lind Meyer Inc. (hereinafter referred to as "Borrower"). Guarantors
understand that the Lender is willing to become the creditor of Borrower only if
Guarantors guaranty the faithful performance of all the terms and conditions
upon which such credit is extended to Borrower, and Guarantors are desirous of
having Lender extend such credit to Borrower upon such terms and conditions as
are agreed upon by Lender and Borrower.
The liability of Guarantors pursuant to this Guaranty (exclusive of any costs
and expenses incurred by Lender to realize upon this Guaranty" shall not, at any
time, exceed the sum of Nine Hundred Fifty Thousand Dollars no/100
($950,000.00).
In consideration of the foregoing, its agreed:
1. Guarantors, jointly and severally, absolutely and unconditionally, guaranty
to Lender, its successors and assigns, the prompt payment to Lender, its
successors and assigns, of all loans, drafts, overdrafts, checks, notes and any
and all other debts, obligations and liabilities of every kind of Borrower to
Lender, including extensions, renewals or refundings thereof (including
extensions, renewals or refundings made after receipt by Lender of written
notice of termination hereof), whether as maker, co-maker, drawer, guarantor,
endorser, or otherwise, whether direct or indirect, liquidated or unliquidated,
absolute or contingent, joint or several, now existing or hereafter arising, due
or to become due, whether originally contracted with Lender, and whether such
indebtedness is from time to time reduced and thereafter increased or entirely
extinguished and thereafter reincurred, including interest and charges and to
the extent not prohibited by law, all costs, expenses, fees and attorneys' fees
at any time paid or incurred by Lender, or its successors or assigns, in efforts
to collect all or part of the foregoing liabilities and obligations or to
realize upon any collateral securing the foregoing liabilities and obligations
(the foregoing are hereinafter collectively referred to as the "Liabilities").
All of the Liabilities shall conclusively be presumed to have been created or
accepted by Lender in reliance on this Guaranty.
In addition to the foregoing obligations of Guarantors, to the extent not
prohibited by law, Guarantors shall be obligated to Lender for any and all costs
and expenses incurred by Lender to realize upon this Guaranty, including, but
not limited to, reasonable attorneys' fees, legal expenses and court costs.
2. This Guaranty is a continuing guaranty and shall remain in effect until
notice of termination in writing is given to Lender. Termination shall be
effective only upon receipt of such notice by Lender. Such termination will be
effective only with respect to those Liabilities incurred or contracted by
Borrower or acquired by Lender after the date on which such written notice is
received by Lender. Notwithstanding the giving of such termination notice and
notwithstanding any other provision contained in this Guaranty, this Guaranty
shall remain in full force
<PAGE>
and effect as to all of the following: (i) all of those Liabilities existing on
the date of receipt by Lender of the notice of termination, (ii) all renewals
and extensions thereof, (iii) all Liabilities arising out of any loan
commitments existing prior to the receipt by Lender of the notice of
termination, and (iv) all costs, expenses, fees and attorneys' fees at any time
paid or incurred by Lender, or its successors or assigns, in efforts to collect
the Liabilities, or to realize upon this Guaranty or any collateral securing the
Liabilities whether or not such costs, expenses or fees are incurred by Lender
before or after the delivery of the notice of termination until full payment of
the Liabilities and other obligations to Lender. Termination of this Guaranty by
notice or by operation of law shall affect the Liabilities in such order as
Lender may elect and without any obligation to account to any of the Guarantors
for the manner or order of application. Any termination of this Guaranty by a
Guarantor shall only be effective as to the Guarantor who has given written
notice and shall not be effective as to any of the other Guarantors.
3. This Guaranty shall be construed as an absolute and continuing guaranty of
payment and, to the extent permitted by law, shall be valid and enforceable
against Guarantors without regard to the regularity, validity or enforceability
of any of the Liabilities. This Guaranty shall be both in supplement of and in
addition to any other guaranty or guaranties, indemnity or indemnities which
shall be furnished to Lender by Guarantors or by any other person or persons to
secure the Liabilities. The failure of any person or entity to sign this
Guaranty shall not release or affect the liability of any signator hereto.
4. Guarantors, jointly and severally, agree, without affecting Guarantors'
liability to Lender hereunder, that Lender may, without notice to or consent of
Guarantors, upon such terms as Lender may deem advisable: (a) from time to time,
extend credit to or otherwise become the creditor of Borrower, (b) renew,
extend, modify, or amend the terms of any of the Liabilities or any agreement
pursuant to which any of the Liabilities were created or security therefor is
held, including, but not limited to, extending the time of payment of any of the
Liabilities, (c) release, surrender, exchange, modify, substitute, impair,
realize upon or deal with any collateral securing any of the Liabilities, (d)
settle or compromise any claim of Lender against Borrower, or against any other
person, firm, or corporation, whose obligation is held by Lender as collateral
security for any of the Liabilities, (e) exercise or refrain from exercising any
rights against Borrower, Guarantors, other guarantors, or any collateral
securing the Liabilities, (f) settle, release or otherwise enter into agreements
regarding the Liabilities with any party primarily or secondarily liable on the
Liabilities, and (g) apply any collateral for the Liabilities in such order as
it may elect and without any obligation to account to Guarantors for the manner
or order of application. Guarantors hereby waive all defenses, counterclaims,
and offsets which Guarantors, jointly and severally, might have by reason of
Lender taking any of the foregoing actions and all such actions shall be binding
upon Guarantors, jointly and severally.
5. Guarantors, jointly and severally, waive: (a) notice of Borrowers incurring
any of the Liabilities, (b) notice of acceptance of this Guaranty by Lender, (c)
notice of presentment, demand for payment, protest or dishonor of any of the
Liabilities, or
<PAGE>
the obligation of any person, firm, or corporation, held by Lender as collateral
security for the Borrower's obligation, (d) notice of the failure of any person,
firm, or corporation to pay to Lender any indebtedness held by Lender as
collateral security for any of the Liabilities, (e) all defenses, offsets and
counterclaims which Guarantors may at any time have to any claim of Lender
against Borrower, and (f) notice of any default on the part of Borrower and any
demand for the payment of the Liabilities; provided, however, if this Guaranty
is for a "Consumer Credit Transaction", as defined in the Iowa Consumer Credit
Code, Lender shall give such notices, if any, as may be required by law.
6. Guarantors, jointly and severally, represent and warrant that, at the time
of the execution and delivery of this Guaranty, there are no conditions to the
effectiveness of this Guaranty and nothing exists to impair the effectiveness of
the liability of Guarantors to Lender hereunder, or to prevent this Guaranty
from taking immediate effect with respect to the guaranty by Guarantors of the
Borrower's obligations to Lender under the Liabilities.
7. Actions to enforce this Guaranty may be brought successively against one or
more of Guarantors, jointly or severally, and against less than all of
Guarantors without impairing or affecting the rights of Lender against the
others. Guarantors may, however, agree among themselves that not release or
settlement shall impair their rights as among themselves. Any claim, including a
claim for contribution, which any of the Guarantors may have against a
co-guarantor indebted or under liability to Lender, either direct or indirect,
or against Borrower, shall not be enforced or payment made until the
indebtedness or liability of the co-guarantor or Borrower to Lender is paid in
full. The collateral given to secure this Guaranty by a co-guarantor indebted or
under liability to Lender shall be applied in payment of the indebtedness or
liability of the co-guarantor to Lender before any part is applied on a claim of
Borrower or a co-guarantor, including, but not limited to, a claim for
contribution of one or more of the Guarantors against a co-guarantor. Lender
may, at its option, proceed in the first instance against Guarantors, jointly
and severally, to collect any obligation covered by this Guaranty, without first
proceeding against Borrower, or any other person, firm, or corporation, and
without first resorting to any property at any time held by Lender as collateral
or security for the payment of the Liabilities or for the payment of Guarantors'
obligations under this Guaranty.
8. The obligations of Guarantors hereunder shall not in any manner be affected
by any of the following: (i) the failure on the part of the Lender to realize
upon, perfect any interest in, or protect any of the Liabilities or security
therefore or take any action with respect thereto, (ii) any impairment,
modification, change, release or limitation of any of the Liabilities resulting
from the operation of any present or future provision of the Bankruptcy Code or
similar statute, or from the decision of any court, (iii) any act or omission by
Lender arising out of Lender's administration of the Liabilities or which in any
way alters the extent of the Guarantors' risk, or (iv) any change, exchange or
alteration of any collateral or other security held by Lender for payment of the
Liabilities or the surrender or release of any such collateral or security.
<PAGE>
9. This Guaranty shall not be discharged or in any way affected by the death
of Guarantors.
10. This Guaranty is secured by all of the following: (a) all collateral
previously, now or hereafter pledged to Lender by any of the Guarantors, (b) all
security interests previously, now or hereafter granted to Lender by any of the
Guarantors and (c) all real estate mortgages previously, now or hereafter
granted to Lender by any of Guarantors (whether such pledge, security interest
or real estate mortgage specifically relates to the Liabilities or not);
provided, however, this Guaranty shall not be secured by any such pledge,
security interest or real estate mortgage given in a "Consumer Credit
Transaction", as defined in the Iowa Consumer Credit Code, unless specifically
provided for therein. Guarantors hereby grant to Lender a security interest in
all accounts, deposits and property of Guarantors in the possession of Lender,
and Lender shall have the right to set off, at any time without notice to
Guarantors, any and all deposits and other sums due from Lender to Guarantor(s).
11. Guarantors, jointly and severally, agree that in the event any payment
made by or on behalf of Borrower respecting any of the Liabilities, or any
person of any such payment, shall at any time be repaid by the recipient in
compliance with an order (whether or not final) by a court of competent
jurisdiction pursuant to any provision of the Bankruptcy Code , as now existing
or hereafter amended, or any provision of applicable state law, the Liabilities
shall not be deemed to have been paid to the extent of the repayment so made and
the obligations of each Guarantor shall continue in full force and effect, and
Lender and Lender's successors and assigns will continue to be entitled to the
full benefits of this Guaranty.
12. All payments received by Lender from Guarantors shall be deemed to have
been made by all Guarantors together with any other guarantors who may be
obligated to Lender on account of the Liabilities, unless Lender is otherwise
advised in writing by all Guarantors and all such other parties. Upon payment,
in full, by Guarantors of the Liabilities. Lender will assign and transfer all
of Lender's rights, if any, in and to the Liabilities (without recourse or any
express or implied warranties) to Guarantors and any other guarantors who may be
obligated to Lender on account of the Liabilities, any such transfer to be in
common (regardless of the source or sources of payment of the Liabilities)
unless Lender is otherwise instructed in writing by all of Guarantors and all
such other parties. Guarantors waive all rights of subrogation to any collateral
and remedies of Lender against Borrower, and other persons or entities, until
all of the Liabilities have been paid in full and discharged.
13. Guarantors hereby release Lender from any duty it may have to disclose to
Guarantors, or any one of them, facts which Lender might now have or in the
future have concerning the financial condition of Borrower, even though such
facts might materially increase the risk of Guarantors.
14. In the event any portion of this Guaranty shall, for any reason, be held
to be invalid, illegal or
<PAGE>
unenforceable in whole or in part, the remaining provisions shall not be
affected thereby and shall continue to be valid and enforceable and if, for any
reason, a court finds that any provision of this Guaranty is invalid, illegal or
unenforceable as written, but that by limiting such provision it would become
valid, legal and enforceable then such provision shall be deemed to be written,
construed and enforced as so limited.
15. This Guaranty constitutes the entire agreement of Guarantors with respect
to the subject matter of this Guaranty, and supersedes all negotiations,
preliminary agreements and all prior and contemporaneous discussions between
Guarantors and Lender in connection with the subject matter of this Guaranty. No
course of dealing, course of performance or trade usage, and no parol evidence
of any nature shall be used to supplement or modify any terms of this Guaranty.
16. This Guaranty is delivered and made in, and shall be construed pursuant to
the laws of, the State of Iowa, and is binding, jointly and severally, upon
Guarantors and their heirs, legal representatives, successors and assigns, and
shall inure to the benefit of Lender, its successors and assigns. This Guaranty
may be enforced by any party to whom all or any part of the Liabilities may be
sold, transferred or assigned. If less than all of the Liabilities are sold,
transferred or assigned, Lender shall have the right to enforce this Guaranty as
to the remainder of the Liabilities. Words and phrases herein shall be construed
as in the singular or plural number, and as masculine, feminine or neuter gender
according to the context.
17. Guarantors hereby acknowledge that they have (i) each received a copy of
this Guaranty, (ii) read and understand this Guaranty, and (iii) been advised by
Lender to consult with legal counsel before signing this Guaranty.
In Witness Whereof Guarantors have signed this Guaranty on this ___________
day of________________________,19_____.
<PAGE>
IN WITNESS WHEREOF Guarantors have signed this Guaranty this __________
day of May, 1997.
____________________________
VERNON B. BRANNON, Guarantor
_____________________________
WILLIAM J. BLALOCK, Guarantor
___________________________
JOSEPH M. HARRIS, Guarantor
STATE OF NORTH CAROLINA )
) ss:
COUNTY OF MECKLENBURG )
On this 29th day of May, 1997, before me, the undersigned, a Notary
Public in and for the State of North Carolina, personally appeared Vernon B.
Brannon, to me known to be the identical person named in and who executed the
foregoing instrument, and acknowledged that he executed the same as his
voluntary act and deed.
___________________________________________
Notary Public in and for the State of North
Carolina
My Commission Expires:
7-4-99
<PAGE>
STATE OF NORTH CAROLINA )
) ss:
COUNTY OF MECKLENBURG )
On this ________ day of May, 1997, before me, the undersigned, a Notary
Public in and for the State of North Carolina, personally appeared William J.
Blalock, to me known to be the identical person named in and who executed the
foregoing instrument, and acknowledged that he executed the same as his
voluntary act and deed.
___________________________________________
Notary Public in and for the State of North
Carolina
My Commission Expires:
__________________
* * * * * * *
STATE OF NORTH CAROLINA )
) ss:
COUNTY OF MECKLENBURG )
On this 29th day of May, 1997, before me, the undersigned, a Notary
Public in and for the State of North Carolina, personally appeared Joseph M.
Harris, to me known to be the identical person named in and who executed the
foregoing instrument, and acknowledged that he executed the same as his
voluntary act and deed.
___________________________________________
Notary Public in and for the State of North
Carolina
My Commission Expires:
7-14-99
IOWA STATE BAR ASSOCIATION FOR THE LEGAL EFFECT OF THE USE OF
Official Form No. 171 THIS FORM, CONSULT YOUR LAWYER
CAVEAT:DO NOT USE THIS FORM IF THIS TRANSACTION IS A CONSUMER CREDIT TRANSACTION
SECURITY AGREEMENT -- GENERAL FORM
1. GRANT OF SECURITY INTEREST. For value received, as security for the
Obligations (as defined below) the undersigned ("Debtor")
hereby grants to
Berthel Fisher & Company Leasing, Inc. ("Secured
-----------------------------------------------------------
Party") a security interest in the property described in the paragraphs checked
below:
|X| All of Debtor's inventory now owned or hereafter acquired;
|X| All of Debtor's accounts, now existing or hereafter arising,
together with all interest of Debtor in any goods, the sale or
lease of which give rise to any of Debtor's accounts, and all
chattel paper, documents and instruments relating to accounts;
|X| All of Debtor's general intangibles, now owned or hereafter
acquired; |X| All of Debtor's equipment now owned or hereafter
acquired; |_| All of Debtor's farm products now owned or hereafter
acquired |_| All of Debtor's fixtures on the real estate described in
Paragraph 3 below;
|X| Property described as See Attached Schedule "A"
--------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
together with the proceeds, products, increase, issue, accessions, attachments,
accessories, parts, additions, repairs, replacements and substitutes of, to, and
for all of the foregoing. Debtor will promptly deliver to Secured Party, duly
endorsed when necessary, all such chattel paper, documents and instruments and
related guaranties, now on hand or hereafter received.
All such property in which a security interest is granted is herein called the
"Collateral."
2. OBLIGATIONS. The aforesaid security interests secure payment and
performance of the following obligations (the "Obligations"): Berthel
-------
Fisher & Company Leasing, Inc. Lease Agreement No.
---------------------------------------------------------------------
- -------------------------------------------------------------------------------
together with all other obligations of Debtor to Secured Party now existing or
hereafter arising, whether direct or indirect, contingent or absolute and
whether as maker or surety and including, but not limited to, future advances
and amounts advanced and expenses and attorneys' fees incurred pursuant to this
Security Agreement.
3. REAL ESTATE. Any Collateral attached to, or grown upon, land (such as
fixtures, crops, timber or minerals) will be grown upon or
attached to the following described real estate: N/A
----------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
and the name of the record owner of such real estate (if other than Debtor) is:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. COPY -- FILING. A carbon, photocopy or other reproduction of this
Security Agreement may be filed as a financing statement. IF FOR FIXTURES TIMBER
OR MINERALS, SUCH A FILING SHALL BE FILED FOR RECORDING IN THE REAL ESTATE
RECORDS.
5. DEBTORS. Each of the undersigned, if more than one, execute this
Security Agreement as his, her, its, their joint and several obligation and it
shall be binding upon and fully enforceable against either or both, or any or
all of them, and reference herein to "Debtor" shall in such case be deemed to be
plural, provided however that nothing contained herein shall extend personal
liability under any of the Obligations as to which such Debtor is not otherwise
liable.
6. COLLATERAL. Debtor represents, warrants and agrees:
a. All Collateral is bona fide and genuine and Debtor is authorized to
grant a security interest in the Collateral, free and clear of all liens and
encumbrances, except the security interest created hereby and except for the
----------
security interests of Firstar Bank Iowa, N.A., being paid off with the proceeds
- -------------------------------------------------------------------------------
of this transaction.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
b. Debtor's principal place of operation is the address shown herein,
and Debtor shall promptly give Secured Party written notice of any change
thereof, unless prior written consent of Secured Party is obtained. All
Collateral and all of the Debtor's business records are now kept, and shall
continue to be kept, at such address, or if not, at 121 West Trade Street, Suite
----------------------------
2950, Charlotte, NC 28002
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THIS AGREEMENT SPECIFICALLY INCLUDES ALL OF THE ADDITIONAL PROVISIONS SET FORTH
BELOW AND ON THE REVERSE SIDE HEREOF. DEBTOR ACKNOWLEDGES RECEIPT OF A FULLY
COMPLETED COPY OF THIS SECURITY AGREEMENT.
DATED: May 29 19 97
------------------------------------------ ---
<TABLE>
<CAPTION>
<S> <C>
/s/ Joseph M. Harris ADDRESS OF SECURED PARTY (FROM WHICH INFORMATION
- -------------------------------------------------------------------- CONCERNING THE SECURITY INTEREST MAY BE OBTAINED)
Joseph M. Harris, President (Debtor)
Hansen Lind Meyer Inc.
----------------------------------------------------------------
(Debtor)
121 West Trade Street, Suite 2950 100 Second Street SE
--------------------------------------------------------------- ------------------------------------------------------
Number and Street Number and Street
Charlotte Cedar Rapids
--------------------------------------------------------------- ------------------------------------------------------
City City
North Carolina Iowa
------------------------------------------------------------------- ------------------------------------------------------
County State County State
</TABLE>
1. REPRESENTATIONS AND AGREEMENTS. Debtor represents and warrants to
Secured Party, and agrees that:
a. If a corporation or other business entity, Debtor is duly
organized, existing, and is qualified and in good standing in all states in
which it is doing business, and the execution, delivery and performance of this
Security Agreement are within Debtor's powers. have been duly authorized, and
are not in contravention of law or the terms of Debtor's charter, bylaws, if
any, or any indenture, agreement, or undertaking to which Debtor is a party, or
by which it is bound. If an individual, Debtor is of legal age. Debtor will not
change his, her or its name, or identity unless written notice is given in
advance to Secured Party.
b. Debtor shall maintain insurance upon the Collateral which is
tangible property against all customarily insured risks for the full insurable
value thereof (and furnish Secured Party with duplicate policies if Secured
Party so requests), loss to be payable to Debtor and Secured Party as their
respective interests may appear. In the event of any loss or damage to any
Collateral, Debtor will give Secured Party written notice thereof forthwith,
promptly file proof of loss with the appropriate insurer and take all other
steps necessary or appropriate to collect such insurance. If Secured Party so
elects, Secured Party shall have full authority to collect all such insurance
and to apply any amount collected to amounts owed hereunder, whether or not
matured. Secured Party shall have no liability for any loss which may occur by
reason of the omission or the lack of coverage of any such insurance.
c. Debtor shall at all times maintain Collateral which is tangible
property in good condition and repair, defend at Debtor's expense all Collateral
rom all adverse claims and shall not use any of the Collateral for any illegal
purpose.
d. Debtor shall (i) keep such books and records pertaining to the
Collateral and to Debtor's business operations as shall be satisfactory to
Secured Party; (ii) permit representatives of Secured Party at any time to
inspect the Collateral and inspect and make abstracts from Debtor's books and
records and (iii) furnish to Secured Party such information and reports
regarding the Collateral and Debtor's business operations and its financial
status, as Secured Party may from time to time reasonably require. SECURED PARTY
IS HEREBY AUTHORIZED TO REQUEST CONFIRMATION OF SUCH INFORMATION OR ADDITIONAL
INFORMATION OF ANY KIND WHATSOEVER DIRECTLY FROM ANY THIRD PARTY HAVING DEALINGS
WITH DEBTOR. SECURED PARTY IS FURTHER IRREVOCABLY AUTHORIZED TO ENTER DEBTOR'S
PREMISES TO INSPECT THE COLLATERAL.
e. Debtor shall give such notice in writing (including but not limited
to notice of assignment or notice to pay Secured Party directly) as Secured
Party may require at any time to any or all account debtors, with respect to
accounts which are Collateral, and, if Secured Party shall so request, deliver
to Secured Party copies of any and all such notices.
f. Debtor shall promptly transmit to Secured Party all information
that it may have or receive with respect to Collateral or with respect to any
account debtor which might in any way affect the value of the Collateral or
Secured Party's rights or remedies with respect thereto.
g. Unless in default under this Security Agreement, Debtor may sell
inventory in the ordinary course of business and consume any raw materials or
supplies, the use and consumption of which are necessary to carry on Debtor's
business. Debtor shall not otherwise consume, assign or transfer any Collateral
without prior written consent of Secured Party. The provision of this Security
Agreement granting a security interest in proceeds shall not be construed to
mean that Secured Party consents to any sale or disposition of any Collateral.
h. Debtor shall pay when due all taxes, assessments, and any other
governmental levy which is, or may be, levied against any Collateral, and shall
otherwise maintain the Collateral tree of all liens, charges, and encumbrances
(except liens set forth herein and the security interest created hereby).
i. Debtor shall not store any Collateral with any warehouseman without
Secured Party's consent.
j. Debtor shall promptly, unless Secured Party shall waive such
requirement in writing, deliver to Secured Party all certificates of title, if
any, (or any other documents evidencing title) to all Collateral with such
proper notations, assignments or endorsements as may be necessary or appropriate
to create, preserve or perfect Secured Party's security interest in the
Collateral.
k. Debtor shall, at its cost and expense, execute, deliver, file or
record (in such manner and form as Secured Party may require) any assignment,
financing statement or other paper that may be necessary or desirable, or that
Secured Party may request, in order to create, preserve or perfect any security
interest granted hereby or to enable Secured Party to exercise and enforce its
rights hereunder or under any Collateral. Secured Party is further granted the
power, coupled with an interest, to sign on behalf of Debtor as attorney-in-fact
and to file one or more financing statements under the Uniform Commercial Code
naming Debtor as debtor and Secured Party as secured party and describing the
Collateral herein specified.
2. EXPENSES. Debtor upon demand shall pay to Secured Party forthwith the
amounts of all expenses, including reasonable attorneys' fees and legal
expenses, incurred by Secured Party in seeking to collect any sums secured
hereunder or to enforce any rights in the Collateral. Such amounts shall be
secured hereby, and if not paid on demand shall bear interest at the highest
rate payable on any of the Obligations.
3. COLLECTION AUTHORITY ON ACCOUNTS. Debtor hereby irrevocably appoints
Secured Party its true and lawful attorney, with full power to substitution, in
Secured Party's name, Debtor's name or otherwise, for Secured Party's sole use
and benefit, but at Debtor's cost and expense, to exercise, if Secured Party
shall elect after an event of default has occurred (whether or not Secured Party
then elects to exercise any other of its rights arising upon default) all or any
of the following powers with respect to all or any accounts which are
Collateral:
a. To execute on Debtor's behalf assignments of any or all accounts
which are Collateral to Secured Party, and to notify account debtors thereunder
to make payments directly to Secured Party;
b. To demand, sue for, collect, receive and give acquittance
for any and all moneys due or to become due upon or by virtue
thereof;
c. To receive, take, endorse, assign and deliver any and all checks,
notes, drafts, documents and other negotiable and non-negotiable instruments and
chattel paper taken or received by Secured Party in connection therewith;
d. To settle, compromise, compound, prosecute or defend any action or
proceeding with respect thereto;
e. To sell, transfer, assign or otherwise deal in or with the same or
the proceeds thereof or the relative goods, as fully and effectually as if
Secured Party were the absolute owner thereof; and
f. To extend the time of payment of any or all thereof and to make any
allowance and other adjustments with reference thereto.
Any funds collected pursuant lo such powers shall be applied to the payment of
the Obligations. The exercise by Secured Party of, or failure to so exercise,
any of the foregoing authority, shall in no manner affect Debtor's liability to
Secured Party on any of the Obligations. Secured Party shall be under no
obligation or duty to exercise any of the powers hereby conferred upon it and it
shall be without liability for any act or failure to act in connection with the
collection of or the preservation of any rights under any such accounts. Secured
Party shall not be bound to take any steps necessary to preserve rights in any
instrument or chattel paper against prior parties.
4. SET OFF. In the event of default hereunder, Secured Party, at its option
at any time, and without notice to Debtor, may apply against the Obligations any
property of Debtor held by Secured Party. As additional security for payment of
the Obligations, Debtor hereby grants to Secured Party a security interest in
any funds or property of Debtor now or hereafter in possession of Secured Party
and with respect thereto Secured Party will have all rights and remedies herein
specified.
5. WAIVER. Debtor waives protest, notice of dishonor, and presentment of
all commercial paper at any time held by Secured Party on which Debtor is in any
way liable, notice of non-payment at maturity of any account or chattel paper,
and notice of any action taken by Secured Party except where notice is expressly
required by this Security Agreement or cannot by law be waived.
6. DEFAULT. Debtor will be in default upon the occurrence of any of the
following events: (a) failure to make the payment, when due and payable. of any
of the Obligations, (b) failure of the performance of any obligation or covenant
contained or referred to herein; (c) any warranty, representation or statement
made or furnished to Secured Party by or on behalf of Debtor proves to have been
false in any material respect when made or furnished; (d) any event which
results in the acceleration of the maturity of the indebtedness of Debtor or any
guarantor or co-maker of any of the Obligations to others under any indenture,
agreement or undertaking; (e) loss, theft, damage, destruction or encumbrance
to, or of, the Collateral or the making of any levy, seizure of attachment
thereof or thereon, (f) death of (if an acceptable management substitute has not
been named within ninety (90) days), dissolution of, termination of existence
of, insolvency of, business failure of, appointment of a receiver of any part of
the property of, assignment for the benefit of creditors by, or the commencement
of any proceeding under any bankruptcy or insolvency law by or against, Debtor
or any guarantor or co-maker of any of the Obligations; (9) the occurrence or
nonoccurrence of any event or events which causes the Secured Party, in good
faith, to deem itself insecure for any reason whatsoever.
In any such event Secured Party may at its option declare any or all of the
Obligations to be due and payable and such sums shall then be due and payable
immediately, without notice or demand.
7. RIGHTS AND REMEDIES ON DEFAULT. After the occurrence of any event of
default, Secured Party may exercise at any time and from time to time any rights
and remedies available to it under applicable law, including but not limited to
the right to sell, lease or otherwise dispose of the Collateral, and the right
to take possession of the Collateral. FOR THAT PURPOSE SECURED PARTY MAY ENTER
UPON ANY PREMISES ON WHICH THE COLLATERAL OR ANY PART THEREOF MAY BE SITUATED
AND REMOVE IT. Secured Party may require Debtor to assemble the Collateral and
make it available at a place to be designated by Secured Party which is
reasonably convenient to both parties. If at the time of repossession any of the
Collateral contains other personal property not included in the Collateral,
Secured Party may take such personal property into custody and store it at the
risk and expense of Debtor. Debtor agrees to notify Secured Party within
forty-eight (48) hours after repossession of the Collateral of any such other
personal property claimed, and failure to do so will release Secured Party and
its representatives from any liability for loss or damage thereto. Any notice of
intended disposition of any of the Collateral required by law shall be deemed
reasonable if such notice is given at least ten (10) days before the time of
such disposition. Any proceeds of any disposition by Secured Party of any of the
Collateral may be applied by it to the payment of expenses in connection with
the Collateral, including but not limited to repossession expenses and
reasonable attorneys' fees and legal expenses, and any balance of such proceeds
shall be then applied against the obligations and other amounts secured hereby
in such order of application as Secured Party may elect.
8. GENERAL
a. Secured Party may, as its option, pay any tax, assessment, or other
Governmental levy, or insurance premium or any other expense or charge relating
to Collateral which is payable by Debtor (and not timely paid by it), and
further may pay any filing or recording fees. Any amount or amounts so paid,
with interest thereon at the highest rate payable on any of the Obligations
(from the date of payment until repaid) shall be secured hereby and shall be
payable upon demand.
b. Secured Party shall not be deemed to have waived any of its rights
hereunder or under any other agreement, instrument or paper signed by Debtor
unless such waiver be in writing and signed by Secured Party. No delay or
omission on the part of Secured Party in exercising any right shall operate as a
waiver of such right or any other right. A waiver on any one occasion shall not
be construed as a bar to, or waiver of, any right or remedy on any future
occasion.
c. Any notice, if mailed, shall be deemed given when mailed postage
prepaid, addressed to Debtor at its address shown above, or at any other address
of Debtor appearing on Secured Party's records.
d. Covenants, representations, warranties and agreements herein set
forth shall be binding upon Debtor, its legal representatives, successors and
assigns. This Security Agreement may be assigned by Secured Party and all rights
and privileges of Secured Party under this Security Agreement shall then inure
to the benefit of its successors and assigns.
e. If any provision of this Security Agreement shall be for any reason
held to be invalid or unenforceable, such invalidity or unenforceability not
affect any other provision hereof, but this Security Agreement shall be
construed as if such invalid or unenforceable provision had never been contained
herein.
f. If Debtor is a guarantor, endorser, co-maker, or an accommodation
party with respect to the Obligations, Debtor hereby waives the benefit of any
and all defenses and claims of damage which are dependent upon Debtor's
character as a party other than the maker. Each party to any of the Obligations
hereby consents to and waives notice of (1) any and all extensions (whether or
not for longer than the original period) granted as to the time of payment of
any or all of the Obligations, and (2) any renewal of any or all of the
Obligations.
g. This Security Agreement and all rights and duties hereunder,
including but not limited to all matters of construction, validity, and
performance shall be governed by the law of Iowa.
h. Unless otherwise defined in the context otherwise requires, all
terms used herein which are defined in the Iowa Uniform Commercial Code shall
have the meanings therein stated. The rights and remedies herein conferred upon
Secured Party shall be in addition to, and not in substitution or in derogation
of, rights and remedies conferred by the Iowa Uniform Commercial Code and other
applicable law.
i. All words and phrases used herein shall be construed as in the
singular or plural number, and as masculine, feminine or neuter gender. as
context may require.
j. Captions are inserted for convenience only and shall not be taken
as altering the text.
LEASE AGREEMENT #063-21770-000
- --------------------------------------------------------------------------------
CUSTOMER: Hansen Lind Meyer Inc. LESSOR: BERTHEL FISHER & COMPANY
121 West Trade Street LEASING, INC.
Suite 2950 100 Second Street SE
Charlotte, NC 28202 Cedar Rapids, IA 52401
- --------------------------------------------------------------------------------
DESCRIPTION OF EQUIPMENT LEASED
Quantity Equipment Description (TYPE, MAKE, MODEL NO. & SERIAL
NO.)
See Attached Schedule A for Equipment Description
Equipment Location (if different from above): __________________________________
Name/Phone No. of Contact to Confirm Installations:_____________________________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TRANSACTION TERMS
FIRST PAYMENT DUE DATE May 30, 1997
<TABLE>
<S> <C> <C> <C> <C>
TOTAL MONTHLY RENT: $64,501.41(plus applicable taxes) SECURITY DEPOSIT: $ - 0 - TERM: Sixty (60) months
PURCHASE OPTION AT END OF TERM: $1.00 or Other (___________) Fair Market Value
(not to exceed 10%)
</TABLE>
- --------------------------------------------------------------------------------
We have written this Lease in plain language so that you may more easily
understand its terms. Please read your copy of the Lease carefully and feel free
to ask questions. We use the words "you" and "your" to mean each Customer named
above. The words "we", "us" and "our" refer to Berthel Fisher & Company Leasing,
Inc., the owner of the Equipment.
IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS LEASE (INCLUDING THOSE ON THE
REVERSE SIDE) SHOULD BE READ CAREFULLY, BECAUSE ONLY THOSE TERMS IN WRITING ARE
ENFORCEABLE. TERMS OR ORAL PROMISES WHICH ARE NOT CONTAINED IN THIS WRITTEN
LEASE CONTRACT MAY NOT BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS
LEASE ONLY BY ANOTHER WRITTEN AGREEMENT BETWEEN YOU AND US. YOU AGREE TO COMPLY
WITH THE TERMS AND CONDITIONS OF THIS LEASE. THIS LEASE IS NOT CANCELLABLE. YOU
AGREE THAT THE EQUIPMENT WILL BE USED ONLY FOR BUSINESS PURPOSES.
YOU CERTIFY THAT ALL THE INFORMATION GIVEN IN THIS LEASE AND YOUR APPLICATION
WAS CORRECT AND COMPLETE WHEN THIS LEASE WAS SIGNED. THIS LEASE IS NOT BINDING
UPON US OR EFFECTIVE UNTIL AND UNLESS WE EXECUTE THIS LEASE. THE LEASE WILL BE
GOVERNED BY THE LAWS OF THE STATE OF IOWA. YOU AGREE TO THE JURISDICTION AND
VENUE OF FEDERAL AND STATE COURTS IN LINN COUNTY, IOWA.
LESSOR: CUSTOMER:
BERTHEL FISHER & COMPANY LEASING, INC. HANSEN LIND MEYER INC
By:________________________________________ By:________________________
Title:_____________________________________ Title:_____________________
Date Accepted:_____________________________ Date Signed:_______________
- --------------------------------------------------------------------------------
1. LEASE; DELIVERY AND ACCEPTANCE OF EQUIPMENT. You agree to lease the Equipment
described on the reverse side of this Lease from us when we accept this Lease at
our office in Iowa. You agree to be bound by all the terms of this Lease. When
you receive the Equipment, you agree to inspect it and to verify by telephone
such information as we may require. If we request, you will send us a written
certificate of acceptance or other evidence of acceptance. ONCE WE ACCEPT THE
LEASE, YOU MAY NOT CANCEL IT DURING THE FULL LEASE TERM. If you have signed a
purchase contract for the Equipment, by signing this Lease you have assigned it
to us, effective when we pay for the Equipment.
2. RENT. You agree to pay us Monthly Rent for the use of the Equipment, plus
applicable taxes, each month during the Term. The first Monthly Rent is due on
the date you accept the Equipment and each month after that on the date we tell
you. Monthly Rent must be received by that date at the address we tell you,
whether or not you receive an invoice. If required, you will pay a security
deposit when you sign this Lease. As long as you are not in default, we may
either apply your security deposit to the last Monthly Rent, or to your Purchase
Option or we may refund the security deposit to you when the Term expires and
the Equipment is returned in accordance with paragraph 14. To the extent allowed
by law, we may charge you a reasonable fee to cover our documentation and
investigation costs. You also authorize us to insert or correct missing or
incorrect information on the Lease, including your official name. We will send
you copies of such changes.
3. NET LEASE. YOU AGREE THAT YOU ARE UNCONDITIONALLY OBLIGATED TO PAY ALL
MONTHLY RENT AND OTHER AMOUNTS DUE FOR THE ENTIRE LEASE TERM NO MATTER WHAT
HAPPENS EVEN IF THE EQUIPMENT IS DAMAGED OR DESTROYED, IF IT IS DEFECTIVE, OR IF
YOU NO LONGER CAN USE IT. YOU ARE NOT ENTITLED TO REDUCE OR SET-OFF AGAINST
MONTHLY RENT OR OTHER AMOUNTS DUE TO US OR TO ANYONE TO WHOM WE TRANSFER THIS
LEASE FOR ANY REASON WHATSOEVER. EACH LEASE IS A `FINANCE LEASE' AS DEFINED IN
ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE, KNOWN IN IOWA AS ARTICLE 13.
4. DISCLAIMER OF WARRANTIES. THE EQUIPMENT IS BEING LEASED TO YOU IN AN AS-IS
CONDITION. NO SALESMAN OR AGENT OF VENDOR IS AUTHORIZED TO CHANGE ANY TERM OF
THIS LEASE. YOU AGREE THAT WE DO NOT MANUFACTURE THE EQUIPMENT, THAT WE DO NOT
REPRESENT THE MANUFACTURER OR THE VENDOR, AND THAT YOU HAVE SELECTED THE
EQUIPMENT BASED UPON YOUR OWN JUDGMENT. YOU HAVE NOT RELIED ON ANY STATEMENTS
MADE OR NOT MADE BY US OR OUR EMPLOYEES. WE DO NOT MAKE ANY REPRESENTATION OR
WARRANTY OF ANY KIND, DIRECT OR INDIRECT, EXPRESS OR IMPLIED, AS TO THE
SUITABILITY, DURABILITY, DESIGN, OPERATION OR CONDITION OF THE EQUIPMENT, ITS
MERCHANTABILITY, FITNESS FOR USE FOR PARTICULAR PURPOSES OR OTHERWISE. WE SHALL
NOT BE LIABLE TO YOU AND YOU WILL NOT MAKE ANY CLAIM AGAINST US FOR ANY LOSS,
DAMAGE, OR EXPENSE OF ANY KIND CAUSED DIRECTLY OR INDIRECTLY BY THE EQUIPMENT.
5. TITLE AND SECURITY INTEREST. If the purchase option amount is $1.00 (a
"Dollar Purchase Option"), you shall have title to the Equipment immediately
upon delivery and shall be deemed to be the owner of the Equipment as long as
you are not in default under this Lease. In the event of a default, title to the
Equipment shall revert to us, free and clear of any rights or interests you may
have in the Equipment. If the Purchase Option is other than $1.00 (a "Stated
Purchase Option"), the Equipment is and shall remain our sole property during
the Lease Term. Unless you are in default under this Lease, you shall have the
right to peacefully possess and use the Equipment during the Lease Term. To
secure all of your obligations to us under this Lease, you hereby grant us a
security interest in (a) the Equipment, to the extent of your interest (b)
anything attached or added to the Equipment at any time (c) any money or
property from the sale of the Equipment, and (d) any money from an insurance
claim if the Equipment is lost or damaged. You agree that the security interest
will not be affected if this Lease is changed in any way. You hereby appoint us
(or our agent) as your true and lawful attorney-in-fact to affix your signature
to UCC financing statements prepared and filed on your behalf by us (or our
agent) with the same force and effect as if you had signed such financing
statements.
6. USE, MAINTENANCE, REPAIR. You will not move the Equipment from the Equipment
Location without our advance written consent. You will provide us reasonable
access to the Equipment so that we can check the Equipment's existence,
condition, and proper maintenance. You will use the Equipment according to its
intended purpose, as required by all applicable manuals and instructions, and
keep it eligible for any manufacturer's certification. At your own cost and
expenses, you will keep the Equipment in good repair, condition and working
order, except for ordinary wear and tear. All replacement parts and repairs will
become our property. You will not make any permanent alterations to the
Equipment. You may enforce all warranty rights, unless you are in default under
this Lease. For a description of those warranty rights you need to contact your
vendor.
7. TAXES. You agree to pay when due, either directly or by reimbursing us, all
taxes, fines, and penalties relating to this Lease or the Equipment. We will
file any required personal property tax returns, unless we agree otherwise in
writing. You agree to pay any reasonable fee required in order for us or our
designee to complete the calculation and filing of required personal property
tax returns. If this Lease contains a Dollar Purchase Option, you agree to file
any personal property tax returns. We do not have to contest any tax on the
Equipment or this Lease. Upon the termination or expiration of this Lease and if
applicable, you agree to promptly remit our estimate of personal property taxes,
which may become due and which relate to the Equipment .
8. INDEMNITY. We are not responsible for any injuries, damages, penalties,
claims or losses, including legal expenses, incurred by you or any other person
caused by the installation, transportation, manufacture, selection, purchase,
lease, ownership, possession, maintenance, condition, use, return, or
disposition of the Equipment. You agree to indemnify and reimburse us for and to
defend us against any claims for such losses, damages, penalties, claims,
injuries or expenses. This indemnity continues even after the Lease has expired
for acts and omissions that occurred during the Lease Term, whether or not
insurance coverage is in effect.
9. LOSS OR DAMAGE. You are responsible for any loss, destruction or damage to
the Equipment, whether or not insured, from the date the Equipment is shipped to
you until it is returned to us. You are required to pay all Monthly Rent even if
there is any such loss or damage. You must notify us in writing immediately of
any loss or damage. Then, at our option, you will either (a) repair the
Equipment so that it is in good condition and working order, eligible for any
manufacturer's certification, or (b) pay us the amount required by Section 12.
We will apply any insurance proceeds that we receive for the Equipment to reduce
any of your unpaid obligations.
10. INSURANCE. You agree to keep the Equipment fully insured against loss until
you have met all your obligations under this Lease. You agree to obtain a
general public liability insurance policy, covering both personal injury and
property damage, from a company that is acceptable to us. You will include us as
an additional insured or loss payee on such policy, whichever is applicable. You
agree to provide us with a certificate or other evidence of insurance acceptable
to us. We are under no duty to tell you if your insurance coverage is adequate.
If any insurance proceeds are paid as a result of any loss or damage to the
Equipment, you agree that such insurance proceeds will be paid first to us to
satisfy your obligations under this Lease. If you do not provide evidence of
proper insurance within 10 days of our request, we will have the right but not
the duty, to obtain such insurance at your expense on our interest in the
Equipment. You will pay all premiums and related charges, including interest at
up to 1.5% per month, or the highest legal rate, if less.
11. DEFAULT. You will be in default under this Lease if any of the following
happens: (a) we do not receive any Monthly Rent or other payment within 10 days
after its due date; (b) you or any of your guarantors break any promises in this
Lease or any guaranty and do not correct the problem within 20 days after we
send you written notice; (c) you or any of your guarantors become insolvent, are
liquidated or dissolved, merge, transfer substantially all of your stock or
assets, stop doing business or assign your rights or property for the benefit of
creditors; (d) a petition is filed by or against you or any of your guarantors
under any bankruptcy or insolvency law; (e) (for individuals) you or any of your
guarantors die or have a guardian appointed; or (f) you (or any affiliate) is in
default under any other agreement between you and us or our affiliate.
12. REMEDIES. If there is a default, we, at our sole discretion, may do any or
all of the following: (a) give you written notice of the default; (b) require
you to pay immediately to us, as compensation for loss of our bargain and not as
a penalty, (I) all unpaid Monthly Rents for the remainder of the Lease Term,
plus (ii) any other amounts due, including expenses we incur to take possession,
hold, repair and dispose of the Equipment, plus (iii) the Purchase Option
Amount, if stated, or if no fixed Purchase Option amount is given, our
reasonable estimate of the fair market value of like equipment. We will discount
all future Monthly Rents to their present value at the higher of the prime rate
of Firstar Bank in effect at the time of the default or 10%, (c) require you to
return the Equipment as provided in Section 14; and/or (d) pursue any other
remedy we may have. In the event you do not return the Equipment, we or our
agent may peacefully repossess it without a court order and you will not make
any claims against us or the Equipment for trespass, damage or any other reason.
Although you agree that we do not have to do so, if we sell the Equipment, we
will give you credit for the amounts we receive. You will immediately pay us any
amounts still owing. If this is not a true lease and if we are paid a price
which exceeds the amount you owe us plus our costs of sale, we will give you the
excess. You agree that we only need to give you 10 days advance notice of any
sale and no notice of advertising. You agree to pay all our costs of enforcing
our rights against you, including attorney's fees. You agree that we will keep
all of our rights against you, even if we do not chose to enforce them at the
time of the default. You also agree that we may telephone you at any reasonable
time to enforce our rights.
13. YOUR OPTIONS AT LEASE END. Provided you are not in default, upon the
expiration of a Lease with a Dollar Purchase Option, you shall purchase the
Equipment at the end of the Lease Term for such amount and we will release any
security interest we may have in the Equipment. Provided you are not in default,
upon expiration of a Lease with a Stated Purchase Option, you shall have the
option to (a) return the Equipment in accordance with Section 14; or (b) on 60
days advance written notice to us, purchase all but not less than all of the
Equipment for the Purchase Option amount, if stated, or if no fixed Purchase
Amount is given, our reasonable estimate of the fair market value of like
equipment as of the end of the Lease Term. If you elect to purchase the
Equipment, upon payment of the agreed upon price including all sales tax and
other applicable taxes, we will transfer the Equipment to you AS-IS-WHERE-IS,
WITHOUT ANY REPRESENTATION OR WARRANTY. If you fail to exercise the purchase
option (a) you will continue to pay Monthly Rent until the Equipment is received
and accepted by us pursuant to Section 14, and (b) all of the terms of the Lease
shall continue to apply, including your obligation to pay Monthly Rent.
14. RETURN OF EQUIPMENT. If (a) a default occurs, (b) you do not purchase the
Equipment at the end of the Lease Term, or (c) you do not extend the Lease Term,
you will immediately return the Equipment to any location(s) we may designate in
the continental United States. The Equipment must be properly packed for
shipment in accordance with the manufacturer's recommendation or specification,
freight prepaid and insured, maintained in accordance with Section 6, and in
Average Saleable Condition. Average Saleable Condition means that all of the
Equipment is immediately available for use by a third party buyer, user, or
lessee, other than yourself, without the need for any repair or refurbishment.
All Equipment must be free of markings. You will pay us for any missing or
defective parts or accessories. You will continue to pay Monthly Rent until the
Equipment is received and accepted by us.
15. ASSIGNMENT. YOU MAY NOT SELL, TRANSFER, ASSIGN, PERMIT A LIEN ON OR SUBLEASE
THE EQUIPMENT. We may, without notifying you, sell, assign, or transfer this
Lease and our rights to the Equipment. You agree that if we do so, the new owner
will have the same rights and benefits that we now have, but will not have to
perform any of our obligations. You agree that the rights of the new owner will
not be subject to any claims, defenses, or set-offs that you may have against
us. If you are given notice of a new owner, you agree to respond to any requests
about this Lease and if directed, to pay the new owner all Monthly Rent and
other amounts due under this Lease.
16. COLLECTION EXPENSES, OVERDUE PAYMENT, TERMINATION. You agree that we can,
but do not have to, take on your behalf any action which you fail to take to
comply with this Lease, and any expenses we incur will be in addition to the
Monthly Rent which you owe us. We may charge you a late charge to cover
collection costs, equal to 10% of any late payment, but not more than the
highest legal rate. To the extent allowed by law, any late payment will continue
to accrue interest at a rate not to exceed the highest legal rate from the due
date until paid. If you so request and we permit the early termination of this
Lease, you agree to pay a fee for such privilege.
17. YOUR REPRESENTATIONS. You state for our benefit that as of the date of this
Lease, (a) you have the lawful power and authority to enter into this Lease; (b)
the individuals signing this Lease have been duly authorized to do so on your
behalf; (c) by entering into this Lease, you will not violate any law or other
agreement to which you are a party; and (d) you are not aware of anything that
will have a material negative effect on your ability to satisfy your obligations
under this Lease.
18. YOUR PROMISES. You will take any actions we reasonably request to protect
our rights in the Equipment and to meet your obligations under this Lease.
During the term of this Lease, and any renewal, you agree to provide us with all
financial information we may reasonably request and permit us to obtain credit
reports and make other credit inquiries on you as we deem necessary.
19. MISCELLANEOUS. This Lease contains our entire agreement and supersedes any
conflicting provision of equipment purchase orders. TIME IS OF THE ESSENCE IN
THIS LEASE. If a court finds any provision of this Lease to be unenforceable,
the remaining terms of the Lease remain in effect. All our and your written
notices must be sent by certified or first class mail or recognized overnight
delivery service, postage prepaid, to your or our address given above or at such
other address as you or we may have been given in writing.
20. WAIVERS. WE AND YOU EACH AGREE TO WAIVE AND TO TAKE ALL REQUIRED STEPS TO
WAIVE ALL RIGHTS TO A JURY TRIAL. To the extent you are permitted by applicable
law, you waive all rights and remedies conferred upon a lessee by Article 2A
(sections 508-522) of the Uniform Commercial Code including but not limited to
your rights to (a) cancel or repudiate this Lease; (b) reject or revoke
acceptance of the Equipment (c) recover damages from us for any breach of
warranty or for any other reason; and (d) grant a security interest in any
Equipment in your possession. To the extent you are permitted by applicable law,
you waive any rights you now or later may have under any statute or otherwise
which; (I) require us to sell or otherwise use any Equipment to reduce our
damages, (ii) require us to provide you with notice of default, intent to
accelerate amounts becoming due or actual acceleration of amounts becoming due,
or (iii) may otherwise limit or modify any of our rights or remedies. ANY ACTION
YOU TAKE AGAINST US FOR ANY DEFAULT, INCLUDING BREACH OF WARRANTY OR INDEMNITY,
MUST BE STARTED WITHIN ONE (1) YEAR AFTER THE EVENT WHICH CAUSED IT. We will not
be liable for specific performance of this Lease or for any losses, damages,
delay or failure to deliver the Equipment.
<PAGE>
Exhibit 10.22
ADDENDUM A TO LEASE AGREEMENT
Notwithstanding anything to the contrary in the attached Lease dated May 30,
1997 number 063-21770-000 (collectively the "Lease") between Lessor and Lessee:
1) Lessee hereby consents to Lessor collaterally assigning and granting a
security interest in the Lease plus the leased property described therein (the
"Collateral Assignment") to Firstar Bank Milwaukee N.A. (the "Assignee").
Furthermore, the Lessee agrees that the Collateral Assignment will not
materially change its duties under the Lease or materially increase the burden
or risk imposed on Lessee under the Lease or involve actual delegation of any
material performance by Lessor. Lessee hereby waives any claims, defenses or
termination of rights available under Article 2A-303 of the Uniform Commercial
Code against Assignee related to the Collateral Assignment or Assignee's
subsequent disposition of the Lease or the leased property described therein to
any subsequent transferee or purchaser.
2) Lessee acknowledges that the Collateral Assignment prohibits modifications or
rescissions of the Lease except upon the written consent of Lessor and Assignee.
3) Lessee acknowledges that each Lease constitutes a separate and independent
lease of personal property, and is independently enforceable by Lessor and
Assignee from any other lease and without the joinder of any other parties; and
Lessee waives any defenses or objections related to the foregoing.
4) Lessee acknowledges that the only "original" Lease is the Lease currently in
the possession of Lessor, which will be subsequently assigned to Assignee and
will ultimately be in Assignee's possession, and that all other Leases
constitute only copies and are all non-originals.
Accepted by initialing these 29 day of May, 1997.
Lessee: Hansen Lind Meyer, Inc.
________________________________
Lessor: Berthel Fisher & Company Leasing, Inc.
________________________________
<PAGE>
ADDENDUM B
This Addendum A (the "Addendum") is attached to and made apart of that
Lease Agreement # 063-21770-000 dated May 30, 1997 (the "Lease Agreement")
executed by and between Berthel Fisher & Company Leasing, Inc. ("Lessor") and
Hansen Lind Meyer Inc. ("Lessee").
All terms defined in the Lease Agreement will have the same meaning
when used in this Addendum unless redefined herein.
Notwithstanding anything to the contrary stated herein, in the event
the Lessee requests to prepay the Lease Agreement the Lessor will grant the
request so long as the prepayment is on the following terms:
1) If the prepayment takes place within the first 12 months of the
Lease Agreement, Lessee will pay to the Lessor, only Lessor's net investment
(Lessor's Equipment Cost) plus all accrued interest due through the date of the
payoff plus any additional accrued interest so that when paid in full (combined
monthly payments and accrued interest), Lessor will have received interest equal
to one full year of interest, which both parties agree is at a rate of fourteen
percent (14%) per annum;
OR
2) If the prepayment takes place after the end of the 12th month of the
Lease Agreement, Lessee must pay in accordance with the terms of the Lease
Agreement including payment of the FMV Purchase Option.
All other terms and conditions remain the same.
LESSOR: LESSEE:
Berthel Fisher & Company Hansen Lind Meyer Inc.
Leasing, Inc.
By:_____________________________ By:___________________________
Title:__________________________ Title:________________________
Exhibit 21.1
Subsidiaries of the Registrant
The Registrant has no subsidiaries.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
We consent to the use in this Amendment No. 2 to the Registration Statement
relating to the shares of Common Stock of HLM Design, Inc. on Form S-1 of our
report dated (i) November 11, 1997 on the financial statements of HLM Design,
Inc. as of April 25, 1997 and for the period ended April 25, 1997, (ii) our
report dated October 31, 1997 on the financial statements of Hansen Lind Meyer,
Inc. as of April 26, 1996 and April 25, 1997 and for each of the three years in
the period ended April 25, 1997 appearing in the Prospectus, which is a part of
this Amendment No. 2 to the Registration Statement, and to the reference to us
under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Charlotte, North Carolina
February 13, 1998
