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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 001-14137
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HLM DESIGN, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
DELAWARE 56-2018819
<S> <C>
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
121 WEST TRADE STREET
SUITE 2950
CHARLOTTE, NORTH CAROLINA 28202
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(704) 358-0779
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
None None
</TABLE>
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Securities registered pursuant to Section 12(g) of the Act:
$.001 Par Value Common Stock
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At July 19, 1999, the aggregate market value of the voting stock held by
non-affiliates was $5,400,094, based on the closing sales price of the
registrant's Common Stock on that date, of $3.75 per share. As of July 19,
1999, the registrant had a total of 2,084,531 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the registrant's proxy
statement for the annual meeting of stockholders to be held September 22, 1999
have been incorporated by reference in Part III of this Form 10-K.
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<PAGE>
FORM 10-K TABLE OF CONTENTS
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PAGE
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<S> <C> <C>
PART I
Item 1. Business .................................................................................. 3
Item 2. Properties ................................................................................ 7
Item 3. Legal Proceedings ......................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders ....................................... 7
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ................. 8
Item 6. Selected Financial Data ................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................ 14
Item 8. Financial Statements and Supplementary Data ............................................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...... 14
PART III
Item 10. Directors and Executive Officers of the Registrant ........................................ 15
Item 11. Executive Compensation .................................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 15
Item 13. Certain Relationships and Related Transactions ............................................ 15
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 16
INDEX TO FINANCIAL STATEMENTS ........................................................................F-1
SIGNATURES ...........................................................................................
</TABLE>
FORWARD-LOOKING STATEMENTS
The forward-looking statements included in the "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections, which reflect management's best judgment based on factors
currently known, involve risks and uncertainties. Words such as "expects,"
"anticipates," "believes," "intends," and "hopes," variations of such words and
similar expressions are intended to identify such forward-looking statements.
Actual results could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including but
not limited to, the factors discussed in such sections and those set forth in
the cautionary statements contained in Exhibit 99.1 to this Form 10-K. (See
Exhibit 99.1 -- Safe Harbor Under the Private Securities Litigation Reform Act
of 1995.) Forward-looking information provided by the Registrant in such
sections pursuant to the safe harbor established under the Private Securities
Litigation Reform Act of 1995 should be evaluated in the context of these
factors.
EXPLANATORY NOTE
Unless otherwise indicated, all information in this report gives effect to
(a) an effective 12.75-to-1 stock split (effected in a series of transactions)
(the "Stock Split") of the Registrant's common stock, par value $.001 per share
(the "Common Stock") completed, and (b) the exercise of certain warrants (as
defined herein) exercised prior to the consummation of the Registrant's initial
public offering as described herein (the "IPO" or "Offering") in June 1998.
Unless the context otherwise requires, references herein to the "Company" mean
HLM Design, Inc.; references to a "Management and Services Agreement" mean a
long-term agreement between the Company and an architectural, engineering and
planning firm (an "AEP Firm") as described herein; and references to the
"Managed Firms" mean HLMNA, HLMSE, HLMNW, HLMMW, HLMMA, HLMNE, JPJ and GAIH
(each as defined below) and such other AEP Firms with which the Company shall,
from time to time, enter into Management and Services Agreements. "HLM" is a
registered trademark of the Company.
2
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
HLM Design, Inc., formed in March 1997, provides management services to
architecture, engineering, and planning firms. The management services result
in operating efficiencies and provide geographic and service diversification
for clients of the Managed Firms.
The Managed Firms provide a broad spectrum of design services to public
and private clients in the United States and internationally. At the end of the
Company's last fiscal year, the Managed Firms were as follows:
o HLM Design of North America, Inc. ("HLMNA")
o HLM Design of the Southeast, P.C. ("HLMSE")
o HLM Design of the Northwest Architecture, Engineering and Planning, P.C.
("HLMNW")
o HLM Design of the Midwest, Inc. ("HLMMW")
o HLM Design of the Midatlantic, P.C. ("HLMMA")
o HLM Design of the Northeast Architecture, Engineering and Planning, P.C.
("HLMNE")
o JPJ Architects, Inc. ("JPJ")
o G.A. Design International Holdings, Ltd. ("GAIH")
JPJ and GAIH are subsidiaries of the Company.
These firms operated in 12 offices located in Atlanta, Georgia; Iowa City,
Iowa; Chicago, Illinois; Orlando, Florida; Bethesda, Maryland; Denver,
Colorado; Sacramento, California; Dallas, Texas; Philadelphia, Pennsylvania;
Portland, Oregon; Charlotte, North Carolina; and London, UK. The Company is
headquartered in Charlotte, North Carolina. THE COMPANY IS NOT ITSELF ENGAGED
IN THE PRACTICE OF ARCHITECTURE, ENGINEERING, AND PLANNING.
THE MANAGED FIRMS
The Company's full service Managed Firms provide a spectrum of services to
clients through a broad range of professionals, including architects,
mechanical, electrical, structural and civil engineers, landscape architects,
interior designers, and construction administration personnel. The Company has
focused its efforts 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. The Company believes that
its management strategy will assist in attracting new AEP Firms as a result of
two major trends: (1) the increasing complexity, cost and competitiveness of
the design practice conducted by AEP Firms requiring operating and cost
efficiencies and (2) AEP Firms' need for access to a wider pool of
geographically dispersed professionals in order to provide solutions for the
evolving needs of their clients.
MARKETS
The professionals at the Managed Firms specialize in the design of large
complex projects in the healthcare, justice (courts and correctional
facilities), research, corporate/commercial, education, and hospitality
markets. Design experience of professionals employed by the Managed Firms
includes corporate headquarters, hospitals, physician office buildings,
investment office buildings, multi-use office complexes, laboratories,
courthouses, schools, and related facilities. The Managed Firm's professionals
maintain full control over their architectural and engineering practices,
determine which projects to pursue, and set their own standards of practice in
order to promote high-quality provision of services and retain ownership of all
contracts with clients.
The following more fully describes the markets and depth of experience of
the Managed Firms.
HEALTHCARE:
o 362 healthcare clients
o 204 health facility master plans
o 120 ambulatory care centers
o 77 ambulatory surgery centers
o 119 academic medical centers and teaching hospitals
o 65 cancer centers
o 69 women's facilities
o 14 replacement hospitals
o 46 medical office buildings
3
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JUSTICE:
o Nearly 6 million square feet of courts and associated agency space
o Almost 300 courtrooms: appeals, district, magistrate, and bankruptcy
o Over 10 juried awards for Excellence in Justice Architecture
o 10 million square feet of prisons and jails
o More than $700 million in construction of prisons and jails
o In excess of 75,000 inmate beds designed by individuals in the firm
RESEARCH/HIGH TECHNOLOGY:
o Over 40 major facilities
o Over 4,000,000 square feet
o Totaling over $600,000,000 in construction
CORPORATE/COMMERCIAL:
o 76 corporate office buildings totaling more than 21,000,000 square feet
o 136 facilities for financial institutions totaling over 30,500,000 square
feet
o Over 380 interior design and renovation projects
o 26 data centers totaling 3,330,000 square feet
EDUCATION:
o Over 69 projects for 39 colleges, community colleges, and universities
o Over 220 primary and secondary school projects
HOSPITALITY:
o 131 hospitality projects
o 76 international projects
o 95 hotels
OPERATING STRATEGY
As a management company, the Company's relationship with the Managed Firms
is contractual. It has no ownership interest in the Managed Firms except for
GAIH and JPJ. As a result, stockholders in the Company will have no direct or
indirect ownership interest in the Managed Firms except for GAIH and JPJ.
The Company'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 internationally and (2) the expansion of
services by Managed Firms to existing clients.
The creation of a management relationship between the Company and a
Managed Firm involves, among other things, the signing of a Management and
Services Agreement between the Company and the Managed Firm. Under the terms of
the Management and Services Agreement, the Company 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, managed and administrative services (including bookkeeping and
accounts), general administrative services, contract negotiation and
administration for all non-architectural and non-engineering aspects of all
agreements pertaining to the provision of architectural and engineering
services by Managed Firms to third parties, personnel, security and
maintenance, architectural and engineering recruiting and training, insurance,
billing, and marketing support. In connection with these services, the Company
receives all but 1% of the firm's positive cash flow (as determined in
accordance with generally accepted accounting principles applied on a
consistent basis). See " -- HLM Design Operations -- Management and Services
Agreements."
In addition to the Management and Services Agreement, the Company requires
individual stockholders of Managed Firms to enter into Stockholders'
Agreements, which provide the stockholders of those entities with nominee
stockholder status. Generally, the Stockholders' Agreements provide for the
following: (i) the repurchase by the Managed Firm of the stockholder's stock
upon such stockholder's death, (ii) restrictions on transferability of the
stock, (iii) a "call-right" on the stock by the Managed Firm and (iv) a voting
agreement among the stockholders and the Managed Firm. See " -- HLM Design
Operations -- Stockholders' Agreements."
Joseph M. Harris and Vernon B. Brannon, executive officers and
stockholders of the Company, are also the principal stockholders of most of the
Managed Firms and are the principal officers of all the Managed Firms. As
officers, they caused the Managed Firms to enter into Management and Services
Agreements with the Company, and as stockholders of certain of the Managed
Firms they entered into Stockholders' Agreements (as described below).
4
<PAGE>
GROWTH STRATEGY
During the current fiscal year the Company implemented 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. The Company believes its
approach is attractive to these large and small AEP Firms because it provides
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.
During the current fiscal year, the Company completed two acquisitions:
o On October 30, 1998, the acquisition of JPJ was completed. JPJ's focus in
the corporate, education and university markets broadens the Managed
Firms' existing client base and adds a geographic region to its operating
base. The Company purchased all the issued and outstanding shares of JPJ
for $2.4 million in cash, an aggregate of 240,000 shares of Common Stock
(to be issued on a delayed delivery basis) and subordinated promissory
notes in the aggregate principal amount of $1.2 million.
o On January 30, 1999, the acquisition of GAIH was completed. GAIH's
business has encompassed work for commercial clients in a variety of
countries (England, Ireland, Egypt, Hungary, Greece, Switzerland, Norway,
Denmark, Finland, Spain, Lebanon, Jordan, Italy, Zaire, Kenya, Dubai,
France, Japan and Australia) which brings an international focus to the
Managed Firms' already strong United States operations. The Company
purchased 95 percent of the issued and outstanding common stock of GAIH
for a combination of cash, 27,667 shares of Common Stock (to be issued on
a delayed delivery basis) and promissory notes for a total consideration
of approximately $1,037,000.
The Company generally expects that AEP Firms that sign Management and
Services Agreements will retain existing high-quality professional staff and
continue to operate in an effective and efficient manner with personnel who
understand the local market. Additionally, management believes it is positioned
to pursue larger, well-established AEP Firms as a result of the depth of the
Company's management team, its capital structure and the reputation of the
management team in the design industry. Management also believes these goals
can be achieved at less cost than that which would be incurred by AEP Firms
operating on a stand-alone basis.
HLM DESIGN OPERATIONS
Pursuant to its Management and Services Agreements, the Company 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. The Company enhances
firm growth by assisting in the recruitment of new professionals and by
expanding and adding ancillary services.
One of the Company's goals is to negotiate national arrangements and
provide cost savings to Managed Firms through economies of scale in areas such
as malpractice insurance, supplies, equipment and business functions.
MANAGEMENT AND SERVICES AGREEMENTS
The Management and Services Agreements with the Managed Firms are for a
period of forty years. Although these agreements are terminable by the Company,
with or without cause, upon 60 days' notice to the Managed Firms (with the
approval of a majority of the Board of Directors and a majority of its
independent directors), they cannot be terminated by the Managed Firms without
a material default or bankruptcy by the Company. Under these agreements, the
Company is appointed as the sole and exclusive manager and administrator of all
of the Managed Firms' day-to-day business functions. The Company has no
authority, directly or indirectly, to perform any of the Managed Firms'
operations that are required by law to be performed by duly licensed architects
and engineers. The Managed Firms retain ownership of all contracts with
clients. Additionally, the Company 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.
5
<PAGE>
STOCKHOLDERS' AGREEMENTS
Individual stockholders of Managed Firms (not including JPJ and GAIH,
which are subsidiaries of the Company) have entered into Stockholders'
Agreements, which generally restrict the ability of these stockholders to
exercise certain rights commonly associated with ownership of common stock and
effectively provide stockholders of such entities with nominee stockholder
status. Generally, such Stockholders' Agreements provide that:
(i) upon the death of a stockholder, the Managed Firm will purchase, and
the personal representative of such stockholder's estate will sell to the
Managed Firm, all the stock owned by such deceased stockholder; provided,
however, in certain circumstances the sale of such stockholder's stock may
be made to one or more third parties, subject to the approval of the
Managed Firm;
(ii) stockholders may not sell, pledge, give or otherwise transfer any or
all of their stock to any third party, either voluntarily or involuntarily,
without first obtaining the Managed Firm's written approval of such
transfer, provided, that if the Managed Firm denies such approval, it shall
purchase such stock;
(iii) the Managed Firm has the right at any time to purchase all, but not
less than all, of the stock then owned by any or all of the stockholders;
and
(iv) the stockholders agree that with respect to all matters submitted to
stockholder vote (and, to the extent that all or any of the stockholders
serve as a director of the Managed Firm, then also with respect to all
matters submitted to a vote of the board of directors), the stockholders
will, if not in unanimous agreement, follow specified procedures to achieve
unity in voting among all stockholders.
In addition, the Stockholders' Agreements contain an acknowledgment on the
part of each stockholder that it is in the parties' best interest that certain
of the Managed Firm's administrative and managerial functions be performed
pursuant to a Management and Services Agreement with the Company and that in
order to ensure consistency and continuity in the management of the firm's
business and affairs, with respect to all matters pertaining to the initiation
of stock "calls" and the approval or denial of proposed stock transfers, the
Managed Firm will in all cases act in accordance with the written
recommendation of the Company. The Stockholders' Agreements provide that they
may be terminated upon the occurrence of any of the following events:
(i) cessation of the Managed Firm's business,
(ii) bankruptcy, receivership or dissolution of the Managed Firm, or
(iii) the voluntary agreement of all parties bound by the terms of such
Stockholders' Agreement.
It is anticipated that Stockholders' Agreements among individual
stockholders of the AEP Firms with whom the Company enters into Management and
Services Agreements in the future will have similar terms.
COMPETITION
The architectural and engineering services industry is highly fragmented
and very competitive. As a result, in each specific market area the Company
competes with many architectural and engineering consulting firms, several of
which are substantially larger than the Company and possess greater financial
resources. No firm currently dominates any significant portion of the Company's
market areas. Competition is based on quality of service, expertise, price,
reputation and local presence. The Company believes that the Managed Firms
compete favorably with respect to each of these factors in the market areas it
serves. The Company is not aware of any other company actively pursuing a
strategy of contracting for firms' administrative and management functions, but
believes that additional companies with similar objectives could be organized
in the future.
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 and regulations
impose licensing requirements and standards upon individual design
professionals and architectural-engineering firms that are overseen by a
registration board. In general, the state laws and regulations 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.
6
<PAGE>
The state laws, or the regulations established by a registration board,
may also establish requirements for the practice of architecture or engineering
by a corporation or partnership. A few states do not permit the practice of
architecture or engineering in a corporate form. Some states require design
professionals who want to incorporate to do so as a professional corporation
authorized and certified by the secretary of state. Most states permit practice
through either a professional corporation or a general business corporation.
Even if a state permits practice in a corporate form, the state may require
that a certain number of principals in the corporation must be registered
architects or engineers. Some states specify that a certain percentage of the
principals, directors or stockholders of a corporate entity must be registered
architects or engineers in order to practice in the state. A corporation
seeking to practice in a state other than that in which it is incorporated must
register as a foreign corporation in the other state and satisfy all of the
registration requirements.
There can be no assurance that the regulatory environment in which the
Company operates will not change significantly in the future.
Federal, state and local environmental laws and regulations have not
historically had a material impact on the operations of the Company; however,
the Company cannot predict the effect on its operations of possible future
environmental legislation or regulations.
EMPLOYEES
As of April 30, 1999, the Company and the Managed Firms together employed
approximately 280 persons of which approximately 100 were registered
professionals (engineers, architects and others). None of the Company's
employees or the Managed Firm's employees is represented by a labor union. The
Company considers its relations with its employees and the employees of the
Managed Firms to be satisfactory.
The registered professional architects and engineers generally have
degrees from accredited architecture or engineering schools, several years of
work experience and have passed licensing examinations. Both registered and
degreed architects have either a five year architectural degree or a four year
degree and a two year advanced architectural degree. The Company's degreed
professionals who are not registered have not yet passed the required licensing
examinations.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 121 West Trade
Street, Suite 2950, Charlotte, North Carolina, where the Company leases 7,254
square feet. Its telephone number is (704) 358-0779. Its lease of such offices
is for a term of 5 years and expires in 2000. Currently, the Company is
negotiating for additional office space for the anticipated growth for the next
fiscal year. In addition to the Company's principal executive offices, the
Company or the Managed Firms lease office space in Sacramento, California;
Denver, Colorado; Orlando, Florida; Atlanta, Georgia; Iowa City, Iowa; Chicago,
Illinois; Bethesda, Maryland; Portland, Oregon; Philadelphia, Pennsylvania;
Dallas, Texas and London, UK.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company or one or more of the Managed Firms are
named in legal proceedings involving contractual disputes or other matters
arising in the ordinary course of business. Currently, no legal proceedings are
pending against or involve the Company or any of 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 the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal
quarter ended April 30, 1999.
7
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Prior to June 12, 1998, the Company was privately held and there was no
market for the Common Stock. Effective June 12, 1998, the Common Stock began
trading on the NASDAQ Small Cap Market under the symbol "HLMD". As of July 19,
1999, 2,084,531 shares of Common Stock were outstanding and issued to a total
of approximately 720 record and beneficial holders.
The Company has never declared or paid a dividend on its Common Stock. The
Company intends to retain all of its earnings to finance the growth and
development of its business, including through the execution of new Management
and Services Agreements, and does not anticipate paying any cash dividends on
its Common Stock for the foreseeable future. Any future change in the Company's
dividend policy will be made at the discretion of the Board of Directors of the
Company and will depend upon the Company's operating results, financial
condition, capital requirements, general business conditions and such other
factors as the Board of Directors deems relevant.
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HIGH LOW
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1999
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First Quarter (Since June 12, 1998) $ 6.25 $ 5.00
Second Quarter ..................... $ 6.25 $ 3.88
Third Quarter ...................... $ 5.63 $ 4.25
Fourth Quarter ..................... $ 5.13 $ 3.38
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS
There have been no sales of unregistered securities by the Company in
fiscal 1999. However, as of October 30, 1998 in connection with the acquisition
of JPJ and as of January 29, 1999 in connection with the acquisition of GAIH
the Company agreed to issue to the respective sellers 240,000 shares and 27,667
shares of Common Stock, respectively, on a delayed delivery basis. In each
case, such shares will be issued in reliance upon the private placement
exemption from the registration requirements of the Securities Act of 1933, as
amended, provided in Section 4(2) thereof.
For additional information concerning such transactions and for
information concerning the use of proceeds of the Company's IPO (Registration
Statement No. 333-40617, effective June 12, 1998), see "Mangement's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 2 to
the Financial Statements included elsewhere herein.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the Predecessor Company (as
defined below) for each of the three fiscal years ended April 25, 1997 are
derived from audited financial statements. The selected financial data
(Predecessor Company) for the one month ended May 30, 1997 are derived from the
unaudited financial statements of HLMNA. The selected financial data for the
year ended May 1, 1998 are derived from the audited consolidated financial
statements of the Company, which reflect the results of operations of the
Company for twelve months and the results of operations of HLMNA, HLMSE and
HLMNW for the eleven month period from May 31, 1997 to May 1, 1998. The
selected financial data for the year ended April 30, 1999 are derived from
audited consolidated financial statements of the Company and the Managed Firms.
All of the data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and related notes included elsewhere
herein.
8
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<TABLE>
<CAPTION>
(PREDECESSOR COMPANY) (1)
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FOR THE YEAR ENDED
--------------------------------------------------
APRIL 30, APRIL 26, APRIL 25,
1995 1996 1997
---------------- ---------------- ----------------
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Revenue ............................................. $ 29,122,557 $ 28,554,424 $ 26,754,710
------------ ------------ ------------
Costs and Expenses:
Direct cost of revenue .............................. 15,685,671 14,261,952 13,376,251
Operating costs ..................................... 14,098,729 13,104,278 12,414,739
ESOP expenses ....................................... 573,837 584,202 408,765
Amortization on intangible assets ................... 5,952 99,145 107,670
------------ ------------ ------------
Total costs and expenses ............................ 30,364,189 28,049,577 26,307,425
------------ ------------ ------------
Income (loss) from operations ....................... (1,241,632) 504,847 447,285
------------ ------------ ------------
Other income (expense)
Net interest ........................................ (142,744) (383,552) (396,007)
Non-operating income (expense) ...................... 428,475 850,273 285,635
------------ ------------ ------------
Total other income (expense) ........................ 285,731 466,721 (110,372)
------------ ------------ ------------
Income (loss) before income taxes, minority
interest and extraordinary item ................... (955,901) 971,568 336,913
Income tax expense (benefit) ........................ (360,080) 435,459 219,799
------------ ------------ ------------
Net income (loss) before minority interest and
extraordinary item ................................ (595,821) 536,109 117,114
Minority interest in earnings ....................... -- -- --
------------ ------------ ------------
Net income (loss) before extraordinary item ......... (595,821) 536,109 117,114
Extraordinary item for early extinguishment of
debt, net of tax of $171,842 ...................... -- -- --
------------ ------------ ------------
Net income (loss) ................................... $ (595,821) $ 536,109 $ 117,114
============ ============ ============
NET INCOME PER SHARE (3)
Basic .............................................
Diluted ...........................................
NET INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM
Basic .............................................
Diluted ...........................................
NUMBER OF SHARES USED TO COMPUTE
PER SHARE DATA
Basic .............................................
Diluted ...........................................
SUPPLEMENTAL NET INCOME PER SHARE (6):
NET INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM
Basic .............................................
Diluted ...........................................
NET INCOME PER SHARE ................................
Basic .............................................
Diluted ...........................................
NUMBER OF SHARES USED TO COMPUTE
PER SHARE DATA
Basic .............................................
Diluted ...........................................
BALANCE SHEET DATA:
Working capital (deficiency) ........................ $ (1,029,547) $ (1,620,488) $ (1,902,363)
Total assets ........................................ 10,519,859 12,577,992 12,874,503
Long-term debt ...................................... 840,302 564,577 103,792
Deferred income taxes ...............................
Total liabilities ................................... 10,690,072 11,819,796 11,670,962
Minority interest ...................................
Warrants outstanding ................................
Stockholders' equity (deficiency) (5) ............... (170,213) 758,196 1,203,541
<CAPTION>
(PREDECESSOR
COMPANY) (1) HLM DESIGN
---------------- CONSOLIDATED
FOR THE YEAR ENDED
ONE MONTH ---------------------------------
ENDED
MAY 30, MAY 1, APRIL 30,
1997 1998 (2) 1999
---------------- ----------------- --------------
<S> <C> <C> <C>
Revenue ............................................. $ 2,233,036 $29,296,690 $37,757,653
------------ ----------- -----------
Costs and Expenses:
Direct cost of revenue .............................. 898,979 13,124,743 17,911,395
Operating costs ..................................... 1,163,141 13,465,102 16,848,453
ESOP expenses .......................................
Amortization on intangible assets ................... 9,571 147,269 262,275
------------ ----------- -----------
Total costs and expenses ............................ 2,071,691 26,737,114 35,022,123
------------ ----------- -----------
Income (loss) from operations ....................... 161,345 2,559,576 2,735,530
------------ ----------- -----------
Other income (expense)
Net interest ........................................ (36,951) (1,027,368) (719,611)
Non-operating income (expense) ...................... -- (69,955) --
------------ ----------- -----------
Total other income (expense) ........................ (36,951) 1,097,323 (719,611)
------------ ----------- -----------
Income (loss) before income taxes, minority
interest and extraordinary item ................... 124,394 1,462,253 2,015,919
Income tax expense (benefit) ........................ 43,000 683,897 942,707
------------ ----------- -----------
Net income (loss) before minority interest and
extraordinary item ................................ 81,394 778,356 1,073,212
Minority interest in earnings ....................... -- -- 326
------------ ----------- -----------
Net income (loss) before extraordinary item ......... 81,394 778,356 1,072,886
Extraordinary item for early extinguishment of
debt, net of tax of $171,842 ...................... -- -- 280,849
------------ ----------- -----------
Net income (loss) ................................... $ 81,394 $ 778,356 $ 792,037
============ =========== ===========
NET INCOME PER SHARE (3)
Basic ............................................. $ 1.12 $ 0.39
=========== ===========
Diluted ........................................... $ .91 $ 0.39
=========== ===========
NET INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM
Basic ............................................. $ 0.52
===========
Diluted ........................................... $ 0.52
===========
NUMBER OF SHARES USED TO COMPUTE
PER SHARE DATA
Basic ............................................. 697,255 2,315,878
=========== ===========
Diluted ........................................... 854,453 2,315,878
=========== ===========
SUPPLEMENTAL NET INCOME PER SHARE (6):
NET INCOME PER SHARE BEFORE
EXTRAORDINARY ITEM
Basic ............................................. $ 0.78
===========
Diluted ........................................... $ 0.70
===========
NET INCOME PER SHARE ................................
Basic ............................................. $ 0.57
===========
Diluted ........................................... $ 0.51
===========
NUMBER OF SHARES USED TO COMPUTE
PER SHARE DATA
Basic ............................................. 1,305,774
===========
Diluted ........................................... 1,462,976
===========
BALANCE SHEET DATA:
Working capital (deficiency) ........................ $ (2,238,531) $ (273,084) $ 5,121,975
Total assets ........................................ 17,639,673 17,582,948 27,474,242
Long-term debt ...................................... 2,476,008 4,164,401 5,672,379
Deferred income taxes ............................... 1,325,138
Total liabilities ................................... 16,354,738 16,503,261 18,470,172
Minority interest ................................... 21,930
Warrants outstanding ................................ 114,932(4) 1,200
Stockholders' equity (deficiency) (5) ............... 1,284,935 964,755 8,980,940
</TABLE>
9
<PAGE>
- ---------
(1) The "Predecessor Company" is HLMNA.
(2) Includes information for HLMNA, HLMSE and HLMNW for the eleven months from
May 31, 1997 to May 1, 1998 on a consolidated basis. The Company's
operations for the month ended May 30, 1997 reflected herein include no
revenues or expenses.
(3) Historical net income per share is not presented, as the historical
capital structure of the Company prior to the Offering is not comparable
with the capital structure of the Company after the Offering.
(4) Reflects in part Warrants held by Pacific Capital, L.P. ("Pacific") as of
May 1, 1998. Pacific exercised its Warrants in June 1998 immediately prior
to the effective date of the Registration Statement with respect to the
Offering.
(5) Neither the Company nor the Predecessor Company has paid cash dividends
from May 1, 1992 to May 1, 1998.
(6) Supplemental net income per share has been prepared based upon the shares
outstanding giving effect to the issuance of common stock related to the
Offering pro rata for Common Stock used to pay certain indebtedness. In
addition, net income has been adjusted to give effect to the Offering and
the May 1997 merger transaction described in Note 2 to Consolidated
Financial Statements as if the transactions had occurred at the beginning
of fiscal 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the Company's
financial statements and the Predecessor Company's financial statements and the
related notes thereto included elsewhere herein.
OVERVIEW
The Company is a management company which enters into management and
services relationships with full-service architectural, engineering and
planning firms. Currently, the Company has entered into Management and Services
Agreements with eight Managed Firms. These Managed Firms operate in twelve
offices, Atlanta, Georgia, Iowa City, Iowa, Chicago, Illinois, Orlando,
Florida, Bethesda, Maryland, Denver, Colorado, Sacramento, California, Dallas,
Texas, Philadelphia, Pennsylvania, Portland, Oregon, Charlotte, North Carolina
and London, UK. The Company is headquarted in 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.
10
<PAGE>
RESULTS OF OPERATIONS
As a result of the acquisition of HLMNA and the consummation of the
Company's Management and Services Agreements and Stockholders' Agreements, the
discussion and analysis of results of operations for the years ended May 1,
1998 and April 25, 1997 are presented on a pro forma basis that reflects the
acquisition of the assets of HLMNA and the consummation of the Management and
Services Agreements and Stockholders' Agreements as though they occurred at the
beginning of the respective periods.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
APRIL 25, MAY 1, APRIL 30,
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenue ...................................................................... $ 26,754,710 $ 31,529,726 $ 37,757,653
Consultant and project expenses .............................................. 6,757,958 6,689,555 9,771,935
------------ ------------ ------------
Net production income ........................................................ 19,996,752 24,840,171 27,985,718
------------ ------------ ------------
Direct labor ................................................................. 6,618,293 7,334,167 8,139,460
Operating costs .............................................................. 12,031,739 14,638,291 16,848,453
Amortization of intangible assets ............................................ 168,000 172,124 262,275
------------ ------------ ------------
Total costs and expenses ..................................................... 18,818,032 22,144,582 25,250,188
------------ ------------ ------------
Income from operations ....................................................... 1,178,720 2,695,589 2,735,530
Other income (expense)
Interest expense ............................................................. (1,096,509) (1,124,357) (719,611)
Non-operating income ......................................................... 292,137 -- --
------------ ------------ ------------
Total other expense .......................................................... (804,372) (1,124,357) (719,611)
------------ ------------ ------------
Income before income taxes, minority interest and extraordinary item ......... 374,348 1,571,232 2,015,919
Income tax expense ........................................................... 298,378 714,897 942,707
------------ ------------ ------------
Net income before minority interest and extraordinary item ................... 75,970 856,335 1,073,212
Minority interest in earnings ................................................ -- -- 326
------------ ------------ ------------
Net income before extraordinary item ......................................... 75,970 856,335 1,072,886
Extraordinary item for early extinguishment of debt, net of tax of $171,842... -- -- 280,849
------------ ------------ ------------
Net income ................................................................... $ 75,970 $ 856,335 $ 792,037
============ ============ ============
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Revenues were $37.8 million in fiscal 1999 as compared to $31.5 million in
fiscal 1998, which is a 19.8% increase. This increase is attributable primarily
to the acquisition of JPJ in October 1998. This increase is partially offset by
the Company's change in its fiscal year end date from the last Friday in April
to the Friday nearest the end of April. This change resulted in one week less
revenues for the fiscal year 1999 as compared to the fiscal year 1998.
Direct costs primarily include consultant costs and reimbursable project
expenses. Direct costs were $9.8 million, or 25.9% of revenues, in fiscal 1999
as compared to $6.7 million, or 21.2% of revenues, in fiscal 1998. This
increase as a percent of revenues is due to the Company's increased use of
consultant expenses to meet project requirements. The increase is primarily due
to JPJ's use of consultants in the period from November 1998 to April 1999.
Management believes that JPJ will continue to use consultants which will cause
direct costs as a percent of revenues to increase in future periods as JPJ
consultant expenses are reflected for a twelve month period.
Direct labor cost was $8.1 million, or 29.1% of net production income, in
fiscal 1999 as compared to $7.3 million, or 29.5% of net production income, in
fiscal 1998. This decrease as a percent of net production income is principally
due to continued improvement in productivity as a result of the Company's
increased focus on cost containment for each project.
Operating costs were $16.8 million, or 60.2% of net production income, in
fiscal 1999 as compared to $14.6 million, or 58.9% of net production income, in
fiscal 1998. This increase as a percent of net production income is principally
due to expenses associated with being a public company and depreciation and
amortization expenses associated with property and equipment, partially offset
by a decrease in legal expenses.
Amortization of intangible assets was $0.3 million in fiscal 1999 as
compared to $0.2 million in fiscal 1998. This increase is attributable to
amortization expense arising from the acquisition of JPJ and GAIH in October
1998 and January 1999, respectively. See Note 2 to the Consolidated Financial
Statements included elsewhere herein.
11
<PAGE>
Interest expense was $0.7 million in fiscal 1999 and $1.1 million in
fiscal 1998. This decrease is principally due to the Company's IPO in June 1998
whereby the Company repaid approximately $3.0 million in debt from the proceeds
of the Offering. This decrease is partially offset by increased borrowings in
the last six months of fiscal 1999 as a result of the Company's acquisition of
JPJ and GAIH in October 1998 and January 1999, respectively.
Income tax expense was $0.9 million and $0.7 million for fiscal 1999 and
fiscal 1998, respectively. The effective income tax rate was 47% and 46% for
fiscal 1999 and fiscal 1998, respectively. The effective rate is higher
primarily due to increased goodwill amortization.
Extraordinary item for early extinguishment of debt was $0.3 million in
fiscal 1999. In June 1998, the early extinguishment of indebtedness to Pacific,
Equitas, L.P. and Berthel Fisher & Company Financial Services, Inc. resulted in
an extraordinary charge of $280,849, net of income taxes of $171,842, that
consisted of write-off of related unamortized financing costs.
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues were $31.5 million in fiscal 1998 as compared to $26.8 million in
fiscal 1997, which is an increase of 17.8%. This increase is attributable to
management's stronger focus on marketing efforts during the fiscal year ended
1998.
Direct costs primarily include consultant cost and reimbursable project
expenses. Direct costs were $6.7 million, or 21.2% of revenues, in fiscal 1998
as compared to $6.8 million, or 25.3% of revenues, in fiscal 1997. This
decrease as a percent of net production income is principally due to a decrease
in consultant costs to meet project requirements.
Direct labor cost was $7.3 million, or 29.5% of net production income, in
fiscal 1998 as compared to $6.6 million, or 33.1% of net production income, in
fiscal 1997. This decrease as a percent of net production income is due to
improved productivity as a result of management's closer monitoring of each
project.
Operating expenses were $14.6 million, or 58.9% of net production income,
in fiscal 1998 as compared to $12.0 million, or 60.2% of net production income
in fiscal 1997. The decrease as a percent of net production income is primarily
due to decreased professional and general insurance costs during fiscal 1998.
Amortization of intangible assets were $0.2 million in both fiscal 1998
and 1997. The amortization expense relates to the goodwill arising from the
acquisition of HLMNA. See Note 2 to the Consolidated Financial Statements
included elsewhere herein.
Interest expense was $1.1 million in both fiscal 1998 and 1997.
Non-operating income was $0.3 million in fiscal 1997. The Company reported
no non-operating income in fiscal 1998. Non-operating income in 1997 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, terminated facility leases resulted in a
gain of $0.3 million.
Income tax expense was $0.7 million in fiscal 1998 as compared to $0.3
million in fiscal 1997. The effective income tax rate was 46% in fiscal 1998 as
compared to 80% in fiscal 1997. The effective income tax rate was higher in
fiscal 1997 principally due to nondeductible penalties in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1999, the Company's current assets of $16.6 million exceeded
current liabilities of $11.5 million resulting in working capital of $5.1
million. During the year ended April 30, 1999, the Company used $0.9 million in
cash from operating activities, primarily related to the increase in costs and
estimated earnings in excess of compared to billings on uncompleted contracts
and decreases in income taxes and accounts payable that were partially offset
by decreases in accounts receivable and prepaid and other assets. The Company
used $2.5 million for investing activities, primarily the cash payment for the
purchase of JPJ, net of cash acquired, and to a lesser extent, the purchase of
equipment and the acquisition of GAIH. On October 30, 1998, the Company
purchased all the issued and outstanding stock of JPJ for $2.4 million in cash
($1.3 million net of cash acquired), promissory notes bearing interest at seven
percent in the aggregate principal amount of $1.2 million and an aggregate of
240,000 shares of Common Stock (to be issued on a delayed delivery basis). In
addition, on January 29, 1999, the Company purchased GAIH for $0.4 million in
cash, promissory notes bearing interest at seven percent in the aggregate
principal amount of $0.7 million and an aggregate of 27,667 shares of Common
Stock (to be issued on a delayed delivery basis). The Company generated $3.6
million from financing activities, primarily from the completion of its IPO.
The Company received $5.92 million in net proceeds after giving effect to
payment of underwriters' discount and
12
<PAGE>
other expenses) from the sale of 1,200,000 of Common Stock sold at an aggregate
price of $7.2 million. The net proceeds were used to repay certain indebtedness
of $0.75 million due to Berthel Fisher & Company Leasing, Inc., $2.0 million
due to Pacific and Equitas, L.P., and $0.2 million due to employee
stockholders. The Company used the remaining net proceeds of $2.97 million for
the acquisition of JPJ and GAIH as described above, and to a lesser extent, for
general corporate purposes.
The Company's growth and operating strategy will require substantial
capital and may result in the Company incurring additional debt, issuing equity
securities or obtaining additional bank financing. As the management company,
the Company will be responsible for the financing of working capital growth,
capital growth and other cash needs of the Managed Firms. See "Business -- HLM
Design Operations -- Management and Services Agreements". On March 26, 1999,
the Company increased its revolving line of credit with First Charter National
Bank from $3.0 million to $5.0 million. At April 30, 1999, the Company had
outstanding borrowings thereunder of $3.1 million. The revolving line of credit
is secured by, among other things, a security interest in all accounts
receivable. Any outstanding balance under this loan bears interest at prime
plus one percent. This loan matures on June 30, 2000.
The Company believes that for present operations, the existing line of
credit and anticipated funds from future operations will be sufficient to meet
the Company's operating needs for at least the next twelve months. However, in
order to continue its expansion program through acquisitions, the Company will
require additional capital. If the Company is unable to obtain additional
capital, its ability to implement its growth strategy will be adversely
affected.
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 1999 were $0.8 million.
SEASONALITY
The Company's operations are not seasonal in nature.
EFFECTS OF INFLATION
Due to the relatively low levels of inflation in fiscal years 1997, 1998
and 1999, inflation did not have a significant effect on the Company's results
of operations for those periods.
YEAR 2000 COMPLIANCE
Many computer systems will not be able to process dates beyond 1999 and
will need to be modified or replaced prior to the year 2000. Many of the
Company's information technology purchases were made after January 1997 and
management believes the Company's internal software and hardware systems will
function properly with respect to dates in the year 2000 and thereafter. Year
2000 issues are also addressed as the Company's network and internal systems
are upgraded in the normal course of business. As of April 30, 1999, the
Company's expenditures towards year 2000 compliance has been minimal and it
does not expect its additional expenditures directly related to year 2000
compliance to exceed $100,000. Management continually reassesses the estimated
costs and status of the Company's year 2000 compliance effort.
The Company began conducting verification testing of all its internal
information technology and information systems in 1998. The testing is a
multi-phased process which includes, but is not limited to, simulating several
key dates and times in the year 2000 and performing normal daily activities.
The infrastructure, servers and workstations, as well as primary software
systems, have been tested and validated using this process. The final phase of
testing is scheduled to be completed in October 1999.
While management believes that its hardware and software applications are
year 2000 compliant, there can be no assurance until the year 2000 occurs that
all systems will then function adequately. The Company is monitoring all key
vendors and suppliers for year 2000 compliance by various methods including,
but not limited to, gathering information from a detailed survey sent by the
Company to each key vendor. Most of the Company's significant suppliers and
vendors have advised the Company that they are, or anticipate being, year 2000
compliant. If, however, other software applications of other suppliers or of
local exchange carriers, long distance carriers, service providers, competitive
access providers, or others on whose services the Company depends are not year
2000 compliant, a material adverse effect on the Company's financial condition
and results of operations could result. The Company is not aware of any
significant vendor who may be unable to provide services to the Company as a
result of year 2000 non-compliance. The Company currently has a disaster
recovery plan in place which will serve as a foundation for its contingency
plan in the event some suppliers and vendors are not year 2000 compliant. The
full contingency plan is currently being developed and will be complete late in
1999.
13
<PAGE>
SIGNIFICANT MATERIALITY OF GOODWILL
Goodwill represents the excess purchase price over the estimated fair
value of tangible and separately measurable intangible net assets acquired. The
cumulative amount of goodwill at May 1, 1998 was $2.4 million and at April 30,
1999 was $7.3 million. As a percentage of total assets and stockholders'
equity, goodwill, net of accumulated amortization, represented 13.6% and
251.5%, respectively, at May 1, 1998, and 27.6% and 81.8%, respectively, at
April 30, 1999. Generally accepted accounting principles require that goodwill
and all other intangible assets be amortized over the period benefited. We have
determined that the period benefited by the goodwill will be no less than 15
years. Accordingly, we are amortizing goodwill over a 15 year period for HLMNA
and a 25 year period for both JPJ and GAIH. Earnings reported in periods
immediately following an acquisition would be overstated if the Company
attributed a 15 or 25 year benefit to an intangible asset that should have had
a shorter benefit period. In later years, the Company would be burdened by a
continuing charge against earnings without the associated benefit to income
valued by management in arriving at the price paid for the businesses acquired.
Earnings in later years also could be significantly affected if management then
determined that the remaining balance of goodwill was impaired. We periodically
compare the carrying value of goodwill with the anticipated undiscounted future
cash flows from operations of the businesses we have acquired in order to
evaluate the recoverability of goodwill. We have concluded that the anticipated
future cash flows associated with intangible assets recognized in our
acquisitions will continue indefinitely and there is no persuasive evidence
that any material portion will dissipate over a period shorter than 15 and 25
years, respectively. We expect to incur additional goodwill in future
acquisitions.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Effective April 30, 1999, the Company
adopted SFAS No. 131 which redefines how operating segments are determined and
requires disclosure of certain financial and descriptive information about a
company's operating segments. The Company operates in one segment which
provides architectural, engineering and planning services.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instrument
and Hedging Activities." This Standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. The Statement will become
effective for the Company beginning April 2001. However, the Company has
elected earlier application of all of the provisions of this Statement
beginning January 30, 1999. The implementation of the provisions of this
Statement did not have an impact on the Company's financial statements for the
year ended April 30, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has limited exposure to interest rate risk related to certain
instruments entered into for other than trading purposes. Specifically, the
Company has in place a $5,000,000 line of credit, which bears interest at the
prime rate of the lender plus one percent. At April 30, 1999, the Company had
borrowings under this line of credit of $3,118,336 and the effective interest
rate at that date was 8.75%. While changes in the prime rate could affect the
cost of funds borrowed in the future, the Company believes the effect, if any,
of reasonably forseeable near-term changes in interest rates on the Company's
financial conditions, results of operations and cash flows would not be
material.
The Company has no other material exposure to market risk sensitive
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Information which appears on F-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item with respect to the Company's directors
and executive officers and compliance by the Company's directors, executive
officers and certain beneficial owners of the Company's Common Stock with
Section 16(a) of the Securities Exchange Act of 1934 is furnished by
incorporation by reference of all information under the captions entitled
"Election of Directors", "Executive Officers" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Proxy Statement (to be
filed hereafter) for the Company's Annual Meeting of the Stockholders to be
held on September 22, 1999 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is furnished by incorporation by
reference of all information under the caption entitled "Executive
Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is furnished by incorporation by
reference of all information under the caption "General -- Equity Security
Ownership" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is furnished by incorporation by
reference of all information under the caption "Certain Transactions" in the
Proxy Statement.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The exhibits and other documents filed as part of this Annual Report on
Form 10-K, including those exhibits which are incorporated by reference herein
to documents previously filed as exhibits to other filings with the Commission,
are:
(a) (1) Financial Statements
See the Index to Financial Information which appears on page F-1
herein.
(2) Financial Statement Schedules
No financial statement schedules are required to be filed as part of
this Annual Report on Form 10-K.
(3) Exhibits:
Exhibits required in connection with this Annual Report on Form 10-K
are listed below. Certain of such exhibits, indicated by an asterisk
(*), are incorporated by reference to documents previously filed as
exhibits to other filings with the Commission.
(b) The Company has not filed any reports on Form 8-K during the last
quarter of the period covered by this report.
16
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------- ------------------------------------------------------------------------------------------------------------------
<S> <C>
3.1* Certificate of Incorporation of the Company, as amended to date (incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 (SEC File No. 333-40617) (the "Form S-1")).
3.2* Bylaws of the Registrant, as amended to date (incorporated by reference to Exhibit 3.2 to the Form S-1).
4.1* Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Form S-1).
4.2* Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Form S-1).
4.3* Registration Rights Agreement dated as of May 30, 1997 by and among the Company, Pacific Capital, L.P. and
Equitas, L.P. (incorporated by reference to Exhibit 4.3 to the Form S-1).
4.4* Registration Rights Agreement dated as of September 10, 1997 by and among the Company and Berthel Fisher
& Company Leasing, Inc. (incorporated by reference to Exhibit 4.4 to the Form S-1).
10.1*1 Management and Services Agreement dated as of May 29, 1997 by and between Hansen Lind Meyer Inc. (now
HLMNA) and the Company (incorporated by reference to Exhibit 10.1 to the Form S-1).
10.2*1 Management and Services Agreement dated as of May 29, 1997 by and between HLM of North Carolina, P.C.
(now HLMSE) and the Company (incorporated by reference to Exhibit 10.2 to the Form S-1).
10.3*1 Management and Services Agreement dated as of May 29, 1997 by and between HLM of Oregon, Architecture
and Planning, P.C. (now HLMNW) and the Company (incorporated by reference to Exhibit 10.3 to the Form
S-1).
10.4*2 Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon and
Hansen Lind Meyer Inc. (now HLMNA) (incorporated by reference to Exhibit 10.4 to the Form S-1).
10.5*2 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. (now HLMSE) (incorporated by reference to Exhibit 10.5 to
the Form S-1).
10.6*2 Stockholders' Agreement dated as of May 29, 1997 by and among Joseph M. Harris, Vernon B. Brannon,
Viktor A. Lituczy and HLM of Oregon, Architecture and Planning, P.C. (now HLMNW) (incorporated by
reference to Exhibit 10.6 to the Form S-1).
10.7* Security Escrow Agreement among the Company, certain security holders and First Union National Bank, as
escrow agent (incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the
fiscal year ended May 1, 1998 (the "1998 Form 10-K")).
10.8* Note Purchase Agreement dated as of May 30, 1997 by and among the Company, Hansen Lind Meyer Inc., BBH
Corp., Pacific Capital, L.P., and Equitas, L.P. (incorporated by reference to Exhibit 10.8 to the Form S-1).
10.9* Promissory Note A-1 dated as of May 30, 1997 by the Company, in favor of Pacific Capital, L.P. (incorporated
by reference to Exhibit 10.9 to the Form S-1).
10.10* Promissory Note A-2 dated as of May 30, 1997 by the Company in favor of Equitas, L.P. (incorporated by
reference to Exhibit 10.10 to the Form S-1).
10.11* Collateral Assignment of Contract Rights dated as of May 30, 1997 by and between the Company, and Pacific
Capital, L.P. and Equitas, L.P. (incorporated by reference to Exhibit 10.11 to the Form S-1).
10.12* Security Agreement dated as of May 30, 1997 by and between the Company, and Pacific Capital, L.P. and
Equitas, L.P. (incorporated by reference to Exhibit 10.12 to the Form S-1).
10.13* Affiliate Promissory Note dated May 30, 1997 by BBH Corp. in favor of the Company (incorporated by
reference to Exhibit 10.13 to the Form S-1).
10.14* Collateral Assignment of Promissory Note dated as of May 30, 1997 by and between the Company, and Pacific
Capital, L.P. and Equitas, L.P. (incorporated by reference to Exhibit 10.14 to the Form S-1).
10.15* Unconditional Guaranty dated as of May 30, 1997 by and between Hansen Lind Meyer Inc. and BBH Corp. in
favor of Pacific Capital, L.P. and Equitas, L.P. (incorporated by reference to Exhibit 10.15 to the Form S-1).
10.16* Guaranty dated as of May 30, 1997 by Joe Harris in favor of Pacific Capital, L.P. and Equitas, L.P. (incorporated
by reference to Exhibit 10.16 to the Form S-1).
10.17* Guaranty dated as of May 30, 1997 by Vernon Brannon in favor of Pacific Capital, L.P. and Equitas, L.P.
(incorporated by reference to Exhibit 10.17 to the Form S-1).
10.18* Noncompetition Agreement dated as of May 30, 1997 by and between the Company, Hansen Lind Meyer Inc.
and Joseph M. Harris (incorporated by reference to Exhibit 10.18 to the Form S-1).
10.19* Noncompetition Agreement dated as of May 30, 1997 by and between the Company, Hansen Lind Meyer Inc.
and Vernon B. Brannon (incorporated by reference to Exhibit 10.19 to the Form S-1).
10.20* Guaranty (Limited in Amount) dated as of May 30, 1997 by and among Vernon B. Brannon, Joseph M. Harris,
and a former director (incorporated by reference to Exhibit 10.20 to the Form S-1).
10.20.1* Addendum B to Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company
Leasing, Inc. and Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.20.1 to the Form S-1).
10.20.2* Letter Agreement dated as of January 9, 1998 amending the Berthel Lease (incorporated by reference to
Exhibit 10.20.2 to the Form S-1).
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------------------
<S> <C>
10.21* Security Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and
Hansen Lind Meyer Inc. (incorporated by reference to Exhibit 10.21 to the Form S-1).
10.22* Lease Agreement dated as of May 30, 1997 by and between Berthel Fisher & Company Leasing, Inc. and
Hansen Lind Meyer Inc. (the "Berthel Lease") (incorporated by reference to Exhibit 10.22 to the Form S-1).
10.23* HLM Design, Inc. Stock Option Plan (incorporated by reference to Exhibit 10.23 to the 1998 Form 10-K).
10.24* HLM Design, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.24 to the 1998
Form 10-K).
10.25* Employment Agreement between the Company and Joseph M. Harris, as amended to date (incorporated by
reference to Exhibit 10.25 to the Form S-1).
10.26* Employment Agreement between the Company and Vernon B. Brannon, as amended to date (incorporated by
reference to Exhibit 10.26 to the Form S-1).
10.27* Promissory Note dated as of May 30, 1997 issued by the Company in favor of First Charter National Bank
(incorporated by reference to Exhibit 10.27 to the Form S-1).
10.28* First Amendment to Management and Services Agreement dated as of May 29, 1997 by and between HLM
Design of Northamerica, Inc. (formerly Hansen Lind Meyer Inc.) and the Company (incorporated by reference to
Exhibit 10.28 to the Form S-1).
10.29* First Amendment to Management and Services Agreement dated as of May 29, 1997 by and between HLM
Design of the Southeast, P.C. (formerly HLM of North Carolina, P.C.) and the Company (incorporated by
reference to Exhibit 10.29 to the Form S-1).
10.30* First Amendment to Management and Services Agreement dated as of May 29, 1997 by and between HLM
Design of the Northwest, Architecture, Engineering and Planning, P.C. (formerly HLM of Oregon Architecture
and Planning, P.C.) and the Company (incorporated by reference to Exhibit 10.30 to the Form S-1).
10.31* Statutory Incentive Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan
between the Company and Joseph M. Harris (incorporated by reference to Exhibit 10.31 to the 1998
Form 10-K).
10.32* Statutory Incentive Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan
between the Company and Vernon B. Brannon (incorporated by reference to Exhibit 10.32 to the 1998
Form 10-K).
10.33* Nonstatutory Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Plan between the
Company and Joseph M. Harris (incorporated by reference to Exhibit 10.33 to the 1998 Form 10-K).
10.34* Nonstatutory Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan between
the Company and Vernon B. Brannon (incorporated by reference to Exhibit 10.34 to the 1998 Form 10-K).
10.35* Stockholders Agreement dated as of July 29, 1997 among the Company, Joseph M. Harris, Vernon B. Brannon,
Pacific Capital, L.P., Equitas, L.P., Clay Caroland, Shannon LeRoy, and a former director (incorporated by
reference to Exhibit 10.35 to the Form S-1).
10.36* Promissory Note dated as of December 10, 1996 issued by Hansen Lind Meyer, Inc. in favor of First Charter
National Bank (incorporated by reference to Exhibit 10.36 to the Form S-1).
10.37* Modification and Extension Agreement dated as of June 2, 1997 between First Charter National Bank and
Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.37 to the Form S-1).
10.38* Commercial Guaranty dated as of May 30, 1997 by Hansen Lind Meyer, Inc. in favor of First Charter National
Bank (incorporated by reference to Exhibit 10.38 to the Form S-1).
10.39* Security Agreement dated as of June 2, 1997 between Hansen Lind Meyer, Inc. and First Charter National Bank
(incorporated by reference to Exhibit 10.39 to the Form S-1).
10.40* Commercial Security Agreement dated as of May 30, 1997 between Hansen Lind Meyer, Inc. and First Charter
National Bank (incorporated by reference to Exhibit 10.40 to the Form S-1).
10.41* Subordination Agreement dated as of May 30, 1997 among Berthel Fisher & Company Leasing, Inc., First
Charter National Bank, the Company and Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.41
to the Form S-1).
10.42* Note and Security Agreement dated as of September 10, 1997 by and among the Company, Hansen Lind Meyer,
Inc., certain individual guarantors and Berthel Fisher & Company Leasing, Inc., as amended to date
(incorporated by reference to Exhibit 10.42 to the Form S-1).
10.43* Note and Security Agreement dated as of September 16, 1997 by and among the Company, Hansen Lind Meyer,
Inc., certain individual guarantors and Berthel Fisher & Company Leasing, Inc., as amended to date
(incorporated by reference to Exhibit 10.43 to the Form S-1).
10.44* Intercreditor Agreement dated as of September 10, 1997 between and among Berthel Fisher & Company
Leasing, Inc., Pacific Capital, L.P. and Equitas L.P. (incorporated by reference to Exhibit 10.44 to the Form S-1).
10.45* Commercial Guaranty dated as of May 30, 1997 by Joseph M. Harris in favor of First Charter National Bank
(relating to Promissory Note of the Company of even date therewith) (incorporated by reference to Exhibit 10.45
to the Form S-1).
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------------
<S> <C>
10.46* Commercial Guaranty dated as of May 30, 1997 by Vernon B. Brannon in favor of First Charter National Bank
(relating to Promissory Note of the Company of even date therewith) (incorporated by reference to Exhibit 10.46
to the Form S-1).
10.47* Modification and Extension Agreement dated as of May 30, 1998 between First Charter National Bank and the
Company (incorporated by reference to Exhibit 10.47 to the Form S-1).
10.48* Modification and Extension Agreement dated as of May 30, 1998 between First Charter National Bank and
Hansen Lind Meyer, Inc. (incorporated by reference to Exhibit 10.48 to the Form S-1).
10.49* Lease Agreement dated as of December 18, 1995 between CTHL Properties and Hanson Lind Meyer, Inc.
(incorporated by reference to Exhibit 10.49 to the Form S-1).
10.50* Promissory Note dated as of March 20, 1997 issued by Hansen Lind Meyer, Inc. in favor of Joseph M. Harris, as
extended to date (incorporated by reference to Exhibit 10.50 to the Form S-1).
10.51* Promissory Note dated as of March 20, 1997 issued by Hansen Lind Meyer, Inc. in favor of Vernon B. Brannon,
as extended to date (incorporated by reference to Exhibit 10.51 to the Form S-1).
10.52* Guaranty dated as of December 10, 1996 by Joseph M. Harris in favor of First Charter National Bank (relating
to Promissory Note of Hansen Lind Meyer, Inc. of even date therewith) (incorporated by reference to
Exhibit 10.52 to the Form S-1).
10.53* Guaranty dated as of December 10, 1996 by Vernon B. Brannon in favor of First Charter National Bank (relating
to Promissory Note of Hansen Lind Meyer, Inc. of even date therewith) (incorporated by reference to
Exhibit 10.53 to the Form S-1).
10.54* Common Stock Purchase Warrant dated as of May 30, 1997 issued to Pacific Capital, L.P. (incorporated by
reference to Exhibit 10.54 to the Form S-1).
10.55* Second Amendment to Management and Services Agreement dated as of June 5, 1998 by and between HLM
Design of Northamerica, Inc. and the Company (incorporated by reference to Exhibit 10.55 to the Form S-1).
10.56* Second Amendment to Management and Services Agreement dated as of June 5, 1998 by and between HLM
Design of the Southeast, P.C. and the Company (incorporated by reference to Exhibit 10.56 to the Form S-1).
10.57* Second Amendment to Management and Services Agreement dated as of June 5, 1998 by and between HLM
Design of the Northwest, Architecture, Engineering and Planning, P.C. and the Company (incorporated by
reference to Exhibit 10.57 to the Form S-1).
10.58* Letter Agreement among Messrs. Harris and Brannon, Berthel Leasing and the Company (incorporated by
reference to Exhibit 10.58 to the 1998 Form 10-K).
10.59 Nonstatutory Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan between
the Company and Fred Pounds.
10.60 Promissory Note made by the Company in favor of First Charter National Bank dated as of March 26, 1999.
10.61* Stock Purchase Agreement dated as of October 30, 1998 among the Company, Bill D. Smith, FAIA, Walter J.
Viney, AIA, Richard E. Morgan, AIA, Weldon W. Nash, Jr., FCSI, Ken G. Rowley, AIA, Douglas R. Bissell,
AIA, Paul H. Woodard, AIA, Jan G. Blackmon, FAIA, and JPJ Architect, Inc. (incorporated by reference to
Exhibit 99.1 to the Company's Form 8-K filed on November 16, 1998).
21.1 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
</TABLE>
- ---------
* Incorporated by reference to documents previously filed as exhibits to other
filings with the Commission.
1 The Company has entered into substantially identical Management and Services
Agreements with each of its other Managed Firms -- HLMMW, HLMMA, HLMNE, JPJ
and GAIH (in addition to those filed as Exhibits 10.1, 10.2 and 10.3).
2 The other Managed Firms -- HLMMW, HLMMA and HLMNE (but not including JPJ and
GAIH, which are subsidiaries of the Company) have entered into substantially
identical Stockholders' Agreements with their respective individual
stockholders (in addition to those filed as Exhibits 10.4, 10.5 and 10.6).
19
<PAGE>
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
HLM DESIGN, INC. AND AFFILIATES:
INDEPENDENT AUDITORS' REPORT ............................................................ F-2
FINANCIAL STATEMENTS:
Balance Sheets at May 1, 1998 and April 30, 1999 ...................................... F-3
Statements of Income for the year ended April 25, 1997 (Predecessor), the one month
ended May 30, 1997 (Predecessor), and the years ended May 1, 1998 (Consolidated) and
April 30, 1999 (Consolidated).......................................................... F-4
Statements of Stockholders' Equity for the periods ended April 25, 1997 (Predecessor),
May 1, 1998 and April 30, 1999 (Consolidated) ......................................... F-5
Statements of Cash Flows for the year ended April 25, 1997 (Predecessor), the one
month ended May 30, 1997 (Predecessor), and the years ended May 1, 1998
(Consolidated) and April 30, 1999 (Consolidated) ...................................... F-6
Notes to Consolidated Financial Statements ............................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
HLM DESIGN, INC.
Charlotte, North Carolina
We have audited the accompanying consolidated balance sheets of HLM
Design, Inc. (the "Company") and Affiliates as of May 1, 1998 and April 30,
1999, and the related statements of income, stockholders' equity, and cash
flows, for each of the years ended May 1, 1998 and April 30, 1999, and the
statement of stockholders equity for the period from inception March 6, 1997
(inception) 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of May 1,
1998 and April 30, 1999 and the changes in stockholders' equity for the period
from March 6, 1997 (inception) to May 1, 1998 and the year ended April 30, 1999
as well as the results of its operations and cash flows for each of the years
ended May 1, 1998 and April 30, 1999 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
June 21, 1999
Charlotte, North Carolina
INDEPENDENT AUDITORS' REPORT
BOARD OF DIRECTORS
HANSEN LIND MEYER INC.
Charlotte, North Carolina
We have audited the accompanying statements of income, stockholders'
equity, and cash flows of Hansen Lind Meyer Inc. ("HLMNA") for the year ended
April 25, 1997. These financial statements are the responsibility of HLMNA'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 audit provides a reasonable basis
for our opinion.
In our opinion, the HLMNA financial statements referred to above present
fairly, in all material respects, the results of its operations and its cash
flows for the year ended April 25, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
October 31, 1997
Charlotte, North Carolina
F-2
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
BALANCE SHEETS
MAY 1, 1998 AND APRIL 30, 1999
<TABLE>
<CAPTION>
MAY 1, 1998 APRIL 30, 1999
(NOTE 1) (NOTE 1)
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .................................................................................... $ 17,369 $ 250,575
Trade and other receivables, less allowance for doubtful accounts at May 1, 1998 and
April 30, 1999 of $150,000 and $341,692, respectively ................................. 6,089,929 8,311,068
Costs and estimated earnings in excess of billings on uncompleted projects (Note 3) ..... 5,234,468 7,550,247
Prepaid expenses ........................................................................ 724,010 397,245
Refundable income taxes ................................................................. -- 85,495
----------- ------------
Total current assets ................................................................. 12,065,776 16,594,630
----------- ------------
OTHER ASSETS:
Deferred income taxes (Note 8) .......................................................... 465,601 557,845
Goodwill, less amortization at May 1, 1998 and April 30, 1999 of 147,269 and
$409,544, respectively (Note 2)........................................................ 2,426,598 7,442,301
Other noncurrent assets ................................................................. 825,018 668,064
----------- ------------
Total other assets ................................................................... 3,717,217 8,668,210
----------- ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements .................................................................. 782,609 1,114,337
Furniture and fixtures .................................................................. 1,786,250 2,929,676
----------- ------------
Total property and equipment ......................................................... 2,568,859 4,044,013
----------- ------------
Less accumulated depreciation ........................................................... (768,904) (1,832,611)
----------- ------------
Property and equipment, net .......................................................... 1,799,955 2,211,402
----------- ------------
TOTAL ASSETS ............................................................................. $17,582,948 $27,474,242
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 4) .................................................................. $ 2,250,000
Accounts payable ........................................................................ 3,041,859 $ 4,853,283
Accrued expenses ........................................................................ 1,649,306 1,855,364
Income taxes payable .................................................................... 215,950 --
Billings in excess of costs and estimated earnings on uncompleted projects (Note 3) ..... 3,008,023 3,179,882
Deferred income taxes (Note 8) .......................................................... 1,517,146 529,757
Current maturities of long-term debt (Note 4) ........................................... 656,576 1,054,369
----------- ------------
Total current liabilities ............................................................ 12,338,860 11,472,655
----------- ------------
LONG-TERM DEBT (Note 4) .................................................................. 4,164,401 5,672,379
----------- ------------
Deferred Income Taxes (Note 8) ........................................................... -- 1,325,138
----------- ------------
TOTAL LIABILITIES ........................................................................ 16,503,261 18,470,172
----------- ------------
MINORITY INTEREST (Note 1) ............................................................... -- 21,930
----------- ------------
WARRANTS OUTSTANDING (Note 4) ............................................................ 114,932 1,200
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 5 and 6)
STOCKHOLDERS' EQUITY:
Capital Stock
Common, $ .001 par value, voting, authorized 9,000,000 shares; issued 776,134 and
2,345,077, respectively (April 30, 1999, 267,667 shares will be issued on a delayed
delivery schedule - Note 2) .......................................................... 776 2,345
Preferred, $.10 par value, voting, authorized 1,000,000 shares, no shares outstanding .
Additional paid in capital .............................................................. 185,623 7,408,864
Retained earnings ....................................................................... 778,356 1,570,393
Foreign currency translation ............................................................ -- (662)
----------- ------------
Total stockholders' equity ............................................................... 964,755 8,980,940
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................... $17,582,948 $27,474,242
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
STATEMENTS OF INCOME
YEAR ENDED APRIL 25, 1997,
ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR) AND
YEARS ENDED MAY 1, 1998 AND APRIL 30, 1999 (CONSOLIDATED)
<TABLE>
<CAPTION>
(PREDECESSOR) (NOTE 1)
----------------------------
YEAR ONE MONTH
ENDED ENDED
-------------- -------------
APRIL 25, MAY 30,
1997 1997
-------------- -------------
(UNAUDITED)
<S> <C> <C>
REVENUES (Note 1):
Fee Income ............................................................. $24,839,560 $1,998,611
Reimbursable income .................................................... 1,915,150 234,425
----------- ----------
Total revenues ....................................................... 26,754,710 2,233,036
----------- ----------
CONSULTANT EXPENSES ..................................................... 4,857,891 192,862
----------- ----------
PROJECT EXPENSES:
Direct expenses ........................................................ 716,449 35,404
Reimbursable expenses .................................................. 1,183,618 68,617
----------- ----------
Total project expenses ............................................... 1,900,067 104,021
----------- ----------
NET PRODUCTION INCOME ................................................... 19,996,752 1,936,153
DIRECT LABOR ............................................................ 6,618,293 602,096
INDIRECT EXPENSES ....................................................... 12,931,174 1,172,712
----------- ----------
OPERATING INCOME ........................................................ 447,285 161,345
----------- ----------
OTHER INCOME (EXPENSE):
Interest income ........................................................ 6,502 54
Interest expense ....................................................... (402,509) (37,005)
Gain on lease termination (Note 5) ..................................... 344,059
Loss on sale of property ............................................... (58,424)
-----------
Total other income (expense), net .................................... (110,372) (36,951)
----------- ----------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEM..... 336,913 124,394
INCOME TAXES (Note 8):
Current tax expense (benefit) .......................................... (4,461) (11,907)
Deferred tax expense ................................................... 224,260 54,907
----------- ----------
Total income tax expense ............................................. 219,799 43,000
----------- ----------
NET INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM .............. 117,114 81,394
MINORITY INTEREST IN EARNINGS (NOTE 1) ..................................
NET INCOME BEFORE EXTRAORDINARY ITEM .................................... 117,114 81,394
EXTRAORDINARY ITEM FOR EARLY EXTINGUISHMENT OF DEBT,
NET OF TAX BENEFIT OF $171,842 .........................................
NET INCOME .............................................................. $ 117,114 $ 81,394
=========== ==========
NET INCOME PER SHARE (NOTE 1)
Basic ..................................................................
Diluted ................................................................
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM ..........................
Basic ..................................................................
Diluted ................................................................
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (NOTE 1)
Basic ..................................................................
Diluted ................................................................
SUPPLEMENTAL NET INCOME PER SHARE (NOTE 1):
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM ..........................
Basic ..................................................................
Diluted ................................................................
NET INCOME PER SHARE
Basic ..................................................................
Dilute .................................................................
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic ..................................................................
Diluted ................................................................
<CAPTION>
YEAR YEAR
ENDED ENDED
-------------- --------------
MAY 1, APRIL 30,
1998 1999
-------------- --------------
(NOTE 1) (NOTE 1)
<S> <C> <C>
REVENUES (Note 1):
Fee Income ............................................................. $ 27,401,122 $29,299,883
Reimbursable income .................................................... 1,895,568 8,457,770
------------ -----------
Total revenues ....................................................... 29,296,690 37,757,653
------------ -----------
CONSULTANT EXPENSES ..................................................... 4,664,605 7,525,208
------------ -----------
PROJECT EXPENSES:
Direct expenses ........................................................ 890,873 742,633
Reimbursable expenses .................................................. 837,194 1,504,094
------------ -----------
Total project expenses ............................................... 1,728,067 2,246,727
------------ -----------
NET PRODUCTION INCOME ................................................... 22,904,018 27,985,718
DIRECT LABOR ............................................................ 6,732,071 8,139,460
INDIRECT EXPENSES ....................................................... 13,626,956 17,110,728
------------ -----------
OPERATING INCOME ........................................................ 2,544,991 2,735,530
------------ -----------
OTHER INCOME (EXPENSE):
Interest income ........................................................ 2,983 39,486
Interest expense ....................................................... (1,030,351) (759,097)
Gain on lease termination (Note 5) .....................................
Loss on sale of property ............................................... (55,370)
------------
Total other income (expense), net .................................... (1,082,738) (719,611)
------------ -----------
INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEM..... 1,462,253 2,015,919
INCOME TAXES (Note 8):
Current tax expense (benefit) .......................................... 323,035 697,201
Deferred tax expense ................................................... 360,862 245,506
------------ -----------
Total income tax expense ............................................. 683,897 942,707
------------ -----------
NET INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEM .............. 778,356 1,073,212
MINORITY INTEREST IN EARNINGS (NOTE 1) .................................. 326
-----------
NET INCOME BEFORE EXTRAORDINARY ITEM .................................... 778,356 1,072,886
EXTRAORDINARY ITEM FOR EARLY EXTINGUISHMENT OF DEBT,
NET OF TAX BENEFIT OF $171,842 ......................................... 280,849
-----------
NET INCOME .............................................................. $ 778,356 $ 792,037
============ ===========
NET INCOME PER SHARE (NOTE 1)
Basic .................................................................. $ 1.12 $ 0.39
============ ===========
Diluted ................................................................ $ .91 $ 0.39
============ ===========
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM ..........................
Basic .................................................................. $ 0.52
===========
Diluted ................................................................ $ 0.52
===========
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (NOTE 1)
Basic .................................................................. 697,255 2,048,974
============ ===========
Diluted ................................................................ 854,453 2,048,974
============ ===========
SUPPLEMENTAL NET INCOME PER SHARE (NOTE 1):
NET INCOME PER SHARE BEFORE EXTRAORDINARY ITEM ..........................
Basic .................................................................. $ 0.78
============
Diluted ................................................................ $ 0.70
============
NET INCOME PER SHARE
Basic .................................................................. $ 0.57
============
Dilute ................................................................. $ 0.51
============
NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA
Basic .................................................................. 1,305,774
============
Diluted ................................................................ 1,462,976
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED APRIL 25, 1997,
ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR), AND
INCEPTION MARCH 6, 1997 TO APRIL 25, 1997 AND THE
YEARS ENDED MAY 1, 1998 AND APRIL 30, 1999 (CONSOLIDATED)
HANSEN LIND MEYER INC. (PREDECESSOR)
<TABLE>
<CAPTION>
COMMON STOCK ESOP DEBT TOTAL
------------------- RETAINED GUARANTEE STOCKHOLDERS'
CLASS A CLASS B EARNINGS (NOTES 4 AND 9) EQUITY
--------- --------- ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, APRIL 26, 1996 .......................... $ 560 $ 7 $1,140,403 $ (382,774) $ 758,196
Net Income ...................................... 117,114 117,114
Retirement of 927 shares of common stock ........ (9) (54,534) (54,543)
Payments on Employee Stock Ownership Plan debt .. 382,774 382,774
Class A common stock exchanged for Class B common
stock ......................................... (13) 13
----- ----- ---------- ----------- -----------
BALANCE, APRIL 25, 1997 .......................... 547 11 1,202,983 1,203,541
----- ----- ---------- ----------- -----------
Net income ...................................... 81,394 81,394
----- ----- ---------- ----------- -----------
BALANCE, MAY 30, 1997 (unaudited) ................ $ 547 $ 11 $1,284,377 $ $ 1,284,935
===== ===== ========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
HLM DESIGN, INC.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------
ADDITIONAL
SHARES AMOUNT PAID IN CAPITAL
------------ ---------- -----------------
<S> <C> <C> <C>
ORGANIZATION OF HLM DESIGN
MARCH 6, 1997 .................... $ $
Issuance of HLM Design, Inc.
shares (subscription
receivable) .................... 618,375 618 2,382
------- ------- -----------
BALANCE, APRIL 25, 1997 ........... 618,375 618 2,382
------- ------- -----------
Payment for common stock
(subscription receivable)
HLM Design ..................... 157,759 158 183,241
Net Income .......................
BALANCE, MAY 1, 1998 .............. 776,134 776 185,623
------- ------- -----------
Issuance of Common Stock
(Note 9) ....................... 1,298,953 1,299 6,036,342
Issuance of Common Stock for
purchase of JPJ Architects,
Inc. (Note 2) .................. 240,000 240 1,070,760
Issuance of Common Stock,
for purchase of GA Design
International Limited
(Note 2) ....................... 27,667 28 108,737
Issuance of Common Stock
under the employee stock
purchase plan .................. 2,323 2 7,402
Foreign Currency Translation .....
Net Income .......................
------- ------- -----------
BALANCE, APRIL 30, 1999 ........... 2,345,077 $ 2,345 $ 7,408,864
========= ======= ===========
<CAPTION>
STOCK FOREIGN TOTAL
RETAINED SUBSCRIPTION CURRENCY STOCKHOLDERS'
EARNINGS RECEIVABLE TRANSLATION EQUITY
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
ORGANIZATION OF HLM DESIGN
MARCH 6, 1997 .................... $ $ $ $
Issuance of HLM Design, Inc.
shares (subscription
receivable) .................... (3,000)
---------
BALANCE, APRIL 25, 1997 ........... (3,000)
---------- --------- ------- -----------
Payment for common stock
(subscription receivable)
HLM Design ..................... 3,000 186,399
Net Income ....................... 778,356 778,356
---------- --------- -----------
BALANCE, MAY 1, 1998 .............. 778,356 964,755
---------- --------- ------- -----------
Issuance of Common Stock
(Note 9) ....................... 6,037,641
Issuance of Common Stock for
purchase of JPJ Architects,
Inc. (Note 2) .................. 1,071,000
Issuance of Common Stock,
for purchase of GA Design
International Limited
(Note 2) ....................... 108,765
Issuance of Common Stock
under the employee stock
purchase plan .................. 7,404
Foreign Currency Translation ..... (662) (662)
Net Income ....................... 792,037 792,037
---------- --------- ------- -----------
BALANCE, APRIL 30, 1999 ........... $1,570,393 $ $ (662) $ 8,980,940
========== ========= ======= ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
STATEMENTS OF CASH FLOWS
YEAR ENDED APRIL 25, 1997 AND
ONE MONTH ENDED MAY 30, 1997 (PREDECESSOR),
AND YEARS ENDED MAY 1, 1998 AND APRIL 30, 1999 (CONSOLIDATED)
<TABLE>
<CAPTION>
(PREDECESSOR) (NOTE 1)
-----------------------------
YEAR ONE MONTH
ENDED ENDED
------------- ---------------
APRIL 25, MAY 30,
1997 1997
------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ........................................................................ $ 117,114 $ 81,394
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Extraordinary item for early extinguishment of debt-net of tax benefit ...........
Depreciation ..................................................................... 671,877 55,544
Amortization of goodwill ......................................................... 107,670 9,571
Amortization of deferred loan fees ...............................................
Deferred rent .................................................................... (356,803)
Deferred income taxes ............................................................ 224,260 54,907
Other ............................................................................ (15,000)
Minority Interest ................................................................
Changes in certain working capital items:
(Increase) decrease in trade and other receivables ............................. 1,343,508 (1,500,472)
(Increase) decrease in costs and estimated earnings compared to billings on
uncompleted contracts, net .................................................... (883,880) 1,199,028
(Increase) decrease in refundable income taxes ................................. 72,056 (11,157)
(Increase) decrease in prepaid expenses and other assets ....................... (258,403) (11,579)
Increase (decrease) in accounts payable ........................................ (352,617) 233,659
Increase (decrease) in accrued expenses ........................................ (218,959) (278,500)
Increase (decrease) in income taxes payable ....................................
Increase in other non-current liabilities ...................................... 15,000
---------- ------------
Net cash (used in) provided by operating activities ........................... 450,823 (152,605)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................... (601,120) (2,023)
Note receivable from officer ......................................................
Payment for purchase of GA Design International Holdings Ltd. .....................
Payment for purchase of JPJ Architects, Inc., net of cash acquired ................
---------- -------------
Net cash used in investing activities ......................................... (601,120) (2,023)
---------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit .................................................. 410,000 (2,360,000)
Net proceeds from issuance of common stock ........................................
Proceeds from issuance of common stock under the employee stock purchase plan .....
Proceeds from long-term borrowings ................................................ 145,000 2,800,000
Net decrease in short-term borrowings .............................................
Payments on long-term borrowings .................................................. (410,952) (285,372)
Payment of deferred loan fees .....................................................
Payment on ESOP buyback ...........................................................
Proceeds from issuance of notes payable to shareholders ...........................
Proceeds from the issuance of warrants ............................................
Proceeds from the exercise of warrants ............................................
Proceeds from the issuance of common stock ........................................
Retirement of common stock ........................................................ (2,560)
Proceeds from payment of stock subscription receivable ............................
---------- ------------
Net cash provided by financing activities ..................................... 141,488 154,628
---------- ------------
INCREASE (DECREASE) in Cash ........................................................ (8,809) --
CASH BALANCE:
Beginning of year ................................................................. 11,130 2,321
---------- ------------
End of year ....................................................................... $ 2,321 $ 2,321
========== ============
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the year for:
Interest ......................................................................... $ 370,167 $ 6,827
Interest on Employee Stock Ownership Plan debt ................................... $ 24,243
Income tax payments (refunds) .................................................... $ (86,091) $ (750)
Noncash investing and financing transactions:
Retirement of common stock through issuance of note payable ...................... $ 51,983
Reduction of ESOP debt ........................................................... $ 382,774
Issuance of warrants to certain debt holders .....................................
Acquisition of JPJ Architects, Inc.:
Notes payable issued to JPJ Architects, Inc. shareholders ........................
Fair value of assets acquired and liabilities assumed, net .......................
Common stock to be issued on delayed delivery schedule ...........................
Acquisition of GA Design Holdings International Ltd:
Notes payable issued to GAIH shareholders ........................................
Fair value of assets acquired and liabilities assumed, net .......................
Common stock to be issued on delayed delivery schedule ...........................
<CAPTION>
YEAR YEAR
ENDED ENDED
--------------- ---------------
MAY 1, APRIL 30,
1998 1999
--------------- ---------------
(NOTE 1) (NOTE 1)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ........................................................................ $ 778,356 $ 792,037
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Extraordinary item for early extinguishment of debt-net of tax benefit ........... 280,849
Depreciation ..................................................................... 468,556 675,924
Amortization of goodwill ......................................................... 147,269 262,275
Amortization of deferred loan fees ............................................... 172,905 86,628
Deferred rent ....................................................................
Deferred income taxes ............................................................ (48,432) 251,379
Other ............................................................................ 14,585 (662)
Minority Interest ................................................................ 326
Changes in certain working capital items:
(Increase) decrease in trade and other receivables ............................. (373,675) 609,861
(Increase) decrease in costs and estimated earnings compared to billings on
uncompleted contracts, net .................................................... (184,513) (2,549,431)
(Increase) decrease in refundable income taxes ................................. 485,047
(Increase) decrease in prepaid expenses and other assets ....................... (742,948) 222,069
Increase (decrease) in accounts payable ........................................ (1,418,834) (539,268)
Increase (decrease) in accrued expenses ........................................ 1,112,959 (475,238)
Increase (decrease) in income taxes payable .................................... 215,950 (497,117)
Increase in other non-current liabilities ......................................
------------- ------------
Net cash (used in) provided by operating activities ........................... 627,225 (880,368)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................................... (737,356) (815,668)
Note receivable from officer ...................................................... 30,000
Payment for purchase of GA Design International Holdings Ltd. ..................... (357,830)
Payment for purchase of JPJ Architects, Inc., net of cash acquired ................ (1,332,030)
------------- ------------
Net cash used in investing activities ......................................... (707,356) (2,505,528)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on line of credit .................................................. 1,618,336
Net proceeds from issuance of common stock ........................................ 5,922,709
Proceeds from issuance of common stock under the employee stock purchase plan ..... 7,407
Proceeds from long-term borrowings ................................................ 6,712,307
Net decrease in short-term borrowings ............................................. (688,630)
Payments on long-term borrowings .................................................. (3,584,491) (3,241,920)
Payment of deferred loan fees ..................................................... (56,300)
Payment on ESOP buyback ........................................................... (3,221,824)
Proceeds from issuance of notes payable to shareholders ........................... 182,308
Proceeds from the issuance of warrants ............................................ 24,757 1,200
Proceeds from the exercise of warrants ............................................ (77)
Proceeds from the issuance of common stock ........................................ 34,899
Retirement of common stock ........................................................
Proceeds from payment of stock subscription receivable ............................ 3,600
------------- ------------
Net cash provided by financing activities ..................................... 95,179 3,619,102
------------- ------------
INCREASE (DECREASE) in Cash ........................................................ 15,048 233,206
CASH BALANCE:
Beginning of year ................................................................. 2,321 17,369
------------- ------------
End of year ....................................................................... $ 17,369 $ 250,575
============= ============
SUPPLEMENTAL DISCLOSURES:
Cash paid (received) during the year for:
Interest ......................................................................... 833,674 $ 1,130,214
Interest on Employee Stock Ownership Plan debt ...................................
Income tax payments (refunds) .................................................... 47,194 $ 992,916
Noncash investing and financing transactions:
Retirement of common stock through issuance of note payable ......................
Reduction of ESOP debt ...........................................................
Issuance of warrants to certain debt holders ..................................... $ 238,752
Acquisition of JPJ Architects, Inc.:
Notes payable issued to JPJ Architects, Inc. shareholders ........................ $ 872,320
Fair value of assets acquired and liabilities assumed, net ....................... $ 180,150
Common stock to be issued on delayed delivery schedule ........................... $ 1,071,000
Acquisition of GA Design Holdings International Ltd:
Notes payable issued to GAIH shareholders ........................................ $ 605,920
Fair value of assets acquired and liabilities assumed, net ....................... $ 21,004
Common stock to be issued on delayed delivery schedule ........................... $ 108,765
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCEPTION MARCH 6, 1997 TO APRIL 25, 1997 AND THE YEAR ENDED APRIL 25, 1997
(PREDECESSOR), THE ONE MONTH PERIOD ENDED MAY 30, 1997 (UNAUDITED)
(PREDECESSOR) AND THE YEARS ENDED MAY 1, 1998 AND APRIL 30, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS -- HLM Design, Inc. ("the Company or HLM
Design") is a management services company incorporated March 6, 1997 for the
purpose of providing management and services to architectural, engineering and
planning design entities under long term management services agreements
("MSAs").
In May 1997, HLM Design executed long term MSAs with HLM Design of North
America, Inc. ("HLMNA"), HLM of the Southeast, P. C. ("HLMSE") and HLM of the
Northwest, Architecture, Engineering and Planning, P.C. ("HLMNW"). HLMSE and
HLMNW, organized in 1996 and have had no operations through May 1, 1998. In
July 1998, HLM Design entered into an MSA with each of HLM Design of the
Midwest, Inc. ("HLMMW"), HLM Design of the Midatlantic, P. C. ("HLMMA") and HLM
Design of the Northeast, Architecture, Engineering and Planning, P. C.
("HLMNE"). In October 1998, HLM Design entered into an MSA with JPJ Architects,
Inc. ("JPJ"). In January 1999, HLM Design entered into an MSA with G.A. Design
International Holdings, Ltd. ("GAIH"). HLMNA, HLMSE, HLMNW, HLMMW, HLMMA,
HLMNE, JPJ and GAIH are referred to herein collectively as "Managed Firms".
The MSAs are for a term of 40 years. HLM Design is the sole and exclusive
manager and administrator of all of the Managed Firms' day-to-day business
functions including financial planning, facilities, equipment and supplies and
management and administrative services (bookkeeping and accounts, general
administration services, contract negotiation and administration for all
non-architectural and non-engineering aspects of all agreements, personnel,
security and maintenance, architectural and engineering recruiting and
training, insurance, issuance of debt and capital stock and billing and
collections). For these services, HLM Design receives all but 1% of the AEP's
net income and positive cash flow (as determined in accordance with generally
accepted accounting principles applied on a consistent basis).
In May 1997, HLMNA entered into a merger agreement with BBH Corp., a newly
formed entity controlled by the principal shareholders of HLM Design, whereby
HLM Design loaned BBH Corp. $3.2 million which BBH Corp. utilized to buy common
stock in HLMNA. Under the merger agreement, BBH Corp. merged into HLMNA with
HLMNA being the surviving entity. As a part of the merger agreement, HLMNA
redeemed previously outstanding common stock of HLMNA from its Employee Stock
Ownership Plan ("ESOP") and other shareholders that represented over 90% of the
pre-merger voting interest. As a result of the change in control, the assets
and liabilities of HLMNA were fair valued using purchase accounting principles
and the excess of the fair value over the identified tangible net assets was
reflected as goodwill.
FINANCIAL STATEMENT PRESENTATION
The financial statements included herein reflect the following:
o HLM Design, Inc. as of April 25, 1997, HLM Design, Inc. had no operations
or cash flows from March 6, 1997, date of inception, to April 25, 1997.
o HLMNA (Predecessor) for the one month ended May 30, 1997 (unaudited), for
the year ended April 25, 1997 (Predecessor).
o The Company consolidated with Managed Firms, from May 31, 1997 the
effective date of the original MSAs and shareholders agreements and, as of
May 1, 1998 and April 30, 1999 and for the years then ended, including JPJ
and GAIH from their respective dates of acquisition. All significant
balances and transactions between the Company and the Managed Firms have
been eliminated in the consolidated financial statements.
HLMNA provides architectural and engineering consulting and design
services from offices in Iowa City, Iowa, Chicago, Illinois, Denver, Colorado,
Orlando, Florida, Dallas, Texas, Atlanta, Georgia, Bethesda, Maryland,
Philadelphia, Pennsylvania, Portland, Oregon, Sacramento, California,
Charlotte, North Carolina and London, U.K.
FISCAL YEAR-END POLICY -- Prior to April 28, 1997, the Company used a
52-53 week fiscal year for accounting purposes which defined the fiscal
year-end date as the last Friday in April. In fiscal 1998, the Company changed
its year-end to the Friday nearest the end of April, which is May 1, 1998 and
contains 53 weeks. In fiscal 1999, the year end is April 30, 1999 which
contains 52 weeks.
F-7
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
OPERATING CYCLE -- Assets and liabilities related to long-term contracts
are included in current assets and current liabilities in the accompanying
balance sheets, as they will be liquidated in the normal course of contract
completion, although this may require more than one year.
REVENUE RECOGNITION -- Revenue is recognized, at estimated collectible
amounts, in the period the services are performed. More specifically, the
Company recognizes revenues either on the percentage-of-completion method
whereby the extent of the contract performance is measured by the percentage of
cost incurred to date to estimated total cost for each contract, or based upon
actual hours spent on the project times the agreed upon hourly rate. Consultant
expenses, project expenses, direct labor and indirect expenses are charged to
expense as incurred. Provisions for estimated losses on uncompleted projects
are made in the period in which such losses are first subject to reasonable
estimation. Unanticipated changes in project performance, project conditions
and estimated profitability may result in revisions to costs and income and are
recognized in the period in which the revisions are determined.
The asset "costs and estimated earnings in excess of billings on
uncompleted projects" represents revenues recognized in excess of amounts
billed. The liability "billings in excess of costs and estimated earnings on
uncompleted projects" represents billings in excess of revenues recognized.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimate impacting the accompanying financial statements
relates to revenue recognition.
PROPERTY AND EQUIPMENT -- Leasehold improvements and equipment are stated
at cost. Depreciation is computed using the double-declining balance or
straight-line method over the estimated useful lives of the assets or the lease
term, including anticipated renewals. The estimated useful lives of property
and equipment for financial reporting purposes are as follows:
<TABLE>
<CAPTION>
PREDECESSOR CONSOLIDATED
------------------------------ -----------------------------
<S> <C> <C>
Computer equipment and software 5 years 3-5 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>
LONG-LIVED ASSETS -- The Company reviews the carrying value of its
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying value of these assets may not be recoverable.
Measurement of any impairment would include a comparison of estimated
undiscounted future operating cash flows anticipated to be generated during the
remaining life of the assets with their net carrying value. An impairment loss
would be recognized as the amount by which the carrying value of the assets
exceeds their fair value.
GOODWILL -- Goodwill represents the excess purchase price over the
estimated fair value of the tangible and separately measurable intangible net
assets acquired. The cumulative amount of goodwill at May 1 1998 was $2.4
million and at April 30, 1999 was $7.3 million. As a percentage of total assets
and stockholders' equity, goodwill, net of accumulated amortization represented
13.6% and 251.5%, respectively at May 1, 1998 and 27.6% and 81.8%,
respectively, at April 30, 1999. Generally accepted accounting principles
require that goodwill and all other intangible assets be amortized over the
period benefited. We have determined that the period benefited by the goodwill
will be no less than 15 years. Accordingly, we are amortizing goodwill for the
Managed Firms over a 15 to 25 year period. In later years, the Company would be
burdened by a continuing charge against earnings without the associated benefit
to income valued by management in arriving at the price paid for the businesses
acquired. Earnings in later years also could be significantly affected if
management then determined that the remaining balance of goodwill was impaired.
We periodically compare the carrying value of goodwill with the anticipated
undiscounted future cash flows from operations of the businesses we have
acquired in order to evaluate the recoverability of goodwill. We have concluded
that the anticipated future cash flows associated with intangible assets
recognized in our acquisitions will continue indefinitely, and there is no
pervasive evidence that any material portion will dissipate over a period
shorter than 15 and 25 years, respectively. We will incur additional goodwill
in future acquisitions.
F-8
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (Continued)
DEFERRED INCOME TAXES -- Deferred income tax assets and liabilities are
calculated based upon differences between the financial statement and tax basis
of assets and liabilities that will result in taxable or deductible amounts in
the future. Such deferred income tax asset or liability computations are based
on enacted tax laws and rates applicable to periods in which the differences
are expected to affect taxable income.
FINANCIAL INSTRUMENTS -- The carrying amount of cash, accounts receivable,
accounts payable and accrued liabilities approximates their fair value because
of the short maturities of these instruments. The Company's bank borrowings
approximate fair value because of interest rates that are based on variable
reference rates. See Note 4 as to fair value of certain obligations.
NEW ACCOUNTING PRONOUNCEMENTS -- In June 1997, the Financial Accounting
Standard Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
Effective April 30, 1999, the Company adopted SFAS No. 131 which redefines how
operating segments are determined and requires disclosure of certain financial
and descriptive information about a company's operating segments. The Company
operates in one segment, which provides architectural, engineering and planning
services.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instrument
and Hedging Activities." This Standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. The Statement will become
effective for the Company beginning April 29, 2001. However, the Company has
elected earlier application of all of the provisions of this Statement
beginning January 30, 1999. The implementation of the provisions of this
Statement did not have an impact on the Company's financial statements for the
year ended April 30, 1999.
NET INCOME PER SHARE -- The calculation of diluted net income per share
considers the potential dilutive effect of warrants to purchase shares of
common stock at $0.01 per share which were outstanding from May 30, 1997 to
April 30, 1999.
SUPPLEMENTAL PER SHARE DATA -- Supplemental net income per share in the
accompanying financial statements has been prepared based upon the shares
outstanding giving effect to the issuance of common stock related to the
initial public offering pro rata for common stock used to pay certain
indebtedness as discussed in Note 9. In addition, net income has been adjusted
to give effect to the initial public offering (the "Offering") and the fiscal
1998 business acquisition (as discussed in Note 2) as if the transactions had
occurred at the beginning of the year.
RECLASSIFICATIONS -- Certain reclassifications have been made to fiscal
1997 and 1998 to conform to fiscal 1999 presentation.
2. BUSINESS ACQUISITIONS
HLMNA AND BBH CORP. MERGER:
Effective May 23, 1997, HLM Design of North America, Inc. 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 HLM Design of North
America, Inc. and each BBH Corp. share outstanding at the time of merger was
converted into one share of HLM Design of North America, Inc.'s stock. All HLM
Design of North America, Inc. shares held by BBH Corp. were canceled and
retired.
Effective as of May 31, 1997, HLM Design of North America, Inc.
repurchased all 46,858 shares of its common stock from the ESOP for $64 per
share as part of a merger agreement with BBH Corp. As a result of this
transaction, the ESOP will effectively cease once the proceeds of the sale have
been distributed by the Trustee to the ESOP's participants following IRS
approval of the ESOP's termination.
F-9
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
The total purchase price, including direct acquisition costs has been
allocated to the assets acquired and the liabilities assumed at their estimated
fair values at acquisition date as follows:
<TABLE>
<S> <C>
Working capital deficiency ......... $ (7,045,092)
Property and equipment ............. 1,531,155
Other assets ....................... 6,320,087
Goodwill ........................... 2,573,867
------------
Total .............................. $ 3,380,017
============
</TABLE>
The following unaudited pro forma financial data is presented as if the
transaction had occurred at the beginning of the respective year.
<TABLE>
<CAPTION>
YEAR ENDED
MAY 1, 1998
----------------
<S> <C>
Revenues ........... $ 31,529,729
============
Net Income ......... $ 856,335
============
Earnings Per Share
Basic .............. $ 1.23
============
Diluted ............ $ 1.00
============
</TABLE>
The pro forma information presented above is not necessarily indicative of
the operating results that would have occurred had the transaction occurred at
the beginning of the respective periods. These results are also not necessarily
indicative of the results of future operations.
JPJ ARCHITECTS, INC. ACQUISITION:
On October 30, 1998, the Company purchased all the issued and outstanding
common stock of JPJ Architects, Inc. ("JPJ") for $2.4 million in cash, an
aggregate of 240,000 shares of the Company's common stock, and subordinated
promissory notes bearing interest at 7 percent in the aggregate principal
amount of $1,160,000. The purchase agreement specifies delivery of 30 percent
of the aggregate shares of the Company's stock and the principal amount of the
promissory notes on each of October 30, 2000 and October 30, 2001 and delivery
of the remaining 40 percent of the aggregated shares of stock and the principal
amount of the promissory notes on October 30, 2002. Following the purchase, the
Company and JPJ entered into Management Services Agreement whereby the Company
will manage all aspects of JPJ other than the provisions of professional
architectural services.
The acquisition has been accounted for using the purchase method of
accounting. The purchase price has been allocated to the assets and liabilities
acquired based on their estimated fair value at the acquisition date.
<TABLE>
<S> <C>
Working capital ................ $ 444,585
Property and equipment ......... 158,266
Other assets ................... 143,020
Goodwill ....................... 3,597,449
----------
Total .......................... $4,343,320
==========
</TABLE>
F-10
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. BUSINESS ACQUISITIONS -- (Continued)
The following unaudited pro forma financial data is presented as if the
transaction occurred as of the beginning of the respective years:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
MAY 1, 1998 APRIL 30, 1999
------------- ---------------
<S> <C> <C>
Revenues ................. $45,677,796 $ 45,265,496
=========== ============
Net Income ............... $ 1,233,688 $ 957,421
=========== ============
Earnings Per Share:
Basic .................... $ 0.43
============
Diluted .................. $ 0.43
============
</TABLE>
G A DESIGN INTERNATIONAL HOLDINGS LTD.
On January 29, 1999, the Company purchased 95 percent of the issued and
outstanding common stock of G A Design International Holdings Ltd. ("GAIH") for
a combination of cash, 27,667 shares of HLM Design common stock and promissory
notes for a total of approximately $1,037,000. The purchase agreement specifies
delivery of 33.3% of the aggregate shares of the stock on each of January 29,
2000, January 2001 and January 2002. The acquisition has been accounted for
using the purchase method of accounting. The purchase price has been allocated
to the assets and liabilities acquired based on their estimated fair value at
the acquisition date resulting in an allocation of goodwill of approximately
$1,042,000. The pro forma effect, assuming purchase at the beginning of the
year would not be material to the results of operations or earnings per share.
3. CONTRACTS IN PROGRESS
Information relative to contracts in progress is as follows:
<TABLE>
<CAPTION>
MAY 1, APRIL 30,
1998 1999
-------------- --------------
<S> <C> <C>
Costs incurred on uncompleted projects (excluding overhead) ..... $45,830,792 $ 52,092,171
Estimated earnings thereon ...................................... 45,335,896 49,678,268
----------- ------------
Total ........................................................... 91,166,688 101,770,439
Less billings to date ........................................... 88,940,243 97,400,073
----------- ------------
Net underbillings ............................................... $ 2,226,445 $ 4,370,366
=========== ============
</TABLE>
Net underbillings are included in the accompanying balance sheets as
follows:
<TABLE>
<CAPTION>
MAY 1, APRIL 30,
1998 1999
--------------- ---------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted projects .............................. $ 5,234,468 $ 7,550,248
Billings in excess of costs and estimated earnings on
uncompleted projects .............................. (3,008,023) (3,179,882)
------------ ------------
Net underbillings ................................... $ 2,226,445 $ 4,370,366
============ ============
</TABLE>
F-11
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS
A summary of financing arrangements at April 30, 1999 is as follows:
Notes Payable -- Revolving Line of Credit
Prior to August 31, 1998, the Company maintained a financing facility with
First Charter National Bank, which provides a line of credit of up to
$1,500,000. On August 31, 1998, the Company increased its revolving line of
credit with First Charter National Bank from $1,500,000 to $3,000,000. In
addition, on March 26, 1999, the Company increased its revolving line of credit
with the same lender from $3,000,000 to $5,000,000. At April 30, 1999, the
Company had borrowings of $3,118,336. The revolving line of credit is secured
by, among other things, a security interest in all accounts receivable. This
loan bears interest at prime plus one percent and matures on June 30, 2000.
Notes Payable -- Other
In September 1997, the Company entered into debt agreements with Berthel
Fisher, an underwriter of the Offering, of $250,000 and $500,000. Interest was
charged at 12% and monthly interest payments were due through July 1, 1998. The
final payment for all accrued interest and principal was due on July 1, 1998.
The Company repaid this obligation from the net proceeds of the Initial Public
Offering (the "Offering") in June 1998.
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
MAY 1, 1998 APRIL 30, 1999
------------- ---------------
<S> <C> <C>
Revolving credit facility to First Charter National Bank, payable June 30, 2000 including
interest at prime plus 1% (8.75% at April 30, 1999 ) .................................... $3,118,336
Notes payable of $1,160,000 to former JPJ Architect, Inc. shareholders, (fair value of
$901,003) due in annual installments of $348,000 beginning October 2000, plus interest at
7%, with final payment due October 2002 of $464,000...................................... 918,720
Notes payable to former GA Design International Holdings Limited shareholder (fair value
of $405,100) due in installments of $221,500, plus interest at 7%, in August 1999 and
$82,500, plus interest at 7% due in annual installments with final payment in August
2002 .................................................................................... 416,895
Notes payable to former GA Design International Holdings Limited shareholder due in
various installments with final payment due January 2001 ................................ 187,550
Notes payable to Messrs. Harris and Brannon at 15%, with a final payment due July 31,
1998 .................................................................................... $ 27,000 $ --
Notes payable to a former stockholder, due in annual payments of $49,522, plus interest at
the prime rate of Chase Manhattan Bank as of the date each installment is due (8.25% at
April 25, 1997); collateralized by 3,088 shares of HLMNA's unissued common stock, with
a final payment due April 2000 .......................................................... 148,567 49,522
Notes payable to former stockholders, due in installments plus interest at prime plus 1%
at various dates to October 1999 ........................................................ 4,755 4,746
Notes payable, MPB Architects, due in annual payments, including interest at a rate of
10.5%, with a final payment due April, 1998 ............................................. 64,850 --
Notes payable to Pacific Capital/Equitas, payable June, 2002 including interest of 13.5%
due in monthly payments .................................................................. 1,980,000 --
Notes payable to HLM Design, Inc. shareholders at 6% with final payment due at various
dates to August 2002 .................................................................... 165,260 --
Lease financing with Berthel Fisher, due in monthly payments of $64,501, including
interest at 14.07%, with final lease and interest payments due on April 2002 (fair value
of $2,905,000 at April 30, 1999)......................................................... 2,430,545 1,969,609
Other .................................................................................... 61,370
---------- ----------
Total long-term debt ..................................................................... 4,820,977 6,726,748
Less current maturities .................................................................. 656,576 1,054,369
---------- ----------
Long-term portion ........................................................................ $4,164,401 $5,672,379
========== ==========
</TABLE>
F-12
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING ARRANGEMENTS -- (Continued)
In May 1997, HLMNA entered into a financing arrangement, in the form of a
capital lease agreement, with Berthel Leasing, a subsidiary of Berthel Fisher,
for $2.8 million. The substance of such agreement is a financing arrangement
and has been presented as such in the financial statements.
Substantially all assets are pledged under financing agreements described
above.
Annual principal payments of the various financing agreements are as
follows:
<TABLE>
<S> <C>
Fiscal 2000 ......... $1,054,369
Fiscal 2001 ......... 4,086,703
Fiscal 2002 ......... 1,059,465
Fiscal 2003 ......... 526,211
----------
Total ............... $6,726,748
==========
</TABLE>
5. LEASE COMMITMENTS
The total minimum rental commitment under non-cancelable operating leases
at April 30, 1999, which has been reduced by minimum rentals to be received
under subleases, are as follows:
<TABLE>
<S> <C>
Fiscal 2000 ......... $1,509,422
Fiscal 2001 ......... 1,459,282
Fiscal 2002 ......... 1,488,068
Fiscal 2003 ......... 1,312,075
Fiscal 2004 ......... 1,147,975
Thereafter .......... 1,972,700
----------
Total ............... $8,889,522
==========
</TABLE>
In 1997, HLMNA terminated facility leases that were being accounted for as
operating leases, resulting in a gain of $344,059. The recorded gain represents
the cumulative excess of lease expense over the lease payments made as of the
termination date.
6. CONTINGENCIES
The Company is involved in various disputes and legal actions related to
contract operations. In the opinion of Company management, the ultimate
resolution of these actions will not have a material effect on the Company's
financial position, future results of operations or cash flows.
7. RELATED PARTY TRANSACTIONS
During the year ended April 30, 1999, the Company incurred $40,000 in
consulting fees for services provided by a director. During the year ended May
1, 1998, the Company incurred $22,911 in financing advisory fees related to
debt financings for services provided by a director. During the year ended
April 25, 1997, HLMNA incurred $257,017 in financing advisory fees related to
debt financing arranged by a director. Such director resigned effective
October, 1997.
F-13
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
(PREDECESSOR)
YEAR ENDED YEAR ENDED
-------------- ----------------------
APRIL 25, MAY 1, APRIL 30,
1997 1998 1999
-------------- ----------- ----------
<S> <C> <C> <C>
Current expense (benefit):
Federal ......................... $ (3,903) $190,424 $581,665
State ........................... (558) 132,611 115,536
Deferred ......................... 224,260 360,862 245,506
-------- -------- --------
Total income tax expense ......... $219,799 $683,897 $942,707
======== ======== ========
</TABLE>
The reconciliation of the statutory federal income tax rate with the
Company's overall effective federal and state income rate is as follows:
<TABLE>
<CAPTION>
(PREDECESSOR)
YEAR ENDED YEAR ENDED
-------------- ---------------------
APRIL 25, MAY 1, APRIL 30,
1997 1998 1999
-------------- ---------- ----------
<S> <C> <C> <C>
Statutory federal rate ......................... 35.0% 34.0% 34.0%
State income taxes, net of federal benefit ..... 3.3 4.0 4.7
Penalties ...................................... 17.4 1.9 1.7
Meals and entertainment ........................ 9.3 2.0 0.8
Goodwill ....................................... 3.8 4.4
Other .......................................... .3 .4 1.2
---- ---- ----
Effective Tax Rates ............................ 65.3% 46.1% 46.8%
==== ==== ====
</TABLE>
The tax effect of temporary differences giving rise to deferred income tax
assets and liabilities as of May 1, 1998 and April 30, 1999 is as follows:
<TABLE>
<CAPTION>
MAY 1, APRIL 30,
1998 1999
---------------- ----------------
<S> <C> <C>
Deferred income tax liabilities -- difference between the
accrual basis and cash basis of accounting related to
certain assets and liabilities ............................ $ (1,517,146) $ (1,881,680)
Prepaid expenses .......................................... (68,568)
------------
Total deferred tax liabilities .............................. (1,517,146) (1,950,248)
------------ ------------
Deferred income tax assets:
Contribution carry forwards ................................. 42,554 --
Property and equipment .................................... 258,908 268,105
Net operating loss carry forwards ......................... 76,273 --
Deferred state taxes ...................................... 60,280 --
Allowances ................................................ 385,093
Other deferred assets ..................................... 27,586
------------ ------------
Total deferred income tax assets ............................ 465,601 653,198
------------ ------------
Deferred income tax liabilities, net ........................ $ (1,051,545) $ (1,297,050)
============ ============
</TABLE>
Management believes it is probable that the Company will realize the tax
benefits of the deductible differences that were available as of April 30,
1999.
The Company, and its Managed Firms, except JPJ, file separate federal and
state income tax returns. The Company and JPJ file a consolidated federal
income tax return.
F-14
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. STOCKHOLDERS' EQUITY
PUBLIC OFFERING OF COMMON STOCK -- The Company completed the Offering of
1,200,000 shares of its common stock on June 12, 1998 at a price of $6.00 per
share. Net proceeds of the Offering of $5.92 million (after underwriting
discount and other offering expenses) were used to repay certain indebtedness
consisting of: (a) $2.0 million due under Pacific Capital/Equitas, and (b)
$0.75 million term loan from Berthel Leasing and $0.2 million to employee
stockholders (See Note 4 -- Financing Arrangements). Remaining net proceeds
were used for development of new business and other general corporate purposes.
The early extinguishment of the Pacific Capital, L.P., Equitas, L.P. and
Berthel Fisher & Company Financial Services, Inc. debt resulted in an
extraordinary charge of $280,849, net of income taxes of $171,842, that
consisted of write-off of related unamortized financing costs.
PREFERRED STOCK -- The Company's Certificate of Incorporation authorizes
the Board of Directors of the Company 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 the Company's Common
Stock. No shares of preferred stock have been issued.
WARRANTS -- In May 1997, warrants to purchase 183,244 shares of HLM Design
common stock (as adjusted for subsequent stock splits) were attached to the
notes issued to Pacific Capital and Equitas. In addition, warrants to purchase
43,631 shares of HLM Design common stock (as adjusted for subsequent stock
splits) were attached to the notes issued to Berthel Fisher in September 1997
and in December 1997. Each warrant allows holders to purchase a share of common
stock for $.01 per share for a five year period. At April 30, 1999, all of the
warrants held by Berthel Fisher, Pacific Capital and Equitas were exercised.
In connection with the Offering, the Company sold to Berthel Fisher, for a
price of $0.01 per warrant, warrants to purchase 120,000 shares of common stock
exercisable at $6.00 per share. At April 30, 1999, all of these Berthel Fisher
warrants were outstanding.
10. EMPLOYEE BENEFIT PLANS
401(K) PLAN -- Substantially all employees are eligible to participate in
a 401(k) plan. Contribution expense for the year ended May 1, 1998, and April
30, 1999 were $27,933 and $53,886, respectively. Prior to fiscal 1998, there
was no company contribution.
EMPLOYEE STOCK PURCHASE PLAN -- In February 1998, the Board of Directors
and stockholders of the Company adopted the HLM Design Inc. Employee Stock
Purchase Plan (the "ESPP"). A total of 57,954 shares of common stock has been
reserved under the ESPP, provided that the number of shares issued or issuable
under the ESPP and under the Stock Option Plan (discussed below) shall not
exceed in the aggregate 10% of the total number of shares of common stock
outstanding. On January 1 of each year, all eligible employees electing to
participate will be granted options to purchase shares of Common Stock. The
purchase price of common stock purchased through the ESPP will be 85% of the
lesser of (i) the fair market value of the common stock on the applicable Grant
Date and (ii) the fair market value of the common stock on the applicable
exercise date. Options will expire on the last exercise date of the calendar
year in which granted. As of April 30, 1999, 2,323 shares have been granted or
issued under the ESPP.
STOCK OPTION PLAN -- In February 1998, the Board of Directors and
stockholders of the Company adopted the HLM Design, Inc. Stock Option Plan (the
"Stock Option Plan") with respect to common stock in order to attract and
retain key personnel. Under the Stock Option Plan, options to purchase an
aggregate of 159,955 shares of common stock may be granted to key employees of
HLM Design and its Managed Firms and to officers, directors, consultants and
other individuals providing services to the Company. The Board of Directors of
HLM Design has approved the grant of 115,908 shares of common stock to two key
employees.
The Company measures the compensation cost of its stock option plan under
the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees", as permitted under Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation".
Under the provisions of APB No. 25,
F-15
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. EMPLOYEE BENEFIT PLANS -- (Continued)
compensation cost is measured based on the intrinsic value of the equity
instrument awarded. Under the provisions of SFAS No. 123, compensation cost is
measured based on the fair value of the equity instrument awarded.
Of the options outstanding as of April 30, 1999, 115,908 are currently
exercisable and have an exercise price from $4.50 to $6.60 per share. The
remaining contractual life of the options outstanding at April 30, 1999 ranges
from 4.1 years to 9.3 years. The average fair value of options granted was
$3.75 per share in 1999. The fair value of each option grant is estimated on
the date of grant using the Black-Sholes option pricing model with the
following assumptions: expected volatility of 60%; risk-free interest rate of
5.2%; and expected life of 8 years. The model reflects that no dividends were
declared in 1999 and assumes that no dividends will be declared in the future.
Had compensation cost for the options been determined consistent with SFAS
No. 123, the Company's net income and net income per share would approximate
the pro forma amounts of $562,000 and $0.27 respectively.
11. HLM DESIGN FINANCIAL INFORMATION (UNAUDITED)
HLM Design's balance sheet as of May 1, 1998 and April 30, 1999 and income
statement for the years ended May 1, 1998 and April 30, 1999 are as follows:
<TABLE>
<CAPTION>
MAY 1, APRIL 30,
1998 1999
BALANCE SHEET ------------- -------------
<S> <C> <C>
Current assets ................................... $ 122,150 $ 5,796,744
---------- -----------
Non-current assets ............................... 5,639,400 18,694,315
---------- -----------
Total assets ..................................... $5,761,550 $24,491,059
========== ===========
Current liabilities .............................. $2,073,271 $11,262,327
---------- -----------
Non-current liabilities .......................... 2,723,524 4,247,792
---------- -----------
Total liabilities ................................ 4,796,795 15,510,119
========== ===========
Total stockholders' equity ....................... 964,755 8,980,940
---------- -----------
Total liabilities & stockholders' equity ......... $5,761,550 $24,491,059
========== ===========
INCOME STATEMENT
Revenue .......................................... $ 8,095,095
Equity in earnings of affiliates ................. $1,443,958 1,058,872
Consultant, project and direct labor expense ..... 5,788,134
Net interest, tax and other expense .............. 665,602 2,573,796
---------- -----------
Net income ....................................... $ 778,356 $ 792,037
========== ===========
</TABLE>
F-16
<PAGE>
HLM DESIGN, INC. AND AFFILIATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Production Income ................. $6,344,991 $ 6,243,102 $ 7,271,359 $ 8,126,266
Operating Income ...................... $ 557,129 $ 576,811 $ 612,439 $ 989,986
Net Income (Loss) ..................... $ (89,227) $ 249,785 $ 205,389 $ 426,090
Net Income (Loss) Per Common Share (A) $ (.06) $ .12 $ .09 $ .18
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Production Income ......... $4,103,553 $6,201,331 $6,061,029 $6,538,105
Operating Income .............. $ 348,384 $ 901,829 $ 569,082 $ 740,281
Net Income .................... $ 47,201 $ 331,914 $ 177,496 $ 221,745
</TABLE>
(A) In the first quarter 1999, as a result of the Offering, certain debt was
repaid resulting in an extraordinary charge of $280,849, net of income
taxes of $171,842, that consisted of write-off of related unamortized
financing costs. Net income before such extraordinary item was $1,072,886
and net income per share was $0.13.
F-17
<PAGE>
SIGNATURE PAGE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
HLM DESIGN, INC.
By: /s/ VERNON B. BRANNON
------------------------------------
VERNON B. BRANNON
SENIOR VICE PRESIDENT, TREASURER
AND CHIEF FINANCIAL OFFICER
Date: July 27, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------- ---------------------------------------- --------------
<S> <C> <C>
/s/ JOSEPH M. HARRIS President, Chief Executive Officer July 27, 1999
---------------------------------- (principal executive officer) and
JOSEPH M. HARRIS Chairman
/s/ VERNON B. BRANNON Senior Vice President, Treasurer, Chief July 27, 1999
---------------------------------- Financial Officer (principal financial
VERNON B. BRANNON and accounting officer) and Director
/s/ L. FRED POUNDS Director July 27, 1999
----------------------------------
L. FRED POUNDS
</TABLE>
NONSTATUTORY STOCK OPTION AGREEMENT AND GRANT
PURSUANT TO
HLM DESIGN, INC. 1998 STOCK OPTION PLAN
This Nonstatutory Stock Option Agreement and Grant is entered into as of
the 1st day of September , 1998 between HLM Design, Inc., a Delaware corporation
(the "Company"), and Fred Pounds (the "Optionee").
WHEREAS, the Company and its stockholders have approved the HLM Design,
Inc. 1998 Stock Option Plan (the "Plan") pursuant to which the Company may, from
time to time, make awards of Options (as defined below) and enter into
Nonstatutory Stock Option Agreements with eligible employees and directors of
the Company or of any Subsidiary (as defined below);
WHEREAS, pursuant to the Plan, the Company has determined to grant to the
Optionee an Option to purchase Common Stock (as defined below) of the Company,
which Option shall be subject to the terms and conditions of this Nonstatutory
Stock Option Agreement and Grant;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereinafter set forth, the parties hereby agree as follows:
1. DEFINITIONS.
For purposes of this Nonstatutory Stock Option Agreement and Grant, the
following terms shall have the meanings indicated:
(a) "ACT" shall mean the Securities Act of 1933, as amended.
(b) "BOARD" shall mean the Board of Directors of the Company;
provided, that Optionee shall decline to vote with respect to any issue
involving this Option.
(c) "CAUSE" shall mean any act, action or series of acts or actions
or any omission, omissions, or series of omissions which result in, or which
have the effect of resulting in, (i) the commission of a crime by the Optionee
involving moral turpitude, which crime has a material adverse impact on the
Company or any Subsidiary, (ii) gross negligence or willful misconduct which is
continuous and results in material damage to the Company or any Subsidiary, or
(iii) any conduct which, in the judgment of the Committee, involves a breach of
fiduciary duty by the Optionee or other conduct detrimental to the Company.
(d) "CODE" shall mean the Internal Revenue Code of 1986, as amended,
any successor revenue laws of the United States and the rules and regulations
promulgated thereunder.
(e) "COMMITTEE" shall mean the committee of members of the Board
that is designated by the Board to administer the Plan; provided that, if
Optionee is a member of the Committee, then Optionee shall decline to vote with
respect to any issue involving this Option. In the event that no such Committee
exists or is appointed, "COMMITTEE" shall mean the Board.
1
<PAGE>
(f) "COMMON STOCK" shall mean the Common Stock, par value $.001 per
share, of the Company.
(g) "DISABILITY" shall mean the inability or failure of a person to
perform those duties for the Company or any Subsidiary traditionally assigned to
and performed by such person because of the person's then-existing physical or
mental condition, impairment or incapacity. The fact of disability shall be
determined by the Committee, which may consider such evidence as it considers
desirable under the circumstances, the determination of which shall be final and
binding upon all parties.
(h) "EXERCISE DATE" shall mean the business day, during the Option
Period, upon which the Optionee delivers to the Company the written notice and
consideration contemplated by Section 5(c) of the Plan.
(i) "FAIR MARKET VALUE" shall mean, with respect to the Common Stock
on any day, its market value determined as provided in Section 5(c) of the Plan.
(j) "IMMEDIATE FAMILY" shall mean the Optionee's spouse, children,
present or former stepchildren, grandchildren, present or former
stepgrandchildren, parents, present or former stepparents, grandparents,
siblings (including half brothers and sisters), in-laws and individuals whose
relationship with the Optionee arises due to legal adoption.
(k) "INVOLUNTARY TERMINATION WITHOUT CAUSE" shall mean either (i)
the dismissal of, or the request for the resignation of, a person, by court
order, order of any court-appointed liquidator or trustee of the Company, or the
order or request of any creditors' committee of the Company constituted under
the federal bankruptcy laws, provided that such order or request contains no
specific reference to Cause; or (ii) the dismissal of, or the request for the
resignation of, a person, by the Board or the shareholders of the Company, for
any reason other than for Cause.
(l) "OPTION" shall mean the option to purchase shares of Common
Stock granted to the Optionee pursuant to this Option Agreement.
(m) "OPTION AGREEMENT" shall mean this Nonstatutory Stock Option
Agreement and Grant between the Company and the Optionee by which the Option is
granted to the Optionee pursuant to the Plan.
(n) "OPTION PERIOD" shall mean the period commencing from the date
of this Option Agreement and ending at the close of business ten years from the
date of this Option Agreement or such earlier date as when this Option Agreement
may be terminated by its terms.
(o) "OPTION SHARES" shall mean the shares of Common Stock purchased
upon exercise of the Option.
(p) "OPTIONEE" shall mean the individual executing this Option
Agreement and, as applicable, the estate, personal representative, beneficiary
or Permitted Transferee to whom this Option may be transferred pursuant to this
Option Agreement by will, by the laws of descent and
2
<PAGE>
distribution, pursuant to a domestic relations order as defined in the Code, or
as otherwise permitted by paragraph 3(f) below.
(q) "PERMITTED TRANSFEREE" shall mean a member of the Optionee's
Immediate Family, a trust established solely for the benefit of one or more
members of the Optionee's Immediate Family or a partnership or limited liability
company of which the only individuals or entities who are or could be partners
or shareholders are members of the Optionee's Immediate Family and/or a trust
established solely for the benefit of one or more members of the Optionee's
Immediate Family.
(r) "PLAN" shall mean the HLM Design, Inc. 1998 Stock Option Plan
and any amendments thereto.
(s) "RETIREMENT" shall mean, with respect to the Optionee,
retirement from the Board in accordance with the Board's retirement policy as
may be in effect from time to time.
(t) "SUBSIDIARY" shall mean any subsidiary corporation of HLM
Design, Inc. as defined in Sections 424(f) and 424(g) of the Code.
(u) "TERMINATION" shall mean the cessation, for any reason, of the
Optionee's status as a member of the Board.
(v) "TOTAL OPTION PRICE" shall mean the consideration payable to the
Company by the Optionee upon exercise of the Option pursuant to Section 5(c) of
the Plan.
2. GRANT OF OPTION. Effective upon the date hereof, and subject to the
terms and conditions set forth herein, the Company hereby grants to the Optionee
the Option to purchase from the Company, at an exercise price of $ 4.50 (but not
less than 100% of the Fair Market Value on the date of the grant of this Option
per share), up to but not exceeding in the aggregate Ten Thousand (10,000)
shares of Common Stock.
3. EXERCISE OF OPTION. The Option granted in paragraph 2 above may be
exercised as follows:
(a) The Option shall be exercisable at any time and from time to
time during the Option Period. The Option shall terminate on the expiration of
the Option Period, if not earlier terminated; provided that, in the event of the
Optionee's Retirement, the Committee in its sole and absolute discretion may
accelerate the Exercise Date, which acceleration may, in the sole discretion of
the Committee, be subject to further terms and conditions mandated by the
Committee.
(b) No less than 100 shares of Common Stock may be purchased on any
Exercise Date unless the number of shares purchased at such time is the total
number of shares in respect of which the Option is then exercisable.
(c) If at any time and for any reason the Option covers a fraction
of a share, then, upon exercise of the Option, the Optionee shall receive the
Fair Market Value of such fractional share in cash.
3
<PAGE>
(d) The Option shall be exercised by the Optionee in accordance with
the terms and conditions of Section 5(c) of the Plan.
(e) As soon as administratively practicable following the Exercise
Date, subject to the receipt of payment of the Total Option Price and, as
appropriate, of any payment in cash of federal, state or local income tax
withholding or other tax that may be due upon the issuance of the Option Shares
as determined and computed by the Company pursuant to paragraph 6 below, the
Company shall issue to the Optionee the number of shares with respect to which
such Option shall be so exercised and shall deliver to the Optionee a
certificate or certificates therefor.
(f) The Option is not transferable by the Optionee otherwise than
(i) by will or the laws of descent and distribution; (ii) pursuant to a domestic
relations order as defined in the Code; or (iii) by transfer without
consideration to a Permitted Transferee, with the consent of and subject to the
rules, terms and conditions imposed by the Committee and provided that the
Committee is notified in advance in writing of any proposed transfer to a
Permitted Transferee and the Committee determines that the proposed transfer
complies with the requirements of the Plan and this Nonstatutory Stock Option
Agreement. No assignment or transfer of this Option, or of the rights
represented thereby, whether voluntary or involuntary, by operation of law or
otherwise, except as described above, shall vest in the assignee or transferee
any interest or right herein whatsoever; but immediately upon any attempt to
assign or transfer this Option, except as expressly permitted herein, the same
shall terminate and be of no force or effect.
4. TERMINATION. The Option granted hereby shall terminate and be of no
force or effect upon and following the occurrence of any of the following
events:
(a) The expiration of the Option Period.
(b) The Termination of the Optionee's status as a director of the
Company for any reason other than the Optionee's death, Disability or
Involuntary Termination Without Cause.
(c) The expiration of three months after the date of the Optionee's
Involuntary Termination Without Cause. During such three-month period, the
Optionee shall have the right to exercise the Option hereby granted in
accordance with the terms of this Option Agreement, but only to the extent the
Option was exercisable on the date of the Termination of the Optionee's status
as a director of the Company.
(d) The expiration of twelve months after Termination of the
Optionee's status as a director of the Company as a result of the Optionee's
Disability. During such twelve-month period, the Optionee shall have the right
to exercise the Option hereby granted in accordance with the terms of this
Option Agreement, but only to the extent the Option was exercisable on the date
of the Termination of the Optionee's status as a director of the Company.
(e) In the event of the death of the Optionee while a director of
the Company or, in the event of the death of the Optionee after Termination
described in subparagraph (c) or (d), above, but within the three-month or
twelve-month period described in subparagraph (c) or (d), above, upon the
expiration of twelve months following the Optionee's death. During such extended
4
<PAGE>
period, the Option may be exercised by the person or persons to whom the
deceased Optionee's rights under the Option Agreement shall pass by will or by
the laws of descent and distribution, but only to the extent the Option was
exercisable on the date of the Termination of the Optionee's status as a
director of the Company.
(f) To the extent set forth in paragraph 7 below, upon the
dissolution, liquidation, consolidation or merger of the Company, and, to the
extent set forth in subparagraph 3(f) above, upon an attempted assignment or
transfer of the Option otherwise than as expressly permitted herein.
Any determination made by the Committee with respect to any matter
referred to in this paragraph 4 shall be final and conclusive on all persons
affected thereby.
5. RIGHTS AS STOCKHOLDER. An Optionee shall have no rights as a
stockholder of the Company with respect to any shares underlying the Option
until the day of the issuance of a stock certificate to him or her for those
shares upon payment of the exercise price in accordance with the terms and
provisions hereof. Subject to paragraph 7 below, no adjustments shall be made
for dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such stock certificate is issued.
6. PAYMENT OF WITHHOLDING TAXES. Upon the Optionee's exercise of his or
her Option with respect to any of the Option Shares in accordance with the
provisions of paragraph 3 above, the Optionee shall pay to the Company upon
exercise of the Option the amount of any federal, state or local income tax
withholding or other tax that may be due upon such exercise. The determination
of the amount of any such federal, state or local income tax withholding or
other tax due in such event shall be made by the Company and shall be binding
upon the Optionee. Nothing in this Section or Agreement shall be construed to
impose on the Company a duty to withhold where applicable law does not require
such withholding, or to imply that the Optionee is an employee or anything other
than an independent director of the Company.
7. RECAPITALIZATION; REORGANIZATION. The shares underlying this Option are
shares of Common Stock as constituted on the date of this Option Agreement, but
if, during the Option Period and prior to the delivery by the Company of all of
the shares of Common Stock with respect to which this Option is granted, the
Company shall effect a subdivision or consolidation of shares or other capital
readjustment, the payment of a stock dividend or some other increase or decrease
in the number of shares of Common Stock outstanding, without receiving
compensation therefor in money, services or property, then, (a) in the event of
any increase in the number of such shares outstanding, the number of shares of
Common Stock then remaining subject to this Option shall be proportionately
increased (except that any fraction of a share resulting from any such
adjustment shall be excluded from the operation of this Option Agreement), and
the exercise price per share shall be proportionately reduced, and, (b) in the
event of a reduction in the number of such shares outstanding, the number of
shares of Common Stock then remaining subject to this Option shall be
proportionately reduced (except that any fractional share resulting from any
such adjustment shall be excluded from the operation of this Option Agreement),
and the exercise price per share shall be proportionately increased.
In the event of a merger of one or more corporations into the Company with
respect to which the Company shall be the surviving or resulting corporation,
the Optionee shall, at no additional
5
<PAGE>
cost, be entitled upon any exercise of this Option to receive (subject to any
required action by shareholders), in lieu of the number of shares as to which
this Option shall then be so exercised, the number and class of shares of stock
or other securities to which the Optionee would have been entitled pursuant to
the terms of the agreement of merger if, immediately prior to such merger, the
Optionee had been the holder of record of a number of shares of Common Stock of
the Company equal to the number of shares as to which such Option shall be so
exercised; provided, however, that, anything herein contained to the contrary
notwithstanding, upon the occurrence of any event described in Section 5(g) of
the Plan, this Option shall be subject to acceleration as provided in such
Section 5(g).
In the event of a change in the Common Stock as presently constituted,
which change is limited to a change of all of the authorized shares with par
value into the same number of shares with a different par value or without par
value, the shares resulting from any such change shall be deemed to be the
Common Stock within the meaning of the Plan.
The existence of this Option shall not affect in any way the right or
power of the Company or its shareholders to make or authorize any or all
adjustments, dividends, stock dividends, recapitalization, reorganizations or
other changes in the Company's capital structure or its business, or any merger
or consolidation of the Company, or any issue of bonds, debentures, preferred or
other stocks with preference ahead of or convertible into, or otherwise
affecting, the Common Stock or the rights thereof, or the dissolution or
liquidation of the Company, or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding, whether of a
similar character or otherwise.
8. NO REGISTRATION RIGHTS. Anything in this Option Agreement to the
contrary notwithstanding, if, at any time specified herein for the issuance of
Option Shares, any law, regulation or requirements of any governmental authority
having jurisdiction in the premises shall require either the Company or the
Optionee, in the opinion of the Company's counsel, to take any action in
connection with the shares then to be issued, the issue of such shares shall be
deferred until such action shall have been taken. Nothing in this Option
Agreement shall be construed to obligate the Company at any time to file or
maintain the effectiveness of a registration statement under the Act, or under
the securities laws of any state or other jurisdiction, or to take or cause to
be taken any action which may be necessary in order to provide an exemption from
the registration requirements of the Act under Rule 144 or any other exemption
with respect to the Option Shares or otherwise for resale or other transfer by
the Optionee (or by the executor or administrator of such Optionee's estate or a
person who is a Permitted Transferee or who acquired the Option or any Option
Shares or other rights by bequest or inheritance or by reason of the death of
the Optionee) as a result of the exercise of an Option granted pursuant to this
Option Agreement.
9. RESOLUTION OF DISPUTES. Any dispute or disagreement that arises under,
or as a result of, or pursuant to, this Option Agreement shall be determined by
the Committee in its absolute and uncontrolled discretion, and any such
determination or other determination by the Committee under or pursuant to this
Option Agreement, and any interpretation by the Committee of the terms of this
Option Agreement, shall be final, binding and conclusive on all parties affected
thereby.
10. COMPLIANCE WITH THE ACT. Notwithstanding any provision herein or in
the Plan to the contrary, the Company shall be under no obligation to issue any
shares of Common Stock to the
6
<PAGE>
Optionee upon exercise of the Option granted hereby unless and until the Company
has determined that such issuance is either exempt from registration, or is
registered, under the Act and is either exempt from registration and
qualification, or is registered or qualified, as applicable, under all
applicable state securities or "blue sky" laws.
11. MISCELLANEOUS.
(a) BINDING ON SUCCESSORS AND REPRESENTATIVES. This Option Agreement
shall be binding not only upon the parties, but also upon their heirs,
executors, administrators, personal representatives, successors and assigns
(including any transferee of a party to this Agreement); and the parties agree,
for themselves and their successors, assigns and representatives, to execute any
instrument which may be necessary legally to effect the terms and conditions of
this Option Agreement.
(b) ENTIRE AGREEMENT. This Option Agreement, together with the Plan,
constitutes the entire agreement of the parties with respect to the Option and
supersedes any previous agreement, whether written or oral, with respect
thereto. This Option Agreement has been entered into in compliance with the
terms of the Plan; wherever a conflict may arise between the terms of this
Option Agreement and the terms of the Plan, the terms of the Plan shall control.
(c) AMENDMENT. Neither this Option Agreement nor any of the terms
and conditions herein set forth may be altered or amended orally, and any such
alteration or amendment shall be effective only when reduced to writing and
signed by each of the parties or their respective successors and assigns.
(d) CONSTRUCTION OF TERMS. Any reference herein to the singular or
plural shall be construed as plural or singular whenever the context requires.
(e) NOTICES. All notices, requests and amendments under this Option
Agreement shall be in writing, and notices shall be deemed to have been given
when personally delivered or sent prepaid registered mail:
(i) if to the Company, at the following address:
HLM Design, Inc.
121 West Trade Street, Suite 2950
Charlotte, North Carolina 28202
Attention: Chief Financial Officer
or at such other address as the Company shall designate by notice.
(ii) if to the Optionee, to the Optionee's address appearing
in the Company's records, or at such other address as
the Optionee shall designate by notice.
7
<PAGE>
(f) GOVERNING LAW. This Option Agreement shall be governed by, and
construed in accordance with, the laws of the State of North Carolina (excluding
the principles of conflict of laws thereof).
(g) SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Option Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provisions were omitted.
(h) NOT AN INCENTIVE STOCK OPTION. The Option granted hereunder is
not intended to be an "Incentive Stock Option" under Section 422 of the Code.
IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement
as of the day and year first written above.
HLM DESIGN, INC.
By: /s/ SIGNATURE ILLEGIBLE
-------------------------------
Title: CEO
--------------------------------
OPTIONEE: FRED POUNDS
/s/ Fred Pounds (SEAL)
----------------------
8
TYPE: EX-10
DESCRIPTION: EXHIBIT 10.60
EXHIBIT 10.60
<TABLE>
<CAPTION>
PROMISSORY NOTE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$5,000,000 03-26-99 06-30-2000 2069136 004A 905 GRS
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item.
- ------------------------------------------------------------------------------------------------------------------------------------
Borrower: HLM DESIGN, INC. (TIN: 56-2018819) Lender: First Charter National Bank
121 West Trade Street, Suite 2950 P. O. Box 228
Charlotte, NC 28202 Concord, NC 28026-0228
====================================================================================================================================
Principal Amount: $5,000,000.00 Initial Rate: 8.75% Date of Note: March 26, 1999
</TABLE>
PROMISE TO PAY. HLM DESIGN, INC. ("BORROWER") PROMISES TO PAY TO FIRST CHARTER
NATIONAL BANK ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF
AMERICA, THE PRINCIPAL AMOUNT OF FIVE MILLION & 00/100 DOLLARS ($5,000,000.00)
OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID
OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM
THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL
PLUS ALL ACCRUED UNPAID INTEREST ON JUNE 30, 2000. IN ADDITION, BORROWER WILL
PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING APRIL 10,
1999. AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH
AFTER THAT. The annual interest rate for this Note is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the Prime Rate as
published in the Wall Street Journal. When a range of rates has been published,
the higher of the rates will be used (the "Index"). The Index is not necessarily
the lowest rate charged by Lender on its loans. If the index becomes unavailable
during the term of this loan, Lender may designate a substitute Index after
notice to Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based on
other rates as well. The interest rate change will not occur more often than
each day. THE INDEX CURRENTLY IS 7.750% PER ANNUM. THE INTEREST RATE TO BE
APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 1.000
PERCENTAGE POINT OVER THE INDEX, RESULTING TO THE INITIAL RATE OF 8.750% PER
ANNUM. NOTICE: Under no circumstances will the interest rate on this Note be
more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 15 DAYS OR MORE LATE, Borrower will be charged
4.00% OF THE REGULARLY SCHEDULED PAYMENT.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender* (c) Any representation or statement made or furnished to
Lender by Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished. (d) Borrower
becomes insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (e) Any creditor tries to take any of Borrower's property on or
in which Lender has a lien or security interest. This includes a garnishment of
any of Borrower's accounts with Lender. (f) Any guarantor dies or any of the
other events described in this default section occurs with respect to any
guarantor of this Note. (g) A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or performance
of the indebtedness is impaired. (h) Lender in good faith deems itself insecure.
*after Borrower shall have received written notice of such default and not cured
such default within thirty (30) days.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Lender may hire or pay someone
else to help collect this Note if Borrower does not pay. Borrower also will pay
Lender that amount. This includes, subject to any limits under applicable law,
Lender's reasonable attorneys' fees and Lender's legal expenses whether or not
there is a lawsuit, including reasonable attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
If not prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF NORTH CAROLINA. IF THERE IS A
LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF
THE COURTS OF CABARRUS COUNTY, THE STATE OF NORTH CAROLINA. THIS NOTE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH
CAROLINA.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts Borrower may open in the future, excluding however all IRA and
Keogh accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts, and, at Lender's option, to administratively
freeze all such accounts to allow Lender to protect Lender's charge and setoff
rights provided on this paragraph.
COLLATERAL. This Note is secured by: ALL PRESENTLY EXISTING AND FUTURE ACCOUNTS,
ACCOUNTS RECEIVABLE, RECEIVABLES, CONTRACTS, CONTRACT RIGHTS, BOOK DEBTS,
GENERAL INTANGIBLES, CHECKS, NOTES, DRAFTS, INSTRUMENTS, CHATTEL PAPER,
DOCUMENTS, ACCEPTANCES, CHOSES IN ACTION AND ALL OTHER OBLIGATIONS FOR THE
PAYMENT OF MONEY CREATED BY THE DEBTOR FROM THE SALE OF INVENTORY OR DELIVERY OF
SERVICES AND FURTHER PROCEEDS THEREOF WITH THE CONTINUING GUARANTY OF HLM DESIGN
OF NORTHAMERICA, INC., HLM DESIGN OF THE SOUTHEAST, P.C., HLM DESIGN OF THE
NORTHWEST, ARCHITECTURE, ENGINEERING AND PLANNING, P.C. AND JPJ ARCHITECTS, INC.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested orally by Borrower or by an authorized person. Lender
may, but need not, require that all oral requests be confirmed in writing. All
communications, instructions, or directions by telephone or otherwise to Lender
are to be directed to Lender's office shown above. The following party or
parties are authorized to request advances under the line of credit until Lender
receives from the Borrower at Lender's address shown above written notice of
revocation of their authority: JOSEPH M. HARRIS, PRESIDENT; AND VERNON B.
BRANNON, CFO. Borrower agrees to be liable for all sums either: (a) advanced in
accordance with the instructions of an authorized person or (b) credited to any
of Borrower's accounts with Lender. The unpaid principal balances owing on this
Note at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if: (a) Borrower or any guarantor is
in default under the terms of this Note or any agreement that Borrower or any
guarantor has with Lender, including any agreement made in connection with the
signing of this Note; (b) Borrower or any guarantor ceases doing business or is
insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such guarantor's guarantee of this Note or any other loan with
Lender; (d) Borrower has applied funds provided pursuant to this Note for
purposes other than those authorized by Lender; or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender and
Borrower.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
09-01-1998 PROMISSORY NOTE Page 2
Loan No 2069136 (Continued)
================================================================================
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
HLM DESIGN, INC.
By: /s/ Vernon B. Brannon (SEAL)
-------------------------------------
VERNON B. BRANNON, CFO
Exhibit 21.1
Subsidiaries of the Registrant
JPJ Architects, Inc.
G.A. Design International Holdings, Ltd.
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement No.
333-75131 of HLM Design, Inc. on Form S-8 of our report dated June 21, 1999,
appearing in this Annual Report on Form 10-K of HLM Design, Inc. for the year
ended April 30, 1999.
Charlotte, North Carolina
July 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001049129
<NAME> HLM DESIGN, INC
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAY-01-1998 APR-30-1999
<PERIOD-START> APR-26-1997 MAY-02-1998
<PERIOD-END> MAY-01-1998 APR-30-1999
<CASH> 17,369 250,575
<SECURITIES> 0 0
<RECEIVABLES> 6,239,929 8,652,760
<ALLOWANCES> (150,000) (341,692)
<INVENTORY> 0 0
<CURRENT-ASSETS> 12,065,776 16,594,630
<PP&E> 2,568,853 4,044,013
<DEPRECIATION> 768,904 (1,832,611)
<TOTAL-ASSETS> 17,582,948 27,474,242
<CURRENT-LIABILITIES> 12,338,860 11,472,655
<BONDS> 0 0
0 0
0 0
<COMMON> 776 2,345
<OTHER-SE> 963,979 8,978,595
<TOTAL-LIABILITY-AND-EQUITY> 17,582,948 27,474,242
<SALES> 0 0
<TOTAL-REVENUES> 29,296,690 37,757,653
<CGS> 0 0
<TOTAL-COSTS> 13,124,743 17,911,395
<OTHER-EXPENSES> 13,679,343 17,071,242
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,030,351 759,097
<INCOME-PRETAX> 1,462,253 2,015,919
<INCOME-TAX> 683,897 942,707
<INCOME-CONTINUING> 778,356 1,072,886
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 280,849
<CHANGES> 0 0
<NET-INCOME> 778,356 792,037
<EPS-BASIC> 1.12 .39
<EPS-DILUTED> .91 .39
</TABLE>
EXHIBIT 99.1
SAFE HARBOR UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. HLM Design, Inc. (the
"Company") desires to take advantage of the "safe harbor" provisions of the Act.
Certain information, particularly information regarding future economic
performance, finances and management's plans and objectives, contained in this
report is forward-looking. In some cases information regarding certain important
factors that could cause actual results to differ materially from any such
forward-looking statement appear together with such statement. Also, the
following factors, in addition to other possible factors not listed, could
affect the Company's actual results and cause such results to differ materially
from those expressed in forward-looking statements:
INNOVATIVE STRATEGY
The Company's operating and growth strategies are predicated upon its ability to
contract with architectural, engineering and planning firm ("AEP Firm")
operations and to generate profits from those firms. The process of identifying
suitable AEP Firm candidates for entering into Management and Services
Agreements and proposing, negotiating and implementing economically feasible
affiliations with AEP Firms is lengthy and complex. Such strategies require
intense management direction in a dynamic marketplace that is increasingly
subject to cost containment and other competitive pressures. There can be no
assurance that these strategies will be successful or that modifications to the
Company's strategies will not be required.
MANAGEMENT AND SERVICES AGREEMENTS WITH A LIMITED NUMBER OF FIRMS
The Company's revenues are derived solely from its contractual relationships
with the Managed Firms (for whom, as indicated below, the Company will also
provide required financing). Currently, the Company has Management and Services
Agreements with two recently acquired subsidiaries (JPJ and GAIH) and six other
firms. All of these other firms are related to each other and to the Company, by
common principal stockholders, Joseph M. Harris and Vernon B. Brannon. There can
be no assurance that the Company will be able to successfully enter into
Management and Services Agreements with additional firms.
UNCERTAINTIES CONCERNING ABILITY TO RECEIVE PAYMENTS FROM MANAGED FIRMS
The Company earns, for services provided to the Managed Firms, 99% of the net
income of the Managed Firms as determined in accordance with generally accepted
accounting principles. However, for cash management purposes, the Company is to
receive 99% of the positive cash flows of the Managed Firms (calculated for any
period as the change in the cash balances from the beginning of the period to
the end of the period). The Company's ability actually to receive payments
1
<PAGE>
in respect thereof during any particular period will be subject to the cash
requirements of the Managed Firms. To the extent the cash requirements of the
Managed Firms continue to exceed 1% of positive cash flows, the Company will be
unable to receive payments against such receivable and such payments will
continue to be delayed. The Company's ability to pay dividends on the Common
Stock will depend on the ability of the Company to collect such receivables.
DEPENDENCE ON KEY PERSONNEL AND LIMITED MANAGEMENT AND PERSONNEL RESOURCES
The Company's success depends to a significant degree upon the continued
contributions of its senior management team 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 (although not all) of its senior professional staff. There can be no
assurance, however, that a court would enforce the noncompetition agreements as
currently in effect. If courts refuse to enforce the noncompetition agreements
of the Company or the Managed Firms, such refusals could have a material
adverse effect on the Company.
In addition, as the Company expands it will likely be dependent on the senior
professional staff of any firm with which the Company enters into a Management
and Services Agreement. The loss of the services of key employees 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.
DEPENDENCE ON MANAGED FIRMS
The Company's revenues depend on fees and revenues generated by various AEP
Firms managed by the Company. 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 the Company. The Company itself is not engaged in the
practice of architecture, engineering or planning and, as a result, does not
2
<PAGE>
control (i) the practice of architecture, engineering or planning by
professionals or (ii) the compliance with certain regulatory requirements
directly applicable to the Managed Firms.
RISKS INHERENT IN PROVISION OF SERVICES
The Managed Firms and certain employees of the Managed Firms are involved in the
delivery of services to the public and, therefore, are exposed to the risk of
professional liability claims. Claims of this nature, if successful, could
result in substantial damage awards to the claimants that may exceed the limits
of any applicable insurance coverage. Insurance against losses related to claims
of this type can be expensive and varies widely from state to state. Although
the Company is indemnified under its Management and Services Agreements for
claims against the Managed Firms and their employees, the Company maintains
liability insurance for itself and negotiates liability insurance for its
Managed Firms and the professionals employed by its Managed Firms. Successful
malpractice claims asserted against the Managed Firms, their employees or the
Company could have an adverse effect on the Company's profitability.
COMPETITION
The business of providing architectural, engineering and planning related
services is highly competitive. The Company's competition includes many other
firms, including large national firms as well as regional or small local firms.
Several companies that have established operating histories and significantly
greater resources than the Company provide some of the services provided by the
Managed Firms. In addition, there are other companies with substantial resources
that may in the future decide to engage in activities similar to those in which
the Company engages.
UNCERTAINTIES CONCERNING ADDITIONAL FINANCINGS
The Company's operating and growth strategies require substantial capital
resources, particularly since the Company, as the management company, will be
responsible for the financing of working capital growth, capital growth and
other cash needs of the Managed Firms. These requirements will result
in the Company incurring long-term and short-term indebtedness and may result in
the public or private issuance, from time to time, of additional debt or equity
securities, including the issuance of such securities in connection with the
execution of Management and Services Agreements. There can be no assurance that
any such financing will be obtainable on terms acceptable to the Company.
The Company's existing revolving line of credit matures as of June 30, 2000,
unless it is renewed by the lender.
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If the Company is unable to renew such facility or obtain a new revolving line
of credit on commercially reasonable terms, its ability to implement its growth
strategy will be adversely affected.
GOVERNMENT REGULATION
The architectural and engineering industries are regulated at the state level.
The Company believes its operations are in material compliance with applicable
law. Nevertheless, because of the unique structure of the relationships between
the Company 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 the Company's relationships with its Managed Firms.
Consequently, if the Company is unable or unwilling to undertake such
modifications, it may be limited in its ability to expand into certain
jurisdictions. As of the date hereof, the Company has not determined which
jurisdictions would require structural or organizational modifications of the
Company's relationships with the Managed Firms. Although the Company believes
its operations are in material compliance with existing applicable law, there
can be no assurance that the Company's existing Management and Services
Agreements could not be successfully challenged as, for example, constituting
the unlicensed practice of architecture, or that the enforceability of the
provisions thereof, including non-disclosure agreements therein, will not be
limited.
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