-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CL32D3danyQEcwGbCuLb7huihoS6RCCCXak+d7q150CiOGR9uDUO+wJ8elpye9+G mgee/uWDqB08qycXYkK8yg== 0000950109-01-502306.txt : 20010724 0000950109-01-502306.hdr.sgml : 20010724 ACCESSION NUMBER: 0000950109-01-502306 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20010427 FILED AS OF DATE: 20010723 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HLM DESIGN INC CENTRAL INDEX KEY: 0001049129 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ENGINEERING, ACCOUNTING, RESEARCH, MANAGEMENT [8700] IRS NUMBER: 562018819 STATE OF INCORPORATION: DE FISCAL YEAR END: 0501 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-14137 FILM NUMBER: 1686301 BUSINESS ADDRESS: STREET 1: 121 W TRADE ST STREET 2: STE 2950 CITY: CHARLOTTE STATE: NC ZIP: 28202 BUSINESS PHONE: 7043580779 MAIL ADDRESS: STREET 1: 121 WEST TRADE STREET STREET 2: SUITE 2950 CITY: CHARLOTTE STATE: NC ZIP: 28202 10-K 1 d10k.txt HLM DESIGN - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- 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 27, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to to Commission file number 001-14137 HLM Design, Inc. (Exact Name of Registrant as Specified in Its Charter) Delaware 56-2018819 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 121 West Trade Street 28202 Suite 2950 (Zip Code) Charlotte, North Carolina (Address of Principal Executive Offices) (704) 358-0779 (Registrant's telephone number, including area code) --------------- Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange Title of Each Class on Which Registered ------------------- --------------------- $.001 Par Value Common Stock American Stock Exchange
--------------- Securities registered pursuant to Section 12(g) of the Act: None --------------- (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. [_] At July 12, 2001, the aggregate market value of the voting stock held by non-affiliates was $3,539,418, based on the closing sales price of the registrant's Common Stock on that date, of $2.26 per share. As of July 12, 2001, the registrant had a total of 2,206,589 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 18, 2001 have been incorporated by reference in Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORM 10-K TABLE OF CONTENTS
Page ---- 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 Information.................................................................. F-1 Signatures...................................................................................... F-19
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 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; and references to the "Managed Firms" mean HLMNA, HLMUSA, HLMAEP, JPJ, GAIH and BL&P (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 PART I Item 1. Business Overview HLM Design, Inc. ("HLM Design"), headquartered in Charlotte, North Carolina, is a professional consultancy that provides management and services to architectural, engineering and planning ("AEP") firms. Formed in 1997, HLM Design Inc.'s strategy is to consolidate non-professional operations and provide management expertise to individual AEP firms. The Company believes it is the first architecturally-driven public company in the AEP industry to provide operating efficiencies and geographic and service diversification to clients. Through the establishment of management and services relationships, HLM Design has adopted a successful strategy used to consolidate other professional service industries. The Managed Firms provide a broad spectrum of design services to public and private clients in the United States and abroad. At April 27, 2001, the Managed Firms included: . HLM Design of North America, Inc. ("HLMNA") . HLM Design USA, Inc. ("HLMUSA") . HLM Design Architecture, Engineering and Planning, P.C. ("HLMAEP") . JPJ Architects, Inc. ("JPJ") . G.A. Design International Holdings, Ltd. ("GAIH") . BL&P Engineers, Inc. ("BL&P") JPJ, GAIH and BL&P are subsidiaries of the Company. These firms operate in 11 offices located in Atlanta, Georgia; Iowa City, Iowa; Chicago, Illinois; Orlando, Florida; Bethesda, Maryland; Denver, Colorado; San Francisco, California; Dallas, Texas; Philadelphia, Pennsylvania; Charlotte, North Carolina; and London, UK. The Company is headquartered in Charlotte, North Carolina. HLM Design itself is not engaged in the practice of architecture, engineering, and planning. The Managed Firms Certain Managed Firms have been in business dating back to 1962. They provide a broad spectrum of design services to public and private clients across the United States and abroad. The professionals include architects, mechanical, electrical, structural, and civil engineers; landscape architects; interior designers; environmental graphic designers; and construction administration personnel. HLM Design believes that its management strategy will attract new AEP firms as a result of two major trends: (1) the increasing complexity, cost, and competitiveness of the design practice that requires operational and cost efficiencies; and (2) the AEP firm's need for access to a wider pool of geographically dispersed professionals in order to capture new clients and provide solutions for the evolving needs of current clients. The professionals maintain full control over their architectural and engineering practices and set their own standards of practice and retain ownership of all contracts with clients. Markets The professionals 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 includes corporate headquarters, hospitals, healthcare facilities, investment office buildings, multi-use office complexes, laboratories, courthouses, schools, and hotels. 3 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 JPJ, GAIH and BL&P. The Company's strategy is to expand revenues of the Managed Firms 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. 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, management 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, 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 Managed Firm's positive cash flow (as determined in accordance with accounting principles generally accepted in the United States of America). See "--HLM Design Operations-- Management and Services Agreements." In addition to the Management and Services Agreements, 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 the non-subsidiary 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). Growth Strategy During the current fiscal year the Company continued its 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's organization, 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 Managed Firms, with the assistance of the Company, to be the single source provider for large national clients with geographically diverse operations. 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. Management also 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 further believes these goals can be achieved at less cost than would be incurred by AEP firms operating on a stand-alone basis. 4 HLM Design Operations Pursuant to its Management and Services Agreements, the Company manages all aspects of the Managed Firms but does not provide professional architectural, engineering and planning services. The provision of these services is controlled by the Managed Firms. The Company enhances growth of the Managed Firms by assisting in the recruitment of new professionals and by expanding and adding ancillary services. The Company is positioned 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 40 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 issuances of common stock or incurrence of indebtedness. Stockholders' Agreements Individual stockholders of Managed Firms (not including JPJ, GAIH and BL&P, 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: 5 (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. The state laws, or the regulations established by a registration board, may also establish requirements for the practice of architecture, engineering or related services 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 of possible future environmental legislation or regulations on its operations. Employees As of April 27, 2001, the Company and the Managed Firms together employed approximately 330 persons of which approximately 115 were registered professionals (engineers, architects and others) and approximately 220 degreed professionals (engineers, architects and others). None of the Company's employees or the Managed Firm's employees are represented by a labor union. The Company considers its relations with its employees and the employees of the Managed Firms to be satisfactory. 6 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 12,292 square feet. Its telephone number is (704) 358-0779. The lease is for a term of five years and expires in January 2006. In addition to the Company's principal executive offices, the Company or the Managed Firms lease office space in San Francisco, 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 27, 2001. 7 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". Effective January 14, 2000, the Common Stock began trading on the American Stock Exchange ("AMEX") under the symbol "HMD." As of July 12, 2001, 2,206,589 shares of Common Stock were outstanding and issued to a total of approximately 780 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 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. The following table sets forth the high and low closing sales prices for the Company's Common Stock as reported by AMEX.
High Low ----- ----- April 28, 2000 -------------- First Quarter................................................. $4.38 $2.81 Second Quarter................................................ $4.00 $2.75 Third Quarter................................................. $4.00 $2.50 Fourth Quarter................................................ $5.19 $3.25 April 27, 2001 -------------- First Quarter................................................. $5.13 $3.75 Second Quarter................................................ $4.38 $2.75 Third Quarter................................................. $3.25 $2.00 Fourth Quarter................................................ $3.00 $2.08
Recent Sales of Unregistered Securities; Use of Proceeds As of April 29, 2000 in connection with the acquisition of BL&P, the Company agreed to issue to the sellers 50,000 shares of Common Stock on a delayed delivery basis. 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. The factors that assured the availability of the exemption included the sophistication of the offerees and purchasers, their access to material information, the disclosures about the Company actually made to them by the Company and the absence of any general solicitation or advertising. Item 6. Selected Financial Data The following selected financial data for the Predecessor Company (as defined below) for the year 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, HLM of the Southeast, P.C. ("HLMSE") and HLM Design of the Northwest, Architecture, Engineering and Planning, P.C. ("HLMNW") for the eleven month period from May 31, 1997 to May 1, 1998. The selected financial data for the years ended April 30, 1999, April 28, 2000 and April 27, 2001 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
(Predecessor Company) (1) HLM Design Consolidated For the Years Ended ------------------------ -------------------------------------------------- For the One Month Year Ended Ended April 25, May 30, May 1, April 30, April 28, April 27, 1997 1997 1998 (2) 1999 2000 2001 ----------- ----------- ----------- ----------- ----------- ----------- Revenue................. $26,754,710 $ 2,233,036 $29,296,690 $37,757,653 $53,101,661 $64,291,362 Costs and expenses: Direct cost of revenue............... 13,376,251 898,979 13,124,743 17,911,395 28,799,298 36,099,203 Operating costs........ 12,414,739 1,163,141 13,465,102 16,848,779 20,915,714 24,125,698 ESOP expenses.......... 408,765 -- -- -- -- -- Amortization of intangible assets..... 107,670 9,571 147,269 262,275 429,569 661,457 ----------- ----------- ----------- ----------- ----------- ----------- Total costs and expenses.............. 26,307,425 2,071,691 26,737,114 35,022,449 50,144,581 60,886,358 ----------- ----------- ----------- ----------- ----------- ----------- Income from operations.. 447,285 161,345 2,559,576 2,735,204 2,957,080 3,405,004 ----------- ----------- ----------- ----------- ----------- ----------- Other expense: Net interest........... (396,007) (36,951) (1,027,368) (719,611) (1,120,407) (1,734,141) Non-operating income (expense)............. 285,635 -- (69,955) -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Total other expense.... (110,372) (36,951) (1,097,323) (719,611) (1,120,407) (1,734,141) ----------- ----------- ----------- ----------- ----------- ----------- Income before income taxes, minority interest and extraordinary items.... 336,913 124,394 1,462,253 2,015,593 1,836,673 1,670,863 Income tax expense...... 219,799 43,000 683,897 942,707 853,894 903,905 ----------- ----------- ----------- ----------- ----------- ----------- Income before minority interest and extraordinary items.... 117,114 81,394 778,356 1,072,886 982,779 766,958 Minority interest in earnings............... -- -- -- -- -- 25,701 ----------- ----------- ----------- ----------- ----------- ----------- Income before extraordinary items.... 117,114 81,394 778,356 1,072,886 982,779 741,257 Extraordinary loss from early extinguishment of debt, net of tax of $171,842 and $128,004 in 1999 and 2000, respectively........... -- -- -- (280,849) (228,355) -- ----------- ----------- ----------- ----------- ----------- ----------- Net income.............. $ 117,114 $ 81,394 $ 778,356 $ 792,037 $ 754,424 $ 741,257 =========== =========== =========== =========== =========== =========== NET INCOME PER SHARE (3)--BASIC: Income before extraordinary items... $ 1.12 $ 0.52 $ 0.42 $ 0.31 Extraordinary loss from early extinguishment of debt............... -- (0.13) (0.10) -- ----------- ----------- ----------- ----------- Net income.............. $ 1.12 $ 0.39 $ 0.32 $ 0.31 =========== =========== =========== =========== NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA................... 697,255 2,048,974 2,352,856 2,415,238 =========== =========== =========== =========== NET INCOME PER SHARE (3)--DILUTED: Income before extraordinary items... $ 0.91 $ 0.52 $ 0.42 $ 0.30 Extraordinary loss from early extinguishment of debt............... -- (0.13) (0.10) -- ----------- ----------- ----------- ----------- Net income.............. $ 0.91 $ 0.39 $ 0.32 $ 0.30 =========== =========== =========== =========== NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA................... 854,453 2,048,974 2,362,471 2,437,611 =========== =========== =========== =========== SUPPLEMENTAL NET INCOME PER SHARE (4): 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)........... $(1,902,363) $(2,238,531) $ (273,084) $ 5,121,975 $ 8,112,877 $ 6,168,938 Total assets............ 12,874,503 17,639,673 17,582,948 27,474,242 32,100,763 38,743,711 Long-term debt.......... 103,792 2,476,008 4,164,401 5,672,379 9,503,285 10,592,714 Stockholders' equity (5).................... 1,203,541 1,284,935 964,755 8,980,940 9,767,993 10,770,327
9 - -------- (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. HLMSE and HLMNW were merged into HLM AEP in November 1999. (3) Historical net income per share of the Predecessor Company is not presented, as the historical capital structure of the Company prior to the initial public offering (the "Offering") is not comparable with the capital structure of the Company after the Offering. (4) 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 between HLMNA and BBH Corp. (HLMNA sold certain shares to BBH Corp. and BBH Corp. was merged into HLMNA. Each BBH Corp. share outstanding at the time of merger was converted to HLMNA's stock. All HLMNA shares held by BBH Corp. were cancelled and retired. HLMNA repurchased all of its common stock from the ESOP) as if the transactions had occurred at the beginning of fiscal 1998. (5) Neither the Company nor the Predecessor Company has paid cash dividends from May 1, 1992 to April 27, 2001. 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 related notes thereto included elsewhere herein. Overview The Company is a professional consultancy which enters into management and services relationships with full-service architectural, engineering and planning firms. Currently, the Company has Management and Services Agreements with six Managed Firms. These Managed Firms operate in eleven offices: Atlanta, Georgia; Iowa City, Iowa; Chicago, Illinois; Orlando, Florida; Bethesda, Maryland; Denver, Colorado; San Francisco, California; Dallas, Texas; Philadelphia, Pennsylvania; Charlotte, North Carolina and London, UK. The Company is headquartered in Charlotte, North Carolina. A full service AEP Firm provides a spectrum of services in various specialties to clients through a broad range of professionals, including architects, mechanical, electrical, structural and civil engineers, landscape architects, interior designers, environmental graphic designers and construction administration personnel. Results of Operations
April 30, April 28, April 27, 1999 2000 2001 ----------- ----------- ----------- Revenue................................ $37,757,653 $53,101,661 $64,291,362 Consultant and project expenses........ 9,771,935 18,221,216 22,875,353 ----------- ----------- ----------- Net production income.................. 27,985,718 34,880,445 41,416,009 ----------- ----------- ----------- Direct labor........................... 8,139,460 10,578,082 13,223,850 Operating costs........................ 16,848,779 20,915,714 24,125,698 Amortization of intangible assets...... 262,275 429,569 661,457 ----------- ----------- ----------- Total costs and expenses............... 25,250,514 31,923,365 38,011,005 ----------- ----------- ----------- Income from operations................. 2,735,204 2,957,080 3,405,004 Interest expense....................... (719,611) (1,120,407) (1,734,141) ----------- ----------- ----------- Income before income taxes, minority interest and extraordinary item....... 2,015,593 1,836,673 1,670,863 Income tax expense..................... 942,707 853,894 903,905 ----------- ----------- ----------- Income before minority interest and extraordinary item.................... 1,072,886 982,779 766,958 Minority interest in earnings.......... -- -- 25,701 ----------- ----------- ----------- Income before extraordinary items...... 1,072,886 982,779 741,257 Extraordinary loss from early extinguishment of debt................ (280,849) (228,355) -- ----------- ----------- ----------- Net income............................. $ 792,037 $ 754,424 $ 741,257 =========== =========== ===========
10 Fiscal 2001 Compared to Fiscal 2000 Revenues were $64.3 million in fiscal 2001 as compared to $53.1 million in fiscal 2000, which is a 21.1% increase. This increase is due to internal growth in existing operations as well as the acquisition of BL&P during the first quarter of fiscal year ended 2001. The rate of internal growth in existing operations declined during the second half of fiscal 2001, thereby reducing the overall fiscal year increase in revenues from the 24.2% experienced for the nine months ended January 26, 2001 to 21.1% for the fiscal year ended 2001. Direct costs primarily include consultant costs and reimbursable project expenses. Direct costs were $22.9 million, or 35.6% of revenue, in fiscal 2001 as compared to $18.2 million, or 34.3% of revenue, in fiscal 2000. This slight increase as a percentage of revenue is due to increased use of consultants to meet project requirements. Direct labor cost was $13.2 million, or 31.9% of net production income, in fiscal 2001 as compared to $10.6 million, or 30.3% of net production income, in fiscal 2000. Although the volume of architecture, planning and engineering services has increased, it is offset by (a) an increase in salary and salary related costs which has not been passed through to the Company's clients in all cases and (b) a reduction in certain higher margin projects. The Company's Chief Operating Officer is working directly with the project managers of the Managed Firms to improve the effectiveness and efficiency of each project and ultimately decrease direct labor cost as a percentage of net production income. Management believes within the fiscal year ending 2002, the financial statements will be positively impacted by this focus on operations. Operating costs were $24.1 million, or 58.3% of net production income, in fiscal 2001 as compared to $20.9 million, or 60.0% of net production income, in fiscal 2000. This decrease is due to fixed costs which do not increase at the same pace as net production income. This decrease as a percentage of net production income is partially offset by (a) expenses incurred and an increase in indirect labor as a result of the consolidation of two of our Managed Firms; (b) an increase in indirect labor as a result of additional marketing efforts; and (c) an increase in certain office expenses. Amortization of intangible assets was $0.7 million in fiscal 2001 as compared to $0.4 million in fiscal 2000. This increase is attributable to goodwill amortization expense primarily arising from the acquisition of BL&P. See Note 2 to the Consolidated Financial Statements included elsewhere herein. Interest expense was $1.7 million in fiscal 2001 and $1.1 million in fiscal 2000. This increase is principally due to the Company's increase in borrowings on its line of credit, as well as, debt resulting from the acquisition of BL&P. Income tax expense was $0.9 million for both fiscal 2001 and fiscal 2000. The effective income tax rate was 54.1% and 46.5% for fiscal 2001 and fiscal 2000, respectively. This effective tax rate is higher in fiscal 2001 principally due to the increase in non-deductible goodwill amortization. Fiscal 2000 Compared to Fiscal 1999 Revenues were $53.1 million in fiscal 2000 as compared to $37.8 million in fiscal 1999, which is a 40.6% increase. This increase was attributable primarily to internal growth in existing operations and prior year acquisitions. Direct costs primarily include consultant costs and reimbursable project expenses. Direct costs were $18.2 million, or 34.3% of revenues, in fiscal 2000 as compared to $9.8 million, or 25.9% of revenues, in fiscal 1999. This increase as a percent of revenues was due to the Company's increased use of consultants to meet project requirements and partially due to the extensive use of consultants by certain companies acquired since November 1998, resulting in only a partial year of such expenses reflected in the April 30, 1999 financial statements, as well as the tight labor market. Management believes that this trend may continue which will cause direct costs as a percentage of revenues to increase in future periods. 11 Direct labor cost was $10.6 million, or 30.3% of net production income, in fiscal 2000 as compared to $8.1 million, or 29.1% of net production income, in fiscal 1999. Although the volume of architecture, planning and engineering services had increased, it was offset by (a) an increase in salary and salary related costs which has not been passed through to the Company's clients in all cases and (b) a reduction in certain higher margin projects. Operating costs were $20.9 million, or 60.0% of net production income, in fiscal 2000 as compared to $16.8 million, or 60.2% of net production income, in fiscal 1999. Operating costs as a percentage of net production income had been negatively impacted in the period by (a) an increase in indirect labor as a result of a slowdown in work in November and December imposed by several commercial clients while they concentrated on Y2K issues and winter storms across the country that closed several offices; (b) an increase in education and seminars due to the Company's increased focus on training and education of its employees; and (c) an increase in depreciation expense due to the Company's increased focus on improvement of certain computer and related equipment. Conversely, operating costs as a percentage of net production income was positively impacted in fiscal 2000 by a decrease in certain recurring expenses relating to the Company's obligations as a public company as well as the Company's internally performing several functions that were previously outsourced. Amortization of intangible assets was $0.4 million in fiscal 2000 as compared to $0.3 million in fiscal 1999. This increase was attributable to goodwill 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. Interest expense was $1.1 million in fiscal 2000 and $0.7 million in fiscal 1999. This increase was principally due to the Company's increase in borrowings on its line of credit as well as debt resulting from the acquisitions of JPJ, GAIH and ESS. Income tax expense was $0.9 million for both fiscal 2000 and fiscal 1999. The effective income tax rate was 47% for both fiscal 2000 and fiscal 1999. This effective tax rate has been impacted by reduction in the effect of state income taxes, which is offset by an increase in the effective tax rate due to increased goodwill amortization. Extraordinary item for early extinguishment of debt was $0.2 million in fiscal 2000. In February 2000, the early extinguishment of indebtedness to First Charter National Bank ("First Charter") and Berthel Fisher & Company Financial Services, Inc. ("Berthel Fisher") resulted in an extraordinary charge of $228,355, net of income taxes of $128,004, that consisted of write- off of related unamortized financing costs and other related costs. Liquidity and Capital Resources Historically, the Company has met working capital and capital expenditure needs through cash from operations and bank financing. At April 27, 2001, the Company's current assets of $23.4 million exceeded current liabilities of $17.2 million resulting in working capital of $6.2 million. In fiscal year ended 2001, the Company's operating activities provided $3.1 million cash from operations before working capital changes of $4.7 million. This increase in cash from operations is partially offset by cash used in operating activities due to working capital changes of $1.6 million. The Company used $2.9 million for investing activities, primarily as payment for the purchase of BL&P on April 29, 2000, and to a lesser extent, the purchase of equipment. The Company used cash of $0.2 million from financing activities primarily for payment on long-term borrowings which is offset by additional borrowings under the Company's revolving credit facility with IBJ. 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." In fiscal 2000, the Company entered into a revolving credit, term loan and capital expenditure loan for a total of $20,000,000 with IBJ Whitehall Business Center Corporation ("IBJ"). The three financing arrangements are discussed below: 12 a. Revolving Credit--The maximum revolving advance amount is $17,000,000. The amount available to borrow is calculated based on the aging of certain assets. This loan matures in February 2003 and bears interest at the prime rate plus 0.5%. At April 27, 2001, the Company had $8,191,031 outstanding bearing interest at 8.0%. b. Term Loan--The amount of the loan is $2,000,000. This loan matures in February 2003 and bears interest at a maximum of prime plus 2%. At April 27, 2001, the Company had $1,222,222 outstanding bearing interest at 9.5%. c. Capital Expenditure Loan--The maximum capital expenditure loan amount is $1,000,000. The amount is available for the financing of equipment used in the Company's business. This loan matures in February 2005 and bears interest at a maximum of prime plus 1%. At April 27, 2001, there were no borrowings under this loan. Substantially all assets are pledged under this financing arrangement. This financing arrangement requires certain financial requirements be maintained such as minimum net worth, maximum leverage and senior leverage ratios, maximum fixed charge coverage and senior fixed charge coverage ratios and maximum capital expenditure commitments. At April 27, 2001, the Company was in compliance with these financial requirements. During the fourth quarter of fiscal year ended 2001, the Company and IBJ entered into discussions regarding the existing revolving credit, term loan and capital expenditure loan to a) reduce the maximum revolving advance amount; b) cancel the capital expenditure loan commitment and c) increase the unpaid principal balance of the term loan to repay amounts under the revolving credit facility which was based on an evaluation of the Company's revolving advance amount, term and capital expenditure loan needs. Effective June 29, 2001, the Company entered into an amendment to its revolving credit, term loan and capital expenditure loan with IBJ. The amendment is summarized as follows: a. Revolving Credit--The maximum revolving advance amount is $12,500,000. b. Term Loan--The unpaid principal balance will be increased to $1,566,667 and will be repaid in equal monthly installments of $80,000, plus interest at a maximum of prime plus 2 percent. c. Capital Expenditure Loan--The Capital Expenditure Loan commitment has been cancelled. The Company believes that the existing line of credit and anticipated cash flow 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 as well as the Company leases certain computer hardware, software, and furniture under operating leases. The Company currently has no material commitments for purchases of additional equipment. Capital expenditures during fiscal 2001 were $0.7 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 1999, 2000 and 2001, inflation did not have a significant effect on the Company's results of operations for those periods. 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 April 28, 2000 was $8.1 million 13 and at April 27, 2001 was $12.2 million. As a percentage of total assets and stockholders' equity, goodwill, net of accumulated amortization, represented 25.3% and 83.3%, respectively, at April 28, 2000 and 31.4% and 113.0%, respectively, at April 27, 2001. Accounting principles generally accepted in the United States of America require that goodwill and all other intangible assets be amortized over the period benefited. The Company has determined that the period benefited by the goodwill will be no less than 15 years. Accordingly, the Company amortizes goodwill over a 15 year period for HLMNA and a 25 year period for JPJ, GAIH and BL&P. 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. The Company periodically compares the carrying value of goodwill with the anticipated undiscounted future cash flows from operations of the businesses acquired in order to evaluate the recoverability of goodwill. The Company has 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. The Company expects to incur additional goodwill in future acquisitions. New Accounting Standards In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. This new standard requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This statement will be effective for the Company for financial statements issued for the fiscal year beginning April 28, 2001. The Company has evaluated the effects the statement will have on its consolidated financial statements and related disclosures and does not believe that the effect will be material. The FASB recently voted in favor of the issuance of two new statements, SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001, and the use of the pooling of interest method will be prohibited. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment approach. Amortization of goodwill, including goodwill recorded in prior business combinations, will cease prospectively upon the adoption of the standard, which the Company anticipates adopting during fiscal year 2002. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from changes in interest rates affecting our credit arrangements, including a variable rate revolving credit arrangement and term loan agreement, which may adversely affect our results of operations and cash flows. We seek to minimize our interest rate risk through our day-to-day operating and financing activities. We do not engage in speculative or derivative financial or trading activities. A hypothetical 100 basis point adverse change (increase) in interest rates relating to our revolving credit arrangement and term loan agreement would have decreased pre-tax income for the year ended April 27, 2001 by approximately $110,000. 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 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", 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 18, 2001 (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 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 Schedule II--Valuation and Qualifying Accounts. (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
Exhibit No. Description -------- --------------------------------------------------------------------- 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. 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*/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). 10.3* 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")). 10.4* 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). 10.5* 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). 10.6* 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). 10.7* 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). 10.8* Letter Agreement dated as of January 9, 1998 amending the Berthel Lease (incorporated by reference to Exhibit 10.20.2 to the Form S-1). 10.9* 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). 10.10* 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). 10.11* HLM Design, Inc. Stock Option Plan (incorporated by reference to Exhibit 10.23 to the 1998 Form 10-K). 10.12* HLM Design, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.24 to the 1998 Form 10-K). 10.13* 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). 10.14* 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). 10.15* 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). 10.16* 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).
17
Exhibit No. Description ------- ---------------------------------------------------------------------- 10.17* 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). 10.18* Nonstatutory 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 10.33 to the 1998 Form 10-K). 10.19* 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). 10.20* 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). 10.21* 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). 10.22* 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). 10.23* 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). 10.24* 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). 10.25* 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). 10.26* 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). 10.27* Nonstatutory Stock Option Agreement and Grant pursuant to HLM Design, Inc. 1998 Stock Option Plan between the Company and Fred Pounds (incorporated by reference to Exhibit 10.59 to the 1999 Form 10-K). 10.28* Promissory Note made by the Company in favor of First Charter National Bank dated as of March 26, 1999 (incorporated by reference to Exhibit 10.60 to the 1999 Form 10-K). 10.29* Revolving Credit, Term Loan, Capital Expenditure Loan, Guaranty, and Security Agreement dated as of February 7, 2000 between HLM Design, Inc. and IBJ Whitehall Business Credit Corporation (incorporated by reference to Exhibit 10.42 to the Company's Annual Report on Form 10-K for the fiscal year ended April 28, 2000 (the "2000 Form 10-K")). 10.29.1 First Amendment to Revolving Credit, Term Loan, Capital Expenditure Loan, Guaranty and Security Agreement. 10.30* 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). 10.31* Stock Purchase Agreement dated as of April 28, 2000 among HLM Design, Inc., BL&P Engineers, Inc. and Scott Brady, PE (incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed on May 15, 2000). 10.32* The Goodwill Purchase Agreement dated as of April 28, 2000 by and between HLM Design, Inc. and Scott L. Brady (incorporated by reference to Exhibit 10.45 to the 2000 Form 10-K). 10.33* HLM Design Inc. 1998 Stock Option Plan as Amended June 13, 2000 (incorporated by reference to Exhibit 4.1 to the Company's Form S-8 (SEC File No. 333-52548) filed on December 21, 2000). 10.34 HLM Design Inc. Employee Stock Purchase Plan As Amended and Restated as of November 22, 2000.
18
Exhibit No. Description ------- ----------------------------------------------------------------- 21.1 Subsidiaries of the Company. 23 Consent of Deloitte & Touche LLP. 99.1 Safe Harbor Under the Private Securities Litigation Reform Act of 1995.
* 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--HLMUSA, HLMAEP, JPJ, GAIH and BL&P (in addition to those filed as Exhibit 10.1, as amended (see Exhibits 10.16 and 10.39)). /2/The other Managed Firms--HLMUSA and HLMAEP (but not including JPJ, GAIH and BL&P, 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 10.2). 19 INDEX TO FINANCIAL INFORMATION Page ---- HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES: INDEPENDENT AUDITORS' REPORT.............................................. F-2 FINANCIAL STATEMENTS: Consolidated Balance Sheets at April 28, 2000 and April 27, 2001.......... F-3 Consolidated Statements of Income for the Years Ended April 30, 1999, April 28, 2000 and April 27, 2001........................................ F-4 Consolidated Statements of Stockholders' Equity for the Years Ended April 30, 1999, April 28, 2000 and April 27, 2001.............................. F-5 Consolidated Statements of Cash Flows for the Years Ended April 30, 1999, April 28, 2000 and April 27, 2001........................................ F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors HLM Design, Inc. Charlotte, North Carolina We have audited the accompanying consolidated balance sheets of HLM Design, Inc. and Subsidiaries and Affiliates (the "Company") as of April 28, 2000 and April 27, 2001, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended April 27, 2001. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of April 28, 2000 and April 27, 2001, and the results of its operations and its cash flows for each of the three years in the period ended April 27, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP June 29, 2001 Charlotte, North Carolina F-2 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONSOLIDATED BALANCE SHEETS April 28, 2000 and April 27, 2001
April 28, 2000 April 27, 2001 -------------- -------------- (Note 1) (Note 1) ASSETS (Note 4) CURRENT ASSETS: Cash............................................ $ 285,616 $ 243,148 Trade and other receivables, less allowance for doubtful accounts at April 28, 2000 and April 27, 2001 of $346,060 and $726,473, respectively................................... 11,286,334 11,977,393 Costs and estimated earnings in excess of billings on uncompleted projects (Note 3)...... 8,412,159 9,767,618 Refundable income taxes......................... -- 673,915 Prepaid expenses and other...................... 788,015 749,484 ----------- ----------- Total current assets........................... 20,772,124 23,411,558 OTHER ASSETS: Goodwill, less amortization at April 28, 2000 and April 27, 2001 of $839,113 and $1,475,570, respectively (Note 2).......................... 8,136,010 12,166,149 Deferred income taxes (Note 8).................. -- 591,565 Other noncurrent assets......................... 887,137 488,637 ----------- ----------- Total other assets............................. 9,023,147 13,246,351 PROPERTY AND EQUIPMENT: Leasehold improvements.......................... 1,508,208 1,925,075 Furniture and fixtures and computer equipment... 3,898,288 4,523,544 ----------- ----------- Total property and equipment................... 5,406,496 6,448,619 Less accumulated depreciation and amortization.. 3,101,004 4,362,817 ----------- ----------- Property and equipment, net.................... 2,305,492 2,085,802 ----------- ----------- TOTAL ASSETS..................................... $32,100,763 $38,743,711 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt (Note 4)... $ 1,216,468 $ 1,848,248 Accounts payable................................ 7,425,799 8,864,277 Accrued expenses and other...................... 961,487 806,186 Accrued payroll................................. 714,045 812,465 Income taxes payable............................ 434,020 -- Billings in excess of costs and estimated earnings on uncompleted projects (Note 3)...... 1,752,736 1,646,954 Deferred income taxes (Note 8).................. 154,692 3,264,490 ----------- ----------- Total current liabilities...................... 12,659,247 17,242,620 LONG-TERM DEBT (Note 4).......................... 9,503,285 10,592,714 DEFERRED INCOME TAXES (Note 8)................... 32,188 -- OTHER............................................ 138,050 138,050 ----------- ----------- TOTAL LIABILITIES................................ 22,332,770 27,973,384 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Notes 5, 6 and 7) STOCKHOLDERS' EQUITY (Notes 9 and 10): Preferred stock, $.10 par value, voting, authorized 1,000,000 shares, no shares outstanding.................................... -- -- Common stock, $ .001 par value, voting, authorized 9,000,000 shares; issued 2,359,975 and 2,426,330 at April 28, 2000 and April 27, 2001, respectively (includes 258,444 and 227,221 shares to be issued on a delayed delivery schedule at April 28, 2000 and April 27, 2001, respectively)........................ 2,360 2,427 Additional paid-in capital...................... 7,450,261 7,744,023 Retained earnings............................... 2,324,817 3,066,074 Accumulated other comprehensive loss............ (9,445) (42,197) ----------- ----------- Total stockholders' equity..................... 9,767,993 10,770,327 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....... $32,100,763 $38,743,711 =========== ===========
See Notes to Consolidated Financial Statements. F-3 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONSOLIDATED STATEMENTS OF INCOME Years Ended April 30, 1999, April 28, 2000 and April 27, 2001
Years Ended ------------------------------------- April 30, April 28, April 27, 1999 2000 2001 ----------- ----------- ----------- (Note 1) (Note 1) (Note 1) REVENUES (Note 1): Fee income............................ $35,090,595 $49,138,344 $60,288,709 Reimbursable income................... 2,667,058 3,963,317 4,002,653 ----------- ----------- ----------- Total revenues...................... 37,757,653 53,101,661 64,291,362 ----------- ----------- ----------- CONSULTANT EXPENSES..................... 7,525,208 15,024,032 19,559,667 ----------- ----------- ----------- PROJECT EXPENSES: Direct expenses....................... 742,633 1,050,512 1,112,544 Reimbursable expenses................. 1,504,094 2,146,672 2,203,142 ----------- ----------- ----------- Total project expenses.............. 2,246,727 3,197,184 3,315,686 ----------- ----------- ----------- NET PRODUCTION INCOME................... 27,985,718 34,880,445 41,416,009 DIRECT LABOR............................ 8,139,460 10,578,082 13,223,850 INDIRECT EXPENSES....................... 17,111,054 21,345,283 24,787,155 ----------- ----------- ----------- OPERATING INCOME........................ 2,735,204 2,957,080 3,405,004 ----------- ----------- ----------- OTHER INCOME (EXPENSE): Interest income....................... 39,486 4,350 5,212 Interest expense...................... (759,097) (1,124,757) (1,739,353) ----------- ----------- ----------- Total other expense, net............ (719,611) (1,120,407) (1,734,141) ----------- ----------- ----------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEMS....... 2,015,593 1,836,673 1,670,863 INCOME TAXES (Note 8): Current tax expense (benefit)......... 697,201 1,964,064 (1,582,140) Deferred tax expense (benefit)........ 245,506 (1,110,170) 2,486,045 ----------- ----------- ----------- Total income tax expense............ 942,707 853,894 903,905 ----------- ----------- ----------- INCOME BEFORE MINORITY INTEREST AND EXTRAORDINARY ITEMS.................... 1,072,886 982,779 766,958 MINORITY INTEREST IN EARNINGS........... -- -- 25,701 ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY ITEMS....... 1,072,886 982,779 741,257 EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT, NET OF TAX BENEFIT OF $171,842 AND $128,004 IN 1999 AND 2000, RESPECTIVELY (NOTES 4 AND 9)........................ (280,849) (228,355) -- ----------- ----------- ----------- NET INCOME.............................. $ 792,037 $ 754,424 $ 741,257 =========== =========== =========== NET INCOME PER SHARE (NOTE 1)--BASIC: Income before extraordinary items....... $ 0.52 $ 0.42 $ 0.31 Extraordinary loss from early extinguishment of debt................. (0.13) (0.10) -- ----------- ----------- ----------- Net income.............................. $ 0.39 $ 0.32 $ 0.31 =========== =========== =========== NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (NOTE 1).................... 2,048,974 2,352,856 2,415,238 =========== =========== =========== NET INCOME PER SHARE (NOTE 1)--DILUTED: Income before extraordinary items....... $ 0.52 $ 0.42 $ 0.30 Extraordinary loss from early extinguishment of debt................. (0.13) (0.10) -- ----------- ----------- ----------- Net income.............................. $ 0.39 $ 0.32 $ 0.30 =========== =========== =========== NUMBER OF SHARES USED TO COMPUTE PER SHARE DATA (NOTE 1).................... 2,048,974 2,362,471 2,437,611 =========== =========== ===========
See Notes to Consolidated Financial Statements. F-4 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended April 30, 1999, April 28, 2000 and April 27, 2001
Common Stock ----------------- Accumulated Additional Other Total Paid-In Retained Comprehensive Stockholders' Shares Amount Capital Earnings Loss Equity --------- ------- ----------- ----------- ------------- ------------- BALANCE, MAY 1, 1998.... 776,134 $ 776 $ 300,555 $ 778,356 $ -- $ 1,079,687 Issuance of common stock (Note 9)....... 1,298,953 1,299 6,036,342 -- -- 6,037,641 Issuance of common stock for purchase of JPJ Architects, Inc. (Note 2)............. 240,000 240 1,070,760 -- -- 1,071,000 Issuance of common stock, for purchase of G.A. Design International Limited (Note 2)............. 27,667 28 108,737 -- -- 108,765 Issuance of common stock under the employee stock purchase plan........ 2,323 2 7,402 -- -- 7,404 Exercise of warrants.. -- -- (113,732) -- -- (113,732) Comprehensive income: Net income........... -- -- -- 792,037 -- -- Foreign currency translation adjustment.......... -- -- -- -- (662) -- Total comprehensive income............... -- -- -- -- -- 791,375 --------- ------- ----------- ----------- -------- ----------- BALANCE, APRIL 30, 1999................... 2,345,077 2,345 7,410,064 1,570,393 (662) 8,982,140 Issuance of common stock under the employee stock purchase plan........ 14,898 15 40,197 -- -- 40,212 Comprehensive income: Net income........... -- -- -- 754,424 -- -- Foreign currency translation adjustment.......... -- -- -- -- (8,783) -- Total comprehensive income............... -- -- -- -- -- 745,641 --------- ------- ----------- ----------- -------- ----------- BALANCE, APRIL 28, 2000................... 2,359,975 2,360 7,450,261 2,324,817 (9,445) 9,767,993 Issuance of common stock under the employee stock purchase plan........ 16,355 17 37,562 -- -- 37,579 Issuance of common stock for purchase of BL&P Engineers, Inc. (Note 2)............. 50,000 50 256,200 -- -- 256,250 Comprehensive income: Net income........... -- -- -- 741,257 -- -- Foreign currency translation adjustment.......... -- -- -- -- (32,752) -- Total comprehensive income............... -- -- -- -- -- 708,505 --------- ------- ----------- ----------- -------- ----------- BALANCE, APRIL 27, 2001................... 2,426,330 $ 2,427 $ 7,744,023 $ 3,066,074 $(42,197) $10,770,327 ========= ======= =========== =========== ======== ===========
See Notes to Consolidated Financial Statements. F-5 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended April 30, 1999, April 28, 2000 and April 27, 2001
Years Ended ------------------------------------- April 30, April 28, April 27, 1999 2000 2001 (Note 1) (Note 1) (Note 1) ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................. $ 792,037 $ 754,424 $ 741,257 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............................... 280,849 228,355 -- Depreciation........................... 675,924 895,778 968,146 Amortization of intangible assets...... 262,275 429,569 661,457 Amortization of deferred loan fees..... 86,628 104,372 204,220 Deferred income taxes.................. 251,379 (1,110,170) 2,486,045 Other.................................. (336) (21,330) 25,701 Changes in certain working capital items: (Increase) decrease in trade and other receivables.................... 609,861 (2,957,666) 793,024 Net increase in costs and estimated earnings in excess of billings on uncompleted projects................. (2,549,431) (2,289,058) (1,990,899) (Increase) decrease in prepaid expenses and other assets............ 136,574 (978,208) 277,100 Increase (decrease) in accounts payable.............................. (539,268) 2,324,979 1,188,047 Decrease in accrued expenses.......... (475,238) (689,221) (1,164,506) Increase (decrease) in income taxes payable.............................. (411,622) 647,519 (1,107,935) ----------- ----------- ----------- Net cash provided by (used in) operating activities................ (880,368) (2,660,657) 3,081,657 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.... (815,668) (880,945) (748,455) Payment for purchase of G.A. Design International Holdings, Ltd. ("GAIH").............................. (357,830) -- -- Payment for purchase of JPJ Architects, Inc., net of cash acquired............ (1,332,030) -- -- Payment for purchase of ESS Architects, Inc., net of cash acquired............ -- (153,993) -- Payment for purchase of BL&P, net of cash acquired......................... -- -- (2,135,394) ----------- ----------- ----------- Net cash used in investing activities.......................... (2,505,528) (1,034,938) (2,883,849) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on line of credit....... 1,618,336 (3,118,336) -- Net borrowings on revolving credit facility.............................. -- 7,257,470 933,561 Net proceeds from issuance of common stock................................. 5,922,712 -- -- Proceeds from issuance of common stock under the employee stock purchase plan.................................. 7,404 40,212 37,579 Proceeds from long-term borrowings..... -- 2,000,000 -- Net decrease in short-term borrowings.. (688,630) -- -- Payments on long-term borrowings....... (3,241,920) (2,448,710) (1,211,416) Proceeds from the issuance of warrants.............................. 1,200 -- -- ----------- ----------- ----------- Net cash provided by (used in) financing activities................ 3,619,102 3,730,636 (240,276) ----------- ----------- ----------- INCREASE (DECREASE) IN CASH............. 233,206 35,041 (42,468) CASH BALANCE: Beginning of year...................... 17,369 250,575 285,616 ----------- ----------- ----------- End of year............................ $ 250,575 $ 285,616 $ 243,148 =========== =========== =========== SUPPLEMENTAL DISCLOSURES: Cash paid during the year for: Interest............................... $ 1,130,214 $ 1,273,453 $ 1,635,968 Income taxes........................... $ 992,916 $ 1,255,009 $ 8,019 NONCASH INVESTING AND FINANCING TRANSACTIONS: Acquisition of JPJ Architects, Inc. (net of imputed interest): 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 GAIH (net of imputed interest): 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 Acquisition of BL&P (net of imputed interest): Notes payable issued to BL&P shareholders.......................... $ 1,871,496 Fair value of assets acquired and liabilities assumed, net.............. $ 281,126 Common stock to be issued on delayed delivery schedule..................... $ 256,250
See Notes to Consolidated Financial Statements. F-6 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended April 30, 1999, April 28, 2000 and April 27, 2001 1. Description of Business and Summary of Significant Accounting Policies Organization and Business--HLM Design, Inc. ( "HLM Design") and Subsidiaries and Affiliates ("the Company") is a professional consultancy that provides management and services to architectural, engineering and planning design entities ("Managed Firms") under long-term management and services agreements ("MSAs"). As of April 27, 2001, the Company had wholly owned subsidiaries and affiliates as follows: . HLM Design of North America, Inc. ("HLMNA") . HLM Design USA, Inc. ("HLMUSA") . HLM Design Architecture, Engineering and Planning, P.C. ("HLMAEP") . JPJ Architects, Inc. ("JPJ") . G.A. Design International Holdings, Ltd. ("GAIH") . BL&P Engineers, Inc. ("BL&P") JPJ, GAIH and BL&P are subsidiaries of HLM Design. 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 (including bookkeeping and accounts), general administration services, contract negotiation and administration for all non-architectural and non-engineering aspects of all agreements pertaining to the provision of architectural and engineering services by Managed Firms to third parties, personnel, maintenance, architectural and engineering recruiting and training, insurance, billing and marketing support). In connection with these services, HLM Design receives all but 1% of the Managed Firm's positive cash flow (as determined in accordance with accounting principles generally accepted in the United States of America). Financial Statement Presentation The financial statements include the accounts of the Company consolidated with the accounts of the Managed Firms, including JPJ, GAIH and BL&P (see Note 2) 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. The Company 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; San Francisco, California; Charlotte, North Carolina and London, U.K. The Company operates in one segment, which encompasses architectural, engineering and planning services. Fiscal Year-End Policy--The Company uses a 52-53 week fiscal year for accounting purposes which defines the fiscal year-end date as the Friday nearest the end of April. For fiscal years 1999, 2000 and 2001, the year-ends were April 30, April 28 and April 27, respectively, each containing 52 weeks. Operating Cycle--Assets and liabilities related to long-term contracts are included in current assets and current liabilities in the accompanying balance sheets, as they will be liquidated in the normal course of contract completion, although this may require more than one year. Stockholder Redemption Rights--Pursuant to the right of certain affiliate shareholders, under nominee shareholder agreements, to redeem their interests, the Company has a remaining non-current liability in the amount of $137,450. F-7 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 1. Description of Business and Summary of Significant Accounting Policies-- (Continued) In the initial consolidation of the Company and HLMNA, the Company eliminated the common stock and additional paid-in capital of HLMNA against goodwill. Upon further evaluation, at April 28, 2000, the Company reclassified in consolidation the common stock and additional paid-in capital of HLMNA as a liability and an increase in goodwill of approximately $470,000. The effect on prior year's financial position and results of operations is not material. 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 direct labor cost incurred to date to estimated total direct labor 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 accounting principles generally accepted in the United States of America 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 estimates impacting the accompanying financial statements relates to revenue recognition under the percentage-of-completion method and the allowance for doubtful accounts. Property and Equipment--Leasehold improvements and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets or the lease term. The estimated useful lives of property and equipment for financial reporting purposes are as follows: Computer equipment and software............... 3-5 years Furniture and fixtures.. 5 years Leasehold improvements.. Lease term, not to exceed the useful life of the asset
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. Goodwill is amortized using the straight-line method over the expected period to be benefited, generally over a 15- to 25-year period. The Company assesses the recoverability of these intangible assets by determining whether the amortization of the goodwill over their remaining lives can be recovered through the undiscounted future operating cash flows of the acquired business. The assessment of the recoverability of goodwill will be impacted if estimated future cash flows are not achieved. F-8 HLM DESIGN, INC. AND SUBSIDIARIES 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. See Note 4 as to fair value of the Company's financing arrangements. Foreign Currency--Assets and liabilities denominated in foreign currencies have been translated into U.S. dollars at the period-end exchange rate. Revenues and expenses denominated in foreign currencies have been translated into U.S. dollars at the weighted average exchange rate. Translation gains and losses are accounted for in a separate component of stockholders' equity. The exchange gains and losses arising on transactions are charged to income as incurred and are not significant for any period presented. New Accounting Standards--In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. This new standard requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This statement will be effective for the Company for financial statements issued for the fiscal year beginning April 28, 2001. The Company has evaluated the effects the statement will have on its consolidated financial statements and related disclosures and does not believe that the effect will be material. The FASB recently voted in favor of the issuance of two new statements, SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method be used for all business combinations initiated after June 30, 2001, and the use of the pooling of interest method will be prohibited. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment approach. Amortization of goodwill, including goodwill recorded in prior business combinations, will cease prospectively upon the adoption of the standard, which the Company anticipates adopting during fiscal year 2002. 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 as well as stock options to purchase shares of common stock which were outstanding from May 1, 1998 to April 27, 2001. For the years ended April 30, 1999, April 28, 2000 and April 27, 2001, the dilutive effect of stock options was 0, 9,615 and 22,373, respectively. The dilutive effect of warrants had no effect on net income per share for any period presented. Reclassifications--Certain reclassifications have been made to the fiscal 1999 and 2000 financial statements to conform to fiscal 2001 presentation. 2. Business Acquisitions JPJ Architects, Inc. On October 30, 1998, the Company purchased all the issued and outstanding common stock of JPJ Architects, Inc. for $2.4 million in cash, an aggregate of 240,000 shares of the Company's common stock, and subordinated promissory notes 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 F-9 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Business Acquisitions--(Continued) promissory notes on each of October 30, 2000 and October 30, 2001 and delivery of the remaining 40 percent of the aggregate shares of stock and the principal amount of the promissory notes on October 30, 2002. Following the purchase, the Company and JPJ entered into a management services agreement whereby the Company will manage all aspects of JPJ other than the provision 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. Working capital.................................................... $ 444,585 Property and equipment............................................. 158,266 Other assets....................................................... 143,020 Goodwill........................................................... 3,597,449 ---------- Total.............................................................. $4,343,320 ==========
The following unaudited pro forma financial data is presented as if the transaction occurred as of the beginning of the fiscal year 1999:
Year Ended April 30, 1999 ----------- Revenues.......................................................... $45,265,496 ----------- Net Income........................................................ $ 957,421 =========== Earnings Per Share: Basic........................................................... $ 0.43 =========== Diluted......................................................... $ 0.43 ===========
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. 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 the purchase had occurred at the beginning of fiscal year ended 1999, would not be material to the Company's results of operations. ESS Architects, Inc. On September 16, 1999, HLM Design purchased all the issued and outstanding common stock of ESS Architects, Inc. ("ESS") for a combination of cash and promissory notes for a total of $425,000 ($219,167 represents notes payable, net of imputed interest, issued to ESS shareholders). 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 $515,450. The pro forma effect, assuming the purchase had occurred at the beginning of fiscal year ended 2000, would not be material to the Company's results of operations. In December 1999, ESS was merged into HLMUSA. F-10 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 2. Business Acquisitions--(Continued) BL&P Engineers, Inc. As of April 29, 2000, the Company purchased all of the issued and outstanding common stock and related goodwill of BL&P for $1.46 million in cash, subordinated promissory notes bearing interest at 7 percent in the aggregate amount of $2.04 million (the "Notes") and 50,000 shares of the Company's common stock having a value of $0.26 million to be delivered on a delayed delivery basis. The Stock Purchase Agreement ("Agreement") provides for, among other things, the delivery to BL&P's former stockholder of 30% of the number of shares of the stock on each of April 29, 2002 and April 29, 2003 and 40% of the number of shares of stock on April 29, 2004. The Notes provide for payment of 30% of the principal amount on each of October 29, 2001 and April 29, 2003 and 40% of the principal amount on April 29, 2004. Following the consummation of the Agreement, the Company and BL&P entered into a Management and Services Agreement, whereby the Company will manage all aspects of BL&P other than the provision of professional engineering services. In addition, the Company paid BL&P debt of $0.76 million upon closing. 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. Working capital................................................... $ 662,344 Other assets...................................................... 79,964 Other liabilities................................................. (461,180) Goodwill.......................................................... 4,536,591 ---------- Total............................................................. $4,817,719 ==========
The following unaudited proforma financial data is presented as if the transaction occurred at the beginning of the respective years:
Years Ended ------------------------- April 30, April 28, 1999 2000 ------------ ------------ Revenues............................................ $ 43,048,716 $ 58,518,294 ------------ ------------ Net income.......................................... $ 946,991 842,182 ============ ============ Earnings Per Share: Basic............................................. $ 0.45 $ 0.35 ============ ============ Diluted........................................... $ 0.45 $ 0.35 ============ ============
3. Contracts in Progress Information relative to contracts in progress is as follows:
April 28, April 27, 2000 2001 ------------ ------------ Costs incurred on uncompleted projects (excluding overhead)......................................... $ 64,016,964 $ 90,872,392 Estimated earnings thereon......................... 58,470,955 77,505,622 ------------ ------------ Total.............................................. 122,487,919 168,378,014 Less billings to date.............................. 115,828,496 160,257,350 ------------ ------------ Net underbillings.................................. $ 6,659,423 $ 8,120,664 ============ ============
F-11 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Contracts in Progress--(Continued) Net underbillings are included in the accompanying balance sheets as follows:
April 28, April 27, 2000 2001 ----------- ----------- Costs and estimated earnings in excess of billings on uncompleted projects............................ $ 8,412,159 $ 9,767,618 Billings in excess of costs and estimated earnings on uncompleted projects............................ (1,752,736) (1,646,954) ----------- ----------- Net underbillings................................... $ 6,659,423 $ 8,120,664 =========== ===========
4. Financing Arrangements A summary of financing arrangements are as follows: On February 7, 2000, the Company entered into a revolving credit, term loan and capital expenditure loan for a total of $20,000,000 with its principal lender. The three financing arrangements are discussed below: Revolving Credit--The maximum revolving advance amount is $17,000,000. The amount available to borrow is calculated based on the aging of certain assets. This loan matures in February 2003 and bears interest at the prime rate plus 0.5%. Term Loan--The amount of the loan is $2,000,000. This loan matures in February 2003 and bears interest at a maximum of prime plus 2%. Capital Expenditure Loan--The maximum capital expenditure loan amount is $1,000,000. The amount is available for the financing of equipment used in the Company's business. This loan matures in February 2005 and bears interest at a maximum of prime plus 1%. At April 27, 2001, there were no borrowings under this loan. In connection with the above financing arrangement, the Company incurred approximately $599,000 in deferred loan transaction fees. These fees are being amortized over the life of the loan. Included in the accompanying consolidated statement of income are amortization expense of these costs of $45,460 and $204,220 for the fiscal years ended 2000 and 2001, respectively. Effective June 29, 2001, the Company entered into an amendment to its revolving credit, term loan and capital expenditure loan with IBJ. The amendment is summarized as follows: a. Revolving Credit--The maximum revolving advance amount is $12,500,000. b. Term Loan--The unpaid principal balance will be increased to $1,566,667 and will be repaid in equal monthly installments of $80,000, plus interest at a maximum of prime plus 2 percent. The increase in unpaid principal balance will be used to repay amounts outstanding under the revolving credit facility. c. Capital Expenditure Loan--The Capital Expenditure Loan commitment has been cancelled. Substantially all assets are pledged under this financing arrangement. The arrangement requires certain financial covenants to be maintained, such as minimum net worth, maximum leverage and senior leverage ratios, maximum fixed charge coverage and senior fixed charge coverage ratios and maximum capital expenditure levels. At April 27, 2001, the Company was in compliance with these financial covenants. During fiscal year ended 2000, the financial arrangements with Berthel Fisher & Company Financial Services, Inc., and First Charter National Bank were extinguished prior to maturity. This resulted in an extraordinary charge of $228,355, net of income taxes of $128,004, that consisted of write-off of related unamortized financing costs. F-12 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 4. Financing Arrangements--(Continued) A summary of long-term debt is as follows:
April 28, April 27, 2000 2001 ---------- ----------- Revolving credit facility to IBJW, payable in February 2003, including interest at prime plus 0.5% (8.0% at April 27, 2001)....................................... $7,257,470 $ 8,191,031 Term note payable to IBJW, due in monthly payments of $55,556, plus interest at a maximum of prime plus 2% (9.5% at April 27, 2001), with final payment due in February 2003......................................... 1,888,889 1,222,222 Notes payable of $1,160,000 to former JPJ Architect, Inc. shareholders, due in annual installments of $348,000 beginning October 2000, plus interest at 7%, with final payment of $464,000 due October 2002....... 1,011,520 742,400 Notes payable to former G.A. Design International Hold- ings Limited shareholder, due in annual installments of $82,500, plus interest at 7%, with final payment in August 2002........................................... 209,738 133,040 Notes payable to former G.A. Design International Hold- ings Limited shareholder, due in various installments with final payment due January 2001................... 55,000 -- Notes payable to former ESS Architects, Inc. sharehold- ers, due in annual installments of $125,000 beginning September 2000, plus interest at 7%, with final pay- ment in September 2001................................ 230,833 120,833 Note payable to former BL&P shareholder, due in two in- stallments of $145,200 beginning April 2001, plus in- terest of 7%, with final payment of $193,600 due April 2004.................................................. -- 457,573 Note payable to former BL&P shareholder, due in two in- stallments of $466,800 beginning April 2001, plus in- terest of 7%, with final payment of $622,400 due April 2004.................................................. -- 1,471,043 Other.................................................. 66,303 102,820 ---------- ----------- Total long-term debt................................... 10,719,753 12,440,962 Less current maturities................................ 1,216,468 1,848,248 ---------- ----------- Long-term portion...................................... $9,503,285 $10,592,714 ========== ===========
At April 28, 2000 and April 27, 2001 the fair value of the Company's financing arrangements totaled approximately $10.7 million and $12.2 million, respectively. Annual principal payments of the various financing agreements are as follows: Fiscal 2002....................................................... $ 1,848,248 Fiscal 2003....................................................... 9,808,314 Fiscal 2004....................................................... 784,400 ----------- Total............................................................. $12,440,962 ===========
F-13 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Lease Commitments The Company leases office space and equipment under non-cancelable operating leases. The total minimum rental commitment under such non-cancelable operating leases at April 27, 2001, which has been reduced by minimum rentals to be received under subleases, are as follows: Fiscal 2002........................................................ $2,965,866 Fiscal 2003........................................................ 2,441,231 Fiscal 2004........................................................ 1,905,293 Fiscal 2005........................................................ 1,547,050 Fiscal 2006........................................................ 990,677 Thereafter......................................................... 146,049 ---------- Total.............................................................. $9,996,166 ==========
Rent expense was $2,279,585, $2,851,280 and $3,295,457 for the periods ended April 30, 1999, April 28, 2000 and April 27, 2001, respectively. 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 28, 2000 and April 27, 2001, the Company paid $140,528 and $210,000, respectively, to certain affiliate shareholders, under nominee shareholder agreements, respectively, to redeem a portion of their interest in the associated Managed Firm. In addition, the Company leases certain warehouse space from certain officers at $3,500 per month. During the year ended April 30, 1999, the Company incurred $40,000 in consulting fees for services provided by a director. 8. Income Taxes The provision for income taxes is as follows:
Years Ended --------------------------------- April 30, April 28, April 27, 1999 2000 2001 -------- ----------- ----------- Current expense (benefit): Federal.................................. $581,665 $ 1,717,617 $(1,633,352) State.................................... 115,536 246,447 51,212 Deferred.................................. 245,506 (1,110,170) 2,486,045 -------- ----------- ----------- Total income tax expense.................. $942,707 $ 853,894 $ 903,905 ======== =========== ===========
F-14 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 8. Income Taxes--(Continued) The reconciliation of the statutory federal income tax rate with the Company's overall effective federal and state income tax rate is as follows:
Years Ended ----------------------------- April 30, April 28, April 27, 1999 2000 2001 --------- --------- --------- Statutory federal rate.......................... 34.0% 34.0% 34.0% State income taxes, net of federal benefit...... 4.7 4.1 6.3 Penalties....................................... 1.7 0.2 0.8 Meals and entertainment......................... 0.8 1.1 1.3 Goodwill amortization........................... 4.4 7.2 11.1 Other........................................... 1.2 (0.1) 0.6 ----- ----- ----- Effective tax rate.............................. 46.8% 46.5% 54.1% ===== ===== =====
The tax effect of temporary differences giving rise to deferred income tax assets and liabilities as of April 28, 2000 and April 27, 2001 is as follows:
April 28, April 27, 2000 2001 ---------- ----------- Deferred income tax liabilities: Difference between the accrual basis and cash basis of accounting related to certain assets and lia- bilities.......................................... $ (971,910) $ (691,985) Difference between the book method and tax method of accounting for the percentage of completion method of revenue recognition..................... -- (3,423,011) Prepaid expenses................................... (43,757) (83,783) Other.............................................. (30,649) (15,344) ---------- ----------- Total deferred income tax liabilities........... (1,046,316) (4,214,123) ---------- ----------- Deferred income tax assets: Property and equipment............................. 447,957 372,322 Net operating losses............................... -- 538,835 Allowances......................................... 397,506 550,777 Other deferred assets.............................. 13,973 79,264 ---------- ----------- Total deferred income tax assets................ 859,436 1,541,198 ---------- ----------- Deferred income tax liabilities, net................ $ (186,880) $(2,672,925) ========== ===========
Management believes it is probable that the Company will realize the tax benefits of the deductible differences that were available as of April 27, 2001. At April 27, 2001, the Company has federal operating losses for income tax reporting purposes of approximately $1.0 million which will expire in 2019. The Company and its Managed Firms, except JPJ and BL&P, file separate federal and state income tax returns. The Company, JPJ and BL&P file a consolidated federal income tax return. 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. Remaining net proceeds were used for development of new business and other general corporate purposes. F-15 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 9. Stockholders' Equity--(Continued) During fiscal year ended 1999, the financial arrangement with Pacific Capital, L.P., Equitas, L.P. and Berthel Fisher & Company Financial Services, Inc. were extinguished prior to maturity. This 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 affect 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 the underwriters, for a price of $0.01 per warrant, warrants to purchase 120,000 shares of common stock exercisable at $7.20 per share. At April 27, 2001, all of these 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 periods ended April 30, 1999, April 28, 2000 and April 27, 2001 was $53,886, $146,065 and $194,460, respectively. 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 27, 2001, 33,576 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") 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 Company increased the number of shares from 159,955 to 265,000 upon shareholder approval in September 2000. During the year ended April 30, 1999, the Board of Directors of HLM Design approved the grant of 125,908 options to three key employees and certain Board Members. During the year ended April 28, 2000 and April 27, 2001, the Board of Directors approved the issuance of options to purchase 28,400 shares and 106,200 shares, respectively, of common stock to several key employees. F-16 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Employee Benefit Plans--(Continued) Option information is summarized below:
Weighted- Average Exercise Price Per Shares Share ------- --------- Outstanding, May 1, 1998...................................... -- -- Granted...................................................... 125,908 $ 5.72 ------- Outstanding, April 30, 1999................................... 125,908 5.72 Granted...................................................... 28,400 3.61 ------- Outstanding, April 28, 2000................................... 154,308 5.34 Granted...................................................... 106,200 2.60 ------- Outstanding, April 27, 2001................................... 260,508 $ 4.22 ======= ====== Exercisable, April 27, 2001................................... 131,588 $ 5.63 ======= ======
Outstanding Exercisable --------------------------- ----------------- Weighted- Weighted- Weighted- Range of Average Average Average Exercise Remaining Exercise Exercise Price Options Term Price Options Price - ----------- ------- --------- --------- ------- --------- $2.60 106,200 9.6 $2.60 -- $ -- $3.61-$4.50 38,400 8.0 $3.84 15,680 4.18 $5.50-$6.60 115,908 5.6 5.83 115,908 5.83 ------- --- ----- ------- ----- 260,508 7.6 $4.22 131,588 $5.63 ======= === ===== ======= =====
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 SFAS No. 123, Accounting for Stock-Based Compensation. Under the provisions of APB No. 25, 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. The Company's net income and net income per share would approximate the following pro forma amounts:
As Pro Reported Forma -------- -------- April 30, 1999: Net income................................................... $792,037 $562,000 Net income per share......................................... $ 0.39 $ 0.27 April 28, 2000: Net income................................................... $754,424 $753,000 Net income per share......................................... $ 0.32 $ 0.32 April 27, 2001: Net income................................................... $741,257 $650,590 Net income per share......................................... $ 0.31 $ 0.27
F-17 HLM DESIGN, INC. AND SUBSIDIARIES AND AFFILIATES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Employee Benefit Plans--(Continued) The fair value of each grant is estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions listed below:
April 30, April 28, April 27, 1999 2000 2001 --------- --------- --------- Weighted-average fair value per option........ $3.75 $3.75 $1.86 Assumptions used: Weighted-average expected volatility......... 60% 60% 57% Weighted-average risk-free interest rate..... 5.2% 5.2% 5.4% Weighted-average expected life, in years..... 8 8 7 Dividends.................................... -- -- --
11. HLM Design Financial Information (Unaudited) HLM Design's balance sheet as of April 28, 2000 and April 27, 2001 and income statement for each of the three years in the period ended April 27, 2001 are as follows:
April 28, April 27, 2000 2001 Balance Sheet ----------- ----------- Current assets...................................... $18,609,130 $18,627,761 Non-current assets.................................. 10,252,070 13,316,440 ----------- ----------- Total assets........................................ $28,861,200 $31,944,201 =========== =========== Current liabilities................................. $ 9,343,867 $11,607,962 Non-current liabilities............................. 9,749,340 9,565,912 ----------- ----------- Total liabilities................................... 19,093,207 21,173,874 Total stockholders' equity.......................... 9,767,993 10,770,327 ----------- ----------- Total liabilities & stockholders' equity............ $28,861,200 $31,944,201 =========== ===========
April 30, April 28, April 27, 1999 2000 2001 Income Statement ----------- ----------- ----------- Equity in earnings of affiliates........ $ 1,185,239 $ 1,501,799 $ 1,509,755 Net interest, tax and other expense..... 393,202 747,375 768,498 ----------- ----------- ----------- Net income.............................. $ 792,037 $ 754,424 $ 741,257 =========== =========== ===========
12. Unaudited Quarterly Financial Data
2000 ----------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- Total revenues............. $11,453,195 $12,325,241 $14,317,484 $15,005,741 Net production income...... 8,081,286 8,437,040 8,642,287 9,719,832 Operating income........... 659,359 777,923 618,430 901,368 Net income................. 226,970 269,909 192,082 65,463 Net income per common share (A)....................... $ 0.10 $ 0.11 $ 0.08 $ 0.03
2001 ----------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- Total revenues............. $15,870,676 $16,069,080 $15,378,104 $16,973,502 Net production income...... 10,552,300 10,503,366 9,920,846 10,439,497 Operating income........... 952,441 1,046,279 640,811 765,473 Net income................. 237,137 269,745 62,233 172,142 Net income per common share..................... $ 0.10 $ 0.11 $ 0.03 $ 0.07
-------- (A) In the fourth quarter 2000, certain debt was repaid resulting in an extraordinary charge of $228,355, net of income taxes of $128,004, that consisted of write-off of related unamortized financing costs and other related costs. Net income before such extraordinary item was $293,818, and net income per share was $0.13. F-18 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/ James B. Huff -------------------------------- James B. Huff Vice President and Chief Financial Officer 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.
Signature Title Date --------- ----- ---- /s/ Joseph M. Harris President, Chief Executive July 23, 2001 - -------------------------------------- Officer (principal Joseph M. Harris executive officer) and Chairman /s/ Vernon B. Brannon Senior Vice President, July 23, 2001 - -------------------------------------- Treasurer, Chief Vernon B. Brannon Operating Officer and Director /s/ D. Shannon LeRoy Director July 23, 2001 - -------------------------------------- D. Shannon LeRoy
F-19 SCHEDULE II HLM DESIGN, INC. VALUATION AND QUALIFYING ACCOUNTS Years Ended April 30, 1999, April 28, 2000 and April 27, 2001
Balance Charged Balance at to Costs Deductions at End Beginning and from of of Period Expenses Other Reserves Period --------- -------- ----------- ---------- -------- 1999--Allowance for doubtful accounts....... 150,000 -- 191,692 (A) -- 341,692 2000--Allowance for doubtful accounts....... 341,692 -- 4,368 (A) -- 346,060 2001--Allowance for doubtful accounts....... $346,060 $26,532 $433,102 (A) $79,221 (B) $726,473
- -------- NOTES: (A) Increases to reserves reflecting acquisitions. (B) Accounts charged off, recoveries, and other adjustments, net. F-20 EX-10.29.1 2 dex10291.txt FIRST AMENDMENT TO REVOLVING CREDIT EXHIBIT 10.29.1 FIRST AMENDMENT TO REVOLVING CREDIT, TERM LOAN, CAPITAL EXPENDITURE LOAN, GUARANTY AND SECURITY AGREEMENT Preamble. THIS FIRST AMENDMENT TO REVOLVING CREDIT, TERM LOAN, CAPITAL - -------- EXPENDITURE LOAN, GUARANTY AND SECURITY AGREEMENT (hereinafter, together with all schedules and exhibits hereto, and any supplements, additions, modifications or amendments thereto made from time to time called the "First Amendment"), --------------- dated as of June 29, 2001 (the "First Amendment Date"), is made by and among HLM -------------------- DESIGN, INC., a Delaware corporation, as borrower ("Borrower"); all those -------- parties identified in the Credit Agreement (defined below) as the "Affiliate Guarantors" (the "Affiliate Guarantors"); IBJ WHITEHALL BUSINESS CREDIT -------------------- CORPORATION, a New York corporation (hereinafter, together with its successors and permitted assigns, called "IBJW"), as sole Lender thereunder and as agent ---- for all Lenders from time to time party thereto and any Issuer (IBJW, in such capacity, the "Agent"). ----- The Borrower, and the Affiliate Guarantors (collectively, the "Obligors"), and IBJW (the foregoing parties herein sometimes collectively -------- called the "Parties" and individually called a "Party") are parties to a certain ------- ----- Revolving Credit, Term Loan, Capital Expenditure Loan, Guaranty and Security Agreement, dated as of February 7, 2000 (which is, as amended pursuant to this First Amendment, called herein the "Credit Agreement"), pursuant to which, among ---------------- other things, IBJW, as sole Lender, agreed to extend credit and other financial accommodations to the Borrower. The Parties have agreed to modify and amend the Credit Agreement in the manner, and subject to the terms and conditions, set forth hereinbelow in order to reduce the amount of credit available for Revolving Advances, increase the Term Loan, change the principal amortization of the Term Loan, cancel the commitment to make Capital Expenditure Loans, and waive, for one time only, the mandatory prepayment based on Excess Cash Flow. NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby mutually acknowledged, the Parties, each intending to be legally bound, hereby agree as follows: SECTION 1. Definitions. Capitalized terms used in this First ----------- Amendment and not defined herein are defined in the Credit Agreement. SECTION 2. Amendments. The Credit Agreement shall be amended as ---------- follows: (a) Reduction in Maximum Revolving Advance Amount. The Maximum --------------------------------------------- Revolving Advance Amount, defined in Section 1.1 of the Credit Agreement, shall be reduced, effective on the First Amendment Date, from "Seventeen Million Dollars ($17,000,000)" to "Twelve Million Five Hundred Thousand Dollars ($12,500,000)." In accordance with Section 2.8 of the Credit Agreement, any Advances outstanding in excess of the reduced Maximum Revolving Advance Amount on the First Amendment Date must be paid in full. Revolving Advances shall continue to be evidenced by the existing Revolving Credit Note, executed on the Closing Date, which shall be deemed amended accordingly to reflect the foregoing terms. 1 (b) Changes in Term Loan. The Term Loan, which has an unpaid principal -------------------- balance as of the First Amendment Date (but before giving effect to this First Amendment) of $1,166,666.75, is hereby increased by an Advance equal to $400,000, with the proceeds of such Advance to be disbursed to Borrower as a reduction against outstanding Revolving Advances on the First Amendment Date. The restated amount of the Term Loan shall be equal to $1,566,666.75, and be repaid in level installments of $80,000 per month, due and payable on the last day of each calendar month, beginning on July 31, 2001 (the installment due on June 30, 2001 being kept at $55,555.55), provided that the final installment, -------- which may be more or less than $80,000, shall be due and payable on the last day of the Term and be in that amount necessary to pay in full the now increased Term Loan. The increased Term Loan, as so amended, shall continue to be evidenced by the existing Term Note, executed on the Closing Date, which shall be deemed amended accordingly to reflect the foregoing terms. (c) Cancellation of Capital Expenditure Line. From and after the First ---------------------------------------- Amendment Date, Capital Expenditure Loans shall no longer be made available to Borrower pursuant to Section 2.5 of the Credit Agreement, and all existing Capital Expenditure Loans (if any) shall be paid in full. (d) One-Time Waiver of Excess Cash Flow Prepayment. The mandatory ---------------------------------------------- prepayment event, based on Excess Cash Flow, relative to the Term Loan, specified in Section 2.15(b) of the Credit Agreement, is hereby waived for the payment due on April 30, 2001 (but all other, future such mandatory prepayment events are hereby preserved). SECTION 3. Waiver of Claims. As a specific inducement to the other Parties ---------------- without which the Obligors acknowledge the other Parties would not enter into this First Amendment, the Borrowers hereby waive any and all claims that it may have against any other Party, as of the date hereof, arising out of or relating to the Credit Agreement or any Other Document whether sounding in contract, tort, or any other basis. SECTION 4. Conditions of Effectiveness. This First Amendment shall become --------------------------- effective when, and only when, the Agent shall have received the following, each in form and substance satisfactory to the Agent, at which time the amendments set forth in Section 2 above shall become effective, retroactive to the Closing Date: (a) a duly executed original counterparts of this First Amendment; (b) a certificate of the Secretary (or Assistant Secretary) of Borrower, attaching and certifying copies of its bylaws and of the resolutions of its board of directors or its members, as the case may be, authorizing the execution, delivery and performance of this First Amendment and the Other Documents to which it is a party and certifying the name, title and true signature of each officer of such entities executing this First Amendment and the Other Documents; SECTION 5. Miscellaneous. ------------- 5.1 Reference to Credit Agreement. Upon the effectiveness of this ----------------------------- First Amendment, each reference in the Credit Agreement to "this Credit Agreement" and each reference in the Other Documents to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. 2 5.2 Effect on Other Documents. Except as specifically amended above, ------------------------- all terms of the Credit Agreement and all Other Documents shall remain in full force and effect and are hereby ratified and confirmed. 5.3 No Waiver. The execution, delivery and effectiveness of this --------- First Amendment shall not operate as a waiver of any right, power, or remedy of Lenders or the Agents under any of the Other Documents, nor constitute a waiver of any provision of any of the Other Documents. 5.4 Costs, Expenses and Taxes. The Borrowers agrees to pay on demand ------------------------- all costs and expenses of IBJW in connection with the preparation, reproduction, execution, and delivery of this First Amendment and the other instruments and documents to be delivered hereunder, including the reasonable fees and out-of- pocket expenses of counsel for IBJW with respect hereto. 5.5 No Novation. Nothing contained herein intended, or shall be ----------- construed, to constitute a novation to the Credit Agreement or any Other Document. 5.6 Governing Law. This First Amendment shall be governed by and ------------- construed in accordance with the laws of the State of New York, without giving affect to conflict of law provisions. 5.7 Counterparts. This First Amendment may be executed in ------------ counterparts. Each counterpart shall bind the Party or Parties executing same. All counterparts, taken together, shall constitute one and the same agreement. [SIGNATURES ON FOLLOWING PAGE] 3 IN WITNESS WHEREOF, the Parties have caused this First Amendment to be duly executed, under seal, by their respective authorized officers as of the day and year first above written. IBJ WHITEHALL BUSINESS CREDIT CORPORATION, as Lender and as Agent (SEAL) By: /s/ Joseph J. Zautra ----------------------------- Name: Joseph J. Zautra --------------------------- Title: Vice President -------------------------- HLM DESIGN, INC., as Borrower and Borrowing Agent By: /s/ Vernon B. Brannon ----------------------------- Name: Vernon B. Brannon --------------------------- Title: Chief Operating Officer -------------------------- JPJ ARCHITECTS, INC., as Affiliate Guarantor By: /s/ Vernon B. Brannon ----------------------------- Name: Vernon B. Brannon --------------------------- Title: Chief Operating Officer -------------------------- HLM DESIGN USA, INC., as Affiliate Guarantor By: /s/ Vernon B. Brannon ----------------------------- Name: Vernon B. Brannon --------------------------- Title: Chief Operating Officer -------------------------- 4 HLM DESIGN ARCHITECTURE ENGINEERING AND PLANNING, P.C., as Affiliate Guarantor By: /s/ Vernon B. Brannon ----------------------------- Name: Vernon B. Brannon --------------------------- Title: Chief Operating Officer -------------------------- HLM DESIGN OF NORTHAMERICA, INC., as Affiliate Guarantor By: /s/ Vernon B. Brannon ----------------------------- Name: Vernon B. Brannon --------------------------- Title: Chief Operating Officer -------------------------- SOTA SOFTWARE SYSTEMS, INC., as Affiliate Guarantor By: /s/ Vernon B. Brannon ----------------------------- Name: Vernon B. Brannon --------------------------- Title: Chief Operating Officer -------------------------- 5 EX-10.34 3 dex1034.txt EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.34 HLM DESIGN, INC. EMPLOYEE STOCK PURCHASE PLAN (AS AMENDED AND RESTATED AS OF NOVEMBER 22, 2000) HLM DESIGN, INC. EMPLOYEE STOCK PURCHASE PLAN (As Amended and Restated as of November 22, 2000) TABLE OF CONTENTS Page ---- ARTICLE I PURPOSE; DEFINITIONS; CONSTRUCTION............................. 1 1.1 Purpose of Plan.............................................. 1 1.2 Definitions.................................................. 1 (a) "Account"............................................... 1 (b) "Base Pay".............................................. 1 (c) "Board of Directors".................................... 1 (d) "Business Day".......................................... 1 (e) "Cause"................................................. 1 (f) "Code".................................................. 1 (g) "Committee"............................................. 2 (h) "Company"............................................... 2 (i) "Company Stock"......................................... 2 (j) "Contributions"......................................... 2 (l) "Employee".............................................. 2 (m) "Employer".............................................. 2 (n) "Exercise Date"......................................... 2 (o) "Grant Date"............................................ 2 (p) "Option"................................................ 2 (q) "Participant"........................................... 2 (r) "Plan".................................................. 2 1.3 Construction................................................. 3 ARTICLE II ADMINISTRATION................................................ 3 2.1 Appointment and Procedures of Committee...................... 3 2.2 Authority of Committee....................................... 3 ARTICLE III PARTICIPATION................................................ 3 3.1 Eligibility to Participate................................... 3 3.2 Restrictions on Participation................................ 4 3.3 Leave of Absence............................................. 4 ARTICLE IV CONTRIBUTIONS................................................. 4 4.1 Payroll Deductions........................................... 4 4.2 Contributions to Accounts.................................... 4 4.3 Leave of Absence............................................. 5 4.4 Withdrawal of Contributions from Plan........................ 5 4.5 Termination of Employment.................................... 5 ARTICLE V OPTIONS........................................................ 5 5.1 Company Stock Available for Options.......................... 5 5.2 Granting of Options.......................................... 5 5.3 Option Price................................................. 6 5.4 Option Period................................................ 6 5.5 Exercise of Options.......................................... 6 (a) Automatic Exercise...................................... 6 (b) Nontransferability of Options........................... 7 (c) Effect of Termination of Employment..................... 7 (i) Termination of Employment Related to Cause....... 7 (ii) Termination of Employment Due to Death........... 7 (iii) Other Termination of Employment.................. 7 (d) Leave of Absence........................................ 8 (e) Delivery of Stock Certificates.......................... 8 (f) Acceleration of Exercisability of Options Upon Occurrence of Certain Events....................... 8 (g) Registration, Listing and Qualification of Shares of Stock......................................... 8 ARTICLE VI MISCELLANEOUS................................................. 9 6.1 Adjustments Upon Changes in Capitalization................... 9 6.2 Approval of Shareholders..................................... 9 6.3 Amendment, Suspension and Termination........................ 9 6.4 Intent to Comply With Code Section 423....................... 9 6.5 Equal Rights and Privileges.................................. 9 6.6 Use of Funds................................................. 10 6.7 Withholding.................................................. 10 6.8 Effect of Plan............................................... 10 6.9 No Employment Rights......................................... 10 6.10 Governing Law................................................ 10 6.11 Other Actions................................................ 10 ii HLM DESIGN, INC. EMPLOYEE STOCK PURCHASE PLAN (AS AMENDED AND RESTATED AS OF NOVEMBER 22, 2000) ARTICLE I PURPOSE; DEFINITIONS; CONSTRUCTION 1.1 Purpose of Plan. The purpose of the Plan, which shall be known as --------------- the HLM Design, Inc. Employee Stock Purchase Plan (the "Plan"), is to provide employees of HLM Design, Inc. (the "Company") and its participating subsidiaries an opportunity to acquire a proprietary interest in the Company through the purchase of the Common Stock, $.001 par value per share, of the Company. This Plan is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). 2.2 Definitions. Throughout this Plan, the following terms shall have the ----------- meanings indicated: (a) "Account" shall mean a memorandum account maintained to record each Participant's Contributions pending purchase of Company Stock. (b) "Base Pay" shall mean the Participant's regular base salary (excluding overtime pay, bonuses, shift premiums, commissions, fringe benefits, other special payments and imputed income) determined without reduction for Contributions made under this Plan or contributions to any Code Section 401(k) or Section 125 Plan. The Committee may establish additional rules for determining a Participant's Base Pay for purposes of this Plan. (c) "Board of Directors" shall mean the Board of Directors of the Company. (d) "Business Day" shall mean any day other than a Saturday, Sunday or holiday. (e) "Cause" shall mean any act, action or series of acts or actions or any omission, omissions or series of omissions which, in the opinion of the Committee, result in, or which have the effect of resulting in, (i) the commission of a crime by the Participant involving moral turpitude, which crime has a material adverse impact on the Employer, (ii) gross negligence or willful misconduct which is continuous and results in material damage to the Employer, or (iii) the continuous, willful failure of the person in question to follow the reasonable directives of the Employer. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended, any successor revenue laws of the United States, and the rules and regulations promulgated thereunder. (g) "Committee" shall mean the committee of directors of the Company appointed by the Board of Directors in accordance with Section 2.1 to administer this Plan, or in the event that no such committee exists or is appointed, "Committee" shall mean the Board of Directors. (h) "Company" shall mean HLM Design, Inc., a company organized and existing under the laws of the State of Delaware. (i) "Company Stock" shall mean the Common Stock, $.001 par value per share, of the Company. (j) "Contributions" shall mean the after-tax payroll deductions contributed to the Plan by Participants pursuant to Article IV. (k) "Effective Date" shall mean the date of the closing of the Company's initial public offering. (l) "Employee" shall mean any person employed by the Employer who (i) is employed on a full-time or part-time basis, (ii) is regularly scheduled to work more than twenty hours per week, and (iii) is customarily employed more than five months in any calendar year. Independent contractors and outside directors shall not be included in the definition of Employee for purposes of this Plan. (m) "Employer" shall mean the Company and any of its present or future subsidiaries (within the meaning of Section 424(f) of the Code) which the Committee may designate from time to time as participating Employers under this Plan. (n) "Exercise Date" shall mean the last Business Day of March, June, September and December on which the principal trading market for Company Stock is open for trading, plus any other interim dates during the year which the Committee designates as Exercise Dates. (o) "Grant Date" shall mean (i) the date initial grants are made pursuant to this Plan, which date shall be as soon as administratively practicable following the Effective Date, and (ii) on or about each January 1 thereafter. (p) "Option" shall mean an option to purchase shares of Company Stock granted by the Committee to a Participant pursuant to this Plan. (q) "Participant" shall mean an eligible Employee electing to participate in this Plan. (r) "Plan" shall mean this HLM Design, Inc. Employee Stock Purchase Plan, as amended and restated as of November 22, 2000 and as subsequently amended from time to time. 2 1.2 Construction. The masculine gender, where appearing in the Plan, ------------ shall be deemed to include the feminine gender, unless the context clearly indicates to the contrary. The words "hereof," "herein," "hereunder" and other similar compounds of the word "here" shall mean and refer to the entire Plan and not to any particular provision or Section. ARTICLE II ADMINISTRATION 2.1 Appointment and Procedures of Committee. The Plan shall be --------------------------------------- administered by the Committee as appointed from time to time by the Board of Directors. The Committee shall consist of not fewer than two members of the Board of Directors. Each Committee member shall be a "non-employee director" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. No member of the Board of Directors who serves on the Committee shall be eligible to participate in the Plan. The Committee shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by all members shall be as effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary (who need not be a member of the Committee). 2.2 Authority of Committee. The Committee, subject to the terms of the ---------------------- Plan, shall have plenary authority in its discretion to interpret and construe the Plan (including, without limitation, any of its terms which are uncertain, doubtful or disputed); to decide all questions of Employee eligibility hereunder; to determine the amount, manner and timing of all Options and purchases of Company Stock hereunder; to establish, amend and rescind rules and regulations pertaining to the administration of the Plan; and to make determinations and interpretations and take such other administrative actions as it deems necessary or advisable for the administration of this Plan. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee. No member of the Committee shall be liable for any act, determination or omission with respect to his service on the Committee, if he acts in good faith and in a manner he reasonably believes to be in or not opposed to the best interest of the Employer. All expenses of administering this Plan shall be borne by the Employer. ARTICLE III PARTICIPATION 3.1 Eligibility to Participate. Subject to the restrictions of Section -------------------------- 3.2 below, any Employee employed on the Effective Date shall be eligible to participate in this Plan as of the initial Grant Date under the Plan (provided that the Employee is still employed on such Grant Date). Each other Employee shall be eligible to participate in the Plan as of the Grant Date coincident with or next following his date of employment with the Employer (provided that the Employee is still employed on such Grant Date). 3 3.2 Restrictions on Participation. Notwithstanding the foregoing Section ----------------------------- 3.1, no Employee shall be eligible to participate in the Plan if such Employee owns or holds options to purchase (or upon participation in this Plan would own or hold options to purchase) stock possessing an aggregate of 5% or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary (as determined in accordance with the rules of Section 424(d) of the Code relating to attribution of stock ownership). 3.3 Leave of Absence. For purposes of participation in the Plan, an ---------------- Employee on a leave of absence shall be deemed to continue to be an Employee for the first ninety days of such leave of absence and such Employee's employment shall be deemed to have terminated at the close of business on the ninetieth day of such leave of absence unless such Employee shall have returned to regular full-time or part-time employment prior to the close of business on such ninetieth day (unless reemployment is guaranteed by statute or contract). Termination by the Company of any Employee's leave of absence, other than termination of such leave of absence on return to regular full-time or part-time employment, shall terminate an Employee's employment for all purposes of the Plan. ARTICLE IV CONTRIBUTIONS 4.1 Payroll Deductions. By written election, made and filed with the ------------------ Committee pursuant to the Committee's rules and procedures, a Participant may elect to designate a whole percentage between one percent and ten percent (or such higher or lower percentage as may be allowed by the Committee's rules and procedures) of his Base Pay to be deferred by payroll deduction as a Contribution to the Plan. Payroll deductions shall commence as soon as administratively practicable following the filing of such written election with the Committee. The Committee in its discretion may develop additional rules and procedures regarding payroll deduction elections. A Participant may change or revoke his payroll deduction amount by filing, on such forms and in accordance with such rules and procedures as the Committee in its discretion may prescribe, a revised written election with the Company. Such modification or revocation shall take effect as soon as administratively practicable after the Company's receipt of such revised election. Notwithstanding the foregoing, a Participant may change his payroll deduction election only once each calendar quarter, or as otherwise specifically allowed by the Plan's administrative rules and procedures. If payroll deductions are discontinued, payroll deductions may not be resumed by the Participant until the payroll period which begins on or after the next Exercise Date, or as otherwise specifically allowed by the Plan's administrative rules and procedures. Under no circumstances may a Participant's payroll deduction election be made, modified or revoked retroactively. 4.2 Contributions to Accounts. A memorandum Account shall be established ------------------------- by the Committee for each Participant for the purpose of accounting for Contributions. Contributions shall be credited to Accounts as soon as administratively practicable following payroll withholding. Amounts credited to Accounts will not accrue interest. 4 4.3 Leave of Absence. If a Participant is on a leave of absence, such ---------------- Participant shall have the right, subject to Section 3.3, to elect to (a) withdraw from the Plan and receive a distribution of the balance in his Account pursuant to Section 4.4, (b) discontinue Contributions to the Plan but remain a Participant in the Plan, or (c) remain a Participant in the Plan during such leave of absence, authorizing deductions to be made from payments by the Company to the Participant during such leave of absence. 4.4 Withdrawal of Contributions from Plan. Prior to an Exercise Date, a ------------------------------------- Participant may elect to withdraw the Contributions then credited to his Account by filing written notice thereof with the Committee on such forms and in accordance with such procedures as the Committee may prescribe. Such election must be made at least ten Business Days prior to an Exercise Date in order for such Contributions to be withdrawn prior to such Exercise Date. The Participant's Contributions shall be distributed to him as soon as administratively practicable after the Committee's receipt of his notice of withdrawal and no further payroll deductions shall be made from his Base Pay. 4.5 Termination of Employment. Upon termination of a Participant's ------------------------- employment for any reason, such Participant may no longer make Contributions to the Plan or be granted Options under the Plan. A Participant's right, if any, to exercise any unexpired Option he holds as of his termination of employment shall be determined in accordance with Section 5.5(c). ARTICLE V OPTIONS 5.1 Company Stock Available for Options. There shall be available for ----------------------------------- Options under the Plan an aggregate maximum of 57,594 shares of Company Stock, subject to any adjustments which may be made pursuant to Section 6.1 of the Plan in connection with changes in capitalization of the Company. Shares of Company Stock used for purposes of the Plan may be either authorized and unissued shares, or previously issued shares held in the treasury of the Company, or both. Shares of Company Stock covered by Options which have expired prior to exercise shall be available for further Options granted hereunder. 5.2 Granting of Options. The Plan shall be implemented by annual ------------------- offerings of approximately twelve months duration (except for the initial offering or as otherwise provided in Section 5.4). Prior to each Grant Date, the Committee shall designate an aggregate number of whole shares of Company Stock that shall be allocated under the Options granted on such Grant Date, subject to the maximum limitation of Section 5.1 above and any adjustments thereto pursuant to Section 6.1. The aggregate number of shares of Company Stock so designated by the Committee shall be allocated among the Participants receiving Options as of the Grant Date in the proportion that each Participant's Base Pay bears to the total Base Pay of all such Participants; provided, that fractional shares shall be rounded down to the nearest whole share. Thus, as of each Grant Date, each eligible Participant shall be deemed to have been granted an Option under the Plan to purchase that number of whole shares of Company Stock that equals: (a) the aggregate number of shares of Company Stock designated by the Committee to be allocated under Options granted as of such Grant Date, multiplied by (b) a fraction, the numerator of which shall be the Base Pay of the Participant and the denominator of which shall 5 be the total Base Pay of all of the eligible Participants. Notwithstanding the foregoing, no Participant may be granted an Option which permits his rights to purchase stock under this Plan and all other employee stock purchase plans of the Company or Employer to accrue at a rate which exceeds $25,000 of the fair market value of such stock (determined at the time such Option is granted) for each calendar year in which such Option is outstanding at any time. 5.3 Option Price. The purchase price at which shares of Company Stock may ------------ be acquired pursuant to the exercise of all or any portion of an Option granted under this Plan shall be eighty-five percent of the lesser of (a) the fair market value per share of the Company Stock on the applicable Grant Date, and (b) the fair market value per share of the Company Stock on the applicable Exercise Date. For purposes of this Section 5.3, the fair market value per share of Company Stock shall be the closing price on the last Business Day prior to the date of reference, or in the event that no sales take place on such date, the average of the closing high bid and low asked prices, in either case on the principal national securities exchange on which the Company Stock is listed or admitted to trading, or if the Company Stock is not listed or admitted to trading on any national securities exchange, the last sale price reported on the National Market System of the National Association of Securities Dealers Automated Quotation system ("NASDAQ") on such date, or the average of the closing high bid and low asked prices of the Company Stock in the over-the- counter market reported on NASDAQ on such date, as furnished to the Committee by any New York Stock Exchange member selected from time to time by the Committee for such purposes. If there is no bid or asked price reported on any such date, the market value shall be determined by the Committee in accordance with the regulations promulgated under Section 2031 of the Code, or by any other appropriate method selected by the Committee. 5.4 Option Period. Each Option granted to a Participant under the Plan ------------- shall expire on the earliest of (a) the last Exercise Date of the calendar year in which the Option was granted, (b) the Participant's (or, in the case of the Participant's death, his estate's) voluntary withdrawal from the Plan following termination of employment, (c) the date of the Participant's termination of employment related to Cause, or (d) the Exercise Date immediately following the Participant's termination of employment for any reason unrelated to Cause. In no event will the duration of an Option period exceed twenty-seven months (or such other applicable period permitted under Section 423(b)(7) of the Code) from the date on which such Option is granted. 5.5 Exercise of Options. ------------------- (a) Automatic Exercise. Any Option granted to a Participant shall be ------------------ exercised automatically on each Exercise Date during the calendar year of the Option's Grant Date in whole or in part such that the Participant's accumulated Contributions as of such Exercise Date shall be applied to the purchase of the maximum number of whole shares of Company Stock that his Contributions will allow at the applicable Option price (determined in accordance with Section 5.3), limited to the number of shares subject to such Option. In the event that the number of shares of Company Stock that may be purchased by all Participants in the Plan exceeds the number of shares then available for issuance under the Plan, the Committee shall make a pro rata allocation of the available shares in as uniform a manner as it determines to be practicable and equitable. Any remaining Contributions in the Participant's Account amounting to less than the Option price of a whole share of Company Stock shall be carried forward and 6 applied on the next Exercise Date; provided that, Contributions remaining after the last Exercise Date of the calendar year may be distributed to the Participant at his election. (b) Nontransferability of Options. During a Participant's lifetime, ----------------------------- Options held by such Participant shall be exercisable only by that Participant. No Option shall be transferable other than by will or by the laws of descent and distribution. (c) Effect of Termination of Employment. ----------------------------------- (i) Termination of Employment Related to Cause. Upon ------------------------------------------ termination of a Participant's employment related to Cause, the Participant's participation in the Plan also shall terminate. Any unexpired Option he holds will expire as of the date of his termination of employment. Remaining contributions credited to his Account shall be distributed to the Participant as soon as administratively practicable following termination of employment. (ii) Termination of Employment Due to Death. In the event of -------------------------------------- the death of the Participant while employed, or during the period following his termination of employment for any reason unrelated to Cause but prior to the next Exercise Date, the Participant's estate shall have the right to elect by written notice to the Committee prior to the earlier of the expiration of sixty days commencing with the date of the Participant's death and the Exercise Date next following the date of the Participant's death: (A) To withdraw all of the Contributions credited to the Participant's Account under the Plan, or (B) To have exercised any unexercised Option held by the Participant as of the date of his death for the purchase of Company Stock on the Exercise Date next following the date of the Participant's death in accordance with Section 5.5(a), but only to the extent such Option was exercisable on the date of the Participant's death, with any remaining Contributions credited to the Participant's Account being distributed to the Participant's estate as soon as administratively practicable after such Exercise Date. In the event that no such written election is timely and properly received by the Committee, all Contributions credited to the Participant's Account shall be distributed to the Participant's estate. In no event shall any Option be exercisable beyond the applicable exercise period specified in Section 5.4 of the Plan. (iii) Other Termination of Employment. Upon termination of a ------------------------------- Participant's employment for any reason unrelated to Cause or his death, the Participant may at his election: (A) Withdraw from the Plan pursuant to Section 4.4 and request the return of the remaining Contributions then credited to his Account, or (B) Continue participation in the Plan until the Exercise Date next following his date of termination of employment for the limited purpose of allowing any unexpired Option he holds as of his termination of employment to be exercised automatically in 7 accordance with Section 5.5(a) on the Exercise Date next following his termination of employment, but only to the extent such Option was exercisable on the date of the Participant's termination of employment, with any remaining Contributions credited to the Participant's Account being distributed to the Participant as soon as administratively practicable after such Exercise Date. (d) Leave of Absence. A Participant on a leave of absence shall, ---------------- subject to the election made by such Participant pursuant to Section 4.3, continue to be a Participant in the Plan so long as such Participant is on continuous leave of absence. A Participant who has been on leave of absence for more than ninety days and who therefore is not an Employee for purposes of the Plan (unless the right to reemployment is guaranteed by statute or contract) shall not be entitled to participate in any offering commencing on any Grant Date following the ninetieth day of such leave of absence. Notwithstanding the foregoing and any other provisions of the Plan, unless a Participant on a leave of absence returns to eligible regular full-time or part-time employment with the Employer at the earlier of (i) the termination of such leave of absence, or (ii) the ninety-first day of such leave of absence, such Participant's employment shall be deemed to have terminated for purposes of the Plan on whichever of such dates first occurs (unless the Participant's right to reemployment is guaranteed by statute or contract). (e) Delivery of Stock Certificates. Upon a Participant's written ------------------------------ request, the Company or the Committee will deliver to the Participant a certificate or certificates evidencing shares of Company Stock purchased under this Plan. (f) Acceleration of Exercisability of Options Upon Occurrence of ------------------------------------------------------------ Certain Events. In connection with any merger or consolidation in which the - -------------- Company is not the surviving corporation and which results in the holders of the outstanding voting securities of the Company (determined immediately prior to such merger or consolidation) owning less than a majority of the outstanding voting securities of the surviving corporation (determined immediately following such merger or consolidation), or any sale or transfer by the Company of all or substantially all of its assets or any tender offer or exchange offer for or the acquisition, directly or indirectly, by any person or group of all or a majority of the then-outstanding voting securities of the Company, all outstanding Options under the Plan shall become exercisable in full, notwithstanding any other provision of the Plan or of any outstanding Options granted hereunder, on and after (i) the fifteenth day prior to the effective date of such merger, consolidation, sale, transfer or acquisition or (ii) the date of commencement of such tender offer or exchange offer, as the case may be. Notwithstanding the foregoing, in no event shall any Option be exercisable beyond the applicable exercise period of such Option specified in Section 5.4. (g) Registration, Listing and Qualification of Shares of Stock. Each ---------------------------------------------------------- Option shall be subject to the requirement that if at any time the Board of Directors shall determine that the registration, listing or qualification of shares of Company Stock covered thereby upon any securities exchange or under any federal or state law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such Option or the purchase of shares of Company Stock thereunder, no such Option may be exercised unless and until such registration, listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board 8 of Directors. The Employer may require that any person exercising an Option shall make such representations and agreements and furnish such information as it deems appropriate to assure compliance with the foregoing or any other applicable legal requirement. ARTICLE VI MISCELLANEOUS 6.1 Adjustments Upon Changes in Capitalization. In the event of a ------------------------------------------ reorganization, stock split, stock dividend, combination of shares, merger, consolidation, rights offering or any other change in the corporate structure of shares of the Company, corresponding adjustments shall be made to the number and kind of shares of Company Stock available for issuance under this Plan and the number and kind of shares of Company Stock and option price thereof covered by outstanding Options under this Plan. Any adjustments made pursuant to this Section 6.1 remain subject to the limitations of Section 423 of the Code (including its $25,000 annual limitation). 6.2 Approval of Shareholders. Within twelve months before or after the ------------------------ Plan is adopted by the Board of Directors, this Plan must be approved by a majority of the votes cast thereon by the stockholders of the Company at a meeting of stockholders duly called and held for such purpose or by unanimous written consent of such stockholders, and no Option granted hereunder shall be exercisable prior to such approval. 6.3 Amendment, Suspension and Termination. The Board of Directors may at ------------------------------------- any time amend, suspend or terminate this Plan; provided, however, that the Board of Directors shall not increase the maximum number of shares of Company Stock for which Options may be granted under the Plan, except as provided in Section 6.1, without obtaining approval of the stockholders in the manner described in Section 6.2. The Plan will continue until terminated by the Board of Directors or until all of the shares of Company Stock reserved for issuance under the Plan have been issued, whichever first occurs. No amendment, suspension or termination of the Plan may, without the consent of the Participants then holding Options to purchase Company Stock, adversely affect the rights of such Participants under such Options. 6.4 Intent to Comply With Code Section 423. It is intended that this Plan -------------------------------------- qualify as an "employee stock purchase plan" under Section 423 of the Code. The provisions of this Plan shall be construed so as to extend and limit participation in a manner consistent with the requirements of that Section of the Code. In the event of an inconsistency between the Plan and Section 423 of the Code, the Plan shall be interpreted in a manner which complies with the requirements of Section 423 of the Code and the regulations thereunder, without further act or amendment by the Company or the Board of Directors unless otherwise required pursuant to Section 6.3 of this Plan. 6.5 Equal Rights and Privileges. All participants granted Options under --------------------------- this Plan shall have equal rights and privileges within the meaning of Section 423(b)(5) of the Code and the regulations thereunder. 9 6.6 Use of Funds. All Contributions received and held by the Employer ------------ under this Plan may be used by the Employer for any corporate purpose and the Employer shall not be obligated to segregate such Contributions. 6.7 Withholding. It shall be a condition to the obligation of the Company ----------- to issue shares of Company Stock upon exercise of an Option that the Participant (or his estate pursuant to Section 5.5(c)(ii)) pay to the Company, upon its demand, through payroll withholding, cash payment or other means acceptable to the Company, such amount as may be requested by the Company for the purpose of satisfying taxes, including taxes owed by the Participant due to the disposition of Company Stock by the Participant prior to the expiration of the holding periods described in Section 423(a) of the Code. 6.8 Effect of Plan. This Plan shall be binding upon each Participant and -------------- his successors, including, without limitation, such Participant's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Participant. 6.9 No Employment Rights. Nothing in this Plan or in any Option granted -------------------- pursuant to the Plan shall be construed as a contract of employment between the Employer and any employee, or as a right of any employee to continue in the employ of the Employer, or as a limitation of the right of the Employer to discharge any of its employees, with or without cause. 6.10 Governing Law. This Plan and all rights and obligations hereunder ------------- shall be construed in accordance with and governed by the laws of the State of North Carolina, except to the extent such laws are preempted by the laws of the United States. 6.11 Other Actions. Nothing contained in the Plan shall be construed to ------------- limit the authority of the Company to exercise its corporate rights and powers, including, but not by way of limitation, the right of the Company to grant or assume options for proper corporate purposes other than under the Plan with respect to any employee or other person, firm, corporation or association. 10 EX-21.1 4 dex211.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT JPJ Architects, Inc. G.A. Design International Holdings, Ltd. BL&P Engineers, Inc. EX-23 5 dex23.txt CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in this Registration Statement No. 333-75131 of HLM Design, Inc. on Form S-8 of our report dated June 29, 2001, appearing in this Annual Report on Form 10-K of HLM Design, Inc. for the year ended April 27, 2001. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Charlotte, North Carolina July 19, 2001 EX-99.1 6 dex991.txt SAFE HARBOR UNDER LITIGATION REFORM ACT 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 three subsidiaries (JPJ, GAIH and BL&P) and three 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 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 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. 2 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. 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 3 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. 4 -----END PRIVACY-ENHANCED MESSAGE-----